Exploring Digital Content Revenues

As Mpayy continues to look for transactions that its Secure Payments Widget can enable, one industry we considered was digital content. The theory was that a Do-It-Yourself model could be enabled allowing artists to host songs on Mpayy's servers, or somewhere within the cloud that we would enable streaming of the music as a preview, and then download.



Mpayy's model is uniquely well-suited for selling digital content online because we do not require the billing address that is a piece of the Address Verification System associated with credit cards. Thus, the checkout process can be simplified, improving incrementally what is the largest concern of ecommerce retailers of all varieties - simplifying the checkout process to improve cart abandonment rates. In the Do-It-Yourself digital content industry, there are a number of players with varying levels of success, and it begs the question...

Can any Money be Made in Digital Content?

Sonific founder Gerd Leonard announced today that the company will shudder its doors. Sonific's mission included:

Sonific.com and Sonific.net reflects our philosophy that offering better tools for music discovery and providing new, free platforms of exposure is what will really sell music, going forward, and that the viral nature of the Internet is perfectly suited to help get the word out for new and established artists and their music.

Leonard discusses the prohibitively costly option of paying for permission to the largest music studios; it is essentially economic suicide. Thus is the danger of abiding by the law, which is the path Sonific was pursuing.

Sonific's fall comes on the heels of Imeem's acquisition of Snocap, which was Napster founder Shawn Fanning's startup. TechCrunch speculates the sale price was less than $5 million, even though the company raised more than $25 million. Last.fm, which is now pulling in 1.7 million monthly unique visitors according to Quantcast has driven a significant rise in its click-through affiliate based sales with Amazon. However, PaidContent.org cites a Jupiter report revealing that digital sales have compensated less than 1/3 of the loss seen by the music industry since 2004.


MySpace recently concluded a new deal with the studios, but the prospects are questionable, because, according to New Zealand's Stuff:

But the MyStores widget proved a bit of a flop. Slightly more than 100,000 of MySpace's 5 million artists embedded the store on their profile, and few sales followed. What's more, rival Imeem has since acquired Snocap – likely to add its own download-to-own service as well. Expect MySpace to either terminate its Snocap deal outright or simply wait for member artists to dump the app on their own.

Industry-backed iLike is the leading music application on Facebook that also leads through to Amazon and iTunes, though no numbers are released.

The Register article I read that pointed me toward Sonific speculates that it was YouTube's disregard for copyrights led to its success as a home for music video viewership. If that's the case, and those are combined with Chinese sites I StumbleUpon frequently with NO respect for digital rights, do Hulu and MySpace have it right that the only way to get money from digital content consumption is through advertising?

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.

GOOG Acquisition of DCLK Approved

The Federal Trade Commission approved Google's acquisition of Doubleclick this morning the Associated Press reports. The $3.1 billion deal will substantially enhance Google's position within the online advertising space as Doublick serves a substantial portion of online advertising and the combination will make Google the #1 company in that space.

The decision comes over opposition lodged from a number of organizations including Microsoft, AT&T, Electronic Privacy Information Center, the Center for Digital Democracy and the U.S. Public Interest Research Groups.

The FTC acted one day after an announcement between Microsoft and and Viacom that could total $500 million over the coming 5 years in which Microsoft will sell Viacom's remnant ad space on properties including MTV, Comedy Central, CBS and others. Microsoft will guarantee Viacom revenues by buying online ad space from Viacom, as well as licensng the company's content for use across the MSN sites.

Viacom's decision to go with a Google competitor is not terribly surprising in light of the company's on-going $1 billion copyright infringement lawsuit lodged against Google over YouTube's display of copyrighted material, including the Daily Show, Colbert Report and others. Specifically, Viacom argued that Google was instructing its advertisers to optimize their content to appear on search results pages leading to the pages where Viacom's copyright videos can actually be viewed.

The agreement also provides some rationalization to Microsoft's acquisition of aQuantive, which owns Avenue A/Razorfish and Atlas. Avenue A is web marketing consultancy that recently helped AT&T with its re-branding. Atlas is a software company that is used to serve and track advertising on partner and affiliate sites. Viacom's properties and advertising provide Microsoft with a use for these large new assets.

This is just one of many arenas in which it will continue to be interesting to watch Google and Microsoft face-off.