Forbes Article

Entrepreneurs

Teen Machine

Helen Coster 10.22.08, 6:00 PM ET
Forbes Magazine

In the world of Alloy Entertainment’s books and television shows, the girls are naughty. In The A-List book series Camilla Sheppard spreads rumors that a rival classmate is a prostitute. On the CW network’s Gossip Girl Serena van der Woodsen has her nemesis banished to boot camp. In Privileged, another TV show developed for that cable network from an Alloy-created book, Sage Baker gets sick after jealous gal pals in Palm Beach spike her drink. There is more bad behavior to come: Nickelodeon is turning another Alloy book into a TV movie called "You Are So Not Invited to My Bat Mitzvah."

The target teen audience eats this up. Today Alloy Entertainment has eight TV pilots in development, as well as a first-look deal with Warner Bros. Television. It has four movies in development at Universal and Warner Bros. The film version of Alloy’s book The Sisterhood of the Traveling Pants and its 2008 sequel grossed $83 million at the domestic box office. The second-season premiere of Gossip Girl drew 3.4 million viewers and gave the CW network some of its highest ratings ever. At one point this past summer Alloy had nine books on the New York Times bestseller list.

A single Alloy book can generate multiple six-figure revenue streams: the initial book deal, plus a fee for selling the television rights, a purchase price and a producer’s fee for the pilot, a per-episode rights fee and producer’s fee, and a cut of the overall profits. Last year Alloy’s media business grew 35.6% to $62.8 million, and revenue in the first half of 2008 increased 52% over the same period the previous year.

Can this frothy fare help Alloy finally cash in on its audience of 10- to 24-year-olds? While its media properties are red-hot, this Manhattan company is still struggling to profit from a hodgepodge of 50 ventures it has created or acquired to reach this fickle market. Last year the 12-year-old media and marketing enterprise, which has never posted a profit, lost $64 million on sales of $200 million after goodwill impairment charges were tied to some of its acquisitions. Its stock price is hovering around $5.50.

Matthew Diamond, company cofounder and chief executive, says he believes investors value Alloy based on earnings before depreciation, interest, taxes and goodwill impairment. Last year Alloy earned $10.4 million by that measure; its enterprise value (debt plus market value of common) is six times that sum. "I think we’ve had a nice run," he says, then admits: "We have a ways to go." His Alloy stock is worth only $2.4 million.

The company’s biggest revenue generator and profit center is its promotions division, with sales of $83 million last year. It helps marketers, including Johnson & Johnson (nyse: JNJ – news – people ), Office Max (nyse: OMX – news – people ) and Verizon (nyse: VZ – news – people ) Wireless, place ads and product samples where they will reach teens and young adults. Through this operation Alloy plants products, including Unilever’s Axe Body Spray and Pom Wonderful’s Pom Tea, at spring break parties and on college campuses. The company also places ads that appear in college newspapers and on media boards on 1,000 campuses. "We want to be the conduit between corporate America and the youth market," says Diamond, 39.

Sometimes that connection is a little fuzzy. Since its offering of shares to the public in 1999, Alloy has spent $100 million to acquire 15 companies that haven’t always added much oomph to this enterprise. For instance, last year Alloy spent $5.8 million to buy Frontline (nyse: FRO – news – people ) Marketing, which puts ad displays in 8,000 supermarkets–not places where students hang out. Despite the focus on youth Alloy has had trouble building thriving online community hubs. A contest site called Sugarloot.com attracts just 86,000 viewers a month. Sconex, a social networking site for high schoolers, was shuttered in August after being outdone by MyYearbook.com ( "Growing Pains") and Facebook.

One problem is that Alloy’s businesses are too disparate, says Steven Martin, a portfolio manager at Slater Capital Management in New York City, which has a 5% stake in Alloy. How does a smattering of 70-some career publications, including Minority Nurse and Graduating Engineer, jibe with its apparel catalogs and the TV business? "They [Alloy] have never lived up to expectations that people have had for them, both financially and in business development," says Martin.

Diamond hopes to squeeze more dollars out of Alloy’s entertainment business. Its book business sprouted out of 17th Street Productions, a book-packaging company Alloy bought in 2000. Soon after, Alloy started packaging books that came out of biweekly brainstorming sessions with a 12-person, mostly female group. Today good ideas get a three- to five-page treatment and are sent to a writer, sometimes a freelance one. Alloy then licenses the rights to a publishing house, keeping an advance against the book royalties (on average, $180,000) and gets a cut of any sales that exceed the advance. The company typically splits revenues 50-50 with the author. The books run about 250 pages and sell for upwards of $10. Alloy creates a book club and a Web site to go along with them.

In 2000 Alloy churned out 100 books, but margins were low until Diamond and company decided to scale back the business and develop books that could work in other media. Five years later Alloy sold a concept called Pretty Little Liars–something of a Desperate Housewives for teens–to the CW for a television series and to HarperCollins for a book. These sizzlers weren’t yet big moneymakers: Alloy at the time only made money from optioning the TV rights ($10,000) or film rights (up to $250,000).

Today the company is savvier. With a hit like Gossip Girl Alloy makes money from the TV rights, from selling the pilot to the CW and from producers’ fees on the pilot. It then collects a per-episode rights fee and a producer’s fee. For films Alloy gets a rights fee, a producer’s fee and a percentage of profits. Eighteen months ago only a fifth of the revenue in Alloy’s entertainment division came from TV and film deals. Today it’s a third.

Diamond aims to do a better job of linking Alloy’s far-flung businesses through cross-promotions. Alloy advertises its books through two catalogs that sell apparel and various trinkets to teens. Last month it placed ads in college newspapers and on a campus billboard network for Summit Entertainment, which is promoting a film based on an Alloy book about a high school senior who drives across the country to meet a girl he met online. Alloy has an e-mail database used to spammertize all sorts of fare.

Alloy also just started promoting its properties on Channel One, the in-school network that broadcasts 12-minute programs, including two minutes of advertising, in 8,000 public schools. Alloy purchased the beleaguered network, created 19 years ago by Chris Whittle, from Primedia (nyse: PRM – news – people ) in April 2007. After spending $12 million to upgrade the Channel One system, Alloy now uses a chunk of the network’s ad time to promote its own fare (such as the ABC Family miniseries Samurai Girl). It sells the rest to marketers. Diamond hopes its entertainment division will soon create content it can broadcast on Channel One for kids who are staying after school.

Diamond insists Alloy is about to turn a corner: "Our profitability will come with good execution on the media side, and then the stock will take care of itself."