“What do you do when your competitor is drowning? Get a live hose - and stick it in his mouth.”
Doug Ivester, Coca Cola Company.
I always hesitate to use that quote from former CFO and CEO of Coca Cola Doug Ivester because as the former, he was a brilliant numbers guy who managed to spruce up the company’s performance during its bull run, but as the latter, he lasted but a couple of years after replacing his legendary predecessor Roberto Goizueta. Goizueta goes down in history as one of the most successful CEOs ever, who grew the bottler’s market cap from $4B in 1981 to $150B in 1997 and made it the world’s #1 beverage company. Goizueta was largely seen as a diplomat and statesman. In other words, while he might have agreed with Mr. Ivester’s quote above, he would not have said it on the record.
Surviving in Bad Times, Thriving in Good Ones
Nowadays, strategy and competition boil down to survival. Survival can mean many things in business. In downturns there is talk of surviving, in boom times, it’s about thriving. Even the definition of thriving is relative.
Another legendary CEO, Jack Welch of GE would say that unless you could be #1 or 2 in your space, you could not thrive, and as such, you should get out of a given industry. In other words, you need to know where you stand vis-a-vis your competition. Connecting all of the dots, I’ve always stated that the #1 or #2 rhetoric makes sense in mature segments, but not online because the market is growing fast enough and is volatile enough that so long as you are in the thick of things, you can always find an opening to gain traction.
Who Are Your Competitors?
There is another reason why I feel that way. The web space remains very embryonic so it’s hard to even know who your competitors are. I’ll be honest, I am not sure who our competitors are.
- Are WatchMojo.com’s competitors other video content producers like Revision3 or Next New Networks? Not sure. I see them as potential partners.
- Are WatchMojo.com’s competitors print companies that also offer content, albeit of a different nature, online? I definitely don’t see print as competition, I see them as partners, mainly because, with all due respect, when it comes to traditional media and online video: those who can won’t and those who want can’t. Print falls under those who want, in case you’re keeping track.
Under those who can, but won’t, I put TV companies.
- Are WatchMojo.com’s competitors TV companies with libraries of content who hesitate to trade offline dollars for online pennies? Again, not sure. I see them as potential partners too, because they’ll need made-for-web content for their online audiences as viewers flock to the Web and they try to defend their traditional revenue streams. Sure, some will start producing their own content specifically for the Web, but those efforts won’t pan out for many reasons.
One reason why defining your competition is challenging for me is the nature of our industry. It is a bit different in technology which usually represent zero-sum games (you either license my software or my competitors, but probably not both); with content, media consumption begets more consumption.
In any industry, your competitor can be your partner. Online, I won’t lie, your so-called competitor may also prove to be your acquirer.
Today I read Glenn Kelman, the CEO of online real estate broker Redfin offer a guide to first time CEOs to survive the downturn. There are some good tips, but the best tip, frankly, was the least emphasized.
8. Go on the Attack
Your competitors are hurting too. Be the aggressor, not the victim.
That’s it? One sentence only?
Either way, that little nugget of wisdom captures the theme I want to drive home to all managers and entrepreneurs: don’t follow the crowd. Everything I read these days is negative, downbeat news. If I had a ledge, I’d be sitting on it (well, not quite, but you know what I mean).
When you get your tech news off TechMeme, you live in a bubble, or as some would put it, an echo chamber. But the truth is, if you run a startup, your audience isn’t Silicon Valley, and there’s a very good chance Om Malik and Michael Arrington aren’t in your target market.
In fact, if you’re like, oh I’d say 99.9% of the people that seek business advice, there’s an even bigger chance that the startup you are running isn’t VC-backed or the company you are managing isn’t a publicly traded firm.
In other words, you don’t have to manage a growing company underneath the thumb of a VC board member and surely don’t have to massage earnings to please a fickle Wall Street, who these days is having its own set of worries anyway.
I personally think that if Sequoia rung the alarm bells and other VCs are now telling their portfolio firms to batten down the hatches, it has more to with their poor conceived investment strategy than with the economy, because a VC is supposed to look ahead 5-10 years anyway. But that is for a separate post, oh look, here.
Don’t Follow the Crowd
As a result, these days, your best bet is to understand that the market is facing some challenges but so long as you are running a new media company, your best bet is to avoid following the crowd. My advice is don’t follow the crowd in good times and don’t listen to the experts in bad times. Seeing how we live in a consumption-driven society, in good times, many of the firms under pressure today raised a bit too much money and spent it a bit too quickly. Naturally in bad times, they have to scale back. In my experience, these two wrongs won’t make a right.
Case Studies in Panic Management
After the first bubble burst, print companies scaled back what little online strategy they had. The result was that by 2003-04 when online came back with a vengeance, they were too slow to get back into the game. This is a major reason why print companies are being mauled right and left.
In the magazine space, just last year, Maxim magazine was generating $28M in EBITDA and sold for some $250M. Today it is generating $8M in EBITDA. But did you know that in the February 2001 issue of Maxim then editor Keith Blanchard penned a letter from the editor called “The Internet Bites.” Seriously. Well, if the Internet bites, what to say about print?
Newspapers are faring even worse. From CrossCut, via SAI, I read how one newspaper company saw over 90% of its value evaporate in four years!
In 2004, newspaper broker Dirks, Van Essen & Murray put the value of the company at $900 million. Two years later McClatchy purchased a 49.5% share of the paper from Knight Ridder, which valued the paper at $240 million. McClatchy has regularly written down the value of the company since and in a federal filing dated Nov. 7, it valued its 49.5% stake in the company at $7.9 million.
Of course, from my vantage point, television media firms are of great interest to me… but they are probably going to go through even larger challenges than print is today.
For example, NBC is having a hard time selling Super Bowl ads. The Super Bowl people! As networks are forced to do more with less resources, the first to go is new business opportunities, so no wonder TV networks are shelving their made-for-Web production plans even though they need it most:
- GigaOM reported that ABC doesn’t actually distribute its own online video shows.
- Last month, it was announced that CBS was discontinuing Moblogic, a spinoff of Wallstrip, which is acquired last year for $4M.
- NBC seems to be a bit more progressive these days, but that is not saying much, frankly.
To conclude, the souring economy will only expose weak ideas and weaker execution. But most importantly, it will force companies to think short-term, which allows you to develop a longer outlook for your company’s growth and objectives.
Regardless, you should never try to attack a market where your only chances of being successful entail you from being #1 or #2 within a short time period because there is no such thing as an overnight success and you definitely don’t want to have the rug pulled from underneath you because “others are panicking”.
For this reason, it’s best to start a business that can be successful regardless of whether it has to be #1 or #2… and then once you gain traction, you start attacking and partnering with your competitors to become #1.
So in other words, when you see anyone even resembling a competitor drowning, actually think about throwing them a life preserver.
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WatchMojo NewsletterRumor has it that MSFT is kicking YHOO’s tires, again, but this time it’s only going after the search component of the business. We know search is key because it accounts for 40% of the only remaining bright spot in advertising, but also because it is seen within MSFT’s walls as a “platform”. From FT, via GigaOm:
“People don’t understand what they’re talking about,” Ballmer told the FT. “At the end of the day, this is about the ad platform. This is not about just any one of the applications.” And for Microsoft, according to the interview, the primary ad platform is search. That makes sense as search is a billion-dollar, proven business.
The rest of Yahoo! is suddenly seen as undesirable, for what I think are two main reasons:
- In the short term (2009), some are calling for a softening of display banner inventory rates, and while video is the fastest growing segment of digital media, it is not as if Yahoo! is necessarily at the forefront of it, YouTube is. This is actually shocking because just a few years ago Yahoo! ruled this space, but I digress.
- More importantly, MSFT made a huge stink about Google’s bid to essentially take over Yahoo!’s search, citing monopoly concerns. As such, MSFT fears that merging MSFT’s and YHOO’s communications platforms - namely email - would give Google something to complain about. Seeing how email is certainly not monetizable, it is not worth the fight.
I personally think the second rationale is smart, in a cautious sort of way. I however think that MSFT needs all the help it can get in online content, portal strategy etc., but who ever listens to me, right?
The Achilles’ heel to this rumored deal, however, is the complexity of the structure. In fact, complex doesn’t even start to cover it:
Under the terms of the proposed transaction, Microsoft would provide a $5 billion facility to the Jon Miller and Ross Levinsohn management team [editor’s note: Mr. Miller ran AOL, Mr. Levinsohn ran FIM]. The duo would raise an additional $5 billion from external investors.
This cash would be used to buy convertible preference shares and warrants which would give it a holding in excess of 30% of Yahoo.
The external investors would also have the right to appoint three of Yahoo’s 11 board directors. The talks with Yahoo involve Microsoft obtaining a 10-year operating agreement to manage the search business. It would also receive a two-year call option to buy the search business for $20 billion. That would leave Yahoo to run its own e-mail, messaging, and content services.
It is expected that the operating agreement would boost Yahoo’s income by as much as $2 billion per annum.
You got that? There’s a quiz next week… I think the world can do without complex financial engineering for a while, don’t you?
Either way, it is worth noting that during his tenure with Fox Interactive Media, Ross Levinsohn orchestrated a deal between News Corp.’s FOXSports.com and MSN which propelled FOX Sports to the upper echelon of sports sites and gave him a lay of land within MSFT’s online division. Does this matter? Sure, why not. It does not hurt.
It also does not hurt that his confrere Jon Miller ran AOL, which sooner or later will merge with Yahoo! I figure down the road when the massive consolidation takes place, it’s highly possible that AOL, Yahoo! will both be units underneath MSFT… and one reason will be Google’s aversion to owning content whereas MSFT has grudgingly dipped its toes in content (Slate.com before it sold it to Washington Post, to name one, but also all of the content on MSN.com, to list other examples).
Ultimately, I really think that when push comes to shove, if MSFT is willing to pay $20B for search (I cannot stress this enough: this is merely a rumor still), then why not pay $25B for the whole kit and kaboodle? It won’t be $44.6B, that is for sure. I should disclose that I owned Yahoo! shares when MSFT first made a bid for YHOO but then sold them at $29 when it became clear that YHOO’s then CEO Jerry Yang would torpedo the deal at any cost. No, really, any cost, try $25B or so, which is the value between Yahoo!’s market cap when he resigned this month and the buyout price MSFT offered.
But the main reason why this will perhaps end in a buyout is that the financial markets remain somewhat frozen and raising $5B won’t be easy (for Levinsohn and Miller). It is easier for MSFT to write a big check than wait for a third party to raise $5B to go along with MSFT’s own $5B… so this might be just one move by MSFT to make it seem like they really don’t want all of Yahoo!, and when no one else will be able to match their capital, they will “be swayed” to sign a check for the whole thing themselves.
Just my two cents.
One of the results of the credit crunch has been the fact that VCs have seen a wrench thrown into their time horizons, exposing the flaws of their investment strategies. For the record, I am not talking about clean energy, infrastructure, semi-conductors, etc., I am strictly talking about the obsession that some VCs had with the consumer media sector.
VCs typically invest with 5-10 year time horizons, after which point they usually expect to see a 10x return on their investments (ideally more, of course). The exits come in the form of an acquisition or an IPO. However, with less and less IPOs happening, VCs now find themselves questioning their models. Exasperating matters is the explosion of VC funds out there, creating an influx of capital for too few VC-worthy projects.
The problem is, they are now looking at triggers and accelerators and scapegoating these as causes. The result now is pressure on VCs to liquidate their holdings. The WSJ, via SAI, reports that some of these distressed funds are now asking for $0.10 to $0.60 for every dollar invested. Considering that VC partners pride themselves on having a long term outlook, this line of action is quite surprising and sign of the times, which will certainly get worst before they get any better.
Meanwhile, a lot of VCs actually see themselves as innocent victims or bystanders who did nothing to bring this on to themselves. That’s half the story.
While I have always poked fun of VCs me-too mindset and herd mentalilty, I’ve also given them credit when and where it’s due. This being said, I just think a major problem with the VC execution here has been that many are simply out of their elements when it comes to the list of consumer web media investments they have made.
VCs tend to hail from engineering or computer programming backgrounds. If they’ve had any sales experience, it’s at a technology company which probably has very little exposure to advertising-supported revenue models. Yet as I am prone to repeat, there has only been one successful ad-supported technology company: Google. Even Google’s success was more of an exception, rather the rule, as a result of the perfect storm.
The harsh truth is that VCs are now seeing the chickens come home to roost:
- The acronym YASN was coined to illustrate the tendency for VCs to invest in “yet another social network”. Apart from MySpace and YouTube, no one can brag about a VC-worthy payoff.
- Think of the number of Digg clones that were backed to profit from user-generated content (UGC). Yet today, none of these companies - not even market leader and admittedly addictive Digg - have a clear path to profits or an exit.
The news for social networking companies’ hopes to monetize their audiences just gets worst and worst, even Facebook, which is growing faster than ever, is scaling back their revenue targets: from $300-350M this year to $250M, and that, with a healthy contribution from Redmond and uncle Steve.
So if VCs are in fact pruning their portfolios, it’s not just that the credit crunch has impacted their time horizons, it is that their bets were misplaced and plain wrong: VCs are simply allergic to content plays, for example, yet they will back countless content aggregators, why is that? VCs look for shortcuts. They think content creation does not scale or is not defensible, yet they will back countless applications that can be duplicated on a whim and a case of Red Bull’s.
To conclude, it is not because of the credit crunch, but rather, their poor investment thesis of backing these clones, that they have failed to show any major exits.
All the credit crunch has done is accelerate the inevitable. Lenin would say that war was the accelerator of history. In some ways, so has the financial meltdown that we’re now watching. Sooner or later, VCs would start to hear what marketers have been saying all along: UGC is undesirable. Their reluctance to heed this feedback now forces them to clean up their portfolios before being able to invest in new companies, which means that they will only be rendered ever more irrelevant.
This, of course, is just my two cents, mind you.
I am biased because we’re a video content producer/syndicator, so the polar opposite of UGC. But the fact remains: UGC has failed in the ad-supported ecosystem that is the Web… yet I don’t see any signs that VCs have learned from history.
The broader economy is certainly going to get a lot worst before it gets better. In fact, worst does not even begin to cover it. Here’s more doomsday talk from none other than Yale’s Robert Schiller, found via SAI.
But as the saying goes: there’s a bull market somewhere at all times, and reading this rosy outlook for online advertising, I wonder if maybe, just maybe, my stoic outlook in September 2007 was not ill-placed. Here’s what I said then:
If tomorrow you had to cut 10, 25, 50% of your ad budget, would you cut print, radio, tv, or web?
This ain’t 2000 when the bubble burst and the Nasdaq crashed, or 2001 when 9/11 happened; then, few F500 companies spent heavily or were experienced with web advertising, then it was a matter of “we don’t have the resources to experiment with the Web.” At the time, there were also less people online. It just did not offer you as much reach x frequency as the other medium.
In technical terms, online advertising’s beta (the ratio compared to the average) was much higher so in a downturn it suffered a deeper decline.
Today, the secret’s out of the bag: print advertising is pretty ineffective, TV is expensive and random, no one listens to radio etc., and online is where it’s at. If an externality - say the sub-prime credit situation turns sour - online advertising might be affected, but TV and other more expensive (and inefficient, effective etc.) formats will be hit harder, faster, and unlike the Web, they simply will not recover.
In other words, once advertising budgets recover, a much larger portion will be allocated to the Web, but if something does happen, the Web will be the least affected thanks to the 3 Ts:
- tracked
- targeted
- timely.
Hopefully I won’t look like a buffoon for writing that a year ago, but I still think online advertising will be the major winner with:
- Print being the biggest loser: why? no one reads print and it is a very archaic distribution method, facing massive asset value drops (hmm… all of them) and steep debt (NYT, Tribune) they will also have to cut resources at a time when they should be investing more and more digital media and in digital distribution. Print’s only salvation will be the fact that you don’t need to be connected and can take it on the go.
- Followed by TV: even more expensive as audiences fall, marketers’ will have a disdain for untracked media
- Then Radio: satellite radio saw that better technology does not translate into success, terrestrial radio is free and the local flavor is hard to beat. Radio will be smaller and smaller for sure, but it won’t be as decimated as some expect.
- Then Outdoors: the only real way to reach people when they’re outside, not connected to anyone of the other media. Plus, as more and more digital screens proliferate, the options for outdoors begin to get better and better. Still, this will be small relative to the Web. I should note, WatchMojo.com’s videos reach 15M consumers across 2,000 screens in North America in digital networks outdoors…
The background:
In 2006, WatchMojo.com focused on content production.
In 2007, WatchMojo.com focused on improving production and distribution.
In 2008, WatchMojo.com focused on scaling production, increasing distribution and monetizing the videos.
To avoid finding ourselves deeper and deeper in the red, we began to insist on guaranteed revenue in our distribution deals. We did not always get others to go along. Sometimes, we gave in, other times, we balked. Frankly, there is such a thing as diminishing return when it comes to marginal distribution. Traditional media companies don’t want to trade offline dollars for online pennies, but when you are a so-called disruptor with no offline pedigree (as is our case, if we can call ourselves that), well, those online pennies add up quickly.
So net-net, we did manage to eke out revenue commitments more often than not. These deals helped us more than double syndication revenues this year.
Right now:
Content is and will remain king. With the economy slowing down, consumers will have less discretionary income and will turn to low-cost entertainment, namely: free content. I think the Web will only become more ingrained in people’s lives and web video will continue to explode in consumption. With UGC being rejected by marketers and publishers under more pressure to generate revenues, I think WatchMojo.com is uniquely positioned to benefit from the slowdown. But this being said, for sure, we’re not immune to the economy, so as companies hesitate to part with cash, we will lose a few licensing deals, too.
The dilemma:
But this creates a dilemma for us, which frankly, is keeping me up at night.
By holding back on speculative syndication deals (by speculative, I mean with no guaranteed revenue), our growth in streams slows down. We still doubled streams this year, as illustrated by the graph below…
… but our monthly and all-time stream count would no doubt me much higher if we blanketed the Web indiscriminately with no care or concern about revenue.
While VC-backed companies start to batten down the hatches to reduce their burn rate, we don’t have much fat to cut, so we’re charging ahead.
The question then it, should we:
- remain conservative during the downturn and continue to demand guaranteed revenue, even if less and less companies might be willing to part with cash…
OR
- get more aggressive and start to unleash our videos all over the place, knowing full well that much like search queries were eventually monetized, online video streams will too, and those with the most real estate and reach will prevail?
That is not my gut, that is essentially the case study of Google, who used the 2000 to give away their search technology at the expense of licensing revenues. Today, licensing revenue generates less than 1% but their free, ad-supported search powers $17B in annual revenues. Then again, Google did have $25M to subsist on, we don’t have that luxury, so I am not sure how relevant Google would be to our predicament. There are many other nuances in the Google analogy, since with technology, it’s a zero-sum game: you either use Google search technology or their competitors’, whereas with content, consumers want to consume more and more of it…
What would you do: continue to hold back distribution and charge for content OR give it away and make it up - potentially - in volume?
Thoughts?
We’re signing a lot of distribution deals these days so I am very bullish about next year. Not just with regards to streams, but also revenue.
- Revenue growth in 2008 was 4x 2007’s sales figure
- 2007’s revenues were in turn 3x 2006’s sales.
- We already have 2x revenue commitments for 2009 than the revenues we booked in 2008… and this is after I went back to our projections and chopped off a lot of deals in a worst case scenario…
Anyway, that is the “boring” revenue part, here is the historical growth in streams… but who’s counting eyeballs these days, right?
I blogged some more details when we did our 33,333,333rd stream just last month. We’re over 35M streams… and getting close to 40M, as the graph above highlights.
Sling.com is the latest partner to join our syndication network, which includes the very same companies that the media purports to be Sling.com’s competitors: Hulu, Joost and of course, when we talk about online video, YouTube.
As a content provider, I do see some nuances in how Sling.com is approaching the content aggregation angle which is very different than what Joost and Hulu are doing, which I think gives them a shot at making a dent in terms of market share. I wish I could say more… should be noted that while Sling competes with Hulu, it also partners with them. If you can’t figure out why, think of Sumner Redstone’s mantra “content is king”. The web has always been a place where competitors become collaborators…
As of now, we have a bunch of content up on Sling.com now (a few hundred clips)… and in the days and weeks to come, we’ll be moving our entire library over the site. I like the interface and the list of content is impressive. Time will tell if their property gains traction.
Sadly, Sling is only available to US residents, so global audiences will have to check out our content on other places.
I’ll be honest: I have no idea who will emerge as the winners of video content aggregation / distribution in 1, 3, 5 or 10 years, let alone 20-50 years… but I do know that it’s nice to hedge your bets and partner and license your clips to a wide array of players that have the DNA and people to be serious contenders, so while we long ago stopped giving content away to just any partner, I think it’s important to give some credit to what Sling Media has accomplished and give them the time it will take to build up a viable player in the space.
With the proliferation of blogs as news sources, companies are crowned as kings or tossed aside as clowns on the day a product is releases or a press release hits the wire… and obviously, that ain’t no way to build - or judge - a business.
eMarketer’s revised projection, benchmarked against the latest Interactive Advertising Bureau (IAB) and PricewaterhouseCoopers (PwC) data, puts online ad spending at $25.7 billion in 2009. That is only 8.9% over the $23.6 billion that will be spent in 2008.
But when you compare their latest figures with their month-old data, it appears that eMarketer is losing its marbles. Let’s see the latest stats:
Comparing this to previous video estimates, from October 6 2008:
Let’s look at eMarketer’s projections then and now, and interestingly, it seems the 2008 figure has been revised upwards!
In fact, when you break down their earlier projections (from October 6 2008) you will see that in fact, their projections for 2008, 2009 and 2010 have been increased but their projections for 2011, 2012 and 2013 have been decreased. This does not make sense if they are saying that the economy is playing a role. If anything, if the economy were to be blamed, then you would see lower revisions for the short term but higher long term revisions due to online media’s bullish secular trends.
Of course it’s worth adding that this is all after they admitted that their methodology was off and reduced the figure from $1.35B to $550M. But I digress, or not.
This, to me, shows that eMarketer is losing some credibility in the space, frankly. I’d be interested to see their explanation. I am all ears.
The inevitable is happening: Google to lay off people, up to 10,000 affected. Here is a look at Google’s headcount:
Google reports to the SEC that it has 20,123 employees but in reality it has 30,000. Why the discrepancy? Google classifies 10,000 of the employees as temporary operational expenses or “workers”. Google co-founder Sergey Brin said, “There is no question that the number (of workers) is too high”.
So who has been cut?
Google has been quietly laying off staff and up to 10,000 jobs could be on the chopping block according to sources. Since August, hundreds of employees have been laid off and there are reports that about 500 of them were recruiters for Google.
Google is the Web bellwether, so in a way, it’s good that they get this done to start the recovery. The longer Google sought to avoid the inevitable, the harder the landing. The only question now is: how steep is the decline and when will the landing come?
Still: madness. 10,000 people laid off from a company that generated $17B last year in revenues… with $10B in cash… but with a stock at 40% of its year-ago high, you knew this was coming.
What to make of this rumor that Facebook was about to acquire Twitter for $500M in stock?
1 - Facebook did not want to do this deal, if it did, it would not offer $500M of stock at a $15B valuation when everyone now pegs Facebook’s value at $5B most. After all, most media companies are at 33-50% off their year-ago prices. Facebook would be no different. Even at the time, MSFT never said “We think Facebook is worth $15B”, it was a deal to mark its territory and if those were Facebook’s rules of engagement, it was worth it to them.
2 - Facebook is wiser to launch something internally than to acquire Twitter and integrate it. I am no programmer, but I am not sure how well Ruby on Rails (which Twitter was built on) with Facebook’s platform. Maybe it is a perfect match, who cares, we’re talking $500M. Mind you, it’s in stock.
3 -If I were Twitter’s VCs, I would certainly not even entertain this deal. Neither Facebook nor Twitter are going to become liquid investments any time soon… but finding a “greater fool”to come around and pay something for Twitter to justify their recent $100M valuation is easier than finding anyone to make the Facebook investment turn to cash.
4 - If I were Facebook’s VC’s, I’d seriously get my head checked for thinking that giving up $500M in stock is smarter than investing $5M (at most) to build something internally. Come on people.
5 - I don’t buy this notion that “next year Twitter will have a revenue model” - Facebook said that two years ago. Then Beacon came and went. No comment.
6 -Social media as a business model or platform is dead. Those who disagree sound awfully similar to those who argued last year that the US economy was resilient and someone would come and pay $1 more for their condo. At some point, logic and common sense trickle back into the landscape no matter how much resistance there is.
7 - Ultimately, this says that Twitter is not a $500M company and Facebook is not a $15B company. Otherwise, the deal would have been made.
