by Frederic Filloux
No one should be happy with the sale of French video streaming Dailymotion to Vivendi. Not buyers, nor the the startup’s management team –and certainly not the venture capital community. (First of two articles)
DailyMotion was meant to be a YouTube competitor. The two companies were actually born almost simultaneously in 2005. Unfortunately, Dailymotion remained deeply French (even though his CEO later resettled in California). Over the last two years, it has become a typical French political football, kicked around by a succession of two cabinet ministers, the colorful Arnaud Montebourg (pictured below) and his more sober successor Emmanuel Macron.
Both government officials vehemently defended DailyMotion, invoking a national imperative: Keeping the French flag floating above the iconic startup. The “nugget” of the French startup scene was granted the status of a national symbol.
But was it really really a “nugget”?
Neither Arnaud Montebourg nor Emmanuel Macron seemed to care enough to have done more than quickly scanning reports from their own cabinet minions –and consulted media headlines for insights. Political imperatives should not be confused with economy realities: As an Industry Minister, Montebourg was obsessed by the defense of the Made in France, while Macron didn’t want to be the one who let the iconic French startup fall in foreign hands.
Dailymotion was created in March 2005. Its two first round of funding ($9.5m in 2006 and $34m in 2007) were provided by VC firms and private individuals. In late 2009, the French government had to step in to secure a third round ($25m) along with the VC syndicate. Audience looked good, but monetization didn’t work — the bane of video streaming platforms. Orange, the French telecommunications giant (inherited from state-owned France Telecom) was brought in to support Dailymotion by integrating the startup in its digital portfolio. The French carrier acquired 49% of Dailymotion in 2011, then 100% in 2011- at a valuation of €126m. “Creating synergies!” was the resonant battle cry. Except synergies never materialized. Dailymotion’s CEO Cédric Tournay was fixated on competing with YouTube and, to his chagrin, found Orange’s culture less than welcoming to the needs of a fledgling video startup.
Incorporated just a month earlier, in February 2005, You Tube followed a different path: one single relatively modest round of financing ($11.5m) then, twenty months later, in October 2006, Google showed up checkbook in hand, and coughed up $1.65bn to acquire 100% of YouTube. The brand remained, so did the headquarters in San Bruno, near San Francisco airport. But, business-wise, two big changes took place. First, in typical Silicon Valley fashion, the massive cash infusion translated into a large scale, global deployment: audience growth first, revenue later. Second, ads became to pour in, diverted from the fantastic Google money machine. Tons of data were used to determine that users should be allow to skip ads after few seconds, thus warranting qualified viewership to brands whose clips were actually seen in full.
This left little chance to Dailymotion, underfunded, unable (nor encouraged) to build upon Orange’s worldwide base of 244 million customers spanning over 29 countries. Through it Strategic Investment Fund, the French government still retained a 27% share in Orange SA (publicly traded on EPA:ORA and NYSE:ORAN). With such a stake, one would have pictured the French government representative sitting on Orange’s board pushing the bold, patriotic development of Dailymotion. No. Dailymotion was never more than a wart on Orange’s conservative product line. And the telco’s CEO, Stephane Richard (himself a former chief of staff of the Economy Minister), quickly set his mind on getting rid of the startup, under the best possible conditions.
A first opportunity flared up in early 2013 when Yahoo! approached Orange to acquire Dailymotion. From Yahoo!’s perspective, the operation made sense. The French company was performing well on markets other than YouTube’s native one, and Marissa Mayer wanted to have her video streaming platform to build upon. Orange’s Stephane Richard was elated: Yahoo! had proposed $300m (€275m) for the company; after all it the company had cost him about €150m, between the acquisition and the cash infusion. Not bad for a quick exit.
All of a sudden, the Minister in a striped marinière woke up and harangued Orange’s CFO: “I’m not going to let you sell one of the best French startups, you don’t know what you are doing”. Yahoo! quickly retracted its offer.
A year later, Orange, willing to get rid of an asset that was losing both relevance and value, tried to secure a syndicate involving Microsoft and Canal+, the Paris-based paid-TV network. Again, no luck.
Two years later, Montebourg is gone (now Board Vice-Chairman at Habitat) and the Economy minister is Emmanuel Macron, a pragmatic former philosopher (yes) and investment banker seen as less driven by ideology and grandstanding. But when Hong Kong’s Pacific Century CyberWorks showed up to acquire Dailymotion, the soft-spoken Macron jumped in and asked Orange to consider “other” suitors (read French or at least European ones). Problem is, in spite of government efforts to arouse bidders, there were no takers –a few tentative marks of interest, but no formal offer. PCCW was out.
Until Vivendi showed up. To its owner, industrial magnate Vincent Bolloré, and its newly appointed CEO Arnaud de Puyfontaine, the timing was just right. Vivendi faced a shareholder revolt lead by the American hedge fund P. Schoenfeld Asset Management. PSAM was calling for a €9bn dividend windfall from Vivendi’s massive divestment from telecommunications assets that left the group with a €15bn cash hoard. Not only PSAM wanted a fat dividend, but it also demanded a viable strategy. Hence the quick wrap-up of the Dailymotion deal. On April 7, Vivendi announced the purchase of 80% of Dailymotion for €217m (€230m), i.e. a €265m (€281m) valuation. Vivendi didn’t quibble, his shareholder meeting was ten days away. In the meantime, Vivendi had reached an agreement with PSAM: €6.75bn in dividend payouts.
Vivendi has yet to find what to do with its brand new “nugget”. It will have to deal with harsh facts:
- Last year, Dailymotion made €65m in revenue, and had a negative EBITDA of €2-3m. No big deal, but due to the specific nature of its business, of its infrastructure costs, the platform is said to require a €20m-€25m yearly cash-burn. (In fact, Dailymotion guarantees a minimum revenue for some of the media it hosts — to some extent, it buys its own revenue.)
- Dailymotion his having hard time monetizing its audience as most of its videos are user-generated (and therefore carry few ads) while Facebook is crushing the market –threatening even YouTube.
- Canal+ needs could generate post-deal opportunities. But, until then, the paid-TV network (owned by Vivendi) seemed quite happy with the deals it had with YouTube. So is Universal Music, also a Vivendi subsidiary.
- Vivendi made an opportunistic acquisition and overpaid it: in its books, Orange is said to have downsized the value of Dailymotion to €58m; that is almost a 5x implicit valuation for the transaction.
As far as going after YouTube, it’s no longer a realistic goal, as shown in these two charts:
This politically-induced operation carries its share of collateral damage. From now on, every Gallic startup that will be seen as a success — real or presumed, that’s beside the point — is likely to become a political football, a situation adverse to the interests of the company and its backers.
Next week, we’ll see how the maneuvers around Dailymotion have done more harm than good to the French startup ecosystem and to those who try to fund it.