Redeye VC Josh Kopelman beat me to it, but indeed, everything that is old is new again.
Let’s get a few things out of the way:
Jason Calacanis is one helluva promoter. Between Silicon Alley Reporter and Weblogs Inc. (the latter which sold to AOL for $25M), Calacanis has a unique track record. Let me also say this: Jason - who posted about the launch on his blog - might very well succeed in a few ways because he’s got willpower en masse.
That track record - we think - is what prompted an all-star cast of investors to invest in Mahalo, his latest venture that he’s been working on since January 2, 2007.
What is Mahalo?
Mahalo - meaning Thank you - is essentially a new venture-backed player in search, directories and navigation. It’s in fact a contrarian play in the space, arguing that human beings can do a better job at finding what people want than technology.
For the record, we think in theory this makes sense, but by the time you finish updating the results page for a given keyword, the results are outdated, or worse, listing dead links.
A who’s who list of investors
The investors range from my old employer News Corp., to lead investor Sequoia, along with VC superstar Fred Wilson (not sure if this was as an individual or on behalf of his fund Union Square Ventures), along with random investors like German-based publisher Burda (yes, the Burda your mom laid out for you), deal-happy CBS, X.com/Paypal shareholder/spaceman Elon Musk and of course, Mark Cuban who seems sold on Calacanis.
We don’t think, for a New York minute, that any other entrepreneur would have been able to raise the amount of money that in JC’s words will allow him to “to run the company for at least five years without any revenue.”
Rumor has it he raised $20M on a $100M valuation, according to an earlier report on Valleywag, who has developed a strong accuracy rating of late…
It’s a good thing, because every possible factor suggests that Mahalo will flop. Will it? Well, not so fast. I swear that we’re not being critical, this post is actually a
- Jason Calacanis is in a league of his own for having convinced people that this could work AND
- Jason Calacanis is one of a handful of people to make this work.
I don’t dole out compliments like this, so to dole it out, I must be somewhat critical on some blaring problems I have (and we’re not alone):
But make no mistake about it: for investors to get a positive return on this will take a Doug Flutie-esque hail marry miracle. More on this below.
Let’s proceed:
a) Been there, done that
Mahalo comes across as a cross between:
- About.com and
- Magellan
We know About.com. Magellan faded into oblivion for many of the reasons that the odds are stacked against Mahalo.
But, the flip side is, MySpace was Geocities 2.0 and it’s the most successful startup of the last 10 years - Facebook euphoria of the past week notwithstanding.
Moreover, all directories ceased to exist and paved the way for algorithsm: Looksmart bought Wisenut, Yahoo! bought Inktomi. There was a reason for that, no?
b) Mahalo seems way too labor intensive to pass any test of common sense.
Google crushed everyone because of, well, the algorithm. Ask flopped because it did not have one (despite the new, eerie ad campaign Mr. Diller). Yahoo! too suffered because it lacked an algorith. Magellan vanished.
The trend, clearly, is that the pace of content being created FAR outstrips any rate of indexing by people. Which takes us to the next point.
c) Mahalo is not a search engine, it’s a directory…
Which is fine, but this begs the question: why not call a duck if it walks like one, quacks like one, etc. Because ducks are oftentimes lame and Calacanis does not want to associate his new puppy with multiples bestowed on directories, but rather, search.
Don Dodge recently posted about how 1% market share in search can translate to $1B-$3B in market value. Well, Google has 55% market share, Yahoo! 27%, MSN has 10%, Ask about 5%, AOL ditto, which means that the remaining 45 in the top 50 have 1%.
Will Mahalo be able to get even 1% by that magical 5 years before it runs out of money?
Probably not. But Calacanis has the track record to prove us all wrong… though I’ve written before that search seems to be mankind’s hubris. Why else would Wikipedia founder Jimmy Wales risk his Midas reputation on Wikia, something that confuses even the most reputable of media?
Considering how tight this space already is - plus the entries of players like Powerset, Wikia, and of course, MetaMojo.com (yes, I’m kidding, sort of - read disclaimer at the end) - within five years, Mahalo might at the very most get 1% market share. Since it won’t be a destination, in Jason’s own words, then he won’t command the $1B market share Don Dodge outlined, but closer to $500M, at most, IN FIVE YEARS! And that’s IF he hits 0.5% market share. But pause for a second and ask yourself how many companies in search are worth $500M despite being in search for decades: Infospace? Enterprise value of $250M. Answers.com? On Google’s results page… market cap? $120M. Looksmart, the original directory: $47M enterprise value. Mamma? $60M. Here’s a rundown of search players I posted just yesterday.
The search destinations #6 through 50 command 1% folks! So IF Jason can ramp this up - despite no distribution - then this will be worth $500M, in theory. That, people, assumes a decent monetization strategy. But if Jason is planning on riding his entity without worrying about revenue, them cut that in half, at least, if not more. The investors probably came in at a valuation touching $100M. If they think this is a good risk/return ratio, more power to them. Just wait until more money is needed for staff, rent, etc.
Problem? Jason has 40 staffers - not IT folks - but artists essentially (based on the description), burning through the VC money. To get into the black, this puppy will need more money, since the demand for Web talent is increasing, particularly in places like the US…
Which introduces problem #2: Jason should have focused on global, and not US search/advertising. Yet his plans call to focus on what Americans search for. That’s nice and dandy, if the gameplan was being drafted, well, in 1996. Quick example of what I mean: Canada has 1/10th of US’ population, yet US commands 16x the ad revenue. That will converge over time. The openings are in global, non English markets.
What Mahalo will do, probably, is make a lot of noise with the blogger community, the digerati and technorati but the masses - those who made google a verb (hence the lower case) - won’t care because Jason Calacanis is as familar to them as Mahalo is. Of course, Google wasn’t a household name either, but that was back in 1999 when search was boring and everyone was leaving the space. ’tis not the case today.
But we’re not boosters here, we’re trying to offer candid observations, and on the surface, the only thing Mahalo has going for itself is Calacanis himself.
If you doubt me, ask yourself this:
- How different is Mahalo from Chacha, fundamentally?
- How different is Mahalo from the 80% of startups that Michael Arrington covers with brazen bravado and hoopla, only to disappear or end up in the deadpool? Here’s his coverage of Mahalo, by the way.
The Web, clearly, is becoming a cess pool of sorts, because there is no logical reason why such marquee investors would back a labor-intensive project like this.
Frankly, Jason just confirmed something that I’ve realized. Unless your sole motivation is money, as an entrepreneur you are better off selling your company, securing a nice exit, and moving on to the next great thing. Had Calacanis held on to Weblogs, sure, he could sell it for more, but the currency of saying “I’ve pulled off a successful exit” is worth more than money. And, as a side note, the currency of saying “I was the founder/CEO in an exit” is miles greater than just being on the executive team… but we’re sidestepping way too much.
In fact, in the very best case scenario, Mahalo will be a version of:
- Wikipedia and
- Netscape 2.0
Ironically, Calacanis was running Netscape, and if he could not make that into a success despite AOL’s billions, how could Mahalo - with no distribution - survive? Distribution is everything in search. Ask is trying to get is by advertising. Google did it via Yahoo! Wikia has a chance - if it sees the light of day - due to Wikipedia’s traffic. What’s Mahalo’s plan? Even investors like CBS and News Corp. will balk at using Mahalo on their portals because in the former at least, Google is paying a whopping $900M to power ads.
I’d like to reiterate, every few paragraphs, that Calacanis can make this work. Weblogs was not an obvious model either, but he made the numbers add up. The problem, was that Weblogs was content, this is not. For this to work, it needs distribution, and I just don’t see it happening.
Mahalo, is, in fact, a contrarian bet on web search: while Powerset, Podzinger, and the many other search engines try to improve on technology, Mahalo turns a blind eye, arguing that 24% of the top searches are a result of the top queries. Perhaps, but staying on top of those queries is a freaking challenge. Mahalo’s top results will within weeks become irrelevant.
We’ve put in a request for an interview, will keep you posted. We don’t think JC will give us one, which is a shame, because we genuinely want Jason to do well… it just put MetaMojo.com into play as a very valuable asset. After all, we index a million times more pages than Mahalo does… and we swear, even if we didn’t run MetaMojo.com, we’d write the exact same thing.
Disclaimer: Mojo Supreme, our parent company, runs the MetaMojo.com vertical search engine, not quite a competitor of Mahalo, since, well, it’s actually a search engine. Jokes aside, its high-quality results, retrieved from best of breed sources based on the category would make a nice addition to Mahalo - and any search engine’s - results page. But my point was: distribution is key, we use MetaMojo.com in the Mojo Supreme network and that has helped search queries skyrocket. Without a distribution angle, any new search engine is DOA, in our humble opinion.
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WatchMojo NewsletterToday, Yahoo!’s CTO announced his retirement after 11 years of duty. Valleywag asks some interesting questions and has the internal memo here.
“Of the three key positions under Terry Semel — sales, product and tech — two are open,” observes Valleywag.
Considering that 2 of the 3 spots reporting to Semel are open, and that Semel might be biding his time to leave, I’d say the power vaccum is a perfect time for eBay, MSFT, even dare I say News Corp. to make a run at YHOO?
Options:
- Should MSFT Spin Off MSN.com/Live into Yahoo!?
- YHOO Let One Rip and Everyone in the Room Heard It
- Take Yahoo! Private, Triple Your Money in Four Years?
Disclaimer: Long YHOO.
Media is going digital, in case you haven’t heard. Today CBS bought music social network Last.fm for $280M. That’s not to say that it will all be online, for free, in an ad-supported model. We maintain that what you see offline vs. the Web will remain different due to economics (ads on the webs are still paltry next to offline advertising after all) and what you see on the Web vs. wireless will remain different mainly due to technology. The cell phone, after all, has the computing power of a computer in 1995. Great. I wasn’t doing much back then online, apart from waiting for a page to download.
But media is going digital, on that there’s no doubt. This does not mean that newspapers, magazines, TV, radio or billboards will vanish, it just means that it will change.
I’ve argued that software - increasingly open source or ad-supported and free - is being replaced by digital content in terms of profit potential: once you produce it, it’s all marginal profit. [See Is Digital Content the New Software?]
But, given that I’m the business of producing video and publishing text (as I am doing here), my focus has been largely on anything but music. So this begs the question, what about music?
When Five Becomes Four… and Four Becomes Three?
Last year Sony merged with BMG. And this year, EMI is being courted by both private bankers and WMG. In fact, the day after EMI shareholders accepted an offer from private bankers for $4.7B and be taken off the markets, the EU conditionally approved Vivendi Universal’s acquisition of BMG Music Publishing, after the music publisher agreed to sell off parts of its catalog, according to this post by Paid Content.
EMI, by the way, lost $568 million in 2006.
As of 2005, here was the breakdown in terms of market share around the World:
Clearly, EMI and WMG are the smaller players… and their market caps reinforce that:
- WMG = $2.49B
- EMI = $4.34B (bought by private bankers)
- Universal is part of Vivendi (we all know that disastrous story, with the Bronfman family knowing it too well).
- BMG was a part of Bertelsmann, and is now a 50%-50% joint venture between German-based Bertelsmann and Japan’s Sony. Looking at that pie chart above, for those keeping track, as of 2005, the market shares were 13.83% for Sony and 11.78% for BMG.
BMG/Sony merged partially to save money, their merger was to lay off 2000 employees and save them $350M each year. Over the years, the record labels had gotten large, fat in fact, and the digital revolution simply exasperated matters.
When EMI loses $568 million in a year, you know the industry is just getting ready for a shakeout.
And much of the preparations have to do with merging to strengthen the base and weed out redundancy.
The smaller labels range from marginal valuations to $36M, for example, in the case of Sanctuary.
An Apple A Day…
Of course, leading the charge on the digital side is none other than Steve Jobs and Apple, who recently sold its 100M unit of iPod. I’ve long said that Shawn Fanning and Napster have proven over time to be poodles compared to the grip that Steve Jobs has on the music industry and to a much lesser extent (for now), the movie industry by selling Pixar to Walt Disney and becoming its largest individual shareholder.
Hardware vs. Software
It’s important to note that Apple makes practically all of its revenue in music off the hardware (the iTunes) and not “software,” the music. Keep in mind that digital media is the new software, in our perspective. The software component is sold via iTunes, Apple’s radically successful music store.
The iTunes Revolution
From Apple:
- Apple sells 2B songs on iTunes, in 2007.
From SFGate:
- February 2006: Apple sells 1B songs on iTunes in 3 years.
From CNET:
- July 2005 - iTunes crosses 500M.
- January 2005 - iTunes crosses 250 million mark.
- December 2004: iTunes crosses 200 million songs sold.
- 2003: iTunes crosses the first 50 million songs after 11 months.
Clearly, things were changing. In fact, by end of 2005, iTunes was outselling Tower and Borders in the US, according to NDP Group. In other words, we don’t expect a deceleration of things, but an acceleration of this shift.
While Apple’s revenues have grown $14B in 2005 to $19B in 2006. Much of that comes from computers, sure, but at $1 a song, having sold 2B songs, there’s $2B in revenues that Apple remits largely to the labels.
Analysts at IDC found that Apple made - as of 2005 - a healthy 35 percent to 40 percent profit on each player sold, and stands to make even more from ITunes music purchases and expected drops in flash memory pricing.
A quick “behind the envelope” estimate pegs revenues (from the launch of iPods in October 2001) at:
= average of $250 per iPod x 100M units = $25B in sales since 2001 for Apple.
The profit on these, at the 35% margin level is a whopping accumulated profit $8.75B since 2001 for Apple.
When you consider that Apple’s net income in 2005 and 2006 were $1.3B and $1.9B respectively, you see the valuable contribution the iPod makes. iTunes, alternatively, don’t add much to the bottom line; or at least, not as much.
Of course, the 2B songs sold on iTunes come from all major record labels and the independents, but considering that all of the independent labels and WMG boasted respective market shares of 18% and 15% respectively (as of 2005), there can be an interesting argument made for Apple to consider buying WMG and a bunch of independent labels.
And yes, this does not mean that WMG and the indies represented (18+15=) 33% of the 2B sold, but such an acquisition of the smaller labels would not cause an antitrust issue, would in fact boost competition and add a lot of value to Apple’s bottom line.
How Much Would Owning the Music Add to Apple’s Bottom Line?
Say the percentage of WMG and indie songs sold is actually 25% (and not 33%), that represents 500M songs, which at $1 would help retain $500M in profits for Apple… this is just one scenario in light of EMI being bought recently and the biggies being too large… but given the pessimistic horizon, who knows, maybe Vivendi would sell Universal Music Group at the right price.
It would also give Apple a way to increase its leverage in negotiations for revenue share with the majors, no?
Et tu Microsoft?
Of course, this is not something that Apple only can do, Microsoft, who launched the Zune in 2006 and has since sold 1M units could also make the move. We’ve argued that MSFT should get into the content space (again) and could do so my making acquisitions of record labels, which in an increasingly digital media landscape is not only a bad corporate strategy but would give it an edge over Apple and a shot in the arm of its Zune unit.
Is Cash King?
Whether or not MSFT or AAPL will actually do this, I doubt.
ADDED LATER: In fact, Apple Inc. (the computer maker) can’t enter the music content business by way of a 1991 agreement with Apple (the fab four). Then again, in 2007 the two parties updated the agreement, so I can’t see why another addendum is out of the question, if Apple Inc. really wanted to enter the space.
Given the stakes, it’s not a bad idea. After all, cash is king but Apple and MSFT have respectively $12B and $35B. The firm’s P/E is 35 times and 22 respectively. Using the example above where a company buys the indies and smallest major record label for about $3B would add $500M in profits, which would in turn add 500M x 35 P/E = $17.5B in market value for Apple and $11B for Microsoft (at a P/E multiple of 22).
At today’s prices, Apple is worth $101B - crossing the mythical $100B valuation mark - so this is in fact a 17% spike in market value. Microsoft weighs in at $300B, and for them, such a move would yield an increase in value of 3%… but in MSFT’s case, it would catapult them in a much stronger position, since their larger war chest would allow them to make a run for a handful of indies and a major record label that is larger than WMG, be it Sony BMG (25% market share) or UMG (31% market share).
All of a sudden, the idea of owning the rights to the songs becomes more and more palatable, no?
Today News Corp. made it official: Fox Interactive Media Agrees to Acquire Photobucket and Flektor, Inc.
A couple of years ago, Rupert Murdoch told the world that he was earmarking $2B to invest in digital media, technology etc. He then made a series of deals, effectively becoming my boss in the process:
- MySpace parent Intermix: $580M
- IGN (my former employer): $650M
- Scout: $60M
- Strategic Data: $?M
- Photobucket: $250-300M (reported, but unofficial)
- Flektor: $15-20M (reported, but unofficial)
Combining it all does not even add up to $2B… though we don’t know how much it paid for either Flektor or SD, but the point is, Murdoch is getting back $900M from Google over the next couple of years, and FIM is now on pace to make $500M in revenue this year…
Was the earmarked $2B worth it?
Two years later - and roughly $2B spent - his Fox Interactive Media is the “Web’s most-viewed network in the U.S. with more than 45 billion page views per month. The group’s properties include MySpace, IGN Entertainment, FOXSports.com, AmericanIdol.com and others.”
You better believe it.
Murdoch did to the three kings of new media (Yahoo!, Time Warner’s AOL and Microsoft’s MSN) what he did to old media (Walt Disney’s ABC, GE’s NBC and CBS) with the introduction of FOX, he became a player through sheer willpower.
Love him, hate him… the man walks around with a swagger and he isn’t all talk.
And, his company is the only one - other than MSFT - in the running to acquire Facebook.
Mark my words.
Yesterday, it was reported that the FTC was going to investigate into potential anti-trust issues in the Google/Doubleclick deal.
That puppy was for a whopping $3.1B, and triggered a plethora of deals, including Yahoo!/Right Media ($800M valuation), WPP/24/7 RealMedia for $680M and MSFT/aQuantive for $6B.
But this begs the question, in a market that is strong-form efficient (all info be it public or private is reflected in stock), can the stock market give a quantifiable probablity that a deal won’t go through?
The Google/DCLK and YHOO/Right Media deals involve private firms, so the answer there is no.
But WPP/TFSM and MSFT/AQNT involve public companies so let’s examine this:
The latter, an all-cash deal, was for $66.50 per share, yet today, the stock is still only at $63.75, or 4.1% off the purchase price. In terms of market cap, AQNT is at $5.03B though the price tag was $6B. That would suggest one can make a 19.28% return… (note: don’t do this! I am not an investment professional and I am sure there is something I am missing, hence why I’m posting this, to find out).
It’s not like the difference is cash, since AQNT has $296M (according to Yahoo! Finance). It also has $80M in debt, so a net cash of $216M. Clearly, this does not explain why the market is hitherto valuing AQNT at $5.03B when MSFT is eager to give shareholders $6B.
Alternatively, it’s worth noting that TFSM is at $11.72 and the buyout price is for $11.75… not much room for arbitrage there. Then again, the market cap is at $598M though the price WPP is to pay is $649M. That’s off by 8%, or $51M, but TFSM has $62M in cash, and $15M in debt… so $47M net, so maybe it’s that?
Is that the transaction costs? Maybe. But who pays for that: buyer or seller. I guess it depends.
Or, maybe the market is saying that there is a probablity that the deal won’t go through?
I don’t - in all honesty - know why, but it’s interesting. If someone knows, please chime in in the comments or email me at ash@mojosupreme.com.
UPDATE #1: From Howard Lindzon, investor and entrepreneur:
“Just merger arb guys betting on the deal and that’s the risk spread the big big money is taking. In the AQNT deal the big money says that there is a bigger chance this deal could get changed.”
I’ll post as people send me their two cents.
For the past couple of years, News Corp. amassed considerable real estate online with the acquisitions of Scout, IGN and MySpace. The company’s fortunes grew as a result: MySpace today boasts the most amount of pageviews amongst any site. While the company continues to make specific acquisitions to bolster its portfolio - namely Strategic Data and Photobucket - the company is not spending anywhere near as much as it was last year.
This year’s M&A media leader seems to the CBS, so far at least. This is all that more interesting because CBS was supposed to be the value vehicle in the Viacom spinoff, with Viacom being the growth opportunity. But, ever since CBS CEO Les Moonves lured dealmaker Quincy Smith from Allen & Co., it looks like ’tis CBS - and not Viacom - who’s shopping for growth and strategic fits.
The company has hitherto launched the CBS Interactive Network, made an undisclosed investment in Joost, acquired Wallstrip for a figure in the vicinity of $5M and today will announce that it bought Last.fm, the UK-based social network music site launched five years ago for $280M.
With Last.fm, users tell the website what music they are listening to. The site recommends other music they might like and links to buy the songs. For music it doesn’t have licenses to play, it offers 30-second samples.
Despite Last.fm’s 15 million monthly users (including more than 4 million in the U.S.), the price tag is far less than others in the social network space have fetched, even though multiples are higher today than they have ever been:
The initial payout is well beneath that paid by rivals in the last two years for video-sharing site YouTube Inc., now owned by Google Inc., and for MySpace, the top social destination on the Web, bought by News Corp. The final price for closely held Last.fm could rise substantially if performance targets are met.
Of course, while music is a red hot space online, it’s not an obvious one:
Last.fm offers Internet radio — the steady streaming of songs to computers. But it’s a tough business now because of a recent ruling by the Copyright Royalty Board that would significantly increase the royalties Internet broadcasters pay for streaming digital songs.
And while Last.fm has had minimal advertising thus far, things will change once CBS’ sales machine pumps into high gear:
CBS is also trying to fill out an advertising portfolio that already includes conventional radio, broadcast and cable TV and outdoor services.
(…)
Music sales aren’t a big part of the financial picture so far, and they might not be even when CBS takes control. The minimal advertising on the site, however, will be beefed up. CBS envisions channels for music backed by corporate sponsors that will pay for the privilege every month.
These are small, incremental deals that are beginning to help CBS catch up in the online real estate land grab; don’t get us wrong, CBS can be as strong as they’d like online, but next to their offline prowess, they’ll always have room to grow. Offline, CBS commands the largest billboard and second larget radio network, oh, they also have a rather popular TV network and a couple movie entities you might have heard of…
In other words, while some might wake up and say “what the?” - truth is that as one of the strongest offline players, CBS has a lot to lose by standing still:
The purchase is emblematic of the sharp change in direction at CBS, which owns the oldest U.S. broadcast television network and one of the country’s largest radio networks.
Instead of focusing solely on creating programming, the long-staid company now sees its mission as reaching the broadest possible audience in any medium, including the Internet and cellphones.
That last sentence says it all: old media will never disappear, but there is a massive shift of consumer’s attention, marketers budget and decision-making online, no one knows where the balance will wind up, but CBS - along with other media companies - don’t want to be caught off balance when the music stops.
Related:
:: Who is the king of digital media?
:: What is NBCU worth if it were spun out?
:: CBS Buys Wallstrip Part 3 | Part 2 | Part 1
:: Quincy Smith Hints at M&A Targets at EconSM Panel
:: Irony of CBS Hiring Quincy Smith
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