Business Models

Did a quick analysis of the Techmeme Top 10 Stories for 2008, split by companyt type (Old Co's New Co,s) and what they were doing (Old tricks, New Tricks).



The Top 10 are (to precis):

1. Microsoft: Microsoft Proposes Acquisition of Yahoo! for $31 per Share

2. Apple: Apple Announces Its Last Year at Macworld

3. Philipp Lenssen / Google Blogoscoped: Google Chrome, Google's Browser Project

4. Apple Developer Connection: To Our Developers - Apple revised its developer terms to rescind a cumbersome non-disclosure agreement

5. John Markoff / New York Times: Google Is Taking Questions (Spoken, via iPhone)

6. Charlie Demerjian / Inquirer: Google to buy Valve (games maker)

7. Wall Street Journal: Music Industry to Abandon Mass Suits

8. Michael Arrington / TechCrunch: Google, Microsoft Said To Be Preparing Bids For Digg

9. Mike Nash / Windows Vista Team Blog: Introducing Windows 7

10. Jesusdiaz / Gizmodo: iPhone 3G Launch Date Confirmed

As you can see - mainly big old dogs trying to get into new tricks.

Interesting article from Jeremy Liew of Lightspeed Ventures in the WSJ on the impact of The Crunch on Web 2.0 companies (mainly consumer focussed ones). He predicts that:

...media buyers will focus on both a flight to quality and a flight to surety. This will benefit three types of startups: companies with large audiences, companies that sell direct-response advertising, and companies that offer valuable niche content.

His argument is that:

- Sites with well known brands and meaningful traffic will remain in the ad plan. Just as no one ever got fired for buying computers from IBM in the 80s, so too no one will get fired for buying advertising from Google and Yahoo! today. However, many smaller companies have built huge audiences that are just starting to be monetized. These are the companies that will see the most growth through the recession.

- In an uncertain environment, advertisers will also want to shift more of their advertising budgets to direct response (the online equivalent of 1-800-number advertisements) and away from brand advertising.

- It will be very hard in the short term to prove that Ad targeting is more effective and justifies a premium price. As a result, vertically focused content sites will have an advantage.

We think the other Web 2.0 companies that survive will be ones that:

(a) Don't need money for 2 years and thus don't have to make the above compromises - those that have serious money are lucky, others are considering reducing burn rate.

(b) Can find some form of non-Ad based monetising model that works - Flickr, for example has moved to a freemium play

Those that are not in these boxes (we can all think of a few, some fairly well known) will probably hit the deadpool (or have their plugs pulled - expect lots of "sales")

From Business week article about Digg:

Last year the company lost $2.8 million on $4.8 million in revenue, according to Digg financial statements reviewed by BusinessWeek. In the first three quarters of 2008, Digg lost $4 million on $6.4 million in revenue. Adelson declined to comment on the figures.

Thats an increase in loss from 58% to 63% of revenues as it grew them by 71% - ie the loss increased by about 1 % point for every 15% growth. Clearly there do not appear to be economies of scale operating here, so the bigger Digg gets, the more it loses.

Assuming Digg grows by the same % again next year to c $11m it will thus lose between $7m (keeps ratio) and $7.5m (increasing rate of loss).

Out hypothesis is that this is because the cost of supporting each transaction is higher than its revenue benefit, and that the cost is growing at a faster rate than the benefit as network complexity sets in (Metcalfe's Law has a dark side - transaction costs also increase with scale, so beware if revenue starts to reach a diminishing return point) without being able to raise revenue in line with this

So the issue for Digg is how to push that diminishing rate of return further up the growth scale. One approach that may work to good on the revenue and cost side is filtering out the cr*p early. Because those transaction costs are non-zero, the Web 2.0 dogma of "publish, then filter" breaks down after major scale is reached. Less cr*p would probably also bring in more high end readers, who avoid Digg due to - well, the cr*p content.

Update - looks like SAI has picked up the same observation this morning.

As part of a forthcoming Online Video Distribution report we've been working on with STL Partners, I modelled the internal economics of some major video distributors on the Web.

We looked at Hulu and most of all, at YouTube. The models use public domain information and make some of our own assumptions as to underlying economics. Before you read this, you should probably read this post of my presentation at the STL Telco 2.0 conference..

The dynamics of the 2 businesses are different in that YouTube serves an enormous volume (reportedly 1 billion plus downloads a day) of small files (around 2.75 minutes on average) at a low ad-inventory fill ratio - only 3-4% of videos carry advertising at all - and low CPMs (around $10, if that). Hulu serves a far smaller volume (about 3-4 million per day) of larger files (around 27.5 minutes), with dramatically higher ad inventory served (we have assumed 80% in the models) with higher CPMs (assume c $15 — 20).

Regarding content creation, we assume YouTube, in effect, pays nothing for its content (recent mainstream deals will change that going forward of course), whereas Hulu has to pay 70 - 72% of its income to the content providers. Aggregation is assumed to be hosting costs, upload and transcode costs, and all staff and SG&A costs. As can be seen, they are fairly small compared to video distribution costs as volumes grow.

The costs of distribution we use are based on Amazon S3 and Akamai pricing; we reckon Hulu’s paying roughly the S3 pricing, and YouTube is paying 50% of that due to its use of Google data centres and extensive peering. Interestingly, the widely-quoted figure of $1 million a day in bandwidth appears to be accurate; our estimates using two different methods converged on a bandwidth bill of $30 million a month.

The main business dynamics revolve around average ad value vs cost per video served — the higher the CPM and Ad inventory % served, the better the revenues (favours Hulu), the bigger the file size and payment to content producers, the worse the costs (favours YouTube). The percentage of outgoing streams that carry any advertising is crucial; whether it’s a macro-advertising play like Hulu (comparatively few but high-value) or a micro-advertising play like Google Ads (low value but extremely high volume) is secondary, as both stand or fall on how much of their content actually carries ads.



We estimate that Hulu is marginally lossmaking today, losing around $9m this year on revenue of $52m, and YouTube will lose about $91m on revenues of $118m. We conclude that, for YouTube to break even, it needs to either drive down its transport costs to 33% of major CDN equivalent or radically increase the percentage of streams that carry advertising. Major change factors which could perturb this include the impact of high-quality (HQ FLV or H.264) video on YouTube’s bandwidth budget, the relationship of both competitors to their parent companies, and their relations with content providers.

Our bandwidth estimates are based on Adobe’s documentation of the Flash video protocol and the actual size and other details of YouTube videos, which give a bitrate of 384Kbps; providing high-quality video could increase this by as much as a factor of five (assuming H.264 High Predictive, 320×240, frame rate 36). Obviously this would pose a significant challenge to YouTube’s profitability.

YouTube is increasingly making deals with content providers to share ad revenue with them in return for the use of their copyrights. This is of course a hit to revenue, but it can be confidently assumed that YouTube will make sure that if anything carries ads, it will be the videos they are paying for. Depending on the distribution of traffic among the videos, it may be that the 3-4% ad ratio is enough to fund the long tail of free material, if the hits all carry advertising; a sort of balanced portfolio approach. (They may also choose to advertise preferentially on high-quality videos.)

Hulu, being owned by content providers, has the feature that its profitability is a function of their tax policy - the owners could choose to set the price of their content high enough to secure the whole of Hulu’s potential profits as sales, or alternatively they could keep it low or even free and take any surplus after distribution costs as a dividend.



However, the fundamental issue is the same even if they choose to obfuscate the business model; funding online video from advertising is all about how many ads per stream you serve up. If YouTube could sign some more peering agreements and keep moving things to cheap sources of power, increasing the ad ratio from 3 to 4% would be enough to reach breakeven. Essentially, it’s a traditional media sales desk - first of all, you’ve got to fill ad space. You can choose whether you want a margin-first strategy, like traditional advertising, or a volume strategy, like Google Ads; but either way you must sell.

Update - there is a piece today on CNet saying that Universal is seeing "tens of millions" of dollars from YouTube advertising. This would seem to corroborate the Hulu Model and also explain why YouTube is moving so rapidly in this direction now.

(You may also like to go back to our post on Joost with these analyses in mind, and understand why we came to the conclusions we did)

Micropayments in Twitter using TwitPay, from Megan McCarthy at CNet:

Here's the premise: Sign up, put some cash in your Twitpay account through another payment service like PayPal, and then send out a "tweet" to another Twitpay member, structured like "@josh twitpay $10 for beers." Twitpay takes a five-cent commission. Its founders are hoping that, eventually, it can be used for charity and disaster relief payments.

It's a nifty idea, though not for everyone. You don't get cash out of it, for example--Twitpay reimburses you in the form of Amazon gift rewards instead. Also, I'm not sure I always want to make it public that I'm letting @josh pay for my beer (don't want my Twitter followers thinking I'm a lush and a mooch), and Twitpay doesn't work with direct messages or friends-only Twitter accounts. You can, however, go to the Twitpay homepage and use that in lieu of a formal tweet.

According to Twitpay's FAQ page, the app was created "because Silicon Alley Insider said it was a billion dollar business (and) a billion dollar business sounded good to us."

Well, micropayments has been an emerging billion dollar industry for quite a while, but its never quite taken off yet.

Its an interesting idea, though Twitter is just the transport mechanism here - you don't need to do this on Twitter, any transaction recording system would work (a Yahoo Group for example, but that doesn't quite get the buzz in 2008).

In fact, they would probably be better off with a system that allows more privacy, as the piece notes. The minute money starts moving, fraudsters and so on are attracted.

There is a fascinating story on TechCrunch today about how they are changing their approach to news embargoes (where you are pre-briefed about a story that is due for release at Time X.). The issue ostensibly is about the heinous tactics of the PR Flacks and Other Blogs:

As the economy turns south, PR firms are under increasing pressure to perform and justify their monthly retainers which range from $10,000 to $30,000 or more. In short, they have to spam the tech world to get coverage, or lose their jobs.

One annoying thing for us is when an embargo is broken. That means that a news site goes early with the news despite the fact that they’ve promised not to. The benefits are clear - sites like Google News and TechMeme prioritize them first as having broken the story. Traffic and links flow in to whoever breaks an embargo first.

And so, to stop this Bad Practice, TechCrunch will righteously refuse to take embargoed news from hereafter - except if it is offered exclusively:

We will honor embargoes from trusted companies and PR firms who give us the news exclusively, so we know there won’t be any mistakes. There are also a handful - maybe three - people who we trust enough to continue to work with them on general embargoes (if you are a PR person and wondering if you’re on that list, you’re not).

In other words, this has got absolutely nothing to do with embargoes per se - it is to do with jockeying for pole position in the inevitable coming consolidation of the Tech Blog-for-Money game, and its quite a clever play by TC.

What they are bidding (in game theory terms) is that they will play by the rules - and use their extensive reach - if they get near exclusivity. What they are also bidding is that if anyone wants non exclusivity and an embargo they miss out on thet TechCrunch reach (and - mention it who dare - the story may not be so favourable)

Whats a poor PR hack to do - TC is a One Transaction bullseye, but if you don't hit them you have to flap around getting a bunch of lesser blog mortals together for the same bang (ie more bucks) and know you may get trashed by TC.

Play by TC rules, and TC gets all the GoogleJuice, the other blogs wither on the GrapeVine.

So, what are Mashable, Ars Tech etc going to counterbid? We wait with eager anticipation

Update...and here it comes - ReadWriteWeb will respect embargoes. So, good news for the PR flacks - except of course that RWW is no kingmaker. If I were "the bunch", I would put some form of common policy so that the PR people could place once with similar reach to TC.

Update 2 - Kara Swisher's BoomTown also puts in a counterbid:

....it is increasingly less important as the economy withers and a lot of the less sustainable start-ups fade away. There are big important stories happening in tech right now about major public companies, the state of innovation and the future of the industry, which require more serious journalism.

She also goes on to say that big echo chamber blogs will be outmanoeuvered by smaller blogs who know what they are talking about....hop for us yet!

(Hat tip to Drew B for link)

This comes out of a discussion last night with "heavy duty" Network Tech bloggers James Enck, Dean Bubbley, the Telco 2.0 bloggers and economist Keith MacMahon, all of whom have been working on evolution of various bits of the (networked) tech industry.

We have all been noticing one thing:

(i) The world has changed, in a major and irrevocable way.

(ii) Most companies are still basing their business plans and models on work and research done pre crunch.

From our side, we've been working on strategies in Online Video, Cable TV, Mobile Data and Online Advertising. All these industries have had many of their underpinning axioms and assumptions completely changed in the last 3 months - yet many are continuing on paths laid down beforehand.

The talk with the above gang last night confirmed it wasn't just us seeing this.

So - you want Black Swan thinking, this is it - look at the current biz plan, look at its date, look at the date of the supporting data, and then think about which of those underpinning assumption may not last in the current environment.

And then give me a call

PS Loving the cr*p karma - always a sign that we've hit a nerve

From the My God thats so Profound Dept:

The WSJ today informed us that Tech shares may fall further.

Who woulda thunk it, eh? But the analysts are as perceptive as ever:

"The big guys of today are now hunkering down, looking at where they've been, and the winners are spending their time building on that," said NPD Group analyst Stephen Baker. "When the market finally comes up, they'll be ready."

Talk about a paradigm shift - better get their ducks in a row so's they can hit the beach running, as they were when it tanked, we hope.....

So, having told St Barack what to do in US Technology this morning before coffee, its time to move on to tell Mr Brown how to save the UK economy before lunch.

Its simple, of course

The biggest medium term strategic issue facing the UK is energy independence - we use too much of it, and it nearly all comes from countries one wouldn't necessarily want to rely on in a tight spot.

In the short term, we have a demi-depression on hand, a large part falling in the sectors that used to service the comings and goings in the housing market. No demand, no movement, no cash flowing, no jobs for millions of small businesses. To solve this it would, in my humble opinion, be better to borrow money to build infrastructure rather than give tax cuts.

And what better infrastructure than that which reduces energy dependence.

Which is where the whole Green thing comes in. The problem the Green Lobby has is that the economics of Green are poor for the average citizen - the ROI of home insulation, solar heating, double glazing, water independence, energy saving light bulbs etc are typically measured in decades, which is - to use the technical term - cr*p.

Added to that, most of us know that Saving the Planet is not going to be done by a few Brits buying Piouss's and wearing woolly jumpers indoors on cold days - Americans sucking up 25% of the global energy consumption for 6% of the global population and and one Chinese power station going up every 3 days is where the problem is.

But what we can do is subsidise the sort of infrastructural upgrade work and products required to reduce domestic and business energy consumption, and borrow the money to do that rather than give it away in tax cuts. Creates work and jobs, reduces UK dependence on foreign energy despots (at a national level you see the full benefits across the board) and makes Messrs Brown and Co the grooviest Green Guys on the planet. Much better Green commitment than cycling to work while your chauffeur drives the briefcase. Whats not to like?

Actually, while I think of it - Mr Obama could do it too (and vice versa - the UK could do worse than copy the Koreans on a joined up Broadband policy)