Internet Outsider

Time to Update Those Facebook Revenue Estimates

That Facebook rate card Valleywag published yesterday?  It was from February.  And, yes, February was eons ago, but who would have suspected that Facebook would have doubled its sponsorship rates in the meantime?  Well, it seems they have.  Valleywag's Owen Thomas reveals the June rate card.

Let's see, 150 group sponsorships times $300,000 per sponsorship for three months ($1.2 million per year), and you're at $180 million in revenue.  And that's before the home page sponsorships.  And the $200 million three-year display deal with Microsoft.  Etc.

Do clients get discounts off the rate card?  Of course.  But even with the sponsorship rates set at half of what they apparently are today, director Peter Thiel's $150 million 2007 revenue number looked reasonable.  And the more pertinent question is what 2008's revenue number looks like.  And 2009's. 

MySpace will reportedly do $1 billion in revenue this year, only a year or two after finally getting serious about selling ads. Facebook's sponsorship rates have doubled in 5 months.  Google's doing $16 billion in revenue.  Is it really so unreasonable to think that Facebook might hit a $1 billion run-rate within a year?  In a word, no.

So here are some updated Facebook revenue estimates:

2007:    $150 million ($200 million? $250 million? Who cares?)
2008:    $750 million
2009:    $1.5 billion

The (Big) Problem For Hakia, Powerset, Mahalo, and Other Google-Killers

The "highlighter" feature that search-engine Hakia announced yesterday wasn't worth a press release, but it did get me to try the company's "semantic search" service, which is actually pretty cool.  As instructed, I asked Hakia three English-language questions:

Why did the stock market crash?
Where do I get good bagels in Brooklyn?
Who invented the Internet?

As promised, I got intelligent results for all (even the last one, which was a trick question).  For example, Hakia understood that, when I asked "why," I would be interested in results with the words "reason for"--and produced some relevant ones.  If I'm ever in the mood to ask an English language question--and I remember that Hakia exists while reaching for the keys--I might use the engine again.

But therein lies the problem--indeed, the problem for Hakia, Mahalo, Powerset, and the dozens of other companies that are pursuing next-generation search.  Contrary to the premise upon which most of these companies are based, I don't agree that current search sucks.  On the contrary, I almost always find satisfactory results immediately, conveniently, and with minimal frustration.  I also don't find myself wanting to ask the Internet English language questions all that often: It's usually easier to just type keywords.  The results (and display) could always be improved, of course, and maybe I'm always missing out on fantastic sites that have just the info I'm looking for, but ignorance is bliss.

On the questions I asked, Hakia certainly delivered nice results. But I'm used to using Google and Yahoo, and Google and Yahoo usually get the job done, and I almost never wonder whether I'm getting "the best possible results."  So unless Hakia, et al, focus on tight, defensible verticals--or sell their technology to Google/Yahoo/Microsoft--I don't think their future is promising. 

Don't believe me?  Check out Hakia's modest traffic over the past year. Or just ask the guys at IAC's Ask, who, despite being widely viewed as having the "best search on the web", despite massive advertising, and despite the brilliant Barry Diller, haven't budged off of 2% market share.

MySpace: $1B of Revenue in 2007 UPDATED

UPDATE:  Turns out Erika (below) got bad information.  I've rerun MySpace estimates based on Murdoch's recent comments.  Updated estimates are $600 million in calendar 2007 and $1.2 billion in 2008.  More on Silicon Alley Insider...

In a lengthy piece on the trials and tribulations of UGO Networks, Forbes' Erika Brown drops in an interesting nugget: MySpace is expected to do $1 billion in revenue this year.

Now, people have been sticking their fingers in the wind on MySpace revenue since the day Murdoch bought it, but Forbes has better insight than most.  In December, Technology Editor Peter Kafka (now Managing Editor of Silicon Alley Insider) wrote a profile of Murdoch in which he put MySpace revenue at "$30 million a month", or a run-rate $360 million a year.  Forbes's Brown presumably has similarly strong Fox relationships, and she's now pegging the 2007 number at $1 billion.  Assuming solid month-to-month growth off the $30 million December number, the $1 billion isn't even a stretch.

Four conclusions:

1. $1 billion is real money, perhaps even enough to finally silence those who continue to argue (pray) that advertisers will NEVER risk being associated with, gasp, user-generated content.
2. If MySpace can generate $1 billion in revenue, then so can Facebook.  So the $10 billion price tag on the FOR SALE sign Facebook hung around its neck last week actually makes sense.
3. News Corp's $580 million MySpace buy was, indeed, a steal.
4. New York-based Fotolog, which is closing in on the 10 million member mark and closed a big deal with Google last week, could end up being worth real money some day, too.

A place for big bucks.

Facebook Puts Self Up For Sale: $10 Billion

[From Silicon Alley Insider]. Few seem to have noticed, but Facebook has now officially put itself in play.  Peter Thiel, a Facebook investor and director, granted a detailed interview to The Deal last week in which he rejected several lowball offers that have reportedly come over the transom--$3 billion range--and essentially offered to sell the company for $7-$10 billion.  The announcement would not have been any more direct if Facebook had written an open letter to Google saying: "Dear Eric: $10 billion and we're yours."

Yes, of course, Thiel also threw in all the required noises about how Facebook has no interest in selling, no interest in going public, etc., to make sure that when Google does walk in the door, it will be the Google folks who are selling.  He also explained why Facebook wasn't ready to sell (not developed enough) and why those who gripe about Facebook's low revenue are missing the point (we don't care about revenue yet).  But make no mistake: Any time a company is this specific about what it would take to get it to the table, it's for sale.  What's more, it's probably for sale at the low end of Thiel's $7-$10 billion range.

As a last gesture of helpfulness, Thiel was also kind enough to tell everyone how much revenue Facebook will generate this year--$150 million (so assume at least $200 million--have to set the bar low)--of which half comes from the Microsoft deal.  So, there, Google and Microsoft investment bankers, you now have everything you need.

Let's see, at today's Google stock price of $515, a $10 billion Facebook buy would amount to about 6% -7% dilution.  A veritable tuck-in!  And none of the copyright headaches that came along with the $1.7 billion YouTube acquisition.  Microsoft?  Why, you'll generate $10 billion in cash in the next few months.  So, step right up!  Yahoo? Um, sorry, missed your chance last year when you could have had it for $2 billion. David Shabelman, The Deal.  DealBook, NYT

Google Q2 Solid, Stock Expensive, Little New

Oh, yes, Wall Street panicked--that's new.  It's hard to say whether the 7% aftermarket plummet was the result of margin slippage (the popular story) or the stock just having been too damn high in the first place, but all the hand-wringing about an "earnings miss" is almost certainly an overreaction.

Google's expenses were higher than expected because:

1) They hired more people than they planned to, and
2) They changed the way they account for bonuses, which required a "catch-up" from Q1. 

The second factor is a one-time item that is unrelated to the company's performance (translation: It's irrelevant).  The first factor, the "over-hiring," could indicate a problem, but only if you believe Google's management is full of it. 

Companies generally "overspend" for one of two reasons.  Either they spend according to plan but their revenue falls short and they try to hide it by blaming spending (which is bad, especially for a growth company like this), or revenue comes in where they think it will and they actually just...overspend. 

Google's revenue performance in the quarter was just fine--a steady, modest deceleration in year-over-year growth, with weakness in the Adsense network and exceptional strength on the far-more-profitable Google.com.  Eric Schmidt also said quite clearly that the company simply hired more people than it expected to.  So, in this case, the "overspending" was quite likely the benign, one-time kind.

Free cash flow, meanwhile, is continuing to grow again, after more than a year of stagnation while the company poured billions into data centers, servers, and real-estate.  At a current run-rate of about $2.6 billion, Google should exit the year with about $3 billion in free cash flow.  Now that the stock is back in the $500-range (Wall-Street's aftermarket fibrillation having sliced $20 billion off the market cap), that translates to about 50X-55X free cash flow.  Expensive.  Not outrageous, but expensive.

And we would be remiss if we did not once again take the opportunity to step back and gape in awe at a company that didn't exist 8 years ago now generating $15-plus billion in annual revenue and $4 billion in profit, all from organic growth.

Click Fraud Increases Again, Especially on Affiliate Networks. Bad News for Content Providers

Click auditing firm Click Forensics reports that the percentage of fraudulent clicks industry-wide jumped another point in Q2, to 16%, after remaining largely stable in 2006.  More alarmingly, Click Forensics says that fraud on affiliate networks like Google AdSense and Yahoo Publisher Network jumped 4 points in a single quarter, from 22% in Q1 to 26% in Q2. This trend has big implications for the thousands of new companies and bloggers who generate revenue through such networks.

Much of the fraud increase, Click Forensics says, comes from "botnets," which click ads automatically and are designed to appear to be humans.  Unlike the search engines, which continue to downplay click-fraud, Click Forensics can analyze end-to-end traffic logs (what a "user" does after clicking through to a site), and the firms consistently conclude that fraud is a bigger problem than Google and Yahoo say.  Google estimates that fraudulent clicks account for less than 10% of the total. Yahoo pegs the figure at somewhere between 12% and 15%.  Although these figures aren't too far off Click Forensics' numbers, Google and Yahoo do not release breakdowns on their affiliate networks.

The affiliate networks are not major profit drivers for these companies (they contribute a big percentage of revenue, at Google, especially, but not profit).  But they are critical revenue drivers for the gigantic ecosystem of small content providers that has sprung up around them.

Most advertisers currently regard click fraud as a cost of doing business.  (And they don't currently have much choice: Yahoo and Google do not provide enough click-level detail about which to complain).  As estimates of click fraud on the affiliate networks increase, however, advertisers will (or should) put increasing pressure on Google and Yahoo to control the problem, provide more detail, and/or provide larger refunds for bad clicks.   Any of these measures could reduce the revenue passed through to affiliate content providers.

Andy Greenberg of Forbes.com originally reported the Click Forensics data.

Analyzing Skype's Q2, Updated Financial Model

Jason Jones was kind enough to update our Skype model with last night's Q2 results.  Feel free to view here:

Key points:

• Skype's revenue and registered users continue to grow nicely year-over-year, up 105% and 95% respectively.  With $90 million of revenue in Q2, the company is now closing in on a $400 million run-rate.  The bad news is that revenue is likely a lagging indicator, and Skype's usage is flattening.
• Skype-to-Skype minutes were flat year-over-year, suggesting that the market for PC-to-PC calls has largely been tapped.  This will always be a niche market, so this isn't surprising.
• Skype's Skype-to-Telephone minutes increased 53% year-over-year, but this was a drastic slowdown from the 131% growth in Q1.  This explains why Skype is desperately casting around for other sources of revenue (e.g., the ludicrous SkypeFind and SkypePrime).

In my opinion, Skype has lost focus, allowing other companies to capture markets it should have owned (Google's new acquisition Grand Central, for example).  Skype has yet to roll out a satisfactory small-business solution (main number, PBX, extensions, etc.) and has yet to penetrate the much larger phone-to-phone market.  Skype's forays into community and commerce, meanwhile, smack of the core expertise of its parent, eBay, which has no strategic reason for owning the company.  eBay should sell Skype to Yahoo, Microsoft, or Google, and focus on its core commerce business.

Yahoo Q2: Not All Bad

Everyone has focused on the negatives, so I'll hit some positives. Yahoo is clearly in trouble, however, so don't mistake these comments for rosy-eyed optimism.  The next year will determine whether the company restores what was once the dominant global Internet franchise to glory--or becomes one of the industry's biggest disappointments.  And, this time, if it stumbles down the latter route, it won't have a global advertising downturn to blame.

Positives:

• We did not have to hear Terry tell us that Yahoo had a great quarter, is outgrowing the market, and is in fantastic shape--and wonder whether he had ever set foot in the place.
• Jerry and Sue appear to understand the magnitude of the problem (competition, morale, talent, buzz, bureaucracy).
• Despite lagging the market, the company is still highly profitable: $1.5 billion free cash flow run-rate.
• Panama is working.  Revenue per search is up 15%-20% year-over-year.  This is crucial, as search is still the industry's largest and most profitable revenue stream.  Alas, the counter problem is that Yahoo appears to be continuing to lose search query share to Google (and in the latest month, god forbid, Microsoft).  With fewer search queries, improving RPS won't make a lick of difference.
• The user base is huge and still growing.  Yahoo now has 463 million users, up 13% year over year (and 17 million paying subscribers, up 18%).  Even if all else falls to pieces, this one metric represents enormous potential value.  The moment Yahoo's user base stops growing, the company is done.
• Revenue is, indeed, accelerating.  The most profitable revenue stream, search and display on Yahoo's proprietary properties, is growing faster than the rest of the business and is accelerating.  And given the rate at which Yahoo is getting its clock cleaned in its global affiliate business, affiliate revenue will soon be so small as to be irrelevant.

All of which is a long winded way of saying, it ain't over yet.  But it will be soon, if Jerry and Sue don't make good use of this latest restart.

Dead-tree media deathwatch: R.I.P. Business 2.0

It's official.  Business 2.0 joins the dodos and dinosaurs, with all but a core staff of 10 getting 1-year-salary severance agreements (so Peter Kafka's sources say).  The lucky 10 will reportedly augment Fortune's Valley coverage--assuming they want to.
 
The good news (for magazine folks) is that B 2.0's problems appear to have been at least partly management-related.   NYT reports that Time Inc. consolidated sales for its finance-business magazines earlier this year, and the sales force reportedly ignored B 2.0 to focus on the sexier Fortune.  The circ was reportedly stable, just north of 600,000. 

But, in any event, B 2.0 ad revenue collapsed, dropping 38% year over year, despite a red-hot business market, stock market, and advertising market.

Forbes' Brian Caulfield has more on the larger story here: Despite the economic boom, the ad dollars are going to bloggers and Google, not Red Herring, B 2.0, et al.  It's not just the wasted paper, ink, and postage--it's the time delay.  By the time the magazine arrives, everyone's already read the story online (or ignored it, if the magazine is trying to "protect it's business" by maintaining a firewall).  Expect more B 2.0-type announcements to come.  Forbes

What Went Wrong At Backfence?

Mark Potts knows, but won't say. Or more accurately, the cofounder of the community website network, which burnt $3 million in less than two years before folding this summer, won't give up the good stuff. He's citing "private business matters involved that we've chosen not to discuss." Yet he's happy to post about general lessons learned on his Recovering Journalist blog. A lot of this is boilerplate that could apply to any new business - startups are hard, keep costs down - and some is pretty much Web 2.0 cant at this point - it's a conversation, engage your community - but still worth reading. One promising note for any community-oriented, ad-supported startups out there - Potts says selling ads wasn't really a problem. But just for argument's sake, if we really are embracing communities here, and we really are in an age of transparency, I look forward to reading postmortems from SAS Investors, Omidyar Networks and other investors who sunk money into the venture. Anyone?