The day before the uSwitch acquisition was announced on March 16, SSP closed at $48. Counting the 2.8% drop this morning, the stock has fallen $3.39 or aproximately 7% in 2.5 trading days. Ouch! Part of the reason for the drop was a Merrill Lynch analyst note penned by Lauren Fine. In her downgrade, Ms. Fine questioned the strategic fit:

SSP already owns Shopzilla, one of the leading comparison shopping sites in the US and, to date, has enjoyed tremendous financial success top and bottom line as well as solid traffic trends. We would have expected them to leverage this technology geographically or to other areas of comparison shopping rather than make a hefty acquisition to enter a new area of comparison shopping. The business model is different as revenues are generated by commissions from service providers to whom uSwitch delivers new customers.

My Comments…
1. Would have expected them to leverage this technology geographically? I assume she means expanding into other countries. Shopzilla is already a force in the UK, Germany, and France. These are the only markets that really matter in Europe right now for comparison shopping. As for Asia, that’s a completely different story because of the double type character set. Yes, Asia has a number of very attractive markets, but building out Asia operations will not happen overnight.

2. Ms. Fine recognizes that the business model of uSwitch is different, but would have expected Shopzilla to leverage its technology to other areas of comparison shopping? Huh? What other areas of comparison shopping? Shopzilla is pretty darn comprehensive in terms of category coverage. I think Ms. Fine might be referring to areas like travel search, job search, comparison shopping for cars, comparison shopping for online degree programs, comparison shopping for cell phone service. But all of these areas are NEW, just like the services offered by uSwitch. Vertical/meta search and comparison shopping for services are pretty much the only comparison shopping areas which Shopzilla doesn’t cover. But these are completely out of Shopzilla’s core competency.

I think it’s really smart for Shopzilla not to get into these new areas of comparison shopping AND really smart for Scripps to acquire a company already working in these new areas of comparison shopping, also known as lead generation. For the uninitiated…

The technology and economics behind comparison shopping for products and the technology and economics behind comparison shopping for services (more typically known as lead gen) are completely different.

To get into the lead gen space for services, Shopzilla would have to:
1) Build out completely new technologies to connect consumers and providers. Lead gen isn’t a merchant listing service and it doesn’t depend on the same type of categorization or normalization that shopping search depends on. Acquiring the service provider’s data is completely different, too.
2) Build out a new sales force to acquire service providers. Getting a lending service, car seller, or home phone provider on board is not the same thing as saying to a merchant, we’re a more targeted pay per click (PPC) marketing channel.
3) Spend a hell of a lot of money to acquire leads at a loss. Yes, this new business probably would have run at a loss for a while which I think would have been much more negative for SSP than its decision to acquire uSwitch.

In lead gen for services, it’s all about acquiring leads at price X and selling that lead multiple times at price Y (or for example, acquiring a lead at $10 and selling that lead an average of 3.5x at $5, thus making a $7.5 profit). Unfortunately, without an established base of service providers, Shopzilla can’t immediately jump into the space and make money because there’s no one to sell the leads to. As opposed to uSwitch (or LowerMyBills) which can sell the lead to 3.5 providers on average (for example), Shopzilla would only be selling to an average of 1.6 providers at first. Furthermore, Shopzilla would have to compete on the marketing side with LMB, LendingTree, and Adteractive which all spend a lot to acquire their leads. I guess people might figure that Shopzilla could put up PPC ads on Google and YSM just as the company does for its shopping comparison engine listings. However, because its not making a ton of money on each lead (not enough service providers to sell to yet), Shopzilla can’t bid high enough on the PPC engines to attract a ton of leads with a positive ROI.

At the same time, there’s still a LONG way to go with comparison shopping or as it will eventually be called, shopping search (a URL which Shopzilla smartly owns). Shopzilla makes 30-40% of its revenue from Google Adsense ads (according to recent SSP filings). To me, this means that people are searching for products which Shopzilla doesn’t have in its database and therefore clicking on Google Adsense ads. Shopzilla and everyone else in the space has a long way to go to cover the long tail - Shopzilla shouldn’t need Google Adsense ads if the company is doing shopping search well. If these shopping comparison engines are getting feeds from just 5,000 merchants, they are sorely missing out on the total e-commerce universe. Yes, Shopzilla is crawling and the company says it offers products from over 70,000 sites, but 70,000 merchants is a small percentage if the pool of shopping sites is 1,000,000 and growing every day. That’s why it makes sense for Shopzilla to stick to its guns and continue exclusively with shopping search. If it wants to get into lead gen (lending, cars, home phone providers, online education) or travel search, it can partner.

Ms. Fine also brings up that the deal is dilutive to SSP EPS by $0.10 - $0.15/share (as Scripps stated on the call) and that the deal is more expensive than the Shopzilla acquisition which leads to a longer payback period. Both perfectly valid points. She then goes on to say that ‘valuation is not the major issue as SSP continues to post solid overall growth. However, the stock has been range bound of late, we believe owing to concerns about slowing growth at the cable network businesses and the coming upfront market; we sense these concerns will also be a factor capping share price appreciation.”

If valuation of SSP isn’t a concern, but slowing growth is, I’m surprised Ms. Fine isn’t applauding this deal as uSwitch is expected to grow revenues by 80% year over year. As I said in a previous post, “the smart old school media companies have realized that online services are the future and the candidate pool for profitable, established companies is getting slim. And if Scripps can leverage its network for uSwitch and UpMyStreet the same way it leveraged its network for Shopzilla, this deal will not look expensive for that long.”

Which leads me back to the question of strategic fit. Yes, Shopzilla could eventually build out uSwitch services, but that’s the wrong move if it wants to remain the king of shopping search.

Look at this deal as an old media company with incredible assets making moves to ensure the company can survive, compete, and post the same growth numbers as companies like Experian and IAC as well as media conglomerates like FOX, Disney, and Viacom which are picking up high growth assets to offset a tough outlook for growth in the traditional areas of Media 1.0.

Now, is that a reason for the stock to drop 7%? Or is it a reason for the stock to rise 7%?

Related Posts
Comments on the uSwitch Acquisition - March 16, 2006
Scripps buys uSwitch for $366m - March 16, 2006