Two thing jumped out at me when I read a CNET interview with John Battelle of Federated Media this morning - his direct criticism of competitor Glam Media as a “flavor of the month,” and his suggestion that he may take equity stakes in his publishers.

Full disclosure - Federated Media is our ad selling partner. Sometimes we love them. Sometimes, not so much.

Glam Media: A Flavor Of The Month

The first thing that stuck out was his criticism of competitor Glam. CNET’s Stefanie Olsen asked Battelle “Vertical ad networks like Glam Media are really popular right now. Investors love them. Why do you think that is?” His response: “Because people don’t understand them and they hope things that they don’t understand will pan out.” He added “I just think they are the kind of flavor of the month, but you have to get down to where do you add value to the marketer and where do you add value to the publisher.” In a world filled with over-media-trained executives, its refreshing to see someone go after a competitor with such a direct statement.

My next question would have been to ask him how Federated Media is different from Glam. Federated Media sells advertising for tech sites; Glam sells ads for women-focused sites (although their biggest partner is MyYearbook). Other than the focus of the ad sales effort, the differences are not obvious to the casual observer.

The truth is the networks have significant strategic differences. Glam owns a few properties of its own, which helped in the early days as anchor properties. Federated Media does not own any major publishing sites.

Glam also guarantees revenues to partners. MyYearbook is rumored to receive a guaranteed CPM on page views, and many of the blogs get guaranteed monthly payments of $10,000 or more. Those guarantees resulted in a loss for Glam of $3.7 million last year on $21 million in revenue. But it also accelerated growth and allowed them to raise a massive round of financing.Federated Media, by contrast, doesn’t guarantee revenues but is profitable. They’ve raised just $7.4 million.

But Battelle also reportedly has Glam envy. He turned down a $100 million buyout offer, reportedly because he felt Federated Media should be worth at least as much as Glam ($400+ million).

Will Federated Media Buy Or Invest In Publishers?

The weak point of Federated Media’s model is that they don’t control their own publishers. If a better deal comes along, those publishers will bail - which is what happened last year when Digg left the network for a big, three year guaranteed revenue deal from Microsoft.

One way to solve that problem without guaranteeing revenue is to own publishers, or at least a stake in them in return for a contract they can’t get out of. When Olsen asked Battelle what he intended to do with the venture capital he’s in the process of raising, he said:

Word has it you’re looking to raise money and you’ve hired Savvian to vet offers. (CNET News.com story here.) Given that you’re already profitable and don’t need the cash, what do you plan to do with the money?
Battelle: Well, I can’t say specifically what we might do with any money that we might raise, should we do a fund-raising round. But I think there are an awful lot of opportunities in this emerging field and it’s just good to have access to capital to execute any reasonable ideas that we might have. It’s a very quickly changing market and it needs financing. I mean individual sites need financing and we want to be a good partner for all of our sites.

What do you mean individual sites need financing? You want to fund some of the sites you represent?
Battelle: I’m not saying that we’ll necessary do that. I’m saying that it might not be a bad idea to be ready, should that become something that those sites are looking to do. In a fast-evolving model, it pays to have a strong balance sheet.

So Federated Media says they want the option of investing in their publishers down the road. But certainly there will be strings attached. Here’s what I think he really means: They’ll either buy sites outright, or guarantee revenue, or guarantee revenue in exchange for equity. A publisher wouldn’t consider Federated Media an attractive investor versus venture capitalists simply because it would mean tying their revenue to them over the long term.

But at one point in the interview Battelle said a roll up wouldn’t work, because authors must be independent to be authentic (I’m interpreting, not quoting). So there’s some conflict in some of his statements. What are they really thinking? I have no idea. But revenue guarantees would be a nice place to start.

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CNET is reporting that tech-focused advertising network Federated Media (which sells advertising on our behalf) is looking for a new round of financing. CNET is basing this partially on our previous report that they hired investment bank Savvian to represent them after they turned down a $100 million acquisition offer, plus a new source that says the company is looking at term sheets now.

From what we hear, Federated Media is looking at both financing and new buyout offers, but wants a valuation way beyond the $100 million floated to them last year. Founder John Battelle is said to be looking for more of a Glam-like valuation, in the $400+ million range. Glam has a similar business model to Federated Media, but focuses on womens sites. Glam also guarantees significant revenue to its partners, which resulted in a loss last year of $3.7 million on $21 million in revenue. Federated Media doesn’t guarantee revenue, and is reportedly profitable (they better be, with how much of our revenue they keep).

Federated Media is reportedly generating gross revenues in excess of $2 million per month, and they keep 40% of that after the split to partners.

It’s unlikely the company will get buyout offers in the price range Battelle is looking for, so a new financing is likely. But part of me wonders why they’re doing this at all. A new financing means a bigger valuation, which means they need a much higher price down the road when they do eventually sell. And with competitors springing up all over the place, margins can take a hit.

Perhaps Federated Media intends to take the Glam approach and go in the red for the sake of growth and begin to guarantee revenues. That’s a slippery slope, but it may also get Battelle his payday.

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Through a variety of sources we’ve confirmed that Technorati is making plans for a major shift in its going forward strategy, and is also considering a number of corporate development transactions.

First, they’ve been pitching venture capitalists on another round of financing. That’s not surprising - their last round, $10.5 million, was in June 2006. The company has raised a total of just over $20 million, and given that they have 25 employees, it’s time for another round. But we’ve also heard that they’ve hired Montgomery & Co. to shop the company to buyers, simultaneous to their funding pitches.

What’s more interesting, though is what we’re hearing on the product front. Technorati, under new CEO Richard Jalichandra, recently changed it site to focus more on its core blogging audience.

That change foreshadows the upcoming shift - which places the Technorati site itself as an anchor in a new blog advertising network.

Advertising networks are popular right now - Glam recently raised $85 million after transitioning, seemingly overnight, from a small web property focused on women to selling advertising for a variety of similarly-focused publishers. And John Battelle’s FM Publishing, an advertising network focused on technology blogs, recently hired investment bank Savvian to help them raise money or sell after turning down a $100 million buyout offer.

Technorati will certainly be competing head to head with FM, although sources say they’ll focus on the long tail of the market as well (FM only takes larger sites). The network will be a self-serve exchange for bloggers (and other publishers) as well as advertisers. Ad units will include both display and text ads, and will allow units to be charged on both a CPM and CPC basis. This self-service model looks a lot more like Adbrite than Glam or FM.

Technorati tags, which are very often used to describe blog posts with keywords selected by the author, would also be a natural way for Technorati to target advertising more effectively.

Technorati has also considered other strategies recently, including a blog rollup. But our understanding is that they’ve gone with the ad network idea, and are currently focusing engineers on finalizing the product.

Will the strategy work? As we’ve argued many times, ad networks suffer from fickle customers. Glam offers partners revenue guarantees based on page views (and lost $3.7 million last year on $21 million in revenue). FM has resisted guarantees to date, but lost high profile partner Digg last year to Microsoft. Others, including us, have simply sold advertising directly while continuing to work with FM. With Technorati entering the market, publishers will have yet more choices. That’s good for everyone except the ad networks competing for their business.

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Yesterday, news started circulating that Federated Media Publishing hired Savvian, a boutique San Francisco investment bank, to shop around the blog ad network to potential buyers. This action was taken after FM Publishing was approached by several investors. One investor, we have learned, put a $100 million buyout offer on the table for the entire company, which FM Publishing declined.

FM’s founder and CEO John Battelle has been down this road before. When he was running the Industry Standard during the dotcom boom, he got at least three firm offers to buy the budding media property, culminating in an offer for $750 million. Owning a small stake in the company, Battelle strongly urged controlling shareholder Pat McGovern, chairman of IDG, to take the deal. In Battelle’s own account, he recalls:

I tried for all of 2000 to get Mr. McGovern to let us sell the company to a stronger buyer, one who believed in our vision of the Internet Economy. He refused, and pushed us to go public instead. It was this very conflict that led to our differences and, partially, to our demise. I had three very real offers on the table that I took to McGovern, and three times he refused them, telling me that instead, we’d make more taking the company public or, at the very least, telling the potential buyer to double the price. Given that the price was between $250mm and $750mm, such a response was, to my mind, nonsensical. But he owned the majority of the shares, and his word was what mattered.

Now that Battelle is the controlling shareholder, you’d think he would be careful not to repeat that mistake again. He must be pretty confident that he can get more than $100 million for FM. (I was unable to reach him for a comment before posting this). Other investors from its $4.5 million A round two years ago include JPMorgan Partners, The Omidyar Network, The New York Times, Mitchell Kapor, Andrew Anker, Mike Homer, and Tim O’Reilly.

(Disclosure: FM Publishing controls a portion of the ad inventory on many blogs and social media sites, including TechCrunch.).

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