When I read Google’s earnings report, two things stood out:
1- Google generated over $5B in revenue, in Q2 nonetheless, historically the weakest quarter. This means Google’s 2008 will be robust, nonetheless:
2- despite ever growing revenues, Google’s traffic acquisition costs, or TAC, was down.
I could not get historical data, but ZDNet took care of that, and Om Malik was kind enough to point it out:
All factors being equal, as Google’s traffic increases, so should the portion paid out to sites like Ask.com, AOL.com, and the many many sites Google powers ads for, be it via search ads or contextual ads.
However, it’s fair to say that Google pretty much secured and locked up most of the Web’s real estate years ago when it acquired Applied Semantics and Sprinks and Yahoo! fell asleep at the wheel. Since - oh I’d say 2005 - Google.com has continued to grow rapidly, while Google the Network has plateaued.
That being said, however, Om is dead right when he says:
TAC in general and AdSense specifically are like a black box – no one quite knows how much Google gives out. Sometimes it feels like Google can use this “black box” to come up with pretty much any numbers it wants to.
I tend to agree. Like all ad networks, Google does not make money for publishers, it makes money for itself. But given the black box nature of Ad Sense, Google’s TAC has long been used (disclaimer I am adding to please our counsel: the following is 100% Ashkan conspiracy theory talk) as a slush fund to offset weakness in profit margins.
What you are now seeing in that graph, with TAC leveling and balancing off, I think, is no safety margin, which makes Om right, once again, when he says: “the traffic acquisition costs is where I think the real story lies.”
Google tinkering with TAC is by of itself not a big deal… but if we’re talking about warning signs, then how about this:
Look at how TAC flattened the fiscal year after Google’s headcount took off. From an earlier piece I wrote:
That makes sense:
- Google goes on a hiring binge: throughout 2005, then the bean counters decide to find cost savings somewhere, and where better than TAC, in the ensuing fiscal year, to make sure the year end bottom line figures are met.
- Look at the TAC graph again:
The first seven quarters, TAC falls from 37% to 31%… but then, in the next 7 quarters, TAC only falls from 31% to 28.4%.
To me, that says Google can’t cut any more meat off the bone without losing publishers, partners, or triggering some red flags… or, maybe, it’s too late.
Does anyone else think this is a coincidence?
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WatchMojo NewsletterRevver was one of the early pioneering video aggregators. After raising nearly $13M, it sold for less than $5M… despite the fact that YouTube - who launched after Revver - sold for $1.65B.
Exits of any kind, let alone mammoth-sized ones like YouTube’s have been rare. Today, one more exit, but not one that anyone should brag about: Podtech sells for - sit down folks - $500,000. The company had raised $7.5M over two rounds.
People, this is getting pathetic. Is the time nigh to admit that something is wrong in the marketplace, and the blame for that should largely rest with the investment community that has been investing in one bad video startup after another?
That last line sounds holier-than-thou; that’s not my intention. However, the facts and figures speak for themselves.
Last December, I was close to doing a financing round with a VC. In the end, we never did the deal. But I was asked to list other content companies who had done VC deals… and I mentioned that while Podtech was a different kind of content company, they were one example, adding “but I hear they are having some difficulties”. The elder VC in the room scolded me, suggesting that all was well at Podtech. Perhaps it was then, but now, that is not the case, apparently.
Venture Beat has a great piece on Podtech’s sale. If it can be called that. Isn’t a fire sale at 1/35th of the VC raised more euthanasia?
Hmm. Here’s what I wrote last year when Facebook launched its API: don’t do it.
I even lambasted VCs who were rushing like fools to fund these apps. I could link to one of the pieces… but you can imagine the gist: “Are you crazy, fool?”
Here’s what has happened in one short year: companies like Slide and Rock You raised tens of millions of dollars. Bow now, the seemingly-inevitable-to-anyone-with-a-brain is happening:
Facebook naturally emulated one of the more popular apps. From Valleywag:
If you’re the application developer and they’re the platform owner, you have to know death can come at any moment: Create a popular, simple application, and the platform owner might just rip you off in their next release. It’s happened to Max Levchin’s Slide, maker of the popular Facebook widget Top Friends. With its latest profile redesign, Facebook now allows users to specify which friends they’d like to display to profile visitors.
The result of this, when you “rinse and repeat”, is that funding for these apps will dry up, naturally - and it is, according to Valleywag and SAI.
My only question, frankly, is: is this a surprise to anyone with a two-digit IQ?
If Paid Content is worth $30M, is Silicon Alley Investor worth $5M pre-money (or $6M post-money)? Sure, why not. That’s how the M&A and financing businesses operate:
1- one part about demand and supply for a business,
2- one part about comparables,
3- one part about fundamentals,
4 - one part about leverage, which is a combination of the three points above. Why it’s a point in itself is because some people might have 1, 2, and 3 but cannot exert that leverage or are poor negotiators (or as they say in Latin, smallus ballus)
However, I wonder… since financing deals take some time - even for money men like Kevin Ryan - do you think the PC deal made them regret the financing value or rush them to close the deal?
I don’t know. In February, we penned Elite Eight Tech Blogs.
I never included valuations, because, well, I wrote that on a Friday evening from 10pm to midnight and I was burnt by the end, not being able to recognize letters, let alone compute valuations… but recent comparables help us start to add price points. Paid Content comes in at $30M, and SAI at $5M.
While I am sure that Rafat Ali took the Guardian’s kids as collateral to ensure editorial autonomy, as a corporate-owned blog, I will remove PC off the list. I had included SAI in the initial list, and this move frankly shoots them up. Nothing spells validation and credibility like an official, institutional round of money. I would know, because we’ve never raised a real round (I’ve funded this bad boy myself), but the drawback is that oftentimes people think I’m crazy when they ask who our VC is and I give them a blank stare.
Anyway, I will be updating that list soon, some things to expect:
- I think GigaOm moves up the list a bit, its recent Business Week partnership being solid validation.
- Tech Crunch remains a powerhouse, but with the whole Web 2.0 being more of a joke now than a fad, I wonder about its resiliency. Also, I really like Erick Schonfeld, but I wonder, what is TC’s value without Arrington? I think Heather Harde has added a je ne sais quoi to the firm… but the fact remains, as the Duncan Riley experience shows, you can’t pluck a blogger and parachute him onto a new blog and create a business.
- As much as I admire what each of the entrepreneurs behind VentureBeat, RWW and Mashable have done, all three need to do some soul searching. RWW is more of an IT source, Mashable is a mash of many things, and VB is more on financing and deals anyway… but the climate for all three is hazy, and cluttered.
One of my favorite VC bloggers (along with Paul Kedrosky) Fred Wilson says that someone told him he could sell AVC for $5-10M. Wilson says “he’s not sure about that” and he is right… because a good VC would tell you that AVC is 100% Fred and without him that site would be worth $0… the discount then would be considerable.
On SAI, the resurgent renaissance man Henry Blodget was smart to immediately surround himself with a handful of young, successful and talented writers: Peter Kafka, Micheal Learmonth, Dan Frommer; I’d never read , but he fills out the cast pretty well.
That is one difference between SAI and its peers. From Day 1, it was not about Blodget, though his presence - and yes, baggage - overshadowed his team.
Honestly, as much as I respect Staci Kramer on Paid Content, for example, I know when Ali was not behind the mike. Same thing applies to Arrington; love him or hate him, you have to admire and respect some of his bombastic posts… anyone else on that blog is fine on another blog… but on TC, I want Arrington in full effect.
Valleywag, on the other hand, is closer to a publication than a blog because it was never about any one blogger (not even Nick Douglas, who was the initial, sole writer). Owen Thomas has been amazing, and his cast of characters complete the masthead admirably.
GigaOm was a special case: no one could fill Om’s shoes… but his stable of writers are all actually unique and make you almost not miss Om. As a writer and journalist, Om hates hearing that; but as an entrepreneur, he probably loves me saying that.
Moving from a blog to a business is not obvious. One day I might hire 1 to 5 writers for HipMojo.com, but I might as well launch ThisIsANewSite.com… cause that’s reality. That site could be far better than HipMojo.com, but HipMojo.com it shant be.
Anyway… nice to see the evolution happen before our eyes.
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