Internet Outsider

Jason Jones on Yahoo/Right Media, VUDU, Amazon

Guest analyst Jason Jones weighs in on Yahoo/Right Media, the new VUDU box, and Amazon's S3 (the business that everyone's now prematurely salivating about):

Yahoo/Right Media: It seems to me like a lot of money to pay for a very young company that passes 90% of its revenue onto to its publishers and seemingly low barriers to entry.  $680m for 80% indicates a total value of $850m, which is larger than 24/7 Real Media's total enterprise value of $478m.  While TFSM does not directly compete in the advertising exchange model, it a profitable public company with a global platform in the media network, technology ad serving, and search engine marketing space and it is expected to do $270m in revs in '07. While Right Media has the first mover advantage, I find it hard to understand how they have a sustainable competitive advantage over companies like TFSM and DCLK that can leverage their ad serving technology and media networks to successfully enter the ad exchange space.  Perhaps that is why RM sold out.

That Cool New Movies-On-Demand Box--VUDU: Does the world really need another set-top box?  I think Vudu needs distribution.  TIVO is best positioned with its Comcast and Cox partnerships. Give it another 6-12 months and the spotlight will shift back to TIVO as the industry leader.  VUDU needs one of the major set-top box manufacturers to buys it or it must make deals with the MSOs for distribution.  Otherwise it isn't that interesting.

Amazon S3: In this blog post, SmugMug lays out the details of how much money his company has saved by switching to Amazon's S3, the new web-services service that Wall Street is all hot-and-bothered about.  On the call, Bezos said the service's contribution to Amazon's performance was immaterial.  Based on SmugMug's post, moreover, it seems like a very low-margin business.  So, is this really a good business for AMZN? AMZN is selling $423k of services for $84k? I am sure AMZN has some scale advantage but it seems like this is likely another low margin business.  If I was Smugmug, I would be concerned that AMZN would raise prices after standardizing on their platform.

MSN Update: Prosperity Still Around Corner

Most people have finally given up on the idea that Microsoft will ever become an online contender, but for those who are still holding out hope, the first quarter's performance offers little encouragement.

• True, MSN's year-over-year revenue growth "accelerated," but the celebration is misplaced.  Growth accelerated from 5% to 10%.
• More importantly, advertising revenue also accelerated...from 21% Y/Y to 23%.  This respectable growth massively trailed Google's, but bested Yahoo!'s.  Unfortunately, this is more a comment on Yahoo than MSN.
• Advertising growth, moreover, is impossible to view without also taking into account the expense growth of 39% year-over year.  MSN grew advertising revenue by $85 milllion...and its costs by $234 million.  For every $1.00 of incremental revenue MSN generated, it spent $2.75.  That's not capital investment.  That's operating expenses.
• The growth in advertising revenue, moreover, came from display advertising on email, the home page, etc, not search.  So much for encouraging signs about AdCenter. 
• Then there's the bottom line.  Say what you will about Yahoo's glacial expansion-rate; at least it's making money.  Microsoft isn't--and won't.  In fact, after losing $205 million in Q1, it's on track to lose almost $1 billion this year.

For Microsoft, web prosperity will forever be just around the corner.

VUDU: NetFlix in a Box

One of the most successfully secretive start-ups in recent memory finally came out over the weekend...and now the promise of true TV-based VOD (anything you want to watch, whenever you want to watch it) seems a step closer to reality.  According to Brad Stone in the NYT, the VUDU TV box will allow owners to watch any of 5,000-plus movies instantly, instead of playing roulette on cable Pay-Per-View, waiting for Netflix discs to arrive, interminably downloading full-length films to their PCs, or, god forbid, driving to the video store.

The VUDU box apparently stores the beginning of all movies locally, which allows for the "instant" viewing, then downloads the rest from a peer-to-peer network of other VUDU boxes.  Owners pay about $300 for the box and then $6-$10 for each movie.  Several studios have already signed up to distribute movies through the box.

Thoughts:

• The future--a world in which TV and movie viewers are no longer "programmed" and, instead, can always watch what they want to watch--is, slowly but surely, arriving.  VUDU is the next step.

• Unlike YouTube, Joost, and PC-based movie-downloading services, VUDU is attacking a TV problem through the TV, as opposed to through the PC.  Downloading and watching movies on a PC will never be a big hit with consumer, and today's PC-to-TV solutions are klugy.  VUDU starts with device on which most movies will and should be watched: the TV.

• The early incarnation of the VUDU functionality, which will require yet another TV box and remote, seems clunky and inconvenient.  Sooner or later, however, the functionality will likely be built into other boxes (the way TiVo is/was).

• The early reported business model--$300 for the box and $6-$10 per movie--is not likely to be as successful as a subscription model (all-you-can-eat or a Netflix-like tiering).  Consumers hate to be nicked for every action, and the per-movie charge will discourage use, no matter how convenient it is.  (If Netflix users got discs for free but had to pay every time they used them, the service would be far less popular).

• This said, the movie studios that have rushed to sign on with VUDU would likely be more wary of a subscription model, and have likely forced the company to go with pay-per-view. The fact that the studios have signed up so fast is, on the one hand, positive: They are finally embracing some change.  On the other hand, the fact that they have signed up so quickly indicates that, from their perspective, the change may not be that radical.  Unlike analog media, digital media is a high fixed-cost, low/zero variable-cost business.  Monthly subscriptions would/will ultimately make far more sense for both producers and consumers.

 

Apple: Jobs Says Subscription-Music For The Birds

According to Digital Music News, Steve Jobs has little interest in offering subscription-based music .  "Never say never, but customers don't seem to be interested in it," Jobs told Reuters.  "The subscription model has failed so far." 

The comments come just ahead of licensing and contractual deadlines with the major labels, a group that is searching for avenues to improve online music sales.  Theoretically, subscription-based approaches have the potential to generate stronger revenue streams, though market performance has been lukewarm.  The space currently corals less than two million subscribers, in part because of a consumer preference for track ownership, instead of rental.  "People want to own their music," Jobs said.

The Jobs comments answer some questions, though the issue is far from closed.  The Apple chief executive is notorious for sending misleading smoke signals on upcoming products, a tendency that erodes credibility in discussions like these.  Still, the emphasis for Jobs may lie elsewhere, specifically in transitioning the iTunes Store into a DRM-free zone. "We've said by the end of this year, over half of the songs we offer on iTunes we believe will be in DRM-free versions," Jobs said. "I think we're going to achieve that."  That push, coupled with an expected, MP3-based push from Amazon, will intensify pressure on heavyweights like Universal Music Group to shift away from protected content.   Also adding pressure is a groundbreaking shift by EMI away from DRM, though the others majors seem locked in a wait-and-see.  In recent comments, RIAA chief executive Mitch Bainwol called for a "prudent, rational judgment on how to proceed on DRM," an assessment that leaves the door slightly ajar.

JJ:  I would like to see a subscription music service combined with MP3s for sale.  AAPL will have difficulty entering the subscription business because none of its iPods have an internal clock necessary for subscription music.

HB: The comments sound to me like a negotiating tactic: One can safely assume that anything Jobs ever says to the press is designed to accomplish something.  Also, a subscription would not have to be about music "rental."  Consumers could pay, say, $9.95 a month, to download (and own), say, 25 songs.  This model would be great for consumers, who hate to get hit on every purchase.  It probably would not be so good for Apple, however (unless the company could negotiate a sweetheart backlist/volume deal with the labels)  

TheStreet.com: Wall Street Likes It (Sort Of). Pray for Cramer's Health and Success

Analysts seem mildly excited about thestreet.com's "strong advertising revenue," but they aren't jumping up and down about its valuation.  Meanwhile, no one is talking about the biggest single risk-factor at any one company since Martha Stewart Living Omnimedia. 

No offense to a lot of talented folks who write for thestreet.com, but most of the company's market capitalization is due to Jim Cramer.  Leaving aside the hit-by-a-bus risk, there are some even more specific risks in play here.  Brilliant though Jim is, he's also demonstrated a tendency to come close to blowing himself up.  Even if he manages to keep himself under control, moreover, the success chart of most popular stock-picking gurus usually resembles that of a typical momentum stock: years of fantastic gains, followed by a horrific crash.  Perhaps Cramer's charm will insulate him from this fate.  More likely, it won't.

eBay: Bear Stearns Schmoozes With Happy Powersellers

After dining with a bunch of eBay powersellers, Bear Stearns analyst Bob Peck is now more optimistic about the company's ability to re-accelerate listings growth and revenue per listing.  Peck believes "changes eBay has implemented / is implementing will ultimately drive more buyer activity, which should improve seller economics, and hence a re-acceleration in listings."  He notes, however, that this will remain a faith-based opinion until at least mid-summer.

JJ: Bob says sellers get higher ASPs and ROI at AMZN and GOOG but they sell on EBAY because of the huge volume, which gives them purchasing power in their overall inventory.  I think EBAY needs to drive a better buying experience to maintain the volume.  The EBAY demo using ADBE Apollo was a much better user interface and could result in a better experience.

HB: I own the stock and would therefore be happy if Bob were right, but the above logic sounds pretty flimsy.  eBay used to have no competition.  Now it has a lot of it.  Following on Jason's "interface" comments, eBay's still feels clunky and amateurish--almost as though the company is trying to maintain the informality and fun of its Pez-dispenser days while actually selling Mercedeses.  I'd still be in favor of an eBay-Amazon merger (Amazon's strengths match up well with eBay's weaknesses), but I gather Meg and Jeff hate each other.

Joost: Big Advertisers Love It. But Will Users?

ClickZ reports that Joost has signed three-month contracts with a group of 31 big brand advertisers, including Procter & Gamble, Coca-Cola, Nike, General Motors and Visa. It will offer these marketers traditional units such as :30 mid-roll spots as well as unique formats, including a small digital overlay ad. "The foundation is the traditional :30 spot, which we believe is far from dead, served on a mid-roll basis," said David Clark, Joost's EVP of global advertising. "We're inspired by others who seem to be able to make this work, like ABC for example."

JJ:  This is pretty cool.  We are witnessing an Interactive TV medium built from the ground up.  It all sounds good but I  haven't heard how they will get Joost into the living room.

HB:  The bigger question, I think, is whether Joost viewers will be willing to watch 30-second ads.  The Joost environment is already startlingly TV-like (see "Test-Driving Joost"), which is great for traditional TV programmers, but not so great for many Internet users, who don't like to be programmed (and who often watch online videos at work, where transforming the PC into a TV won't go over so well).  The reason "traditional TV spots" aren't common online is not that they don't work--it's that Internet users hate them.  So I think it's premature for Joost fans to commence an end-zone dance.

Microsoft: The Internet Brain Drain Continues...

Robert Scoble, recently of Microsoft, reports that Microsoft's talent drain is continuing.  In its efforts to defend itself against Google, let alone make up ground, this is exactly what the company cannot afford.  The revolving door in Microsoft's Internet business is preventing the company from developing and sticking with a consistent strategy and making an already major challenge--transitioning from leading one technology revolution to leading the next--downright insurmountable.

Scoble: I just got a press release that Tjeerd Hoek, director or user experience design for Microsoft Windows, is now executive creative director of software and hardware convergence at Frog Design. Tjeerd was well liked and well respected inside Microsoft. Microsoft is seemingly in the middle of a full-bore executive cleanout. I've seen tons of executives leave, particularly in the MSN/Live division that's struggling to compete with Google. Nearly every executive I knew inside that division is now gone.

Just a few days ago Mary Jo Foley reported that Dane Glasgow left, following Chris Payne. Mary Jo also has a report on Microsoft's financial results, which were pretty darn good overall (they better be, a new copy of Windows and Office shipped). The question now is "will the sales of those sustain over several quarters?" Microsoft's guideance says it will.

JJ:  Robert was a very high profile blogger for MSFT who left the firm a few months ago.

Yahoo: Jeff Weiner to Run "Audience Group"?

Valleywag says so.  If so, this would likely mean that the company's vaunted external search failed to attract a strong enough candidate.  Given this (reported) outcome, Semel should have avoided several months of purgatory and named Jeff to the post several months ago.  Now, Jeff will have to start his job under the shadow of, "We looked everywhere, and this was the best we could do."  (Instead of what may, in fact, be the truth: "We looked everywhere, and we finally realized that the best candidate was already working for us.")

Who Will Get Blessing/Curse of "Best Company of the Year"?

Watchmojo wonders which lucky entrant will be chosen as the "Best Internet Company of the Year."  As with Time's "Person of the Year," earning this distinction isn't always a blessing: Some previous winners (Google, Cisco...) have gone on to greatness.  Others (Netscape, Altavista) have just gone to zero.

JJ: There are no strong candidates right now but I have my eye on Craigslist, Facebook, LinkedIn, and possibly Aquantive as 2007 breakout stars.  (I would have included AKAM if earnings were a blowout yesterday).

Previous Winners:

1994: AOL.com

1995: Netscape

1996: Altavista

1997: eBay

1998: Yahoo!

1999: Amazon.com

2000: Lycos

2001: Napster

2002: Google

2003: Cisco

2004: Skype

2005: MySpace

2006: YouTube