Thoughts on Tech, Deals, and Markets

Archive for January 2009

Clowns in Office

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Listening to NPR last Wed morning, a congressmen from CA who was against the stimulus made a shockingly dimwitted argument.  He said that it won’t have any actual effect because every dollar that is spent on stimulus now takes a dollar from the taxpayer’s pocket since the taxpayer foots the bill for the stimulus.  True, the taxpayer does foot the bill, but that misses the point entirely.  The whole concept of the stimulus is that you borrow from the future to prop up demand in the present, so of course the taxpayer will pay for it.  In the future.  Future, not present.  Big difference.  I can’t believe a clown like that got elected.  Then again, I guess it can’t be too surprising since California voters have voted themselves into an unbreakable fiscal headlock over the past few decades.

Written by sandykory

January 31, 2009 at 9:32 am

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Jobs Watch

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Steve Jobs, that is.   What a lightning rod.  Here are my views on a few of the big Jobs-related controversies.  On the matter of his importance to Apple, I take the under.  True, he’s amazing and deserves tons of credit for reviving Apple.  They are killing it with the iPhone/iPod Touch platform, which I believe is in the process of disrupting the legacy video game market.  But he’s surrounded by great people and, given the obvious health issues he’s been dealing with for years, it would be foolish to assume there hasn’t been a concerted effort to build out the management bench behind him.  On the matter of Apple’s obligation to disclose his personal health issues, I take the over.  Regardless of his true importance to the company, perceptions of his health can make or take billions of equity value in a flash, so every last detail is incredibly material to investors and therefore should disclosed.

Factoid of the day, hat tip to Tech Trader Daily:

CEO Steve Jobs has been staying in town a lot more than he did last year. Expenses charged to Apple for operating his private plane fell to $4,000, from $550,000 in the December quarter last year.

The fragility of his health is now public knowledge so this bit of reporting shouldn’t surprise anyone, but if this factoid came out a month it would have been a shortable tip.

Written by sandykory

January 31, 2009 at 9:26 am

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Economic Good News/Bad News

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According to Calculated Risk, Credit indicators are improving:

TED Spread
  • The TED spread is at 0.94, still moving lower. (improved)

    The TED spread was stuck above 2.0 for some time. The peak was 4.63 on Oct 10th. The TED spread has finally moved below 1.0, although a normal spread is around 0.5.

  • The TED spread measures the difference between the interest rates on interbank lending (as measured by LIBOR) and  the three-month US Treasury.  Its decline indicates a slowly recovering tolerance for risk taking.  Trend economic growth won’t resume until risk tolerance normalizes.

    There is still plenty of bad news across the global economic landscape, but the continued thaw of the credit markets will soften the economy’s contraction and lessen the chance of a worst-case, depression scenario.

    The bad news that bothers me is that new home sales dropped to a record low in Dec of 331k.  My reaction isn’t, “gee that’s low,” it’s “are you kidding me?  331k people actually bought a new home smack in the middle of the worst housing decline in history?  Who are these people?”  Everyone on the planet by now should realize that housing will be cheaper tomorrow than today.   They probably don’t intend to perpetuate the mispricing of an asset class and the continued misallocation of scarce resources into the housing sector, but they are feeding the albatross that’s crushing the US economy.  If everyone realized housing is tanking and stepped out of the market, then finally the stickiness of housing prices on the way down would ease, prices would plummet to a bottom, and we could begin to recover.

    Written by sandykory

    January 30, 2009 at 8:26 am

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    Options in Negotiations

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    Effective negotiations depends on having options.  Everyone knows that if you get a crappy hand in poker your outlook is bleak.  Fortunately, real life isn’t like poker.  You can turn over as many cards as you want.  So  I urge friends, prospects, and clients alike to maximize options in any negotiation.

    Often it’s an uphill battle.  A company gets a feeler from a prospective buyer.  A friend gets interest from a prospective employer.  For the company or friend, it’s exciting.  You want to play it out.  Why disrupt that tantalizing possibility by creating a competitive process?  Won’t it slow things down?  What would that prospective buyer or employer say if they knew you were talking to someone else?  Isn’t that disloyal?

    On the contrary.  First, realize that the buyer or employer is probably talking to other people as well.  Especially if they are serious about hiring a person or buying a company like you.  So why shouldn’t you also explore your options and create leverage?  Moreover, any buyer or employer that doesn’t want you to talk to anyone else is either (a.) looking for a naive target that they can take advantage of, (b.) unethical, or, often, (c.) both.

    Written by sandykory

    January 29, 2009 at 3:07 pm

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    Competitive Advantage in Lead Gen: Part III

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    In my last post, I made the point that efficient media buying is very hard.  It’s not a coincidence that businesses that do it well consisently post EBITDA margins of 20-30%.  But media buying is only one piece of the monetization challenge.  The next piece I’ll cover is conversion and optimization.

    When a lead gen company buys a pair of eyeballs, they drive it to a targetted landing page.  If they want to survive, they need to make the user convert.  Every landing page is a huge, multivariate optimization problem.  Good lead gen companies don’t just run a few tests now and then.  They are constantly testing.  To buy traffic and not use it for a test is to lose money.  Like managing PPC, this conversion testing piece requires significant technology.   Once again, the magnitude of this challenge is illustrated by the large number of venture-backed startups working on it.

    In addition to the conversion problem of maximizing the number of users who fill out a given form, there is an additional optimization problem–what do you do after the user fills out the form?  In many verticals, a lead gen company has the opportunity to get the user to fill out another form or collect additional monetizable data.  That can dramatically enhance monetization, creating a big edge over competitors.

    Similar to traffic buying, it often takes millions to get enough data to figure out what works in conversion and optimization.  A smaller player might never have a large enough sample to learn the optimization drivers that a larger company exploits.    What if an edu lead for a teaching program generated in the afternoon can often convert into a lead for a nursing program, while in the evening it converts more efficiently into a lead for an accounting program?  The rule of thumb in optimization is that your intuition will fail you.  You can only figure out the optimal conversion solution using endless loops of testing-and-learning.  If you have technology and scale to crunch the data and figure that out, you have a robust competitive advantage.

    Written by sandykory

    January 29, 2009 at 2:13 pm

    Competitive Advantage in Lead Gen Part II

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    In my last post, I mentioned the three potential layers of competitive advantage in lead gen:  media buying, conversion/optimization, and customer relationships.   In this post, I’ll talk about the challenges of media buying, aka buying traffic.

    I divide paid traffic into 5 sources.  Search/PPC, banner, email, affiliate, and social media.  Each source is large enough to generate 10’s, if not 100’s, of millions of revenue a year.  Each is complex–only a gifted few can make a single source work well, and only the elite can do it in multiple sources.  What’s so hard about it?  First, the technology.  Second, and critically related to the technology, there is business knowledge needed to properly build and deploy the technology.   I.e., it takes more than engineering IQ.  It takes both engineering IQ and an unusual degree of Internet savvy.  The few who have figured it out have often done so through a trial-and-error process that cost millions, and often more.

    Search/PPC:  this traffic is mostly Google AdWords, although Google’s content network, Yahoo, and MSN are significant.   Search is the highest quality traffic source.  The volume and quality attract lots of competition, so it’s very expensive.  Another difficulty is that also attracts undisciplined spenders who bid up keywords beyond their pure direct response ROI for branding or other nonsensical purposes.  For all of these reasons, search is really, really hard.  One of the biggest insurance lead aggregators, to pick one example, just gave up doing PPC even though their agent network gives them awesome monetization.  There is a reason why there are a flood of high-tech startups building technology to automate and optimize search–it’s hard.  But to truly dominate in search, it requires a flexible technology platform that constantly optimizes keywords, ad copy, bids, and landing pages, then has a feedback loop to maintain the optimization in a dynamic landscape.  No third party tool can do that yet, but a few companies can with their own technology.  When it happens, the results are staggering.  I know a lead gen company that grew 300% last year, doing 10’s of millions of revenue, with EBITDA of 30%, that only gets traffic from search.  Their automated platform scales while keeping opex low and requires no capex.  It’s an awesome business.

    Banner:  online banners, or display, are also very hard for direct marketers.  The good news is that there is immense volume across the portals and ad networks.  But buying at scale is expensive.  Unlike search where you only pay for clicks, banners are almost always sold by CPM, with no performance guarantee.  Click through rates are normally paltry.  CPM rates have come down as many formerly big spenders in automotive and financial have cut back, but it’s still hard.  Only a few have done it well.  At its peak, LowerMyBills’ banners were ubiquitous and highly profitable.  Nextag is also very good in banners (not to mention search).  Similar to search, the high number of high-tech startups working on technology to make display advertising work illustrates the challenge involved.  These days, the killer app in display is using behavioral technology.  Every ad network claims its behavioral targeting is the best, but there is plenty of room for improvement.  Aside:  I think Google will eventually own the diplay intermediary business.  Like lead gen, it’s driven by scale and technology.  Once Google get’s it’s ship set in a direction, no one can touch them in those two areas.

    Email:  email doesn’t require as much technology as search and banner.  But the huge variability of performance among different players illustrates the challenge involved.  For example, in the education vertical, I was told by the leading emailer that the top-performing offer had 3x the monetization of the bottom performing offer.  And the bottom performing offer was from a company that was doing over 50m in revenue and had a history of profitability.  That means it’s hard. Email is more relationship-driven than banner and search.  Knowing the right vendors to work with is incredibly valuable.  Datran and AdKnowledge are the biggest players, but there are dozens of others.

    Affiliate:  affiliate overlaps with all the other channels, since affiliates can get traffic from anywhere.  Therein lies the problem–it’s very hard to manage the quality of affiliates.  Formerly major players like Adteractive have been crushed by affiliates passing them trash.  The affiliate channel is also driven by relationships.  Knowing how to find and cultivate good affiliates is difficult, yet can drive 100”s of millions of revenue.  Businesses solely dependent on affiliate traffic, such as CPA networks, have inherent instability.  Folks like Azoogle and Hydra have taken private equity and maintained profitability, but have struggled to find buyers.  Google search “Ben Edelman,” and you’ll get an idea about the dark underside of this space.  However, a business that carefully uses affiliates to supplement high quality traffic from other sources can significantly and profitably enhance its volume.

    Social media:  this is an emerging source that has some overlap with other channels.  For ex, you can buy banner ads on Facebook and MySpace.   More interesting is traffic from apps, often incentivized traffic seeking virtual currency in games like Mob Wars.  A few businesses are absolutely killing it in this area.  One of them is Offerpal Media.   I think what they are doing takes one part technology and two parts business knowledge.  Figuring out how to make offers endemic in the game play and then targeting appropriately is non-trivial.  But I’m not sold that this model will last.   The key is if the incentivized traffic can convert into quality.  Lead buyers have a history of overpaying for low quality leads, so that could be the case here.  But if not, the early leaders will be able to leverage the growing volume of the channel to build scale and technology and create signficant competitive advantages.   Of course, the crazy-high margins currently seen will be competed down, but there should be multiple players doing 100’s of millions in profitable social media lead gen revenue within a few years.

    The above should give visibility into the complexities and challenges of efficient traffic buying in each channel.  I should emphasize that in each channel, competition is intense and the landscape constantly evolving.  What works today will not work tomorrow.  A good example:  Google “Acai berry” and look at the ad copy in the highly competitive paid results.  You can imagine that initially all the ads touted the benefits of their acai product.  Then one clever advertiser, realizing that all the products and ad copy were undifferentiated, wrote “buyer beware” or “watch our for acai scams.”  With ad copy that stood out from the crowd, their click-through-rate (CTR) skyrocketed.  The idea was likely worth millions.  Quickly, however, competing advertisers must have realized their disadvantage and changed their ad copy.  Now, you can see that most have some variant of that copy.

    Efficient traffic buying alone won’t make a great business, but it’s an important component to building a competitive moat around a lead gen business.

    Written by sandykory

    January 29, 2009 at 1:50 pm

    Competitive Advantage in Lead Gen Part I

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    There are many knocks against lead gen businesses:  no barriers to entry, no customer switching costs, no real technology is necessary, overly dependent on Google, unsustainable margins.  And so forth.

    There are kernels of truth in each of these claims.  But they mask the fact that a lead gen business at scale can build a large and durable competitive advantage.   A great lead gen business can expect to enjoy continuing growth and profitability excepting extraordinary challenging business conditions (such as what occurred in the auto and mortgage verticals and what might be happening in others if the economy continues to worsen).

    A great lead gen business exploits positive feedback between its media buying efficiency, conversion optimization, and customer relationships.  Scale and technology drive each feedback loop.  In short, all these levers allow it to monetize certain types of traffic better than competitors.  This monetization advantage represents an enormous competitive advantage.

    I detail these key dynamics in the following posts:

    Competitive Advantage in Lead Gen Part II

    Competitive Advantage in Lead Gen Part III

    Competitive Advantage in Lead Gen Part IV

    Written by sandykory

    January 22, 2009 at 7:38 am

    Posted in Uncategorized