Yahoo, AOL, And The Sad Truth About Online Publishing OR How I Learned To Overcome My Fear And Love Snapchat

By Ariel Steinlauf, Managing Partner, Onyx Venture Advisors
February 19, 2014

In recent weeks I’ve seen many articles about Yahoo! and AOL, two of the most venerable giants of the early-internet era. The two companies have known many ups and downs, and these days are global corporate behemoths. However, a closer look at their core business – running enormous online media networks – reveals that it is not a particularly lucrative one to be in.

Let’s begin with the smaller of the two – AOL. The days of the mega-merger with Time Warner are long gone as AOL, currently with an enterprise value of only $3.5 Bn, is a standalone company operating two distinct businesses: a declining, yet profitable, dial-up subscription service, and an online advertising business. The subscription business generated $650 MM in 2012, down from $705 MM in 2012, and AOL is using the cash flow it generates to fund the growth of its online advertising business. The only problem is – it’s not growing so fast.

AOL’s online advertising business generated $1.6 Bn in 2013, up from $1.4 Bn in 2012. It is comprised of owned & operated (O&O) properties, which are further divided into display ads and search ads, and a 3^rd-party network. While the latter is growing by double digits (30%), the O&O part is only growing by single digits (5%). Furthermore, 40% of the O&O revenue is attributed to search, powered by Google. As if to exacerbate the situation, the online advertising business is not terribly profitable. A look at AOL’s cost breakdown by segment (which closely mimic the revenue streams) reveals that the O&O segment is barely profitable, while the 3^rd-party network is losing money.

Moving on to Yahoo!, the picture doesn’t get much better. While Yahoo!’s enterprise value is nearly $37 Bn, that value is largely attributed to its 24% stake in Alibaba, the Chinese e-commerce giant slated to go public later this year. With analysts projecting Alibaba’s value at $120 Bn to $150 Bn, one thing is certain – Yahoo! stands to make a boatload of money out of that IPO, and investors value to the company accordingly.

Meanwhile, its core online advertising business isn’t faring so well – the company generated $4.7 Bn in 2013, down from ~$5 Bn in 2012. Similarly to AOL, Yahoo! derives most of its revenue from display ads and search ads, the latter powered by Microsoft. Both revenue streams have been stagnant and most recently have declined. I could go into further analysis of display vs. search or O&O vs. affiliate sites, but the outlook won’t be any rosier. Deducting its Alibaba stake, Yahoo!’s core business is trading at ~1X revenue.

Interestingly, all these numbers serve to highlight is one sad truth – online publishing, even at scale, is not such a great business to be in. This stems from several reasons:

• Content production is expensive
• CPMs are low and getting lower due to
• More accountable models (e.g., CPC, CPA)
• Programmatic buying and real-time bidding (RTB) putting downward pressure on CPMs

 The scale of an online media network is no longer enough to make money, as the content served needs to be coupled with additional data about the user viewing it for advertisers to be willing to pay. That’s why Google’s search ads are more valuable than display ads and why Facebook’s native ad formats are so appealing – both companies have unique, highly relevant information about the user viewing the content and they use it for their advertisers’ benefit. More importantly, they didn’t pay a penny to produce their content.

To keep up with Google and Facebook, AOL and Yahoo! have made, and need to continue making, substantial investments in ad technologies, either developing them in-house or acquiring them (mostly the latter). But, they still need to produce their content as well, while Google and Facebook don’t. Plus, AOL and Yahoo!’s balance sheets don’t support recruiting engineering talent away from these two tech darlings. And without great engineers, their internal platforms are doomed to be at a disadvantage.

If running an online media network is such a terrible business, what business would you rather operate in order to capture all of those coveted digital advertising dollars?

There are three answers to this question:

(1)   Focus solely on producing premium content

The Wall Street Journal and the New York Times are examples of companies who realized they had unique, highly desirable premium content that they can also charge for, separately from putting advertising next to it. They also realized they can’t develop their own independent ad tech platforms and opted to outsource that function. And so, they erected pay-walls. AOL is actually seeing initial positive signs from its own AOL On video platform, but it’s too early to tell.

(2)   Focus solely on creating an ad tech platform that can serve many players

AppNexus, and recently SOVRN, are examples of companies that provide the means for advertisers to engage in RTB and programmatic buying. SOVRN is actually a spin-off from Federated Media, a company that decided to sell its online media network and focus on developing an ad tech platform to serve many players. AOL has recently acquired Adap.tv and instantly became a strong player in the growing video ad serving space.

(3)   Develop a new media platform and invent new kinds of ad formats

Which finally brings us to Snapchat, the new kid on the block that everybody wants to play with, sometimes offering $3 Bn for the pleasure to do. Is Snapchat really worth $3 Bn? Certainly not today, but it might be in a few years if it plays its cards right. All Evan Spiegel et al need to do is figure out how to retain their users’ attention and how to put native forms of advertising in front of them. If they do, they might become the next Facebook. All the while, not paying a penny for the content they serve.

The Surge of Mobile Wallets: Hype vs. Reality

by Michael Bershadski, Managing Partner at Onyx Venture Advisors
Dec. 12, 2013

Ever since the launch of the first iPhone in 2007, there has been a major shift in consumer behavior toward mobile media consumption, shopping and payments.  Mobile commerce is expected to surpass $86B by 2016 in the U.S. alone, according to eMarketer.  Our phones have already replaced our cameras, music players, web browsers, and navigation systems, so the idea that phones will soon replace our wallets is highly plausible.  

Considering that, I thought it would be interesting to put some of the recent announcements in this space into perspective.

After three years of testing and development, major U.S. carriers have finally rolled out Isis, a joint mobile payment initiative in November (available to AT&T, T-Mobile and Verizon customers).  The Isis Mobile Wallet stores credit cards and loyalty programs and makes it possible for users to complete payments simply by waving their phone in front of the check out terminal.  The wallet takes advantage of near-field-communication (NFC) technology and is accepted at thousands of merchant locations nationwide.  However acceptance is far from ubiquitous, as majority of merchants are yet to upgrade existing point of sale (POS) systems to new contactless terminals.  Whether Isis succeeds or fails will be largely determined by widespread adoption of contactless terminals, ease of use and ultimately the carriers’ ability to convince mainstream users of its value and benefits. 

Google, which first piloted an NFC mobile wallet back in 2011, has recently issued a physical debit card that allows users to withdraw funds from their Google Wallet account in an attempt to broaden its reach and bridge the gap with legacy POS systems. Despite being one of the early proponents of NFC in the U.S., Google Wallet has struggled to gain meaningful traction with consumers, and its tap-and-pay feature has been hindered by the carriers, who have all but blocked it from their networks in favor of their own proprietary wallet, Isis (Sprint is the sole U.S. carrier supporting Google Wallet and is not part of the Isis consortium).

Meanwhile, a new startup called Coin announced plans to develop a programmable card that can store multiple credit cards, debit cards, and loyalty accounts and has a new kind of magnetic strip capable of replicating any stored account at the press of a button, allthewhile maintaining physical dimensions of a traditional card (i.e. compatible with existing magnetic swipe terminals). Coin appears to have taken a clue from Google Wallet by developing a proprietary device that is outside of the carriers’ reach and is compatible with legacy POS systems.  However, Coin has yet to face card issuers, payment networks, and financial regulators as it attempts to process and store sensitive payment information.    

While financial institutions have for the most part embraced mobile banking, there is a general sense of unease surrounding POS transactions.  This is primarily driven by the financial sector’s reluctance to share a slice of transaction fees with contenders and desire to protect current merchant discount rates.  That said, the battle is not only over merchant fees, another contentious issue is the data associated with financial transactions.  This is arguably the real reason why Internet giants such as Google have a vested interest in mobile payments.  After all, whoever owns transaction data holds the keys to a treasure trove of consumer behavior information (when and where they shop, what they purchase) and is in a position to influence future purchasing decisions by serving more targeted and timely ads, deals, and offers.

Technology has the power to disrupt industries and to change the power dynamics among the key players.  Publishing and music industries are but two recent examples.  As new mobile payment mechanisms evolve in the form of mobile wallets, smart cards, and (someday soon) wearable devices, they may well threaten financial institutions’ grip on merchant fees and transaction data.  While the financial sector is highly regulated and the underlying payment networks so far remain largely unchanged, the world is changing.  Those that adopt short-term defensive strategies will face long-term risk of being left on the sidelines, disintermediated and ultimately not in control of the customer interface.











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Strategic Partnership with By The People Ltd.

Nov. 1, 2013

We are delighted to announce a new strategic partnership with Israel-based By The People Ltd., a unique IT consulting firm. The partnership enables us to tap the firm's network of highly talented software engineers, designers, and UX experts for the benefit of our clients. 

You can read the full press release below.

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PRESS RELEASE

For Immediate Release 
November 1st, 2013


Israel-based By The People and New York-based Onyx Venture Advisors Announce a Global Strategic Partnership

IT consulting firm By The People and product innovation firm Onyx Venture Advisors announce a strategic partnership that that will greatly expand collaboration between the two organizations.

NEW YORK, NY AND NETANYA, ISRAEL, NOVEMBER 1ST, 2013 – By The People Ltd., an IT consulting firm, and Onyx Venture Advisors LLC, a product innovation firm, today announced a strategic partnership.  The partnership will deliver a comprehensive set of new product development and technology incubation services to clients.  The companies will join forces on client engagements across markets. 

“The new partnership allows our clients to expedite the product innovation process through By The People’s cutting edge network of engineering talent, graphic designers, and UX experts” said Ariel Steinlauf, Managing Partner at Onyx Venture Advisors, emphasizing, “This approach dovetails perfectly with our general philosophy of Innovation-as-a-Service.”

Oren Glanz, Founder and CEO of By The People, said of the partnership “the Onyx Venture Advisors team brings a unique combination of skills, experience, and market expertise that would be incredibly valuable to new ventures our members incubate,” adding, “the partnership gets us ‘people on the ground’ who will represent our strategic and business development interests in the all-important US market.”

The partners expect to work on both existing and new projects in the immediate horizon.


ABOUT BY THE PEOPLE

By The People Ltd. is an IT consulting firm, providing technology solutions and professional services through a unique business model. The firm, based in Israel, is comprised of a thriving network of professional freelance experts and entrepreneurs, who collaborate on projects, exchange ideas and information, and form new ventures.

The firm was founded, and is headed by, Oren Glanz, a seasoned entrepreneur and renowned executive, along with an experienced team of high-tech veterans. The firm’s professional community consists of experts in a broad range of disciplines, including software development, QA, graphic design, technical writing, and more.

ABOUT ONYX VENTURE ADVISORS

Onyx Venture Advisors LLC is a product development and innovation firm, based at the heart of New York’s Silicon Alley.  The firm provides digital innovation for Fortune 100 companies and startups alike with a stated mission to enable clients to innovate cost effectively and achieve better business results, faster.
The firm advises corporations in the development of new initiatives by guiding the innovation process from ideation, through launch, to performance tracking.  Onyx also assists entrepreneurs with incubating business ideas and bringing the right products to market, and helps early-stage startups identify the right application for their technology, determine the right monetization model, and scale their products/services to support millions of users.

For further inquiries please contact:

By The People Ltd.
Oren Glanz
+972 (9) 835-5605
info@bythepeople.co.il
www.bythepeople.co.il 
https://www.facebook.com/BTPeople 
http://www.linkedin.com/company/249041 


Onyx Venture Advisors LLC
Ariel Steinlauf
+1 (646) 274-0200
info@onyxva.com 
www.onyxva.com
https://www.facebook.com/onyxva
http://www.linkedin.com/company/onyx-venture-advisors-llc

Why Companies Fail - How RIM (BlackBerry) Missed the Boat on BBM

by Greg Blumstein, Managing Partner at Onyx Venture Advisors

Oct. 29, 2013

Virtually everyone has written about BlackBerry’s (formerly RIM) decline over the last few years, and recently what it’d be worth if it were sold off in whole or in pieces. With loads of hindsight in mind, I thought it would be interesting to write a slightly different version of what their history could have been, and what might today be one of their biggest assets had they done things differently.

My first exposure to a RIM device was in 1999 with demo units provided by a RIM salesperson going door-to-door through my office building. I was given a two-week demo of the BlackBerry 850 and 950 devices, and I was impressed. Over the following years, RIM was quite successful in the smartphone market, but then Apple and Google showed up on the scene in 2007. I think everyone knows the story from there.

In May of 2013 BlackBerry announced it would bring its BlackBerry Messenger (BBM) to other mobile platforms, after years of pundits urging them to do so. A few days ago, BlackBerry finally released BBM for iOS and Android after a month of technical delays, coupled with a slow-start reservation system, apparently to limit the load of new users. This approach might make sense for a startup like Mailbox, but it’s surprising considering BlackBerry’s size, and the many years of experience they have operating the BBM service.

Now let’s travel back in time. Mirabilis, the company that created ICQ and launched the Instant Messaging category, was founded in 1996. Two years later, Mirabilis sold their ICQ business to AOL for $407 million. ICQ reportedly had “more than 12 million users” in 1998 when it was acquired, and 100 million users in 2001. AOL, in turn divested the ICQ business in 2010 for $187.5M with roughly 32M users at the time. All told, AOL paid around $33 per user when it acquired ICQ and sold it for around $5.85 per user (talk about a value decrease…).

So where am I going with this? In early 2013, BBM had 60M users worldwide. Here’s how it stacks up versus its competitors:

• WhatsApp - 350 million monthly active users (October 2013)
• Viber – 200 million users (May 2013)
• Apple iMessage – 140 million users (June 2012)
• Kik – 80 million users (September 2013)

Why does this matter? Well, BBM was for many years the only real alternative to traditional Text/SMS messages, and the de-facto mobile IM network. In 2009, with the exception of WhatsApp (Nov 2009), the services listed above didn't even exist. 2009 was also the year RIM’s smartphone market share losses started to become alarming - In Q4 2009 Android and iOS' combined market share passed RIM’s. By Q3 2010, each of them had passed RIM individually.

At that point, RIM could have gone multi-platform and built BBM mobile apps for all other mobile OS’s. If it did, it’s likely none of those competing services would be where they are today, or perhaps even exist.

Based on the combined subscriber bases of BBM’s competitors (granted there’s some level of duplicate users), it would be reasonable to assume that by now BBM could have had roughly 500M users. The early-mover advantage, and network-effect would have been significant factors, as was the case with WhatsApp.

Let’s run with that 500M users assumption for now. Doing some back-of-the-envelope calculations, BBM would have had 8x the users they have now. Would those users be worth the $33 per user figure Mirabilis got from AOL back in 1998? Perhaps not, but just for argument’s sake, that would value just the BBM business at $16.5B, or almost 4x BlackBerry’s (BBRY) current market capitalization.

For further comparison, maybe those 500M users would be worth something closer to the $8B Microsoft paid for Skype’s roughly 663M users in 2011 - or about $12 per user - which would value the theoretical 500M-user BBM business at $6B, or approximately 1.4x BBRY’s current market cap. Perhaps if they were really lucky, they’d get the insanely high amount eBay paid for Skype’s 54M users in 2005 - roughly $46 per user - valuing BBM at $23B, or over 5x BBRY’s current market cap. Not likely, but one can dream…

In short, had BlackBerry taken a chance earlier on and opened up the BBM service to multiple platforms, BBM could have had the first-mover advantage and perhaps become the dominant mobile IM platform across all mobile OS’s, and it might have been one of BlackBerry’s most valuable assets today.

Just to put all this in perspective, apparently an analyst from Scotiabank recently estimated BBM alone could be worth about 60% of BBRY’s value today.

Based on publicly available information, WhatsApp, which started out from scratch in late 2009, is the largest and most well known of the mobile IM networks today. Couple that with their strategy of going multi-platform from day one and it’s an example of where BlackBerry’s BBM likely would have been today had BBRY opened up its platform much sooner. With its brand name and existing user base BBRY certainly would've had an advantage and could've grown even faster and larger than WhatsApp did.

BlackBerry recently reported it had over 10M downloads of BBM for Android and iOS within 24 hours of release, so they’re off to a good start, but what could have been if only they hadn’t waited so long?

Disclaimer: Greg Blumstein has never owned RIM / BlackBerry stock, has no intention to purchase BBRY in the near future, and doesn’t believe this very simplistic analysis will cause any change to BBRY’s value.

Why Startups Fail – Can Early Media Exposure Kill Your Startup?

by Ariel Steinlauf, Managing Partner at Onyx Venture Advisors

Oct. 15, 2013

Today, more than ever before, the barriers to starting a new company are the lowest they’ve ever been. This phenomenon is not necessarily reserved to companies in the online/mobile space, but it applies to tech startups in a more profound way. Hardware has moved to the cloud and is offered in a utility model, and open source software stacks are now available to anyone who would care to seek them out and learn how to integrate them. These two elements combine to create a materially easier environment in which to create new online/mobile products and services.

And so, the question should be asked: if starting a company is so easy, why do startups fail?

When you ask entrepreneurs, founders of fledgling startups, what their companies’ needs are, almost invariably the 3 answers you’ll get would be – funding, customer acquisition, or business development. Those are indeed highly important to any business, but there is a bigger issue that is often ignored but should be dealt with before any effort is made to get more funds or acquire more customers – is your startup ready?

Recently, two entrepreneurs – Brett Martin of Sonar and Bobby Ghoshal of Flud – have published fascinating post-mortems about the reasons behind their respective startups’ failure. In their posts, which are highly recommended reads to any aspiring entrepreneur, a common thread is revealed. Both startups secured funding, got millions of users, and garnered substantial media attention. On the flip side, both startups were not ready for the media’s attention, and the ensuing public interest, and continuously failed to deliver a glitch-free, uber-positive customer experience. That, coupled with constantly worrying about their competition, and spending too much time on potential enterprise partners’ whims, resulted in both startups reaching the end of their runway without a coherent product that caters to customers’ needs.

Steve Blank once commented on early media exposure:

Isn't it cool if you start your company, and the first thing you do, TechCrunch mentions you? … I gotta tell you, if I'm on your advisory board or board, I'd break your arms… For me, any type of press, any type of PR, any type of talking about your company, is not done [before you have discovered your customer]… that's typically done after you've understood what business you're in, who your customers are, and how you need to scale demand for your company."

No other “words of wisdom” I know capture this more accurately. The chief goal of an early stage startup is to figure out what its business is. That is achieved by customer development efforts, such as talking to your customers, understanding what pain points they experience, and focusing on providing a solution to their pain. As part of that process, entrepreneurs should develop an early sense of how they intend to make money out of their new product. This should not be left as an afterthought.

Too many entrepreneurs have been mesmerized by the media too early and failed to focus on these two critical tasks, leading to their startups’ demise. Don’t be one of them. There is a time and place for media exposure, but it should be done when your startup is ready to reap its benefits.