26 May’10

The Oprah Winfrey Network – Deal or No Deal??

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An IP Valuation Case Study (Part 1 of 2)

We would like to present the case of The Oprah Winfrey Network (OWN) as an example of how the values of intangible assets can sometimes be found in daily news stories. This case presents some interesting valuation questions and provides a rare glance into a highly publicized joint venture based primarily on intangibles.

The following story first appeared on USA today in January 2008:

“Oprah Winfrey is getting her own cable channel, called OWN: The Oprah Winfrey Network. A deal announced Tuesday with Discovery Communications will create a 50-50 cable and Web venture. In the cashless transaction, Discovery will contribute its Discovery Health Channel, to be converted to OWN in late 2009 and simulcast in HD. Launched in 1999, the channel reaches more than 70 million cable and satellite homes. Winfrey’s company, Harpo, will kick in her website, Oprah.com. “ 1

Putting our IP valuation experts’ hat on, we ask ourselves: is this a fair deal? For a 50-50 cashless deal to be fair, each party’s contribution needs to have about the same fair market value. OWN will be structured as a joint venture partnership where each party makes an” in-kind” contribution of assets – in this case: mostly intangible assets – in lieu of cash. It is this unique structure that makes it a very interesting IP valuation case study …

Let’s look at what each party is contributing to the deal:

1. Discovery – is contributing its Discovery Health Channel, which, by its own admission, was a struggling media entity at the time the deal was announced:

“Discovery Health faced an uncertain prognosis. It is drawing fewer than 200,000 prime-time viewers at a time when cable and satellite services want to cut payments for channels with small audiences. “They need audiences to jump-start (Health),” said SNL Kagan’s Derek Baine. He said that Discovery Health became profitable in 2007, with $7.4 million in cash flow on revenue of $141.8 million. Discovery spokesman David Leavy said those numbers are “a bit high” but would not be more precise.” 2

2. Oprah – Winfrey’s company, Harpo Productions, is contributing the website, Oprah.com, a very popular websites at the time the deal was announced, according to several sources:

“OWN will feature mostly original, nonfiction programming… focusing on topics Winfrey is known for — health, love, spirituality, child-rearing and personal growth. The channel will coordinate with Oprah.com, Winfrey’s Web site, which averages about 6 million unique visitors per month.” 3

“Oprah.com offers extensive expert advice, interactive workbooks, photos, video, inspirational stories, books and features to more than six million unique visitors with more than 80 million page views per month.” 4

What is the fair market value of each of the parties’ contributions into the OWN joint venture? Since we have no access to any of the parties’ detailed financial data (Harpo is privately owned), our analysis will be based on publicly available information.

Discovery Health Network. A cable network is a media property that includes a bundle of tangible (equipment, infrastructure) and intangible (broadcasting rights, content, and subscribers) assets. The most valuable asset for cable networks is their subscriber list, which is an intangible asset. Cable network values are often benchmarked using valuation metrics such as the ‘value per subscriber’, or ‘cash flow multiple’. We have looked at some transactions involving similar cable networks, and found two relevant data points relating to similar “lifestyle” channels: Bravo and Oxygen (another media venture backed by Winfrey), both purchased by NBC 5.

The table shows a wide variation in the value per subscriber metrics: while NBC paid $23 a subscriber for Bravo, it only paid $13 a subscriber for Oxygen (some analysts called the Oxygen deal a “bargain”). However, the table also shows that prices seem to be more correlated with the annual cash flow generated by the network, with a ‘cash flow multiple’ (=total value/annual cash flow) of around 8-9. While Discovery Health Channel has 70 million subscribers (it’s part of the large Discovery family of channels), that particular channel has been around since 1999 but only turned a profit in 2007, generating a mere $7 million in cash annually. It does not seem right to compare it on a value per subsriber basis to Oxygen, with a similar number of subscribers, since Oxygen generates almost 15 times as much cash flow as Discovery Health. It seems more appropriate to apply the cash flow multiple to the cash flow generated by Discovery Health (about $7 million a year), as that ratio is better correlated with acquisition prices:

Discovery Health’s Fair Market Value ($mill) =

9 x 70 mill subs = $63 million

>> we believe that the fair market value of the Discovery Health Channel in early 2008 was probably less than $100 million,

Oprah.com Website. A website is a bundle of intangible assets (domain, content, code, back links, etc), that are mostly protected by Copyright laws. Websites can largely be classified into E-commerce sites (selling goods & services online, ie. Amazon.com) and content driven sites. There are various models for valuing Content-driven websites, most of which are primarily based on web analytics related to traffic (i.e., are a function of the number of unique visitors, number of web pages viewed, etc). The Oprah.com website can be classified as a Content-driven website, and therefore, we have turned to comparable transactions around the time the deal was announced to figure out the prices paid for similar web properties.
An analysis of news articles from the 2005-2007 time period reveals that an often-quoted average ‘value per unique monthly visitor’ in web content deals was around $38 per visitor 6. In addition, larger sites seemed to be generating a higher price per visitor than smaller sites, ranging anywhere from $20 to over $200 7. We found two relevant data points related to transactions that took place in late 2007, and involved large content driven web properties:

We believe that the Oprah.com site should be valued at least at the average price of $38/visitor, but more likely at the $55-$65 range (or even higher, since it’s larger than both deals presented above) using the 6 million unique visitors, as reported by Harpo:

Oprah.com’s Fair Market Value ($mill) =

$38 x 6 mill unique visitors = $230 million
$60 x 6 mill unique visitors = $360 million

>> we believe that the fair market value of Oprah.com website in early 2008 was at least $200 million, and probably higher than $300.

Our analysis leads to an interesting valuation “puzzle”: why would Oprah Winfrey, one of the savviest business people in the world, be entering a 50-50 joint venture where the fair market value of her contribution is at least two or three times that of her partner’s?

While we cannot give a definite answer, we think that we have a few possible explanations, which we will share with our readers in Part 2 of our discussion of the OWN deal. In the meantime, we would be interested in your opinions – what would you advise Oprah Winfrey: Deal, or No Deal ?!…

1 http://www.usatoday.com/money/media/2008-01-15-oprah-cable-channel_N.htm
2 Ibid.
3 http://www.washingtonpost.com/wp-dyn/content/article/2008/01/15/AR2008011501562.html
4 http://www.targetmarketnews.com/storyid01160802.htm
5 http://www.nytimes.com/2007/10/10/business/media/10oxygen.html?_r=2
6 For example: http://www.websitebroker.com/articles/website-valuation/simple-ways-to-value-your-website
7 http://seekingalpha.com/article/92809-valuation-metrics-of-large-vs-small-website-acquisitions?source=article_lb_author