TradeDoubler Q4: gross profit up, costs up even more, search *must* improve

As a former employee of and holder of 100 shares, worth a whopping 3090 SEK by end of business Wedensday, in TradeDoubler, I checked out the company's full year 2008 report.

Two quick thoughts:

* Overall gross profit (more or less revenue less payments to publishers) was up to 195 MSEK from 188 MSEK for Q4 and 747 MSEK from 636 MSEK for the year. I.e. underlying business is holding up pretty welll. Costs grew much faster, leading to a steep fall in all margins. TradeDoubler let 6 % of its staff go in Q4, but as management seems to be expecting relatively slow growth in 2009 it seems likely there will be additional cuts (either as additional cost-savings or by attrition).

* The acquisition and integration of IMW/Search Works has been a failure. It seems quite likely that TradeDoubler will have to take a very significant impairment charge on the goodwill from the acquisition, which likely would force the company to raise additional capital as equity could be wiped out. That is unless there is a heroic effort to cross-sell search/PPC services in Germany, France, Spain, Italy and Sweden, as it will be very hard to motivate 600 MSEK of goodwill even if EBITDA triples to 30-40 MSEK (as public Internet companies are valued at 8-20x net profit in this environment).

I hope TradeDoubler executes well in 2009 and that the postives (being performance-oriented) outweigh negatives (large share of revenue/gross profit in industries like consumer electronics, travel, finance).


Yahoo shrinked in Q4

Yahoo's revenue decreased 1 % year-on-year to $1,806 million in Q4 and the company lost $303 million (compared with a profit of $206 million in Q4 2007). In this light, Google's 18 % growth is even more remarkable.


Google's second trick only small when compared to search ads

A small, relatively, thing I noted in Google's Q4 report was that revenue categorized as Licensing and other revenues was $667 million dollars for 2008 and $196 million for Q4 (compared with $181 million for entire 2007). I haven't dived into what Licensing and other revenue actually is, but I'd guess it mainly is licensing of the search technology and Google Apps.

As Steve Ballmer repeatedly have said that Google is a one-trick pony, today the one-trick thing seems to primarily be relevant in the context of Google's outstanding search advertising business.

To put a run-rate of shy of $800 million in perspective:

* It is about the size of MySpace revenue (and 80 % of Fox Interactive Media's)
* Likely double the size of Facebook's revenue
* It is 25 % more than Skype (which, in my mind, is widely misunderstood as a 'failure')
* It is 2.5x the revenue of Omniture
* It is about 9 % of Yahoo's total revenues.
* It is about 20 % of Microsoft's Online Services Division

In other words, most companies would get a major boost from something that didn't really make a lot of difference to Google in 2008.


Similar tools, different use

Johan Siwers describes the underlying reason (sv) why one social network or communication service is unlikely to rule them all. We use each service for different things and project different personas in each environment. Even though one service might be technologically superior, there is a social advantage in context diversity.


Gustav Söderström joins Spotify to head up mobile

Gustav Söderström: Leaving Yahoo! Inc. to head up Spotify Mobile . "I came to Yahoo! Inc in 2006 through the acquisition of Mobile social software company Kenet Works AB of which I was CEO and co-founder (learn more about me). After two years as Director of Product Management and later Director of Business Development, I've decided to leave Yahoo! Inc in order to join music startup Spotify."

It is cool when some of your best friends in the industry decide to team up. In addition, I cannot think of a person better suited to head Spotify Mobile than Gustav. Now, go create great things. =)

Microsoft's first ever major layoffs

Yesterday, Swedish time, Microsoft did the first major layoffs in its history. 1,400 out of about 95,000 employees was laid off, and up to another 3,600 will be laid off over the next 18 months. Far less than the "15 % will be laid off" speculations from a few weeks ago.


Google had a strong Q4 2008

Google had a good fourth quarter, with revenue up 18 % year-on-year to $5.70 billion. In Q3 2008 year-on-year revenue growth was 31 % and for Q4 2007 year-on-year revenue growth was 51 %. While revenue still grew at a brisk pace, growth is slowing quite quickly. Operating margins and profits were up, but impairment charges to the investments in AOL and Clearwire dragged down net profits. It seems like Google has been tightening up their operations in Q4 and for 2008 as a whole, with cashflow improving faster than revenue.

Efficient Frontiers data that said search spend was down 8 % obviously wasn't representative for Google.


Invite-only is an anti-growth strategy

With 90 or so Swedish Internet entrepreneurs about to meet for 24 hours to create new web services, I'm going to write a note on why I think invite-only is a bad marketing strategy for web services.

The semi-public, invite-only service is an interesting child of Web 2.0. The classic example obviously being Gmail. A more current example would be the free Spotify accounts.

With the success of Gmail, one might be fooled into thinking that the buzz created by the invite-only aspect was a major reason for the strong word-of-mouth. I know I certainly thought so when being part of two community projects at Universum four years ago. (If the results of those projects are anything to go by, I was wrong. Buzz is created by amazing products.)

Part of the invite-only thinking is summarized in the fourth question Jaiku-founder Jyri Engeström says creators of social web services should be asking themselves: "What is the gift in the invitation?"

Creating a reason for people to invite friends is a good thing. If it is possible to make the invitation into a gift it is even better. But fake scarcity rarely creates a valuable gift. As a creator, one has to come up with a better way to make a gift out of the invitation than to restrict access. (An exception would obviously be made for sites like Asmallworld where not being open to everyone is a core part of the service and not a marketing gimmick.)

Andrew Chen's post What's your viral loop? Understanding the engine of adoption explains how to design in order to make users invite other users. Read it and think about how invite-only affects the viral funnel. Conversion rates goes down across the board, which is exactly what one wants to avoid.

Jyri's often-used example of an invitation-as-a-gift is the $10 gift Paypal gave new members when they they accepted an invitation from a friend. That is a gift that fuels growth, not restricts it. Even if giving $10 away might be too much for many services, it is a good benchmark when thinking about invitations-as-gifts for marketing purposes.

The two reasons one should ever use an invite-only system are 1) to slowly let people on to the service to find bugs and issues and 2) to control growth ("make sure we don't grow too fast") for technical/operational reasons. Both are fair reasons, but from a marketing perspective they should be recognized for what they bring: slower growth than a site open for everyone would have.

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Short-term profits might not be found by search engines

Yesterday my plan for today's blog post was to congratulate SoundCloud for winning Music Ally / MidemNet New Business Showcase at the music industry gathering Midem and add some reflections on startups.

However, the news (longer for subscribers at WSJ) that Efficient Frontier, one of the largest SEM agencies in the world with $750 million in annual spend, says that search advertising spend declined 8 percent in the last quarter of 2008 got me to change the subject.

Some people have argued that search is insulated from the recession as it is measurable, an assessment I've disagreed with.

Google reports its Q4 revenues on Thursday, and then we'll see if Efficient Frontier's numbers are representative for the market. With the November chatter about Google reducing its contractor workforce with up to a few thousand people (unconfirmed), the layoffs of in-house recruiters and closing of peripheral services, I guess Google has seen weak revenue growth (but not necessarily negative) and is trying to manage profitability by cutting costs.

The beauty of AdWords -- for Google

The beauty of Google's AdWords system is that its auctions pits advertisers against each other, driving them to increase bids at the expense of their margins to grab market share. When consumption is strong (resulting in lots of searches with commercial intent), web sites are getting better an monetizing users (the underlying value of a click to the advertiser increases) and corporate strategies aim for growth (if the last search is bought with poor ROI, no-one will get fired) revenue growth explodes! And revenue surely exploded for Google.

Times are bad and Google's customers are hurting

Times have changed. Consumer confidence is at an all-time low and to firms cashflow is more important than growth. Adding to that, it is industries that have been spending heavily on search that are hurting the most:

* Finance. (All the large international banks are losing money like their is no tomorrow and are on governmental life support.)

* Automotive. (U.S. sales in December was down 22.4 % year-over-year)

* Travel. (U.S. consumer confidence was at an all-time low in December)

* Retail. (U.S. retail sales were down 9.8 % year-over-year in December)

Advertisers do measure their return on search spend and can still improve their monetization of visitors (via) from search campaigns, both which are positives for Google, Yahoo and Microsoft's search engine even in a down economy.

However, I see three big negatives for search marketing that I think outweighs those two positives:

Three reasons search could be hurting in the recession

1) the search engines and their customers (the advertisers) have to fight lower consumer interest the resulting lower search volumes in previously very attractive industries like the ones above.

2) as deep discounts ravage the profitability of retailers and cheap credit has gone away, life-time values and average order sizes are going down, negatively affecting what advertisers want to pay per click.

3) as firms cut costs, I believe CFOs around the world are imposing stricter standards on the return on investment marketing, including search, should have, which is negatively affecting the average cost per click.

In addition, for Google as a public company with a large international presence, the stronger dollar should weigh on the Q4 results.

Regardless of search marketing growth in Q4 and in 2009, in a few years time search marketing will be significantly larger industry as consumer usage and advertiser adoption grow. Short-term it might be rockier than most of us expected, though.


Consumers are ok, no corporate welfare needed for Google and Opera

The EU is, after a complaint by Opera, going after the bundling of Internet Explorer with Windows. The legal reason being that "Microsoft's tying of Internet Explorer to the Windows operating system harms competition between web browsers, undermines product innovation and ultimately reduces consumer choice." It is alleged abuse of monopolistic power all over again.

At least two of Microsoft's competitors are obviously thinking it is a good idea for Microsoft to get its assed kicked by regulators, in addition to the whopping Internet Explorer is taking in the marketplace. That is what competitors are for, I guess.

Opera's CEO is talking about free choice and Mozilla's Asa Dotzler is portraying Mozilla Foundation and the Firefox movement as "a not for profit open source organization that depends on volunteers for almost half of its work product and nearly all of its marketing and distribution" and "an odd-ball organization called Mozilla has had some success in breaking Microsoft and Apple browser strongholds". But in addition he writes that for Microsoft's competitors, like Opera and Google, it is all about the money. Which is a really important point.

As we all have learned, open source software development works. It might be described as oddball compared with large corporations, but nevertheless it works. Especially when you have revenue of $75 million per year and 20 % market share (which is more than "some success" in my book). Thus, one shouldn't be fooled by the innocent description of Mozilla Foundation.

My take is that if enforcement don't make the situation significantly better for consumers and mainly end up giving competitors a larger market share for free, little is won and we should let everything play out in the market instead of regulating. And to me it looks like that is the case this time around.

Consumers are leaving Internet Explorer by their own choice

Obviously a huge reason for Internet Explorer's 70 % market share is that it is shipped with Windows. But does that mean that consumers don't have a real choice? Looking at the market share data for web browsers, it doesn't seem so. Internet Explorer has been losing 0.5-1 % of market share per month for the last three years and is now likely around 70-75 %. That is is a clear sign that consumers and companies have a real choice not to use Internet Explorer (and maybe that the distribution costs aren't that high).

Obviously 70 % market share is way above the circa 40 % line where regulators start to get concerned about a company having a dominant position, but Internet Explorer's market share is getting lower by the month and there are some trends that might accelerate the market share loss.

1) Google is no longer just supporting Firefox, Safari and Opera et al, but launched its own browser Chrome. Chrome took 0.5-1 % market share in its first two quarters, and I expect Google will push very hard to take it to 5-10 % in the next 18 months by market Chrome on its web sites and doing distribution deals with PC vendors like HP and Dell.

2) Firefox has good momentum and will continue to grow driven by strong word-of-mouth and likely to go from 20 % to 25-30 % market share in the next 18 months (given that Google doesn't stick a knife in Firefox's back when it really starts to market Chrome, then I think Firefox will hold its 20 % share).

3) Apple is taking share in the operating systems market, which translates into Safari having a larger share of the browser market as Apple is tying Safari with OSX. Likely going from 2-3 % to 5-6 % in 18 months.

4) Internet in the mobile is starting to take off with the iPhone and usage is switching from the computer (where Internet Explorer is strong) to the mobile (where Internet Explorer is weak). Likely it won't play out to more than 1-2 % of market share in the next 18 months, though.

So while Internet Explorer has the largest market share, its share is deteriorating and will likely be between 50-60 % in 18 months. To me that looks like the market is letting consumers choose.

Browser technology is getting better and there are ever fewer "only for IE" sites

Looking at browser technology, a lot of development have been made in the last few years driven by Mozilla, Opera and others. Regardless of what Microsoft has done with Internet Explorer, browsers that are widely used are much better today than five years ago.

In the same period, the use of standards when building web sites have taken a leap forward. A few years ago, web sites were quite often being designed primarily with Internet Explorer in mind. That is going away. The playing field is clearly more leveled today.

So there is innovation that benefits consumers and barriers to entry in the way of proprietary standards are going away. Thus I cannot see how increased regulation would significantly improve the browser technology available to consumers.

This relatively long blog post doesn't mean I think "the browser market" is a perfect market, but markets generally aren't. It means that given the current state of the Internet industry I think Microsoft bundling Internet Explorer with Windows does more good than bad for consumers and that the actions regulators seem to be thinking about (forcing Microsoft to distribute competitive browsers) would primarily help competitors rather than consumers.


Banking is not a game of musical chairs

"As long as the music is playing, you've got to get up and dance", Chuck Prince, then CEO of Citigroup, to the Financial Times in 2007. (Referring to lending to private equity firms doing leveraged buyouts.)

"One of the toughest jobs as CEO is to look at all the stupid things other people are doing and to not do them - because maybe you're the stupid one," - Bob Willumstad, former president and COO of Citigroup.

Given the losses and dismantling of Citigroup, it is pretty obvious that too much dancing (and the accompanying drinking) can result in such a hangover that it is often best to leave well before the music stops playing. Because if you don't, you were just one of the guys and girls doing something really stupid. Like wrecking the global financial system.

Rant on online newspaper business model and differentation

The recurring debate about how to fund quality journalism and newspapers caught my eye this week with three posts in Swedish by Expressen Digital Media's Editor-in Chief Thomas Mattsson, HD.se's publisher Sören Karlsson and Mindpark's Joakim Jardenberg.

It is interesting that the example used was Spotify invites, as Spotify is a pretty good contrasting example to online newspapers when it comes to getting people to pay for a service.

The big problem for online newspapers that want to charge their readers is that they are producing something that, to a large extent, is an undifferentiated commodity. While news is popular, it is hardly ever unique. Most of the content, for the lack a better word, found at Aftonbladet, Expressen, DN and SvD can be found at its main competitor in very similar form. No individual Swedish newspaper does create a product that is great enough to motivate a larger number of people why they should pay for it when there are advertising-funded alternatives. (It doesn't mean that it is impossible to create a product that you can charge for, as Wall Street Journal Online proves.)

Spotify is quite a contrast. It is a great, in the true sense of the word, service offering something that no other music service in Sweden offers today. I.e. it is not a commodity but something special. If you want consumers to pay you, that is what you should be looking for.

As a good online newspaper gets lots of visitors (even if they usually lack commercial intent and as a group are heterogeneous and thus far less valuable than a visitor to a search engine or niche site), the possibility to launch mass-market add-on services (which has been done in classifieds, dieting, dating and other sectors) to add sales is at least as great as when selling DVDs with the physical paper.

By the way, I don't get why Expressen.se didn't try and charge for the Spotify invites.


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Yahoo bringing in external CEO to fix the company

With Yahoo bringing Carol Bartz on-board as CEO, my initial reaction is that the company, for the second time, is bringing in an older, external CEO to fix the company (rather than to fix the products).


Playdo have raised 3 million euros from Miniclip and Northzone

A few weeks after the fact, but congratulations to Swedish gaming/community developer Playdo for raising 3 million euros from Miniclip and Northzone.


Blogs on the economy

With all the economic turmoil I find that the following blogs provide both analysis and pointers to the most interesting news of the day.

Abnormal Returns
The Big Picture
Calculated Risk
Paul Kedrosky's Infectious Greed
Paul Krugman