Bronte Media

Most likely through my naivety I didn’t see any other folks pick up on the news that Housevalues has re-branded itself as Market Leader. Perhaps because the company is moving more into managed lead gen for agents and brokerages rather than simply helping consumers get an assessment on the value of their house or perhaps more cynically because the company had what has to be the 2008 stock symbol of the year: SOLD (they will soon trade under LEDR).

The company has largely been shielded from the stockmarket carnage for one simple reason: Investors gave up on the company long ago. See my previous post here. Housevalues continues to trade at roughly its cash balance. Their third quarter results were actually not that bad: They generated 700k in operational cash flow despite revenue falling by one third from the same period one year ago.

The company with its small dwindling revenues, low growth prospects and a public market that values its ongoing operations at zero clearly does not belong on the NASDAQ so it will be interesting to see what becomes of it. It has one huge strategic asset, >$60m in cash, when cash is precious. If it can wait long enough (2 years) it may be able to pick up Trulia or Zillow at a steal price if either misteps through the downturn and their investors decided to give up on either.

One thing I have been pondering lately is the impact of a worsening economy on online advertising. The first conclusion is an easy one: A downturn will negatively impact online advertising. Any idiot who tells you otherwise is deluding themselves.

But like William Gibson said about the future, the hurt will not be evenly distributed. What I currently believe is that online media that captures a consumer closest to a decision (and by virtue helps the consumer make a decision) will fare better than ones that wont.

At the moment, current consensus seems to be that search will fare better and display will be hit hardest. But my problem with that is that it divides the Internet into two very broad categories: search and everything else (display).

What is a better framework for judging how different parts of display will fare? I have mostly seen by format (banner vs text vs video etc.) but again format is a very crude way of looking at things and does not correlate to gains and losses.

A better measure is some sort of behavioral index. With the consumer searching for ‘asbestos cancer lawyer’ on Google at index 100 to a group of High School girls chatting about life on Meebo at 0.

A little secret of portals is that a lot of inventory is actually communications in orientation. That is, email, IM and other types of social networking. During surges in online advertising earlier this decade, advertisers wanting to advertise on specific sections like Finance and Travel were forced to buy bundles of other inventory on the portal, which in most cases was mail.

While I believe that someone searching for mortgage in the morning will be valuable to reach during their email session in the afternoon, there is a great discount and we will see this being played out in the next few years. Also with surges of supply with inventory, marketers will be able to be more picky and be as close to that first search page view and in as close a context as that first mortgage page view.

Once this has been figured out, the tide will go out on Ad Networks and it will be revealed that a huge number of them have been swimming naked. However, there still will be a large black market of ad networks that know who to buy from for cheap and know who to sell to for more. But these are more sales agencies and wont attract venture capital.

The winners (as far as there can be winners in this market) will be directories and resource based content and the losers will be perishable content and communication services.

When I say resource based content, I mean content that is relevant for a period of greater than one week. Perishable content (like breaking news) is only relevant for less than one week.

Regarding ad-supported communications services, I believe that there will be a large reduction in current ones doing business, huge restructurings and new ones will be premised on very low expectations.

That is, Facebook and MySpace will endure a whole lot of hurt, and other social networks and web-based communications services will see their CPMs plummet even further. I expect MySpace and Facebook will become relatively large companies but the investment that each has received based upon the premise of steadily rising CPMs after figuring out behavioral targeting will fail.

We may see Facebook get attached to a portal so that in the next up turn advertisers who want to buy inventory on a finance section will be forced to pay $5cpms in buying large bundles of Facebook inventory just like they were with Yahoo Mail.

Other vertical social networks will become like online forums in the late nineties. There are a lot of great small businesses in each of them but none large enough to justify venture returns. Thus there will continue to exist wide and varied social networks but you will never hear of them again in mainstream press and jaded bloggers in 2011 will be writing of social networks as ‘failures’ only because some companies decided to take and some venture capitalists decided to give venture money.

I believe Ning will be like Jelsoft, makers of the vBulletin online forum software. It’s an 8 person company within the wider Internet Brands listed entity that sold 35,000 licenses for roughly $180 a pop in 2007. That is, a great little business that won’t be able to earn returns for the large amount of capital Ning has taken and the superstar management team they have there.

So basically if you have had the right expectations, nothing will change. But a lot of people will reset their expectations and that means a lot less capital being invested unfortunately.

And those ad-supported publishers nearer to helping a consumer make a decision on a product or service will fair better than those that entertain, are focused around short term news or help consumers communicate in new and more interesting way.

One rule of the downturn for troubled companies is that whatever is salable will get sold. This rule runs contrary to logic as any rational human being would rather keep what’s working and get rid of what is not but they don’t call it a downturn for nothing.

Following up from my gloomy Newspaper post, Gawker reports on the New York Times shopping About.com.

The NY Times acquired About.com from Primedia for $410m in March of 2005. While many criticized the price, the acquisition has proven to be a fantastic one for the company. About.com will likely do over $100m in revenue this year and the economics of the business are glorious (margins of 50%+). So it’s not hard to see even in this down market how they could at least get their money back ($400m) and they have been exposed to the profits for the last three years.

Why is About.com a good business? Because it’s a ’second page’ company. What do I mean by second page? Although the content is fairly ordinary (so much so it is my girlfriend’s most hated site), it ranks superbly in Google and it wholly focuses on answering questions consumers have on their minds.

You could say About.com earns it’s revenue from ‘display advertising’ next to ‘news articles’ but it is more like a search business. The user is in a laser sharp mode of seeking an answer to their question and that means they are willing to transact for whatever product or service is involved and they are liberally more willing to click on advertising.

From an advertising point of view, this is multitudes more valuable than a reclusive billionaire reading the latest diarrhea diatribe from Paul Krugman. Such is the state of online advertising in 2008: you’d rather have a mid-western housewife looking to cook an egg than a gold-standard environment of demographics, journalism and flash banners.

It would be incredibly foolish of the New York Times to sell About.com. They should be wading deeper into the area and indeed, blurring the lines between the Times itself and the About.com model. Kind of like eHow and HowCast. But the reality is the most likely scenario is that they will sell. They are on their financial knees, wading in debt and must act to right the ship.

Until Newspapers are willing to completely transform themselves we will continue to see a death by a thousand strategic mistakes, which although are the ‘next logical move given the situation’ compound themselves into a future of oblivion.

I’m incredibly interested to see what becomes of the New York Times. Blodget is on to something very interesting here.

The downturn will be incredibly destructive for newspaper companies. McClatchey are on their knees, Gannett are deeply wounded and the rest are fighting for their mere survival.

I will try to add to the discussion but I admit I have zero answers. One misplaced focus is on the concept of news being free online versus paid for in print.

This is completely false. The rise of the cost of newsprint has vastly outpaced subscription and cover prices in the last 50 years. Newspapers lose a huge amount of money in selling the printed product to subscribers and newstand buyers. The Internet enables them to more cost-efficiently deliver their core product and to do so to a wider audience.

The larger problem for newspapers is that classifieds and editorial have been de-coupled due to the Internet. Worse, Newspapers have by and large screwed up even having the two separate units.

Without the crutch of classifieds profit (used to be 40% of total revenue and 80%+ of profits), the business of news has been exposed to the clear light of day. And it’s not pretty.

The second problem is that advertisers do not place the same value on Internet advertising as they do to print advertising (I can see the argument for TV, but print being better than online? C’mon!).

In the current trajectory there are two miserable outcomes: Smaller, local newspapers becoming a retail-sales circular/weekly yellow-pages company or the storied institutions of journalism like the New York Times landing in the hands of sports franchise-buying set - being run to minimize losses and maximize status, influence and personal joy.

A few people have asked me what I would do if I was running a printed newspaper company. I have honestly answered them “I don’t know”. And that makes me more intrigued to find a solution. I keep, however, landing on the conclusion that the business of journalism has always had a pathetic business outlook and that the industry’s sugar daddy, classifieds advertising, has permanently bolted.

Excellent presentation at the TargusInfo Lead Quality Conference from the always excellent Jay Weintraub.

In the end, the consumer behavior is exactly the same: A person is looking to make a decision on a valuable product or service. Companies who are optimizing for the advertiser (lead generators) will always lose out to those who are optimizing for the consumer. Think Mint, Wesabe or Billshrink versus Lowermybills.com.

The existence of paid search will slow the transition, as it is such an incredibly efficient system for feeding the lead generation landscape. But by its very definition, arbitrage disappears over time.

The presentation:

You Give Leads A Bad Name

Yahoo’s Q3 was another nail in the coffin of mediocrity but upon closer inspection one thing is clear: The company is now being eaten up by Google overseas. Google ‘overseas’ is much more potent than Google US, having 80%-90%+ market share in almost all the major countries. And now it seems it is eating Yahoo’s lunch on ad-repping and/or Yahoo’s businesses overseas are completely disintegrating.

International was down 12% yoy, but US was up 7%. Yahoo currently has a 70%/30% revenue split of US vs international.

The always excellent Kara Swisher had a great interview with Jerry Yang yesterday in which this nugget was unveiled:

“International was hit much harder, although display still grew double-digits there in Q3.”

So assuming Jerry is right, then that means that Yahoo search completely bombed. And it would have to bomb alot since it is a smaller portion of international revenue than it is in the US where Yahoo is roughly 50/50.

The only reason I can think of is that Yahoo’s share has fallen into such obscurity that marketers haven’t even bothered to sign up to the service and load in their Google keyword lists (see MSN AdCenter in the US).

You mightn’t think that matters much but International is a faster growing portion of the total global pie and that won’t change at any stage in the future.

From a WSJ wrap on Yahoo’s Q3:

“Management is at least trying,” said Youssef Squali, an analyst with Jefferies & Co.”

Mr Squali is truly a master of faint praise.

Barry Ritholtz has a great post on the cause of the housing/mortgage mess, specifically:

“So long as the mortgage did not default in that period of time, it could not be “put back” to the originator. A salesman or mortgage business would only lose their fee if the borrower defaults within that 3 or 6 month contractually specified period. Indeed, a default gave the buyer the right to return the mortgage and charge back the lender the full purchase price.

What do rational, profit-maximizers do? They put people in houses that would not default in 90 days — and the easiest way to do that were the 2/28 ARM mortgages. Cheap teaser rates for 24 months, then the big reset. Once the reset occurred 24 months later, it was long off the books of the mortgage originators — by then, it was Wall Street’s problem.”

If I had to think of the luckiest guy in the world, I would probably say Eric Schmidt. He fought two losing battles where his company had early leads and squandered them (Sun + Novell) before parachuting into the cushiest job in the world. Although they like to tout the fact that they have a leadership ‘triumvirate’, it’s more a very very skewed isosceles triangle rather than an equilateral one.

Schmidt benefited from thinking at the time that young companies ‘needed adult supervision’ when John Doerr and Kleiner Perkins pushed hard for Google to have a CEO for a number of years before Sergey and Larry finally relented. The company would have benefited from simply having a sharp COO like Sheryl Sandberg (they did have her and she probably would have naturally risen to this position with or without Schmidt). And despite being made a billionaire he still shows no signs of understanding the company he works for.

And so with that leadup, we have the news that Schmidt is about to “announce” his support for Barack Obama for president. Wow, big call Eric. Intrade, a political futures market, has Obama at around 75% chance to win. So Schmidt’s announcement comes just in the nick of time.

And just so you think that the pledge isn’t just empty, let’s look at the dollars donated:
“Google employees have contributed $487,355 to Sen. Obama’s campaign and $20,600 to Sen. McCain’s as of Aug. 31. Mr. Schmidt hasn’t donated to either.”

Sounds like a man who is absolutely sure! And not only that one who has had no doubt in previous years:
“Mr. Schmidt’s political views have been mixed. He has recently donated more money to Democrats than to Republicans, but spoke at Britain’s Conservative Party conference in 2006.”

- My biography of Warren Buffett still hasn’t arrived yet but the sage has penned a letter in the NY Times that describes his case for buying US equities. One my favorite Buffett quotes is “Be fearful when others are greedy, and be greedy when others are fearful.”

- Which leads me the next point on how VC funds can “thrive” in the downturn. You would think so, but the irony is that they simply don’t. Case in point from the always excellent Dan Primack:

“Just take a look at Thomson Reuters fund performance data for funds raised in 2002 and 2003. The median IRR for a 2002-vintage buyout fund is 8.2%, while the median IRR for a 2003-vintage buyout fund is 11.9 percent. The median IRR for a 2002-vintage VC fund, on the other hand, is -1.2%, while the median IRR for a 2003-vintage VC fund is 0.9 percent.”

Now maybe 5-6 years isn’t enough to get a full picture but even the VCs say that 8 years should be enough to judge performance. Why didn’t they succeed investing in the last downturn? Well primarily because most of them froze new investments and battered down the hatches and focused on raping their current portfolio with cram down rounds that removed the incentive for the entrepreneurs to keep trying. That strategy doesn’t seem to have changed during this downturn either.

- What is up with the fascination of the word ‘light-weight’. Of course a service that has just launched is light weight. In fact I would find a hard time finding a service built after 2000 to not be light weight. It’s a useless term.

Light weight are what the people building the applications were called during their high school years.

- Speaking of VCs this graph is now making the rounds and I am guessing will be a favorite add on to ‘downturn’ presentations at conferences:

But what if all the companies follow the green line this time? Part of the outcome of the demise of the red line counts on a majority of people following it and a minority following the green line. I am not saying people should follow the red line but if everybody follows the green line then they all survive but maybe there isn’t the growth over the longer term. There is a ‘what next’ quality after that.

- It still amazes me when people mock the rumours posted in the New York Post, calling it a ‘tabloid’. The business section of the New York Post has broken huge stories of significance (admittedly surfacing the rumour is all they do). Why? Because it’s Rupert’s personal blog. He is obviously plugged in to the stream of activity and he calls the Post and they report the rumours.

- PE Hub also reports on Benchmark’s Bill Hurley and the firm’s new focus on investing in downtrodden public firms:
“Our first priority right now is helping our companies by giving them the information and tools they need,” general partner Bill Gurley told me a little earlier today. At the same time, he said, Benchmark, which closed on a $500 million fund back in March, is “cognizant of public company valuations falling, so we’re been talking to some about whether they need funding.”

Long time readers will know of my fascination of public valuations as compared to private ones, when in a lot of cases their growth prospects are identical. So it’s great to see venture capital poised to err capitalize on it. For bonus points, Bill relays the Warren Buffett quote in the article.