Internet Outsider

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.

Rumor of the Day: Microsoft for Facebook for $6 Billion

No, of course we can't confirm it.  But it makes sense, don't you think?  Steve Ballmer, desperate and furious, sick of sucking wind in the Internet game, sick of losing every Internet in-play company and much of the future to You Know Who, sick of feeling like a has-been also-ran, raiding the bank account and snapping up the hottest company on earth.

The fly in the ointment: $6 billion's a nice fat number, but it's only 1/25th of Google's valuation, and the Facebook folks clearly think they're worth more than that.  So maybe Steve will have to throw in another $5 or $10.  Or $20.  Or maybe Mark Zuckerberg will just tell him to go...home.

Calacanis's Mahalo Off to Solid Start

Jason Calacanis's new human-powered search engine, Mahalo, appears to be off to a solid start.  According to Jason, the site is currently serving about 50,000 pageviews a day (1mm a month).

Mahalo also recently launched a new "Greenhouse" program that addresses the primary business concern about the company--namely that the cost of hand-building SERPs will be so high that Mahalo will never survive.  The Greenhouse program allows the public to apply for part-time paid work building Mahalo search-results pages (SERPs).  According to Jason, Greenhouse received 800 applications in two weeks.  The company has hired 150 people as Part-Time-Guides (PTGs) so far and hopes to have 500 by year end. 

Greenhouse PTGs create SERPs based on the company's "Most Wanted" list, and Mahalo's full-time editors then accept or reject them. Mahalo is giving the first 100 PTGs to hit 100 accepted SERPs an iPhone. 

The Greenhouse program is currently producing 10-20 SERPs per day, at a cost to the company of approximately $10-$15 each. The company expects its PTGs to be producing 100 SERPs a day by the end of the year.

For most search queries, a human-edited SERP will be superior to one generated solely by an algorithm.  Here, Mahalo's ability to prioritize SERP-building is the key to success.  If the company had to compete with Google on speed or breadth, it would fail.  Assuming search requests follow standard distribution laws, however (e.g., 20% of terms account for 80% of searches), Mahalo ought to be able to invest its resources in building only the most popular and profitable SERPs, with links to Google for the rest. 

Assuming Revenue Per Search (RPS) of, say, $0.05 to $0.10, Mahalo would have to generate 100-300 queries per SERP to generate a positive gross margin.  It's not clear how long a shelf-life each individual SERP has (presumably minutes for some and years for others), but given the traffic the site is already generating, this doesn't seem a high hurdle for the company to meet.   

Map Wars: Google and Microsoft Tussle Over Coolest Map Apps

At the Where 2.0 conference in San Jose--which, like every other web-related conference these days, is jammed.  "Geospatial" content and tool companies have developed into their own micro-economy, and Where is the center of it.

The big fight, here as elsewhere, is between Google and Microsoft, over who can produce the coolest 2D and 3D global mapping platforms.  The startling news is that, in this arena, Microsoft appears to be holding its own.  Google's new "block view" feature is cool (put yourself on map, look at buildings around you, walk down street, etc.), but Microsoft's new "Virtual Earth" project is even cooler.  The latter is powered by high-res photos taken from low-flying planes, and the reported $150 million the company is spending on geospatial content is paying off (at least in the "wow" department). 

As with many of the companies here, Google Earth and "Virtual Earth" appear to be cooler than they are commercial, at least for now.  The most obvious source of revenue on the consumer side of the geospatial business would seem to be local advertising and logo/placement, but if this opportunity is producing meaningful numbers, no one is discussing them.  The CEO of Platial, for example, Di-Ann Eisnor, raved about how much money there was to be made in made in mash-ups, but offered exactly zero details.  The same went for a company that provides "soundscapes" (click on a place, listen to what it sounds like) and Garmin, which has some cool "make your own trail maps with your GPS device" technology that mountain-bikers and joggers are reportedly bananas about. Garmin's model is obvious--sell units--but the gravy train that will eventually have to support the rest of this exploding industry is still unclear.

Search Share: Google Gains, Everyone Else Loses (Again)

Bob Peck of Bear Stearns offers a detailed analysis of Comscore's domestic search share numbers for April.  Search is by far the largest category of online advertising, and number of queries is the primary revenue driver.  So query share is crucial. 

Bob's full note is available at Searchblog.  Here are the key points:

• Google's share of US queries jumped another 140 basis points to nearly 50%, up 27% year over year.  This is a continued deceleration of the y/y growth rate, but it's still impressive--especially relative to the rest of the industry.

• Yahoo lost 70 basis points to 27% and grew only 6% year over year.  Yahoo is doing better than the other major players, but this ain't saying much.  It is important to note that Panama, even if wildly successful, won't help increase query share.

• MSN dropped 60 basis points to 10%.  Given how much time, effort, and money Microsoft has invested in search over the years, this is, in a word, pathetic. (But not surprising).  Importantly, the $6 billion Microsoft is spending on aQuantive won't help this trend.

• Ask Network was flat at about 5% and Ask.com was flat at a dismal 2%.  Search is not TV, and Ask's massive advertising push has had no effect on the site's market share.  There is no reason to expect this will ever change.

 

Why Did Google Invest in Sergey's Wife's Start-Up?

TechCrunch, AP, et al, are reporting that Google just invested $3.9 million in a biotech start-up run by Sergey Brin's wife.  The company, 23andMe, immediately used this money to pay back a $2.6 million loan Sergey had personally extended to the company. For several reasons, this transaction is bizarre.

First, given the obvious conflicts of interest (perceived or otherwise), why would Google do this?  As far as I know, Google is not normally in the business of investing in start-ups, especially biotech ones.  So what's the strategic imperative here?  What Google business logic could possibly offset the scrutiny that such an investment would receive?  Even if a Google investment makes all the business sense in the world (and if it does, I need some help understanding why), it looks terrible, and Google obviously knows that.  So what gives?

Second, why didn't Sergey just make this investment himself?  Yes, $3.9 million is chicken feed for Google, but it's also chicken feed for Sergey (the AP reports his current net worth at $16 billion).  Sergey could fund 1,000 such start-ups before breakfast and never miss the money.  Sergey's idol, Warren Buffett, would NEVER let Berkshire Hathaway invest in his wife's start-up.  So, again, what gives?

I understand that Google is "a different kind of company," but, in this case, I'd like it to be different by explaining more about why this investment was made, who approved it (the Audit Committee, apparently--but why?), and why Sergey didn't conclude that it wouldn't be better for all involved if he just made the investment himself.  Inquiring minds want to know.

UPDATE:

NYT has more detail, including the names of a couple of other start-ups Google has invested in.  The decision still sounds strange, but better than it did initially.  The situation could have been helped with clearer upfront communication.

(Hat tip to Rick Stratton)

 

Instant Gratification: Microsoft Buys aQuantive

Always nice to make a good call, and Jason Jones made a great one yesterday--that aQuantive would be one of the next digital advertising companies to go in the panicked land-grab of the web elephants.  Even Jason probably didn't imagine that he'd be so right so soon, but we're proud of him.

Sick of forever being outbid and then having to mumble about "expensive" amid the Google-Yahoo celebrations, Microsoft made a preemptive offer on this one.  At 2% of Microsoft's market value, the acquisition is still a tuck-in, but it's the biggest one in Microsoft's history.  aQuantive won't solve all of Microsoft's web problems, but it will solve some of them.  Most importantly, it will mean that Microsoft's web business must--at least temporarily--be taken seriously again.   

Time Warner Chief Hallucinates at Cable Show, Speaks Truth

Dick Parsons must have puffed on something stronger than a peace-pipe before taking the stage at the National Cable & Telecommunications Conference this week.  Addressing the growing tension between Big Media and Google, et al, the normally thoughtful Time Warner chief drew an analogy to one of the most famous (and gruesome) battles in the conquest of the American west.

"The Googles of the world, they are the Custer of the modern world. We are the Sioux nation,"  Reuters quotes Parsons as saying, referring to the Civil War American general George Custer who was defeated by Native Americans in a battle dubbed "Custer's Last Stand." They will lose this war if they go to war," Parsons added, "The notion that the new kids on the block have taken over is a false notion."

Um, okay, but leaving aside the outcome and horrific violence of this particular clash (if memory serves, Sioux squaws completed the massacre by collecting scalps and family jewels from Custer's still-living soldiers), who won the war?  Despite his apparent intention to express confidence in Big Media, perhaps Parsons was actually just being his usual forthright self: Time Warner, et al (the Sioux Nation), might win a battle or two, but there's no question about which side will ultimately prevail.

More from Steve Baldwin.