I started a series on the Freemium business model a couple of days back since this seems to be one of the most misunderstood business model among startups. Today we get into number crunching that one needs to do to make the Freemium model work.
As with every business, the ultimate goals is to make money, be profitable, grow revenues and become self-sustaining and cash-flow positive at the earliest. However, depending on which stage the business is in, the metrics that you use to decide for or against Freemium can be different. The only number that really matters when you are starved for cash For an early-stage bootstrapped business, it is very important to stay afloat and stay cash-flow positive. In such a case, one really needs to have a compelling reason to implement Freemium. For such a business, it is extremely important that Marginal cost to maintain a user = 0 (or close to it) It is important to note that marginal cost is the delta that an extra user adds to your operations and will not, in general, include costs which go into maintaining the user base but are not a function of it as such. E.g. in case of Youtube, bandwidth costs per user are marginal for viewers and storage costs are marginal for contributors. One of the reasons Freemium might not be a great model to start with at an early stage is that it is very difficult, near impossible, to have marginal costs close to zero. Segmenting and Pricing correctly to have a profitable user base While analyzing new ventures as part of what I do, I have a bias towards always starting with analyzing the per-user economics before I look at any other numbers. After all, if the per-user economics themselves don’t make sense, it is impossible for the business to turn profitable and stay cash-flow positive. In case of Freemium, the per-user economics maps out as follows: ARPU: (No. of paid customers*Price per customer) / (No. of paid + No. of free users) Compare this with the average cost of maintaining a user. Note that this is NOT the marginal cost! To be talking about the right numbers, it is very important that one understands the difference between these two. Hence, the first step is to ensure that ARPU > Cost of maintaining a user An important point here is that while the ARPU calculation may look fairly straightforward, it is an extremely tricky proposition when a business is still planning on going Freemium since one needs to estimate the percentage of the user base that will actually pay for the product to work out this calculation. Estimating the paid user percentage can be as much of an art as it is a science. There are two key elements to doing this correctly: 1.Segmenting your market correctly Segmentation of your market is more important than ever in case of a Freemium product. Firstly, it is important to figure out upfront the exact user profiles who will want to pay for the Freemium product. Secondly, it is very important to size exactly those user segments. After all, you need to be sure that there are going to be a certain number of user segments who clearly will be compelled to pay for your product and that their numbers lead us to the kind of ARPU that we would like to have given our costs. 2.Finding the right price point More often than not, your paid% can really change with the price point that you set. Firstly, it is important as a business owner to understand whether your market is a price-sensitive market. Second, irrespective of whether the market is price sensitive or not, it is important to get the pricing right so that you cover your costs well (per user as well as for the business as a whole) and are still perceived value for money. I could go into a long discussion about the various ways pricing is done depending on your market, product and operations but we’ll save that for another post. In a nutshell, cover your costs and talk to customers often to reach at the right price point. An important point is that this is not just a one-time activity. This number crunching needs to be done over time because average costs, unlike marginal costs, will definitely change over time as the business develops scale and efficiencies. Also, per-user economics is only a starting point. Over time, the business should show signs of profitability as a whole (i.e. profitable on the entire cash base). So far so good! We now have some of the numbers that make a sustainable operating business with the Freemium model. However, we’ve left a third important element. What about the cost of Customer Acquisition? Maintenance costs are important but often, the biggest cost bucket for a growth business without a brand to leverage is the cost of customer acquisition. Simply defined, the cost of customer acquisition is the amount of money that the company needs to invest to get a paying customer. If you think about it, Freemium is not just a business model; it is also a marketing channel. “Try and Buy” has been an age-old marketing technique ever since hawkers started giving out samples of the food they cooked to passers-by (which also makes it my favorite marketing technique from a consumer perspective ). Most models on Freemium eventually want to entice users into paying for it. Hence, it is important to see that the cost of customer acquisition via Freemium is lower than the cost of customer acqiosiiton in a pure subscription model where the business would have indulged in other marketing, tiral and awareness activities. In this regard, there are 3 important numbers to look at 1. Number of Paid Customers 2. Number of Free Customers who wouldn’t pay if the free service ceased to exist 3. Number of Free Customers who would probably start paying if the free service ceased to exist It is important to make the distinction between 2 and 3 because by running a Freemium, you are possibly losing out on revenue that you would have got from customers in 3. Hence, the final very important calculation that you need to do is: Revenue from paid customers > Customer acquisition costs through other channels + Revenue from customers in 3 You need to have an estimate of customer acquisition costs from other channels. There is no general rule to that and it really is about how much of marketing, branding and other activities you would need to do to get to the same customer base.
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Freemium is a much debated topic among startups as few companies have really done it well. MailChimp recently went on record talking about its great success at implementing Freemium though the author also claims that there wasn’t a great deal of science to their success. While a lot of MailChimp’s decisions seem to have been based on gut, instinct and a thing for Ben & Jerry’s free ice cream, they don’t deny the fact that a lot of thought does need to go into Freemium.
To start with Freemium, while a very “internet” term, is not a new concept. It simply refers to a model where basic services are free and access to premium services is at a price. It is important to note that the free users and the paid users are essentially from the same group of users. A website which is free to the students and charges access fees to the teachers is not a Freemium model. Most startups end up messing up a Freemium implementation because the reason they implement Freemium isn’t correct in the first place: Case 1: Some startups put on Freemium because a subscription model doesn’t see significant uptake for them. Not every product can support a Freemium business model. There are two very basic criteria that a product needs to meet to go Freemium: 1. The “free” service should have real value to build a user base. The free user should get real value out of the product rather than feel restricted. There should be at least one critical action he can successfully complete with the product without hitting “Pay Now” banners at every point. 2. The “paid” features should add substantial value to the “free” service to be compelling for users to pay for it. a. Some of the best examples are file sharing services like Rapidshare where the free service gives you a taste of what you can get but the paid service gives you significant advantage in terms of download time, broken downloads and parallel downloads. b. The worst examples of Freemium are cases where the core service is delivered free and other VAS is charged for. In this case, the VAS is a luxury and not a need. Case 2: Some startups think of Freemium as an architectural model rather than a business model. They go ahead and try out Freemium just because it is as simple as turning some features ON and OFF based on login and because their site is already architected for such performance. To start with, Freemium is not something that works for every product just because you have the ability to restrict access to some features. More importantly, Freemium is not about features, it’s about workflow and access. Before implementing Freemium, it is important to do the following product analyses:
Case 3: Some startups, having failed with subscription, believe that Freemium is something they should just try out since; after all, there is nothing to lose, by opening up some of the product to trial users. Yes, it worked for MailChimp but you can’t just “try” Freemium without doing some number crunching first. There is a cost to maintaining a free community. As in every business, an analysis needs to be done to ensure that the ARPU exceeds the cost of maintaining a user in the very least. Facebook recently displaced Orkut as the top social network in India. This is no mean feat. Social Networking is one of the few spaces where a first-mover advantage can mean a lot. The network efficiencies and advantages built up by the first mover are not only difficult to replicate, there is also rarely any reason for users to migrate from an existing network to another. This point was clearly lost on the hundreds of random social networks that mushroomed in India in the 2005-07 period. Social networking is usually a winner-takes-all market and for Facebook to come in, well after Orkut was well-established, and to wrest the advantage away from it is a huge deal. Orkut was the first real product that brought social networking to India and very soon, it meant for social networking what Google meant for search. “Orkutting” caught on as a term. One must note that this rarely happens in the internet industry. With such a large clutter of sites to choose from, a particular site rarely defines its category in a way that Orkut did in India. When a site starts defining a category, it is extremely difficult for another site to, not just overtake it in terms of usage but also start definiig the category. In fact, more people I know spend their time Facebooking that Orkutting these days. How did this happen? What worked for Facebook? How did it manage to pull something like this off? I’ve often asked people around me why they made the transition. And here’s what I gather from my conversations with other users: Bringing Privacy into the market: The Indian male stalker psyche definitely helped people move towards Facebook. The fact that everything about you was so public with no privacy settings whatsoever on Orkut was highly unnerving for a lot of users, especially girls who received random friend requests from unknown wierdos. Facebook’s privacy feature was the first real antidote to that and prompted many to move to Facebook. Sure Orkut did that too soon after but that was the start of Orkut getting into a “Copy-that-Facebook-feature” spiral which didn’t win them a lot of respect with the users. Everything under one roof: Facebook in its current form, had it not been so successful, could probably have been used as an example of clutter in user experience design workshops. Strangely, the fact that users could do everything from managing their pictures to playing games in one place really helped. Features were rolled out in a phased manner. For users who were already addicted to the site and comfortable with the interface, it probably wasn’t feature overload as much as it was some added utility. Social RSS: That’s how I would like to refer to the concept of Facebook feeds. While the Orkut design centers around the user and gives him a view of the network with himself at the centre, Facebook gives a more non-centric view of the network featuring feeds from all his friends at various points of time. I have a feeling this could just have clicked for the Indian psyche where everyone loves to know everything happening in everyone else’s life. I won’t have any data to support this but I will have a hard time believing that the average Facebooker in India doesn’t like this feature. Social Gaming: Social gaming is the most time-consuming activity on Facebook and many game developers continue to side with Facebook ignoring Orkut. While this may not have been the main drawer in bandwidth-starved India (or so we would believe), it definitely had a major impact in appealing to the next generation of net users, especially the ones who became active netizens towards the middle of this decade. Many believe that this was waiting to happen given a similar trend in Asia where Facebook displaced Friendster, the #1 social network in most SE Asian countries a couple of years back. The reasons for Facebook’s success in S.E. Asia were much more different though, riding largely on a very well-designed mobile app. S.E. Asia continues to thrive on mobile access to the internet and Facebook’s success here was less about the product and more about the added convenience of mobile access. Facebook is an interesting and rare example of a late entrant taking the market by storm, redefining the rules (Facebook Connect, Open Like) and eventually dominating the market. Google did it a decade ago in a space which no one was too interested to enter in. Facebook succeeded in doing it in a space that everyone was too keen about and some were already dominating. And like Google back then, Facebook with its virtual currency platform may just lead the way to ,monetizing it as well. e-filing of taxes has seen significant growth over the past few years (136% YoY for salaried professionals) making it one of those apparently lucrative internet spaces with a clear revenue model and steady growth year-on-year riding offline regulatory changes. However, the numbers don’t reveal the challenges that still remain in the Indian e-filing space which need to be addressed for players to really win in this space. 1. Seasonality of revenues: The first thing that strikes one about the e-filing business is the seasonality of the business model, the fact that tax filing will invariably experience a spurt during a particular time of the year. If e-filing is just one of the many businesses that a company is into, then this shouldn’t hurt too much but if this is the only business that a startup does, then it clearly needs to look out for a sustainable model to make money during the rest of the year. 2. Cost rationalization for computing hardware: While seasonality of revenues is an important factor, there is another challenge very particular to the tax business. All e-filing sites see a sudden spurt of usage towards the end of the filing season. The last few days of the filing season see astronomical growth day-on-day in the number of filings and the last day invariably witnesses the most number of taxes filed. The huge spurt in traffic and activity towards the end of the filing season requires a lot of computing and processing hardware. However, this hardware is hardly used during the rest of the year when traffic is either stable or low. When one invest in all the hardware, what does one do with it during the rest of the year? 3. Is this a consumer business? The answer must seem obvious. Of course it’s a consumer business. Consumers use the product and consumers pay for it. The reality though is that this is a business where the bulk of the customers currently are coming through on account of enterprise deals. Tax filing services strike deals with employers and pass incentives to the respective employees to use their services. For most startups, less than 5% of their customer base files taxes directly through them. The rest of the base is acquired by the employer channel. The problem with the employer channel is that it is very difficult to scale it and there is no way it will ever see the organic growth that a direct-to-consumer business will. This might be a great channel to get your first couple of hundred thousand users but how does one make it a sustainable growth story beyond that? 4. Trust: In a country like India, trust continues to be an important factor and people are more comfortable taking the extra pains to file taxes offline where they can actually meet a tax consultant. An online brand needs to build trust to really penetrate the market and that trust can never be built by a series of campaigns in the tax filing season. A presence needs to be created in the consumers’ mind all year round and, if possible; the company needs to establish itself as a champion of consumer financial needs by offering other financial services rather than just a tax-filing service. This is not to say that players will not make good money in the meantime. For a 5-10 member team running a tax website, a million dollars of revenue is good money. However, to make a business that can really scale organically, capture the fancy of investors and create an impact in a crowded market of players, one needs to address these challenges successfully. Nokia Beta Labs recently announced the launch of Nokia Listings. The application’s purpose is to connect buyers and sellers, as well as employers and job seekers, via mobile phones – thus acting as a digital local marketplace.
It features three major categories of listings: 1. Buy & Sell 2. Jobs 3. Local Services Nokia mentions that 60% of the hiring and consumer-to-consumer transactions, like apartment rentals, in emerging markets (like India) currently occur via word-of-mouth or through middlemen who charge a hefty commission for their services. Nokia aims to bring a digital marketplace of sorts to users of basic mobile phones (Series 40) without the need of GPRS connections. While this is great on paper, I am really unsure that the Indian digital consumer is evolved enough to start using digital marketplaces actively. Here are a few reasons: 1. C2C marketplaces in India: Attempts at forming C2C marketplaces haven’t been very successful in India. Baazi might have been a success to some extent but the trick to forming a successful C2C marketplace is to simultaneously get a good base of buyers and sellers. Running deal sites is far simpler where you can artificially (non-organically) source deals from businesses and then get an interested audience for the same. Hence, it remains to be seen whether this attempt works. 2. Mobile Local Search in India: Zook, Google, Yahoo and others have unsuccessfully tried to create a mobile local search service. In a country like India where data is rarely standardized (and hence, not easily searchable), starting a local search service over SMS is all the more difficult where you have to return the correct answer within the top 3 results. Starting such a service where the publishing is also over SMS could increase complications as implementing search can be tough if the database itself isn’t content-rich 3. Inherent challenges with solving certain problems: a. Job search on mobile: In a job market as evolved as India, it is difficult to fathom aa job classifieds service doing well on an SMS-based phone. A full-fledged app experience may still help but over SMS, anything beyond pushed alerts may not really be of value. Also, I don’t see job search as being as critically needed over a mobile device as is local search since you may need to know about the nearest restaurant on the move but you can still wait to get on to the web to figure out your next job jump. I do believe mobile becomes more relevant in a case like that of Babajobs where you are catering to the job needs of a segment that doesn’t have access to the web. b. Real Estate marketplace: Nokia believes that a C2C marketplace may do away with having to deal with brokers in finding apartments for rental etc. In a country like India, I don’t see that happening too soon. People still don’t use digital marketplaces while advertising for real estate. In fact, most advertisements on existing classified sites like Makaan and Indiaproperty are by brokers. Hence, while marketplaces solve for aggregation of an otherwise scattered listings space, they do not yet solve for disintermediation. This is not the first time that a digital marketplace has been launched on the mobile phone. CellBazaar in Bangladesh was among the first such services to launch an SMS-based marketplace in partnership with Grameen Mobile. However, the company learnt soon enough that the service wasn’t easy to use on SMS. Over time, they moved to a web-based service and the SMS marketplace ended up becoming a means to get a new customer onto the marketplace who would then typically migrate to the web version for future usage. It remains to be seen whether a mobile-only marketplace will kick off well. It will be interesting to see how Nokia Listings gets traction and whether it tries anything different to break the above constraints. Amazon Weds Facebook and you get that feeling of “Finally!!!” when you see a two obviously compatible people hanging out at the same pub but not hooking up for some unknown reason for ages. Ever since websites started showing us what our Facebook friends liked (sometimes in irritatingly irrelevant contexts), I was just waiting for Amazon to do the same. After all, wasn’t it most obvious that the company which tapped into community intelligence before the whole social media hoopla kicked in (“Users who liked this also liked that…”) should be the one cashing in on a user’s actual network to mine similarities and give gift suggestions?
The integration does solve for some basic social shopping scenarios at the moment. Gift recommendations and gifting alerts are probably the most basic way in which Amazon can use the Facebook network data. But the real value of this alliance can come through only if Amazon successfully understands relationships on Facebook based on common activity, location, likes and dislikes. If most of the people in my network listen to Coldplay, the chances are fairly good that I like the band too. However, if Amazon can really get to a point where it can segregate common interest friends from work/school connections and both the above from random friend requests one may have accepted, the product recommendations can get very relevant. The amount of positive recent activity with another friend should also be a good indicator of how much I would value that person’s interests as well as how likely I would be to buy something for them. What is good is that unlike a lot of other Facebook integrations, Amazon is not publishing data back to Facebook. Given the recent spate of controversies around Facebook’s privacy stance, this will definitely help spur the uptake of this opt-in feature. Great partnership that was waiting to happen! I hope this really works out well for the good of all of us who love shopping online. My earlier article on Saas applications was largely about Saas applications that focus on productivity. The benefit of those apps is to allow users to ‘outsource’ their IT needs using a hosted service, thereby resulting in a lower TCO. While Saas and hosted applications did set out to primarily create that benefit for users, it is unfortunate that most people who think of Saas limit the definition to just that.
In today’s world where the ‘community’ aspect of the internet is over-emphasized to a fault, it is only logical for productivity apps to incorporate that aspect. Business, after all, is about interactions with your network and productivity, largely depends on how best one can source and manage these interactions whether these interactions are with consumers, buyers, suppliers or with internal employees for a firm. Saas allows such interactions within the context of an application much better than desktop software ever could, owing to its very nature as a hosted service. There are two models in which the productivity and community aspects of Saas can be deployed: 1. Productivity apps on a Social Networking platform This is the more obvious (and widespread) model. A social network with an engaged user base is a great hook for developers to create apps. Most general-purpose social networks primarily serve as a place for entertainment and casual connections but there still are a few apps that solve use cases like: · CRM on a social network: Enables small businesses to engage with their clients and keep a tab of the latest updates at their client’s end with relevant analytics · Partner management apps: These work more on niche social networks that are targeted towards business networking. E.g. YouCanDo.Biz is one of the best examples of business apps enhancing the value of a social network 2. Productivity apps with social features: · Several CRM apps, in particular, plug into your existing social networks to update customer information on the app based on his live feeds. Hence, if your customer is also a friend on Facebook, all details relevant to him will be analysed and extracted from his feed and added to the app · Several HR management apps, especially those into recruitment management, are closely integrated with LinkedIn to manage a constant inflow of leads based on the HR exec’s requirements One would expect marketplace apps like Alibaba and Indiamart to go several steps beyond the basic client discovery nad lead generation service that they provide to include online client management apps. While sites like YouCanDo.biz are attempting something similar, Alibaba, with its already mammoth user base would be the ideal platform to deliver this and potentially open itself to new business models by bringing the entire transation and client management process online. Zoho is clearly a leader in the social Saas space but its customer base is largely non-Indian. The only Indian website providing a productivity app to businesses over a network (at least, the only on that comes to mind) is probably Burrp Small Business Solutions which helps small businesses connect with their customers, get interesting analytics around what customers are saying and run marketing campaigns among target customers. As more businesses come online, this will be an interesting space to look out for. Saas is widely touted as the one big driving force that will expand the market for business software by satisfying the latent demand among SMBs at rates that they can afford. The promise, though, hasn’t been fulfilled yet, especially in emerging markets. Saas adoption is still largely driven by large enterprises which are essentially simply diverting budgets from legacy systems to Saas.
For Saas to really find adoption among SMBs, it is important that one understands the nuances of this segment. I believe that SMBs, like enterprises, have vertical-specific needs and creating vertical-specific Saas products is critical to managing data and processes. Saas essentially brings in two advantages: 1. Productivity: Saas is a hosted model seeking to replace legacy data and process management software and I believe that the evolution and adoption of Saas among SMBs should logically follow a path similar to the one followed by legacy systems in large enterprises. 2. Productivity + Network: While the hosted model helps reduce TCO, it would be a terrible waste of the potential of the internet if Saas products didn’t simulate business relationships online. In Part 1 of this analysis, I will largely be focusing on the Productivity aspect alone and will discuss the network aspect in a follow-up blog post. Information Technology, in the pre-networking and communication days, evolved out of the need for better data management. The basic use cases that any information system seeks to solve are the following: 1. Data Storage 2. Data Search and Retrieval 3. Data Mining and Analysis From the early days of IT, the industries consuming maximum IT infrastructure have been industries which had to deal with large volumes of data and large churn in these data volumes. I believe that SMBs which so far could not afford legacy solutions would need Saas to solve similar needs that were and still are solved by legacy IT at large enterprises. 1. Banking and Consumer Financial Services: a. Rationale: Banking continues to be the largest consumer of IT. Not only do banks manage huge amounts of data, they also experience high churn in data in the form of daily transactions. Data storage is critical but so is retrieval. Also, financial services firms (even the smaller ones) are usually run by well-educated managers who are more likely to understand the importance of Saas. b. Risk: The challenge is that most banks require the data that they manage to be stored within their environment and may not be very open to Saas. c. Recommendation: Saas could be an important model for non-banking service providers which could include brokerages, MFIs and other smaller players in less regulated FI verticals. 2. Healthcare: a. Rationale: Healthcare again has great need for data storage as there is a lot of churn in terms of patients moving in and out. More importantly, since patients are fairly loyal, data retrieval and management needs are also high. Also, healthcare is a recession-proof business which augurs well for anyone providing Saas services to this vertical. Healthcare has a long tail of clinics and nursing homes which cannot afford sophisticated IT making Saas an ideal model for serving them. Add to that the fact that compared to other SMB owners, doctors are much better educated. b. Recommendation: Hospital management is fast becoming popular among smaller nursing homes and Saas is a great model for the same. Patient data management for smaller clinics and hospital resources management for larger nursing homes could be interesting spaces to watch. 3. Education a. Rationale: Education is a recession-proof business and the number of small educational institutions has been on the rise. Process management is important in education institutions but the Saas applications that might have most potential could be in the area of e-learning for education systems to use the internet as a disctrbution channel. Any Saas apps that help them create education modules fast and disburse it over the net may have good potential. This is especially true while targeting the long tail of individual tutors who might want to look at the internet as an alternate revenue stream. b. Risk: Not a deal-breaker but data management problems are not quite as complicated as in BFSI or healthcare owing to lesser churn. Hence, Saas need for internal processes may not be too high. c. Recommendation: Saas models that help create e-learning modules could find high adoption. 4. Retail: a. Rationale: Sheer numbers should be enough to make IT vendors run to this vertical. Retailers have huge data churn managing sales and inventory. It is important to understand the use cases that can be solved by Saas and those that can’t. E.g. POS terminals are fairly inexpensive as desktop products and need to have continuous uptime which is why Saas might not be a great model there. Hence, it is important to identify the right pain points for retailers that can be served by Saas. b. Risk: Sadly, retail is a largely unorganized industry and it can be very difficult reaching the long tail. Labor is cheap and any Saas model that simply seeks to replace labor without adding intelligence won’t do very well in emerging markets. Most importantly, retailers are largely mom and pop stores and the level of IT awareness is very low compared to the other verticals. c. Recommendation: Given that broadband doesn’t exist among the long tail, mobile could be the model of delivery AOL’s recent sale of Bebo was all over the news last week for all the wrong reasons. AOL has had an unenviable track record of killing acquisition value for quite some time. Bebo, bought for $850M a couple of years back, was sold last week for under $10M to Criterion Capital Partners. AOL may go around justifying this deal giving it a “meaningful tax deduction” but the ridiculousness of the value lost cannot be ignored.
For some reason, media companies have never done a great job of managing internet acquisitions in general and social networking sites in particular. Murdoch’s NewsCorp paid $580M for MySpace and ended up paying another $450M last year as impairment charges! Along similar lines, ITV (a British TV group) did an AOL when it sold off Friends Reunited for 25M pounds after acquiring it for 7 times that price. Acquisitions regularly destroy value across industries but one of the main reasons the success rate is that much lower with media companies acquiring internet companies is the inherent culture clash. Most internet startups, if bought early enough, are a group of T-shirt-and-shorts-sporting geeks-in-a-garage who iterate quickly, learn quickly and build quickly. Most media houses, on the other hand, are slow-moving, largely-family-owned with large stakes owned by which refuse to move without the customary bureaucracy and paperwork. The culture shock is immense, the bottleneck theory kicks in and the combined entity is only as fast as its slowest entity. One of the main reasons acquisitions in the social networking space, in particular, have killed value has been the lack of post-acquisition integration strategy. Social networking took the world by storm a few years back and every media and internet giant wanted to have it in their portfolio. No one was quite sure why! Some wanted to have a “social networking strategy”, others wanted to have a “Gen Y strategy” but no one was quite sure how they were going to integrate a social networking site with the rest of their products. A case in point is ebay’s acquisition of Skype. While Skype may not fall under the social networking umbrella, ebay ‘s acquisition of Skype wanted to fundamentally do what most social networks do… help its users connect and share information better, and of course, given Skype’s capabilities, add the voice channel. Though not an AOL-Bebo story in pure numerical terms, Skype left the ebay canvas without registering much change for ebay largely because ebay had no clue how to go about integrating its multiple online shopping platforms (many of them country-specific) with Skype. As for AOL, it remains to be seen how many value-destroyed acquisitions they have to spin off before they return to being a growth story! AOL’s recent sale of Bebo was all over the news last week for all the wrong reasons. AOL has had an unenviable track record of killing acquisition value for quite some time. Bebo, bought for $850M a couple of years back, was sold last week for under $10M to Criterion Capital Partners. AOL may go around justifying this deal giving it a “meaningful tax deduction” but the ridiculousness of the value lost cannot be ignored.
For some reason, media companies have never done a great job of managing internet acquisitions in general and social networking sites in particular. Murdoch’s NewsCorp paid $580M for MySpace and ended up paying another $450M last year as impairment charges! Along similar lines, ITV (a British TV group) did an AOL when it sold off Friends Reunited for 25M pounds after acquiring it for 7 times that price. Acquisitions regularly destroy value across industries but one of the main reasons the success rate is that much lower with media companies acquiring internet companies is the inherent culture clash. Most internet startups, if bought early enough, are a group of T-shirt-and-shorts-sporting geeks-in-a-garage who iterate quickly, learn quickly and build quickly. Most media houses, on the other hand, are slow-moving, largely-family-owned with large stakes owned by which refuse to move without the customary bureaucracy and paperwork. The culture shock is immense, the bottleneck theory kicks in and the combined entity is only as fast as its slowest entity. One of the main reasons acquisitions in the social networking space, in particular, have killed value has been the lack of post-acquisition integration strategy. Social networking took the world by storm a few years back and every media and internet giant wanted to have it in their portfolio. No one was quite sure why! Some wanted to have a “social networking strategy”, others wanted to have a “Gen Y strategy” but no one was quite sure how they were going to integrate a social networking site with the rest of their products. A case in point is ebay’s acquisition of Skype. While Skype may not fall under the social networking umbrella, ebay ‘s acquisition of Skype wanted to fundamentally do what most social networks do… help its users connect and share information better, and of course, given Skype’s capabilities, add the voice channel. Though not an AOL-Bebo story in pure numerical terms, Skype left the ebay canvas without registering much change for ebay largely because ebay had no clue how to go about integrating its multiple online shopping platforms (many of them country-specific) with Skype. As for AOL, it remains to be seen how many value-destroyed acquisitions they have to spin off before they return to being a growth story! | AuthorA curious cat, online at odd hours, trying to figure out why some companies don't suck and how to be one of them! ArchivesOctober 2010 CategoriesAll |
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