It is astounding that eBay forked over $3B for Skype and didn’t actually buy Skype’s underlying technology.
It is amazing that they didn’t realize this and outright criminal that they didn’t get a fully-paid, irrevocable, perpetual, non-exclusive (exclusive for the purposes of international calling) license.
Om Malik has all of the links you need:
- Skype Founders suggest they still own underlying technology to Skype
- Will Joltid turn eBay’s planned Skype IPO into a nightmare?
- Why eBay Should Accept Skype Founders’ Buyout Offer.
Now this will probably get settled one way or another, and as a non-Skype user, non-eBay shareholder, I don’t really care either way.
But a few points:
- this proves that just because you hire expensive lawyers doesn’t mean anything.
- One more example of upward failing, and to think this woman, Meg Whitman, could have been our Treasury secretary. I am sorry how wonderful Ms. Whitman was, this was done on her watch and it’s just appaling in terms of botched due diligence.
- With all due respect to Skype founders Niklas Zennstrom and Janus Friis, you have to wonder, will anyone ever buy a company from them again? I mean, sure Viacom/CBS and a number of VCs invested in their next venture Joost (hmm… is there such a thing as karma?), but this was before this bit of news was out. Ultimately, I am not sure I would have a lot of comfort and confidence doing a deal with these guys.
Agree or disagree with all points, Mark Goldenson pens a gem, called “10 Lessons from Failed Startup”, for Venture Beat.
The ten points are:
1. Find quick money first.
2. Content businesses suck (or: do it for love and expect to lose money).
3. Know when to value speed vs. stability.
4. Set a dollar value on your time.
5. Marketing requires constant expertise.
6. Control and calculate your user acquisition costs.
7. Form partner relationships early, even if informal.
8. Plan costs conservatively and err on the side of raising too much.
9. The key to negotiating is having options.
10. Knowing isn’t enough.
Personally, I’ll simply say content creation and distribution can work. But 99.9% of content startups just don’t know what they’re doing. And to his credit, Mark is honest to admit that his was just one of many.
What’s criminal is that he raised $900,000, some have raised over $20,000,000 and lord knows they won’t be around in 1 or 2 years.
Live coverage of ad:tech San Francisco by David Shabelman.
A few more thoughts from Digg founder Kevin Rose at ad:tech San Francisco.
- On whether he was enticed to accept millions of dollars in a buyout, Rose admitted, “who wouldn’t want to have a shit ton of money,” but said he wasn’t too worried about his personal wealth. “I’ve never been one to need much to live on.”
- But Rose also said he’s not interested in selling out to a large company, then have the site losing its cache, not innovate and fizzles out in a few years.
- Rose said the company could use some of its funds to acquire a digg-like company in another country. He said digg monitors numbers of other sites and if they are gaining traction digg could acquire them.
- He said the dead tree media “is dead” and he doesn’t know why people keep talking about it. In terms of the media’s role as a watchdog, he said that won’t go away, it will just be stripped down. Rose said he doesn’t know if Digg can save newspapers, but it can provide newspapers with reams of information about their users and what other types of stories they’re reading.
- Along the same lines, he said popular journalists, such as the Wall Street Journal’s Walt Mossberg, will always have a following and will actually be more powerful when they are not affiliated with a newspaper.
- He does not believe Twitter competes with digg.
- He said digg has gone about as far as it can with its current format, but said there were drastic changes for the site in the works.
- He was shocked by the amount of hatred its users expressed after the introduction of chocolate Skittles.
For more coverage ad:tech SF, visit our overview page here.
Boxee’s efforts to try to “rescue” Hulu and introduce them to “the 10-foot experience” reminds me a lot of this skit from Mad TV (incidentally, airing on News Corp.’s FOX, which owns 50% of Hulu):
When Boxee’s dalliance with Hulu began, I wrote “The Techies Don’t Get It“, because technologists think that they are doing media companies a favor by ripping them off and robbing them of their choice to choose where and when consumers should access their media. I mean, I like both of these companies and want both to be wildly successul (not just as a user, our company’s content is on both platforms), but for the love of all things holy, technology companies cannot unilaterally make decisions on behalf of media companies.
Just this morning Paidcontent.org’s CEO Nathan Richardson wrote about how Silicon Valley can help newspapers. Are you freaking kidding me? VCs and technologists essentially plot ways to rip off media. That’s the only challenge they see, the only one they view as potentially lucrative.
Personally, I don’t shed a tear when a traditional media company goes out of business over sheer stupidity, but by the same token, I don’t exactly take pleasure in seeing a technology company act so brazen.
Wordpress: when I want to choose a category, I don’t like to have to scroll down dozens, if not hundreds of categories (especially on our TenMojo.com Top 10 list site)… I’d like to be able to start to type in the category and have an auto-speller list all of the pre-existing options.
Gmail: why do I have to scroll all the way down a message before pressing Reply or Forward. I know the commercial reason why: it’s akin to malls making you go around before taking the next escalator… it forces you to walk by the stores and see the sales… Gmail is similar, by having to scroll down you have to see the text link ads. However, when you are emailing someone back and forth frequently, the thread can be very long… and this becomes tedious.
Please, just do these two things.
More suggestions to be filed under “Assuming you care”:
“I believe constraints are key to building great web apps. I am not sure about rules that are dictated by the market or government. But the reality of the place we are in is that we have to deal with them. And the best entrepreneurs will figure out how to play these rules to their advantage.”
Amen. In fact, you can replace “web apps” with companies. Read more.
Yesterday the NY Times wrote an article mentioning that no VC-backed firm did an IPO in Q2 2008. I observed that VCs were basically becoming useless by backing largely useless companies. I was not alone, the main argument was leveled by VC Paul Kedrosky.
A reader of this blog echoed the same thing, and today, the last major IPO to hit the tech space - Google - shows why we go eons between IPOs:
I left [Google to back to MSFT] because Microsoft turned out to be the right place for me.
First, I love multiple aspects of the software development process. I like engineering, but I love the business aspects no less. I can’t write code for the sake of the technology alone - I need to know that the code is useful for others, and the only way to measure the usefulness is by the amount of money that the people are willing to part with to have access to my work.
Sorry open source fanatics, your world is not for me!
Google software business is divided between producing the “eye candy” - web properties that are designed to amuse and attract people - and the infrastructure required to support them.
Some of the web properties are useful (some extremely useful - search), but most of them primarily help people waste time online (blogger, youtube, orkut, etc).
All of them are free, and it’s anyone’s guess how many people would actually pay, say $5 per month to use Gmail. For me, this really does make the project less interesting if people are not willing to pay for it.
This orientation towards cool, but not necessarilly useful or essential software really affects the way the software engineering is done. Everything is pretty much run by the engineering - PMs and testers are conspicuously absent from the process. While they do exist in theory, there are too few of them to matter.
On one hand, there are beneficial effects - it is easy to ship software quickly. I’ve shipped 3 major features (a lot of spell checker and other stuff in the latest Gmail release, multi-user chat in Gmail, and road traffic incidents in Google Maps), and was busy at work on my fourth project in just a year. You can turn really quickly when you don’t have to build consensus between 3 disciplines as you do at Microsoft!
On the other hand, I was using Google software - a lot of it - in the last year, and slick as it is, there’s just too much of it that is regularly broken. It seems like every week 10% of all the features are broken in one or the other browser. And it’s a different 10% every week - the old bugs are getting fixed, the new ones introduced. This across Blogger, Gmail, Google Docs, Maps, and more.
This is probably fine for free software, but I always laugh when people tell me that Google Docs is viable competition to Microsoft Office. If it is, that is only true for the occasional users who would not buy Office anyway. Google as an organization is not geared - culturally - to delivering enterprise class reliability to its user applications.
The culture part is very important here - you can spend more time fixing bugs, you can introduce processes to improve things, but it is very, very hard to change the culture. And the culture at Google values “coolness” tremendously, and the quality of service not as much. At least in the places where I worked.
Since I’ve been an infrastructure person for most of my life, I value reliability far, far more than “coolness”, so I could never really learn to love the technical work I was doing at Google.
The second reason I left Google was because I realized that I am not excited by the individual contributor role any more, and I don’t want to become a manager at Google.
Read more on the why I left Google to go back to MSFT here.
The Misplaced Bet on UGC
Back in 2006, we’d get the occasional call from someone pitching us a turnkey solution to add User-Generated Content (UGC) videos to our WatchMojo.com property, which houses professionally produced videos we have created.
At the time, I thought it was an odd pitch, akin to adding a half liter of malt liquor over graciously aged scotch. Biased no doubt as the producer of these clips on WatchMojo.com, I tempered my prejudice and disdain for UGC and said, maybe, just maybe, UGC is the great next big thing, and advertisers will catch on.
Mind you, having served for 6 years as a VP of ad sales at a Fox Interactive Media-acquired property, it struck me as odd. The advertising ecosystem has long been a tiered on involving marketers, publishers and users. That was not to change in my opinion.
That part regarding advertising is key, for in this free, ad-supported ecosystem we’ve created online, no self-respecting consumer pays for anything; advertisers are supposed to foot the bill for both content and technology.
2008: The Flight to Quality
Fast forward to 2008, and things they have changed. For one, no one calls us with such offers, in fact, the calls are coming in asking for the right to license and syndicate our library of professionally produced, premium content.
While this is refreshing to hear for us, I do believe that it spells a potentially doomsday scenario for many of the aggregators of video content as well as suppliers of the broader video space, namely hosting companies and content delivery network (CDN) firms.
UGC’s Impact on Media, Publishing, Marketing and Advertising
Numerous companies raised a lot of money betting on UGC, expecting the so-called wisdom of the crowds to change the rules of engagement in media. Indeed, social media (of which UGC is a subset) has changed the dynamics of publishing, but advertising will remain largely immune as marketers won’t come near it. In fact, the only real impact UGC shall have on advertising is depress advertising rates as an influx of ad inventory floods the marketplace.However, a solid 5 years into the UGC video “revolution”, it’s clear that advertisers are not impressed. eMarketer just reduced the forecasts for social advertising: The company is projecting that by 2011, advertisers will spend $4.3B worldwide on social networks; it had previously guessed the number would be $4.7B. It also took down its US 2008 estimate to $1.4B from $1.8B. You won’t see that in any investor decks, I’ll tell you that.
This spells a lights-out scenario for many in the space, let’s consider the domino steps to explain why.
Today Chad Hurley, co-founder of YouTube, suggested that affiliate marketing (the low paying, low hanging fruit in the marketing ecosystem) might become a source of revenue for YouTube. This year, analysts have been throwing darts at the board trying to guesstimate YouTube’s earning power. As a professional content provider to YouTube, I can probably add my own two cents, but in this post, that makes no sense… and with an NDA in place, that would be folly. So as usual I will keep the comments to the market as a whole. To read our 2006-era estimate of YouTube’s earning power, potentially the first one conducted on YouTube, click here.
The point is: apart from YouTube’s massive, outlier $1.65B sale to Google, every single YouTube competitor in the social networking file sharing video segment has been throwing airballs and putting up donuts on the scoreboard that matters most: making money, either via income or via capital gain. It seems, in fact, that the only time money is even an issue or in the news is when one of these firms raises a ridiculously high financing amount. As I like to say, success should be measured by return on invested capital, and not invested capital.
Measured by the former, practically all of these firms are flamboyant flops. Measured by the latter, granted, they’re smashing successes.
What Should These Sites Have Done?
In essence, VCs have financed these UGC sites to spend money on hosting. Oftentimes, these hosting firms are engaged in price wars with other hosting firms (or CDN companies) that the same or other VCs have invested in. Then, these companies go public and they flop. Case in point: Limelight Networks, who has put up a disastrous return since its IPO. Limelight raised $130M from Goldman Sachs before its IPO.
Quality vs. Quantity: Are You Better Off?
Well, first off, remember that while social media/UGC is a numbers game where you hope to generate 1 billion impressions; and then sell those for $0.10 CPM. The math is simple: 1B impressions x $0.10 CPM equals $100,000.
With professional content, you can build a lucrative business on 10M impressions and then sell those for $10 CPM, which once again running the numbers yields a revenue of $100,000. This was further discussed in our Hulu vs. YouTube: Quality vs. Quantity post.
As a business person, I much rather take my chances building the business that needs to hit 10M impressions.
But, if you are a VC who invested $10M in a CDN or some infrastructure company, you get far more value by investing in a video file sharing site that can house tens of millions of videos and generate 1 billion streams, even if pound-for-pound, those streams are of lower value. This is especialy true if you’ve never sold a single ad deal, and don’t understand the ad business, as most VCs don’t. Of course, it does not help that VCs have a predisposed bias against content businesses, anyway.
As a result, the bulk of video aggregators essentially spend their VC funding on hosting, CDN, etc., and other non-differentiating costs instead of things that could get advertising money in the doors. Advertisers really don’t care where you house your clips and who your CDN provider is, they do however care about the quality of the content.
In other words, instead of footing CDN charges to host crappy UGC videos that are unmonetizable, these companies should have licensed professional content instead.
Chicken, Meet Egg.
As a content producer, I am biased. But the truth is, it’s the other way around. It is not the fact that I am in the content business that I am biased. I have a belief that advertisers seek professional content, so I am in the business of producing high-quality video content.
In the same vein, content owners are now turning their backs on speculative revenue share arrangements and demanding guaranteed money not because they did not initially believe in the idea of revenue sharing, but because the aggregators loaded up their sites with so much crap that they became unmonetizable.
However, had these aggregators taken a portion of their massive funding and licensed professional content and combined that with their burgeoning audiences, they would have been in a very strong position to profit from it.
But don’t take it from me, take a look at Hulu (for more on this, read Mark Cuban’s post). Admittedly, Hulu had a unique advantage what with being owned partially by News Corp. and NBC Universal. Hulu does not need to pay out for content because it leveraged NBC and News Corp.’s content to come out of the gates.
Hulu came to market 2 years after Google bought YouTube. It also came to market years after the YouTube clones had raised boatloads of cash. But when the dust settles, YouTube and MySpace TV will remain standing, along with Hulu. As per all of the others, I suspect one, maybe two will remain in business. The others might cease to operate not because their traffic is stalling, but because they will be perceived as largely untouchable and undesirable to advertisers. There are way too many low-quality UGC clips on those sites for advertisers to care to bother with. Consequently, advertisers will continue to seek a distance between professional and low-quality (or pirated) content. They’ll have no one to blame but themselves, because they got lazy and arrogant about the value of content.
For the record, WatchMojo.com syndicates content to YouTube, MySpace TV, Hulu, Veoh, Daily Motion, Revver, Metacafe. etc. etc. etc. and genuinely wants every single aggretator to succeed, because marginal distribution - while susceptible to diminishing returns, too - is always welcome.
In the end, sure, YouTube will have walked away with a $1.65B payday, but when you consider that since 2006 the online video has garnered $1B in VC investment, suddenly, you wonder if that’s anything to write home about.
Moore’s Law is Meaningless in an Environment Devoid of Revenues
Back in the day, YouTube’s hosting fees were said to be $1M per month (according to a piece by Dan Frommer in Forbes, he is now at SAI). Today it’s rumored to be $1M per day (according to Fortune’s Yi-Wyn Yen).
YouTube commands 75% market share, Veoh (placed #5) has 1%. In other words, Veoh, Daily Motion, Metacafe et al. are not spending $1M per month, let alone a day, but they are spending alot. Veoh has raised $80M in funding, Metacafe and Daily Motion are at $40M each. I presume the companies are now spending $5-10M per year on hosting fees to house User-Generated-Crap.
VCs are no longer indifferent. Initially, VCs were at best ambivalent about hosting costs because when the technologists who programmed these file sharing sites pitched their vision and business model, they presumed that it would replace the historically expensive cost of creating content. They were wrong.
Their business models relied on the wisdom of the masses and collective mojo to create content that advertisers would want. Why pay for content, was the idea, if content would be created on the cheap? That might very well go down as one of the biggest investment flops ever, when you consider the sum of money invested in UGC with no promise or hope of payoff in the near, mid or long term.
Don’t take it from me, take it from existing case studies:
- YouTube - despite a 75% market share - continues to wonder about monetization.
- Revver sold for $5M after raising $13M in VC.
In both cases, the companies bet on the wrong cost structure: hosting of crap over licensing of quality content. YouTube won, others did not. The”others” camp is far more numerous while YouTube remains the lone winner.
So, What’s Around the Corner
Ultimately, my gut says that many of these VCs who 3-5 years ago placed their chips on these horses will grow wary and tired of burning money while Google’s YouTube continues to galvanize market share. Before long, much like the fate reserved for Revver, VCs will cut off the lines of financing; they will have to sell for pennies on the dollar.
It’s not like this is new, either:
- GoFish has changed business models a few times as it looks for something to hang on to.
- Handheld Entertainment / ZVUE is now worth a whopping $6M, it’s changed its name a few times and paid an obscene $25-50M for eBaumsworld.com, something that left many scratching their heads.
But these have been off the radar. The more visible players are entering a period where they will have to raise $10M or more to maintain their lifestyle… I am not sure those content libraries are worth their weight. I am also not sure if an audience that has been conditioned to watch UGC will suddenly embrace professional content, either.
Once this happens, I expect to see a lot of the videos that are fueling the growth in CDN business take a further hit, too (as a whole, this is a bad market to invest too, as it has become a commodity).
Onto the Next Fad
Of course, this is all moot, because VCs are now chasing the next pipe dream: wireless, clean tech, space travel…
But there too expect a meltdown, and look no further than today’s news where Helio sold for a paltry $39M after raising $650M.
From a general entrepreneurial perspective, the lesson is simple: VCs talk a big game about being in it for the long haul, but their definition of the long haul is unique to their attention spans, which rivals that of a 2 year old’s. When you craft a business plan, build a company based on your gut and your understanding of the space. Generally speaking, you as the entrepreneur has the best understanding of the opportunity and market reality, and not your VCs or advisors.
From a video specific perspective: it’s on. Video is no longer about hype and its potential. With TV audiences now averaging a mature 50 years of age, newspapers declining faster than anyone could have predicted, the Web is the future of media and the future is now. A lot of money was placed on the wrong horse, a horse who is wobbly and in decline. The shakeout has started, it won’t hit overnight because some of these companies have money in the bank… but when VCs come knocking, you won’t know what hit you.
Related: Video
- The race for #3 in the online video space is on.
- Comedy video vertical sites getting cluttered.
Related: Social Media
- Connecting the Dots: Why Social Media Fails at Generating Revenue
- Why Social Media and Advertising = Fail
- Dark Cloud, Meet Social Media. Social Media, Meet Dark Cloud
- Social Media Hype Train Continues
- When Will Social Media Get It?
- Why Social Media and Beacon Are Doomed to Fail and What Facebook Should Do
- Social Media Growing Pains
Is it all negative? Nope. In fact, social networking might be better suited for e-Commerce, but the greed muscle clouds people’s judgment and makes them chase ad dollars, by far the more lucrative slice of the pie.
- Facebook, or MySpace’s, Multi-Billion Dollar Business?
- Are Affiliate Sales the Path to Facebook’s Billions?
- Memo to Facebook Sales Team
What do you think, is UGC going to experience a turnaround and experience a renaissance… or is it on its last breath?
Today is Sunday. I sure wish I could hop in my car, drive to the ballpark and catch the Montreal Expos. Problem is, it won’t happen. It can’t. That train long left the building. The only way it might happen is if I come across over $500M to buy a franchise and build a new ballpark. Even then, I need to move fast because in a decade, baseball will be a footnote in this city’s history.
How on earth does this relate to the search marketplace? Just because one might desire something does not mean it will happen.
Everyone agrees that it’s good to have some kind of competition against Google’s march towards a checkmate situation in search (on the desktop). The problem is, it’s too late.
#1 - We’ve already explained why Google was a one-in-a-million, perfect storm, lightning-won’t-strike-twice kind of business case.
#2 - We’ve also expressed why search startups - including our own MetaMojo.com, but thinking mainly of others suck as Haika, PoweRset, Mahalo, Eurekster etc. - will have very hard times. Mainly: an economic and user behavior-driven impossibility to gain distribution. And second, their only lifeline to survival is a deal with, you guessed it, Google.
A Better Mousetrap?
In search, the history has been quite simple.
2005 Buzzword: Vertical search;
2006 Buzzword: Social search;
2007 Buzzword: Natural language search;
Yet the result in 2008 remains the same: Google is stronger than ever without really banking on any of those trends.
When we built MetaMojo.com, it was a bet first on the theory of vertical search. Basically, you search for Madrid, you should get the best results from best-of-breed travel sources; you search for prostate cancer, ditto health sources.
The first problem? Distribution
No one would leave Google to search on MetaMojo.com (that was not surprising). So we initially launched a myriad of blogs (which became the BloggerMojo.com network) in order to showcase the search results and convince other bloggers to use it, too.
The second problem? Economics
You cannot possibly expect to survive by being in both the content and search spaces, each one deserves its own focus. Incidentally, another unit of ours in content - the WatchMojo.com video property and mainly, syndication network - took off, reducing our own appetite to have our asses kicked by Google/Yahoo/Ask/MSFT.
Of course then, the idea was then to have other blogs do this, not only have our blogs feature MetaMojo.com.
The problem? Google comes with a built-in monetization engine, too… meaning that no site operator in their right mind would pick us over Google. Our strategy (I won’t get into it all) was to then layer a set of personalization and social media bells and whistles. We didn’t, because then Jimmy Wales’ Wikia began to make noise and despite the challenges it would invariably face, I made the decision to focus 100% on WatchMojo.com and leave search for the major players with VC-backed resources.
Monetization is moot if you don’t have distribution: an audience and thus, search volume. This is why MSFT wanted to buy Yahoo!, because it could hit 30% market share, a threshold at which you can become a meaningful player in the market.
Of course, bear in mind that once you have distribution, it’s very easy for one of those Big Four to simply emulate the one bell or whistle you have. Within months, Google launched Co-op which basically gave no site or person to even consider using MetaMojo.com.
The End Game for Google Competitors Remains the Same
MetaMojo.com was always a toy while WatchMojo.com launched… I still think that we could have built a very solid vertical search product with considerable social media attributes but the problem is, even had MetaMojo.com been able to get off the ground, ultimately, the end-game ain’t pleasant. How do I know? A bit of revisionist history?
Nope. Let’s look at one of those wanna-be search competitors, Eurekster.
Eurekster essentially did what I wanted to do in the distribution sense: getting sites to use it. The problem is, even with a number of sites using it, it’s now in the deadpool. I am not sure how long it will remain in the deadpool… but ultimately, Google has built a perfect 1-2 combination punch that proves lethal in that it has locked up distribution and monetization in search, desktop search, that is.
Indeed, Google is the 21st century version to Microsoft and Standard Oil (and it very well might be more valuable soon). But I don’t see a problem, personally.
Sure, an argument could be made that Google (search product) and AdSense/AdWords need to be spun off to create a healthy and competitive market. I am not sure that argument is fair. But that’s another issue.
A Brave New World: Mobile,Wireless Search
Wireless is the biggest pile of hype before/after social networking (before in terms of chronology, after in terms of rank)… when it comes to advertising-supported business models.
However, wireless presents a brave new world, a new frontier, so to speak, for search. The one area where Google could become an after-thought, frankly, is in wireless search.
As such, when Mahalo raises $16M, or PoweRset gets all of this hype (when others like Cognition seem to be doing more, for longer periods of time), etc., I wonder, why bust a nut over something that is already over… why not put all of those resources in wireless (in fact, Mahalo might be scaling, but it’s scaling in the wrong direction).
Then again, maybe mobile search is also a big pile of hype, too?
I doubt it. I say right now video is the killer app, but the idea to search anything at anytime on a wireless devices and get the info I need is arguably a bigger killer app than video…
PLAY
