Ad Blocks’ Doomsday Scenarios

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by Frederic Filloux

On the ad blocking front, the situation keeps getting worse. Until now, the media industry pretended to ignore the problem, perhaps waiting for a miracle cure. This might turn into a long lull.  

In coming weeks, a large analytic firm will release disturbing figures on the state of the ad blocking scene. According to someone who has advanced knowledge of the data, on desktop computers and on critical segments of the digital audience, the use of ad blocking keeps rising exponentially.

Along with The Netherlands, the German market is by far the most affected one by the ad blocking phenomenon. There, ad block use approaches 40% of the internet population. The reasons for the epidemic are unclear, but two elements are likely to play a role. First, AdBlock Plus (ABP), the most popular ad blocking software, has its roots in Cologne. Second, a cultural factor: German opposition to online advertising that manifests itself in the government’s obsessive anti-Google stance pushed by large media conglomerates such as Axel Springer SE.

In France too, ad blocking use is on the rise: about 30% of Gallic internet users are said to have installed extensions that remove banners and other modules; and the Millennials segment (born in 1980-2000) is twice more likely to use an ad blocker. The worst hit are Gaming sites with 80% to 90% of their views deprived of ads. More broadly, the more technophile an audience is, the more likely it is to resort to an ad blocking product.

The US market seems the less affected with 15%-17% of the internet population, again on average, using an ad blocking extension. Among the Millennials, the share is said to be twice the average. The UK is said to experience the same pattern.

Altogether, 300m people in the world have downloaded an ad blocking extension and about half have actually installed it.

Since my last column on the subject in December 2014 — one of our most read Monday Notes ever — several factors have contributed to the phenomenon’s expansion.

— Technically, Eyeo GmbH, the company that dominates the trade has “improved” in every dimensions. In January the company announced a new feature that allows large scale deployment of Adblock Plus (ABP) in corporate networks. In a few clicks, a system administrator can install ABP on thousands of PCs.

— Then, in February of this year, competition set in: A previously unknown group of Canadian developers introduced uBlock, a new generation of ad blockers, reported to be faster, with a smaller memory footprint than Eyeo’s extension. Both are now available on every browser and OS.

— On the legal front, the anti-ad block camp suffered a major blow in April when a court in Hamburg ruled that the ABP extension was indeed legal, a decision that is likely to set a precedent in Germany at least, and possibly in the entire EU.

— The battle is now spreading to mobile. According to a FT.com story this month, several major mobile operators intend to deploy ad blockers on their network to put pressure on large mobile ad providers such as Google, Yahoo!, or AOL. They want to protest against what they see as excessive use of their bandwidth by those internet giants. Carriers would benefit from technology developed by Shine Technologies, an Israeli startup. According to Shine’s chief marketing officer Roi Carthy, the proliferation of invasive formats displayed on mobile — popups, auto-play videos — accounts for 10% to 50% of a carrier’s network capacity. Hence the idea to block those ads, no more than an hour per day, to bring the ad providers to the negotiating table. Scores of publishers might get caught in the battle as the three companies aforementioned also served ads on behalf thousands of media companies…

— And finally, just last week, Eyeo rolled out a brand new Firefox Mobile Browser for Android with a built-in ad-blocking module. The mobile ecosystem is no longer immune to ravages of the extension

For publishers, ad blockers are the elephant in the room: Everybody sees them, no one talks about it. The common understanding is that the first to speak up will be dead as it will acknowledge that the volume of ads actually delivered can in fact be 30% to 50% smaller than claimed — and invoiced. Publishers fear retaliation from media buying agencies — even though the ad community is quick to forget that it dug its own grave by flooding the web with intolerable amounts of promotional formats.

A week ago, I was in Finland, for the Google-sponsored conference Newsgeist. The gathering was setup by Richard Gingras and his Google News team, and by Google’s media team in London. Up there, in a  high-tech campus nested in a birch forest outside Helsinki, about 150 internet people from Europe and the United States were setting the  agenda for what is called an un-conference as opposed to the usual PowerPoint-saturated format delivered in one-way mode.   As expected, one session was devoted to the ad blocking issue. (I can’t quote anyone since discussions took place under the Chatham House Rule).

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Everybody agreed ad blockers have grown exponentially in every market and were now threatening the whole ecosystem.Their reach now extends to native advertising until now relatively spared since they can be managed by the publisher’s Content Management System instead of an ad-server. But ABP’s engineers found a way to spot and remove any mention like “Sponsored Content” or “Sponsored by”, which creates pernicious side-effects as the user won’t be able to distinguish between commercial and legitimate editorial contents. In doing so, the Eyeo people now drift far away from their self-assigned “mission” to protect users from aggressive ads because branded contents are seen by publishers as a credible alternative to invasive formats that disfigure web sites. As times passes, Eyeo GmbH now veers into anti-advertising activism — a pragmatic pursuit since it collects millions or euros from large players such as Google, Amazon, Microsoft and Taboola, who all gave in to Eyeo blackmail to have their ads whitelisted.

Publishers are left with few options to response to the spread of ad blockers. As we saw, lawsuits are not a viable option as the German case is likely to set a precedent, and because the European Commission is obsessed with hitting Google hard. In Scandinavia, Schibsted is hard at work on an initiative to raise user awareness by getting many sites to close down access to browsers carrying and ad block extension.

But the most potent response evolves around the idea of changing the commercial relationship between publishers and their customers. They could consider three different kind of deals:
– Option #1: use an ad blocking extension and face your preferred site displaying various annoying tricks that will deny or slow down access.
– Option #2: opt-in, i.e. register with a valid email address. Yes, you will get ads, but on a selective basis: No autoplay videos, no pop-in windows, etc. From the publisher’s perspective, an opt-in reader is more valuable than an anonymous one, and the loss on the number of formats can be offset by a stiffer rate-card.
– Option #3: simply subscribe and you get rid of any ads (except Branded Content that I see as another form of editorial — not my favorite one, for sure — but carrying the best value for publishers and the smaller inconvenience for users. Even better, entire sites and apps will load much faster, which is a solid argument when 50% of the audience reads through mobile.
This idea goes with several conditions: news publishers defining themselves as quality-oriented (lower audience but higher CPMs), acting in concert, and an ad community willing to focus on the quality of the campaign — as opposed to only betting on programmatic selling. None of which is a given.

frederic.filloux@mondaynote.com

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Firing Well

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by Jean-Louis Gassée

Ending a work relationship needn’t be complicated or traumatic. It can be done in a sane and respectful way if a clean framework is set up at hiring time.

In an August, 2012 Monday Note titled The HR-Less Performance Review, I described a sane, humane way for an employer to conduct the dreaded Performance Review. The script is simple:

Your performance meets or exceeds requirements. You get to keep your job.
Your salary increase is x%.
When you’re ready, allow me to offer a few observations and suggestions that could help improve your performance and our relationship: <Polite challenges and proposed cures, here>.
That said, because you’re doing fine as things are, feel free to ignore my remarks.

Now, do you have any questions, complaints, or observations of your own?

And remember, You’re Doing Fine…

Thank you. End of review.

That’s the template. Of course, there is a second type of review, or, more accurately, there isn’t one. If the individual’s performance fails to meet requirements, the message should be succinct and clear: We need to part company. There’s no need to drag the victim through a painful and pointless Performance Improvement Process. (I will briefly address the in-between pass/fail configuration below.)

The termination of a work relationship can be just as clean and respectful as a positive review… and Firing Well starts with a sane and honest hiring process.

I’m not referring to the painstaking process that matches skills, credentials, and experience to the prospective position. As long as it doesn’t lapse into a Death by Interview ordeal, or flirt with bizarre, “mind-bending” questions, the job interview lets both parties read each other and come to a mutual agreement.

Once hired, there is the honeymoon. After that, the real relationship starts, and with it, occasionally, the realization that there are non-technical obstacles that were hard to foresee during the interview courtship.

To ease the pain of the breakup, my standard interview routine includes a segment on Why and How I’ll Fire You.

This is how it goes.

You will definitely be fired for Attitude or Judgement failures — and note the plural. A single incident can be a great opportunity to reboot the relationship; I’ve experienced several such instances where a healthy confrontation cleared things up for the better and for good.  

Business life is tournament play, we have to be competitive. If the organization’s size and composition allows, we will “bench” you, offer a supporting role, especially if you have shown good judgment and a helpful disposition. 

But repeated lapses of judgment or a habitually disruptive attitude can’t be tolerated, and we will have to part company. In plain English, I will fire you.

I’ll pause here to note how helpful this is as an interview test. The ideal candidate will shrug: “But of course, no need to stay with a bad situation.” Some will show discomfort — which can then be explored and dispelled with a friendly but frank explanation. As for the rare individual who’s dumbfounded or distraught by the notion of possibly being fired…thanks, we’ll get back to you.

Then I proceed to explain How I’ll Fire You. This is the part that clears up unwarranted doubt and fear.

If the dreaded day comes, I assume you’ll already understand that things aren’t working. No perp walk across the floor to my office, I’ll walk into yours, close the door, ask permission to sit down, and state my business. I’ve made a decision: You have to leave the company. 

I’ll tell you that the decision was made after thoughtful deliberation, and it won’t be reconsidered. I won’t suffer you the indignity of Why, I’ll only want to discuss the How, what I’m prepared to offer. It will be generous, and it will be accompanied by a Covenant Not To Sue, sundry legal verbiage that caters to reparations, confidentiality, and not taking one another to Court. I’d rather give money to you and your family than to lawyers.

That’s as far as you need to go during the interview; anything more would be ghoulish.

If the day comes, the offer should be generous, an amount that sometimes horrifies Board members and investors. “What? You’re giving six months to that [expletive deleted]. We shouldn’t be rewarding bad behavior!” (And it could be more than six months, depending on age, the suspected proclivity to sue, the company’s own mistakes, and other issues.)

After the persphinctery Thank You For Sharing and other exchanges of wisdom, we get to the meat of the matter, paying for a clean, peaceful resolution versus a messy, distracting dispute, one that never endears Management to the people performing actual work.

Of course, the employee can refuse the offer and sue, and will very likely win something. But…

It could take years to get “there”, and the award may be a pittance after legal expenses — if an attorney will even take the case after reading the proposed settlement.

The battle will certainly cause emotional trauma, loss of sleep and other pleasure functions.

The ordeal will result in a reputation for litigiousness. Yes, I know: California Law forbids giving bad references by phone. But we know the routine: To slam a candidate, all I have to say on the phone is “According to California Law, all I’m allowed to do is to confirm Job Title and Employment Dates”. The prospective employer promptly hangs up, fully warned.

I learned to Fire Well after two contrasting turnaround situations in France, in the late eighties. The first was needlessly complicated and acrimonious, but during the second, at Exxon Informations Systems, I was fortunate to meet a savvy attorney, Bertrand Nouel, of the Gide Loyrette Nouel firm. He kindly explained I shouldn’t worry too much about being manacled by French Labor Laws. A suitably drafted Covenant Not To Sue forestalls legal complications because it generously compensates the individual and is proof of full and informed consent and provides a bargained-for reparation of the injury, including an offer to pay for legal consultation elsewhere.

It worked like a charm, if that’s the right word, including one case where the individual was laughed out of the Labor Inspector’s office and advised to quickly run back to her ex-boss before he’d changed his mind.

Moving to Cupertino in 1985 for another turnaround challenge, I told HR I wanted to use the same process. “Oh, no, you can’t do that in California. You need to give a written warning as part of a Performance Review [you see why I wrote this HR-Less Performance Review Monday Note]. After that, we’ll take the person through a 90-day Corrective Action Plan. Then and only then can you walk the individual out.”

My protest that this would demean the individual, demoralize the organization with the spectacle of a contrived process, and label Management and HR as manipulative bureaucrats wasn’t enough to change the charade.

Later, when I set up the legal framework for Be, I asked our attorney about the process and template developed in France. His answer was diametrically non-HR: “Yes, absolutely, that’s exactly how you should do it. I’ll just touch up your translation of the French template and you’re good to go.”

All of this depends on having a fully informed and consenting adult on board… which is why it’s so important to set things straight during the interview.

In the unlikely event that you reach the point of no return, things will be much less stressful. As promised, you walk into the individual’s office, close the door, and ask for permission to sit…

The last time this happened, the executive saw me close the door and promptly asked: “Is this The Conversation? Does the arrangement stand?” Not much left to discuss but the date of his public My Work Is Done valediction, with yours truly applauding from the front row.

JLG@mondaynote.com

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Three Slides? You’re Nuts! OK. How About Seven?

by Jean-Louis Gassée

In practice, the three slide pitch may be impossibly concise. This week, we’ll look at the seven slide variation.

After last week’s Monday Note, Three Slides Then Shut Up – The Art of The Pitch, I was subjected to a bit of email ribbing. My honorable correspondents, many of them entrepreneurs themselves, questioned my rationality, insisting that it’s psychologically and emotionally impossible for entrepreneurs to be so boldly concise as to limit their presentations to three slides. Indeed, how many three-slide presentations had I actually seen in a decade+ of venture investing? Upon the fourth slide, is the presenter sent packing?

True, I know how difficult it is to restrain yourself when you’re given a chance to present the breadth and depth of the miracle that you’re but one investment away from realizing. I know, because I’ve been there…but thanks to the pressure of an IPO Road Show and the robust ministrations of investment bankers, I crossed the threshold into frugal enlightenment.

Sadly, I’ve not seen more than a dozen three-slide pitches during my VC career, but I’ve been part of the decision to fund many dozens of others. Clearly, prolixity isn’t an insurmountable obstacle to getting funded. Perhaps I am just an irrational, impatient purist.

Instead of a terse trio, seven slides might give the presenter more breathing room. The extended template goes like this:

1. Who we are. Same as before.
2. How we’ll change the world. Ditto.
3. Our market. This one’s new, and here we hit a double bind

If you pose your product as a breakthrough in an established market, investors may worry about the capital required to battle the incumbent giants. On the other hand, if your pitch proposes a whole new genre, your audience could question the wisdom of investing in a market that currently has no customers, even though the segment may be poised to explode (of course!).

The choice you make in how to position your product and the response it elicits will sort the visionary sheep — investors who merely follow — from the ones who believe in technology and have faith in the entrepreneurs who create new markets. Huge returns are only made by catching a nascent wave at just the right angle (the product/technology) and the perfect surfboard (the founding team). Uber and Airbnb come to mind.

But no matter how ardently an investor believes in technology, you can’t assume a blind faith. As retroactively obvious as Uber and Airbnb are now, these companies demanded a tremendous amount of trust on the part of their investors. It’s the job of the pitch to engender this trust.

You could present your Fortune Teller vision in a manner similar to this beautiful, if ill-fated, Wattage pitch deck:

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(I prefer the more traditional lower-left-to-upper-right to right up to signal a bright future, but I’m an irrational purist.)

4. Our Competition. Another new one.
Don’t tell us you have no competition. It’s a bad way to start a conversation and, in any case, there’s always competition, even if you’re simply competing with the ways in which consumers currently spend their money.
But, please, spare us charts like this:

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Or the dreaded Gartner Magic Quadrant:

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Just tell us which of your adversaries concerns you the most, where they could hurt you, and how you will win.

5. What you own.
This can be your IP (patents, trade secrets) or your exclusive access to Unobtainium suppliers… but we don’t place too much stock in any of that. The most important thing that you own is your team of gifted, energetic people, the alchemists who will magically transform easily obtained, common ingredients. Uber is a good example again: The Uber team built a huge business using technology that was available to all, including the lazy incumbent taxi companies.

6. The Money Pump. No change from the three-slide deck.
7. The Overview.

This is another Fortune Teller chart. Over a series of three-month increments, it describes  parallel company activities ranging from Product Development to Financing:

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This is more than a lot of noisy detail: It outlines your command of your project’s universe. The explicit checkpoints show your willingness to take authority and responsibility. It belongs at the end of the presentation so it can be left on the screen when you shut up and look at your hands or shoes. The minutiae of schedule, partnerships, and financing plans are yummy bait for questions and arguments.

So which is it? Three slides or seven?

I still prefer the three-slide version because it’s easily memorized and can be delivered on a white board or performed on air guitar. Certainly, the concluding Overview in the seven-slide format is attractive. It provides a strong, natural coda and caesura, but it’s much more difficult to recreate on the spot from thin air.

Either way, neither format will induce the First Seventy Minutes of The Hour blight mentioned last week. Neither provides enough breathing room for you to bore your audience by dumping all your knowledge and wisdom on them. You decide.

Lastly, I’d be remiss if I didn’t mention The Demo. First, If you have a spectacular demo, lead off with it. It will act as the action sequence before the screen credits in a James Bond movie. Sufficiently adrenaline rushed, your audience will be ready for some calm exposition.

Second, your demo should require little or no explanation. Don’t tell us what you’re about to do, what you’re doing, and what you’ve just done. We’d rather see the demo twice to better get the point than be submitted to laborious explanations.

A demo that does the selling by itself will get you way ahead of the fundraising process. If your demo is a poor salesman, rework it… or don’t give it at all. An old VC joke contends that there’s no better time to raise money than when you have nothing but words, no prototype to break at an embarrassing moment during the demo:

“What does your software run on? PowerPoint.”

JLG@mondaynote.com

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Circa: What went wrong

by Frederic Filloux

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Circa, the clever smartphone news app, failed to live up to its promises. The fiasco stems from the smartphone advertising market’s inherent weakness, from Circa’s inability to catch up with evolving reading habits, and from an insufficient editorial proposition. 

In mid-2013, many were praising Circa. The app was kind of unique at the time (see this Monday Note about it); it was built on a clever news flow rearrangement, truncated for faster reading; quotes were pulled out, sources listed apart in a precise manner. Circa gave readers the ability to follow-up on a story, a convenient feature no one else offered then. The whole process was manually operated by a tiny newsroom whose job was (and still is) to repackage others’ information, creating about 30-40 pieces a day and updating 2-3 times as much… Over the last two years, Circa grew to about 20 people.

The concept’s novelty attracted about $5.7m from angel investors. By the end of last year, Ken Doctor reported that Circa was seeking another $8m to support its development. And last week, Fortune’s Dan Primack revealed that Circa no longer sought capital but a buyer instead. (See also Joshua Benton’s piece on NielmanLab.)

Unlike many, including prominent industry figures I talked to at the time, I won’t bash today what I praised two years ago. Rafat Ali, the founder of Skift (a great travel industry site), triggered a solid tweet storm deriding Circa’s enthusiastic reviews as yet another bout of media business navel gazing. While Rafat is right on the industry’s propensity to lionize apps and services hopelessly deprived of any business model, Circa was a tiny fish compared to billion-plus “unicorns” that contribute to what many see as a content bubble (more in an upcoming Monday Note.) As an innovation in the mobile news consumption field, Circa was interesting to analyze — and worthy of support.

Two years later, I see three factors contributing to Circa’s failure. What make these worth a close look is they could impact more companies.

#1. The dysfunctional mobile ad market. Last week at the FT Media conference in London, many speakers were defending their mobile activity as doing just fine, sounding like they were just off their second chemo. Everyone was short on specifics, but a consensus estimate left the audience with an unpleasant discrepancy between traffic and revenue: while more than 50% of traffic has migrated to mobile, the share of mobile revenue is in the low 30% at best…

Consider this chart based on figures from the Pew Research State of the News Media 2015 report: It shows the size of the digital ad market, the share of the mobile and the crushing dominance of a handful of players:

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We see almost 2/3 of mobile ads controlled by 5 major tech companies, the largest one being Facebook getting 70% of its ad revenue from mobile. Put another way, aside from big tech companies, very few media are able to pull significant revenue from mobile. One of the reasons for this situation is the reliance on data that favors Facebook’s and Google’s profiling capabilities; the other is the challenge in devising ad formats that audiences accept.

#2. News audiences shifting to mobile. The last two years have seen a dominant part of newspapers’ online readership embracing mobile use. The younger the user base is, the likelier it is to consume news on a smartphone.

Again, according to Pew Research:

For 19 of the top 25 newspaper sites and associated apps in overall traffic, mobile traffic exceeded desktop by at least 10%. For five of the 25, the split was about equal (i.e., less than a 10% difference between the two), and for just one – the Houston Chronicle – desktop traffic still accounted for more visits than mobile. 

Below is a chart detailing the share of mobile for the largest American newspapers:

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This trend’s acceleration is recent. When Circa hit the AppStore in Spring 2013, the titles above were still focusing most of their digital efforts on the web. Consequently, Circa’s agile rearrangement of contents was seen as innovative. Six months after a New York Times exec told me how interested he was in Circa (I suspect the NYT had considered buying it), the NYT Now app launched — and it didn’t work as expected either.  Over the last 24 months, many news organizations have beefed up their mobile presence, deploying substantial editorial and technical resources in the process.

At the same time, native digital players raced to catch the mobile wave, devising new audience strategies on social networks. As a result, they became even more dependent on mobile than online newspapers, by about ten percentage points :

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Pew’s remarks on this trend:

39 of the top 50 news sites and associated apps had more mobile visitors than desktop in the time period studied. In addition, four had roughly similar amounts of mobile and desktop traffic, and seven had more desktop traffic than mobile.

To sum up this second factor: The combination of newspapers’ mobile strategies coupled with pure players betting massively on social (itself largely powered by smartphone use) has made Circa’s magic formula increasingly irrelevant. Especially as their interface evolved way too slowly — due to a lack of capital, mostly. By contrast, a new app created by deep-pocketed Al Jazeera and called AJ+ took off, boosted by a combo of social and video.

#3. Editorial uniqueness remains a key success factor. And Circa didn’t have it. Great packaging is one thing, but it can’t support itself without the help of original, specific, identifiable editorial. Since its inception, the web has been plagued by the commoditization of information. As social vastly amplifies that trend, being able to develop its own editorial identity remains critical for any media. Recent successes (such as Quartz), prove that a contemporary digital strategy must rely on two pillars: One is social amplification to create brand awareness, reach a critical mass of users, and spare most of the marketing expenditures usually required to build a news brand. The other pillar is editorial specificity, buttressed by all the components of quality journalism: the angle of a coverage, the line-up of great intellectual resources, experience, knowledge, etc. More than ever, these ingredients are irreplaceable when striving to rise above the Internet’s deafening background noise.

frederic.filloux@mondaynote.com

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Three Slides Then Shut Up – The Art Of The Pitch

by Jean-Louis Gassée

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This week, we look at pitches, at the stories entrepreneurs tell investors. The best pitches aren’t really pitches. Dumping one’s entire body of knowledge on easily bored investors won’t help. The best pitch is one that quickly moves from monologue to conversation.

The First 70 Minutes of The Hour. When, in 2002, I was invited to join the ranks of venture investors by Barry Weinman, my Gentleman Capitalist mentor, I voiced a concern: I didn’t want to go blind looking at PowerPoint presentations for the rest of my life. Gentleman that he is, Barry didn’t — and didn’t need to — remind me of the two hours investment pitches I had inflicted on his kind during my early entrepreneur days.

I finally learned to curb my prolix talk during the Be IPO road show in 1999. The investment bankers who helped prepare the show soundly disabused me of my prolix ways. I was relegated to the clean up position, following the VP of Marketing, our experienced CFO (three IPOs before ours), and the demo. Putting me last before the hard stop enforced concision.

Now that I’ve joined the VC brotherhood and am on the receiving end of money-seeking tall tales, I can attest that my fear of mental cauterization by PowerPoint wasn’t misplaced. I’ve found a name for the blight: The First 70 Minutes of The Hour.

The condition is caused when an entrepreneur uses the allotted hour to dump everything he or she knows about his/her business. I’m a sinner reminiscing: I’m anxious, I’m unsure which of the product’s many arcane features and benefits will click, I’m terrified that I’ll leave something out. My desperation induces acedia as the allotted hour ticks past, and, as a reward, I receive non-committal California-speak: Great, Interesting, We’ll Circle Back To You.

This is an unfair caricature, but not by much. Too many presentations concentrate on the needs of the speaker instead of addressing the interests of the audience. Fortunately, there’s a simple remedy: Show three slides and shut up. Say just enough to engage us and then move on to a lively conversation, to questions, arguments, suggestions.

The canonical three slides go like this:

  1. Who we are: The founding team’s résumé, its technical, business, and academic background.
  2. A nice, sharp dichotomy: The world before us, the world after us. Show a substantial, practical impact, not just a marginal improvement of something that’s already in place. The more impossible or unthinkable the better — it will become retroactively obvious once understood. The mouse is a good example.
  3. The Money Pump. Your business plan. I like the Money Pump image, the pipes that allow the cash that’s temporarily residing in customers’ pockets to flow into the company’s coffers – legally, willingly, and repeatedly.

After that, shut up.

The silence will be unbearable. It might help to look down at your shoes, your hands, something on the conference room table. But the awkward moment won’t last, no more than an interminable 12 to 15 seconds. If you don’t get questions, you have your answer: We’re not interested.

But if we poke holes in your story, demand explanations, play devil’s advocate, we’re hooked. You may now dig into the 253 backing slides you have under the table, whip out the market research, competitive analysis, academic studies, financial projections, and casually lay out your roadmap. Show us that you’re not afraid to think on your feet. You can even gently flatter us that we’re the visionaries, you just want to help make that vision a bit clearer.

You’re either in or you’re out, but you won’t have wasted our time or yours.

There are benefits to this approach even if we don’t buy your pitch.

If we’ve turned you down, you can call us back six months later, remind us of your “failed” three-slide presentation and offer to show us three new ones. If the first pass was quick and painless, we might ask you back in. You won’t get this welcome if you bored us for 70 minutes the first time around.

Moving forward, sharpen your internal characterization of your business. You can’t have ten success factors that are equally important. Concentrate on the top level features in your Before/After slide and leave the “really cool” pet tricks for the ensuing conversation. Remove the branches that blur the picture, but don’t hack away at the graphical details in your slides. Edward Tufte, the world’s pre-eminent “data visualizer”, has posited the counterintuitive notion that by adding visual cues we enhance comprehension. (We’ll get back to Tufte in the postscript.)

And the most important benefit: If you’ve distilled your presentation into three slides, you won’t even need them. The effort will have been so intense that they’re now burned into your brain. You can walk into a conference room, ask for a white board and a marker, and impress us with your command of your business by “extemporaneously” drawing the three slides. There will always be time to whip out your laptop, tablet, or big smartphone for the 253 FAQ (Foire Aux Questions, in French) slides.

All of this is easier said than done, of course. I can relate to anxious entrepreneurs who have a hard time sorting through the wonderful ideas brewing inside the garages in their heads. Afflicted with what Buddhists call monkey brains, I, too, have a hard time quieting the noise so I can “hear” the most important, reality-changing element of a product/service/business. Only the most gifted and focused (or perhaps the most delusional) can see the edge of the blade with unfailing clarity. The rest of us muddle through.

One point remains: The goal of the presentation is to start a conversation, the sooner the better.

JLG@mondaynote.com


Speaking of presentations, you might want to read Edward Tufte’s The Cognitive Style of PowerPoint: Pitching Out Corrupts Within, a searing indictment of mindless slide presentations ($7 paperback on Amazon):

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(Also available in PowerPoint, er, PDF format here)

Tufte’s seminal work, The Visual Display of Quantitative Information ($29.62 for the hardcover edition on Amazon and also, it seems, in PDF form here), includes this celebrated chart that tracks Napoleon’s ill-fated march to and from Russia during the abominable Winter of 1812-1813:

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The chart makes the French Army’s unimaginable losses imaginable.

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Featured On Tim Cook’s Keynote – What It Takes

by Frederic Filloux

At last October’s introduction of the new iPad Air, the creators of a clever iOS app named Replay were invited on stage. To get there, they went through a selection process that illustrates Apple’s perfectionism — and hidden application sophistication.

In September 2014, while at the Stupeflix Paris office, Nicolas Steegmann got a call from Apple in Cupertino. Once the caller identified herself, Nicolas knew something up. The contact came after Stupeflix presentations to Apple’s team in Paris. In rather elliptic terms, Steegman’s interlocutor said it would be great if two members of the company, a developer and a designer, could be in Cupertino the next day. ‘They will have to stay at least two weeks’, she said. 48 hours later, the team was on Apple’s campus. They quickly found themselves in a windowless room and given a straightforward brief: Devise the coolest possible demo for your app. No more details, no promises whatsoever.

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[Stupeflix founder Nicolas Steegmans (right) and motion engineer Jean Patry (left)] 

Replay is a clever iOS application that focuses on a “simple” issue: Automating the process of making of videos, without going through the convoluted steps of a dedicated movie editing app. With Replay, you shoot with your iPhone (or your iPad), select the clips you want, pick one of the proposed theme and you’re done. The app will assemble the clips in the smartest possible way, making visual corrections, adjusting the soundtrack selected from your iTunes library (or drawn from a proposed catalogue) to the pace of the movie. If you have the time and inclination, additional settings let you fine-tune your production. But even if you just stay with basic preset themes, the result is stunning. In literally a few seconds, you end up with a clip perfectly suited to quick sharing on YouTube, Instagram or Facebook.

Behind Replay’s simplicity are years of work and a great deal of sophisticated programming. The company’s roots are in an automated video generation system originally designed for completely different goals.

As often, a company’s final product has little to do with the original intent.

Stupeflix is a pure engineers’ startup. It was created in 2008 by Nicolas Steegmann, an engineering and mathematics graduate from Ecole Centrale de Paris, and Francois Lagunas who holds a PhD in computer sciences and linguistics from Polytechnique and Ecole des Mines. Their first product was an automated video generator that scrapped images and text from Wikipedia and other sources, inserted text-to-speech voice-over, to create 45 sec. glances at various cities and places around the world. The result was more a demonstrator than a commercial product (you can still access hundreds of automatically generated videos here on YouTube.)

The concept paved the way for a much more bankable product: a system to create videos entirely online, with presets themes — the ancestor to the Replay app. Its business model was (and still is) based on the proven freemium mechanism: Casual use is free, scaling to a professional/intensive use requires a subscription.

The same went for the next iteration: a home-brewed API allowing third parties to use all the tools Stupeflix developed to create videos. As a result, digital advertising agencies such as Publicis, Saatchi and TBWA jumped on it. Hundreds of thousands of videos were created for Coca-Cola, Red Bull or Sprint, to be used in countless promotional operations. Stupeflix still derives significant revenue from its API business.

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Technically speaking, editing and rendering a video is CPU intensive — GPU intensive to be more precise; Stupeflix’s APIs suck a lot of graphic processing power. At the time, explains Nicolas Steegmann, graphics rendering was outsourced to a specialized server farm in Texas (where the oil industry consumes loads of computational power for geophysics modeling). Now, Stupeflix relies on Amazon Web Services, which has since cornered the CPU/GPU for-hire market.

It took 18 months to port the video rendering engine to iOS. Many invisible features had to be pared down to fit the power of the iPad/iPhone processor. Unbeknownst to the user, Replay performs many complex graphics tasks. For instance, it analyses each piece of raw media material picked by the user. Color palette and saturation, exposure, motion, pace are decomposed and translated into mathematically useable components. These chunks of data are then fed into a “cinematographic grammar” hard-coded by Replay’s programmers (all movie enthusiasts). Each theme or skin selected by the user reflects a Quentin Tarantino or Alfred Hitchcock inspiration that will direct transitions, colorimetry, beat, as well as soundtrack sync. And an embedded machine learning engine also devises new rules by itself.

The fluidity of Replay’s performance caught Apple’ attention during the summer of 2014, a couple of months before Tim Cook’s unveiling of the new iPad Air.

Now secluded in their room of the Apple campus, always escorted when they had to walk in and out, Stupeflix’s team is hard at work devising the most mind-blowing demonstration of their app. Early on, they had a hunch that the whole process was in fact a competition among applications (12 contenders, as they would later discover.) For two weeks, a quiet selection process took place, with a stream of people visiting the team, now allowed to test its work on the last version of a new iPad camouflaged in a thick neoprene enclosure to conceal its size and shape. Each successive visit was made by someone ranking higher and higher in the chain of command — as the team realized after Googling the reviewers. They knew they were on the short list when their demo was shown to Phil Schiller, Apple SVP for Worldwide Marketing. The next day, the pair was taken to a conference room where their work was reviewed by Tim Cook in person. They knew it was a go. It was time for a series of full rehearsals.

On D-day, the two-minute presentation was to be made by Jeff Boudier, the Stupeflix man in San Fransisco (and co-founder of the company), assisted by François Lagunas controlling the iPad. It went well, except when a slip of a finger (due to an excess of makeup applied to the demonstrator’s hand) caused the auto-correct to transform the title “Utah Road Trip” into a weirder “It’s a road trip”… After the show, Apple staff asked to re-record the demo for a spotless posterity (the re-edited version visible here on Apple’s site, while the original is here; time code about 00:55:10 on the two keynotes). This says much about Apple’s attention to details.

An epilogue: Replay became a hit, generating substantial revenue thanks to the in-app purchase system. Stupeflix now employs 23 people, all of the same caliber as the founders. To stimulate the team’s creativity, management keeps holding internal hackathons, and they continue to build on the uniqueness of their video algorithms and rendering engines. The company recently came up with Steady, a spectacular app that gives the impression your iPhone is mounted on a Steadicam (a complex system crops each frame in real-time to compensate for unwanted motion) and Legend, that animates texts on the fly. They are now working on another movie capture app that will further transfer the burden of filmmaking from the user to the software. Call it talent by proxy.

frederic.filloux@mondaynote.com

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Comcast Folds. No Dancing In the Streets Yet

by Jean-Louis Gassée

We may have dodged the Comcast/Time Warner bullet but we’re still far from getting rid of the antiquated set-top boxes and cable modems that only exist to protect juicy old business models.

We can breathe a sigh of relief: The proposed $45B merger between Comcast and Time Warner Cable (TWC) is dead. When the merger was announced with size-appropriate fanfare just before Valentine’s Day, 2014, normal humans saw the deal as clearly dangerous. How could “Concast”, a company that’s unanimously despised and indisputably abusive, be allowed to bear down with even greater weight on our collective neck?

In a salvo of Orwellian doublespeak, Comcast assured us that less competition and a more dominant provider would translate into a dream come true for consumers and competitors:

“Transaction Creates Multiple Pro-Consumer and Pro-Competitive Benefits, Including for Small and Medium-Sized Businesses…This transaction will be accretive and will yield many synergies and benefits in the years ahead.”

This Freedom Is Slavery agitprop is evidence of Comcast’s belief in our passive idiocy — but it’s more than that. It’s a testament to the company’s faith in its political chicanery. Combined, Comcast and Time Warner Cable spent an outlandish $25M trying to persuade lawmakers to endorse the deal, and showered campaign donations on both parties – a little bit more on Democrats. (And let’s not forget that Comcast CEO Brian Roberts is President Obama’s golf buddy.)

The political machinations don’t stop there. As uncovered by The Verge, Comcast ghostwrote pro-merger letters that were delivered to the FCC:

“…Mayor Jere Wood of Roswell, Georgia, sent a letter to the Federal Communications Commission expressing emphatic support for Comcast’s controversial effort to merge with Time Warner Cable… Yet Wood’s letter made one key omission: Neither Wood nor anyone representing Roswell’s residents wrote his letter to the FCC. Instead, a vice president of external affairs at Comcast authored the missive word for word in Mayor Wood’s voice.”

Dipping into this bag of tricks has worked before. After all, Comcast got away with an anti-competitive deal when it acquired NBC in spite of the obvious anti-competitive distribution advantage stemming from its huge Cable TV footprint.

Yet, Comcast insists that the sentiments are genuine, an “outpouring of thoughtful and positive comments“. The company pronounced itself “especially gratified for the support of mayors and other local officials, […] underscoring the powerful benefits of this transaction for their cities, constituents, and customers.

As Consumerist reminds us, this is the company that resorts to tortuous customer rentention tricks and foments a culture of customer disrespect. We’ve all experienced the poor customer service and bad attitudes, the last minute appointment cancellations, the phone reps who know nothing about our accounts. During a visit to Comcast Palo Alto,  one rep tells me I can self-install while another rudely insists that I ignore what I’ve just been told.

I can’t blame the customer service employees. Deprived by management of any ability to access data or to exercise judgment, they’re just following the script and emulating the examples set by their bosses. I blame the execs who don tuxedos and put on airs of benevolent prosperity at charity balls in Washington and Philadelphia. They’re the ones who created the culture and then feign bewilderment and concern when they discover that customers don’t like Comcast. About a month ago, when the merger hung in the balance, the @ComcastCares Twitter account suddenly displayed increased activity, after repeated apologies and the appointment of a Senior VP of Customer Experience last September.

But arrogance, mendacity, and poor customer service weren’t enough to stop the merger. ‘Twas Net Neutrality killed the Beast.

The Comcast/TWC deal was initially seen as a Cable TV merger, with a combined market share that approached 30% of Pay TV. But Pay TV is sliding into the past. Internet connectivity, broadband speed, and reliability are what matter now, and an expanded Comcast would have garnered more than 40% market share. That’s a portion that can’t be squared with the concept of a free (as in freedom, not free beer) and open Internet. After the FCC issued Net Neutrality rules — which were immediately challenged by our freedom loving carrier friends — the notion that 40% of public access and about 50% of “triple play” services would be handed to a single company became intolerable.

So, we dodged that bullet. But entrenched players and their convoluted business models still keep us far from where today’s technology wants to take us.

First, an old issue: Extortionate channel bundling. Why must we buy a bunch of channels we’ll never watch just to get the few we actually want? A la carte distribution should be the norm.

Second, everything ought to be on-demand from the Cloud. It’s not that much of a fantasy: today, I can set up a recording from my Xfinity set-top box and then watch it from my laptop or tablet anywhere in the world — especially in places where Internet access is better and less expensive than in the US. See the following graph and sigh:

Broadband Worldwide Price Performance

As Joe Palmer, a former colleague and current friend likes to say: It costs more, but it does less.

Lastly, our regulators should force carriers to let users connect a Brand X, Y, or Z box to the Cable network. Why must we put up with the clutter of a Comcast Internet modem and Wi-Fi access point, an Xfinity set-top box and DVR, and a Microsoft Xbox? Satya Nadella would love to sell us a single, universal Xbox. I have no doubt Tim Cook would look kindly on an all-in-one Apple “iBox” that replaces the two Comcast boxes and combines it with an Apple TV and a Time Capsule.

There will be dancing in the streets when we throw away today’s cable modems and set-top boxes. It will happen…but I won’t hold my breath. It will take time and repeated attempts to tear down the blockades erected by Comcast, AT&T, and the other carriers.

JLG@mondaynote.com

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Funding Innovation: France’s Image Problem 

 

by Frederic Filloux

The French government didn’t foresee the negative ripple effect of its interventionism in the Dailymotion case. VCs and entrepreneurs are appalled. It’s time to rethink the French way of funding innovation. (Part 2 or 2)

Last week, we looked at the pathetic Dailymotion saga.  Once described as “one the best French startups”, Dailymotion was funded, for a large part, with public money, then put on life support by Orange, patriotically protected by two economy ministers, and finally sold to media conglomerate Vivendi. The transaction did little to mask the company’s (and the Board’s) lack of a real strategy.

This wasn’t French capitalism’s finest hour.

Apparently, for the French government, Dailymotion was more important than Alcatel, acquired last week by Nokia (read below Jean-Louis Gassée’s analysis). The Nokia takeover will inevitably translate into massive jobs losses: Nordics, especially Finns, can be brutally efficient.

In the French venture capital milieu, the Dailymotion folk tale is seen as yet another blow to an already weak funding ecosystem. All the people I spoke with last week — VCs, entrepreneurs — say the same thing: The incursion of politics in the destiny of a tech startup sends a terrible message to the VC community — especially to non-French investors. If a startup becomes successful, it is likely to become a political issue in such a way that financial considerations become secondary, at everyone’s expense: employees, founders and funders.

Such government-induced repellent is the last thing the French economy needs. When it comes to supporting innovation, France already has an image problem — unfair in parts.

For one, the country does not really like entrepreneurs. Despite efforts deployed by all administrations from left to right, public opinion remains suspicious of entrepreneurship, startups, etc. No one really likes success stories here — including the press — which doesn’t help. A few entrepreneurs get lionized – as long as they don’t disturb the establishment, or don’t hire and fire like entrepreneurs.

Then there are structural obstacles.  Here is a list of the most quoted issues by VCs and entrepreneurs:

— The tax issue. In due fairness, they note, this problem is largely overstated: When looking into details, the French tax system is not worse than anywhere else. Actually, many tax incentives favor investments in startups. But some items — stock options, capital gains, a misbegotten Wealth Tax — have justifiably created a negative perception.

— Administrative weight and scrutiny. Today, it doesn’t take more time to start a company in France than in the US or the UK. But after a year, the administrative burden falls on young entrepreneurs’ shoulders, with scores of complicated taxes and paperworks requirements. And the tax collector is watching: in 2012, about one out of five startups has endured a tax investigation, twice the previous year’s rate.

— Labor laws. A startup requires flexibility, a concept that is at the polar opposite of the super-rigid French labor code which imposes to a 10-person company the same obligations as those of a big corporation. As a result, entrepreneurs are virtually unable to adjust their staffing to the uncertainties of the business; in every incubator, you hear: “Well I could easily hire three more developers or project managers, but if things go South, I won’t be able to fire them before it’s too late”. Plus, employment costs a lot. Not only do the French work (legally) less hours in a week, fewer weeks in a year (and a lesser number of years in a lifetime) than in neighboring countries, but the amount of a salary diverted into social contributions accounts for 38% of French labor costs: that is 5 percentage points more than Germany, 9 points more than Sweden — both countries with much lower unemployment rates.

— Pool of accessible capital. That’s probably France’s biggest problem. “Here, we have no pensions funds, very few family offices (for tax reasons, they stay out of France, mostly in Switzerland, Belgium)”, says an investor, “and we don’t have university endowments”. As matter of fact, the French academic apparatus is notoriously allergic to business. A Stanford-like model is nearly impossible here. (On the relationships between Stanford U and the tech sphere, read this landmark piece by Ken Auletta in The New Yorker.)

The result is a size problem of the French venture capital ecosystem. This table says all:

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Not only is the total amount invested by French VCs small, but it is spread too thin. Compared to the rest of Europe, France does well in the early stages but very badly when it comes to really grow companies.  According to a study made by France Digitale for the European Commission:

France is the top European market for early stage investments, with 35% of all European deals ranging from 500K to USD 2 million taking place in the country, but it is surpassed by other countries immediately after the USD 2 million mark. The German industry is driven by large rounds, demonstrating a favorable later stage environment with 27% of European deals ranging from USD 10 to 50 million taking place in Germany. 

Consequently, past the first round of financing, foreign VCs take the lead: According to a 2013 survey conduct by France Digitale and Ernst & Young, beyond the €50m revenue mark, 67% of the French startup already have foreign VCs among their investors. And when it comes to supporting a truly ambitious and global growth, French VCs are left out of the game. Two recent examples: Less than a year ago, French car-pooling platform BlaBlaCar raised $100m entirely from foreign funds. “We didn’t see any proposals”, said a manager in a prominent VC boutique. More recently, Sigfox, specialized in Internet of Things connectivity, raised €100m mostly form foreigns funds – and from state-owned Banque Publique d’Investissement.

Despite this bleak picture, French investors and entrepreneurs are also prompt to mention key national assets: An excellent technical infrastructure with blazing fast and relatively inexpensive internet connectivity; a significant output of qualified engineers in many disciplines, that are much less expensive (and less volatile) than their US counterparts; a vast catalogue of tax incentives that favor early stage investments; and the famous (and costly) social safety net that contributes to individual risk-taking. This results in a vast network of incubators, often supported by municipalities or regional administrations. As far as the pipeline of capital is concerned, solutions do exist. France Digitale recently proposed to divert a tiny amount of life insurance assets — 0.2% to 0.3% — to venture capital; it could almost double French VC firepower, at no cost to the French state, it says.

The main problem — which extends to most of Europe (not the UK) — is the exit for successful companies. European stock markets don’t have the Nasdaq’s strength (or luster), and the size gap between Europe and the United Sates discourages continental trade sales. Again, based on the EU survey made by France Digitale, “9 out 10 startup companies financed by VCs are sold to foreign acquirers (US and Asia)”.

At least, those lucky ones didn’t collide with the political agenda of the French government and its overzealous ministers.

frederic.filloux@mondaynote.com

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FrankenNokia

 

by Jean-Louis Gassée

Stitching together the disparate body parts – and cultures – that make up Nokia-Alcatel-Lucent is not a task for the faint of heart. This week we look at what Rajeev Suri, the CEO of the combined companies, is up against.

April 15th 2015: Nokia “agrees” to the $16.6B takeover of Alcatel-Lucent. On the surface, the acqui-merger makes sense. Both companies make networking gear and they’re of similar size, each with 2014 revenues of about $16B. (Nokia’s latest financials; Alcatel-Lucent’s 2014 annual report.)

It’s a financially complex transaction involving two complicated and venerable companies. Debt is assumed, debt is exchanged for shares, new debt is issued…there are a lot of ifs and buts.

As expected when a deal isn’t a straight shot, Wall Street’s reaction is mixed. Some think Alcatel-Lucent’s shareholders are on the short end of the bargain. Others, such as Standard & Poor’s (S&P), the haruspex that fondles financial statements and divines the value of securities, buys into the deal partners’ obligatory rationale and opines that the merger will result in a stronger product portfolio and less financial risk. (Let’s keep in mind that this is the same S&P that contributed to the 2007 housing bubble and the resulting depression. It recently agreed to pay the United States $1.38 billion to settle civil fraud charges that the firm had inflated the value of mortgage investments.)

Regardless of the prognosis, these analyses have concentrated on the numbers, the regulatory hurdles, the challenges of competing with ascendent Chinese companies, or the rise of Software Defined Networking (SDN) competitors. They blithely overlook a more fundamental element that determines success or failure: Culture. As an old but eternal saying goes: Culture Eats Strategy For Breakfast, a saying attributed to management sage Peter Drucker.

Consider the paths that led the two companies to the altar.

Alcatel was founded in 1898 as Compagnie Générale d’Électricité (CGE). For more than a century, the company accretes and sheds businesses, mostly in France, but never achieves a solid, lasting market position.

Embroiled in a fraud and corruption controversy in 1995, Alcatel hires Serge Tchuruk to clean house and reshape the old electric equipment and electronics company. Tchuruk, a life-long chemical and energy man, had seen success as CEO of oil giant Total, but at Alcatel things don’t go his way and the company continues to lose money.

In an attempt to right the ship, Tchuruk explores a merger with Lucent, the telecom equipment company that was born from the AT&T breakup. The deal fails to conclude amidst accusations, from both sides, of “unreasonable demands”.

But Tchuruk is persistent. Five years later, in April 2006, he finally gets his way: “Alcatel and Lucent Technologies To Merge and Form World’s Leading Communication Solutions Provider”.

As part of the deal, Patricia Russo, Lucent’s CEO, relocates from New Jersey to Paris and becomes CEO of Alcatel-Lucent. Tchuruk stays on as non-executive chairman of the combined entity.

This was a deal based on weakness, a marriage of convenience between two struggling companies whose culturally incompatible teams were fixated, understandably, on surviving the impending “workforce optimizations”. Lucent carried habits of heart and mind that had been deeply embedded during its grand days nesting in Ma Bell’s well-regulated system. To top it off, no one believes that Russo and Tchuruk can work together.

The marriage doesn’t last. In October 2008, after two years of finger pointing and a further slide into industry irrelevance, both Tchuruk and Russo resign. (Tchuruk returned to the energy industry as CEO of Joule; Russo is back in the US as an HP Director and will almost certainly become Chairperson of HP Enterprise when the company is spun-off.)

Russo is replaced by Ben Verwaayen, a well-regarded, well-liked, and more restrained telecom industry veteran. He lasts for six years; the company continues to suffer.

In 2013, the task of turning Alcatel-Lucent around falls to Michel Combes, another respected and experienced telecom industry exec. Combes immediately launches a two-year mission aimed at cutting costs by 1B€. We’ve come to the end of the two-year time limit…and it looks like he made a reasoned decision to throw in the towel and go for the Nokia deal. Combes has let it be known he won’t stay on as a Nokia exec.

Nokia is a different story. Formed in 1865 as a paper pulp business, Nokia expands into galoshes and other rubber products around the turn of the 20th century (you can still put Nokian Tyres on your vehicle – a separate company). Soon after that, the company gets into electrical equipment (such as cables) and electronics.

After a long history of ups and downs, Nokia, under CEO Jorma Ollila, makes the fortuitous decision to get into the GSM networking business (late 1980s) and then the handset business (early 1990’s). By 2010, it’s the world’s largest handset maker, shipping 100M phones per quarter.

With its long history, its ability to ride crises and invent new businesses, its hard-won preeminence in the high-tech sector, it seems as though Nokia can survive anything.

Well, almost.

Nokia can’t compete in the new world of software platforms and ecosystems. (See a June 2010 Monday Note: Science Fiction, Nokia Goes Android.)

When it becomes painfully obvious that its too-many Symbian and Linux derivatives won’t cut it, Nokia makes a grievous mistake in appointing a former Microsoft exec, Stephen Elop, as CEO. Elop promptly Osborns the existing product line by prematurely announcing a new and improved Microsoft OS that takes a year to materialize.

After Nokia sells its collapsing handset business to Microsoft in 2013 (the deal finally closes in April 2014 for about $7B), the company is left with three businesses: Nokia NetworksHere (mapping technology), Nokia Technologies (guardians of a fat patent portfolio).

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[From Nokia’s latest quarterly numbers]

Nokia Networks is the result of the difficult absorption of Siemens’ networking operations, a joint venture once known as Nokia Siemens Networks (NSN), started in 2006 and fully “resolved” in 2013. Despite the birth pains, it’s Nokia’s main breadwinner, garnering 90% of the 12.7B€ achieved in 2014 (about $14B US at today’s rate) with decent operating margins (lately between 12% and 14%).

Nokia Technologies and Here don’t really matter. Combined, they weigh less than 12% of total sales. The patent licensing activity provides decent margins, more than 50%, but it doesn’t matter much with less than 4% of sales. Here’s 6.8% operating margin guarantees that it will be disposed of.

Throughout it’s history, Nokia has been decidedly and unabashedly Finnish. In its heyday, Nokia remained proud of its strong culture and gutsy sisu, even as its factories, Supply Chain Management operations, and carrier relations spanned the globe.

Today, the company is no longer the old Finnish Nokia; it’s now a kind of FrankenNokia assembled from disparate body parts and cultures that CEO Rajeev Suri, a 20-year veteran of Nokia, will have the thankless task of stitching together.

We’ll be watching to see if Nokia can regain its once-proud culture and overcome the “foreign bodies” introduced by the Alcatel-Lucent acquisition.

JLG@mondaynote.com

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Dailymotion: The Cautionary Tale Of A Gallic “Nugget”

 

by Frederic Filloux

No one should be happy with the sale of French video streaming Dailymotion to Vivendi. Not buyers, nor the the startup’s management team –and certainly not the venture capital community. (First of two articles) 

DailyMotion was meant to be a YouTube competitor. The two companies were actually born almost simultaneously in 2005. Unfortunately, Dailymotion remained deeply French (even though his CEO later resettled in California). Over the last two years, it has become a typical French political football, kicked around by a succession of two cabinet ministers, the colorful Arnaud Montebourg (pictured below) and his more sober successor Emmanuel Macron.

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[Then Minister Arnaud Montebourg, defending domestic savoir-faire]

Both government officials vehemently defended DailyMotion, invoking a national imperative: Keeping the French flag floating above the iconic startup. The “nugget” of the French startup scene was granted the status of a national symbol.

But was it really really a “nugget”?

Neither Arnaud Montebourg nor Emmanuel Macron seemed to care enough to have done more than quickly scanning reports from their own cabinet minions –and consulted media headlines for insights. Political imperatives should not be confused with economy realities: As an Industry Minister, Montebourg was obsessed by the defense of the Made in France, while Macron didn’t want to be the one who let the iconic French startup fall in foreign hands.

Dailymotion was created in March 2005. Its two first round of funding ($9.5m in 2006 and  $34m in 2007) were provided by VC firms and private individuals. In late 2009, the French government had to step in to secure a third round ($25m) along with the VC syndicate. Audience looked good, but monetization didn’t work — the bane of video streaming platforms. Orange, the French telecommunications giant (inherited from state-owned France Telecom) was brought in to support Dailymotion by integrating the startup in its digital portfolio. The French carrier acquired 49% of Dailymotion in 2011, then 100% in 2011- at a valuation of €126m. “Creating synergies!” was the resonant battle cry. Except synergies never materialized. Dailymotion’s CEO Cédric Tournay was fixated on competing with YouTube and, to his chagrin, found Orange’s culture less than welcoming to the needs of a fledgling video startup.

Incorporated just a month earlier, in February 2005, You Tube followed a different path: one single relatively modest round of financing ($11.5m) then, twenty months later, in October 2006, Google showed up checkbook in hand, and coughed up $1.65bn to acquire 100% of YouTube. The brand remained, so did the headquarters in San Bruno, near San Francisco airport. But, business-wise, two big changes took place. First, in typical Silicon Valley fashion, the massive cash infusion translated into a large scale, global deployment: audience growth first, revenue later. Second, ads became to pour in, diverted from the fantastic Google money machine. Tons of data were used to determine that users should be allow to skip ads after few seconds, thus warranting qualified viewership to brands whose clips were actually seen in full.

This left little chance to Dailymotion, underfunded, unable (nor encouraged) to  build upon Orange’s worldwide base of 244 million customers spanning over 29 countries. Through it Strategic Investment Fund, the French government still retained a 27% share in Orange SA (publicly traded on EPA:ORA and NYSE:ORAN). With such a stake, one would have pictured the French government representative sitting on Orange’s board pushing the bold, patriotic development of Dailymotion. No. Dailymotion was never more than a wart on Orange’s conservative product line. And the telco’s CEO, Stephane Richard (himself a former chief of staff of the Economy Minister), quickly set his mind on getting rid of the startup, under the best possible conditions.

A first opportunity flared up in early 2013 when Yahoo! approached Orange to acquire Dailymotion. From Yahoo!’s perspective, the operation made sense. The French company was performing well on markets other than YouTube’s native one, and Marissa Mayer wanted to have her video streaming platform to build upon. Orange’s Stephane Richard was elated: Yahoo! had proposed $300m (€275m) for the company; after all it the company had cost him about €150m, between the acquisition and the cash infusion. Not bad for a quick exit.

All of a sudden, the Minister in a striped marinière woke up and harangued Orange’s CFO: “I’m not going to let you sell one of the best French startups, you don’t know what you are doing”. Yahoo! quickly retracted its offer.

A year later, Orange, willing to get rid of an asset that was losing both relevance and value, tried to secure a syndicate involving Microsoft and Canal+, the Paris-based paid-TV network. Again, no luck.

Two years later, Montebourg is gone (now Board Vice-Chairman at Habitat) and the Economy minister is Emmanuel Macron, a pragmatic former philosopher (yes) and investment banker seen as less driven by ideology and grandstanding. But when Hong Kong’s Pacific Century CyberWorks showed up to acquire Dailymotion, the soft-spoken Macron jumped in and asked Orange to consider “other” suitors (read French or at least European ones). Problem is, in spite of government efforts to arouse bidders, there were no takers –a few tentative marks of interest, but no formal offer. PCCW was out.

Until Vivendi showed up. To its owner, industrial magnate Vincent Bolloré, and its newly appointed CEO Arnaud de Puyfontaine, the timing was just right. Vivendi faced a shareholder revolt lead by the American hedge fund P. Schoenfeld Asset Management. PSAM was calling for a €9bn dividend windfall from Vivendi’s massive divestment from telecommunications assets that left the group with a €15bn cash hoard. Not only PSAM wanted a fat dividend, but it also demanded a viable strategy. Hence the quick wrap-up of the Dailymotion deal. On April 7, Vivendi announced the purchase of 80% of Dailymotion for €217m (€230m), i.e. a €265m (€281m) valuation. Vivendi didn’t quibble, his shareholder meeting was ten days away. In the meantime, Vivendi had reached an agreement with PSAM: €6.75bn in dividend payouts.

Vivendi has yet to find what to do with its brand new “nugget”. It will have to deal with harsh facts:

  • Last year, Dailymotion made €65m in revenue, and had a negative EBITDA of €2-3m. No big deal, but due to the specific nature of its business, of its infrastructure costs, the platform is said to require a €20m-€25m yearly cash-burn. (In fact, Dailymotion guarantees a minimum revenue for some of the media it hosts — to some extent, it buys its own revenue.)
  • Dailymotion his having hard time monetizing its audience as most of its videos are user-generated (and therefore carry few ads) while Facebook is crushing the market –threatening even YouTube.
  • Canal+ needs could generate post-deal opportunities. But, until then, the paid-TV network (owned by Vivendi) seemed quite happy with the deals it had with YouTube. So is Universal Music, also a Vivendi subsidiary.
  • Vivendi made an opportunistic acquisition and overpaid it: in its books, Orange is said to have downsized the value of Dailymotion to €58m; that is almost a 5x implicit valuation for the transaction.

As far as going after YouTube, it’s no longer a realistic goal, as shown in these two charts:

362_2_keyFig

This politically-induced operation carries its share of collateral damage. From now on, every Gallic startup that will be seen as a success — real or presumed, that’s beside the point — is likely to become a political football, a situation adverse to the interests of the company and its backers.

Next week, we’ll see how the maneuvers around Dailymotion have done more harm than good to the French startup ecosystem and to those who try to fund it.

—frederic.filloux@mondaynote.com

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