Amazon's Broadband Strategy Revealed
If you thought that Amazon wasn't thinking about their future, think
again. It's interesting to note, especially as the Street concentrates
on the media implications of broadband, that Amazon has reserved
three domain names that suggest they are taking the convergence of the
PC and the TV seriously. Amazontelevision.com, Amazontv.com and
Amazontube.com have all been licensed by the company.
Another Value Chain Reorg By AMZN
Another interesting news item from Amazon.com caused us to remember
why we like the company and the concept so much; they have the
distinct opportunity to change the value chain dynamics in the
businesses they enter (and uniquely, take margin out of that value
chain). They're already starting to do this with books (publishers are
increasingly viewing Amazon as a strategic and valued partner), and
they're undertaking the same with music. To this end, Amazon announced
Amazon Advantage for music, a program that gives independent artists,
bands, and labels much more widespread distribution of their music
than the industry's economics would otherwise allow.
Unknown artists, bands, and independent labels have a very difficult
time accessing the shelf space of the local Tower Records or Barnes
and Noble superstore; with the Amazon program, they can access
Amazon's 4.5 million customers just like the Rolling Stones can. To
put Amazon's actual music distribution power into perspective,
independent artists would have to get their CDs into about 100,000
retail music stores across the world, a prospect that would be
impossible save for the most well capitalized and already popular
bands. Though placement and advertising will continue to be important
on the Amazon site, the Amazon Advantage program is yet another
example of how Amazon behaves: in the best interest of customers,
publishers, artists, and, ultimately, shareholders.
Yahoo! (YHOO)
Yahoo! Adds NPR An A Content Partner
In yet another example of the increasingly blurry line between
different media (and the increasing importance of the Internet),
Yahoo! agreed to offer audio content from National Public Radio on the
Yahoo! site. The Yahoo! News site will offer top stories (world,
political and business), as well as snippets from our favorites
Morning Edition and All Things Considered. With NPR Chats not far
away, we look forward seeing how those radio stalwarts at NPR react to
this melding of old and new media. As importantly, the deal suggests
(along with Yahoo!'s increasing presence on TV with prime time
commercials) Yahoo! recognizes that it's time for them to be at least
experimenting with broad-based advertising and media exposure, since
today's NPR listener is tomorrow's Nina Totenberg unofficial fan club
Web site designer.
DoubleClick (DCLK)
MSFT's LinkExchange Purchase
In conversations with DoubleClick management after the announcement of
Microsoft's reported $250mm purchase of LinkExchange (see Observations
for an analysis of this transaction), we were struck by the importance
of Microsoft's $17.2 billion in cash on their balance sheet. Though
DoubleClick had considered purchase of LinkExchange in the past,
several factors, including price, kept a transaction from being
consummated. Though we have always thought of Microsoft as thrifty in
their purchases (that is, recognizing value and paying a fair price
for it) , they most certainly do not come under the same financial
restrictions as do other Internet companies when considering mergers
and acquisitions (even despite the fact that many Internet companies
use stock as their currency). All other things being equal (and they
most often are not), we are witnessing yet another benefit of being
Microsoft; having lots of cash on hand and an extremely valuable
currency.
Observations
Marketer's Appetites Are Growing Larger And Longer
A common theme among the Internet media companies that have reported
their Q3's has been the inexorable trend toward advertisers taking
longer and larger contracts for their marketing plans. All the major
portal players suggested that advertiser appetite for this medium
continues to build, which is as much a leading indicator of these
entities future success as the absolute dollars they are reporting as
revenue today. Perhaps the most dramatic anecdotal data point came
from Jack Riggs, Broadcast.com's CFO, who, on a recent visit to NYC,
shared with us that, when they went public (just a few short months
ago), they were signing lots of 2-3 month deals worth somewhere around
$50,000. Now, he relays, they are signing many more 1-2 year deals at
several hundred thousand dollars apiece. Though the visibility of a
very successful IPO transaction certainly helped on this front, there
can be no doubt that the environment for advertising-based business
models is wholly robust, which bodes well going into what is
traditionally the strongest advertising quarter in the business. These
two factors, when combined, are part of the anecdotal evidence we cite
in our continuing conviction that Q4 should be very strong for many
Internet companies.
Some Thoughts On MSN.com
We had the pleasure of speaking with some executives from MSN.com over
the past several days and we've come away with the feeling that, after
some early fits and starts (no pun intended), Microsoft may well be
have latched on to the Internet operating principles that could carry
them to success in this medium. Time (and execution) will tell, but
Microsoft seems to have evinced a sober and quite sensible plan for
increasing their presence on the Internet with consumers.
Perhaps there is no more popular technology truism (other than,
perhaps, Moore's Law) than that Microsoft tends to get things right
the third time around (remember Windows 2.0?). By our measure, the
latest incarnation of MSN.com, represents Microsoft's third, and
certainly most viable, plan for becoming a major presence on the
Internet. Gone is the Microsoft Network, gone is the laser-like focus
on the stand-alone properties of Expedia, CarPoint, and the rest; and
in their stead is MSN.com, a network representing a cross-section of
content, functionality, and destination sites, focused on delivering
both reach and depth to marketers and merchants alike.
On the conference call discussing Microsoft's purchase of
LinkExchange, Laura Jennings, MSN's VP, let loose with the interesting
data point that MSN has signed more than $150 million in advertising
and commerce deals over the last 45 days (including the $90mm First
USA deal), suggesting that the new, umbrella MSN that incorporates the
destination sites of CarPoint, Expedia, etc. and the MSN.com home page
is finding success with mainstream marketers. Even with the Firsst USA
deal, this is a big number, and perhaps most impressive is the
momentum MSN has generated with advertisers since the re-launch of
MSN.com; $150mm over 45 days is about 3 million per day in deals.
This momentum is the result of a concerted effort on Microsoft's part
to concentrate on providing the interstitial glue between their
destination sites and the MSN portal by, for instance, providing a
common interface and navigation style between them. Among other
things, this allows for greater cross-promotion within the MSN network
while giving marketers the added assurance that their messages are
received. None of this is new, of course; common interfaces and
navigation styles are commonplace, but the execution against these
elements seems to be strong. Anecdotal evidence from MSN advertisers
seems to suggest a strong, and positive reaction.
At the Microsoft analyst meeting in July, our first reaction to the re-
positioning of MSN and the Microsoft properties under one umbrella was
skepticism. After all, Microsoft was attempting a strategy completely
at odds with the manner in which Yahoo! and Excite developed. Whereas
these two portals developed from a single functionality (search) and
added services and content as the medium matured, Microsoft developed
separate properties with distinctly different functionality,
interfaces, content, and to a certain extent, users. Then they
attempted to bring them under one umbrella and sell them as a package.
The proposed benefits of this approach seem to be pretty reasonable to
us; advertisers are looking for both broad reach and deep quality,
and Microsoft suggests that only the umbrella MSN provides both. Where
the portals have very broad reach, they get relatively few hits, and
thus their usage is low. With the destination sites in the MSN
network, Microsoft officials suggest that they have found at least a
partial solution to advertisers' desire for both breadth (reach) and
depth (strength of relationship). Microsoft believes that the portal's
concentration on reach has caused them to miss (or, more precisely,
neglect) the dimension of activity (read: usage). In the October 23rd
edition of The Internet Capitalist, we provided our view on the
growing importance of depth to these portals and their advertising and
commerce partners. We put it this way:
So what metric gets at the strength of the relationship between the
portals and their users? Which gets to the heart of these company's
influence on Internet users? In our view, influence is a function of
two factors: breadth (e.g. the sheer number of users Excite reaches
per month) and depth (e.g. the strength of the relationship between
Excite and its users). Reach has been a helpful in determining the
breadth of a portal's influence on Internet users thanks to its
commonality, its easy measurement, and its third party verification.
However, it doesn't get us any closer to understanding the depth of
these portals' influence on the eyes and ears of the Internet
population. Why is depth important? A metric that quantifies depth
will give investors a better understanding of how influential, for
example, Yahoo! is to a Yahoo! user, that is, how much Yahoo! can
"guide" that user to a certain merchant, a certain content provider,
or a certain brand message. This, in turn, will be very valuable to
advertisers and merchants.
So has MSN found a solution to the breadth versus depth issue? Time
will tell, of course, but both their execution so far, and as
importantly, advertiser reaction, has suggested they may be on to
something. This could have interesting effects on how the other
portals develop their content and service offerings; perhaps they turn
their attention toward partnering with commerce and service providers
more than with entertainment-based content providers? Microsoft's
success, to the extent that it manifests itself aggressively, could
also impact M&A strategy at these firms, which, of course, could all
boil down to the stock price. We think it makes sense for Internet
investors to keep a close eye on Microsoft and the evolution of
MSN.com.
The Microsoft/LinkExchange Deal
Microsoft reportedly paid about $250 million for LinkExchange (the
company will neither confirm nor deny this figure), an ad network of
small and medium-sized sites (about 400k in size). LinkExchange
immediately adds about 100 employees to the MSN group, with a
substantial portion of those working in a sales capacity (which can't
hurt MSN's advertising productivity). LinkExchange, as of September,
had something like 42% reach of Web users (thanks, RelevantKnowledge),
sold about 25-30% of their inventory to advertisers and did so at CPMs
between $10 and $50, with zero "cost-per-action" revenue.
The importance of the deal is manifold, but a few thoughts immediately
came to our minds. First, the transaction completely reinforces the
notion that portals don't necessarily need to own content to derive
advertising and commerce revenue from marketers. Like DoubleClick,
Microsoft has recognized that they can act as the intermediary between
content providers (the 400,000 Web sites on LinkExchange's Banner
Network) and the marketers who wish to reach them, and don't have to
take the risks of developing online content on their own and have that
content be the magnet that attracts consumers and the marketers that
want to reach them.
As importantly, this inventory is significantly different than the
inventory that MSN already owns, which makes it highly additive (and
strategically important) to MSN's new network sell to advertisers. The
transaction reinforces our belief that Microsoft is committed to the
strategy of developing and selling MSN as an entity, rather than as a
collection of single sites. LinkExchange fills in an important gap in
MSNs content inventory. Once again, Internet investors would be wise
to keep a close eye on MSN.
The Internet's Growing Role
As A Consumer Medium
The news that the Bureau of Labor Statistics (BLS) accidentally posted
October's employment data on their Web site (www.bls.gov) on Thursday
sparked some thoughts on the growing importance the Internet has taken
on as a medium for information and entertainment. As we spoke about
above, our Internet investing First Principle is that this is an
entirely new and unique medium. Whether it be reports that president
Clinton was hunched over a computer terminal checking out the early
returns of Election '98 on Tuesday night or evidence that bond traders
make several millions dollars thanks to the Internet and the BLS, it's
clear that the Web is surely growing in importance to everyday
consumers (if not everyday billion dollar bond traders) lives.
Disintermediation 201: Not All Virtual
One of the widely held beliefs in the Internet space is that the
Internet can and has disintermediated middlemen in certain vertical
industries. That is, remove layers of middlemen who tend top add
inefficiencies (read: costs) to any industry value chain (e.g. retail
apparelm which has lots of middlemen). In the classic Michael Porter
value chain approach, new Internet intermediaries can leverage the
Web, remove inefficiencies in the value chain, and squeez out some
margin in the process. These disintermediation effects are perhaps
most typified by Amazon.com, who has changed the manner in which books
are bought and sold, adding value to consumers (price, selection,
convenience) and publishers (better demand data, fewer returns) alike.
However, we've long felt that disintermediation can take many forms
and the one typified by Amazon.com may be the most impactful (and
valuable?), but that it may be the exception and not the rule, since
certain industries don't allow for disintermediation by pure Internet-
only players. Some "traditional" middlemen may embrace the Internet
piecemeal or integrate the Internet in certain aspects of their
business but not others and protect their industry positions and
margins. This isn't necessarily new thinking per se, since quite a few
businesses have already recognized these facts and are changing their
supplier and distributor relationships using the Internet; in effect,
morphing themselves into hybrid intermediaries by leveraging the Net
as a distribution and customer acquisition channel. Less recognized,
however, is the tendency of some of the new Internet middlemen to add
physical assets like actual stores, customer service centers, or sales
representatives. They've recognized a need for certain physical
assets, suggesting that not all intermediaries can be completely
virtual, that is, exist on the Web only.
Two recent examples that run counter to this trend come from small,
private companies E-Loan, an online mortgage banker, and Auto-By-Tel,
the online car buying service. For it's part, E-Loan announced that it
is opening a new 40,000-square-foot office dedicated to customer loan
processing and call center request and will triple its current work
force over the next year as a result. Of course, the company is
reacting to a growing demand for processing mortgages online, which
happens to have a high customer service element.
In effect, E-Loan is leveraging the Internet in all the right ways and
only where it makes sense to the business (giving customers greater
information, taking middlemen out of the application and transaction
process), while maintaining a serious commitment to the customer
service element of their business, since that can not necessarily be
either outsourced or turned into a self-service, web-based applicaiton
(which may make them completely "virtual" in an operating sense, but
would cause them lost customers in the process).
Autobytel (ABT) recently announced the roll-out of localized field
representation in the form of district managers who will act as
liaisons between dealers and Autobytel. Ostensibly, the purpose of
these dealer service technicians will be to provide ABT with knowledge
about how and why car dealers are using the ABT service and will in
turn help these dealers use the Autobytel service. Since car buying
is inherently a local service, having feet on the street in this
manner, though certainly running against the "virtual" intermediary
grain, makes lots of sense. Again, they are leveraging the Internet in
ways that make sense to their business while acting like traditional
middlemen where it matters. |
