The Equity Swap Swan Song?

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The equity for advertising deals the networks struck with dozens of dot-coms during the past year looked like they were going to make NBC, CBS and ABC a laughing stock earlier this month when the technology stocks tanked.


Yet, despite the volatility of the stock market, the networks say the deals they cut are not in jeopardy nor do they foresee scaling back such agreements in the future.


However, media analysts expect the flurry of deals to die down as soon as the networks' ad inventory begins to run low and their online partners begin to go belly up.


Ad-for-equity deals involving a network receiving a stake in an online company, instead of cash, in exchange for commercial spots and other on-air mentions. Most of the deals include extended marketing elements including joint promotions and shared content with online network properties.


CBS, which currently has as many as 18 deals with dot-coms including iWon.com, MarketWatch and SportsLine, was unfazed by the turn in the market.


"We're not a venture capital company. We're not doing it for return on investment. Much of the reason is to extend the CBS brand," said Dana McClintock, spokesman at CBS, New York, by forming "synergistic partnerships."


Since CBS is a business and profits will always be the king, this sounds like a lot of nonsense to Jack Myers, CEO and chief economist at The Myers Group, New York, an economic research firm that follows media spending. "I think that's [bull], they're looking for increased valuation in the financial markets."


Even though the networks have brushed off the recent stock market tumble as a bump in the road, it may make them wary of delving into a throng of new deals, said Rick Bruner, vice president for IMT Strategies, an e-business research and strategy firm in Stamford CT.


"The sobering market performance in past weeks will give them pause as to whether they want to get more heavily vested at this moment," he said. "But, I wouldn't expect they're going to draw a line in the sand and say 'we're not taking any more offers' if the right deal comes along."


The networks pointed out that short of a market crash, plummeting stock prices don't sting as much because many of the deals were conducted in the pre-IPO stages of their online partners' existence. Additionally, the amount of revenue they are displacing is lessened because most of the ad swap deals don't involve prime time slots.


The leader in online alliances is NBC, which has 50 deals with dot-coms such as Flooz.com, iVillage.com and Space.com. For NBC, these opportunities are viewed as a way to extend its presence into the online world without plunking down bundles of cash.


"By owning a piece of these companies, we go from being a one-dimensional company to being a three-dimensional company," said James Schwab, senior vice president of interactive business development for NBC, New York. "This goes beyond the pure selling of advertising. It's an investment opportunity."


The ad-for-equity deals, in total, are estimated to be valued at $2.2 billion over the course of the next seven years, according to Myers. CBS has made deals that are valued as high as $900 million with NBC following closely behind at $750 million.


CBS's McClintock said these numbers are deceiving because there were no real dollars invested and they are spread out over a long period of time. "We dole out our ad and promotions over the course of five to seven years."


The proliferation of these deals will continue for the time being as a number of the cable channels, broadcast station groups and others will get into the game. Then they will taper off because of waning inventory, said Myers. "The networks ability to continue to commit promotional time will be significantly reduced. You can only give up so much of your inventory."


The networks expect to continue along the same path. "When these deals dry up, if this is a successful model, there will be a new wave of them," said McClintock.


ABC has struck relatively few deals. Most notably it has agreements with Netpliance, Pets.com and Toysmart. Fox has commitments with WebMD.com.
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