Thoughts on Tech, Deals, and Markets

Sucker’s Rally

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The S&P was up 2.69% today despite worse-than-expected data on job losses.  The logic is that bad economic news is good because it will force a government stimulus package.  Except nothing the government has done yet has kept unemployment from skyrocketing and the financial system from remaining fundamentally insolvent.  Maybe logic isn’t the right word.

Written by sandykory

February 7, 2009 at 6:40 am

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Competitive Advantage in Lead Gen: Part IV

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Recently I’ve explained how lead gen businesses gain competitive advantages through a positive feedback loop driven by scale and technology, through efficient traffic buying, and through conversion and optimization.  In this post, I’m going to cover the final piece of the puzzle, the competitive advantages that can be achieved through customer relationships, or distribution (confusingly, many in the industry also use ‘distribution’ to refer to their consumer audience.)

These advantages take different forms across verticals.  It’s most pronounced in verticals such as home improvement/home services and insurance, where geo-targeted leads can be sold multiple times.  This creates huge variance in lead monetization between stronger and weaker players.

In these verticals, lead generators face a chicken-and-egg problem as they scale.  If they want to generate leads in a new location, they want to first have agents (insurance) or contractors (home improvement) to which they can sell.  But in order to get those agents/contractors to sign on as customers, they need to have leads to sell them.

In most cases, a lead generator attempting to scale into new locales will generate leads before building up a big customer base.  They will be forced to sell most of the leads they generate to lead aggregators (I define a lead aggregator as a lead gen company that generates less than 50% of its leads from internal traffic sources) that have strong disribution.   This can be more profitable for the lead generator than the alternative–not selling a lead–but it can hurt.  Lead aggregators will typically offer  30-40%  payouts, meaning the lead generator is giving up a lot of upside.  This is testament to the value of having a strong lead distribution network, which is huge when you think about the value of a lead sold once vs. 3, 4, or 5 times.  Companies such as ServiceMagic, ReliableRemodeler.com, Netquote, and Insureme all have large distribution networks that represent significant competitive advantages.

Lead gen companies can also differentiate themselves by building trust with their customers.  This might not seem like a big deal, except it is when you’re dealing in the murky world of online marketing.  Countless lead gen companies have shot themselves in the foot by letting their lead quality suffer as they try to generate more volume.  One of the wonderful ironies of the space is that every lead gen company claims to have great lead quality, yet most complain about the quality of their competitors.

In this context, a lead gen company that can rigorously control quality over the long-term can built up extremely valuable relationship capital with their customers.  These customers will be the first to benefit from a customer’s increased lead spend and the last to get cut back.

In addition, customer goodwill also enables lead gen companies with scale to exercise pricing power.  Like oil and unlike a giant box of cereal from Costco, lead pricing increases with more demand.  A lead gen company with scale and deep customer relationships can push price increases on to their customers by explaining that the price increases are necessary to increase volume while maintaining quality.  This is true on one level, but it’s also true that this is how a lead gen company at scale can enhance its margins.  That can only happen, of course, because of the powerful competitive advantages it enjoys.

Written by sandykory

February 5, 2009 at 1:50 pm

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The Rodney Dangerfield of Lead Gen

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IACI just announced less-than-stellar Q4 results.  The stock continues to languish near 52 week lows.

On a brighter note, ServiceMagic posted heroic numbers given the brutal consumer slowdown.  Revenue was $25.3m, up 15% y-o-y, while EBITDA was $2m, flat  y-o-y.  They are in a highly seasonal business–in Q3 they were at 34m/8m.

ServiceMagic dominates its vertical (home improvement/home services) more than any other lead gen company.   Given the significant economies of scale in a vertically-oriented lead gen business, they have a dominant strategic position.

Yet they are buried in IACI, where ASK.com, Match.com, and others get far more attention, and happen to be dramatically inferior businesses.

Written by sandykory

February 4, 2009 at 8:17 am

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Missing the Story on the iPhone and iPod Touch

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Comscore has a press release out on a recent study with the headline, “Smartphones Provide Extra Mana for Mobile Games Industry as Audience for Downloaded Games Grows 17 Percent.”

In an article covering the study, Ars Technica headlines, “Study: iPhone leading the pack in mobile phone gaming.  A new study has revealed that smartphone gaming is exploding, and the iPhone is at ground zero.”

Neither the study nor Ars’ article mentions the iPod Touch. Yet the iPod Touch is selling at 5x the rate of the iPhone, so obviously it is driving this trend.  It’s the reason why competing platforms like the Blackberry have no chance to keep up with the quality of games and other apps available on the iPhone.

As I’ve noted before, the killer edge Apple has with the iPhone and iPod Touch is that they are economic complements, like peanut butter and jelly.  More sales of each attract more developer resources to the platform.   This means better apps will be available for each device, driving more sales, attracting development, and so forth.

The study found that iPhone users are 9x as likely to download games to their phones as users of other smartphones. I would bet that they are also downloading many more games on average than non iPhone users, meaning the volume of games downloaded by iPhone users dwarfs that of non-users.   That doesn’t even include downloads on the iPod Touch, and it also doesn’t include downloads of non-gaming apps–another area where Apple is blowing the competition away.

Written by sandykory

February 3, 2009 at 7:15 am

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Mobile Web Obsolete?

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For a long time, I assumed that the mobile Internet was going to become the Next Big Thing as smartphones with 3g Internet connectivity proliferated.  On my Blackberry, I used to spend a fair amount of time on ugly, WAP-enabled sites that had spartan functionality.  Eventually, I thought, whether using the WAP protocol or not, mobile Internet browsing would be as ubiquitous as desktop browsing.

Not anymore.  With my iPhone, I get my news via apps from Bloomberg and NY Times.  The apps provide a dramatically better experience of consuming digital media on a smartphone.  I still think within a few years most people will have a smartphone with high-speed Internet.  But apps crush the mobile Internet browser.  I think apps from the iPhone and iPod Touch will end up dominating, but even if market share is dispersed between multiple smartphone platforms, I’m convinced apps will rule the day.

There are many things to figure out in this emerging ecosystem.  Do apps lose allure since they aren’t hyperlinked to the World Wide Web?  A little, but I’m sure smart engineers will figure out ways to have rich apps that integrate with other apps.  How will apps make money?  Like anyone else, I would say through a combination of pay-per-download, subscription, and ads.  But I don’t know enough at this point to get more specific than that.

It’s early days in apps monetization, but I’d wager many fortunes will be made as the platform matures.

Written by sandykory

February 2, 2009 at 9:46 am

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Charity in Negotiations

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As I’ve written previously, options are critical in negotiations.  In any negotiation, both sides should brainstorm options to probe for outcomes that create mutual benefit.

I was recently negotiating a fee structure with a prospective client that was composed of two parts.  They were having a hard time stomaching one of the parts.  It was very small compared to the other part, but even though it was small we didn’t want to compromise on what we considered was a  ‘market’ price for that part.  After many rounds of back-and-forth, I asked the prospect if there was any dollar amount that would suffice.  They suggested a number, let’s call it x, that was less than what we wanted.  But we would have taken it if we had to.  Then, an idea occurred to me that I thought could create a win-win.  I said that we would take x, but we would prefer that they pay 1.33x but give us half and give the other half to charity.  I’m sure they were shocked to hear the word ‘charity’ coming from an ibanker, and even more stunned to hear us volunteering to take a lower fee, but they thought it was a great idea and enthusiastically agreed to it.

With the tax deduction they’ll get on the donation, they will end up paying about x overall.  So at little net cost to them, they’ll be able to make a large contribution to a deserving charity.  We both feel good about that, and that will surely strengthen our working relationship.  That alone is worth us forgoing part of the fee, and probably worth much more than that.  More importantly, we were able to cause a charity to get a substantial donation that they otherwise would not have received.

Written by sandykory

February 1, 2009 at 4:36 am

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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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