Content Matters

Google (NASD:GOOG) and Amazon (NASD:AMZN) are the two big winners in the Internet race, while Yahoo and IAC/Interactive Corp are also-rans. That’s the conclusion of the new Sanford Bernstein Black Book, U.S. Internet: the End of the Beginning.

The report looks at the ultimate winners and losers during this next phase of the Internet, as well as the potential impact of the current economic slowdown on the online segment.



Bernstein suggests that the Internet is somewhat recession resistant.  Compared to the burst of the bubble in 2001, they feel the sector is strongly positioned. Online advertising accounts for 8% of all U.S. advertising and is growing at a 20% annual rate.  In fact, as the economy sours, they expect more offline advertising to move online, where metrics allow advertisers to quantify the ROI on their investment.  With Bernstein estimating offline advertising revenues in the US of $299 billion in 2008, each 1% that moves online is roughly $3 billion. On a global basis, Bernstein forecasts online advertising, estimated at $55 billion for 2008, to grow to $97 billion in 2025, at which time it will account for 13.1% of all advertising spend.

Breaking down the individual components of online advertising, they remain most bullish on paid search (CPC), continuing to strengthen Google’s dominance.  Paid search should generate $19.1 billion in 2008, according to their model, growing to more than $36 billion in 2025, a 20% annual growth rate.

Bernstein projects hyper growth for the nascent IP video and mobile advertising markets, with mobile growing from $4.7 billion in 2008 to $17.5 billion in 2025 while video grows from $2.8 billion to $10 billion over the same period.

At greatest risk from economic pressures is CPM-based display advertising, used more for brand awareness than driving specific actions. Brand advertising online is likely to behave similarly to traditional media advertising, with advertisers pulling back during difficult markets. That won’t be comforting to Yahoo nor to the ad networks that were the target of last year’s M&A frenzy, such as DoubleClick, Right Media and aQuantive.

Meanwhile, consumer comfort with eCommerce is strong, and Bernstein expects etailers to be the beneficiary of consumers moving more of their retail spend online. For 2008, Bernstein projects online retail revenues of $362 billion, less than 3% of the total retail spending of $13.2 trillion. They project the online spend growing to $692 billion in 2025, more than 4.2% of their $16 trillion global retail forecast.

The report explores other factors, such as whether U.S.-based internet players will be able to penetrate Asia, the impact of regulatory issues (online sales tax, net neutrality) and the future for video and mobile.

So, how will it all shake out?
No real surprises here. Bernstein views Google and Amazon as the big winners. They also see eBay as a bit of a comeback story, while projecting it’s eventual acquisition. The losers in the segment – Yahoo (NASD:YHOO), which they still believe may be acquired by Microsoft, and IAC/Interactive Corp (NASD:IACI), though they seem optimistic that the restructuring and divestitures could give IAC the kick it needs to get back on track.

Even the Twitter ecosystem is now turning on the social media platform for its downtime.
I checked IsTwitterDown and rather than the normal "yes" or "no" response, it replied "of course".

Ouch.

The early days of Internet publishing can be considered the “field of dreams” period - Build it and they will come. Those were the days of mega-portals where Internet users would come to find content. Content distribution was easier then. Most publishers simply built their own portal and/or inked licensing deals with companies like Yahoo, Lycos and AOL.

As if we didn’t have enough evidence, the current conditions of Yahoo and AOL make it pretty clear that the field of dreams days have ended. Internet users are more sophisticated now and they don’t need some mega portal company deciding which content they should look at. The deportalization of the Internet (as Fred Wilson and others have described it) is here and users today want to be in control of what content they get, where they access it and how it should be arranged.

For publishers and aggregators, this means that you can no longer simply make your content available on your proprietary site; instead, you need to package your content up and make it available where the users are.

Alacra today launched its first widget, the Alacra Affiliate Widget, designed to get content in front of potential users wherever they may be.  The Alacra Affiliate Widget is a widgetized version of the Premium Content Ad Network which we launched earlier this year. You can see the widget scrolling in the right-hand column of this blog.

The Alacra Affiliate Widget displays contextually relevant content (available for purchase at www.alacrastore.com) based upon the content of the page it runs on. The goal of the Widget is to help readers of blogs, financial news or commentary websites to identify related content that may be of interest to them.

For bloggers and website owners, the Alacra Affiliate Widget provides new ways to monetize their traffic. The widget is built on the Alacra Affiliate Program, so bloggers and website owners share in the revenue generated by reader purchases on the Alacra Store.

For Alacra content partners, the Alacra Affiliate Widget enables them to get their content in front of potential buyers while those buyers are in the midst of researching or reading about a company. The ads are contextually relevant, so they serve up headlines on companies that are mentioned in the blog post or article they are already reading. In addition, they are behaviorally relevant as they serve up research content at the time a user is researching a company. Compare that to a typical display advertising network – if a user is reading a page on a financial commentary about HP’s intended acquisition of EDS, a typical contextual ad server will return ads for Hewlett Packard printers or laptops. But, clearly, no one’s reading that article because they want to buy a printer. With the Alacra Widget, the user will see an ad displaying links to recent credit and investment research on HP and EDS, as well as M&A analyses and, perhaps, transcripts from HP’s analyst call discussing the deal.

If you’re interested in exploring ways to better monetize your blog or website traffic or wish to learn more about the Alacra Affiliate Widget, drop me a note at barry-dot-graubart-at-Alacra-dot-com. Or, click here to configure and download the widget.

More details about the Alacra Affiliate Widget can be found on the Alacra Blog.

The morning's buzz was all about two acquisitions - CBS (NYSE:CBS) acquiring the downtrodden CNET (NASD:CNET) and Comcast (NASD:CMCSA) acquiring Plaxo.

Looking at the CNET deal, I guess my initial reaction is that if I had $1.8 billion to spend, it certainly wouldn't be at the top of my list. While traffic stats are unreliable, it was fairly well documented last year that CNET had lost about 50% of its traffic, as compared to 2006. The stock, which peaked around $70 during the dot-com boom has been stuck in the $8-14 band for the past five years. Revenue last quarter was $91 million, up a paltry 3% from the same quarter in the prior  year.

About a week ago, I wrote a post suggesting there should be more M&A in the blog space. I think an acquirer would be much better served acquiring a series of blogs to get into this space. The obvious start would be TechCrunch, followed by gadget blog Boing Boing, and I'm sure that Nick Denton would part with Gizmodo for the right price. Heck, you could buy all of Gawker for about a tenth of the price of CNET, according to Doug McIntyre's estimates.

While none of these blogs have the current traffic of CNET, they all have two features that make them much more attractive (IMO) than CNET: growth and a low cost structure.

It makes sense that during down markets, companies fish around for acquisitions at discount prices. What doesn't make sense to me though is bottom-fishing in this space. Rather than buying underperforming assets for bargain basement prices, why not leverage the bad market to buy growth businesses at a (albeit lower) discount?

This is just another case of an old media company buying another dying media business. Hey, CBS - why not go acquire a few newspapers while you're at it?

The Comcast/Plaxo deal is a little harder for me to get my arms around. The deal is rumored to be for $170 million. The two companies have partnered for the past year, with Plaxo serving as the address book for Comcast's data subscribers.
Plaxo is a great utility for keeping address books current. That was its initial purpose and I've always thought that it would be a great add-on for Gmail, Hotmail or Yahoo. Recently, it's tried to leverage its user base to form a social network, Plaxo Pulse. I've joined and have gotten a bunch of invites, but have yet to find any value in it as a YASS ("yet another social network"). PaidContent, via the Washington Post, notes that the companies see the future as leveraging Plaxo Pulse's social networking capabilities via the Comcast set top box. Sounds OK in theory, but I don't see any real value there in practice.

Google tonight will launch Google Friend Connect, the first major product introduction around the Open Social platform.  Friend Connect will allow websites to integrate social networking capabilities without the need to write code.

The announcement comes on the heels of announcements from MySpace and Facebook that they are enabling more data portability. In other words, visitors to a given website should be able to leverage the relationship data they have stored at any other social networking site.

Data portability will be critical to the future growth of social networks. Anyone who tries to figure out which friends they have on LinkedIn vs. Facebook vs. Plaxo vs. MySpace knows the value of this. And, for Google and its partners, whoever gets out in front on that wave has the chance to be the primary host for that data. It seems that Google has taken a slightly closed approach to openness - rather than a fully open service, they provide code to enable you to open a Google Open Social iFrame.

Will try to post more tonight after the site goes live, but there's lots of good coverage already from  Forrester's Charlene Li, TechCrunch, Dan Farber at CNET, Read/Write/Web and Mashable, among others.

The URL (not yet working) for Friend Connect will be live tonight.

I've been following the commentary on the election results on Twitter tonight, trading messages with Larry Schwartz, Dave Winer and others.

Around 10:20pm EST, Twitter went down for a good 15 minutes or so. They've had a bunch of such outages recently and just let go their head of ops. I'd post this as a tweet, but, umm.. Twitter's down.

Twitter's really getting good mindshare (at least among the digerati) but they could lose it all in a hurry if they don't fix the scaling issues. I hope they get it done because I really like the app, but Friendfeed or someone like Google (who just introduced some Twitter-like sharing capabilities in Reader) could take the business away in a heartbeat.

Royal Pingdom has a great chart showing social network downtime since January. As shown here, Twitter tops the list, down twice as long as the runner-up site, Reunion.com. Good news, I guess, for those looking to cheat on a spouse with their highschool sweetheart, but bad news for those of us using Twitter.  See the chart here:

btw - you can follow my tweets here.

A side note - it really looks as though the west coast still has a lot more fun than us on the east coast. The same group who spent last week waiting for Iron Man to be released were all heading out to a Fast Company party tonight while the east coasters were sitting home watching election results.

Dow Jones has acquired business intelligence technology company Generate, Inc.

Generate, led by identical twin co-founders Tom and Darr Aley, is among the leaders in harvesting web content. They have been able to productize and monetize this capability, where others like ZoomInfo, have struggled. They combine this with semantic analysis of text, to identify business events, which trigger alerts.

Combining Generate with Factiva Salesworks, should create a competitive sales intelligence application. Dow Jones has strong market penetration and many feet on the street; with this improved technology and content, they should make strong inroads into this market.

Congratulations to Tom and Darr, Debbie Perry and the entire Generate team.

After two months of foot-dragging and stumbling by both Yahoo and Microsoft doing nothing for shareholder value, the action has heated up.

Yahoo (NASD:YHOO) took an early shot yesterday, announcing a test under which they would route 3% of their search traffic through Google (NASD:GOOG). This is a potential precursor to outsourcing search to Google, a move that analysts called for more than six months ago.  Such a move could provide an EBITDA boost of between $300-500 million per year, according to Silicon Alley Insider.  As SAI points out, while such a deal might not scuttle the Microsoft bid, it could help justify a bump of $5 per share in the price.

The bigger blow came last night, as it emerged that discussions with Time Warner (NYSE:TWX) had heated up and that Yahoo was close to finalizing terms for a potential merger with AOL. Under this deal, Time Warner would merge AOL into Yahoo, along with a cash infusion, in return for 20% of the combined company. The cash would be used to buy back Yahoo shares in the public markets at a price somewhat higher than the $31 Microsoft offer.

Meanwhile, Microsoft (NASD:MSFT) is apparently poised to launch a counter-offer in combination with News Corp  News Corp (NYSE:NWS) has been trying to figure out a way to get into the Yahoo sweepstakes but hadn’t been able to find financial backers for the deal.  According to reports, the deal would combine Yahoo, MySpace and MSN into a massive consumer internet business.

So, which of these potential deals seems more attractive? In part, that depends from whose vantage point you look at it.  Let’s take a closer look:

YahooAOL:
For Time Warner, the deal is a no-brainer. They’ve been trying to figure out how to get value out of AOL for quite a while and the combination of the two would create some immediate benefits:
•    Dominant positioning for online display advertising and ad networks
•    Increased leverage with Google (assuming the combined entity would outsource its search to Google)
•    Combination of strong destination sites in finance, travel, entertainment and other markets
•    There would be obvious cost-cutting opportunities due to the large amounts of overlap between the companies.

For Yahoo, the deal is attractive for some of the same reasons, but does the combination of two declining properties really create a competitive player? Yahoo is pushing this deal as they want to remain an independent company but that desire alone does not create the most long-term shareholder value.

MyYahooMSNSpace:
From a Yahoo or News Corp perspective, this could actually be the more compelling of the two deals.  Combining Fox Interactive with Yahoo could provide significant growth opportunities. The combination of Yahoo’s display advertising expertise plus the social networking growth of MySpace would be extremely attractive.

The benefits to Microsoft are questionable, as has been pointed out in the past.  Microsoft is sitting on a good amount of cash today. The question is whether they’re best served investing that into a consumer Internet play or focusing on the b2b software markets. While the Internet side has more sizzle, the software side of the business could be a better long-term investment. Analysts have suggested that for the same price, Microsoft could acquire businesses like Salesforce.com, Omniture and Facebook.

At SIIA, Hoovers today announced the acquisition of social networking software provider Visible Path.  In conjunction with the acquisition, Hoovers announced the official launch of Hoovers Connect, which leverages Visible Path technology within the Hoovers environment.  The product had been in beta for the past year.

Visible Path monitors a user's email to identify the paths of influence within their social network.  Hoovers Connect leverages those networks so that a user can click on a target company and see the various paths within their social network which they could use to reach that company.

It’s been a busy January.  Most years, I’ve posted my themes & predictions by New Year’s day.  This year, it’s almost February and I’m just getting this out. 

First, a quick look back at my predictions for 2007:

1. Growth in vertical search – didn’t really happen
2. Changes in web advertising models and metrics as page views become less important due to AJAX and UGC.  This one was a big issue and Nielsen/NetRatings dropped use of page view by mid-year.
3. Further consolidation in the industry/heavy M&A: record-setting year.
4. Rollup of blogging tools: Most of the companies I mentioned in this paragraph (Feedburner, MyBlogLog, Last.fm) were acquired; just not by the same company.
5. MySpace jumps the shark: While Facebook had the stronger growth during 2007, MySpace continued with steady growth.  The predicted slowdown didn’t happen.
6. RSS Gains Adoption: sort of, but not really
7. Widgets gain prominence: Thanks to Facebook, widgets skyrocketed in 2007.
8. Drop in newspaper readership accelerates: OK, sort of like predicting that the sky will be blue, so I’m not taking too much credit for this one.

I score that five out of eight, slightly better than my usual 50%. 

Let’s take a look at what 2008 might have in store.

The economy will hang heavily over all business, especially during the first half of the year.
Both b2b and b2c content businesses are likely to see revenue declines.  On the b2b side, the first thing that goes in a week economy is the peripheral user.  When asked, most business leaders will tell you that the bulk of their customers are “core users”.  In reality, for most businesses, it’s probably half that.  So, half of your users have been paying for subscriptions but can’t quantify the value you provide.  2008 may be the year that many of those casual users choose not to renew.

That creates opportunity, of course, for new business models.  Advertising-supported or freemium businesses may be well-positioned to take users away from long-established paid content providers.  Providers like ZoomInfo may not be as good as the incumbents they replace, but for free, they may be good enough.

Slowdown in M&A
The second economic impact will likely be a slowdown in M&A.  2007 was a record-setting year for M&A in the content industry.  According to Jordan, Edmiston, there were 838 transactions worth nearly $108 billion, nearly the sum of the prior two years combined.

With lending tight, at least for the first half of the year, it will be harder to do large acquisitions.  On top of this, some of the more active strategic buyers in the past, such as Thomson, Reuters and Dow Jones, will be busy digesting their 2007 deals and may have a lower appetite for new deals. That said, this could finally be the year that Yahoo gets acquired, either by Microsoft or perhaps by private equity.

Yet 2008 will not be all bad for M&A.  For European and Asian acquirers, the weak US dollar makes it seem like everything’s on sale.  While private equity deals may be down a bit this year, cross-border strategic acquisitions will keep the deal flow alive.

A great time for startups
The weak economy could be a good time for startups, however.

It’s never been less expensive to get a content or technology startup off the ground than now.  Hosted technology solutions mean you can buy an off-the-shelf technology infrastructure at a fraction of what it would cost to build it out yourself.  Meanwhile, as legacy businesses see their revenues erode, they’re less likely to test out new revenue models or launch new products.  For nimble startups with low cost structures, this can be a great time to gain a foothold into a market.

The financial markets may also yield opportunities for startups.  Thomson and Reuters will be distracted by the internal politics of combining their two businesses.  At the same time, financial institutions often require multiple sources for key databases.  The consolidation of Reuters and Thomson may leave only a single source, creating opportunities for others to become the alternative supplier.

The other big issue for 2008 will be the Elections.
The hot races in both parties have helped take the sting out of the writers’ strike for the networks.  So far, little election spending has made its way online, but I think that will begin to change as the campaigns move from the retail politics of New Hampshire and Iowa to the broader media campaigns of the national election.  Lehman forecasts that $110 million will be spent by candidates in online advertising.  More important than the advertising dollars could be the continued large roles of blogs and user-generated content as primary sources for political knowledge. 

The elections also create an interesting opportunity for startups.  Mashing up campaign contributions with legislative records or voting results with census data could generate really great websites that the media and public will eat up.  Lots of this information is publicly available, so it’s there for the picking.

Revenue models emerge for social networks
As users spend more and more of their time online using social networks, it’s inevitable that viable business models will emerge.  While 2007 was definitely the year of Facebook, I think it’s likely that the Google-led OpenSocial will be a big player during the second half of 2008.  I had truly expected Facebook to position itself as a solid b2b platform by now, but they’ve shown little interest in doing so.  That should leave a void that can be filled by LinkedIn, who are already the dominant player for business social networking.  If they embrace the “open” aspect of OpenSocial, they could entrench themselves as the players to beat.

The emergence of widgets was one of my themes for 2007.  In 2008, widgets will become more important as users look to get your content "their way".  Visits to traditional destination sites will be down and content providers who don't widgetize their information will see usage drop accordingly.

Video hits b2b
Until now, video has largely been a consumer play.  While some markets will be slow adopters (for multiple reasons I don't see it playing on the financial trading floor), video will start to penetrate the corporate market this year.

So, there they are.  Trends & predictions for 2008.

As always, I welcome your thoughts in the comments.