About Frédéric Filloux

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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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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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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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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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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:

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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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Jumping In bed with Facebook: Smart or desperate?

 

by Frederic Filloux

Update on May 13 : 9 publishers joining Facebook Instant Articles program

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[Our April 6 article]

Several major news organizations are said to be in negotiations with Facebook for a hosting deal. This throws the media sphere into an intense debate: Is this a path to prosperity or a dangerous surrender? 

The digital media odyssey’s latest chapter: According to a March 23rd New York Times article, half a dozen news organizations are currently in discussions with Facebook for a distribution deal. Cited as candidates for the experiment: The NYT itself, but also BuzzFeed, the National Geographic and even Quartz. (No one actually confirmed the information.) Under the putative deal terms, instead of simple links, Facebook would host media contents. In exchange, the media would get a cut of the ad revenue generated by the arrangement.

Media commentators quickly split into two camps: Those seeing this proposal as the most dangerous idea ever, versus others suggesting that times had changed, that Facebook had become the dominant ingredient in the Y generation media diet, and that news organizations better board the Facebook bandwagon or face a certain death (this Google News page provides a good glance at the controversy).

The debate about the increasing dependency on Facebook has been around for a while. Think tank seers remind us that FB has become the main source of news consumption. Last year, in its Digital News Report, the Reuters Institute asked which social platform had been used for any purpose (the dark blue bar), and more specifically for news (light blue):

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At least a quarter of respondents mention Facebook as their source for news, reaching 67% in Brazil, 57% in Italy, and 50% in Spain. In the UK, when these readers are asked how they use Facebook for news, 48% say they browse their feeds and, more importantly, 44% say they actually click on a link, thus revealing a staggering level of engagement:

Actually, these numbers might be vastly underestimated. Last week, I interviewed a candidate for a project manager position at Les Echos. When asked about his media diet, the candidate said the vast majority of his news consumption took place on Facebook; he had about 500 various subscriptions and believed he didn’t miss anything. But he was barely able to mention a news brand on the main screen of his smartphone. I heard such a tale many times over.

When it comes to social media traffic referrals, Facebook is crushing everyone else. According to Shareaholic, in December 2014, Facebook generated 25% of all visits collected by publishers, leaving the rest of the social crowd in its dust. Pinterest, weirdly enough, comes in second, but with only 5% of referrals, and Twitter lags far behind with a mere 0.82%. The six other notable social platforms collectively weigh less than 2% of the total web traffic. Facebook “owns” the social distribution of news. But, impressive as it is, the 25% ratio needs further clarification: News organizations born with the digital era rely much more on social — sometimes up to 70% — while legacy media for only 10% to 15%.

This trend will continue as Facebook is actually expanding both ways: While its user base grew by 60% between December 2011 and December 2014, its referrals contribution grew by 277%, again according to Shareaholic. Aside from Pinterest (+685% growth over the last four years), other social channels did decline in the interval.

Hence Facebook’s powerful pitch to publishers:
– We grow in absolute terms — 1.4bn users and counting, with almost 1bn mobile users.
– We also grow in relative terms as our users stuff their feed with more news sources than ever.
– The engagement — time spent, click-through rate — is also on the rise.
– We provide the most granular ad targeting you can dream of.
– We can serve your contents on any platform much faster than you do, thanks to our technology and global infrastructure.

Seriously, who can resist that song?

The fact that the New York Times is said to be talking to Facebook rattled the news sector even more. The gold standard of quality journalism considering Facebook’s boost is indeed disturbing to many publishers — many of them in dire situations.

The decision-making process should factor the following items:
– The brand: the more powerful (read: established, acknowledged, ancestral) it is, the less likely it needs a social boost. (That’s the comfortable theory.)
– The type of content: Long form journalism is not the best fit for Facebook. Hardcore journalism, with its share of tragedies, is less likely to click than lighter, shorter pieces of information. ISIS doesn’t do well on FB’s newsfeed but Beyoncé scores high.
– Target group: The younger the better. If your readership is above 45, educated and affluent, you might consider a decisive social deal aimed at tapping into an additional pool of readers.
– Advertising: What’s in it for the publishers who might be part of the deal? That’s the big money question.

Let’s explore some answers.

Based on various deals seen here and there, the honey pot, as considered by publishers, consists in sharing advertising revenue. It is likely that Facebook will propose a two-pronged ad deal: a format sold by the publisher will collect between 70% and 100% of the revenue; if the ad is sold by Facebook, the network takes a cut that varies widely, depending on the partner’s bargaining power, but it can be 70/30… in favor of Facebook (a quota of say, a third of the inventory, can be reserved for the network.)

Last week, I spoke with two major european digital native players, each getting dozens of millions UVs per month. Both doubted the advantage of such a deal: Based on their experience with Google, they told me their audience increased while the revenue derived from the deal actually decreased. Their conclusion: Once hooked, the distributor will tend to arbitrarily tighten the deal, making it less and less favorable.

Can Facebook be trusted? The short answer is no. First of all, when someone subscribes to a given media content, Facebook’s algorithm will decide which amount of news the user will actually see. And s/he sees very little: for a specific flow of news pouring into Facebook, a ratio of 15% actually reaching a subscriber’s newsfeed is considered quite good. (In fact, Mark Zuckerberg said the average Facebook user could be exposed to 1500 stories per day but actually only sees a hundred of those, that’s 6%. As he sees it, Zuck’s own job is to determine which pieces of news everyone is entitled to see according to their profile.)

Facebook is an unpredictable spigot, whose flow varies according to constantly changing and opaque criteria. A given news stream will see its conversion into clicks vary widely for no apparent reason. (One suspected motive might be the correlation between ad spending on Facebook and the propensity of a news content to rise above the noise.)

Second, unlike Google which is relatively single-product oriented (structuring mostly text-based knowledge), Facebook carries lots of promises: it’s a video platform, a photo repository, a conversational system, an instant messaging service — all competing for the same real estate: your computer display or your mobile screen. Soon, Facebook will encompass a transaction platform, a classified service able to overthrow Craigslist or eBay, a search engine, etc.

In Facebook’s entanglement of platforms, services and applications, the news segment can only expect to play a minor role. In this ecosystem, news is expendable, it will be the adjustment variable that can be downplayed or even sacrificed should the company’s interest dictates it.

Having said that, news distribution through social channels must be part of any media strategy. A news brand, relying only on its notoriety might become increasingly secluded and lose its relevance by falling below its audience’s radar. Those who produce in-depth and unique editorial will consider Facebook a marginal addition to their core audience, while others, gushing loads of repackaged, cheap pieces of information will agree to be handcuffed by their distributor, for better or worse.

frederic.filloux@mondaynote.com

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Beware of Airbnb entering the hyperlocal travel guide business

 

by Frédéric Filloux 

Airbnb has every reason to enter the news services sector – and to threaten a broad range of media/services such as Trip Advisor or Yelp. 

Seen through the eyes of travel information publishers, Airbnb holds a dream position: a huge base of 25 million potential readers/users, spread over 34,000 cities in 190 countries, well in tune with the brand’s core product and attributes.

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For a start, should Airbnb develop a publishing arm, this unparalleled notoriety would spare it tens of millions dollars otherwise required to promote its content services: In the travel industry, advertising and marketing demand high spending. To put things in perspective, this year, according to the trade site Skift.com, HomeAway, one of Airbnb’s key competitors, plans to spend $100m (after shelling out $60m in 2014) “To show it’s not Airbnb“. HomeAway was created in 2005 and received $504m in funding before going public in 2011 — the stock lost 18% since. Airbnb has yet to go public after raising more than $800m. Its latest confirmed round closed in October was for $50M with a $13bn valuation. Airbnb is now rumored to be raising a $1bn “war chest” at an even higher price: $20bn.

Today, Airbnb’s expansion is a matter of concern not only for its direct competitors but also for large players in the travel information segment.

Last November, Airbnb fired the first shot: Pineapple, a 128 page, ad-free, glossy quarterly magazine, mostly written by hosts and guests gently discussing their experiences. With a tiny print run of 20,000 copies, it was distributed for free in some Airbnb hotspots and sold at selected bookstores such as WH Smith in Paris, where I got my copy for €12. According to Pineapple publisher Christopher Lunekzic (interview on the FIPP site), “The idea came from a desire to capture the unique nature of traveling through Airbnb. We wanted to bring that sense of creativity, culture and connection to life”. All the talking points of an elegant PR campaign are checked, part of Airbnb recent rebranding. Nothing to freak out travel press behemoths.

Except… Now, a sizable part of Airbnb community is aware of the company’s recent push into the magazine business. Which could make a serious difference.

That said, print is certainly not a key part of Airbnb’s media future. Mobile apps are. Last year, only 20% of Airbnb traffic came from mobile. That was before last December’s app redesign. Today, the Airbnb ranks in the top 5 apps in 7 countries, and in the top 100 in… 152 countries. That’s where the real potential is. And the San Francisco-based icon of the sharing economy is betting heavily on mobile: it recently announced a partnership with Deutsche Telekom’s T-Mobile to pre-install its app on Android smartphone across 13 markets in Europe (TechCrunch story here). A decisive move for Airbnb’s mobile expansion.

Now let’s indulge in a little bit of fiction — from the perspective of an Airbnb guest.

I’m booking a flat in, say in London’s Marylebone district. I’m not familiar with the best places to go out. In the dedicated section of the new Airbnb app, I enter the host’s postal code, which is precise down to the building (likewise, the American “Zip+4″ code provides a city block location; in other cities, the Lat-Long associated to a street address does the job). My host has listed her preferred spots: organic groceries, wine bars, galleries, shopping places, movie theaters… Every place shows up on a Google map. The practical details I might need appear over my host’s comments: business hours, booking information, etc. I can also check the reviews on third party sites, but given my host’s profile, I assume our tastes will match; plus, I don’t want to get drowned into a tedious (and too often dubious) series of five-stars searches.

On my phone, I now enjoy a mini-guide of the neighborhood where I’m going to spend the next few days, filled with trusted, non-commercially-induced recommendations. Right from the app, I can make reservation via Open Table, and even call a Uber car. That’s what API’s are for: connecting applications together, in a mutually beneficial way. The third-party service provider expands its reach and the app publisher offers a wider range of services while keeping the customer “inside”. Similarly, a gallery or museum can make its program available within the app.
APIs will be a major development engine for the apps ecosystem as the number of features and services that can be added is boundless. For example, Uber has recently made its API system much more accessible and now partners with 11 companies, including Hyatt, OpenTable, Starbucks, Time Out, TripAdvisor, TripCase — curiously, not Airbnb nor Yelp.

Why would such integration threaten large travel business publishers?

Beyond developing its gigantic global footprint, Airbnb wants to build a community of users, itself structured in homogenous layers (e.g. young families looking for budget rentals, yuppies aiming at trendy places…) There’s even the growing crowd of professionals who prefer an Airbnb apartment free of the check-in/out hassles of hotels, and who will gladly trade unexciting room service for a super-fast DSL connection. (I’m told a growing number of Googlers do so for their business trips, with their employer’s blessing.) Each of these sub-communities will be far more likely to trust their peers than the usual travel guides where it’s always difficult to sort actual user opinions from bogus reviews and paid-for insertions, disguised advertorials, etc.

The beauty of this powerful combination lies in its scalability. Airbnb listings contain a broad range of properties, including high-end, luxury items. Those who might be willing to cough up €2,000 a night for a two-bedroom unit with a stunning view of the Hong Kong harbor might also want a special cicerone, a much more sophisticated one than the peer-to-peer guide described above.

Sometime ago, Louis Vuitton — the main brand of LVMH luxury conglomerate — had the idea of creating a dedicated app aimed at its rich Chinese clientèle, at those able to spend €20,000 or more in a single afternoon shopping stroll through Avenue Montaigne in Paris. This special application was to offer the services of a personal shopper, but also a personal city guide (Louis Vuitton already publishes its own collection of high-end guides) to be used from planning the trip to the actual journey. Even better, the app was to rely on the Chinese-made WeChat application (500 millions users, roughly 85% from mainland China) connected to an actual human able to guide the wealthy tourist on a real-time basis, either with messages or voice contact. In such case, relying on peer recommendations made no sense, but a highly personalized service did. A couple of selected partners were in the loop.

Regardless of the market segment, a notorious brand coupled to a set of mobile services is a potent combination. In the case of Airbnb, the “full stack” company — a concept coined by Andreesen Horowitz’ Chris Dixon —  is likely to be a master tool for securing the position of a brand in its market.

frederic.filloux@mondaynote.com

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News Media Should Drop Native Apps

 

by Frédéric Filloux

When it comes to the most basic form of news delivery, facts keep piling up in a way that makes native apps more and more questionable. Here is why it’s worth considering a move back to mobile sites or web apps…  

One of the most shared statistic on mobile use is this one: Applications account for 86% of the time spend b’y users. This leaves a mere 14% for browser-based activities, i.e. sites designed for mobile, either especially coded for nomad consumption, built using responsive design techniques that adapt look and feel to screen size, or special WebApp designs such as FT.com.

This 86/14 split is completely misleading for two reasons: the weight of mobile gaming, and the importance of Facebook.

Take a look at this chart form Flurry Analytics:

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If you combine gaming, Facebook and Social Messaging, roughly 60% of time spent on mobile is swallowed by this trio. As for Facebook, it reaped the top four slots in downloads for non-gaming apps worldwide:

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Mobile consumption will concentrate even more as messaging and free direct communication (red dot in the chart) combine into the fastest growing segment by far. Mobile carriers have reason to be scared. Consequently, Facebook will tighten its grip on the mobile ecosystem as it commands the two dominant direct communication apps. If this wasn’t enough, there are two other fast-growing usages: Video streaming (+44% downloads last year) and Travel & Transportation — Uber, AirBnB, CityMapper — (+31%.)

The main characteristic of these services is they couldn’t be designed outside of a full-fledged application: They require key phone features not easily accessible through a browser such as radio modules, GPS,  image rendering (for maps, graphics), camera, etc.

By comparison, news-related applications do not requires a lot of phone resources. They collect XML feeds, some low resolution images and render those in pre-defined, non-dynamic templates. They use a tiny fraction of a modern smartphone’s processing power.

In fact, for news media, as the following matrix shows, native apps (iOS, Android and soon Windows) become a questionable proposition:

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Summing up, apps for news distribution are technically justified for speed, ability to send notifications, inApp purchases, and the hypothetical use of phone sensors. That’s much money and a lot of complications for a small number of features. (On this subject, see the previous The Future of Mobile Apps for News column.)

Unless you are fighting for the prime phone screens, say the first three swipes, or if you are determined to provide key visual or functional differentiators, going for a set of native apps must be carefully weighed. Depending on the level of sophistication and required features, developing a native application costs between $50,000 and $100,000, for each environment, plus dedicated SDKs for marketing, analytics, etc., plus a 30% fee paid to the app store if you go for a paid or subscription model, plus hassles for approval of the smallest update in the messy iOS App Store…

But if you are already big on social and SEO, a mobile site, lightweight, clearly focused on a small feature set can be quite effective. Disappointing as it may be, HTML5-based web apps are all but dead (the difficulty lies in finding good developers and in managing them.)

Among all players, Google has the ability to overhaul the mobile ecosystem. If it comes up with an SDK or a framework aimed at creating simple and effective apps, indeed with limited performance but with enough features to accommodate news delivery, this could become an industry game-changer.

frederic.filloux@mondaynote.com

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NYT vs Buzzfeed: Valuations Discrepancies – Part II

 

by Frédéric Filloux

My last column about new valuations in digital media triggered an abundance of comments. Here are my responses and additions to the discussion. 

The most revealing part of argument used by those who tweeted (800 of them), commented or emailed me, is how many wished things to remain simple and segregated: legacy vs. native media, content producers vs. service providers, ancestral performances indicators and, of course, the self-granted permission to a certain category of people to decide what is worthy. Too bad for cartesian minds and simplifiers, the digital world is blurring known boundaries, mixing company purposes of and overhauling the competitive landscape.

Let’s start with one point of contention:

Why throw LinkedIn, Facebook and old companies such as the NYTimes or the Guardian into the equation? That’s the old apples and oranges point some commenters have real trouble seeing past. Here is why, precisely, the mix is relevant.

Last Tuesday February 17, LinkedIn announced it had hired a Fortune reporter as its business editor. Caroline Fairchild is the archetypal modern, young journalist: reporter, blogger with a cause (The Broadsheet is her newsletter on powerful women), mastering all necessary tools (video editing, SEO tactics, partnerships) as she went from Bloomberg to the HuffPo, among other gigs. Here is what she says about her new job:

 LinkedIn’s been around for 11 years and today publishes more than 50,000 posts a week (that’s roughly 10 NYTs per day) — but the publishing platform is still an infant, debuting widely less than a year ago. The rules and roles are being defined and redefined daily; experimenting is a constant.

Here we are: LinkedIn intends to morph into a major business news provider and a frontal competitor to established business media. Already, scores of guest columnists publish on a regular basis on LinkedIn, enjoying audiences many times larger than their DeLuxe appearances in legacy media. (For the record, I was invited to blend the Monday Note into LinkedIn, but the conditions didn’t quite make sense to us. Jean-Louis Gassée and I preferred preserving our independent franchise.)

For a $2.2bn revenue company such as LinkedIn, creating a newsroom aimed at the business community definitely makes sense and I simply wonder why it took them so long to go full throttle in that direction — not only with an avalanche of posts but with a more selective, quality-oriented approach. If it shows an ability to display properly value-added editorial, LinkedIn could be poised to become a potent publishing platform eventually competing with The Economist, Quartz, FT.com or Les Echos. All of it with a huge data analytics staff led by world-class engineers.

That’s why I think the comparison with established media makes sense.

As for Facebook, the argument is even more straightforward. Last October, I published a column titled How Facebook and Google Now Dominate Media Distribution; it exposed our growing dependence on social media, and the need to look more closely at the virtues of direct access as a generator of quality traffic. (A visit coming from social generates less than one page view versus 4 to 6 page views for direct access.) Facebook has become a dominant channel for accessing the news. Take a look at this table from Reuters Institute Report on Digital News Report (PDF here.)

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There’s no doubt that these figures are now outdated as media’s quest to tap into the social reservoir has never been greater. (In passing, note the small delta between News Lovers and Casual Users.) It varies widely from one country to another, but about 40% of the age segment below 35 relies on social as its primary source for news… and when we say “social”, we mostly mean Facebook. Should we really ignore this behemoth when it comes to assess news economics? I don’t think so.

More than ever, Facebook deserves close monitoring. No one is eager to criticize their dope dealer, but Mark Zuckerberg’s construction is probably the most pernicious and the most unpredictable distributors the news industry ever faced.

For instance, even if you picked a given media for your FB newsfeed, the algorithm will decide how much you’ll see from it, based on your past navigation and profile. And numbers are terrible: as an example, only 16% of what the FT.com pushes on Facebook actually reaches its users, and that’s not a bad number when compared to the rest of the industry.

And still, the media sector continues to increase its dependence on social. Consider the recent change in the home page of NowThis,  a clever video provider specialized in  rapid-fire news clips:

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No more home page! Implementing a rather bold idea floated years ago by BuzzFeed’s editor Ben Smith, NowThis recently decided to get rid of the traditional web access to, instead, propagate its content only via, from left to right: Tumbler, Kik, YouTube, Facebook, Twitter, Instagram, Vine, and Snapchat. We can assume that this strategy is based on careful analytics (more on this in a future Monday Note.)

Among other questions raised by Monday Note readers: Why focus solely on the New York Times and why not include the Gannetts or McClatchys? It’s simply because, along with The Guardian or the FT.com, the NYT is substantially more likely to become predominantly a digital brand than many others in the (old) league.

To be sure, as one reader rightly pointed out, recent history shows how printed media that chose to go full digital end up losing on both vectors. Indeed, given the size of its print advertising revenue, the Times would be foolish to switch to 100% online — at least for now. However, the trends is there: a shrinking print readership, fewer points of copy sale, consequently higher cost of delivery… Giving up the idea of a daily newspaper (while preserving a revamped end-of-the-week offering) its just a matter of time — I’ll give it five years, not more. And the more decisive the shift, the better the results will be: Keep in mind that only 7 (seven!) full-time positions are assigned to the making of the Financial Times’ print edition; how many in the vast herd of money-losing, newspaper-obsessed companies?

Again, this is not a matter of advocating the disappearance of print; it is about market relevancy such as addressing niches and the most solvent readerships. The narrower the better: if your target group is perfectly identified, affluent, geographically bound — e.g. the financial or administrative district in big capital — a print product still makes sense. (And of course, some magazines will continue to thrive.)

Finally, when it comes to assessing valuations, the biggest divide lies between the static and the dynamic appreciation of the future. Wall Street analysts see prospects for the NYT Co. in a rather static manner: readership evolution, in volumes and structures, ability to reduce production expenditures, cost of goods — all of the above feeding the usual Discounted Cash Flow model and its derivatives… But they don’t consider drastic changes in the environment, nor signs of disruption.

Venture Capital people see the context in a much more dynamic, chaotic perspective. For instance: the unabated rise of the smartphone; massive shifts in consumer behaviors and time allocation; the impact of Moore’s or Metcalfe’s Laws (tech improvements and network effects); or a new breed of corporations such as the Full Stack Startup concept exposed by Andreessen Horowitz’ Chris Dixon (the man behind BuzzFeed valuation):

Suppose you develop a new technology that is valuable to some industry. The old approach was to sell or license your technology to the existing companies in that industry. The new approach is to build a complete, end-to-end product or service that bypasses existing companies.
Prominent examples of this “full stack” approach include Tesla, Warby Parker, Uber, Harry’s, Nest, Buzzfeed, and Netflix.

All of it is far more enthralling than promising investors a new print section for 2016, two more tabs on the website all manned by a smaller but more productive staff.

One analysis looks at a continuously evolving environment, the other places bets on an uncertain, discontinuous future.

The problem for legacy media is their inability to propose disruptive or scalable perspectives. Wherever we turn — The NYT, The Guardian, Le Monde — we see only a sad narrative based on incremental gains and cost-cutting. No game changing perspective, no compelling storytelling, no conquering posture. Instead, in most cases, the scenario is one of quietly managing an inevitable decline.

By contrast, native digital players propose a much brighter (although riskier) future wrapped in high octane concepts, such as: Transportation as reliable as running water, everywhere, for everyone (Uber), or Organize the world’s information and make it universally accessible and useful (Google), or Redefining online advertising with social, content-driven publishing technology, [and providing] the most shareable breaking news, original reporting, entertainment, and video across the social web (BuzzFeed).

No wonder why some are big money attractors while others aren’t.

frederic.filloux@mondaynote.com

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The NYTimes could be worth $19bn instead of $2bn  

 

by Frédéric Filloux

Some legacy media assets are vastly underestimated. A few clues in four charts.   

Recent annual reports and estimates for the calendar year 2014 suggest interesting comparisons between the financial performance of media (either legacy or digital) and Internet giants.

In the charts below, I look at seven companies, each in a class by itself:

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A few explanations are required.

For two companies, in order to make comparisons relevant, I broke down “digital revenues” as they appear in financial statements: $351m for the New York Times ($182m in digital advertising + $169m for digital subscriptions) and, for The Guardian, $106m (the equivalent of the £69.5m in the Guardian Media Group annual report (PDF here).

Audience numbers above come from ComScore (Dec 2014 report) for a common reference. We’ll note traffic data do vary when looking at other sources – which shows the urgent need for an industry-wide measurement standard.

The “Members” column seemed necessary because traffic as measured by monthly uniques does differ from actual membership. Such difference doesn’t apply to news media (NYT, Guardian, BuzzFeed).

For valuations, stock data provide precise market cap figures, but I didn’t venture putting a number the Guardian’s value. For BuzzFeed, the $850m figure is based on its latest round of investment. I selected BuzzFeed because it might be one of the most interesting properties to watch this year: It built a huge audience of 77m UVs (some say the number could be over 100m), mostly by milking endless stacks of listicles, with clever marketing and an abundance of native ads. And, at the same time, BuzzFeed is poaching a number first class editors and writers, including, recently, from the Guardian and ProPublica; it will be interesting to see how Buzzfeed uses this talent pool. (For the record: If founder Jonah Peretti and editor-in-chief Ben Smith pull this off, I will gladly revise my harsh opinion of BuzzFeed).

The New York Times is an obvious choice: It belongs to the tiny guild of legacy media that did almost everything right for their conversion to digital. The $169m revenue coming from its 910,000 digital subscribers didn’t exist at all seven years ago, and digital advertising is now picking up thanks to a decisive shift to native formats. Amazingly enough, the New York Times sales team is said to now feature a ratio of one to one between hardcore sales persons and creative people who engineer bespoke operations for advertisers. Altogether, last year’s $351m in digital revenue far surpasses newsroom costs (about $200m).

A “normal” board of directors would certainly ask management why it does not consider a drastic downsizing of newspaper operations and only keep the fat weekend edition. (I believe the Times will eventually go there.)

The Guardian also deserves to be in this group: It became a global and digital powerhouse that never yielded to the click-bait temptation. From its journalistic breadth and depth to the design of its web site and applications, it is the gold standard of the profession – but regrettably not for its financial performances, read Henry Mance’s piece in the FT.

Coming back to our analysis, Google unsurprisingly crushes all competitors when it comes its financial performance against its audience (counted in monthly unique visitors):

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Google monetizes its UVs almost five times better than its arch-rival Facebook, and 46 times better than The New York Times Digital. BuzzFeed generates a tiny $1.30 per unique visitors per year.

When measured in terms of membership — which doesn’t apply to digital media — the gap is even greater between the search engine and the rest of the pack :

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The valuation approach reveals an apparent break in financial logic. While being a giant in every aspects (revenue, profit, market share, R&D spending, staffing, etc), Google appears strangely undervalued. When you divide its market capitalization by its actual revenue, the multiple is not even 6 times the revenue. By comparison, BuzzFeed has a multiple of 8.5 times its presumed revenue (the multiple could fall below 6 if its audience remains the same and its projected revenue increases by 50% this year as management suggests.)  Conversely, when using this market cap/revenue metric, the top three (Twitter, Facebook, and even LinkedIn) show strong signs of overvaluation:

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Through this lens, if Wall Street could assign to The New York Times the ratio Silicon Valley grants BuzzFeed (8.5 instead of a paltry 1.4), the Times would be worth about $19bn instead of the current $2.2bn.

Again, there is no doubt that Wall Street would respond enthusiastically to a major shrinkage of NYTCo’s print operations; but regardless of the drag caused by the newspaper itself, the valuation gap is absurdly wide when considering that 75% of BuzzFeed traffic is actually controlled by Facebook, certainly not the most reliably unselfish partner.

As if the above wasn’t enough, a final look confirms the oddity of market valuations. Riding the unabated trust of its investors, BuzzFeed brings three times less money per employee  than The New York Times does (all sources of revenue included this time):

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I leave it to the reader to decide whether this is a bubble that rewards hype and clever marketing, or if the NYT is an unsung investment opportunity.

frederic.filloux@mondaynote.com

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