Join the Fight Against Lupus

Mpayy has officially joined the fight against Lupus with the Alliance for Lupus Research. Together, Mpayy and the ALR are working to leverage Facebook traffic to fight against Lupus. See the ALR's donation widget at http://apps.facebook.com/curelupus.

Mpayy will match each new donation account with a $1 donation to the ALR.

Internet Impotent in Music-Buying Decisions?

Last month, I discussed the troubles companies have driving revenues through online music services. Sonific had shut down and Snocap was sold to Imeem for what was rumored to be fire-sale prices. On Friday, the Pew Center for Internet Research provided some data that may explain some of the trouble these folks are having.

The Pew report cites an ABC news story pointing to the crux of the problem:

"Shipments of CDs peaked at 942.5 million units in 2000 and fell by 25% to 705 million units in 2005. Figures released earlier this year show that album sales fell by 9.5% in 2007, even though digital sales grew by 45% in this period." (
Alex Veiga, U.S. Album Sales Down, Digital Up. Associated Press, January 8, 2008. Available online at: http://abcnews.go.com/Business/wireStory?id=4081901. Accessed on May 8, 2008.



Among internet users who research the music they buy online, their methods are varied (picture left), but only 32% of those who said they used music said their online research was definitive in making their purchasing decision. In order, the top 5 effects of online music research were:

1. Learn more about the band
2. Learn about new artists
3. Save money on music purchases
4. Buy more music than was planned
5. Changed their mind about the artist or song they were going to purchase.

By and large, it is offline influences that continue to drive the music purchasing decision according to the survey data.



Now, the 70+% of users who say that friends and family are impactful in driving their music purchases could certainly include folks interacting on social networking sites like Facebook or MySpace. Applications such as iLike on Facebook that allows friends to dedicate songs to others can be source of new music.

Activities for online music research are also varied, and certainly skewed towards the younger generation. The Pew Center caveats this report with the fact that litigation fears may drive many people to not respond in the positive to the question of whether or not they download music.



Given the large concentration of offline influences and purchases, it becomes more understandable why a fragmented strategy towards digital content sales may not drive the fortunes of many companies and the benefits continue to be concentrated in the likes of iTunes and Amazon. However, Apple's recent success in surpassing WalMart in music sales is evidence that more sales may move to digital. In the meantime, it will be interesting to see how the content vs. free advertising-supported listening shakes out. It's not likely to resolve itself in the same timeframe as BluRay vs. HD DVD.

What Value Widgets?

ReadWrite Web continues to questions the ability of facebook to monetize its platform. The general potential of facebook and other social networks is an issue I've blogged about here and here. It has not stopped the venture community from continuing to pour money in, including a $20 million investment in meebo at a $200 million valuation most recently.

RWW notes that most of the successful facebook applications are strictly fun ways to communicate with your friends - I totally just superPoked your demon. Applications that actually have utility tend to not have the viral component that many of these applications which just reach out and touch/invite facebook friends. Further, it remains difficult to engage users while on facebook. Further, for applications that are related to one's personal activities - calendars, reminders, blog readers - it is strains reason to assume that people will bother their friends with invitations.

None of this has stopped folks like Adonomics from continuing to espouse the limitless earning potential of facebook applications. According to a February blog post everything on the web will be remade for facebook which will create a marketplace and incomes for developers of facebook applications along the lines of eBay for Power Sellers. However, to date, the income from the widgets has come only through advertising with networks like Gigya and WidgetBucks.

These networks may extract the ad rents from facebook, assuming they can produce more success than ads on the network itself. My personal experiment with ~15 different ads failed to yield a click-through rate above 0.04%, at which point the company stops serving your ad until you increase the Cost-per-Click bid to something in the Google levels - read $1.50. The site does have the ability to deliver impressions, but the value of that given its users' unwillingness to engage calls into question its ability to drive value. (Companies can use larger images, but to do so, you need a $50,000 guaranteed budget, and who knows whether that is on an impression or click basis.

Online ads certainly continue to garner more of the discretionary funds of large advertisers. The battle for the clicks that make these ads useful will continue to go on between the multiple players providing each piece of a web page.

Widget Payments

Mpayy continues to offer its secure payments services through a syndicated widget that can also be found on facebook. Mpayy will relaunch its widget with configurable logos, skins and payment fields on May 18th. Stay tuned.

Eyeballs Aren't Enough

I've been having a discussion with an acquaintance who is starting a venture incubator about what startups really need in a strategic partner. He contends that personnel and advice are critical to a startup, and that the proper guidance can make most business models work. My argument is that the foundation HAS to be a solid business model - with very few notable exceptions - or in the long run it will fail, and there are a number of examples out there right now to draw lessons from.

The Many Faces of Social Networking

I've discussed at length the potential overvaluation of many startup companies, and the overcrowding of specific markets caused by the herd mentality. However, that does not stop money from flowing into those markets whether or not they prove profitable.

Three years ago, Fox bought MySpace for $850 million, and Google bought YouTube in 2006 for $1.65 billion. AOL spent the same amount as Fox to buy Bebo last month, and Microsoft's investment in facebook that valued the social network at $15 billion has been widely documented.

As of now, the only business model producing revenue for these companies is advertising, and acquiring companies possess successful advertising businesses that the acquired properties are expected to drive forward. In fact, Google paid Fox News $900 million for the right to sell advertising on the popular MySpace property. Yet, that bet doesn't seem to be panning out, as Investor's Business Daily reports.

The story does say that Fox's revenues from "Other" grew significantly, and guesses that may be related to improved targeting in it advertising.

Targeted Ads to Drive Revenue through IM/Chat?



In the Spring of 2006, I wrote a paper on instant messaging startup Meebo for a Technology Strategy class at the University of Chicago. I'll dig the document out and post it here as soon as I get a chance. The thesis behind our paper was that Meebo's power would leverage the universality of instant messaging by allowing users to log in to multiple instant messaging services at the same time. While there are a number of other services that allow this, meebo's thin-client application was unique in that it would not be blocked by firewalls and download restrictions that businesses put on instant messaging, and users could use meebo through a browser from anywhere. The traffic has certainly come.



While we were correct in our forecast that the company would benefit from the zero costs of homing among instant messaging networks, and meebo would free ride on the dollars that Yahoo, AOL, Hotmail, and others had spent to build out their instant messaging memberships. These features, combined with their successful launch of chat rooms, has generated incredible success. The challenge, we concluded, would be to monetize the traffic for long-term viability.

Meebo has attempted to turn its traffic into a sale to both Fox and AOL at a valuation of around $250 million, but is now searching for a new round of funding at a valuation of $175-200 million. The company has only thus far created around $1 million in revenue.

Meebo hired a Chief Revenue Officer, CNet and Warner Music vet Carter Brokaw, to help it launch its long anticipated advertising offering. According to Read/Write Web,

"Users will be able to opt-in to sponsored experiences that are targeted to them specifically, based on their demographics and behavior. Negative feedback on a particular ad will teach the ad server not to serve the same ad to a particular user and there will be a leader board on the site displaying the most popular ads according to user response.

Meebo says that in tests, they are experiencing 2 to 4% user engagement with these new types of ads, a far higher percentage than banner ads see. "

If meebo can replicate its click-through rate at scale, it will certainly earn a premium for its advertising and could grow into a significant moneymaker. However, if, like on facebook and others, users remain too engaged in the process of networking and chat, rather than commerce and advertising, meebo will continue to struggle to justify its valuation.

Where's the Beef?

Might as well use this Leap Day to get one more blog post in before the month of February ends...

Two weeks ago, a blog post by Redfin CEO Glen Kellman entitled "How Green was my Valley" prompted a quick reply by TechCrunch founder Michael Arrington. At issue was their argument as to whether or not Silicon Valley or Seattle was better for life, love, and most importantly entrepreneurial success.

Now I grew up outside of Atlanta, and have been in Chicago for ten years, but 7.5 years of policy debate and the diaspora of my friends has provided me plenty of access to folks from both Northern California and Seattle. In addition, I've been exposed to the platitudes, "The West Coast is the Best Coast" and "NorCal is hella cooler than SoCal." I was on my way out west after finishing my MBA when I got waylaid by my dream job at Mpayy.

I have no dog in the race, and would certainly argue that either is a more nurturing locale than Chicago for starting a company than is Chicago. As PWC Moneytree demonstrates, the $2.399 billion that Silicon Valley pulled in the fourth quarter in VC funding far outstrips the $439 million in the Northwest and the $244 million in the midwest.



If you drill down, you will see that the $405 million in Software in the Valley, which leads industries there, is much higher than the $57 million in software in the northwest, which is still almost twice the $29 million in the Midwest. So, the funds are certainly there, especially as so many alumni of successful high-tech startups move into Angel/VC roles.

What Does it All Ad(d) Up to?

Here again, I am not in a position to comment on the fashion and social mores related to commenting on websites at parties in either Silicon Valley or Seattle. My question from this detached position is related to the insights and filters that are applied to business models (or lack thereof) and valuations that are derived.

Yelp raised $15 million yesterday at what is rumored to be a $200 million valuation, and the company has "Revenues are rumored to be sub $10 million/year," again from the Blog of Record. At the high end, that is a 20x multiple on revenues in a crowded marketplace. TechCrunch mentions Insider Pages, Yellowbot, City Search, Google & Yahoo Local, to which I would add grayboxx, Kijiji, and Zagat off the top of my head. Not to mention TripAdvisor, Frommer's and Viewpoints for specific properties.



Yelp has three lines of revenues:

1. Sponsored Search Results Placement
2. Advertising
3. Branded Goods

I don't know how quickly Yelp-gear is taking off, but a 20X revenue multiple raises some eyebrows.

Kara Swisher recently put out numbers from a facebook all hands meeting that point to -$50 million in Free Cash Flow (FCF) based on $150 million in revenue and $200 million in Capital Expenditure. Even if that were +$50 million, it would be a 300X FCF multiple compared with Google's 34X FCF after the recent drop in its share price. Swisher also questioned the $50 million valuation placed on PayPal co-founder Max Levchin's Slide.


My questions respectfully are as follows:

• What is the scenario that drives these valuations, and how frequently is that "Winner Take All"?
• What is the exit for these companies, and how frequently is that assumed to be a strategic buyer in the form of Google, Yahoo or Microsoft?
• Online advertising rose 25% last year, and is expected to continue to rise. However, there is clear evidence that click-through rates are falling to an industry average of about 0.25%. Search engine marketing text links are higher, but are they concentrated enough among the highly atomized online publishing community to run a business based on this revenue stream?
• What effect does the "Bandwagon Effect" play in many of these investments in crowded sectors? Money is also flowing into the Open Social/Data Portability sector with a number of players, most recently Gmail-creator Paul Bucheit's FriendFeed. Similarly, as I discussed here, survey participants expected Clean Tech as the sector most likely to receive investments and be over-valued in 2008.

Turning the Mirror Inward

Electronic and Mobile Payments startups is certainly not an empty marketplace, and it's a frequent discussion about how to distinguish ourselves from the pack. We will swear up and down we have the most economical and efficient payment solution for Internet Retailers and Online Sellers alike. We give folks free and efficient means to send money to friends through Mpayy, our widget that launches 3/2 and our mobile site. The speed with which I can diagnose a payment processing system has accelerated significantly since I came aboard Mpayy. The quest to distinguish ourselves from the money launderers, store & forward companies, those who charge the consumer, and those without a qualified merchant model continues. For a complete discussion of capabilities of payment processors, click here, and pricing here.