$10 Million Won’t Make Honey Any Sweeter For Investors

I’m having a hard time figuring out what makes the new online version of Honey magazine worth a $10 million dollar investment.  Sure, the re-emergence of Honey in an online only format will no doubt be popular among fans of the old print edition and those new to the Honey brand.  Sahara Media has the necessary steps to ensure honeymag.com and the affiliated hivespot.com social network will be dynamic and of high quality.  Sahara purchased full rights to the Honey brand, brought on former Vibe Associate Editor Shanel Odum as it’s Editor-in-Chief,  and managed to obtain $10 million dollars in private investments to use at its disposal.

But what kind of return do investors expect to make on their investment, if any?

The website and social network’s four components will include community, communication, career, and connection.  The hivespot.com website also makes note of a “virtual closet” and “access to incredible offers on clothes, cosmetics, gadgets, music, and more,” with free access.   This essentially means the site will offer content, social networking, job listings, the ability to sell third party merchandise, and sponsorships.  This means it will make its money off of traditional advertising and sponsorships, along with a percentage of transactional third party-to-consumer, possibly direct-to-consumer, and potentially (if the virtual closet has anything to do with sales) consumer-to-consumer sales.

Let’s do some basic math based off of some very optimistic assumptions. The print version of Honey reached as many as 1.5 million people per month.  Myspace has a 2% profit margin.  Radio One’s combined Interactive One and publishing businesses generated $5.6 million in revenue off of the 9.4 million people who visited its websites or read its magazines between July and August of 2008, or $0.20 per viewer/reader monthly, its best reported quarter in terms of the year to date.

If honeymag.com manages to attract as many visitors as the print magazine did in its heyday (more than twice that of essence.com’s 729,000 according to quantcast), brings in as much advertising and subscription revenue per visitor as Interactive One did in its best quarter, and has 10 times the profit margins of myspace, it would make an annual net income of $720,000.  Add another $20,000 per month for other potential income sources, such as subscription, sponsorships, and/or job listings (about $0.01net income per potential visitor) and you’d end up with a net income of about $860,000 per year.  If Honey could consistently hold these numbers they still would not be able to make up for the $10 million dollar investment a decade later, and that’s assuming that Honey does not go through the normal pains of an internet start-up, which often lose money for at least their first few years.

But those are just numbers, and optimistic numbers at that.  Despite having its best quarter in revenue in 2008, Interactive One/Publishing still lost $4.9 million.  Honey’s well-known brand, vertical African-American and female-focused orientation, and centralized content will save it from losing nearly as much money as it makes.  But I’m willing to bet the new version of Honey will end up much like the old one.  It will be a great product, but it’s financial return won’t justify the investment.  It’s tough to justify a $10 million investment in an internet media company during a time when the biggest and the best in new and old media haven’t found a way to turn a decent profit off of internet magazines and social websites.  That amount of capital should have been enough to secure full ownership of the entire Honey/Sahara Media operation.

The math doesn’t add up, and it would take one of five things for this investment to make sense.  Maybe you can tell me which one you think it is.  I am guessing 2 or 4.  And if it is 2, I am assuming that Honey will look to generate a large portion of its income off of third-party sponsorships, revenue share, and percent of transaction or licensing, much like Robert Johnson’s new concept for digital television content from established magazine brands:

1.  Investors were being realistic.  They will recoup what they spent and more.

2. Sahara Media is applying a revolutionary, or at least extremely sound,  business model they have yet to share with the public.  Tell us what you think they are up to.

3. The math, logic, assumptions and/or information in this post are the off mark.  Tell everyone how much of an idiot I am and school us all.

4.  John Thomas Financial, and the investors it represented in this transaction, used dot.com boom era valuations to decide how much to invest in the company.  Much like Oak Investment Partners recent $25 million dollar investment in Huffington Post.

5.  The same investors have other incentives in investing $10 million dollars into Sahara beyond actually making a return on their investment.  Say contribution to cultural prosperity, diversity within digital media, or they are in it for the long term.

Sources: Bnet.com, Interaciveone.com, MSN Money, Quantcast.com, Radio One 10-Q Filing, Reuters