Friday, February 27, 2009

The end of Eyeballonomics?

Reading the details of President Obama's proposed budget makes clear that the Reganomics era has ended. By extension, I have been thinking about the tight economic environment and one of the key measures for valuing consumer facing internet companies, EBV (EyeBall value).

When coming to an appropriate value metric for companies aggregating an audience, but not yet producing revenue, many bankers and VC's have used comparable valuation metrics that have been EBV centered. Components of formulas counting total eyeballs, active eyeballs, and eyeball turnover were matched with an X factor to arrive at a professional number that had the underpinnings of relativity (if company X is worth Y, with 1mm eyeballs, our EBV is Z) at its core.

Perhaps, a great franchise such as Facebook, or an emerging one such as Twitter will breakthrough EBV and into more traditional P/E or Enterprise value/Revenue metrics. If they do, they just may find a disconnect between the derivative valuation of EBV and traditional valuation metrics.

I suspect a sustained capital constrained environment, coupled with great pressure on CPM's will fundamentally alter the eyeball aggregation metric as a way for the masses to realize sustained shareholder returns.

Wednesday, February 25, 2009

Annus horribilis?

As the newspaper industry is suffering its 'Detroit' period, a recent report highlights the difference between soaring demand, and being able to build a proper business from the demand.

Nielsen recently published a study detailing the traffic results for the top 10 newspapers in the US. Year to year traffic was up 16%, to over 40mm unique visitors. The embattled NY Times is nearly 70% larger than its nearest competitor, USA Today, with an industry leading 18.1mm uniques. Fastest growing is the NY Daily News, which nearly doubled its uniques to 5.9mm.

Nine of the top ten newspaper sites experienced positive online growth. The frequency of visits jumped too, with the total number of visits growing 27% to over 252mm.

Traffic and frequency of visit are usually leading indicators for site prosperity. In this industry, where the value of an online viewer (free) is a small fraction of the worth of a 'brick n mortar' customer (paid) it seems like a Herculean mission to properly allocate scarce resources between the two competing efforts.

However painful it is, strategic focus is a necessity to properly deploy now scarce resources.

Tuesday, February 24, 2009

Surprising Venture numbers

Dan Primack over at peHub published an interesting post regarding the number of seed and early-stage venture deals completed between 1995-2008. Click here for the link.

Surprisingly, even with a dismal Q4, the number of seed-stage deals, and the % of venture deals that were funded by professional venture firms in 2008 was nearly at a post '00 bubble record. The high volume extended beyond seed, into early stage investing too. Though it's hard to capture all the transactions in any given year in this highly fragmented, and geographically disperse arena, I can only assume the trend data is more or less correct.

If anything, due to the deep participation of Angels in this asset class (for disclosure, I am on the board of the NY Angels), I suspect the numbers are under reported.

With all the talk about 'VC bailouts' and government assistance to the asset class, nothing like some common data to stir it up. My view is that late in 08 many venture funds began to revisit their reserve assumptions. As a consequence to decisions to hold more capital to support existing investments, we are now seeing a pronounced slowdown in funding for early stage companies. This is driving the hue and cry to favor profitability, even at the expense of growth.

Monday, February 23, 2009


Marvell Electronics is promoting an innovative 'permacheap' approach to storing digital content. A "plug computer' that plugs into an electic socket, yet stores and manages all your home media for a cool 50 bucks.

It seems that on an almost daily basis we are seeing fantastic dislocations associated with the digital living room. Product announcements from stalwarts such as Cisco, LG and HP, saber rattling from NBC and CBS, and innovation from Pando Networks, Tversity and many others. Analysts are also in the game arguing about whether intelligent TV's, smart set-top boxes, or media servers will win the home front war.

Back to Marvell. With their new product, folk will be able to access files from anywhere in their house, or over a Internet connection when you're out. It's promised to be ultra small, cheap, and centralizes your media in a format that facilitates discovery and transmission. Don Clark, of the WSJ, wrote about it here.

Hopefully, when the product is introduced, this proud chip company will do so in a consumer friendly way. If so, I have no doubt, we can be together on this one.

Green Bananas

I was reading about the travails over at Move Networks, and the environment management, and their investors are facing. It's troubling, but it seems like our 'new normal'.

The sudden slowing of the economy is now placing many young venture or angel backed companies in an 'awkward' position. Many budgeted to bring their product to market with sufficient leeway to show initial customer traction before completing a funding round that brings them to a stable expansion stage (and, with success, vying for market leadership). Move was incredibly successful in garnering a prestigious stable of financial and strategic investors.

Now, many CEO's are faced with the real prospect of slow market traction, evidenced by meaningful revenue metrics or subscriber hypergrowth. Unfortunately, many can't reduce expenses fast enough, while completing their development, to stave off difficult bridge rounds or worse. Painfully, many of these companies set rational initial objectives (properly approved by their investors), experienced a normalized development expense cycle, but are now facing a suddenly shifted revenue environment.

These companies are like a suddenly hungry person facing the green bananas he harvested too early. He knows they may one day be delicious, bursting with unproven promise, and is trying all the home remedies to accelerate their ripening.

Friday, February 20, 2009

ComScore's report on the status of US Online Retail

ComScore published yesterday their report, taken from a 2mm person sample, on the state of US Online commerce. Here's my take-away's:

1. 7% 2008 growth to $221B was way below the 17% of '07. Travel, at $84B (and 9% growth) is still the dominant vertical. Since ComScore has been tracking the numbers, it's the first time Online consumer growth has been in single digits.

2. Online coupon sites saw a 40% surge in traffic last year (to 40mm uniques). More sites are using time expiring coupons as a way to drive traffic and commerce.

3. Online commerce has achieved sufficient critical mass that it seems to now closely mirror trends within the general economy.

Thursday, February 19, 2009

A big chill and gatekeepers

I have been thinking about the Boxee/Hulu imbroglio. While it's unclear what ransom will be extracted from Boxee type companies to gain access to distribute proprietary content, some points are crystal clear:

1. The pace of capital investment towards young companies involved in the 'digital living room' will be vastly diminished.

2. Venture capitalists will be taking turns writing 100x on conference room chalkboards lines of "I will never again invest in industry's controlled by gatekeepers".

3. Hulu's management is in conflict with its parents. On one hand, Hulu has a mandate to build a top destination site, on the other hand, it can't be accomplished by embracing/extending technology to the digital living room; which happens to be an incredibly fast growing market segment.

4. Existing investors in exposed companies have that Free Fallin feeling.

Is Boxee Cable's Napster?

Hulu a leading site that streams premium TV content, announced that its content will no longer be available via Boxee (recently funded by Union Square and Spark).

In a short period of time, hundreds of thousands of people have expressed interest in Boxee's solution, that enables you to view movies, TV programs, etc., streamed from your PC and displayed on your HDTV. In a twist that Hollywood writers would deeply appreciate, it seems as if the warm market response became the ironic problem for this company. Similar to the way Napster, Bit torrent, and other pirates siphoned revenues from content providers, it seems as if the battleground is now shifting to Cable/MSO's. Make no mistake, these folk relish a good bloody fight.

The issue is that, with services such as this (and there are many services such as this), users can stream quality content via one cable connection to many TV's. Adios multiple set top boxes (perhaps, hasta la vista one set top box).Therefore, monthly subscriber revenue, which is much more powerful to these folk than advertising revenue, will be under intense pressure. It's similar to the problem newspapers have; no realistic prospect of replacing home subscription revenue with monetized CPM views. It's the ultimate existential threat to the status quo.

Safe to say, round 1 goes to the cable/content providers here. Nevertheless, the software/internet industry is known for being thrown out the door and coming back through the window. The technology barriers to entry for services such as Boxee are not that large. The question is whether this fight, which is really over 'business' model and legal use, will determine if we see a new generation of pirates, or will there be an accommodation that enables a new generation of legal innovators?

In hindsight, unlike YouTube, which experienced incredible hypergrowth, largely through purloined SNL content, Boxee had an early high profile and was rapidly attacked by the content/cable owners (fool me once shame on you, fool me twice...). No doubt this is a battle to see if the Wolf will survive.

Wednesday, February 18, 2009

Great site for domestic travelers; or those who want to stay connected with home

Sometimes, simple things add great value. Courtesy of Peta in LA, here's an interactive map from Newseum showing the front pages of local newspapers by city. Just click and read.

Perfect for the Ramblin Man.

Alan Partricof's view of the changing Venture landscape

Alan Patricof began investing in the 1960's, a time of 'little venture' at Patricof & Company. He later rode the 80's wave into 'big investing' when he founded LBO shop APAX, and has now come full circle, back to 'little venture' with Greycroft Partners.

In a recent article in DealBook, he explains the reasons behind his move back to little venture. To summarize, he feels the changed prospects for IPO's is not a temporary phenomenon, due to its semi-permanence, venture firms (and entrepreneurs) ought to shift exit expectations exclusively to M&A. Seeing the bulk of M&A is in the $20-$100mm range, the amount of capital raised ought to be in alignment (far less than today) with the perceived exit.

As expected from Alan, it's a good general industry perspective that highlights dynamics that are changing the venture capital industry. It does, however, beg three open issues for discussion:

1. The number of public software/internet firms has declined over the past five years by nearly one third. The largest decline was in the ‘middle’ market, which is the most likely exit vehicle for venture backed companies seeking valuations in the $20-$100mm range. A growing imbalance is creating a gulf between the supply of sellers and the demand from buyers.

2. Buyers will continue to want to acquire successful firms, not the laggards. Two measures for success have always been market share and growth. Good teams will be able to build respectable companies, in a capital efficient manner, and be satisfied with a more than respectable 5x return. I have no doubt that other teams, experiencing hypergrowth will shoot for bigger wins (e.g. Google, Youtube or perhaps Twitter). Or will dig themselves into a capital starved hole. It's not the bankers that give firms wonderful exits, it's paying customers that build market share leaders. Bankers are facilitators; intermediaries which bring capital to shareholders/companies.

3. Early stage Venture firms tend to embrace a culture of controlled risk. As such, we experience a not insignificant company mortality rate. Such a 'death' rate is then masked by a couple of portfolio 'ten baggers' that provide the bulk of returns for investors. Take away the big hits and the investment culture must change to one closer to the buyout world where no bad investment goes unpunished.

I expect the exit ’stagflation’ to continue only so long as the center weight of innovation is around applications with little innovation at their core, and many competitors at the ready.

Tuesday, February 17, 2009

NBC Direct launches download of 'HD' shows

After an extended testing period, NBC launched today their 'HD' video download service. Content is available for immediate download, or via a free download subscription that automatically sends shows to your PC (for now Windows only, and not transferable to other machines/devices).

Notable is the first significant market endorsement of P2P technology by a large owner of video content. Long the scourge of content owners, P2P (in this case powered by Pando Networks...where I am an investor), the legal harnessing of this technology has a promise of providing enhanced quality, lower costs, and better network performance than stand alone CDN delivery.

The nascent yet emerging 'digital living room' market is showing signs of experiencing great growth, as evidenced by Hulu's steep rise in viewers here. We are seeing a gaggle of solutions from stream to download, hearing about the primacy of the set-top box and new intelligence built into the PC (mom would love that oxymoron), let alone the great media server debate. The raging debates reminds me of the IBM/ATT quarrel of the late 80's when the hot topic was which is more valuable the network or the node? While ATT and IBM were fighting that one out, Cisco and Microsoft created the great franchises for the next decade. I would not be surprised if some of the young vendors competing here today have similar DNA.

For NBC, I suspect that the scope of available content and the viewing experience will be the key factors in its success. Looking at content, the NBC Video Library includes such stalwart shows as Alfred Hitchcock Hour, Buck Rogers, and Mr. T's the A Team! As for the viewing experience, download the client and start watching. Don't feel guilty, you are doing 'research'.

From NBC's perspective, I am sure watched by other broadcasters, delivering 'HD' using P2P could be a cost/experience equation game changer. If not for you, NBC....

Monday, February 16, 2009

An entrepeneur goes to school

I had the opportunity over the weekend to hear a successful software entrepreneur address a group of pre-business school young adults. He shared with them the 4 key elements an internet founding CEO ought to concentrate on when starting a business. His thoughts were so crisp that I wanted to share them with you here:

1. Market- For him, this is 90% inspiration and 10% perspiration. He looks for large problems, areas where people are repeatedly spending money (ongoing purchases that could become a much less stressful and less costly subscription), or likely to spend money/time, where he can innovate and save them time or increase their purchasing power through removing or obsoleting a vendor (drive to permacheap).

2. Technology- He looks for a set of technologies that could be integrated in a novel way. Low R but high D, in the R&D equation.

3. The experience- Delight the customer, but don't think you will do this immediately. By expecting, and planning that your first few iterations will be off market, he inculcates a culture that embraces, rather than denies, rapid change. In his mind, the product/experience is never complete; so don't fight it.

4. Reaching the market- Today, this is an all consuming task for him as it's the company's largest expense component and capital efficiency is one of his mantras. He strives to build a balance between channel sales, business development (partnerships), and a limited direct effort. The later is an area he is least comfortable with as it takes 6 months of investment/training to receive a preliminary indication of success. Contrasting this with channel or affiliate sales and it's scores of 'turns' off from being able to rapidly react to market 'changes' or product management miscues.

Four well thought out rules.

Friday, February 13, 2009

Light in the tunnel

The WSJ unsurprisingly noted that, as investors react to an altered state, a shake-out appears to be happening amongst venture backed companies.

After being involved in my fair share of 'heroic' efforts attempting to save/rescue young technology companies, I am an advocate of taking a spoon-full of medicine and refocusing investor, and entrepreneurial efforts away from failing companies. The grand yarns, told around worn conference room tables, about how the last minute purchase order, big sale, or business development agreement launched a company on the path to riches unfortunately obscures the long-odds of this happening.

Interestingly, on the same day this article appeared, Guggenheim Venture Partners announced the sale of one of their portfolio companies, CICLON to Texas Instruments.

Guggenheim concentrates its investment efforts in an arena that is complementary to the trend noted in the WSJ, and seems timely to be exploited. Their investment focus is dedicated towards acquiring equity positions in technology firms/divisions where the initial venture backers no longer have adequate capital to pursue the market opportunity, or in buying positions in spin-outs from corporations seeking to trim their focus. The targets have management teams in place, product developed, and participate in growing markets. Everything but the capital to make it work.

Every ecosystem needs scavengers (here it's a compliment). With many venture portfolios suffering from investment constipation (many deals made, few exits) this just may well be a once in a lifetime equity building opportunity.

Thursday, February 12, 2009

There's something going around here,

What it is ain't exactly clear Outbrain, a company started in NY by Quigo co-founder, Yaron Galai, announced an expansion round of financing led by new investor, Israel based Carmel Ventures.

During the summer, NY based Payoneer, also received expansion funding led by Carmel. Last year, Greylock (Israel) led an expansion round for NY based WebCollage. Also, last year, Eyeblaster secured a $30mm expansion round from a group of Israel based technology investors.

With a dearth of exits that the general venture market has experienced, the venture capital market in Israel has been contracting for a number of years. But that's only part of the story. A few years ago, it was standard practice for young, Israel based companies, to receive initial funding from local VC's, then relocate to NY, Ca, or Boston while raising expansion funding from US investors. Now, however, a generation of US based (the above examples are even more specific to NY) Israeli's have successfully raised expansion funding from Israel based VC's that have shifted, at least some of their focus, to expansion stage investing and are deploying significant capital in the US.

Today, in Israel, non-native VC's account for more than 50% of the early stage funding activity. Great firms such as Greylock, Lightspeed, Benchmark, Canaan, and Sequoia, have paved the way for others.

I am sure that the natural movement up the lifecycle chain by Israeli VC's is both a defensive reaction to the success of non-Israeli investors in garnering significant market share, as well as an opportunistic move to leverage existing relationships.

Turning back to earlier stage transactions, we have seen Union Square and First Round involved in funding young Israel based (and other non-US) companies that are building presence in the NY area.

There was a time, interrupted by the Internet bubble, when the venture market was strictly segmented by stage and geography. The globalization of the internet opportunity, coupled with the democratization of IP knowledge seems to have broken down the limiting geographic walls in investing criteria. Time will tell how well stage agnostic investors will fare.

Tuesday, February 10, 2009

SAP and Adobe M&A presentations (sponsored by SIIA with Credit Suisse)

Ken Wasch and his team over at the SIIA, have really put together a quality program aimed at providing exit insights to venture capitalists, and visibility to the software/internet's most prolific M&A players. Their Private Equity forum is worth a look.

Following are notes from the session held yesterday:

Monty Gray- Director M&A SAP

Company overview
11.5B Euros of Revenue
51,000 Employees (reducing headcount to 48,000)
12mm users across 120 countries
1.5mm community partners
15 Industry Value Networks

EMEA 60% of Revenue
Americas 30% of Revenue
Other 10% of Revenue

View the US as the early adopter market that is a precursor for global adoption of innovative products/technologies.

SAP has completed 27 deals in the past 5 years, including their largest acquisition, and the 4th largest in the history of the software industry at $7B+, Business Objects. Though that transaction has exceeded expectations, they are not similarly focused as Oracle, with a drive to consolidate market share.

Historically, viewed the Company as a packaged software business with maintenance (33% of revenue) driving the profit engine. The core SAP Business Suite has spawned vertical Industry Solutions, a horizontal Business Process (middleware) platform, and a Small Business offering. Finally, Business Objects is the core of a Business User Solution Group (addressing White Collar workers).

Look at acquisitions in 4 buckets:

1. Game Changer- Move to position SAP as player in a new segment (e.g. BOJ brought them scale in providing product to white collar workers). Large transactions usually >500B Euros. SAP does these infrequently
2. Market Extension-Expedite time to market or small market extensions for an existing market focus. Transaction size between 20-500mm Euros
3. Direct Tuck-in- Same criteria as market extension, but smaller transaction size. Deal size is under 20mm Euros and will do 3-5/year
4. In-Direct Tuck-in- New technology that enables new use cases or user experience. Deal size is under 20mm Euros and will do 3-5/year

In the Business User Solution (white collar) area looking for market extensions and Tuck-in's

SME- Happy with what they have, may do some tuck-in's

Business Process Platform- Organic Growth

Industry Solutions- Looking for market extensions and tuck-in's

Prefer to pay a bit more for companies doing well, and will shy away from turn-around situations. With that said, they are conservative buyers and unlikely to purchase high growth companies at a significant premium.


Paul Weiskopf SVP-Corporate Development Adobe

"Adobe's mission is to create enabling technologies to create and enable growing markets through democratizing technology"

First growth phase for Adobe was around desktop publishing, next around electronic documents (PDF), 3rd was around Interactive media/websites (Flash), now looking at the rapid adoption of rich internet applications as their growth engine. Sees the industry at an inflection point around devices, smart documents, and rich media that fundamentally changes the way people interact with the internet. He thinks our computing experience is changing radically. The largest problem they see needing to be solved is to provide a consistent application and viewing experiences around multiple devices.

Sees Adobe uniquely positioned to add value in the application development tools, run times, and deployment arenas. He did mention, in a response to a question from the audience, that P2P is a technology they are looking at to facilitate the provisioning of live events.

Customer Segmentation

Creatives and Prosumers
Knowledge Workers
OEM & Service Providers
Web Application

Creative Solutions- 58% of Revenue
Business Productivity- 30% of Revenue
Other 9%
Mobile 3%

Americas's represent 46% of Revenue and is growing slower than the rest of the world.

Expect to continue doing 2-4 M&A deals/year and may be more aggressive in an environment where they see enhanced value through lower prices. Generally focused on smaller technology companies that have a culture of innovation, cutting edge technology and strong engineering teams.

Have completed more than 50 transactions over the past 10 years. The core M&A activity is around buying smaller technology oriented companies. They will pursue larger, Company transformative deals if they can attain a leadership position in an important target market. Macromedia was the last transformative deal they completed (2005).

Complementing its M&A activity, Adobe employs an active venture investment program. Adobe does not lead these investments, but will participate taking a minority ownership stake and holds board observer positions. The motivation is driven by strategy and measured with financial returns. If there is not an opportunity for a tangible commercial relationship, they typically do not engage.

Have invested cross-stage from seed to expansion, with B round the typical stage. $1mm is the often the minimum target amount invested, with $2mm the mean and $5mm the to date maximum.

Since 2006, have made 17 investments including:

Veoh & web video discovery
iMeem- content driven social networking
Bunchball- driving and measuring user engagement
ScanR & ColorZip- mobile information capture
DemandBase- marketing automation/lead generation


Steve West- Managing Director and Co-Head of Global Software Credit Suisse

Only 4 Technology IPO's in 2008. Prior to the mess we have in our financial system, the main issue is that not many private companies today fit the current institutional interest profile requiring cash flow growth and business model stability...with critical mass.

Dow Jones data from time of funding to exit:
78 months to M&A
99 months to IPO

The public software market is contracting, and the 'middle market' is disappearing with:

275 public software companies in 2004; with 35% below $100mm market cap
182 public software companies in 2009; with 80% below $100mm market cap

Looking at the near term health of the industry:

Public company revenue growth expectations have fallen dramatically as total software growth expectations in June '08 was 17%; now it's 6%. Expectations for firms with >$1B revenue went from 9% to 0. Firms under $100mm went from 29% to 9% (he expects this to come down further).

Consistent with the compression in expected growth, revenue multiples have fallen 55-70% from 2007 averages to a mean of 1.5x expected revenues. EBITDA multiples are down a similar amount to 5-6x (Saas is an outlier at 10x).

Clearly sobering news for venture portfolios heavy with software investments made in a different economic and valuation environment. Also hard to reconcile with an average pre-money venture valuation of $22mm during 2008.

If this trend holds, venture funds that follow FAS 157 (mark to market), and have software investments, will likely show some serious write-downs in their portfolios.

Do you want to know a secret?

Let's talk.

A-Rod no longer has a secret.
Ken Lay (RIP) took many secrets to the grave
Rating Agencies no longer have secrets...but why they still get paid is beyond me.
Banks and related financial institutions no longer have secrets.

In hindsight, maybe we should have known.

Do you want to know a secret
? I will share it with you if you promise to tell.

Click fraud is huge, it's getting larger, it's global, our leading industry participants have conflicts fighting it (I think of it as the equivalent to using steroids on their P&L's) and they won't share how they fight it (may be understandable). Not many mainstream folk are talking about the way click fraud growth is outstripping the internet's growth by nearly 2x. We have uninvited guests to our dinner, and that's a problem.

I am sure that executives at MSFT, Yahoo, Google, et al hate click fraud; though I suspect it's an unreported and unmonitored profit center for each of them. Grab a look at the Click Fraud Index from a company ClickForensics. They estimate click fraud grew to 17+% in Q4 '08. But it gets worse..." The average click fraud rate of PPC advertisements appearing on search engine content networks, including Google AdSense and the Yahoo Publisher Network, was 28.2%"

More than 28%!
. Hard to imagine, but this is a lower estimate than MarketingExperiments published.

It's going to get much worse. According to the Index, automated Botnet fraud is taking more share of the fraud pie. Unfortunately, these criminals take the 'permacheap' business model to a new level of refinement as they 'borrow' bandwidth and cpu's from unsuspecting innocents to purport their crimes. It's incredibly profitable, hard to detect, and when detected, hard to prosecute when the bad guys are resident in countries that don't have effective laws to combat this, or choose to ignore them.

Our industry has a little secret that's growing into a quiet big problem. Young industries, like small children, have little problems. Large industries, supporting market caps in the hundreds of billions of dollars, which experience fraud rates this high have BIG problems. At this rate of growth, clickfraud is going to kill PPC, if Congressional type hearings don't get there first.

It must be a big problem, clicking through on the key words 'click fraud' on Google, gave me 53 pages of paid Adwords and 539 displayed results. Many smart people are working on combating the problem. Someone is going to build a boatload of valuable equity when they devise a solution that becomes an industry standard at fighting it. Today, the industry's fragmentation is a sign that no one has a recognized superior solution.

That's a secret we don't want to share.

Monday, February 9, 2009

Random events and realtime operations

Zak recently sent me a great O'Reilly Radar post that highlights how totally random events (in this case the stunning online numbers of folk watching Mr. Obama's inauguration), affect management metrics for online sites.

For sure, sites will be barraged by ongoing Black Swan's that serve as a reminder that an element of pay-as-you-go-provisioning looks like a prudent, and efficient way to deploy capital.

You reap what you sow

Over the wise objections of my spouse, I thought it would be great family time to have the various members of the family unit explore the myriad short and long form video content available on the internet. I had visions of us sitting together, like a Norman Rockwell painting, enjoying past Hill Street Blues episodes and pontificating how this is a precursor to the beloved and fast paced 24. The reality is that, after 3 minutes, the family unit degraded to the plural; family units. Screens were displaying a myriad of video content in four separate rooms and I found myself assigned four room popcorn kernel corralling Dustbuster duty.

Fortunately, we have a number of distinct access points so 4 HD/VHS quality streams were not too taxing on our bandwidth, but it set me thinking about the 'real time' video experience that is about to hit the beach. The vagaries of video encoding, coupled with network congestion issues, caused uneven experiences in our unscientific family sample. Most of us were watching Hulu, where the stream is around 700kps (VHS quality); or their HD channel which I suspect is closer to 2Mbs. No doubt the uneven experience would have been exacerbated if we all chose to watch true 4+Mbps HD content.

An even larger macro issue facing the industry is scalability of provisioning a network to economically deliver a positive 'real time' viewing experience. Our industry has learned in many ways and countless times that adequate provisioning is really over provisioning; where networks need to have the infrastructure ready for the peaks, not the normal traffic load, is an equation rife with the potential of economic losses.

For many reasons, I am normally a fierce advocate of non-client solutions. Nevertheless, it seems likely that, from a combined cost/quality perspective, we are (and should be) heading towards a hybrid client/cloud solution for the living room internet experience. Content will be called from the cloud and streamed via a hybrid P2P solution (see Pandonetworks) that can cost effectively deal with the massive over provisioning required in an uncertain forecasting world.

This may be stored content, or 'live' streamed (see Octoshape and what they did with CNN, delivering 25mm streams around Mr. Obama's inauguration). Provisioning to such a large, and uncertain number of viewers exclusively via CDN's would break the bank for many revenue starved networks. In an era of challenged advertising budgets, network shareholders no longer tolerate spending like drunken sailors, especially when viable solutions that increase quality, lower costs, and provide better viewing information are available.

If the premise that we are heading towards a hybrid P2P client/cloud delivery solution holds true, it is logical that the client would also incorporate features that enable you to download once to the house and enable distribution to multiple family unit(s) (see Tversity), offer PVR capabilities, and an enhanced discovery/search capability.

Sometimes, fantasies come true.

Friday, February 6, 2009

Access, Fire hoses, to Garden hoses to Straws

For sometime, I have been looking at the internet to the living room market opportunity (NY Video 2.0 Meet-up, run by Yaron Samid, is a recommended place to see some interesting folk) and, while visiting with companies, have been focused on how this phenomena can be harnessed with a 'permacheap' focus. Many entrepreneurial vendors are stirring the better component of the better/faster/cheaper cauldron. I grok better (but think it will be commoditized quicker than you can say good exit), faster (tends to be in the capital intensive hardware dominated section of the infrastructure arena), and cheaper (when combined with the one of the two aforementioned traits) is good for any season.

MSFT and Netflix just issued a joint announcement stating that 1 million Xbox LIVE Gold members activated the joint service and watched 1.5 billion minutes of video in the past 3 months. The service enables people to watch content, streamed to their Xbox via Netflix, on their connected TV's. Today, 30,000 movies and shows are available via Netflix, plus over 17,000 HD content is available from Xbox Live. Surely, the amount of available content from these vendors, plus,, or type vendors is going to dwarf the exposure available from the moderated Netflix/MSFT sources.

It seems to me that the first issue of bringing the internet to the large screen home TV is access; simple to set up and attractively priced. Receiving streamed/cached content through a device that I already own, hard wired to the TV, clearly reduces the adoption cycle. With all the PC's and devices in homes today, I am sure enterprising folk are working to overcome this first hurdle. From a large vendor perspective, LG seems to be taking an early first step in this direction with their announcement last month.

This brings me to the fire hose. When these screens are connected to the internet, users will be instantly overwhelmed by the tens of thousands of sites offering millions of clips/shows/movies to watch. Hopefully, device will have sufficient intelligence to understand the various codecs used. If so, the next big step is to help organize this morass through an easy navigable User Interface (big button AOL circa 1999) that reduces navigation time.

While I will undoubtedly appreciate the winnowing of the content fire hose to a mere garden stream, it's still not good enough; Amazon has trained me to expect better. I value 'the customers like me also bought' facility, and appreciate the display of in context alerts from my 'favorites'. Therefore, on my TV, I would like a recommendation list populated by my friends/associates on Facebook/LinkedIn. Thereby giving instant access to a trickle, or a strawfull, of moderated content that has real 'better' value.

In fact, if I have a number of WiFi ready spare devices at home, a centralized PC (think Media Server), capable of streaming moderated content, enables me to reduce the number of monthly billed cable connections. Thereby, combining 'better' and 'cheaper' experiences. With a bit of Mr. Harry luck, this could be really rewarding.

Wednesday, February 4, 2009

U of Texas Investment Mangement Co (UTIMCO) reports on the value of their PE investments

Is a large investor in the Private Equity asset category. The folk at PEHub recently published UTIMCO's PE performance data here. In general, UTIMCO has posted reasonable numbers, certainly compared with the S&P index. One has to caveat these numbers as the returns embed a sizable number of investments that are not yet realized, and are subject to market vagaries.

You will see the data for such notable venture firms as Atlas Ventures (which missed its fund raising target), Austin Ventures, Spark (too early to opine), and Union Square (last fund seems to be a solid performer; latest is too new to comment on). I would expect that, in the near term, GP assessment of current value will trend down as the comparables have tanked. It is still too early for many of the funds recently raised to opine on the cash-on-cash or IRR numbers.

Incidentally, the publication of these numbers is precisely why many funds shy away from taking investments from public entities that have an obligation to report on the status of their PE investments. Certainly, in the venture capital business, one large 'win' can overnight change the outlook for an entire fund.

ComScore 2008 Digital Year report (click here) and excerpts from Akamai analyst call

Comscore recently released a report detailing digital media usage for '08, and thoughts for '09. As video is a big part of it, I have also included highlights from today's Akamai analyst call:

1. 2008 e-commerce spending of $214B increased 7% over '07. All metrics were positive going into Q4, which ended with Nov/Dec each down 3%. Travel continues as the largest commerce category ($84B).

2. The fastest growing categories were Video +29%, Home/Garden +25% and Sport/fitness +25%

3. Notable site performance; Facebook +57%, Wordpress +67%, Mozilla +40%

4. Video is rocking; 6% more people viewed 34% more videos last year than prior period. Online video now accounts for 12.5% of all time on the internet (up 50% in the last year). YouTube leads all video sites, with a 40% market share, and growing more than 50% faster than the market. Facilitated by near ubiquitous broadband access, legal streaming and better displays, a pronounced trend is emerging towards long-form viewing, led by Hulu, which is now the #6 video site. Moreover, Hulu had an average of 12 minutes view/video, which is nearly 4x that of today's other leading video sites. From the Akamai call, management sees television moving to delivery over IP. Today, internet provisioned video to the home serves the 3rd or 4th TV in the house, but they inevitably see it coming to the primary screen. For the big screen, quality of the viewing experience matters.

I am not sure that '09 will be the year it crosses to the mainstream, but definitely sees signs that it's coming. Per my son, " this is going to kill MTV". Quite fittingly, as we are at the beginning of another paradigm shift, here is the first video played on MTV.

5. Smartphone internet browsing soared 34%. Led by a 43% rise of 3G phones, coupled with flat rate pricing, this trend should accelerate as the full-year impact of 3G iPhones, Blackberry's and Androids are felt.

These trends continue to bode well for cloud based applications that are built for universal access (any device/anywhere). The continued explosion of alternative viewing channels will place a premium on developing a familiar way to organize and search/discover desired content. Also, during platform shifts people are constantly trying new things. Of course, many monetization and user experiences need to be worked out. In any event, these should be wonderful areas for young companies to exploit vibrant and growing markets.

Pew reports

The Pew Charitable Trust has for many years sponsored the Pew Internet & American Life Project. Researchers there have produced many fine reports that range from Internet usage trends (highlighting surprising demographic data), to details on what activities people are doing online.

If you are interested in gathering data on social trends, demographics, or connectivity this is a wonderful place to visit. Check out the piece on Networked Workers, it will give you a sense on why people are flocking to SaaS and Cloud based applications.

All the reports are free.

Monday, February 2, 2009

Time = Quality + Features

A recent article about Microsoft's process and thoughts behind the release cycle of Windows 7, brought to mind the above equation. A few years ago, I was lucky enough to have a partner, Yuval, who is as quietly wise (especially on matters dealing with technology), as he is gentle. Over hot chocolate one evening, he explained to me a stunningly simple equation that brought the tie between Product Management and company culture into sharp focus. For him it was as obvious; sort of like Einstein just knowing there was a relationship between the square of speed of light, energy and mass. Let me explain his equation:

Time= The date when your product/service will really be introduced to its customers
Quality= The customer experience (e.g. how many bugs/maximum pain to be inflicted)
Features= How much 'stuff' will be packed into the release

Yuval explained that each company has its own DNA, market pressures, and competitive dynamics that will cause them to interpret the above equation uniquely. For example, Intuit must hold (T) constant for its TurboTax product line, even at the risk of excluding 'killer' features, as it would be a death defying act for them to release a tax product on April 16th. On the other hand, Microsoft, was well known for its mantra to win all reviews. Knowing that breadth of features was essential to securing the coveted 'editors choice' (T) and (Q) often lagged customer expectations.

Lastly, a proud organization, such as IBM, was logically obsessed with product quality. As a consequence, they often shipped a superior quality product too late (OS/2) to have a market impact, or one that lacked feature depth to really differentiate themselves in a crowded ecosystem. Nonetheless, their core constituency, Enterprise customers, appreciated the reliability of the IBM brand.

The Internet, and more specifically the fast evolving SaaS universe, reinforces the validity of the equation. The now common practice, eponymous with Google, of releasing low/no cost permacheap 'beta' products may change user expectations at the core of Yuval's theorem, but it does not alter the DNA, or market pressures, that inevitably lead companies to make the 'best' in character decisions. To everything there is a season.

Resource for acquistion/partnering insights (SYMC, IBM, Citrix, Salesforce, SAP,etc)

The Software and Information Industry Association (SIIA) is in the midst of running a series of presentations, for members of the Venture Capital community, where the most acquisitive companies in the Information Technology Industry present their strategies, M&A interests, and are open for questions from participants.

Access to a few of the past presentations are available here. I participated in the last session where the VP of M&A for Oracle, and bankers from Pacific Crest, shared their M&A and strategic thoughts. Past sessions included IBM's thoughts on cloud computing, Salesforce's view of SaaS, and Pacific Crest's insights into the Saas M&A environment. With the IPO window closed and capital access used to fund market expansion vastly more expensive, these sessions are timely.

On Feb 10th, they are hosting a presentation from Adobe, SAP, and Credit Suisse's Software analyst that is accessible in person, or via conference call. You can learn more, sign up to attend, or listen to the next session here.

Ken Wasch, the head of the SIIA, is focusing on building a closer relationship between the Association and the venture capital community. With sessions like these, I have no doubt he will be successful. If you want to reach Ken directly, his mail is Ken.Wasch at