Bronte Media

In the end, shit has to smell.

Danny does the best job of straight forward analysis amid the madness of comScore Google click data. Firstly, it’s madness that comScore is actually market moving information. They do their best but ultimately they revise their data infinitum and dont allow trending from more than a year or so ago (even though they’ve been in business for 10 years).

But back to Google. Since November when they said they don’t want crap ads clogging up the right hand side of the page and eroding user trust in Google’s advertising world domination system the percentage of searches with ads has gone from 52% in November to 46% in February (or a decrease of 13%).

Paid clicks have gone from around 610m to 510m, or a decrease of 19%. All this is according to comScore by the way.

But we know that Google had been seeing CPC growth at around 6-7% year over year worldwide (from their SEC Filings) and then in the fourth quarter this jumped to 16%. Even though 33-50% of the quarter didn’t have the new quality score guidelines in place. So we can expect pricing to be up around 20-25% year over year. If it’s not, then Google really might be maturing. If it is, then it’s simply reflective of Google’s longer term strategy with higher quality ads and more user trust (i.e. they dont click on an ad and end up on some piece of shit page with ads blasted on it).

There is one factor that everyone seems to be ignoring as well: Google does half of its business outside the United States (known to Americans simply as ‘International’). Comscore’s click data is US Only. Let me say that again: Comscore’s click data is US only.

Having a liquid net worth of $0 I have no way to put my money where my mouth is. But if I did, GOOG is just screaming to be bought.

Congrats to the Auctomatic team, on a fine acquisition. I followed the blog of one of its founders, initially because I was fascinated with Y Combinator.

Because the acquirers were a small and public company (that is the acquisition is material even though it’s only a $5m transaction), the merger agreements are public. So let’s take a look at the anatomy of a small acquisition:

The total purchase price was $5m, as Michael Arrington reported.

That’s structured as $1.2m in cash on day zero. And another $800k on the first anniversary.

The rest, is equity; structured as $1.02m worth of Live Current Media shares on day zero, and then $660k on the first, second and third anniversaries of the deal.

How did Y Combinator make out? The distribution schedule in the agreement says the firm owned 3.42% of the company - or shares worth $171k. Depending on their outlay (whether they put in $10k or $15k) that’s roughly a 10-15x return (on a very small outlay admittedly).

The founders each had around 21% of the company, valued at just a little bit north of $1m. I would never underestimate the power of the $1m mark in psychological value. I know of another acquisition where the price was set basically so that each founding member got $1m.

The notorious Chris Sacca had 2.42% but under liabilities it also says the company owes Sacca Consulting $30k (more than the founders were paying themselves in salary).

Spotrunner is a company with a very good basic premise: It’s hard to buy Television advertising if you are a small company. But separating out the idea from the company, I will not be surprised to see if the company bombs.

Venturebeat reports the company is raising another big round at a large valuation. Things going swimmingly right?

Every person I ask about how the company is going gives me a sly shrug. That there is something below the surface. They have raised roughly $50m so far, including a monster $40m round from every media dog and his mother.

Something about their progress just doesn’t pass the smell test, though. There is of course the fact that Lachlan Murdoch invested (who is not his Father’s son in media ways). There is the news that Joanne Bradford joined. And now, per the Venturebeat article, the news “that early investor Battery Ventures has proposed to sell a portion of shares — enough so that it will reap the full amount of its original investment plus a small profit.”

Zooming up to 40,000 feet, what is wrong with the company? There are two basic barriers/problems to the business:

1) It’s an ad network. You don’t own the viewer and the networks choke and dribble inventory they deem OK for you to sell. You get a small share of the revenue which gets ever smaller with scale (see case study in ad network economics, Overture before it was sold to Yahoo).

2) It’s really hard to make TV ads. Sure you have stock videos that can be tailored. The reason why search ads and not display took off in a self service way was that it is easy to create a text ad. Creating a rich media banner is harder. And creating a 30 sec TV spot is even harder. I know this is the central premise of the compay: To make this step dead easy. But even with the cost of video equipment and editing plummeting, it’s still a lot harder for people to be creative. That is, a few lines of text fine; 30 seconds of Ridley Scott inspired creativity, not so much.

I never thought I would be worth the attention but on Saturday my blog was hacked. The result? They injected 100s of links related to credit cards, mortgages and, uhm, ‘men’s health’. Longtime readers know that if I am going to have viagra links, I want to at least get paid for them.

Luckily, the blog is being hosted on our Homethinking servers that we have managed with one of the best firms I have ever had the pleasure in dealing with, Contegix. I am not even limiting my comments to managed servers. They are simply the best example of customer service I have ever dealt with period.

Anyhow, if you want more information about the exploit, it’s becoming a plague on wordpress blogs. I continue to be amazed by the ingenuity of search spammers.

Great, they are joining another committee. That should fix things.

Honestly, I read the growth plan presentation and came away disappointed. I then read that others like Blodget and Mahaney from Citi thought the plan was actually *too optimistic* and decided not to post. But now, I am sufficiently bewildered that I will bang out this post.

What are the key assumptions?

1. Revenue growth will be disappointing but the company will boost their margin by a third by cutting the fat. Revenue growth in the plan is expected to be 11% (pathetic) this year and 25% in each of 2009 and 2010 (average). But their margin in the mean time will go from 33% to 42%. Because of that margin improvement they can double cash flow (driver of valuation of media companies).

What’s wrong with the assumption? Forecasting revenue growth as anemic as they did, shareholders will almost certainly conclude the firm is in better hands at Microsoft. For fuck’s sake, the sky-diving US dollar will surely add 5-10% yearly revenue growth.

Jerry also doesn’t seem to comfortable wielding an axe and betting that he can restore the margin the company enjoyed from the pre-Panama drunken spending days by laying off thousands is wishful thinking.

2. The nitty gritty of growth. Yahoo helpfully breaks out its expectations around volume and yield growth. Specifically on slide 11. The most depressing quadrant is the lower left: Yahoo expects display impressions to grow with a 12% CAGR. Everything else hangs off this one number. Nobody is confident the firm will grow search (or anywhere close to growing with the market, i.e. Google). But in display, Yahoo is still in a leading position it must lose.

The dynamics are completely out of whack. Volume should be growing from 50-100% a year and yield dropping. Let me explain the yield dropping. Even though on a like-for-like basis most inventory will be going up in pricing, the flood of new inventory around social applications and the demand-supply imbalance will mean the *average* cost of inventory will be going down.

If those dynamics aren’t at play then Yahoo will be exposed to the same ‘premium end’ of the market that CNET is currently enjoying.

I actually think the company would have been better off acquiring Bebo instead of AOL. I am not sure why the firm hesitates on pulling the trigger on these type of deals (Youtube, Facebook, Bebo et al). They honestly need to wade as deep into this type of inventory as possible. It’s crap, it doesn’t get any click throughs, people are looking to communicate etc. They are huge problems. But huge problems are opportunities to be solved and everything has it’s price. Yahoo have been selling email impressions with a straight face for years and they more than anyone else know how to monetize this type of inventory. Or rather they should.

The deck was, in my mind, Yahoo’s last stand. If that is what they came up with, the firm is going to be sold. And soon. After reading it, I don’t even think Microsoft should raise it’s bid. Leave it at $28 or whatever the bid is now valued at. If they still refuse to deal, let them fumble for another year and come back with a $20 bid in honor of the Larry Ellison school of takeovers. Goodbye Yahoo, I loved thee.

In the New Yorker’s history of newspapers profile, comes this quote of the day:

“The Huffington Post’s editorial processes are based on what Peretti has named the “mullet strategy.” (“Business up front, party in the back” is how his trend-spotting site BuzzFeed glosses it.) “User-generated content is all the rage, but most of it totally sucks,” Peretti says. The mullet strategy invites users to “argue and vent on the secondary pages, but professional editors keep the front page looking sharp.”

Dan Primack on Willis Stein Partners (a private equity outfit that bet the firm on Ziff Davis and lost and is now back raising a new fund):
“This brings us to today, and I’m hopelessly confused. Willis Stein has not announced a single liquidity event in the past six months. In fact, the firm’s only noise has involved Ziff Davis, which in early March filed for Chapter 11 bankruptcy protection (not the kind of liquidity LPs were hoping for).”

“The musicians who posted their work on Bebo.com are no different from investors in a start-up enterprise. Their investment is the content provided for free while the site has no liquid assets. Now that the business has reaped huge benefits, surely they deserve a dividend.”

Except for the fact that startup investors tend to negotiate what their contribution is worth before giving their resources. That’s just one small difference though.

Heads I win, Tails you lose:

“Former executives of Countrywide are launching an investment firm backed by BlackRock to buy distressed mortgages.”