Monthly Archives: October 2007

I can’t be the only one without a Facebook post!

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There is no shortage of commentary on the $15 billion valuation of Microsoft’s deal with Facebook. As Facebook’s investors have said themselves, Facebook needs to perform incredibly well over the coming years to grow into the valuation. So how exactly is that going to be done?

 

To date, Facebook’s monetization strategy has centered mainly on attempts to sell sponsorships for groups or user profile-based text ads called Flyers. A recent conversation with one of the big agencies revealed the cost associated with sponsoring groups, as measured by people and activity in the group, far surpasses traditional CPMs. Yet, the same agency pointed out that no agency employee is getting promoted without having purchased a sponsored group on Facebook. The promise of building relationships with users that are passionate about brands is a major lure for advertisers. How long can Facebook count on agencies to ignore the poor fundamental economics and effectiveness of sponsored groups? It would seem that the revenue realized from groups this year is a temporary anomaly, unless something fundamentally changes in user behavior.

 

As for Flyers, Facebook doesn’t even provide advertisers with click-through rates for the Basic version, suggesting instead that “the value proposition of Flyers is primarily the high volume and localized exposure of your ad, not click through rates”. Flyers Pro is a cost-per-click product that doesn’t address the needs of brand advertisers or those interested in “engagement”. Further, I’m told that click-through rates are only slightly better than for standard banner ads, yielding only a nominal effective CPM for Facebook. This matches the experience that we had at Google working with social networking sites like Orkut, MySpace and Hi5 on various targeting techniques. The fact is that targeting ads based on user profile information performs only marginally better than contextual targeting or no targeting at all. It’s also incredibly difficult for advertisers to purchase campaigns at scale when segmentation and targeting get too granular. So don’t count on Flyers to be the magic monetization bullet either.

 

Recent reports suggest that we will have a much better idea about the future of advertising on and potentially off of Facebook after its big advertising announcement in New York on November 6th. Let’s hope that the new targeting models and ad formats introduced are dramatically different than what we have seen to date.  Importantly, they need to engage users within the context of the primarily communication-oriented activities that take place on Facebook. The success of advertising on Facebook is important not just for the company, but for all of social media, which now accounts for over 25% of all web page views. Someone is going to crack the social media monetization problem. To live up to its expectations and valuation, Facebook better hope that it has devised the scalable, effective social media monetization solution that has so far eluded its competitors and its recent investor.

Setting free the Wall Street Journal Online

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The entire online community is anxiously waiting for Rupert Murdoch to open the gates at the Wall Street Journal Online and provide free access to its content. At yesterday’s Web 2.0 Summit in San Francisco, he outlined his plans for the property, which included expanding national, international and cultural content to compete more effectively against newspapers such as The New York Times. As a long time subscriber who appreciates the both the quality and the breadth of the journalism, I am eager to see the Journal make the operational and economic leap to free content and execute against this vision.

 

I got a recent view into some of their plans via an online survey from the WSJ Online. What surprised me most about the survey was that the focus was on identifying packages of content and services for which I would be willing to pay (unfortunately, I didn’t think quickly enough to capture screenshots so this is mostly from memory). For the most part, the services mentioned were identical to many services that I can already get online for free, such as Digg, Techmeme and Google Alerts. The Journal’s differentiating assets are its journalists and its reputation/brand. Why try to use those assets to charge for content and services similar to what is available for free at established online properties? Given the decision to open up content, shouldn’t the goal be to provide increasing amounts of free content and drive as much traffic as possible to increase advertising inventory? Wouldn’t the WSJ be better off encouraging its loyal reader community to participate in conversations centered on WSJ authored or identified content, rather than charge it for accessing additional content? The New York Times already demonstrated through TimesSelect that only a small percentage of readers are willing to pay for additional content. Further, recent data suggests that opening up NYT content has led to enough page view growth to make up for lost TimesSelect subscription revenue.

 

I’m a firm believer in the advertising model for online newspaper content, so I’m eager to see the impact on WSJ.com traffic and advertising growth once content is indexed by search engines and increasingly linked to by blogs. The WSJ should free its content rather than spend time identifying ways to protect or generate subscription revenue through paid services that don’t leverage the Journal’s core journalistic strengths and loyal readership. If the new content and services are valuable, readers will visit the site and advertising revenue will follow. If the new products don’t strike a chord, no one would have paid for them anyway. Will WSJ.com make the leap headfirst or instead tumble towards the advertising-based model that is clearly the present and future of online content?

Miners vs. picks and shovels: a contrarian venture capital investing approach?

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Earlier this week, The New York Times published an article about the “fuzzy math” driving the funding of companies in Silicon Valley. In talking to my peers in the investment community, there seems to be consensus that valuations are regularly disconnected from the reality of many companies. That said, the exuberance seems to be continuing and is at its peak amongst consumer-facing media companies.

 

At Battery, our digital media investing is focused on two categories of companies, of which the first is consumer-facing media properties that build, aggregate and monetize audiences in differentiated ways. The second category is companies that provide the tools and technologies to support the first category, including everything from ad networks to targeting and optimization software to video delivery infrastructure. Increasingly, we find ourselves spending more time on the second category while largely avoiding the first. Broadly speaking, this seems to be a fairly contrarian investing approach.

 

There is no shortage of speculative, high-priced investments being made in hopes of finding the next YouTube or MySpace or Photobucket. My perspective is that the risk/reward tradeoff associated with investing in many of these companies does not compute. I’d much rather invest in the companies that are arming all of the competitors in the consumer media market (the picks and shovels approach) than bet on identifying the one that is going to be the next big hit (trying to find the goldmine). There is no doubt that incredible amounts of equity value can be created by leading consumer media companies, as evidenced by the aforementioned companies. However, neither I nor any investors I have spoken to have found a crystal ball that tells us which consumer web properties are going to be the next ones to resonate with consumers and spread virally. In addition, there is intense competition for consumer attention on the web, making it an expensive battle to fight. Lastly, it seems that the equity value that has been created by consumer web properties in recent memory has been independent of demonstrated economic success.

 

As we learned in earlier this decade, valuing companies primarily on audience-based metrics is not a sustainable approach. At the same time, we have also seen that companies that build fundamentally sound businesses by providing value to and extracting value from paying customers can also create tremendous amounts of equity value. As an investor and an entrepreneur, do you have a better shot at creating the single winner in the online video destination market (i.e., Youtube) or building one of several successful companies in the online ad serving market (i.e., DoubleClick, Aquantive, 24/7 Real Media, Right Media)? Which businesses are easier to predict and monetize?

 

I think that chasing the next Youtube also puts investors at odds with their entrepreneurs. Searching for a single big win forces investors to take an aggressive approach to managing their portfolio of “bets”. Approaches to financing and exits can diverge dramatically when an investor is swinging for the fences at the potential expense of the entrepreneur. While the economic rewards of investing in picks and shovels may not be as great (although this can be argued), the satisfaction of building a sustainable business in partnership with entrepreneurs is well worth the cost associated with watching this current “gold rush” from the sidelines.      

A few more nails in the traditional music industry coffin

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The entire music world is abuzz with the launch of Radiohead’s “pay what you want” download of their new album, “In Rainbows”. Nine Inch Nails, Oasis, Jamiroquai and Madonna have also announced their own intentions to divorce themselves from the stranglehold of the major music labels. Clearly, the time when major artists simply complained about their indentured servitude to the labels has ended and their experiments in freeing themselves have begun.

 

In the pre-digital days, the music labels played a critical role in the industry. At a high level, the labels were responsible for identifying talent, financing production and marketing music, while retail outlets sold it to consumers. Artists were beholden to the labels and retailers, and consequently, earned only a few pennies for every album sold. Consumers were beholden to the retail outlets given that they controlled access to the physical media of LPs, cassettes and CDs. The digital world has changed all of these dynamics. Artists can choose to assume all of the responsibilities of the labels because the cost of production has decreased dramatically and cheap, digital distribution is available over the Internet. Consumers have ready access to inexpensive or free digital music at thousands of places on the web. As has happened in many other industries, the digital age has made it possible to remove the middleman from the relationship between the producer of the good and the consumer of the good.

 

Artists have long known that album sales are only one piece of the revenue puzzle. Merchandise, touring and publishing are critical ways in which to increase revenue and make music a potentially lucrative business. Consequently, the move away from the labels is about more than just capturing a larger share of album revenue. What’s most striking about the shift is that artists have come to the realization that being closer to their listeners gives them more control over their economic fates. Even if someone who downloads Radiohead’s new album chooses to pay nothing, what is it worth to Radiohead to have that listener’s mailing address, email address and mobile phone number? How many different ways can Radiohead touch me as a fan and encourage me to spend, now that they have that information? The most exciting part of what’s happening in the music industry is the ability for artists to have an ongoing dialogue with both their avid and casual fans.

 

And it’s not just possible for the big name artists to cut ties with the labels. Huge entities like MySpace and new upstart companies such as Sellaband, Amie Street and Magnatune are all making it possible for emerging and independent artists to make a business out of their passion for music. 

 

As a consumer and an investor (Battery is an investor in Ruckus), I’m thrilled to see the new experiments in music creation and distribution. However, it remains shocking that music industry’s only responses to the emergence of digital music and the Internet have been litigation and digital rights management. Isn’t it time that the music industry stopped swimming against the tide and embraced new business models before they are cut out of the value chain altogether? How is it possible that the labels haven’t learned anything from the prior transitions of vinyl to cassette to CD to Napster? The recent announcements from major artists have to be the final wake up calls for the labels, or else the final nails in their coffins.

Mobile advertising’s day is yet to come

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The hullabaloo over mobile advertising continues with news of Nokia’s acquisition of Enpocket a couple of weeks ago. But if you talk to the people who control the ad budgets, there isn’t much to get excited about. In fact, my recent conversations with several major agencies all suggest that the market shouldn’t expect anything beyond the continuation of test budgets in 2008 and likely in 2009. 

 

Advertising on the web thrived because advertisers could leverage the same creatives in large volumes across multiple websites and measure the performance in a consistent way. As long as the mobile carriers continue to act as individual gatekeepers, mobile advertising will struggle to grow as fast as many in the industry project. Carriers continue to inhibit access to off-deck websites and content, limiting the volume of mobile web traffic and ad inventory. They have also refused to work with each other, making it impossible for advertisers to deliver and measure ads on the same publisher across their networks. Lastly, carriers own the data that is most useful for targeting advertising in a mobile context and have been unwilling to make that data available, even for a fee. Unless mobile advertising is deemed highly relevant by consumers, very few consumers are going to be willing to tolerate the “intrusive” delivery of ads during their mobile experience.  Carriers hold the key to this relevancy because they own the needed data.

 

The carriers control the destinies of all of the players in the US mobile advertising market.  We can only hope that they look to models in markets such as Japan to see that that collectively opening their doors can help create a larger mobile advertising pie for them and everyone else.