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August 31, 2005
YAMNO and AOLMNO
I mentioned in my last post that Google is well positioned to be a big LMNO. I subscribe to Business 2.0, but the latest copy has been stuck at the bottom of my pile. Last night I read Om Malik’s Googlenet piece. Read it if you haven’t yet. It’s a great summarized version of what I was trying to say in my last post. (Om is a much more efficient writer than I. ;-) It was so interesting that I wish his editor had given him another page to go into more detail.
Basically, it solidified my conviction that Google can be the interface that enables users to find anything from any source through a network of other users via every communication protocol available. Owning the network makes perfect sense. It also made me think that Google really doesn’t have to buy Skype. It can build a viable competitor itself because they have so many assets that could be rolled into it that Skype lacks. So, disregard the bit about Google buying Skype in my last post. TellMe is the only company they really need to buy in that regard. Love that company.
I mentioned in my last post that as well positioned as Google may be, Yahoo and AOL are better positioned in a lot of ways. I am thinking about how valuable Yahoo’s assets are within the LMNO construct. If communication is evolving to include media that people create, borrow, augment and attach themselves to in order to represent themselves and all that content needs a transactional platform to enable that communication, then Yahoo and AOL have a lead over Google at the moment. The difference is Yahoo Messenger and AIM. AOL, Yahoo and Microsoft have the same opportunity available to them, but I like Yahoo and AOL because although MSN Messenger has more users than Yahoo Messenger, Microsoft is really still more of a software company. Yahoo and AOL are more media companies, so I give them an edge. I personally like Yahoo coming from 3rd place in the IM wars, because they have more to gain.
YAMNO (Yet Another Media Networking Operator)
Here is a simple way to look at Yahoo’s and AOL’s opportunity: Intelligent IM. There are two things needed to build Intelligent IM – a smart host and intelligent routing.
First, all IM clients should have a smart host built in. If you use AIM, create a buddy named SmarterChild and send it a message. It’s a bot that can tell you stuff like weather, movie listings and what time it is in other cities. It’s pretty useful, but if you were to plug in all of the media assets that AOL and Yahoo have, it would be unbelievably cool. Conversagent is a cool company that is sort of the IM equivalent of TellMe, but better in a lot of ways because the interface can offer more information faster.
Second, break the buddy links. Yes, you can search for people on IM, but it is kludgy and doesn’t utilize the primary interface which is the chat window itself. Also, it should be passive. Look at Wondir. Great idea, bad UI. "User-generated questions and answers" just doesn’t make sense as a website. But what if you could distribute those questions automatically to the people who are best qualified and who have opted in to answer them? You would type a question into your IM client, “What’s the best Thai restaurant in San Diego?” and it would be routed to a smart agent that would compare the content of the question and your profile to the profiles and preferences of all other users and send the message to several active users. They would see a message from the smart agent saying “a user wants to know ‘What’s the best Thai restaurant in San Diego?’” One or more (or none) of those people would quickly respond with, “Royal Thai downtown” or “Taste of Thai in Del Mar.” Because the smart agent is tied into the extensive Yahoo media network, it not only understands and indexes the content so that “Royal Thai” is a clickable link, but it also learns over time. You could also choose to make a connection to people: “Do you want UsernameBlah to be added to your buddy list?”
Now plug in all the vertical services that Yahoo has and it would be ULTRA cool. If the agent can answer the question directly, it does. Otherwise, it connects you to the right source. Use it to look for a date, a house, local news or some new music that suits your taste based on your profile and best of all get it from someone who has taste similar to yours.
The result is a true media networking tool. I would like to see the IM giants rev their products in this way instead of baking in VoIP clients, though even that makes sense because it is one more mode of communication. “Click here to dial this restaurant’s number to make a reservation” becomes a cool new feature.
BTW, this is exactly what our platform does and is a cornerstone of the LMNO concept. It is baked into Rabble and affects search results transparently to users, though the next version is when we turn on most of the other really cool functionality. We did this to increase relevance in a small form factor with short session lengths typical of the mobile space, but also because there is a bunch of information being created at the edge of the network that isn’t being captured and optimized. Nobody is really looking at communication this way, but it is clearly the future. We just happen to do it in a mobile environment because we're good at it and we think media networking is more valuable when your device is your remote control to the world around you. That is true of my smartphone, but not my laptop. We are integrating with a lot of companies along these lines. I’ll talk more about that in a future general update post after most of those deals are integrated.
Posted by Shawn Conahan at 04:35 PM | Comments (2)
August 29, 2005
How Many Pieces In A Google Pi?
Pi is a small number with a lot of decimal points after it: 3.14159265 etc., which apparently goes on forever. Google’s new issuance of shares, 14,159,265, is a large number with no decimal points after it, which apparently goes on to be worth about $4 billion in cash. (See how the number of shares they are selling is the same as the first eight decimal points of Pi? Get my clever/stupid blog title now?)
When I think Google, I think “search.” I don’t think community applications, social networking, VoIP, software, email or digital music. “Googling” is “searching.” For this reason, I think there is one piece in a Google Pi and it is Search. But what does search look like in the future?
Let’s assume that the reason for Google’s new issuance isn’t that they consider their stock overvalued and therefore just took some money off the table. Let’s further assume they raised the cash to make some acquisitions. What would they buy?
Google sure is a great company. With sales of $4.5 billion and trading at more than a 17x multiple, they have an impressive market cap of roughly $80 billion and with a ~32% operating margin they are generating well in excess of a billion and a half EBITDA annually. So figure they’ve got around $3 billion in the bank. Add another $4 billion to get $7 billion and you start wondering why that is the right amount to execute on their apparent plan to grow through acquisition. You can buy a lot of small companies with $7 billion, but the integration cost is too high if you buy too many, so you do it sparingly. A company like Google buys a small company when they are building a new value chain and have some links missing and their build/buy analysis points to buy. You cannot buy a big company because they are simply unaffordable. MSFT: $291B. EBAY: $52B. YHOO: $47B. (BTW, I personally think YHOO compared to GOOG is undervalued, and if you look at the fundamentals of each, you will likely agree. Same revenue, better profit margin, lower multiple. Is a search company really valued on “search” or is it valued on how many ads it can sell against its inventory? I just convinced myself to buy more Yahoo.)
So that means Google is most likely going to buy some medium-sized companies in areas that move the revenue needle measurably and some small companies where there is a strategic fit to build new value.
This post is divided into the three major strategies I see that Google could execute to fuel growth through acquisition:
1) Buy more inventory
2) Focus on International
3) Focus on Local Search
…plus a fourth area that I think ties them all together that I just know a major player is going to figure out sooner or later and it might as well be them. That is:
4) Be the largest LMNO.
1) Buy inventory in different forms
Medium-sized acquisition top pick: Skype. (Yes, me and everyone else, but this only really makes sense to me if Google also buys my small company acquisition top pick, TellMe.)
There is some speculation about Google buying Skype.
What would it give them? Skype kicks much ass, and is a truly disruptive technology. Owning Skype is like owning all phone calls in the future. Many more people make a call every day than search for something on the web. Think about the Skype interface. Could you monetize that? I could. And so could Google. Plus it is sticky in a way that Google isn’t if you believe it is possible for a better search engine to challenge them.
What would it cost? Several billion. Math: Let’s say MySpace has around 15 million active users. At $580 million, News Corp. is paying around $38 per user. Skype’s website boasts in excess of 51 million users. If the going rate for user acquisition is $38, then around $2 billion should be about right. But Skype is rumored to have turned down multi-billion dollar offers. So then they are simply not for sale or they believe there is sufficiently massive upside to their business in the future combined with a low enough threat of competition that they can realize larger gains going it alone. In any case, on its own this doesn’t make sense to me unless there is an interface to tie the Google ad-based world to the Skype transaction-based world. For this, I like TellMe.
Small company acquisition top pick: TellMe. I absolutely love this company. It’s the kind of company entrepreneurs wish they had started. Call ANY big company and the annoying but cost-effective “natural language” voice-recognition menu system is probably powered by TellMe. (“Hi, this is Julie. I thought I heard you say, ‘I want to talk to a real %$#@! person.' Did I get that right?”) TellMe is internet-powered telecommunications, and it is the link that is missing between Google and Skype (or Google Talk.)
What would it give them? A telephony-based front end for search. This acquisition makes so much sense to me that I can hardly believe it hasn’t happened yet. If you believe that phones will replace computers and Google with voice recognition would be the ultimate killer app for the phone, then combine this acquisition with Skype and Google can close the loop, essentially owning the whole telephony search value chain in two simple acquisitions. They would have the user relationship, the interface, the network and the inventory.
What would it cost? With revenue around $100 million for the year, a 10x multiple, while generous, would not be out of line, and it might be more than the public markets would represent when the company finally executes on its long-anticipated IPO plans.
2) International expansion = good
Medium-sized acquisition top pick: Baidu. (Yes, more bandwagoning here, but look at the major emerging international markets and you'll see India is unattractive and that leaves China.) Google makes money by selling ads. The more inventory you have, the more ads you can sell. All the hype around Baidu lately whipped up speculation that Google may have to buy them or else miss the gigantic opportunity that is China.
Impossible? A similar thing happened to Ebay, which got its ass handed to them by Yahoo Japan.
The price is looking more attractive now that they have lost 35% of their value since their meteoric IPO.
What would it give them? In the case of international expansion, I would rather see Google spend the money internally on a massive organic growth strategy. Put (a lot of) people on the ground in international markets that matter and grow battle ground by battle ground the way Ebay did. Sometimes you lose, but if you stick to what you do best, most of the time you win. That said, this post is about acquisitions, so I’ll jump on the bandwagon and say Baidu looks pretty good, particularly because as far as international markets go, China looks very promising, despite its highly censored version of the internet.
What would it cost? Google already has a stake in Baidu, so this acquisition makes sense if you think at ~$3 billion, it is worth it to get in on the ground floor (current total online revenue in China: $1.1 billion) of a market that is going to dwarf the U.S. at some point in the future.
3) Focus on local search
Nobody does local search very well, least of all the biggest internet search engines. Because the internet is placeless, relevance ranking is based on how many people link to a site or the traffic it gets or the keywords they buy. Stand on a street corner in New York City and search for “Steakhouse” in "new york" and observe the results. Use Google web and you get Outback Steakhouse, which ignores your location. Use Google local and you get Smith and Wollensky, which ignores your proximity. Try to drill down on Google Local to “Manhattan” and it doesn’t know where that is. I am serious. Google Local doesn’t know where Manhattan is. Try it yourself.
Yes, I am sure there is a Manhattan in the UK, but now we’re back to the need for a relevance ranking engine that is entirely different if Google is going to do local search.
In fairness, it knows Manhattan zip codes, but people don’t know zip codes other than where they live and work. I don't have to search for a steakhouse around where I live because I have tribal knowledge of where I live. This is a major UI problem, and a nontrivial issue that means they are going to build some cool new stuff or they are going to buy someone who puts them seriously into local search.
Medium-sized acquisition top pick: InfoSpace. Recently, investors have proven they apparently don’t see the upside of this great company, but maybe they are simply the piece of a larger company that has been missing. FYI, I objectively believe in this company. I have no financial interest in INSP and sold all of my stock long ago. (At 55 :-P)
What would it get them? A mobile, local bolt-on strategy. InfoSpace has smart people, great assets and a search engine optimized to make their local data relevant. Plug it in to Google Local and slap on a mobile phone-based interface and they instantly become the most relevant search conglomerate in the free world. If you believe local search is the holy grail because owning that “last mile” to enable people to find everything around them gives you the power to become a sort of personal portal to all services that anyone could ever want, then you will see the logic of this acquisition.
What would it cost? With a nice premium, INSP could be had for a little less than $1 billion, which is way less than this company is worth, in my opinion. Plus, with $400 million in the bank, you get a nice rebate on your purchase.
4) Connect the dots to be a huge LMNO
Google could spend the money to be the largest LMNO. They have the technical skill to build a Skype competitor, and the reach to distribute it. Google Talk could beat Skype eventually, if they come at it from a different angle, like voice communication is about Phone Call 2.0, not Skype's Phone Call 1.0.
Here is the GOOGLMNO value chain:
Google Search +
Blogger (distributed network of people plugged into Search) +
Google Talk, Gmail, and [missing: IM and social networking, but they just bought Meetroduction] (most familiar communication protocols to connect people) +
Google Local [missing: Better local POI like InfoSpace] +
Dodgeball (Proximity-based local overlay for aforementioned media networking construct) +
[missing: Mobile thick-client footprint] (distributable addictive mobile communication client that rolls up blogging, social networking, IM, messaging and possibly a Skype-like client all as a front end for their core product, Search.)
Simply put, GOOGLMNO would be the interface that enables users to find anything from any source through a network of other users via every communication protocol available. Interestingly, it isn’t that hard to put together and doesn’t require a paradigm shift in user behavior. More interestingly, Yahoo and MSN may actually be better positioned for this. Most interestingly, IAC, AOL/Time Warner or News Corp. may be best positioned because their media assets add particular value to the future of communication which is really personal networking through media creation, attachment and redistribution.
Posted by Shawn Conahan at 07:09 PM | Comments (3)
August 17, 2005
Inferior Bathroom Technology and UI In The Mobile Space
I am thinking about UI lately, and because of this, I am noticing all of the things with really bad user interfaces that could be greatly improved with a new approach. Particularly, I am noticing things that probably work well in the test environment, but fail miserably in real-world deployment.
My next company
I you want to be a kajillionaire, make an automatic sensor for restrooms that actually works. I travel a lot, and the thing that most detracts from the enjoyability of my trips is inferior bathroom technology. Automatic sensors are used to flush the toilets, operate the faucets and dispense the paper towels. NONE of them work well. You enter the stall and put the little paper gasket thing on the toilet seat, then when you stand up to undo your belt, the damn thing flushes and takes the little paper thing away. You might figure out how to fake out the sensor, but probably not and then it won't flush when you actually want it to so you end up pushing the manual override button. Then you want to wash your hands. You put your hands under the faucet, and…nothing. You wave your hands a bit, then something! Then nothing. More hand waving. A small ration of water vomits onto your hands. Then you see everyone else, down a line of twenty sinks, doing the same thing with looks of mild frustration on their faces. After that maddening experience, you have to wave your hand in front of the paper towel dispenser and it dispenses ONE piece of paper, which is insufficient, but when you wave your hand again, nothing. Wait five seconds, wave your hand again, then one more piece of paper. A queue of people builds up behind you. Out of the corner of your eye you see a guy quickly walk out with wet hands, wiping them on his suit pants.
To me, airports are for rushing through, and the bathroom technology not only slows me down, but it adds indignity and frustration to the process. This is because it doesn’t quite work the way it might work in another environment like, say, the manufacturer’s showroom where they are using the product in a very different way. I don’t think any salespeople are actually demonstrating the auto-flushing toilets.
The mobile environment is like an airport bathroom – it requires a specific technology approach to accommodate a specific use case that is very different from your bathroom at home. The current technology meant to enable us, while nifty, actually slows us down.
Mobile applications are different
Mobile application development is constrained in ways that web development is not. The browser environment is relatively stabilized and robust now, whereas the mobile phone only recently could do anything but ring. There is no real “platform” - every handset is unique in its own beautiful way, often requiring reverse engineering to find workarounds. Last week, we discovered and reported manufacturer defects on five handsets and had to engineer creative ways to work around them. (How is it that we are the first to discover these things? Happens all the time.) For Rabble, we essentially maintain a different client codebase for each handset class ID, and often for each handset within a class ID.
Not only is it difficult to do, requiring technical domain expertise that not every hacker possesses, but the environment itself is different, requiring a fundamentally different approach to technology, architecture, presentation and most importantly, User Interface. Rabble has been in development for a year. Sounds like a long time for a blogging and social networking app, doesn’t it? How about cramming that app into a 200k payload, working around caching limitations which are all different across hundreds of supported handsets, overcoming network latency issues unheard of on the web and doing it all in a presentation environment that requires creative solutions to the problems that are among the easiest to solve on the web? Now do it with 1.5 inches or less of screen real estate in a way that is logical and useful for the consumer. The coding was done in a few months. It’s everything else that goes into bringing a product to market that takes time. This is the kind of time I wish the automatic bathroom flushing people would have spent.
Be careful if you think that your website is going to be relevant in the mobile space because you may be asking for disappointment. Your functionality might be very relevant, but your success will depend much on how you present that functionality to the consumer. You cannot effectively render a web page on a mobile device. The 18 inches of landscape point-and-click multi-purpose real estate you have on the web simply does not translate to the 1.5 inches of scroll-and-select single-purpose real estate you have on mobile devices. Oh, and session lengths are measured in seconds, not minutes or hours. Thinking that a user is going to fire up the browser on their mobile phone and get any real utility out of an application developed for the web is like providing inferior bathroom technology – you will slow them down and frustrate them to the point of losing a customer. Imagine viewing this site on a 1-inch screen.
I counted 158 things to click on. You cannot do “portal” in the mobile space.
Rules for mobile app development
I want to see more companies provide mobile applications, but I want to avoid the lameness of the internet bubble when you could go public with a “dog food service provider.” Just because you can make a mobile app doesn’t mean you should. Behold my contribution in this regard: Shawn Conahan’s Rules For Mobile Application Development…
Start with UI and work backwards. This is the era of single-purpose applications. They must be extremely well thought out, provide vertical functionality with minimal navigation options or requirements and still be visually compelling. Do not try to replicate an experience from somewhere else. If you can’t make it work with very small storyboard mocks, (we do ours at actual size to pass the “squint test”) then you may simply have an idea that won’t work in the mobile environment.
Consider the input device. DigitWireless' Fastap is going to help text input-based applications. The HipTop is even better, and possibly the coolest device in the mobile space. While you shouldn’t underestimate the amount of free time a teenage girl has to spend with her mobile phone, there is no reason to make life more difficult for her. The best mobile apps are built with the hardware in mind. (Rabble on the HipTop will be a great user experience.) Like bathroom technology engineers, many handset manufacturers aren’t thinking about the total use case of their handsets. Many manufacturers still don’t ship their devices with things like multiple keypress. This has implications if you are building a game which requires you to be able to move your spaceship and shoot at the same time. The Motorola T-720 was a big seller, but the soft keys don’t map to anything in BREW, making it a difficult handset to develop for. Keep these sorts of things in mind across the hundreds of handsets you will need to support.
Get mobile domain expertise. There are many web-based businesses that could be very successful in the mobile space if presented correctly. The most important presentation element to keep in mind is how mobility augments your functionality. Internet dating is cool, mobile dating with an LBS-based social networking proximity overlay (a cornerstone of the LMNO) is very cool, but it also changes your service from the web-based long session length “I want to meet Miss Right” to the mobile-based short session length “I want to meet Miss Right Now.” Not that there’s anything wrong with that. I am just pointing out that mobility changes things and may change what you think you have, so just be aware of it and think creatively.
Start with the basics. If you do these things and don’t consider whether your application is relevant or useful to the mobile consumer, you might fail anyway. Here are my five criteria for useful mobile applications. (All of our planned mobile applications must have at least four, but maybe you don’t think they are all that important for what you are doing. Time will tell.)
Successful mobile applications:
1) Are not just mobile relevant, but mobility relevant
2) Are personal or offer some form of personalization
3) Leverage the network effect of mobile connected devices
4) Originate in the mobile space
5) Utilize and extend the upstream capabilities of the mobile device (this could be as simple as texting and passive location or as involved as massively multi-user networked games.)
All of this boils down to a holistic approach to UI, which I believe is the cornerstone of mobile application development. I like short lists, but feel free to add more if you think I missed something important.
Posted by Shawn Conahan at 09:45 AM | Comments (1)
August 15, 2005
JAMDAT Soup
Investors punished JMDT last week and it continued today. I think this is an exaggerated response to the 3rd-quarter guidance. I have some broader observations about it, and like InfoSpace’s recently tanking stock, I foresee a ripple effect throughout the mobile content space that could have some interesting repercussions.
First the fundamentals from the call and a couple of summary articles I saw. JAMDAT had a great 2nd quarter as revenue more than doubled to $19.3mm from $8.4mm in the same quarter a year ago. Profits surged to $2.6mm, compared to $423k a year ago. The expectation of 4 to 6 cents a share on revenue of $20mm to $21mm in the 3rd quarter soured analysts’ taste for JMDT who were expecting something more like 21 cents a share on $21.9mm. JAMDAT stuck to its estimate of $80mm for the year, though analysts want to see a little more.
This is a strong business and they are trading at a respectable ~6.5x multiple. JAMDAT has a strong management team and the company has a leadership position in the mobile gaming space that is virtually untouchable by any one competitor. So why the lack of confidence? Here is what I think:
How much soup can people eat? – JAMDAT was an early entrant in the mobile space. Because of this, they have been able to secure very valuable deck placement on the handsets of the carriers to which they sell their products. That may also be part of their problem. Look at it from the standpoint of any wireless carrier: They have their own revenue targets for the quarter. They want to sell to their subscribers as many products like the ones JAMDAT makes as possible, and variety is good for consumers. So while the opportunity may be growing, it is being shared among an increasing number of providers.
Selling to consumers through a channel like this is a lot like selling soup at retail. Go to the soup aisle at your supermarket. Campbell’s Soup has an astounding number and variety of soups. There are other brands of soup, but Campbell’s was first, so they have the brand that means “soup” and they sell the most of it. Their first soup was Tomato, introduced in 1897, and they sell more Tomato soup today than any other soup. Tomato, Chicken Noodle and Cream of Mushroom are their top sellers, (people eat 2.3 billion bowls of just these three varieties a year) then there is everything else. And so why is there everything else? Shelf Space. The more soup Campbell’s sells, the more shelf space they get in the store. That’s good for Campbell’s because the more shelf space they take up, the greater their defensive position is because there is only one soup aisle, thus making it more difficult for any new entrant wanting to sell soup. You are a new company wanting to sell soup? Be prepared for the “Can you sell 2.3 billion bowls of your soup per year?” question. For this reason, you should like JAMDAT.
But the store is only so big, right? What if the store is hyper-optimizing every square inch of their soup aisle to make sure that consumers are getting the best possible soup which in turn makes the store the most money possible? Then the deal they had with Campbell’s is off. It’s not enough to sell the most soup across the entire brand anymore. Every can has to sell a certain amount. If Barley Clam ‘n Rice Bisque isn’t pulling, Campbell’s better find a replacement or else the store will put in a competitor. Such is the trouble with all hit-driven businesses. But Campbell’s has their Tomato Soup, which is among the top 10 items purchased at any supermarket. For this reason, you should like JAMDAT because even in a hit-driven business constrained by the amount of shelf space available to them, JAMDAT Bowling is the Campbell’s Tomato Soup of the mobile gaming space. Tetris may be their Chicken Noodle Soup.
Also, soup is soup. Off the top of your head, name all the soup brands you can. When I mentally scanned the soup aisle at my store, I came up with Campbell’s, Progresso and Healthy Choice. I am sure there are many more brands, but how many more do we really need? Not a lot. How far do you need to segment the market for soup if all soup is pretty much undifferentiated? I would be happy with one brand, Campbell’s, if they sold enough different cans of soup to satisfy my desire for something different from Tomato or Chicken Noodle now and again. (Which they do.) For this reason, you should like JAMDAT because they have a good mix of solidly entertaining mobile games like JAMDAT Bowling and Tetris and also release new games every year to satisfy consumers’ desire for something different. And name all of the mobile gaming brands you can. Let’s see, there’s JAMDAT, …and nobody else.
So what’s the problem?
Surely there are more consumers to which JAMDAT can sell their products, but can they get at them? Apparently not. JAMDAT’s model is very much like selling soup in a supermarket, where they have the strongest position. They might say, “The soup aisle is only so long and we own most of it.” True, and another reason to like JAMDAT. But what happens when consumer tastes shift and a wide swath of consumers start shopping at specialty, organic or “healthy” food stores? The supermarket definitely still matters, but even if you protect your shelf space there, your competitors aren’t even in the same store because neither are all of the other consumers you would like to be selling to.
This is similar to the problem that InfoSpace is faced with that may have something to do with how investors are regarding their otherwise strong business: Even though you may have a highly defensible position on the carriers’ decks, what if your competitors are selling elsewhere, like via short codes on 15-second spots late at night on MTV? Well, business means competition. You could adapt pretty quickly and compete on any number of fronts if you mapped your company to a new vision and shifted your focus. But what if taking your business to another channel means that your primary business might suffer? What if you get a call from one of your large wireless carrier distributors saying they want you to shut down your website where you are selling the same content at a higher margin because it is undermining the distribution relationship you have with them? That happened to me at Moviso, and we determined that the distribution channel on the carrier’s deck was vastly more important than www.yourmobile.com, and a quick visit there confirms that InfoSpace rightfully continues to think the same thing since it doesn’t appear to have been updated for several years. (In Da Club by 50 Cent. Fresh.)
I want to invest in a company that has unlimited growth potential and complete autonomy to achieve it. There aren’t many companies like that. The reason Google can have such a high multiple is in part due to their obvious growth, but more importantly the seemingly limitless size of their potential market. Same thing with eBay. They are limited to “all people with computers” which is enough like saying “all people” to give investors the confidence to invest in the stock in droves. JAMDAT’s revenue looks like it is flattening out a bit which tells investors that there isn’t an unlimited number of mobile gamers. When you size the market at “all people with mobile phones,” JAMDAT has huge growth potential ahead of them. This is the biggest (maybe the only) problem facing JAMDAT: They are in a tight spot at the moment because to fuel growth in the mainstream market and start selling games via other channels, they might have to give up their current bread and butter deck distribution. That would be a big risk, and the numbers (which I just jotted down on the back of a napkin) can’t make sense in the short term. This issue will resolve itself within the next two years as carriers move increasingly to higher-margin and higher-volume off-deck arrangements which enable them to leverage the marketing dollars of their partners, while reserving their own decks for more mobile-relevant applications that enhance their core offering of communication. (Think about this – Vodafone sells a game for three bucks which you download and use offline possibly for hundreds of hours without utilizing their core asset which is their wireless network. How many roaming minutes would it take to equal three bucks? Is selling games the best long-term strategy for wireless carriers?)
Which brings me to the implications part:
First of all, this bodes ill for Mforma, which is widely rumored to be planning an IPO in the mobile gaming space. I wish them luck because I want to see more money flow into this space to crack it open. But the market is speculative around this space and doesn’t seem to want to fully support even one public mobile gaming company, and unlocking the value currently trapped in consumers’ wallets is difficult at best given the current state of efficiency of the distribution channel.
This means Consolidation. If JAMDAT cannot fuel growth organically, investors will likely appreciate them buying it through acquisition. The Tetris deal was criticized by some, but I think it was a shrewd move and is exactly the kind of thing they should be doing. But how many other gaming companies of any note are there to buy?
Really, though, the consolidation should take place at the level where it will make the most sense to unlock the untapped value. If JAMDAT sticks to the same basic distribution and revenue model, they will only be able to acquire revenue that is already available to them, meaning some cannibalism is likely. This is why the rumored acquisition by EA makes a lot of sense – there is clear synergy on the product side and there might be a slight bump in distribution. But if the goal is to exploit new distribution channels, I don’t think EA makes the most sense. They have strong retail distribution. I don’t think that is what JAMDAT needs. They need a direct channel. Either a web property or a media company (News Corp) make the most sense in my opinion because they can provide an actionable marketing, distribution and sales channel which could significantly augment the current revenue flow plus it would extend the offering of the acquiring company.
Furthermore, off-deck distribution means off-deck marketing, and the winners of that game are the ones who have the most reach. (And a ton of marketing money to spend.) We are about to see a few large media companies with broad synergy across multiple channels get a little bigger as they realize that the lines are blurring between the “mobile space” and everything else and they start buying companies like JAMDAT and Mforma. On some level, JAMDAT isn’t a “mobile gaming” company, rather they are a gaming company that focused on the mobile space. This is not unlike selling your low-sodium soup to Whole Foods because you know you can’t beat Campbell’s at Publix. If the platform of choice is going to be the Personal Media Device formerly known as the mobile phone, then having strong DNA in that area spells success for the company that can most effectively compete there. That is why someone other than EA should buy JAMDAT if they really want to give EA a run for their money five years down the road.
My bottom line is that JMDT is a bargain today if you believe they will find a way to tap a larger vein in the $11 billion gaming industry. Think about that. At their current run rate they have less than .7% of the opportunity available to them. Mobile devices are the future, and JAMDAT is the only real player in mobile games. I think the massive upside of this apparent reality is theirs to lose. For this reason, you should like JMDT as a long position.
The last thing I have to say about this company is this: Suing Jamster is a bad idea and investors are not apparently encouraged by it. I do not say this because the argument is baseless, I say it because lawsuits are costly distractions no matter who wins. The lift in brand value they might get would come at a great cost, and they can’t book as revenue whatever settlement money they might win anyway, and the order of the day for this company is revenue. Losing would be the equivalent of flushing millions of dollars in legal fees down the drain. As an investor, I can say that Microsoft can sue whoever they want for trademark infringement because generating revenue is not something that apparently requires much effort for them. I do not like this risk being taken by a company that has more important things to focus on, like how are they going to double their revenue again next year? I know they wouldn’t be doing it if it didn’t make sense to them, I am just saying I don’t like it. I would rather they spent the money developing new marketing and distribution channels.
Other than that, this company is a mature powerhouse and the investors who pulled out were speculators who already made a better return than they expected because of it. If you see a convergence of trends in this space creating an opportunity way beyond the current “1.0” status of mobile gaming, then you have to think JAMDAT has a better-than-average chance at capitalizing on it.
Posted by Shawn Conahan at 01:18 PM | Comments (0)
August 08, 2005
We Just Took A $5.5mm Investment
Why have billions when you can have...meelions...
Good news: We just closed a Series A round of VC financing for $5.5mm. The round was split between two great firms, Avalon Ventures in San Diego and Masthead Venture Partners in Boston. These are great firms and really great people to work with, and we regard them as true partners, not just investors.
I cannot say enough good things about our investors. They understand the billion-dollar opportunity here, but are also pragmatic about building value incrementally, every week along the way. On a recent flight to Boston, Steve from Avalon gave me an essay, How To Start A Startup, by Paul Graham in which he said that aside from certain rockstar VC firms that can bring some kind of mythical added value, “Basically, a VC is a source of money. I'd be inclined to go with whoever offered the most money the soonest with the least strings attached.” It is difficult to argue with that logic, but I think there is one more thing that matters the most and that is the ability to believe in your vision.
Our vision is to build a populist media company. We want to reverse the flow of content, distribute it via a series of overlapping personal networks, empower people as producers, enable them on a location-aware grid and redefine media from something that is produced and pushed to consumers in a series of monetization windows to something that is discovered, added to, borrowed from, shared, redistributed and discovered again all to the benefit of millions of people with mobile-connected PMDs in their pockets.
While it happens to be true that Steve at Avalon was the first VC we talked to and we happened to settle on a deal that we thought was fairly founder-friendly, I think the reason for this is that Steve believes in our vision. He introduced us to Masthead, and the guys we met there, Brady, Rich and Dave, all immediately believed in our vision, as well, and we really hit it off. Once we all had alignment on the vision and the path to get there, it was a relatively easy and quick process to get the cash in the bank. (Around 30 days.) VCs are rightfully a skeptical bunch, so having so many more people around the table who are fully committed to delivering on our vision just added a ton of horsepower.
And there’s the money - that adds horsepower, too, and will help us go much faster now. We have several products in development, we are improving Rabble and have a bunch of relationships to deliver on. I know I mentioned before that we are hiring in a big way, but now we can actually afford to pay people. ;-) We hired three people last week, and we have several more positions open in core engineering, handset engineering, product management and business development. We aren’t building a huge team, but we definitely need more exceptionally talented people. If you believe in our vision and want to join us, please drop me a note.
Posted by Shawn Conahan at 09:09 AM | Comments (2)
August 04, 2005
Branding In The Mobile Space
Part 1: Brands in the mobile space are affected by unique issues
I looked around at other industries for interesting fodder on the concept of branding. Part 1 is really all I have to say about it at the moment, but if you have a few extra minutes to spare, feel free to read Part 2. I found it so totally unrelated that I edited it out but since I had already written it (I had a long flight yesterday and rambled on more than usual) I figured I’d leave it in for people who like cars.
We all know what cars are and what they are for, so there is no need to make it explicit in their names. It’s the Porsche Boxster, not the Porsche Boxster Automobile. In the car space, brands only differentiate from one another in a homogenous industry on select attributes. (The explicit purpose of an automobile is to get you from point A to point B. The value proposition of a Porsche is to get you there very very fast and in style.) Furthermore, rarely does a new car category emerge that requires a huge amount of consumer education. The last new category was the SUV, which was really just a refresh of an existing category. (Yes, you SUV owners are driving repackaged stationwagons with bling bling rims. How cool of you.)
The mobile space is different. The mobile application space is new. That means that native mobile applications are all new brands. So what should we call them? And what is the best way to present them to consumers to make those brands meaningful?
Look at the big brands on the internets that immediately command consumer recognition. They didn’t exist before the internet, and they are some of the largest companies in the world today. They all started from scratch and grew within the context for which they were intended, which means we can do the same thing in the mobile space.
“Yahoo” stands for “Yet Another Hierarchical Officious Oracle,” representing what they do as a search and directory company. I think that’s cool. “Google” is a trademarkable version of Googol, which is a very large number. Again, very indicative of what they do – searching through a very large number of sites to find you a needle in a haystack. I like these brands because they communicate something about the value proposition to consumers.
EBay is a big brand, but it doesn’t mean anything. Pierre wanted “EchoBay.com” since his company at the time was called Echo Bay Technology Group, but that domain name was taken so he went with ebay.com. I like this brand, too, but it doesn’t communicate anything to consumers. Rather, they have done a good job of imbuing a non-word with consumer value, and in the process have owned the majority of mindshare for “auction site” in many countries in which they compete.
Napster was a great brand, wasn’t it? It just embodied coolness. Also, it did an important thing: It defined a category. Before Napster, the notion of P2P hadn’t really entered the collective consciousness, and a really interesting thing happened when it did. Other companies co-opted “…ster” to mean “P2P” in a variety of other segments. There is now a Friendster, Grokster, Eurekester, Feedster, Blubster, Hamsterster, but interestingly no Sterster.
Anyway, it occurs to me that branding in the mobile space is driven by its own set of issues that I don't see in many other industries.
Issue #1: Handset UI makes data entry difficult
The numerical keypad has to evolve. It wasn't designed for what we are asking it to do. Data entry limitations on handsets have apparently already shaped one brand. What does JAMDAT mean? Nothing, but it is the first letter on your keypad of 526328. I think the thought there was that when you are entering an address into a WAP browser, it is easier to enter the first letters mapped to the keypad because it avoids the need to multitap. If you like this approach, admad.com is not available, but gadmat.com is. I think it is smart how they use their brand: It’s “JAMDAT Bowling.” You see the publisher’s brand along with a subtitle that tells you exactly what you are getting. Very smart for deck marketing, and easy to trademark. Additionally, JAMDAT owns a lot of “mobile gaming” mindshare. Will we see some kind of repeat of the “…ster” phenomenon? (Just in case, I am starting a competing mobile gaming company and just registered JAMDIS.com, so there. "No no, don’t jam dat bowling, jam dis bowling." Brilliant, I know. Consumers will flock to it.)
Issue #2: Off-portal marketing means more numbers for people to remember
I can no longer remember numbers because all of my communication starts either with a click on an IM screen name or a scroll to someone’s name in my mobile phone’s PIM. But the big thing now is short codes, so marketers are challenged with making their consumers remember more numbers. Premium short codes sell for more than generic short codes. It’s like the new domain name. Have you heard of a company named GLOO? I don't think it was intentional, but that is a great brand for short code marketing. For one thing, it is 4-5-6-6 right across the center of the keypad, which is easy muscle memory to develop. If they ever got into the business of interactive media, they could make 4566 their universal short code and make that the nucleus of their marketing strategy. Anyway, I think we can look forward to many more 4- and 5-letter brands in the mobile space over the next year.
Issue #3: Differentiation is difficult
Bango, Handango and Ztango. Quick - which of these mobile media companies does what? There aren’t many single-product companies in the mobile space, so I guess company name doesn’t really matter much if it isn’t intended to be a consumer-recognized brand. More importantly though, if what you do is not specific enough, you run the risk of not capturing any mindspace at all. The term “mobile media company” is not very descriptive, yet that’s what everyone calls themselves because the opportunities are evolving so rapidly and there are so many potential customers to sell to that mobile media companies are presenting themselves very broadly lest they leave some money on the table somewhere. This is probably good because it points to a rapidly growing opportunity space, but it also generates a lot of noise. Hence the very memorable names.
Issue #4: Existing categories don’t reflect the choices available to consumers
This is the era of deck marketing, where consumers are scrolling through a list of names sometimes categorized in ill-defined buckets. I know where games go in a wireless carrier’s storefront – it’s called “games.” Well, where do I find productivity applications? And what does “productivity” really mean anyway? Does a mobile email client belong in “productivity apps” or is it in “messaging and chat”? Does it matter if it is targeted at a youth segment or an enterprise segment? Are there enough categories on any carrier’s deck to reflect the number and variety of mobile applications available to consumers? What about an application that enables you to point your cameraphone at a barcode and receive information or execute a transaction of some sort? What exactly is that and how do you communicate it to consumers? I am looking at my phone right now and I cannot find the category for it.
This reminds me of the early days of usenet when there were seven categories: comp, news, rec, misc, sci, soc, talk. Many more have been added over time but possibly the most important one is alt, which was not an original category and is now the receptacle for the lion’s share of usenet groups. I wonder if this is going to happen in the mobile space.
Proliferation of content in the mobile space will create the same problem we saw on the internet. There is an immediate need for a mobile search engine that only looks for mobile-relevant content and applications. Somebody please beat us to this opportunity.
Totally unrelated but interesting to me Part 2: Consumers define brands as much as companies do
Brands are a way for consumers to assign meaning and differentiate products and services among competitors. There are many reasons to invest in a brand. One is to communicate market positioning in a crowded or highly segmented category. I know branding works in this way because the average consumer can rank order automobile brands off the top of their heads: Most people would agree that Mercedes is ranked somewhere above Toyota and Toyota is ranked somewhere above Buick. This consumer “gut feel” is a reflection of brand investment. Those companies have invested in their brands to fight for their rank on the mindshare ladder and it works. Now ask an objective* party to rank order those brands according to some measurable criteria like initial quality, and the order reverses: Buick, Mercedes, Toyota. Buick above Toyota? Really? I never would have guessed that. Does their brand reflect that?
* I am referring to JD Powers and Associates Initial Quality Survey in which cars are ranked by problems reported per 100 vehicles shipped. Just FYI, I personally find it dubious that JD Powers can be truly objective when it sells customer survey services to the very same manufacturers and dealers that it rates on behalf of consumers.
Lexus is at the top of the list. Jaguar is ranked second. Would you have thought that, given the years of negativity associated with the Jaguar brand? Wasn’t it a common understanding that they broke all the time? When did that change? Doesn’t matter – it apparently did change at some point. Perhaps more importantly, their brand didn’t – at least, not in my mind. Until I saw that press release just now, I assumed they still had the same negative service track record that their brand has been associated with for so long. Well, good for them. I wonder if it is helping sales at all?
I find it interesting that Porsche is very close to last place in initial quality. Here is the real test of branding in the automotive space: If I said I was going to give you a free car and you could choose between a Porsche and a Jaguar, which would you choose? Everyone I asked chose the Porsche. This isn’t about price, either – the convertible Jaguar is more expensive than the convertible Porsche.
There is nothing wrong with Ford products, but the Jaguar looks to me like the Taurus design team got reassigned to the Jaguar product after Ford acquired the nameplate. I don’t want to drive a convertible Taurus. What used to be a symbol of status and luxury (i.e., if you drove one, you could afford to have it break all the time) is now a symbol of cost-cutting and repurposing of Ford parts across multiple brands. Despite its high quality ranking, no number of quirky radio ads wherein they pronounce Jaguar “Jag-you-are” with a British accent is going to imbue this brand with the luxury it once stood for.
So, do brands necessarily map to quality? Do brands necessarily map to reality?
I don’t think so, and that is the point of branding – to capture the hearts and minds of consumers. But there is a difference between what you would like your brand to mean, and what your brand really means to people. I will remember not to ignore this.
Posted by Shawn Conahan at 05:31 PM | Comments (1)