Our First Nine Companies Graduate The LaunchBox Digital 2008 Incubator Program

Wow!  What an exciting time for us.  Last fall, I met with Julius and Sean to talk about our views on what we might do next, and we all shared the same passion:  Helping early stage entrepreneurs.  With that goal in mind. there were a number of good models in the market for us to consider:

1.  Early stage venture capitalists like First Round Capital, and

2.  Incubator programs like Y Combinator.

We felt that our biggest value was not just as investors, but as activist coaches to young entrepreneurs, and decided then and there to pursue starting an incubator program in Washington, DC.

We got a lot of questions from folk early on about the choice of location, but each of us had met enough individual talent over the years here that we knew that DC represented a great under-leveraged opportunity – smart people, but ineffectively networked and supported.

Right out of the gate, we got support from an amazing network of people who volunteered to be advisors to the companies – people like Ted Leonsis, the godfather of technology in Washington, Raul Fernandez, a great friend who has built two great businesses (Proxicom and ObjectVideo), Reed Hundt and Michael Powell, two amazing guys who, beyond being former FCC Chairmen, both have a huge passion and talent for helping early stage companies, Jon Miller, my dear friend and wickedly smart mentor from AOL days, and other successful entrepreneurs and executives too numerous to mention (Go to our site to see the full list – an all-star list of generous, talented folk).

This spring, we got close to 250 applications to the program from across the globe, and chose nine companies to join us in DC for the summer.  We liked the teams when we first met them, but grew to love them all – so positive, so talented, so focused!  With a little help and advice from the Founders and Advisors, they all did amazing things, and all in a matter of only 12 weeks.

This week, we present each of the nine companies to the world.  Press, bloggers, angel investors, VCs, and a number of the big technology players will see first-hand the terrific set of businesses and products that have been built.

I have tremendous faith and confidence in the teams – I can’t wait for them to spread their wings.

To help you get a taste of things, I have pulled together brief descriptions of each company, and highlight some of the reasons why we think they can win.


BuzzHubb: A Better College Social Network

Founders: Satjot Sawhney and Ashish Kundra

My Perspective: Most people think the college communications market is saturated, but with 75% of Facebook users dissatisfied with their feed experience, and Twitter only in use by 7% of students in a poll we ran on several campuses, that is hardly the case.

BuzzHubb is best summarized as bringing the utility of next-gen Yahoo Groups to the mobile college student, but done in a creative, lightweight manner. The first fundamental element of BuzzHubb is that it establishes boundaries around the university campus – you can only join a school’s BuzzHubb community if you are part of the school (a great concept that Facebook championed). Once you have joined, you can join existing Hubbs, or quickly establish your own.

College students have complex, sometimes overlapping social group relationships. BuzzHubb makes communicating with those groups simple and engaging. A Hubb is a group of individuals who can share group messages quickly and easily from their phone, the web, or their social network. There are several types of Hubbs: Broadcast Hubbs, where you join, but there is a single author (e.g, the campus sports blog), Invitation-only Hubbs, where an existing member needs to invite you to join (a study group, a team, a special interest group) and all can contribute, and Open Hubbs, where anyone on campus can join and contribute (e.g., Obama 2008).

The UI allows you to quickly navigate all the Hubbs you are part of – a failing of the Facebook feeds metaphor. The mobile experience lets you opt to be alerted to new posts on a Hubb-by-Hubb basis, as well as share thoughts with friends or Hubbs via SMS or BuzzHubb’s WAP experience. The plan is to get it on 7 campuses in the Fall, learn, refine the experience, and then blow it out in the Spring.

Heekya: The Wikipedia For Stories

Founders: David Adewumi, Kwasi Nti, Rasvan Orendovici and Avner Ahmend

My Perspective: The current model of story telling on the web is pretty fragmented. There are really good individual repositories out there (YouTube, Flickr, and Photobucket are a few), but they focus primarily on a given category (photos, video), and have limited ability to address linear story telling. Blogging is a potential answer, but while there are close to 200 million blogs, only 600,000 posts occur each day – too many blogs die the slow death of neglect.

Heekya wants to encourage social story telling. They do this through several approaches.

First, they have a simple to use multi-media story builder that allows a story author to tap into their existing base of digital assets on Flickr, YouTube, PhotoBucket and Facebook. They also let the author use compelling public/shared content from those same sources. Good commenting and annotation tools help enhance the story, and simple sharing tools allow you to both share the story and post/embed it.

Second, they encourage alternate perspectives, allowing someone to clone a story and add or enhance it to create a linked, but unique story reflecting their own point of view.

Finally, they have a variety of browsing and discovery tools to let people see stories (and their related threads) along a variety of dimensions, including topic, geography, social connection, etc.

JamLegend: Guitar Hero Goes Social

Founders: Andrew Lee, Arjun Lall and Ryan Wilson

My Perspective: JamLegend is a new online music gaming experience, competing with the likes of Rock Band and Guitar Hero with a disruptive offering. The experience is fun and engaging. It’s free, involves no client code, and has a very compelling social gaming experience at its core. The problems with the incumbents are:

• High price points. (Several hundred dollars to purchase the game, an instrument, and a library of music tracks)
• “Tethered” experiences – what I mean here is that they are console based games, which means you are effectively tethered to the living room, basement, or dorm room where your console lives
• Limited catalogs – the two incumbents focus on the major labels and English-language rock music. Rock Music is 34% of tracks sold on music sites. Other genres, artists (independents) and language groups are way under-represented
• Limited social gaming experiences, and infrequent releases to get new functionality into user’s hands.

JamLegend attacks these limitations head on. It’s free. It can be played whenever and wherever you are (using a full game guitar if you want, but it’s just as fun on keyboards or laptops)—play it on the road, at work, at a coffee shop. Its catalog will serve the indies, just as MySpace and Bebo have done, and include other genres like Country and Jazz. It also is built to allow artists to upload their work directly to the JamLegend community. And finally, it really has a compelling social experience that is much better than that of the incumbents, through fun head-to-head challenges as well as simulcast tournaments.

Koofers: Crib Notes For Picking College Classes

Founders: Michael Rihani, Glynn LoPresti, Patrick Gartlan and Doug Feit

My Perspective: Koofers – where were you when I was in school? Koofers started at Virginia Tech, with a campus rollout in 2007. In that one year, it became the third-most visited site by students, behind Facebook and MySpace. The reason? It allows students to make the relatively opaque process of class and teacher selection fully transparent, by providing grade distributions and teacher feedback to allow a student to shape their individual class schedule, based on their own needs and style (e.g., “I am fine with exams, but I hate teachers who give tons of quizzes”).

Once a student has started the semester, Koofers provides help by offering access to a collective repository of study guides, past exams, etc. This is something schools have had for over a century, but these vaults were only available to small groups of students (e.g., a fraternity). Now, those tools are available to all students. Koofers also supports ongoing communication between students and teachers through its community tools.

The reaction at its alpha deployment at Virginia Tech, coupled with positive feedback this Spring from a quick pilot during the last week of the term at the University of Maryland (where 1000+ users signed up), gives the Koofers team confidence that they have a winner here.

Koofers will deploy to 30+ schools this fall, to provide themselves a bigger test bed, and then look to launch more broadly in the Spring.

Mpowerplayer: Marketing Mobile Games On Facebook

Founder: Michael Powers

My Perspective: Mpowerplayer is targeted to fix the discovery problem in the mobile gaming market today. Unlike ringtones, where the explosive growth and repeat buyer habits of consumers has built a multi-billion dollar market, the mobile gaming market is stalled.

The biggest issues? No way for a consumer to know what they are buying in advance of the purchase, coupled with poor provisioning processes. With ringtones, consumers know the product they are buying—they’ve heard it on the radio, on TV, or own the track. With mobile games, there is no natural discovery process. It is click and pray for the purchaser. Only 5% of people with a games-capable handset have ever played a game on their phone, and less than a third of the people who buy a game ever purchase a second game. It is a huge problem for both carriers and game publishers seeking new sources of revenue.

Mpowerplayer solves this problem in two ways: It provides a PC-based means for consumers to play mobile versions of the games they are interested in (via an emulator), and, if they like a title, simplifies the purchasing experience. Once someone becomes a member of the Mpowerplayer community, the ability of Mpowerplayer to understand their playing preferences and purchases makes it a uniquely effective marketing partner to the publishers.

Mpowerplayer has supported over 15 million demo plays to date, and powers the mobile sites of both EA and Sprint. They have now built a Web-based demo experience, and will use that to accelerate their marketing efforts more broadly.

MyGameMug: Match.com For Gamers

Founders: Raymond Lau and Erik Yao

My Perspective: MyGameMug is trying to return the fun to online gaming . Take one minute and search “trash talking” on YouTube, and you can sample first-hand how bad is the current model of only matching players by skill level.

MyGameMug was started by a couple of avid gamers who wanted to create the match.com for online gaming. Their goal? To create a fun and engaging way to find the “gaming style” of a person, and use it to hook them up with people who are compatible with them to play with online. The core of the MyGameMug experience is a 36-question test that draws out important information about attitude, competitiveness, gaming interests, etc. The responses are then used to slot you into one of 16 different GameMugs. Think of it as a Meyers-Briggs test for gaming.

As you take the test, MyGameMug starts surfacing potential matches for you—the further you go in the test, the higher the matching accuracy gets. Once you complete the test, you can either see those people who are good matches for you and reach out in real-time to offer immediate game play, or use the scheduling tool to offer a potential future time/day to play.

In its first week of testing, over 12,000 people completed the entire test, reporting an 85% satisfaction of where they were slotted in the 16 different categories.

The goal is to start with getting people to take the test, and then draw people into being an ongoing part of the MyGameMug community with other value-added things like user generated reviews, group contests/tournaments, a reputation system, guild management tools, etc.

Razume: Resume 2.0

Team: Sam Blum, Kyle Stoneman (founders), Brian Turnbull, and Ryan Geist

My Perspective: Razume is addressing the needs of job seekers in the 21-35 year old demographic. While there are lots of businesses out there to help the employer (Job boards, etc.), there is a huge under-served opportunity to focus on the needs of the job seeker, especially ones without the power of a robust LinkedIn network to help them in their job seeking journey.

The opportunity: There are over 20 million job change events happening this year, and the average 18 year old today is expected to make over 10 job changes before they hit 38 years of age.

Razume helps the job seeker along three dimensions. First, it helps a person develop a professional resume, starting with powerful authoring tools and online tips, and then making it simple for a person to reach out and get tips on fine-tuning their resume from friends, associates, and just as importantly, the Razume community itself. Simple annotation and commenting tools allow people to give very specific feedback to turn someone’s resume into a better, more effective marketing tool.

After that, Razume helps get the resume into the market. That’s done through two means: a free one-click posting of the resume to the major job boards (a service that costs $59+ at other sites), and use of the Razume Job Finder to browse and bookmark jobs of interest from over 7 million job listings on the web.

Once a user has a call-back, Razume helps them prepare for that interview with useful tips and techniques, plus tools to help research prospective employers that, ultimately, helps a person get the job and make the right decision.

ShareMeme: Evite Meets Twitter

Founders: Ahson Wardak and Luc Castera

My Perspective: ShareMeme is an easy tool for sending messages, polls, invitations and other things to your friends and associated groups on the channels that they prefer.

ShareMeme is addressing a real problem today – inadvertent “spamming” of friends across all the channels you use to interact with people (SMS, Facebook, IM, email, Twitter, etc.). To reach our friends, we find ourselves broadcasting redundant messages across multiple channels to ensure our bases are covered. ShareMeme takes that problem head-on. It is built upon a powerful, self-learning platform that understands the nature of a given message, its priority, and recipient preferences to send the right message the right way to your targeted audience.

Interacting with ShareMeme is simple – you can use the mini-forms on the web site or its iPhone experience, or use its natural language interface via the web, SMS, Twitter, or Jott to say things like “Invite college friends to see the Opening Ceremonies at my house at 7pm on August 8″, and ShareMeme takes it from there. It understands the group “college friends”, the priority of the message, and users’ explicit or derived preference in interacting with you, and reaches out automatically via the most effective and user-respectful communications channel, be it SMS, Twitter, IM, your social network, or email.

The strategic desire of ShareMeme is to be the root location of recipient preference data on the web, as well as the place to define group relationships one time, in a manner that can then be leveraged by you anywhere you want, be it through mobile communications, email, or your social networks. Think of groups here as subsets of your social graph.

Zadby: Web Video Product Placement

Team: Tim McLaughlin (Founder), Beau Brewer (General Manager)

My Perspective: Zadby deals with the intersection of two phenomena: The continued lack of effectiveness of traditional advertising to reach the 18-35 year old demographic, and the poor means that independent web video producers have to monetize the value of the communities that follow them.

Zadby is a market maker for product placement in web video. It allows brand managers, agencies and others to tap into the network of independent web video producers, outline their needs and what they are willing to pay per CPM, and then producers create proposed videos, get them approved by the client, and offer them up to their communities, where they get paid on what traffic they generate.

The challenge is how to bring product placement to web video in a scalable manner. Zadby’s approach works to solve this problem (and we’ve seen it succeed with our trial efforts).

With YouTube only selling ads on 3% of its videos, producers are struggling to find a way to make their passion a real business. Yet, web producers are succeeding in building sizable communities who follow them. They may not be “Desperate Housewives”-sized communities yet, but at several hundreds of thousands of viewers, they rival the audiences of many cable TV shows. Zadby leverages the creativity and reach of these producers to create a useful pay-for-performance advertising option for them to add to their arsenal.

Facebook thinks my friends want to know when I buy hemorrhoid cream – the culmination of a bad month for privacy, and my views on the solution

This has been a pretty wild and woolly couple of weeks in the advertising and social networking space:

On the Facebook-can’t-be-stopped front, the social advertising play Facebook outlined (Beacon, Social Ads, corporate ad pages, et al) is a really well thought-out means of making their entrance as a principal into the whole ad ecosystem not just a simple vertical integration of their inventory (how I would typify moves like MySpace’s, before their hyper-targeting announcement), but a front-on attack on the first generation behavioral targeting players and search principals.

On the Privacy-is-an-illusion front, AOL is trying to get out in front of the anticipated consumer backlash around behavioral targeting by announcing their plan to allow an opt-out capability.  Consumers, you can find that opt-out at “www.reallyobscureurlthatwehopeyouneverdiscovery.com;)

On the Don’t-forget-your-old-friend-Tom front, MySpace announced two steps to address the intellectual high ground gap they have with Facebook:  They agreed to be part of the OpenSocial consortium with Google, in the hopes of getting the same developer community mojo that Facebook is riding, and they announced their “hyper-targeting” capabilities for advertisers, leveraging the profile information of their members.

And finally, lest they be forgotten, on the $1000-per-share-freight-train front, Google made a great first step in addressing the assault by Facebook with their OpenSocial play.  Without MySpace, it would have been irrelevant.  With MySpace as a part, they are starting escalating the pressure on Facebook on opening access their social graph data.  I don’t see Facebook blinking anytime soon, but each journey begins with a single step, and OpenSocial is off to a good start.  Its long-term success will be determined if and when they show consumers a powerful call-to-action, in terms of a compelling value proposition that resonates with the social networking demographic (that hasn’t happened as of yet – it is still just a standards dialog/battle among the tech principals). I found the fact that it was hacked in its first week of existence to be a serious warning to all that openness relating to consumer data, without the appropriate design and software quality rigour, is a train wreck – hopefully they will learn from their first bloody nose here.

This past week, for me, was all about the privacy entitlements individuals are owed, and how they might effectively administered to the broad base of online consumers.   I see no scenario where consumers’ voices aren’t heard on this issue – it’s too rich of a topic for Washington not to opine on.   Given the initial dialogs on the topic, I see 5 major paths this privacy dialog takes;

Option 1: The FTC implements some form of “do not call registry” for web users.  One challenge:  In the phone world, the issues of identity was easy – it is my phone number.  How on earth do they intend to do it for my web activities?  Today, I roam from site to site without a common identity.  If I now have a privacy policy I want uniformly enforced, I see no easy way to do it, short of a cookie the FTC places on my PC that sites all need to respect/use to understand my “rules”, and I see multiple issues here:

How do you know a site is respecting the policy?

How does that approach work in my multiple PC/kiosks/mobile world?

How long will it take for the FTC to design and implement the solution?

Option 2: The FCC wins its proposal to enforce “anti-spyware” efforts, defines web tracking as a potential “spyware in the cloud” model, and intervenes. If this is like the approach to SPAM fighting, it will take the form of a reactive mechanism to prosecute offenders – not a real solution in my eyes.

Option 3: The industry proposed a solution (led by the majors).  Certainly, this is a proactive approach to the pending backlash, but each player is really conflicted here (hence all the leading with opt-out vs. opt-in proposals).  Nothing other than point solutions by individual players has arisen, and that’s a non-starter for me.

Option 4: Grass roots solutions, in the form of third-party browser extensions, arise.  There are a number of IE and Firefox add-ons that are starts at trying to address the security and privacy issues, but no solution reflects the needs of today’s consumer, who is now facing the increased use of behavioral targeting by each of the majors and the new social network profile-accessing ad schemes relatively unarmed.

Option 5:  The browser manufacturers incorporate more robust privacy controls in the core shipping product that is well beyond the controls they offer today.

To me, the best answer is Option 5: the major browser “manufacturers”: Microsoft, Mozilla, Apple, Opera all need to ship as part of their standard offering (not as add-ons), a simple process to allow consumers to select, in simple terms, the level of personal information they are willing to disclose to web sites / ad networks.

Today, the core browser-based options available to consumers are really blunt instruments:

Enabling/Disabling cookie support – a hugely bad consumer experience here, in terms of ease-of-use of their popular sites

Periodic cookie sweeping – again, a bad experience rarely done by the average consumer

Site-specific cookie blocking – a rarely used feature

Blocking all third-party cookies – again, a buried option rarely used, and one that treats all third party cookies as equals as privacy offenders, which is not the case

Ad blocking tools, an economically unjust solution, in my eyes.

My rationale for developing and shipping enhanced privacy controls in the core browser at the best approach?

1. The current principals in the publishing and networking space are just way too conflicted to come up with the right solution.  All the talk today centers around opt-out schemes, and that is really an intentionally weak scheme – Opt out studies have shown only 15% or less folk elect to opt out, when presented with a default opt in selection.

Past action also indicates future intent.  Look at how Facebook addressed public profiles – it shows they are going to be aggressive in their data usage tactics.  Beacon is just another step (and certainly not their last) in their advertising journey.

MySpace is not much better, just a few chapter behind – hyper-targeting on profile info is just a first step by them.

It’s not like Google is immune from similar criticism.  It started with their archiving of web search history, to their terms of service for Gmail, and will extend to their own plans for targeting in the display ad and mobile space.

I just don’t see any thoughtful answer arising from the monetization players.

2. The browser presents a tool that can implement a near-100% privacy compliance scheme (you still have the issues of multiple PCs and mobile to wrestle with here as well, I’ll acknowledge).  I’d prefer some form of white-list scheme as part of the solution to eliminate the threat of new bad actors – if you haven’t passed the test of respecting my privacy policy, your cookie gets wacked (passing through Newark NJ on the train as I now type, hence the Sopranos term ;)

3. You have a solid means for getting the vast majority of consumers easy access to the control mechanism.  This means the solution can’t be buried in detailed options rarely used – it should be part of the install/upgrade dialog.

4.  You have a possible practical middle ground for consumers and publishers.  The solution might even include an option to share an anonymous “mini-profile” I am willing to expose (e.g., age/sex/location).

5. It’s a solution that could be developed and broadly deployed quickly (e.g., 6-9 months).

I think this (browser-based control) should be on a short-list of options to consider as we go forward.  The biggest challenge for me (and a reality check)?  The fact that the browser manufacturers themselves are conflicted in coming up with the best answer.  IE’s owner, Microsoft, has made major investments in its ad business, and any approach that dilutes their efforts will get major pushback.

I even worry about Firefox – the income that the Google relationship brings into Mozilla Foundation is addictive – but hopefully the community will rule here and perhaps make privacy an “A list” initiative.  Firefox is the shipping vehicle that I hold out the most hope for – if they do this, and it further helps their install momentum, it can get Microsoft to the table.

I do think there is a practical answer that works for consumers and businesses – I just don’t think I need to trade this much privacy away so quickly.  I wait with baited breath to here the first real pro forma answer to emerge.  It is way too critical a topic for us to let age much more than it already has…

The impact of the debt markets and AOL’s future – it’s time for new thinking

The latest report covering the KKR buyout of First Data is disturbing at several levels.  It is a clear demonstration that the buyout model of the last 2-3 years is over – the debt markets have dried up for this sort of lower quality paper. Does this mean buyouts will disappear?  No – I just think you will see a return to the model championed by Silverlake and others in less buoyant times: Buy what you think are solid-fundamentals quality firms with growth potential (e.g., Seagate), then help get them the operational talent they need to take their game to a new level. We saw a number of marginal buyouts happen over the last two years (I am not trying to paint First Data with this brush) – that’s over for the foreseeable future. The major banks are, as mentioned in the WSJ article, caught in-flight with a commitment of their balance sheets to some of the major buy-out firms, with little or no chance of placing that paper without a SERIOUS haircut.

With the drying up of liquidity, the future for AOL is now made much more complex. There were lots of folk betting on a private equity consortium stepping in to take AOL of TWX’s books. That path now has little or no chance of succeeding in this environment.

What next then for AOL? I am not sure. Under the assumption that the aggregate AOL entity moves into a model of flat to low single digits growth, I am not sure TWX can afford to continue to have it roll up into the aggregate numbers. It makes TWX’s ability to position itself as a 10+% annual growth business a real challenge. If we assume that some structural move is in AOL’s future, what are left as options? Most of the prior musing about AOL has its future going down one of five paths:

1. Acquisition by Microsoft

2. Acquisition by Yahoo

3. Acquisition by Google

4. Standalone spinout as public entity

5. Sale to private equity player.

I think all of these options have way too much hair on them. Buying all of AOL brings a lot of financial baggage with it. To begin the dialog, let me give you my view on AOL and its composite parts. AOL is essentially composed of three major segments (this is not how things are necessarily organized, but is the best way to discuss its valuation):

AccessCo – this is the remnant primarily-dial-up access business. It is a great source of free cash, now that the marketing spend has been dialed back to practically zero, but as the last quarter showed, it is on a pretty fast decline (10% subscriber declines in the quarter), and should be modeled and valued appropriately. To me, on a discounted cash flow basis, maybe it is worth $3.5B-$4B (this is a rough justice estimate, given analyst views on sub profitability and an extrapolation of subscriber trends), assuming there is some tail of folk who will stay customers till the end (like what we saw with Compuserve).

PublishCo – these are all the properties that generate the viewership traffic for AOL to monetize. This is a collection of a lot of disparate assets, ranging from things like AIM and MapQuest to the AOL 9.0 user base. Most of PublishCo is best described as Web 1.0 in nature (no franchise model), with the exception of businesses like Userplane. Valuing PublishCo is difficult – The aggregate US pageviews and engagement metrics are pretty huge, but the trajectory is relatively flat, and even with an optimistic lens, it is most probably a low single digits growth business.

AdCo – these are the operations for monetizing the traffic of both PublishCo and third party inventory. I am putting the search operations in here as well. The centerpieces for AdCo are Advertising.com and AOL’s ad sales force. AdCo has been expanded over the last year through acquisitions like Lightningcast, Third Screen Media, Tacoda, and AdTech AG. Performance of elements of AdCo are pretty stunning. On last quarter’s earnings call, Dick Parsons mentioned sales on third party inventory (versus PublishCo’s) were up 32% year over year. This is driven in large part by the performance at Advertising.com. Valuing AdCo is probably the heart of matter in determining AOL’s future. If you focus on the display ad sales business, solving for a combination of sales within AOL’s own properties and sales on third party sites, you can craft a business of 20+% annual growth, with decent, if not exceptional margins. Adding the AOL search business into the mix gives you a lower growth top line story (the 16% year-over-year growth highlighted in last quarter’s financials), but dramatically improved margins, given the sweet economics of the deal with Google. The structural thinking here is the biggest leverage point in any AOL valuation dialog. It’s well worth the effort – if we use the Microsoft acquisition of aQuantive for $6B earlier this year as a comp, some permutation of AdCo (Advertising.com, the search business, a multiyear commitment by TWX to rep the inventory of PublishCo) could be valued at $10+B, assuming the parts hit the magic 20+% annual growth bogey.

So if these are the pieces and parts, what do you do as the parent?

Cowboy up and stick to the script of giving AOL runway to validate its strategy? I think we are rolling down the runway at 220 mph and have about 1000 feet left. Given the lukewarm feedback to the announcement of the $5B in additional stock buyback and the increase in dividend (the TWX stock closed today at 18.66), time is running out for management to remain masters of their own domain. The harsh words by Pali analyst Rich Greenfield are a shot across the bow – the buy side is losing patience. The only question is who is going to play the role of Carl Icahn this time around.

Sell the aggregate entity? I just don’t think that is something that will attract lots of attention. The three majors (Google, Microsoft and Yahoo) wouldn’t want the mass of no-growth components that the aggregate entity brings with it. How many acquisitions bring with them an immediate establishment of a sizable discontinued operations (AccessCo)? Maybe you could see a three party transaction, where the acquirer immediately lays off the declining cash cow to a private equity player…

Sell/spin AdCo? I think this is an attractive path. TWX retains AccessCo in its discontinued operations segment, and uses the free cash generated for more strategic purposes. AdCo is either sold to one of the majors (let’s add Murdoch and Diller to this list), or spun out to create a growth multiple currency to continue to roll up properties. AdCo is a really complementary acquisition by almost every major player out there (unlike what buying the assets of PublishCo would mean to a Yahoo or Microsoft). It also can survive and thrive in a world of disaggregation of traffic (i.e., it’s not a Web 1.0 bet on portals).

What about PublishCo? There are interesting properties (MapQuest, AIM, etc.) that are worth decent valuations. I just think dealing with PublishCo in the same time horizon as AdCo is a tough act. Perhaps Day 1, PublishCo might be combined with other web properties in the TWX family and given a longer event horizon to determine its course. The other option might be a separate aggregate sale to a player with greater web aspirations (e.g., Comcast). I struggle here on an elegant solution for this, but I think PublishCo’s valuation isn’t the big dial to turn in an AOL discussion – it just doesn’t have legs as part of a growth story. You do need the commitment from PublishCo for AdCo to run its inventory (and its search traffic) for 5 years to make the story all hold together, but I think that’s about the full extent you’d want the operational interop between AdCio and PublishCo.

I am a TWX stockholder, and the retreat to 18.66 pains me. I just don’t see an organic path to material success (i.e., 10+% annual growth) for AOL in its existing form, given current course and speed. In this world of inflated valuations and TWX’s commitments to stock buybacks consuming the available cash for acquisitions, too many deals will trade away that would help AdCo continue its forward momentum. With all the talk about arming AOL with its own currency over the last few years, it’s time to make it a reality – it just needs to take another form – AdCo currency.

AOL Search – a case of sincere flattery, but a bad business decision?

First, let me congratulate the AOL team on its latest acquisition, Tacoda. I think that since Randy and Ron have taken the helm, the acquisitions to continue to fill out the advertising infrastructure have been logical and done at sane valuations. At this point, the non-search related portions of AOL are as strong as any of the other majors, and you could even say that Advertising.com continues to be the best-in-class player out there in the display ad network arena.

That said, while there are a number of really good things occurring, the recent decision to clone the Google search UI is one that I think needs a major revisit.

A brief history of AOL search for the uninitiated: AOL did a deal that, in Mid 2002, swapped out the prior Inktomi-powered search experience with a Google-powered one. The deal was a seminal one for Google, garnering them a lot of US search traffic at a critical time in their history (remember the more dominate position that MSN and Yahoo had in search in prior years).

The nature of the deal involved really favorable economics, as well as warrants in the pre-IPO Google. The deal did, however, have a number of constraints on what AOL could do to customize the Google search experience. The deal was a good one – AOL had much more flexibility than any other Google partner to-date, but even with that flexibility, it was probably correct to paint a picture of AOL being able to build a creative veneer around the core Google results, but not much else.

Well, the search team, led by Jim Riesenbach, Gerry Campell and Mark Canon, actually did a really great job, given the cards they were dealt. They did a number of things to allow for creative monetization of high-value searches, and built an underlying architecture that allowed real-time mixing of a number of external feeds, published in a customized template for each category of search terms. They were able to serve up the results with very little latency, given all the pre-processing they were doing. Overall, a nice piece of work. They also championed the selective use of editorial results in the header of popular searches (later copied by others), giving users really good payoff in the top half of the initial results screen displayed.

The growth in search-related ad revenue was pretty dramatic under their watch, but they knew that they had to test moving further out on the efficient frontier of “veneer design”, if AOL was ever to establish its own unique voice in search.

Their last major release (started long before their departures) was AOL FullView, which built on all their prior learnings/feedback on everything from consumer lukewarm acceptance of clustering, to the navigational issues of excessive reliance on horizontal tabs to toggle between result set types (text, image, video, etc.)..

Here is a sample of what one of the FullView templates looked like for an artist-related search (in this case, Dave Matthews):

AOL FullView Template for Artist-related Search

To me, it resembles more of what Ask.com has morphed over the last several months – delivering a composite page with lots of rich content payoff above the fold. Compare that to a search for the same artist search today on AOL. using the new “look like Google” philosophy.

AOL Search As It Exists Today for Same Artist

It is drab for a content-rich search like a music artist, and is a pretty forgettable experience. Note the heavy use Google branding at the top and bottom of the page. I understood the desire: If consumers felt that they were getting “Google results” from any search originated from the AOL network, maybe they would reduce their tendencies to use the Google site directly. This search traffic capture objective, combined with the newest Google deal (done as part of the Google investment in AOL in 2005) to allow AOL to start selling their own version of adwords to major advertisers, certainly has intellectual appeal at some level.

The challenge with this approach is fourfold:

1. We lost the impact of some of the tips and techniques we had developed as a “veneer” player that maximized the revenue we could get from high-value searches – maybe that will be offset by the private label adwords, but maybe not…

2. Over time, the average consumer is going to develop more of a tendency to just go to google.com directly – I certainly have begun doing that. The value of AOL as part of the value chain in the eyes of the consumer is getting pretty minimal.

3. It under-leverages AOL’s ability to deliver unique rich content assets from within the TWX network.

4. It is, by its nature, defensive in nature – how could you possibly grow search share materially this way?

I do think AOL has some great assets, and its video search is best-in-class, thanks to the Truveo acquisition. A great video search, however, will not have enough of a material financial impact to offset the gradual decline in core algorithmic search that this new Google-clone approach portends.

It’s time to revisit the decision before Google further erodes AOL’s position here. FullView may not have been the answer, but this current approach is definitely not a winning playbook.

Update: Saw the latest TWX earnings announcement this morning. AOL ad revenue up only 16% year-over-year (they did warn about this earlier in the quarter), but certainly better that some (YHOO). Under the assumption that advertising.com continued to do well (since it is less tied to AOL pageviews), I am not sure how the rest of ad/search revenue did (I am assuming lower than the 16% average). I had hoped the paid subscriber declines would slow on a percentage basis, and the 1.1MM sub loss in the quarter pains me – it creates an environment of more OIBDA/cost pressure going forward. Here’s hoping that a lot of them were converted to free AOL users – I think we’ll hear about that “save rate” on the earnings call, since it is a critical leading indicator of the new strategy.

Yahoo and the views of modern Martin Luthers

Reading all the various views about Yahoo over the last 72 hours, it is pretty easy to join the crowd and opine, since all posts seem clustered at three get-well strategies:

  • Fix search (gee, this is easier than I thought)
  • Buy MySpace (refined from “Buy MySpace or Facebook” of the first 24 hours following the Jerry Yang announcement)
  • Sell Yahoo to Private Equity/Microsoft/Newscorp

Do I agree with the wisdom of crowds here? Well, you’d have to be daft not to observe Yahoo’s search share declines and an effectively flat US story and think all is fine. The answers aren’t easy here – but all pundits agree it is critical to crack the code of search improvement beyond Panama, or there are troubled waters ahead.

Let’s start with search. Fixing search is as much a brand positioning as a technology issue. Pure play brands trump hybrid brands in the eyes of the consumer. Google is Search – pure and simple. Yahoo was search in eyes of consumers in the ‘90s and early ‘00s (and it ads reflected that very clearly), but with its content focus under the most recent regime, it started looking and acting as a media company. In the bull market of online advertising over the last 4 years, that seemed at first to be a winning play (maybe content WAS king), but now seeing Google at the precarious market tipping point in the US, that positioning as a media company is hurting the Yahoo cause. It’s time to reinforce Yahoo’s value here (and stress other unique elements of it search value proposition, like Yahoo Answers). Just don’t mention “the algorithm” ;)

On the search experience front, there is just too little differentiation of the Yahoo and Google search experience. Some people think that maybe an OK play if you just want to settle for trying to maintain your share as search player 3 through 6, and you believe users WANT a more consistent keyword focused search experience… That is the perceived AOL bet (outside of video). For the number two player, however, that is a scary place to be. Yahoo needs to take some risk here (not blind “bet the franchise” risk, but some form of champion challenger testing of a more transformative search experience, ranging anywhere from an editorial focus like Mahalo to a natural language experience like Powerset). Search today is flawed – anyone’s own usability tests reinforces that understanding. It is still fertile ground for a company of the scale of Yahoo. There is innovation happening by Yahoo in the space – the Yahoo Answers experience has been a big win – but even there I am starting to see lots more really low quality “answers” manifest themself. Don’t rest on your laurels. Apply more automated editorial control here, or the great long-tail knowledge base will get compromised pretty quickly. There is a role for some form of post-answer posting editorial control – figure a way to do it at scale by empowering high-scoring community members additional editorial rights by category, or use better algorithms to deal with things like how to weight single-answer submissions better – lots of them are of pretty low utility.

Yahoo has a great and unique asset in its namespace – the size of its explicitly identified users (garnered by circling so much of the web email business for years). Google isn’t there yet, but their thrusts in email, IM, payment schemes, etc., all serve to recognize the strategic importance for Google to be a primary explicit basis for identity on the web. The challenge for Yahoo is figuring out a more aggressive strategy to leverage that namespace beyond Yahoo owned-and-operated experiences. I see them WAY under-indexed here. I do like the idea manifested in the current mail beta to blur the lines between IM and mail for the broader Yahoo community, effectively making everyone a member of the Yahoo IM community (even though this is not really a namespace expansion strategy, but one of increased leverage within the Yahoo experience), but I hated to see the buddy list concept re-manifest itself. By default, the online status of everyone I communicate with via IM and mail should be visible to me, if I am a newcomer to instant messaging). Let the experienced users tweak/refine things. Also, let me see new communications events anywhere I am in Yahoo web properties, not just the home page.

Social networks are another way to expand the Yahoo namespace, and much has been written over the past several months on the need for Yahoo to buy their way in via MySpace or Facebook. I do think that at a 30x multiple for MySpace, it makes a great addition (not the 50x multiple being bandied about), and if I had a choice, MySpace is much more of a Yahoo-scale thought than Facebook. That said, the recent Rivals acquisition is a really nice US-focused acquisition at a very reasoned valuation. It is not of enough scale to move a dial, but is a great step while they ponder “mega” transactions. The challenge in all these social networking plays is coming up with a plan to get more value from the relationships beyond the low CPM ad revenue they currently obtain. Yahoo does have enough other assets to make a recirculation strategy to higher CPM locations/properties a reality. None of these social network acquisitions can be justified using any traditional metric, but if you don’t dive in, they’ll either trade away to a rival with a hyper-valued currency, or they’ll do an ad deal to the highest bidder (in both cases, that has historically meant Google, but now I would add Microsoft to that mix – they are writing some pretty huge checks of late). We’ll certainly see more M&A by Yahoo here, even if the top two properties trade away from them.

On the mobile front , Yahoo has done some aggressive work with Yahoo Go, and 17 months after the original announcement by Terry S. at CES 2006, it is a valiant example at an integrated experience for feature phone users. I use the bits – there is goodness in them – but I find myself using dedicated email and mapping apps from Google more. I am not sure what drove me there. The email experience within Yahoo Go is good. One major differentiator might be the aggregation of inboxes I can get from the Google mail experience for free. Yahoo could and should do the same (heck, that was Oddpost’s lead value proposition at one point). On mapping and local search, I don’t think the Yahoo bits are on par with Google’s – that’s an important sub-element of fixing the search value proposition. Also, there is not a lot of thought leadership yet on testing of mobile advertising within the experience, beyond non-actionable micro-banner ads and the usual sponsored links in the search experience. I would be fascinated to see the usage stats for Yahoo Go, and what’s been learned to date. I do think the over-the-top distribution play was the right way to go – I wonder if that change came as a result of assessing the effectiveness of their prior Cingular cross promotion deal… As I mentioned in an earlier post, mobile may be the right thrust in the big emerging markets for the major players, and Yahoo certainly has the assets to make a much more compelling mobile experience for these markets a reality. Update:  have downloaded the just released Yahoo Go 2.0 – I like some of the cosmetic improvements, and mapping seems improved.  Performance a bit slow, but I like what I see in the first 20 minutes of hands on use.

Net net, I am a fan of Yahoo, and the quick exit to a private equity player envisioned by some is a misplaced thought, in my opinion. I don’t think you reengage a founder to be a steady pair of hands to navigate a transaction. I think it is much more of a statement of a need to get back to the roots of the company, and be an aggressor once again. It will be interesting to see what the next few months hold for them.

Search and the problem of Google muscle memory

I just looked at last month’s U.S. search share statistics, and it was interesting to see overall search query volume look flat year-over-year. I don’t think one data point is enough to shoot off signal flares and declare an emergency (especially given that March’s year-over-year growth was 14%), but that statistic, coupled with flat average time spent on line, is creating an environment where all boats will no longer rise with the tide.

The first macro event that concerned me about life for the non-Google community was Yahoo’s first quarter performance. While they underplayed the positive impact of Panama, it DID have an impact that, without its contribution, paints Yahoo as a player with little or no domestic growth – a pretty scary thing for a company still trading at a sporty growth multiple.

The second event was the Doubleclick acquisition. Here was a company who barely got $1B when they shopped themselves two years early getting $3.1B from Google. The disturbing thing here was not the premium Google was willing to pay, but the fact that Google, often criticized for far-afield attention to things like radio advertising, has moved their attention firmly back to their original major, online advertising, and made a stepwise change in their display advertising capabilities (why it took so long for a move like this was a mystery to me, but, given their dominant market position, the ship had certainly not sailed on the opportunity).

Now we see the latest search stats, summarized as Google gains 1.4% of the search market month-over-month, at the expense of Yahoo and MSN. That’s pretty huge shift for a given month for a mature market like the US, and you worry if the market will reach a tipping point in the next year, accelerating Google’s share gains even faster. I see selected big markets in Europe, where Google’s share is 80+%, and think that life gets tougher, not easier for the other majors in generalized search over the next year.

Does this mean the game is over? Not by any means, but for me, the opportunities exist via:

  • Vertical search
  • Highly aggressive generalized search plays

In the vertical search markets, we already have good poster children to validate that the entire fractionalizing of the web is relevant to search as well (WebMD and CNET, who I view as a tech product search play, are two examples). I think there are addressable market size constraints in any vertical search play, but that there are a number of markets of size that possess enough of a specialized nature to allow for niche entrants to survive and thrive. Nothing new here as a concept, but I do think that plays like video search are not vertical search plays – I view them as horizontal plays – and they are going to have a hard time thriving as stand-alone offerings in the face of moves/acquisitions/product extensions of generalized search players (Google’s new composite search page being just one thing that changes that landscape).

Does that mean we will see no new entrants in the generalized algorithmic search markets? No, but it means you need a radically different positioning and algorithmic approach to have any shot at scale. It’s not a new UI wrapper on old concepts. It’s bold bets, backed by hard science. Powerset is probably the best example of what I mean…