Episode 108: Why Genius Spent $1.2bn On An Affiliate

[Music] Hello and welcome to episode 108 of Zero Length Sea, the podcast from Eilers and Cry Check Gaming. I'm your host Brad Allen and we are brought to you today by Optimoof, the creator of positionless marketing and the number one player engagement solution for iGaming and sports betting operators. My guest today is a familiar face, the founder, co-founder of third planet media. I've done that off the top of the head. I don't know if I've linked in open. That was foolish of me. Adam Small. Welcome back Adam. Thank you. Hey, it's great to be back third time on the show now if I'm counting right and it's always fun. You get right into the topic I like talking about. That's why we call you Adam. When there's affiliate news, we go to Adam Small and there was affiliate news on Friday. Genius sports acquiring legend, probably better known as the publisher/affiliate behind brands like covers, sportsbook review and casino.org which apparently rumored to make like casino.org makes up half of their revenues. I don't know if that's true, but that's what people are saying. Genius acquired them for 900 million upfront and up to 1.2 billion, so 300 million in earn out to which are apparently on profitability targets. The market obviously despised this. Genius is down 30% since it announced this deal. There's probably hair being torn out at genius sports. I would say the general vibe from the market or from people was initially they have paid 1.2 billion for an affiliate. What are they doing because of affiliates as you know Adam? Many are struggling, not all are struggling. What was your first reaction? Let me show this news come through. First reaction as well is it's a big number. We haven't seen any affiliate in our industry go for that much action network as far as I know was the biggest acquisition that I've seen happen that that was 240 million. This is a multiple of that. This is probably going to end up being from what I'm sure are getable and they're probably going to get the whole amount, the 1.2 billion. This would be four plus times the biggest acquisition we've seen. That's a big deal. I've known Nick Kisberg, the founder of legend of the company has had many names over the years, but now known as legend. I've known for a long time. He had a little cycle cards chat. If you remember that one, it's still out there, but this big and poker back when he poker was the main thing. And Nick, I believe started it either in his late teeth or early 20s who's very young when he got going with the business. And is a total SEO wizard. Probably probably one of the 10 or 20 best SEOs in the entire world and created an absolute mammoth of a company and ended up caching in. And I've been hearing for a couple of years if they were looking into potentially getting acquired. I just I couldn't ever really quite visualize who would acquire them because I don't think like the gambler dot com better collective types are able to finance an acquisition big enough like legend, especially after they'd acquired covers and forks book review and and revitalize those sites who made them more profitable. They're just they're just bigger. And so who's going to buy them? Is it going to be an operator that's pretty tough for an operator buying a affiliate like that? It's very tricky. And so it didn't totally shot me that they were liar. But it's still such a huge acquisition for them. It's such a big percentage of their market cap. What they've sort of bet on this acquisition that it really is just like it's it's it's it's like they're taking their shot here. If this thing doesn't work out for them I mean they're cooked so it's a big move. Yeah the genius market cap as we stand is 1.6 billion. So yeah it's it is a big swing. And as I say the the I think the forward EBITDA multiple they paid about 8.5 X 26 EBITDA legend. And I think the market looked at affiliates listed on stock markets and they're trading it like for 5 X for EBITDA. And I think that was part of the you know what you're doing. So why I guess from from your point of view what why would legend command a premium valuation? Well I don't think they should come on that much of a premium valuation. I'm also I'm you know I'm not I've never done an M&A of you know this size. So I don't have a full understanding but I do think there are a couple factors in play here that made it have probably the biggest of scarcity. There just aren't that many quality affiliate assets to purchase. And pretty much everything has been snapped up by by the big publicly traded affiliates. And then there are a number of other companies that exist that sort of operate in more kind of gray spaces where they're doing either black head SEO or operating primarily offshore. Whatever it is that they make them less acquirable for these big companies. They're just weren't they're just aren't a lot of things that you can buy there like this. So I think I'm guessing that legend have a lot of leverage in the discussions when it came at price. Very premium brands, covers the senior dot org SBR. These are sets have been around a very long time. They have a history of quality search results and brand power and tons and tons of content. They're not about to like get a manual penalty from Google and disappear. These sites just that's just not going to happen these sites. They're too good. They're too strong and too clean and so they are really good assets and dependable assets. On the other end I definitely agree with the people that are surprised by the multiple just because this revenue is it's very hard to feel that comfortable that it's going to be repeatable especially for another 7, 8, 9 years. The affiliate business has taken a lot of shocks recently. CPAs are going down. Operators are not wanting to pay as much out to affiliates. There's also a lot of disruption around things like Betz Mark that don't necessarily fall under like what a company like covers does right now or you know these other brands that legend has maybe they'll build stuff for that but I don't know that they have any of it today. So I just I think that there's a lot of questions and there are a lot of questions around how we're bringing this and how long it's going to take to pay back. I mean they borrowed 850 that 850. I don't know how to say a number this big. They borrowed 850 million. That's such a huge amount of debt for a company that's worth a half their market cap that they get this done. They're going to have to they're going to have to be damn sure this thing produced it's three years ago. Yeah it would be interesting to be in that building like you know I can imagine they're all excited to get this announcement out there like this is a transformative deal and then obviously your stock drops 30%. Honestly so I listened to the the call on Friday and I felt like part of it was a communication problem because they were so desperate to avoid using the word affiliate that they were saying but they someone asked them what does legend do because they really wasn't clear because they were trying to talk around it trying to speak in court with the and this was the answer what does legend do as we discuss it's an affiliate they make covers they make casino dog and they you know they produce content with and they sign up customers but the answer they got was the simple version of legend is that it has an AI led technology stack that produces digital content it builds a load of premium publishing websites for itself to own and operate and it does that for its partners. Like they couldn't make this sort of according to them it's like an AI super text that like nobody knows what that means and it just I found it strange messaging to try and use it anything to say this is an affiliate I felt that's part of the problem. Right like it's so hard to have to balance like the real world with how you make money and how you operate with like that actually works for like the public market it's not it's it's unenviable from my perspective. Yeah yeah I've read something somewhere like always remember the end of the day it's a human talk to another human and try and try and use language that other humans can understand. So you you said earlier that the sites are rock solid like they're not just going to disappear and that was the first question on the court what happens there's some concern about affiliates with like the AI search where you know people searching stuff no longer directed to sites they just get the info and there's going to be a drop off there is that a concern for them for you as well in your own business? Sure I mean it's it's already affecting things a lot. So yeah I mean coming back to it is the sites being solid I mean I think that that's what we're talking about for a minute on its own. I think that one of the biggest risks, and this popped into my head immediately when I heard about the deal, but maybe it's less easy to understand as either like a stock trader or, you know, someone inside a company like genius, is there's tremendous, tremendous and risk with its acquisition. Nick Kisberg is one of a kind. There's certain leaders or talents that are not replicable staff. And so, you know, I felt like I got a lot with, you know, Cal Spears, who I worked with, that, you know, my current company and my previous company is that, you know, it was very hard for the company. So I said, like, Roto grinders to replicate like that, that he had for that site, and they've done well with its sense to their credit. But it's very hard to take something that was built by a person, like a very clear vision for it and unique talents and continue to succeed beyond that person's tenure. And Nick is probably going to be a billionaire with this is all done if he's not already, you know, he's going to have a 12 car garage full of Lamborghini's or ever and does not need to work for genius. I think like that would be big concern. Like, yes, the sites are rock solid today. They're all scoring, you know, perfect. It's in all the SEO tools and they crush for every time they go after. But like, how does that look five years from now? I guess that would be a real concern of mine. How do you build infrastructure that replaces what he was doing? Is that even possible? So, and then the other thing is, yes, so search is starting after many, many years, it mainly being a Google thing and like everything being Google organic. Now it's been trending toward a lot more there for Google and maybe worse for the searcher, whether that is, you know, shopping type results. There's all kinds of stuff that comes in the top of your search that is not like actual publisher news type information. And you know, blusher's go is they get less and less traffic from that. And I think that that's going to be concern as well. Like covers isn't able to get tons and tons of content and top stories all the time. Like how did they mean in their revenue where it is today. So, yeah, it's another risk. But I be more confident on that will be okay because they're all working on those problems for a long time. Have a really competent. They can handle that kind of stuff. And being more concerned about just sort of like the long term like they at the very top when you have that top person at the top. Brain drain as it were. Yeah, well, one of the things that came up, genius said they felt comfortable. I think doing the deal because 75% of the revenues were recurring. Like revenue share deals with operators. But someone said to me about growth like, hey, that's is harder to, you know, you've got some revenues, but you're not necessarily going to grow them and then be the incentives for legend now. It sounds like it's profitability over growth. So does does that mean at the end of the day growth is going to slow down. I mean, I think growth has got to inevitably slow down just because you know, so much of this hint like new emerging like last markets, new states or like the advent of sweepstakes, maybe you know, prediction markets, you know, offers a new way to do that. But there, there have been a lot of new opportunities and new things to kind of put out there that I just, you know, aren't there anymore. And then I guess about the recurring rabbit. What is that because if it's if a lot of it is like sweeps casinos or if it's steak in particular, or if it's, you know, how good is that in terms of what you can expect years down the road. Also, I sometimes say that people conflate rare share a little bit with like reliable long term revenue, but in reality players fall off after a few months. So even if you have a lot of contiguous players at the same rate, you always were the revenue, like it has kind of a half life. It doesn't go to zero, but it starts drinking pretty quickly once you're not setting the same number of players. So I just fair a lot more questions they come to my mind and then answers when I hear about recurring revenue. Starting to start on one of these people selling genius. I don't have any to sell. I admire them for going and taking a shot, you know, like I think I'd be hamstrung. It's probably why I'm not the CEO of a company like that is that I would not be able to pull a trigger on something that risky. I mean, they are taking a shot like they're trying to do something big and you know, I was really want to mind you as letters this morning that was talking about the deal which one it was, but it was talking about how they believe they could get organically. I think it was Ernie's a more was saying that they thought they could organically by 2028 with a get it. And I believe by making his acquisition and it's as simple as that like they don't have some some synergistic vision of how this media company helps them grow their other ambitions. Yeah, but I guess to your point, if you're just trying to speed up, maybe you don't need to speed up. Well, do you need to add risk to speed up? Well, I get investors have said maybe maybe shouldn't have. That part I don't get I really don't understand what I need to get this. But that's you know, that's why I don't run a public company. Last thing I wanted to ask you about this was something. Bit and gin for speaking about last week as well. And it might be a bit relevant here. They said they noticed CPA starting to creep up again partially because prediction markets when they're bidding for assets on Google and affiliate sites. Something you've seen something legend might see as well a little boost. Yeah, it always depends on what we're talking about. But I think the CPAs when you talk about online casino, which is still I think legends. They're still pretty healthy. There's a ton of money to be made in crypto casino. If you're you know, if you're good at monetizing that, which I think they are as well. I think they do all right with all that stuff. And so I think that there is there are good rev share deals a good CPA deals to be had on the casino side. I think sports a lot tougher like the OSB. Asian has gotten really challenging. And yeah, a lot of it is competition with like the underdog price picks kind of sector and the you know, now the Calci polymark, polymark and not yet, but Calci and others like that. So I think more competition is typically good for affiliates. I get there more sectors and more operators getting it's better for affiliates. But it is a little tricky right now. Strategy is like I think we see companies like drafting salating for a while between, you know, are we going to be prediction markets are we kind of prediction markets are we going to be all the way prediction markets. prediction markets, whereas you see underdog price big sleeper, no big et cetera go all in pretty much immediately underdog pulled out of North Carolina. Is there a you know, they just decide we're not doing sports, but at all we're going to pure prediction and DFS. I just think that on the casinos a little cleaner still and and they are seeing more value and opportunity and wanted to pay a little bit more for players. I think that makes more sense for us on the sports side I would expect it to be like rough sailing for a while towards affiliate. Yes, so yeah, one thing I should maybe say about genius is when they did that NFL deal a few years back now and they gave away a ton of equity and they paid a lot of money to get the NFL official data rights. And a lot of people at the time said you've you've overpaid there and I think they would say that that deal was a success to a different level so they they've swung the back big before and made it paid off so they they might be right again. Adam Maliggo unless there is anything else we should be asking you about. I think for everyone involved would be the last thing I'd say I have a lot of respect for what those guys have done over there legend, especially last few years for a long time they were mainly an offshore affiliate and I looked at them very differently than I do now but I think they become an extremely professional organization. They've hired a lot of people that I know and like and I'm rooting for and I'm happy for them and I hope this works out for all parties involved. Alright Adam thank you very much for your time to our listeners we are Iles and Krichek we put a note out flash note out on this deal on Monday to our clients and if you would like to get hold of that become a client please drop me a line on LinkedIn and I'll put you in the right direction and thank you all for listening.