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TMF Interview With broadcast.com Co-Founder & Chairman Mark Cuban
April 13, 1999
With Yi-Hsin Chang (TMF Puck)
Streaming media company broadcast.com (Nasdaq: BCST), formerly known as AudioNet, provides audio and video programming -- including live music and sports broadcasts, as well as access to company conference calls and meetings -- and allows users to preview entire CDs, audiobooks, and videos before making a purchase. The Dallas-based company just agreed to be acquired by Internet powerhouse Yahoo! (Nasdaq: YHOO), a deal that's expected to close in the third quarter of this year.
TMF: As you can imagine, we're very interested in your deal with Yahoo! Why did you decide to merge with another company instead of staying independent, and why Yahoo! as opposed to, for example, one of its competitors, such as America Online (NYSE: AOL)?
Cuban: First of all, broadcast.com, as you saw yesterday when we reported [first-quarter earnings], business has been phenomenal, so we're really working from a position of strength. Our goal was to win in streaming media. We want to be and continue to want to be the dominant player in streaming media. We know we could've done it on our own, but we thought we'd be in a stronger position to do it more quickly if we teamed up with the right partner.
So we talked with a lot of different people, but we chose Yahoo! because one, we loved their management. Their management had the same focus and vision that we did, and we continue to. We love the culture. Their organization is very similar to ours. It's lean, mean, focused, fast, not pretentious, not ego-driven, and so that was a nice fit.
"We love the culture [at Yahoo!]. Their organization is very similar to ours. It's lean, mean, focused, fast, not pretentious, not ego-driven, and so that was a nice fit."
If you look at their skill set and our skill set, they're very, very complementary. Broadcast.com is the dominant player in streaming media. We've developed a very unique infrastructure, unique integration and technology skills in the digital media space. But there were a lot of things that we hadn't gotten good at yet, like personalization, like a My Yahoo had, like calendaring services, like the pager services they have.
There are so many things that we need that we were going to have to do at some point to be a full portal, to offer all the full-portal services, leveraging our streaming media. We just thought that by combining with Yahoo! we would get there a lot faster. Now on the other side of the ledger, they don't have any of the streaming media skills or digital media skills that we had so there was no overlap there, and we brought that to the table. You put those pieces together then add the fact that Yahoo! gets 270 million-plus page hits a day and 60 million unique users, that's a great combination.
TMF: Will you continue to operate as a separate company based in Dallas?
Cuban: We'll be a subsidiary, but we'll be based in Dallas and continue to run with Todd Wagner -- my partner -- and myself heading the ship.
TMF: Since you guys founded the company in '95, you've basically been running your own show. Do you think it will be difficult to have to answer to a parent company?
Cuban: There are always challenges, of course, but at the same time I'd rather deal with the difficulties of answering to T.K. [Tim Koogle] and Jerry Yang and Jeff Mallett than dealing with the realities of the marketplace alone. This gives us the chance to just blow by anybody who might consider trying to catch up with us. We're already way ahead. You put us two together, and we're even further ahead.
So if I had to balance the two, and say, "OK, Mark, you're going to have to deal with guys you really like and have a lot of respect for -- the folks at Yahoo! -- or you can just take on all potential comers on your own." Heck, I'm more concerned with winning than the ego aspect of "this is my company." Because when it's all said and done, how much can I return to my shareholders? How much can I return to my employees? How much can I return to my customers and my users? And this is the best value for everybody involved.
TMF: How will being a part of a media giant change the way you do business?
Cuban: I don't think it will. I think we were working as fast as we could. Possibly it might accelerate it. It will put us in a position to accomplish things that we might not have been in a position to accomplish before. The interesting part about what we do in streaming media -- content wants to be seen and heard, right? I mean The Motley Fool Radio Show wants to be on as many affiliates and heard by as many ears as it possibly can be, and content at broadcast.com is no different.
So operationally, we're not going to change, but in terms of scale, we can work with a content provider like a Motley Fool, like IBM, like Dell, like General Motors. Pick any of our thousands of customers and say to them, "You combine our skill sets with Yahoo!'s and our ability to draw an audience, and the value proposition to you as a customer is far greater." So if anything, I think it will accelerate our plans to turn the Internet into a broadcast medium.
"[The merger with Yahoo!] gives us the chance to just blow by anybody who might consider trying to catch up with us."
TMF: Well, as you mentioned, you just reported first-quarter results -- a 127% gain in revenues year-over-year to $10.3 million, and a loss of $3.4 million before charges compared with a loss of $2.6 million a year ago. Since Yahoo! actually makes profit, the losses at broadcast.com will likely take away from Yahoo!'s earnings. How do you plan to achieve profitability?
Cuban: If you look at our business plan and our models, a lot of the things that we were going to have to invest in -- personalization services, all the things you find in a traditional portal -- we're not going to have to invest in now. So I think -- I don't want to try to make any forward-thinking statements or anything -- but we're very encouraged that we're going to be able to be very accretive to Yahoo! in the not-too-distant future.
TMF: How do you think broadcast.com's performance should be measured in terms of looking at the results -- whether it's revenues or income...?
Cuban: Revenue's always important because we're in a space that didn't exist three years ago. Things that we're selling are things that no one else has ever sold before, so our ability to gain revenue is a big win for us, but where we measure ourselves internally is our investment in our sales force. If you look at our business, business services are 70% of our revenue. Within that realm, you need sales people who are out there closing the deals, and we continue to invest heavily in our sales force because there's kind of a delayed upside, if you will, because we have to train them, we have to give them a chance to learn their skills, and it takes them a little bit of time before they can really start digging in and selling.
So we think as we continue to invest in our sales force, which grew from 85 people at the end of last quarter to 105 people at the end of this last quarter, we're building a base for future revenue growth and profitability growth. And if you look at our margins, our margins are continuing to be very solid in terms of gross margins. Those are two important measures.
And the third, I'd say, is unique users, people who are coming and becoming comfortable with streaming and digital media. We grew from 800,000 at the end of last quarter to 1.1 million this quarter. That's huge growth, where the rest of the Internet was -- with the exception of Yahoo! -- dealing with flat to down sequential sales. Both Yahoo! and broadcast.com were the exception to the rule, showing significant incremental quarter-to-quarter growth.
TMF: As far as streaming media is concerned, at what point does the average consumer have the bandwidth necessary to really take advantage of the potential of broadcast.com?
Cuban: Well, they all do. All you need is a 14.4 modem just to be able to listen to any of our sporting events. So everybody with a connection to the Internet can benefit from broadcast.com's streaming media. Now when is everybody going to have full-screen video? Well, that happens over time.
There are two points people don't realize. One, half of our users come during the day, and, almost by definition, people at work have faster connectivity, right? So we basically are already living in a broadband world from 9 to 5. So our corporate customers are really starting to leverage high-speed video. When we do events for IBM and Oracle and Microsoft and others, we almost always include a high-bit-rate video stream as part of the solution.
"We're very encouraged that we're going to be able to be very accretive to Yahoo! in the not-too-distant future."
Now on the consumer side, there are about 800,000 cable modems and xDSL lines out there in the U.S.A. today -- not a huge number all things considered, but you know what? If I went to any TV producer in America and said, "We're going to create another Milwaukee. Would you like to distribute programming?" That's the size of the cable usage in Milwaukee -- it's bigger than the size of Milwaukee. It's bigger than Indianapolis. It's not huge the way people like to think of things being big, but certainly nothing to sneeze at already today. It's a real market.
But the best news is, from a technology perspective, this is the worst that it's ever going to be, and the videos are only going to get better, and the bandwidth is only going to get bigger, and the number of households and businesses that have high-speed connectivity is only going to get bigger and better. And that's great for broadcast.com and broadcast and Yahoo! together.
TMF: If you were running things at Yahoo! -- by the way, is that what you want to do, run things at Yahoo!?
Cuban: I just want to make money for all of our shareholders.
TMF: Would you consider using stock to acquire a major TV network?
Cuban: I don't even want to go there. Since I am going to be working for Yahoo!, sometimes you learn to keep your mouth shut, right?
TMF: I guess really what the question is, is this PC and TV issue? Do you see them as closely related or as two mediums?
Cuban: No, not really, because what I would tell you is that the Net has no problem raising capital, right? I look at broadcast.com equity as being very dear, and I know the guys at Yahoo! look at their equity as being very dear and very valuable to them and their shareholders. I'd rather just go out and raise the money. If I really need advertising, or if I need promotion on air, I'll write a check. Why not just go out and buy it instead of giving up equity? Because that equity has been going up a lot faster in value than any other asset that you can name. I've yet to run into a TV station or cable network or traditional TV network who won't take our checks. They all will take our money, and we can get all the advertising we care to buy.
TMF: Do you foresee making other acquisitions as part of Yahoo! in the broadcast realm?
Cuban: I really can't speak to that at this point. But just to reiterate what [Yahoo! CEO] Tim Koogle says, one of the nice things that we both have in common -- Yahoo! and broadcast.com -- is that we're both very, very opportunistic. And when the right opportunity comes along, we're always looking for ways to add value for our shareholders. One thing Fool listeners know and Fool readers know is that it's all about return on equity, it's all about return to shareholders. We talk about complementary visions and culture. Broadcast.com -- I had never been around people in a company that was so focused on returning wealth to shareholders, and Yahoo! is in the same boat.
TMF: How do you envision the Internet and streaming media technology two to three years from now?
Cuban: We're in a digital world, and in a digital world, bits are bits. What's happening is that we're going through this period I call defragmentation of media. In an analog world -- TV is one analog form, radio is another analog form, VHS is another analog form -- but all those different media forms are defragmenting into just digital form. So what was TV and now HDTV or digital television, radios going CD-digital radio, VHS going DVD, they can all be represented by bits. Now once you're at that point where it's all digital, then they all start squishing together -- music, audio, video, everything starts becoming one format, and I think the Net enables that far better than anything in prior history. There's no limit to how many of those bits you can distribute and how those people can receive them.
I think even more interestingly -- I don't like to call it convergence because you can't converge analog and digital; it's either one or the other -- you're going to start seeing new media types come up. There's going to be some little 12-year-old girl somewhere that's going to say, "You know, Mom, I don't want to do my homework. I want to write this new piece of software. I think it's going allow me to create this music and this visual presentation far different than anything I've seen before."
"It's just natural that better companies will buy the smaller good companies, and the companies that aren't as strong will just fall away."
It's going to change the way we know media. Just like silent films ran into talkies, and radio ran into TV, and TV ran into VHS, and etc., etc., the rate of change is not going to slow down, it's going to accelerate, and there will be all kinds of really interesting, exciting things to come down the pipe. And the Internet and broadcast.com and Yahoo! are very well-positioned to leverage them, whereas traditional media are going to find it a lot more difficult.
TMF: Do you expect to see a lot more consolidation in the Internet industry?
Cuban: Absolutely, it has to happen, just because there's a lot of good companies out there, but there's a lot of bad companies out there. I'm not going to say which are which, but history repeats itself again and again and again and again, and people go through the same natural trends. I'm not a historian or sociologist, but I think it's just natural that better companies will buy the smaller good companies, and the companies that aren't as strong will just fall away.
TMF: Great. Well, thank you so much.
Cuban: Oh, anytime.
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