Dating and Deals
A handful of people reading might be heading not to the upcoming daily deal conferencein San Francisco next week but to Moscow for the Internet Dating Conference. There are probably a bunch of jokes ready made about a dating conference in Moscow, especially one that sounds more consumer than business focused. This show, however, does not feature Russian brides in a Meet (Meat) Market set-up. Instead it gathers the largest businesses who focus on the online dating space – a great mix of advertisers, publishers, and technology solution providers. I would not have known about the event were I not discussing the deal space with the internet dating industry’s news publication, Online Personals Watch.
Online Personals Watch founder, Mark Books, pinged me to see if I had any thoughts on a recent transaction, Friend Finder Networks purchasing deal business Jigo City. Most people have heard of Friend Finder, the subscription dating business known for its popular Adult Friend Finder service. What is easy to forget with Friend Finder Neworks, or FFN as it trades on the Nasdaq, is just how long it has been in business. The year was 2007. That wasn’t when Friend Finder started; that was when the parent company at the time, Various Inc., sold the business to Penthouse for a cool $500 million, a number that some considered low given that the business looked on pace to generate $340 million in revenues.
At that time, Penthouse was a private company, and they bought Friend Finder, it would seem to give them a digital revenue stream and allow it to describe itself as not purely an adult play. The addition of a digital growth engine would then in theory allow the company to go public and look less like an adult business. By less that really meant plausible deniability on the part of the investors. The path to going public obviously took a lot longer than anticipated. Early talk seemed to focus on 2008 (where they looked to raise $460 million), with speculation intensifying again in early 2010. They finally went public though in May of this year, raising “only” $55 million. Here is how one analyst described the company after seeing their financials, “FFN continues to generate poor financials and is burdened with a very high interest expense, with only 5% sales growth for 2010 compared to 2009. Stay away from this IPO.”
The interest payment part is the most confusing, and our cursory assumption is that it comes from the debt used by Penthouse to acquire Friend Finder in 2007. It appears the company pays a staggering $80mm per year in interest alone. All of which helps explain why the purchase of JigoCity did not use cash. As the release states, “The merger consideration consists of approximately 1.6 million shares of FFN common stock and approximately 6.4 million FFN warrants with exercise prices ranging from $5.00-$18.00 per share. Assuming the cashless exercise of all the warrants at the highest exercise price, the merger consideration will be approximately $65 million.” At the current $2/share price point, Jigo City seems to have an implied value of $3.2 million today. (We don’t understand warrants well enough to discuss the earn out.)
Jigo City doesn’t make Friend Finder money, but it makes more money than many deal sites. The release states that JigoCity generated revenue of approximately $600,000 in July and approximately $1.1 million in August with a user base of 1 million members. That equates to roughly $1/member/month. Given that the site seems focused predominantly on the Chinese market (jigocity.com is in Chinese), that would make it even more impressive, but the information shared says the firm operates in five countries currently. Their value per user is the key behind the whole transaction. Were it not for Mark Brooks, we would have still thought dating and deals a poor fit.
The best deals and dating sites both share a performance marketing, customer acquisition dna. Deal sites though, at least the most successful ,buy users based on lifetime value but they tend to focus on offline transactions and require a sales intensive labor force. Revenue is generated as an accumulation of individual transactions, and communication comes from regular push notifications, i.e. emails. Not so with dating sites, which are customer service heavy, and use emails not to generate transactions but to keep engagement high so that people won’t end their subscriptions. Each month a user stays on, means more money for the dating site, but each month that goes by with a deal site just increases their bandwidth. So why try and push them together when they seem to be two different peas of a subscriber / lifetime value pod? The company tells us why – enhance its ability to monetize its users.
Dating sites can have a high lifetime value per user. As mentionedin a previous company disclosure, FriendFinder’s was $80.17 for the year ended December 31, 2010. Everyone in our space knows the value of increasing this dollar. Just think of what a dollar or two makes for a typical offer. A five percent bump in LTV often equates to a greater than five percent bump in volume or margin. Instead of a five percent bump, what if the company could up that by 25%? How much more media could they buy? How much more profitable might they be? From the FriendFinder standpoint then, this looks straight forward. They aren’t trying to create some innovative mix of local and activities and dating. They are just looking to add fuel to their media buyers arsenal and find a way to not only monetize better but keep monetizing even if users cancel their subscription. They can always run a special discount to them to get them to sign-up again.
