The collapse of Swish Media late yesterday is the latest event in a shocking 12 months for the sector loosely termed “digital media”.
I say loosely, because this is a sector that was built around clumping vaguely similar businesses together – as long as they had something to do with online or media, the wallets came out.
There’s plenty of evidence to say the model didn’t work. Destra, an eclectic mix of PR digital music, entertainment and media companies, went under in November 2008.
BlueFeeway, another digital media and marketing group, was taken private by the Hannan family after losing money and struggling to obtain finance.
CommQuest, the digital company set up by William Scott, was rescued in June after racking up big losses and heavy debts.
The collapse of Swish is another reminder of the problems with this model.
These companies had their own unique problems, but their basic strategies were the same: acquire lots of supposedly complementary businesses very quickly and gain access to as many sub sectors of the digital industry as possible.
It sounds like a great idea – it seems obvious that there would be synergies between an online music business, a digital marketing company and public relations firm. And even if the businesses weren’t completely complementary, the diversification should provide the group as a whole with some extra protection.
But there were a few flaws in the strategy.
Firstly, the companies overpaid for their acquisitions and usually funded the deals with debt. When the economy turned, these deals gave the companies very little room to move.
Secondly, the companies overestimated how complementary the businesses were – they all still needed their own infrastructure and teams. In many cases, integration of acquisitions was non-existent.
Finally, they misread how difficult it is to service very different groups of customers. The clients for a sales and marketing services businesses are very different from the customers for a digital music business. There is very little opportunity to cross sell, which means you need separate sales systems for each business – and that’s a huge expense for a company to carry, particularly when times are tough.
The lesson – acquisitions are great, but they must be strategic, well price and, most of all, well executed.
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
