I’m getting pretty tired of iPhone talk… but isolated cases, or a sign of things to come?
Related:
- Line of the Year - Dvorak: “Hitler got less coverage when he invaded Poland”.
- Forbes’ hack job on iPhone?
- Top 10 Web/High Tech Stocks of Past, Present and Future
- What is Fake Steve was Real Steve?
- Will Hubris, Greed and Arrogance Haunt Apple?
- Apple’s Golden Era: Over and Out?
- Hype: A Bastardly Double Edged Sword - Part I
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WatchMojo NewsletterPaid Content reports on a Globes Online (Israel’s Business Arena) that US and Israeli-based Quigo is looking to seize on investor demand for consumer web media companies, and I guess, the lack of new options. It’s been a few years since Google put IPOs back in vogue amongst consumer firms, but there have not really been many since.
Quigo joins LinkedIn and Facebook as likely candidates to file, either in 2007 for a 2008 float… or by next year.
Of course, nothing says “we’re open to sale talks” like whispering ”we’re going to IPO.” A few years ago, my brief employer IGN did just that: filing in May, selling in October.
Related:
Entrepreneur.com asks 8 questions, via TheStreet.com (then some quick comments):
1. Are you a technology company?
2. Can you be a market leader?
3. Will it be cheap to make this company?
4. Is there a clear distribution channel?
5. Can this product be distributed without significant support?
6. Can the product or service generate gross margins of more than 50%?
7. Can the company go public or be acquired?
8. Can the company achieve $25 million in sales, and are there prospects for $50 million to $100 million in sales?
I’d add # 9 and 10 as follows:
9. Are you and your company in a city that is geographically close to a financing hub? Not too VCs, after all, want to hop on a flight to make sure their investment is safe, sound and growing.
10. Do you have a track record as a successful (with an exit, basically) entrepreneur.
I think VC is a fantastic route for many companies, but seeing how this comes from Entrepreneur.com, I think it’s worth adding a couple of points:
As an entrepreneur, there are some trends you realize, some opportunities you that lead you to take the risk to start a company.
Many VCs are indeed former entrepeneurs themselves, but they usually have great perspective on broad management and financial issues, or they might be strong operationally or within an industry, but they just might not have a comfort zone with your industry, your target market or simply, you.
When VCs approach you or when you hit them up, they’ll have a lot of good feedback. The process takes time and is not always fruitful.
At some point, you have to ask yourself:
Do you want to build a company that you think will be successful or a company that VCs feel comfortable in financing and maybe sharing in that success?
Sometimes, those are one and the same thing, but if they are not, you might then run the risk of becoming a me-too company in a crowded and saturated space.
Last year when I started WatchMojo.com, a producer of original video, the conventional wisdom was that we should go the user-generated content route. I thought it was madness: by doing so, we’d go from being one of the largest producers of original video content to being one of the smallest (and late entrants) in the UGC space. But the smart money felt that that was the way to go. I realized that was beyind my comfort zone, and ultimately, I was wasting my time. That’s not a knock at anyone, I swear, it’s an admission that I realized my time would be better served. Today, most video sites are moving away from UGC… reinforcing the decision to stick to our guns last year. Had we listened to please VCs (even though there was no guarantee of raising funds), we would have wasted a lot of time and not become a leader in the areas that we are today. I’m extremely fortunate that we did not really need VCs, but if you look around too, you’ll see VC is a nice to have, and not a need to have.
To quote Marc Andreessen, VCs are like baseball players in that they will strike out a few times, ground out, miss a home run by an inch… they’ll probably have a single and double and if they’re lucky, one home run will make up for the remaining so-so at-bat’s.
Because there are no guarantees in the financing or startup process, my rule of thumb is spend 5 hours on business development and sales for every hour you spend on corporate development. Then, and only then, can you too have a batting average worthy of winning.
Related:
- Has Web 2.0 Become a Farce?
- Hubris 2.0
- Has the Bubble of Pocket moved from Video Sharing Sites to Video Ad Networks?
- Could super angel investor Ron Conway possibly be wrong on…
- Not sure about the crazy valuations, frankly.
- Funding Myths, Tips, Random Advice
- What is the anti-VC?
- Are VCs Jumping on Broadband Content Bandwagon
- An Open Source VC?
What’s up with that massive spike? After eight down sessions, Limelight Networks shoots up dramatically?
Anyone got a clue as to why?
Disclaimer: Long LLNW.
When pundits think of what might be in store for Yahoo!, the options that come to mind are as follows:
- status quo
- merger with eBay
- acquisition by/merger with Microsoft
- taken private
No one really suggests that Google will and can buy Yahoo!, and that has a lot to do with the current breakdown of the search engine market space.
Any combination of Google with Yahoo! would yield a monopoly obstacle. Google’s 57.4% market share in search and Yahoo!’s 22.9% gives the Stanford alumni 80.3% market share in the influential search engine industry.
But, some dealmaking could make that a non-issue.
I’ve already argued that in many ways, Yahoo! being taken private would shelter it from envious investors that yearn Google’s faster growth rates. That would allow it to continue to throw off more cash and eventually be taken public again when online advertising is an ever bigger juggernaut.
But say Yahoo! chooses not to stay independent as a publicly traded firm or go private, the options remain sell to MSFT or merge with eBay. The objection that some people raised with MSFT remained conflicting cultures and Jerry Yang’s supposed disdain of MSFT products.
But what about Google?
Sure, the egos at Yahoo! might never allow this to happen, for Yahoo! was close to buying Google for $1B, or so goes the legend. But what if egos can be set aside and Yahoo! considered a $50B offer from Google. At a market capitalization of $160B, with $10B in cash, that gives Google a $150B enterprise value.
Of course the second issue is would Yahoo! stockholders accept a stock deal, since Google will have, after a $3.1B Doubleclick acquisition, about $7B in cash left.
Assuming there are no restrictions and Yahoo!’s shareholders can simply sell the Google shares shortly thereafter, then let’s assume that this would work as well. Moreover, one of the main arguments why Yahoo! shares are in the dumps, some would argue, is that Yahoo! shareholders suffer from Google envy. Mind you, as a Yahoo! shareholder, I’m not sure I’d prefer having Google at $150B than Yahoo! at $36B. But I also said that with Google at $30B, $40B… ok, this is painful, you get the idea.
So assuming Google offers and Yahoo! accepts a $50B deal, that means that Google/Yahoo! (I’ll spare you all the potential names for a combined entity) would have a combined value of about $200B, with Yahoo! shareholders owning 25% of the firm. Like I said, I’m not sure Yahoo! shareholders would accept this, but it is 25% of a $200B enterprise value entity, that with its roughly $10B in cash (Google would have $7B and Yahoo! $3B) would have a market capitalization of $215B…
That, I’m sure you noticed, would technically be pretty close to Microsoft’s $259B enterprise value (its market cap as of today is $285B).
Of course, how could this happen, given that a comined company with 80% market share would never get approval to merge, right?
Wrong.
Some objections: Yahoo! has spent a lot of time and money to build Panama. But the flip side is that Google’s monetization is currently at $0.11, compared to Yahoo!’s $0.04. Of course, on record: as a Yahoo! shareholder, I fully encouraged, encourage and will encourage Yahoo! to build and own its search business. I think any new media company who relies 100% on Google for search is foolish. But in the context of building a powerful combination that would get by legal scrutiny, if Yahoo! shareholders really wanted this to happen, they could simply sell its search business to someone else, be it MSN, who commands but 8.8% share, or even IAC (though I doubt it could afford it) or Time Warner’s AOL, which commands but 5% market share.
Bear in mind that in the wacky world wide web, sometimes some deals don’t really make sense strategically, they just are part of legacy deals, arrangements, etc. Example: Google owns 5% of Time Warner’s AOL, yet Time Warner’s properties CNN.com and SI.com have their search powered by Yahoo! In some ways, it makes total sense; in other ways, it’s banal.
Now, there are a couple of ways this can play out.
1- Sale of Ad Technology Platform only
In this scenario, MSN buys Panama and Google/Yahoo! continue to serve ads, but split it with MSN. The split could be 50-50 or even 100-0 in MSN’s favor, since MSN would need an incentive to buy only the IT and IP of Panama but not get to generate ads. This arrangement could wok in the short and mid term, eventually MSFT would want total control, but I could see them agreeing in order to get approval from anti-trust chiefs.
In other words, Google would use its ad server, its keywords of paid ads, etc., and since they yield 0.11 CPC vs. Yahoo!’s 0.04 CPC, it could work in that the total pie could somehow be bigger. Technically, if the 0.04/0.11 ratio is correct, then Google would be happy to take 36% of revenus vs. 64% for MSFT.
MSFT’s incentive here is to get search advertising technology to reinforce its adCenter platform and boost its search engine market share from 8.8% to 31.7%. Google would still have 57.4%, or 81% more. Combined with its 275% times higher monetization rate (0.11 vs. 0.04), that still gives Google a whopping lead.
The cost, of course, is that MSFT won’t own the ad inventory, only the IP/IT. In this case, would MSFT still pay $50B? Probably not. It could technically get a discount equal to Yahoo!’s search revenue, discounted by a rate for the cost of capital for the number of years this arrangement would be grandfathered.
This sounds counter-intuitive, but bear in mind that we’ve search many odd arrangement in the search engine business:
- the above-mentioned AOL/TW/Yahoo! situation where TW relies on Yahoo! to power its properties even though Google owns 5%.
- Google paying Ask Jeeves 110% revenue share to lock up the distribution deal.
2. Sale of Technology and Ad Business
This one is less interesting to Google and Yahoo! in that they give up both the ad serving technology and the 22.9% market share inventory that Yahoo! currently gets. In other words, indeed, Google wins Yahoo!’s display business, its email business, all of the bells and whistles, from Flickr, to Delicious, etc. In fact, this is akin to splitting up the Yahoo! asset into two, with the search business becoming either a) a smaller, stand-alone company or b) sold to someone else, notably MSFT.
Of course, Google does not acquire the 22.9% search volume, but at 57.4% and rapidly growing, it might think it’s worth it to give that up for a shot in the arm in the faster growing video and display ad business. Bear in mind that despite buying Doubleclick and YouTube, Google is still not well positioned in either the sale of either display or video ads. This is why we just wrote: What’s the missing piece of Google puzzle?
Oddly enough, anti-trust chiefs would see this as a boost for competition.
Google generates more profit in one quarter that Yahoo! did all year: Google netted $1B on sales of $3B in Q1 2007 whereas Yahoo! did $751M in all of 2006 (on sales of $6.4B).
That’s in total ad business, so imagine how much more revenue Google makes in search revenue than Yahoo! It could basically view this as an immaterial loss, especially since Yahoo!’s audience has a far lower propensity to search than Google’s does. I covered this here, and so did Microsoft’s Don Dodge here. Another reason why Google would live with this, frankly, is that people spend more time on Yahoo! than they do on Google, Paul Kedrosky looked at this, here.
Oh, there’s one more reason why Google would do this, naturally by foregoing the search business - be it tech alone or tech and media - Google could pay far less. How much of a discount?
Let’s see.
When Don Dodge stated that 1% market share is worth over $1B, I disagreed. After all, with its 22.9% market share, that would imply Yahoo!’s non-search business is worth but nearly $23B and the non-search business is only $12B (and if you rely on comScore, then it would be $26.4B for search and only $8.6B for non-search).
I did some number-crunching and projected Ask.com to be worth $3.15B. In that post, we also projected that Yahoo! commands about $750M for every 1% it holds, so times 22.9%, Yahoo! search business is a $17B business, meaning that the non-search business is an $18B business (Yahoo!’s enterprise value, once again, is $35B), so it’s a 50-50 split, almost.
Frankly, I’d value it at more, but bear in mind that most online business are actually worth more separate than combined once they’re developed. Case in point: IAC spun off Expedia for a reason, and we ran some numbers to suggest that News Corp.’s Fox Interactive Media was worth more separate than combined, and given the focus on MySpace, IGN should be spun off.
Of course, once we consider all of this, then in fact we’re splitting off Yahoo! into two: the search business gets effectively sold to Microsoft (for example) and the rest goes to Google.
So Google would in fact not have to pay $50B, but only $25B, and Microsoft would then buy the search business for $25B. Google could sell more stock, raise cash and make an all-cash offer, or Yahoo! shareholders can ask for a portion in stock or all stock. By now, frankly, we’re talking crazy.
This begs the question: would Microsoft pay $25B for Yahoo!’s search business? Would it pay $50B for the whole thing?
Doing the former means that they get Panama, an additional 22.9% market share but they’re still a far distance away from Google, who commands 57.4% and would now have the Yahoo! video and sales ad sales machine under its umbrella. At that rate, Microsoft might as well make a run for all of Yahoo!, even though that creates some redundancies and doubles the financial risk.
Of course, for the former to materialize, that would mean that Google would want Yahoo! so bad (to get into the sale of video and display, reinforce its market share in email, double up ad inventory, get its hands on all of Yahoo!’s properties and assets etc.) that it would let the search IP go to MSFT or remain independent as a smaller, search player.
All of this is unlikely, admittedly, but when Jerry Yang and Yahoo!’s Board reads this, they suddenly realize the plethora of choices that present themselves to the company.
Disclaimer: Long Yahoo! stock.
Earlier this year, Powerset made a lot of noise by securing the rights to natural language technology from Xerox Parc as it set off to index the Web and building a search destination site.
According to the much covered VentureBeat story:
The move is significant because Google’s own technology, based on “page rank,” has been virtually replicated by other search engines like Yahoo and MSN, and so isn’t as difficult to emulate as it was a few years ago. Powerset could possibly steal a lead if it improves search results by a significant measure with natural language and simultaneously incorporates a near-equivalent to Google’s existing capabilities. Powerset has been hiring lots of Yahoo search experts and others, to help it do that.
That led me to ponder: should Powerset and Podzinger (now Everyzing) merge?
Today ZDNet’s Dan Farber reports that Powerset is out of stealth mode and the company’s ambition is “boundary-less”:
“We after after a pretty big goal–replacing the core of the search engine, the patents and technology are locked down,” said Steve Newcomb, a Powerset co-founder and COO, which won’t be open to the community until September.
I am certainly a believer that search is still very much in its infancy technology-wise, but from a business standpoint, it’s almost a fait accompli that Google will be dominant in it, much like Microsoft became dominant in software (related post: is Google the Standard Oil, AT&T or Microsoft of the 21st century?).
The main reason we think Google has checkmate the search industry, of course, has a lot to do with:
- distribution trumping technology in search these days
- advertising being bundled into Google’s core search offering
Of course, it is true that what made Ask Jeeves so interesting and promising in the late 1990s was its promise to deliver on natural search. But it should also be said that the failure to deliver on such promise is exactly what made Ask Jeeves crash and burn. Ask dropped that strategy - and the Jeeves part in its brand - and became a run-of-the-mill, standard search engine. Today’s it’s part of InterActive Corp. after Barry Diller acquired it for $1.85B in January 2005. We encouraged Mr. Diller to drop the $100M ad campaign and acquire companies, such as Powerset, instead. Read that here.
In other words, reinforcing our theme that search is the hubris of mankind on the Web, Powerset better be careful about its claims, and lord knows it’s aiming high. Problem is, it’s a lot of buzz and hyperbole right now. Let’s count the buzzwords (in bold).
From the same ZDNet article:
- Powerset leverages the wisdom of the crowds for development.
- “Imagine a mashup between Facebook, Digg and Google Apps, but you get to participate in the building of the products that sit on top of our platform. You log into a social network, like you would Facebook, and you get certified to be a Powerlabber. Once certified you can join different interest groups, such as travel, and participate in idea and mashup competitions. QA is embedded and its all bloggable.”
I know what you’re thinking: “but Ash, these are not buzzwords, these are massive trends that Powerset is embracing and leveraging.” Read on, please.
“We want as many people in Powerlabs to help us build and test the product. Powerlabs tells us when we are ready to go. We could have 50,000 people QAing our product,” he added. So far Powerset has 10,000 Powerlabs users. “Imagine how many widgets that could sit inside of Facebook, MySpace and even Second Life. It gives us the ability to launch with an extremely passionate set of people,” Newcomb said.
“We have people who were interviewing at Google, and now they would work for nothing at Powerset to be part of the company,” Newcomb said. “The passion is unbelievable. Powerset is ripping the core out again, like Google did, and they just want to be a part of it.”
Oh-oh, that last sentence is eerie: we’re basically reinventing the wheel, by jumping on board of a number of things that were hot and in vogue in 2004 (blogging), 2005 (social networks) and 2006 (widgets). Sure, these things are more pertinent today than ever, but folks, let’s get a grip. Let’s actually see it in action!
Like my concerns with Jimmy Wales’ Wikia search project, some of the loose arrangement will hamper its growth:
Regarding intellectual property for those contributing to Powerset, there may or may not be an agreement with those participating in Powerlabs, Newcomb said.
Powerset hopes that building a platform and attracting developers will save it from the fate of other search startups.
I’ve said this frequently, part of the reason some companies succeed online is the speed and focus of a very small core of developers: Yahoo!? 2 people. Google? 2 people. Facebook? 1 guy. See a trend. The wisdom of the crowds stuff is great in theory but tends to dumb and slow things down in practice. Oh, and please don’t mention Wikipedia, which is to some extent copied and pasted material from elsewhere from the Web. That’s not wisdom of the crowds, in my humble opinion.
As I continue to read, all I see are red flags:
”We are trying to challenge everything out there,” Newcomb said. He said many search companies had a 90 percent attrition in attention not long after their announcement. “After a few blogstorms they die–it’s the dead cat bounce model. We want to launch with super passionate people–David versus Goliath people and with the people who can build products off of our platform.”
”We are trying to challenge everything out there”? You sure that’s wise. Last time I checked MSFT too was doing that: Sony and Nintendo via XBOX; Apple and Sandisk via Zune; Google via Live.com; Yahoo! via MSN.com… I commend it for not sitting on its software business cash hoard, but I’m still curious if the “challenge everything out there” mantra works. Yes, that’s a bit ironic coming from me given the range of properties and applications we have, but beneath the surface, most of that all fits together. I guess, of course, Powerset would argue, so does their strategy.
Which raises a question: what is the strategy?
“Google is Goliath in this battle. Screw alpha, beta and blogs to launch–[Powerlabs] is the way to do it. The power of the blogosphere and the people active in our community is a big force, and it is a big deal to take on Google,” Newcomb said. “We are not anti-Google, we just believe the next decade is about computational linguistics.” However, Newcomb said he does “want to own the space.”
Effectively, Powerset is, if I understand this correctly, running with Wales’ idea of employing the wisdom of the crowds to scale (not in the open source context, since “patents and rights are locked down”). I’m not sure how well this will succeed, but despite our apprehension, we do with them well.
“Powerlabs will tell us when we are ready to go, and ready to build out the index,” Newcomb said. “We are in a financial position to wait until it is ready to go, and not a crap product.”
“We are betting that we win, but we don’t know, but we do know that search is going to get better because of it,” Newcomb said.
If that last part turns out to be correct, then we commend them for trying. There are good aspects to the potential of Powerset, but as Nitin Karandikar points out at The Software Abstractions in his thorough overview, we’re still talking potential. Tech Dirt seems to echo pretty what I’ve covered here, too.
“We are betting on our index,” concludes Newcomb.
Yikes. I give them a good chance of building a good product, but on the business front, it’s an uphill struggle. My gut says there’s a lot of bravado here to get a “too good to turn down offer” from Yahoo!, Microsoft, InterActive Corp., Time Warner AOL or News Corp.
Disclaimer: Our sister site MetaMojo.com is a vertical search engine. It’s got a place online, but we don’t for one second think it will own the space or take on Google. It will own the Mojo Supreme space, though, and that’s really all we think is up for grabs these days in search: your own backyard…
