Early Days of Mechanical Turk
I have started to encounter businesses that rely on Amazon’s Mechanical Turk for key components of their product or service. For those not aware, it’s a labor marketplace where anyone can pay anyone else to do “HITs,” or Human Intelligence Tasks. There are currently 722 available tasks, such as “Find the Addresses for a Business” and “Label images of a device.” Bidders are offering $.05 and $.04, respectively, per completed task.
It’s non-trivial to figure out where a business can use it and how to implement it. But those that I’ve talked to who have figured it out have a very scalable, margin-enhancing asset. I expect to see more and more businesses using it in coming years. I wouldn’t be surprised to see a cottage industry arise in consulting for businesses that could use it profitably but need external help to make it work.
On a smaller scale, it looks a bit like early days of PPC advertising. Before PPC become ubiquitous, profitable keyword-buying opportunities were abundant. As the value of PPC became established and market awareness grew, competition drove up keyword prices and made it much harder to profit. Similarly, I think there is low-hanging fruit right now with Mechanical Turk, but within a few years it should become much more competitive.
The Best Negotiating Tactic
As an M&A advisor, negotiating is a critical part of my job. I’m often asked about what it takes to be a good negotiator. There’s a stereotype of the negotiator as cool in the most tense situations, with quick wits and silver tongue. Throw the good negotiator into the diciest of situations and they’ll pacify it, leaving with pockets brimming with whatever loot they could carry.
Composure and eloquence under pressure don’t hurt, but focusing on that as the defining factors of good negotiations is way off the mark. The most important dynamic in any negotiation is alternatives. If you want a raise at your current job, the best way to get one is to let your boss know you that you are seriously considering an attractive offer from another company.
A friend of mine felt he was due a promotion, but it wasn’t forthcoming. So, he interviewed around and just got a offer from a competitor that comes with higher comp and a better title. He told his employer that he was going to take it, though hadn’t signed anything yet. Guess what? They are offering him that promotion.
My friend has been an extremely effective negotiator with his current company. Yet it required neither manipulation nor deceit. What he did was simple. He improved his alternative, then was transparent with the other side in his negotiation. It’s that simple. The best negotiating tactic is to improve your alternatives. (Another key point: honesty pays.)
Some might wonder if that tactic can backfire. What if you improve your alternative, then tell the opposing side of the negotiation, and they say ‘go to hell.’ You might not have actually wanted that alternative, but now you’re stuck. In that case, you learned something about your original option–it’s not as good as you thought. If it’s in a negotiation with your employer, you now know that your employer isn’t interested in giving you fair market value (and is probably a prick). So you’re better off taking your alternative.
Forest Fire
Tree.com is en fuego. Anyone else notice that it’s basically doubled in the past week?
Palm’s Hail Mary
Palm stock was up 35% in the afternoon today and is up another 12% in after-hours trading. Teetering on the brink of oblivion as the iPhone and, to a lesser extent, the Blackberry gobble up market share in the booming smartphone market, Palm showed off its long-awaited new gadget, the Pre. The early returns are positive.
Kudos to them for a slick release. But I’m bearish. The iPhone is a great device in of itself, but the differentiator is the app store. Developers are flocking to that platform, releasing a torrent of apps that dramatically enhances the iPhone’s utility. “First Mover Advantage” has often been often overrated in the past, but in this case it’s legit. The iPhone’s developer community generates network effects that will create an insurmountable lead over other platforms. Worse for Palm, word is that the Pre’s app capabilities are limited. Oops. While I love my Blackberry and don’t see RIMM fading away any time soon, I think Apple is in the process of winning the U.S. smartphone market. Palm’s Hail Mary looks to be an admirable effort, but I think it’s too little, too late.
Is Deflation Really That Bad?
BusinessWeek has an article on the popularity of netbooks.
In accord with the laws of technology, today you can buy more tech with less dollars. Tomorrow, inevitably, your money will go even further in tech. Isn’t that–dare I say it–deflation?
Wait a sec. I thought deflation was the boogeyman. It ruined Japan in the 90′s. But what about in tech? With netbooks, high-functioning machines are available for $300. Same as with every tech product, both B2B and B2C. Large screen TV’s prices are in freefall, online classified ads are free to publish, it takes a few bucks to start an Internet business, etc. Why don’t tech buyers hoard their money and wait for tomorrow to spend? Their tech dollars will be worth a lot more. But obviously that doesn’t happen. Even in this dismal economy, people are still buying iPhones and video games even though they could get more value buying in the future. At least in technology, no, deflation really isn’t that bad.
How Much is My Company Worth?
As an M&A advisor, this is one of the questions I’m asked most frequently. Common answers illustrate the shortcomings of so many in my sector. Most like to reel off multiples of metrics such as revenue or profit. That works in industries where there are many comparable public companies with well established trading ranges or where there are many deals done at transparent valuations. In my sector, that’s not the case. There are many public new media and technology companies, but there are very few pure-play businesses with clear valuation metrics that match up to private companies. Moreover, few of the deals that transpire have publicly disclosed valuation numbers. I understand why many of my brethren discuss valuation using black and white multiples—it’s simple and provides comforting clarity about a subject laced with uncertainty. Too bad it’s usually a load of crap.
The right answer to what your Internet or tech company is worth is both simple and complex. The simple: it’s worth what someone will pay for it. That could be zero. That could be an unexpectedly high number. The complex: my deals often have 2x or 3x spreads between low and high bidders. I’ve done deals where 5 bidders were clustered around x million but one paid 2x million. In deal processes buyers often come and go based on external events, so what would the company have been worth if the 2x buyer dropped out?
Understanding valuation in my industry is not easy. Yes, you need to look at whatever publicly available metrics you can find. Yes, you should build models of future cash flows to give more meat to any valuation. But the fundamental truth is that it’s highly variable. This highlights the value of a good advisor. A company needs to have a structured process to generate competitive bidding. A good advisor will create that, then guide you to make an informed choice about the future of your company.
SEO and Other Popularity Contests
Many people have a hard time understanding SEO. But it’s not that complicated. Like so many other things in life—governmental and student body elections, college admissions, trials by jury—SEO is basically a popularity contest. That’s a good thing, too. A popularity contest is a relatively efficient and fair means to decide something.
You might point out that Google’s algorithm isn’t a person. So how can SEO be a popularity contest? Google’s algorithm is the most efficient and effective automated popularity contest ever created. It’s conducting a popularity contest with every search, picking the most popular websites for a given keyword query.
What does this mean? A long time ago, I was a college tour guide and fielded many questions on admissions. The piece of advice that I gave most was that it’s critical to be likable in your application. It’s basically sales. At every school, people with everyday emotions decide admissions, and they will choose people they like. Google’s algorithm is obviously not a person, but the most important SEO factors that it measures are artifacts of a site’s likability. Most notably, volume and quality of inbound links dominate SEO. To get good links, it’s sales. Figure out the right audience (i.e., authoritative websites) for your product (i.e. your website), then sell the snot out of it. Volume (talking to the most prospects) and personalization (tailoring what you say to meet the needs of each one) will drive sales success. They are in opposition, which is part of why SEO is so hard.
It’s also hard because the best way to gain incremental popularity in life is to already be popular. It’s easier for Brad Pitt or Angelina Jolie to make a new friend than for you or me. So established sites have a much easier time getting additional links than new sites, giving them a growing competitive advantage*.
(* Investor note: that’s a reason why a website’s SEO, when built on ‘white hat’ link-building, is a durable and valuable competitive advantage.)
Google: Waiting for the DOJ Hatchet to Fall
Google is the new FCC. Except it’s not regulated. That can’t last. I predict Google to become dismantled and highly regulated early in Obama’s second term.
Historically, radio and television broadcasting have been great businesses, often cash flowing 40-50%. Why? A critical reason is that FCC regulations created huge barriers to entry in every market. With some content, a station could attract an audience and lucrative advertising dollars. An FCC license was in effect a license to print cash.
Today, sitting atop (or just making the first page) of Google’s organic search rankings creates a similar position. Businesses like Bankrate in finance, All Star Directories in education, and About.com in ‘how-to’ are achieving similarly high operating profitability. These businesses invest a relatively small amount in content, then attract an ad-friendly audience through their steady stream of organic search traffic. They businesses are entirely dependent on the favor of Google’s SEO algorithm for their audience. Just like the broadcasters depend on the FCC.
Not only do Google’s black box algorithms create winners and losers in organic (or unpaid) search listings, but they create winners and losers in the paid search listings. I’ll save a discussion on the intricacies of natural search (SEO) and paid search (PPC) optimization for further posts, but suffice it to say that both SEO and PPC have separate algorithms designed to optimize user experience (and ultimately revenue). A tweak in either can literally crush a business, instantly wiping out hundreds of millions in value (for ex, Geosign).
This represents tremendous economic power for one company. If Google knocks you down, you’re toast. With Google owning 70%+ of search, there is no other game in town when it comes to search traffic.
While Google gives some insight into the inner workings of its algorithms, it is fundamentally opaque. Google keeps a black box for two legitimate reasons: it doesn’t want competitors to replicate it and it doesn’t want web publishers to cater to its algorithm over the general principles of good user experience.
This makes Google an easy target for conspiracy theorists who posit ulterior motives for every algorithmic tweak. While I think most of that is bunk, there is a fundamental conflict of interest. What if Google’s natural search algorithm gives a boost to a site that uses AdSense to monetize its traffic over another site that uses a different ad network? What if a heavy spender on PPC suddenly improves its SEO? Conspiracy theorists could also suggest that Google could reward sites that use Google Payments or other Google products. As it continue to introduce new products, these potential conflicts of interest will multiply.
The regulatory scrutiny of Google’s proposed search deal with Yahoo was a harbinger of more regulation to come. Microsoft and other competitors will recognize the ROI of using legal warfare to combat Google, especially given open market competition is futile against a natural monopolist. With the current financial bailout and an activist Obama administration, there is a tidal shift of growing governmental intervention in the economy. As Google’s hammerlock on the commanding heights of the Internet ecosystem continues to grow, it’s inevitable that the DOJ’s hatchet will come down. Expect to see Google’s consumer-facing search business separated from its advertiser-facing monetization business. Obama & co. will have other priorities in the first term, but by the second they should be ready to unleash the DOJ on Google.
The Best Business Ever
Google is the best business ever. No company has ever created so much equity value so fast. Search is a natural monopoly. Competition is futile. As the Internet expands in every direction, Google gets stronger. As Nicholas Carr has explained:
Google’s protean appearance is not a reflection of its core business. Rather, it stems from the vast number of complements to its core business. Complements are, to put it simply, any products or services that tend be consumed together. Think hot dogs and mustard, or houses and mortgages. For Google, literally everything that happens on the Internet is a complement to its main business. The more things that people and companies do online, the more ads they see and the more money Google makes.
Google’s economies of scale give it a growing lead in providing the best search experience. Google deserves immense credit for winning search.
Search monetization is a different story. Google was pushed, kicking and screaming, into running ads on Google.com, known as AdWords. Little did they know that search turns out to be the most monetizable moment in online behavior. It also turns out that the revenue yielded per search is jacked up by the volume of advertisers bidding for terms. So, if you’re Google and have the most search traffic and get advertisers to show up, you have a virtuous cycle. More traffic brings more advertisers and more monetization, which generates more revenue to invest in user experience, which generates more traffic, etc.
Google’s CPC-based ad network, AdSense, feeds off of these dynamics. In the past, Google forced advertisers bidding on search terms at Google.com to also bid on its content network (AdSense) for those same terms. This huge advertising base ensured relatively high prices per click since inception, enabling Google to provide market-leading payouts to publishers while keeping large portions (often up to 70%) to invest in R&D and to fall to the bottom line. This enabled AdSense to rapidly build scale and create a large payout gap between itself and other CPC-based networks, even as Google now allows advertisers to bid on AdWords traffic without having to bid on AdSense.
While AdWords revenue from Google.com will always have better margins than AdSense revenue from its content network, both businesses benefit from overwhelming and overlapping economies of scale. Google’s stranglehold on monetizing the Internet gets tighter with every bit of additional anything put online.
Some might question the durability of Google’s leadership position in search. After all, there’s no switching cost for users to leave Google. What is to keep users from going to the next great search engine? This logic has encouraged legions of poor, unfortunate souls to waste countless millions trying to fund the mythical Google-killer.
But, as Rick Skrenta explained, zero switching costs create a winner-take-all market.
Zero switching costs lead to a winner-take-all market for the leader. Even a modest initial lead will snowball until majority market share is reached and maintained. This is because, faced with a choice between two products, in the absence of switching costs users will choose the better one, even if it is only slightly better.
That’s why Google’s market share will steadily inch towards 100%.*
(* = Yes, MSFT is buying market share with OEM deals like those announced today with Dell and Verizon, but MSFT is fighting a losing battle. They are better off dividending out their cash hoard than wasting it tilting at windmills.)
