Cogblog

Disclosure: I know a few sales people at Yahoo! and one engineer. This post has no biases in it.

Citi analyst Mark Mahaney said about Yahoo! this week:

Its core Display Ad biz seems like a Deteriorating Asset – a possibly perpetual market share loser – while its Asia Investment Portfolio would seem to contain significant Shareholder Value creation opportunities. We applaud YHOO’s significant share repo activity and would encourage the consideration of a dividend.

Mark Mahaney is a fellow Wharton alum (Go Quakers!) and a Hopkins alum (My wife’s school), so you would think he would be super smart, but I hate this analysis. This analysis is what you do when you are losing: Milk the deteriorating asset and give the cash to shareholders before the company throws it away. This is not how to win at all. Turnarounds require cash hoarding. Should Apple have paid a dividend a decade ago?  Should Apple be paying a dividend now? Cash should go to investing in the business if there are places you can invest it that return a reasonable IRR (theoretically not hard given the interest rate at the moment). If Yahoo doesn’t have these, and Scott Thompson can’t figure out what they are, they truly are doomed, but I continue to think of Yahoo! as one of the most valuable media properties on the Internet today. Ironically, a Citi analysis tells the story:

There you go: Yahoo! is just behind Google and Facebook for time on site in the U.S. Admittedly, the inventory is not as valuable as Google’s directed intent inventory, but still, don’t go throwing in the towel. I vote for turning it around! That requires investing in awesome, not milking the business dry. You need to give Scott Thompson a fighting chance here.

Of course, I have to comment on the ridiculous things said by Business Insider as well. Here is the best part of that article:

This exec said: “I would like to know what the Yahoo board was looking for that this guy is the answer. Because I just don’t understand.”

This exec’s primary complaint is that Thompson has spent most of his career on the product development side of the tech industry and he has exactly zero experience in media or advertising.

“He doesn’t really know the company. He thinks there’s opportunity but was not specific about it. I think he doesn’t even really grok what business Yahoo is in.”

In this person’s view, Yahoo didn’t need an executive with product development experience as CEO because “there is very little that is wrong with the Yahoo product.”

“Maybe a year ago they had product problems, but [Yahoo product boss] Blake [Irving] has done a great amount of work and what Yahoo has in the product pipeline is more compelling than another other media company.”

In this person’s view, what Yahoo needed to grow its revenues again was a CEO who can “better position” the company’s various advertising offerings to agencies. After meeting with Thompson, this source said that could be a problem for Yahoo’s new CEO.

“He is not really familiar with the kinds of sensitivities in the agency business. This is a very relationship heavy industry and I don’t know if he’s best equipped for that. “

This guy is hoping they re-hire Terry Semel. I liked this hire because I thought they needed the second coming of Tim Koogle.

Yahoo! is not in the media business, it is in the new media business. Unlike movies and TV, where the format has really changed minimally in the last 50 years, new media is changing drastically every 5 years. The advent of online video like Youtube and Hulu, the emergence of the mobile Internet, and more mean that being a new media conglomerate leader is about having a vision of how technology will evolve more than it is about being a mac-daddy networker. Continuing to evolve the product pipeline over the next decade is at least as important, if not more so, than simply shilling what they have.

The job of Yahoo’s CEO is to change the world, not sell what they got to agencies. They need the Steve Jobs of media, not Greg Coleman. You want a guy with tight agency relationships? This guy is the CEO of Yahoo!, he can hire that guy. Can’t hire vision. Can’t hire game-changing. Plus, as many of the commenters point out – while agencies have lots of options, winning is about the audience. How are Zucks agency relationships? Bet he is not going to have too much trouble taking money out of agencies pockets. Eric Schmidt’s big fat agency rolodex? Non-existent. How is that Google advertising business doing? OK?

If you have the audience, and you have the products, you will overcome.

I wish Yahoo! the best of luck. The world needs more innovation and I would hate to see companies simply go “poof”. I feel the same way about Tim Armstrong at Aol. No one wants Aol to stop existing. The world is more fun when there is more stuff going on. We just want them to suck less.

This is a funny story from about 3 years ago at Aol. If you are a lawyer or PR flack at Aol and want me to remove this, just let me know, but I don’t think this really hurts anybody and it shows a little bit about Tim Armstrong’s commitment to the cause, which I don’t think is bad.

I attended a senior leadership offsite at Aol shortly after Tim Armstrong joined the company. The first order of business for Tim was deciding on the three or four things we wanted to focus on as a business to be great. One of the areas that Tim proposed was “Local”. Keep in mind, this was before Patch, etc.. Tim used the exact same verbiage to describe local as he does today: “It’s a big white space with no winners”.

So he had all 100+ senior people vote on “what we should focus on” and local lost. So, in deference to senior leadership, Tim took local off the table. We came out of that meeting with three areas of focus for Aol as a business. But you could tell that Tim thought we could have local and he was deferring to people to show that he could compromise, etc.

I think it only took a few months before he acquired Patch, re-engineered the senior leadership team around Jon Brod and made huge, sweeping investments in local.

Moral of the story: Maybe people should just let the CEO set the direction and then people can move on with their lives. Trying to explain to a CEO what an organization isn’t good at is like talking to a wall sometimes – and with good reason! The CEO is the only person who has the power to make an organization good at something.

You can make fun of Patch, but Tim followed his heart and his gut with where the market opportunity was and other than that one moment when he wanted to show people he was a nice guy in the first few months of his tenure, he has never looked back. I suspect he looks back on that meeting with regret. Don’t ask people’s opinion if you aren’t interested in hearing them! Or maybe, more importantly, don’t tell them their opinion matters if it doesn’t.

Sidebar: I love the Aol logo. The Google/Microsoft/Yahoo! logos bore me to death. When I talk with start-ups about logos, I always tell them that most people can’t do what Aol did. Aol could have a million logos because when you spend that much on consumer branding, people will get the message. With my last start-up, I always felt like I would spend so little on marketing in the life of the company that almost no one would even see the one logo. When you have a huge brand, that ain’t a problem. And I love the playful spirit and ability to do fun things with that.

Disclosure: I know tons of people at Millennial and am good friends with many of them. And I hope they all make crazy bank.

But as they say, “No conflict, no interest!”

Anyway, I haven’t talked to anyone there since the S-1 filing and I am not an employee, so I can complain about the coverage that Millennial is getting from the Business Insider. They have written a couple of articles that I take exception with. Also, Business Insider is a rag and I wish I could stop reading it.

Finally, I have been wanting to do a blog post about Millennial’s IPO and how their Q4 was probably boffo.

The first article I take exception with: http://www.businessinsider.com/millennial-medias-ipo-is-dependent-on-accounting-gimmicks-2012-1

I think the URL says it all: Millennial Media’s IPO is dependent on accounting gimmicks.

This is a bullshit article.

Business Insider is dismayed that that an ad network recognizes dollars that pass through as revenue and then the publisher payments as COGS. Although they note that this is how every ad network does it.

But folks, this IPO is not about small revenue – although I actually agree: The revenue is smaller than I expected.

This IPO is a growth story and a story of needing cash. Historically, networks have a negative cash cycle. Publishers expect to get paid by networks quickly and agencies pay slowly. The result is that you need a lot of cash to front the business.

But let’s talk about the growth story: In 2010 Millennial did 40% of their revenue in Q4. I expect more of the same and a key part of their IPO is putting the puck on the ice with a great announcement in a few weeks – immediately prior to their IPO – about a blowout Q4. How do I know this?

1. This business is seasonal. Q4 is when it happens. You saw it in 2010.
2. I had a great Q4. Q4 was great for mobile advertising – I have seen a number of anecdotal industry data points.
3. Millennial knows what they are doing. These are the same guys that hit it out of the park at Ad.com and they ran that business with strong operations. I am telling you right now: They know exactly how much money they make every day. When they filed their S-1 in the beginning of January, they already knew what Q4 was and they filed knowing they were going to have a great announcement to make prior to the IPO. They know. Their bankers know. This is orchestrated.

The second article I take exception with: http://www.businessinsider.com/this-chart-shows-the-no1-problem-at-millennial-media-right-now-2012-1

“This Chart Shows the No. 1 Problem at Millennial Media Right Now”

What is that problem? Let’s quote.

The real culprit is general and administrative expenses — “product, operations, developer support, business development, administration, finance and accounting, legal, information systems and human resources employees,” as Millennial describes them. G&A expenses (in orangey-brown, below) are growing faster than any of the company’s other operating costs:

This ought to be CEO Paul Palmieri’s No.1 issue right now: Controlling his bloated admin costs. If Palmieri (pictured at top) can’t get those down as a portion of gross profit then it doesn’t matter how successful his salesforce is.

This is pretty much 10000000% wrong. The hypothesis that a business needs to cut these costs imply that a business is mature. Millennial’s plan is not to control costs to generate profits. It is to grow. GROW. GROW.

This is the Amazon model. If you want to win, you spend. They will grow their way to profitability, but Business Insider talks out of both sides of their mouth: This company is tiny! This company has bloated admin! What no one can deny is that they are growing super fast. They could be 10x bigger in 4 years. Bet they will throw off tons of cash then. When you raise money and when you build a business, people always need to be thinking about optimal velocity. This spend is about maximizing market opportunity, not maximizing quarterly profits. That will come soon enough!

Did they hire people to work in Publisher Services and lock up tons of inventory for Q4? Yep.

Did they scale up operations like crazy? Yep.

Did they hire finance people to get all SOX-compliant? Probably. My understanding is the business is swarming with finance people now.

Is this a bad idea? Nope.

It is the top of the first inning. They have a chance to be a dominant player in the industry. Why would you underinvest?

They are going after it. That is totally the right thing to do. In a market like this, you grow your way to profits. Skimping on the business is a recipe for disaster. Why Business Insider would encourage this demonstrates their naivety toward the opportunity in mobile advertising.

One of the interesting artifacts of developing technology in a start-up is that the “what” isn’t the only important thing. “How” is pretty important as well.

When you are building a start-up, you are trying to create value around the asset. Obviously, job one is to be all “MVP” and “build something customers want”. After that – after you have done the impossible job of building a business – something that looks a tiny bit like “traditional” product management starts to appear. Your product has to evolve and certain decisions about what to build next need to be made.

Today, much of this is solved via “user stories“. User stories capture what users will do with the system and how that creates value. The goal is to separate what needs to be built from how to build it. While this is a noble goal, it can actually interfere with the building of the value of the asset: In certain situations, the goal is not just to solve the users problem, but “lead the industry” or “map to a potential acquirer’s reference technology architecture”. In these situations, the “How” it is built becomes just as important as the problem being solved.

The only cure for this problem is tight linkage between business and technology. Just as a user story is an invitation to have a conversation around a user problem, that invitation must encompass the larger “how”. Of course, that presupposes that the business has some inkling of how technology approaches build business value.

Was just thinking back to a period at Ad.com when I was running the behavioral products. At one point, retargeting probably contributed >50% of the margin of the business: Buying a billion or two impressions a day at cut rate prices and showing performance ads on them was essentially a breakeven business that we used to acquire reach. Acquiring reach allowed us to show retargeting ads. Retargeting ads generated profit. We are talking about, probably 1% of the impression volume of the network generating most of the profitability of the network.

Pretty amazing!

Also, it is amazing how exchanges have changed that business. That strategy is not nearly as interesting as reach becomes a commodity.

I would love to hear from our readers: I used to hear how complex decision-making was in “buying the right networks for retargeting”. Advertisers ended up doing a lot of “buying more frequency” when they were trying to buy more reach. As inventory has consolidated to the exchanges and SSPs, it would seem like advertisers could, more than ever, rely on just a few providers to get the retargeting reach they need, yet as Darren Herman reported over the holidays, people still drop dozens of retargeting pixels.

I think part of the driver is that retargeting has gotten more complex as people seek ways to add value to retargeting by optimizing the retargeting in different ways.

Tell me what is up in your world! As a mobile guy (now), I don’t really think about retargeting at all today.

Another blog post I have been meaning to write for 6 months.

If the FTC asked me for my opinion on the Google/AdMeld acquisition, I would tell them that they are actively reducing competition in a market and that Google should not be allowed to do it.

What proof have I? Look no further than the DoubleClick acquisition. With DoubleClick owned by Google and the free Google Ad Manager product, I got the distinct impression that the life was sucked out of the ad serving market. When you talked with investors, they would tell you that no one valued ad serving – it was a commodity product. When you talked with customers, they would tell you how ad serving was a commodity and they expected to pay virtually nothing for the product.

This, despite the fact that ad serving products basically sucked. (Apologies in all these regards to OpenX, 24/7, AdTech, etc.)

I suspect that we will see much of the same now with SSPs – AdMeld, probably the market leader from a technology perspective, will now be a part of Google. How could someone fund a competitor? And AdMeld is good (I know Ben, etc.), but DCLK was good 5 years ago.

Lot’s of people I talk to feel like the industry is going through a period of maturation and consolidation – I see very few (none?) companies that blow my mind like that first meeting with Invite Media did when they were 8 guys in an apartment in Philadelphia.

And let’s face it, online advertising still sucks. I laughed time and again at the new commercial for Siri with Santa Claus. I made my wife come watch it. I haven’t seen a good online ad since subservient chicken. Online advertising is good at bottom of the funnel, not so good at the stuff that TV excels at. Big opportunities out there remain unrealized.

Of course, Google recognizes that this is where they will make their money so they are land grabbing left and right. I can’t blame them, but it does make our industry less interesting.

I realized recently that my  perspective on “what is interesting about daily deal companies” is different than most people, so I wanted to articulate it.

Lot’s of people worry that consumers will suffer daily deal burnout and they say, “these daily deal companies whole businesses are built around email marketing lists, when consumers burn out, they are doomed”. That drives headlines like, “BURNOUT IS HAPPENING”. Don’t get me wrong, that is a concern, but this is not what makes the daily deal companies so interesting to me, and it is precisely what I find interesting about them that makes them so valuable in my opinion.

For a decade, Internet start-ups bemoaned the challenge of penetrating the local market – no one had the sales force. Everyone dreamed of partnering with people like the Yellow Pages that had 10,000 feet on the street. Every start-up had a product that, if they could somehow magically motivate a third party salesforce of thousands of people, they could turn into a mint of money. The problem was, building a sales force was super expensive. Only one company really did it: ReachLocal. They raised huge chunks of money at extraordinary risk and successfully made it happen. But they were the exception, not the rule.

With the advent of the daily deal, several companies have had the chance to build out giant sales forces – Groupon and LivingSocial now have sales organizations that dwarf ReachLocal and they are rapidly going international.

Sure, there is a finite limit to the amount of daily deals a vendor will offer. And a finite limit to the amount of daily deals that consumers will buy. But that is not bad. All they need is more product. LivingSocial and Groupon suffer today because they have this huge sales organization, but they really only have one thing for them to sell. They go to all this trouble to build a relationship with a business, they do a daily deal, and they are done. Can’t really sell them anything else for six months or a year. What they need is MORE STUFF TO SELL THEM.

That is easy. Go buy companies. You have the equity to do it. You have cash in the bank too. I predict that Groupon and LivingSocial will start munching up companies left and right in the next few years. They need more product in the pipeline for their salesforce. And being a salesforce, they will always want something new. Now the ideas will meet distribution in a beautiful marriage and tons of early stage companies will be gobbled up to feed the hungry maw of sales. And many entrepreneurs will get to see their dream fulfilled as their idea is used by thousands of small businesses.

Check Crunchbase out: Groupon has already done 10 acquisitions. LivingSocial has done 7. This is just the beginning.

It’s been a while since we had an irrelevant post, but here we go:

In today’s modern NFL offenses, for a team to really tear it up, you need two #1 receivers.

It used to be that you had a #1 and you had a #2. But then, you rarely had more than two receivers on the field at any one time. Now, with potentially 5 receivers lining up, you need more receiver talent to make a team super awesome. If you look at the trend in the NFL, it is very much towards acquiring a critical mass of receiving talent. Cases in point:

• Jets have Braylon Edwards and go get Santonio Holmes
• Patriots had Wes Welker and Randy Moss
• Eagles have DeSean Jackson and Jeremy Maclin
• Falcons have Roddy White and draft Julio Jones
• Ravens have Anquan Boldin and go get Lee Evans (then Buffalo’s #1)
• Cowboys have Miles Austin and Roy Williams and go draft Dez Bryant
• Steelers have Hines Ward and Mike Wallace

I was at lunch the other day with a very skilled engineer and I was bemoaning the difficulty in finding skilled engineers to get involved in start-ups. My buddy responded that he would just go to tons of coding oriented meet-ups if he was doing a start-up and wanted to meet skilled, motivated junior engineers.

He had two great reasons why meetups are a great place to recruit for start-ups:

• People that attend meetups for coding clearly think of coding as an avocation, and not simply a vocation.
• People that attend meetups are probably single.

I love Founders Institute’s new Founder Advisor Standard Template. I am on the advisory board for several companies – most of them very early stage – and one of the things I have always done is have a “conversation” about my compensation, without putting anything in writing. Given my desire to be an asset to the company, one of the things I have always done is say, “let’s defer getting this all legaled up”. I don’t want my start-ups wasting money on lawyers pre-fundraising (or even post, frankly) – and I have always felt that I am both a little bit willing to risk getting screwed and a little bit willing to demonstrate my value and worth. Once I demonstrate how hard I work for my companies, I have yet to be screwed, so in that respect my approach has tended to work out well for me. But I have always thought, “It would be nice to formalize this”.

Founders Institute’s attempt to create a “seed series” standard document for setting up advisory boards is a brilliant idea and very valuable to early stage start-ups. I also am a fan of the approach that they have taken to recognizing that various advisory organizations will have varying levels of commitment.

It is getting easier and less expensive than ever to build a high-performing start-up.