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Why Europe Hates US Internet Giants In Six Charts

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by Frederic Filloux

Here in Europe, America’s domination of the digital world is met with unabated detestation. Today’s first of two articles looks at the facts.  

This summer, as I prepared lectures for my foreign students at the Sciences-Po School of Journalism, I wanted to explain who “owns” internet traffic and audiences in Europe.
The figures are irrefutable: Most of what we watch is controlled by a handful of US-based internet giants. Thanks to rigorous processes and quasi-religious conviction, Google, Facebook, Microsoft and a group of their partners or competitors have succeeded in creating, consolidating and exporting their power. They broke things on the way to their dominant position and, as a result, built a wide front of malcontents: large corporations (e.g. in Germany) who see their local dominion threatened by “those barbarians”; frustrated entrepreneurs unable to fuel the growth of their businesses; national politicians eager to find traction in the public opinion; public officials who manage to aggrandize business issues, transmuting them into great “causes”. Of course, American companies carry their share of responsibility in this process as their muscular confidence too often veered into arrogance. But it is nonetheless fascinating to watch how the narrative drifted away from facts and into fantasy.

First, the audience question. Here is the internet audience in raw, non-unduplicated millions “uniques” (visitors) per month for the French market:

audience mUV

When you look at such a picture, a sense of frustration is understandable. Almost everyone in France’s 50M internet population (and that’s likely to be similar in other European countries) deals with a Microsoft or a Google digital property. And half of that population visits Facebook — almost as much as all French news sites combined. When it comes to legacy flagship players such as Le Monde or Le Figaro (both see their desktop traffic going away), their audience share is 5x less…

A look through other metrics such as the time spent isn’t enthralling either:

time spent

In short, French internet users spend roughly as much time on Facebook as on the ten largest local media sites combined.

Despite good mobile penetration, excellent infrastructure and reasonable rates, France didn’t manage to catch up on mobile applications:

Capture d’écran 2015-08-24 à 10.06.38

In an ecosystem in which the winner (read: icons on the first screen) takes all, US companies have been able to capture an even greater audience share on mobile than on the web. In this, there is no reason other than product features and quality.

Take the weather forecast apps in the above ranking. In theory, Météo-France, with its near-monopoly on weather data, should have been able to grab the N°1 slot for mobile apps on French smartphones. It turns out AccuWeather did just that. With less than half Météo-France’s staff — but most likely a business culture built upon 180,000 customers across the world — the Pennsylvania company enjoys almost twice the mobile viewership of the French state-owned weather forecasting bureaucracy.

The same goes for the classifieds business captured by LeBonCoin – owned by Norway’s Schibsted and implementing an inherited Swedish concept. While French newspapers were ranting about their evaporating classifieds revenue, the Norwegian group quietly built an amazing click-machine that even managed to outpace eBay.

In both cases, no predatory practices, no abuse of dominant position, nothing to chew on for EU commissaires. We simply have two corporations, deeply imbued with customer-centric cultures, that took advantage of weak incumbents in markets that were up for grabs.

Those who stigmatize the dominance of internet giants forget to mention two key success factors badly lacking in France.

The first is the access to capital. The comparison between Europe and the United States is eye-opening:

vc size

As Venture Beat noted in its yearly account of VC activity in Europe:

That big year in venture funding was somewhat muted because, after two big quarters, venture financing dropped 24 percent in Q4 compared to Q3.
And more bad news: The number of VC fund closings in 2014 fell 4 percent from 2013 to 76. The total amount raised dropped 18 percent in 2014 to €3.4 billion ($3.8 billion). The drop was especially steep in Q4, when the number of funds that had closings plummeted 51 percent from the same period a year ago.

Such performances bodes ill for Europe’s ability to fund a vibrant innovation ecosystem. (As explained in a previous Monday Note, French VC are doing even worse: With a GDP 6x smaller than the US, its VC pipe is 50x smaller, and the gap is worsening.)

The second success factor found wantings in Europe is higher education.  Again, an appalling picture emerges:

edu expenditure

Whatever the metric (secondary education, tertiary, with or without R&D programs), the United States educational system far outspends Europe. (French elite Ecole Polytechnique engineering school has only 7 computer science professors vs hundreds for Ivy League and Ivy League+ universities.)

America’s dominance of the European internet is indisputable, but it can’t be explained away with accusations of bullying and exclusionary practices. Agreed, US companies don’t pay enough taxes, but they often do so by taking advantage of tax arrangements concocted by European officials, including the former European commission president Jean-Claude Juncker himself when he was Prime minister of Luxembourg. And it should be noted that all European multinationals avail themselves of similar “tax optimization” practices. As a high ranking Google official once told me: “Our shareholders, the financial markets would crucify us for not taking advantage of the European tax system…”

Europe can be proud of many extraordinary industrial achievements: Airbus, Arianespace, the European network of high-speed trains, the French nuclear energy program that is second to none, Germany features a world-beating auto industry and is China’s lead supplier of complex industrial machinery. But when it comes to the digital revolution, European structures, mentality and inward-looking conservatism played against the innovation thrust.

Next week, we’ll look at the ideology built upon European technological frustrations. It even comes with its own grammar.

frederic.filloux@mondaynote.com

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? More

Three Slides Then Shut Up – The Art Of The Pitch

by Jean-Louis Gassée

365_slide

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):

lenine

 

(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:

campagne_russie

 

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

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:

363_VC_table

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

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.

362_montebourg_mariniere
[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

BuzzFeed: An Open Letter to Ben Horowitz

 

Ben Horowitz, the erudite cofounder of the Andreessen Horowitz (A16z) firm is a respected heavyweight in the Silicon Valley’s venture capital milieu. But A16z’s $50m BuzzFeed funding looks surprisingly ill-advised, to say the least. 

From: frederic.filloux@mondaynote.com
To: Ben Horowitz, Andreessen Horowitz, Menlo Park, California
Re: A16z investment in BuzzFeed
———————————————————
Dear Ben:

May I ask you something? How long did you spend on BuzzFeed before deciding to invest $50m? I’m not talking of Jonah Peretti’s PowerPoint deck or spreadsheets, which, I’m sure, must be quite compelling. But did you sample the real thing, the BuzzFeed site?

And how many times a day do you log in? Please, don’t tell me it’s part of your mandatory media diet, I’ll have to struggle not to express polite disbelief.

Frankly, your investment leaves me bewildered.

Judging by your blog and your remarkable book (I energetically proselytize both), you embody a mixture of vista, courage, combining focus on details with broad systemic vision, all supported by deep hands-on experience.

In addition, you are of the generous type and I was even happier to buy two copies of your book (including a paper version for a friend) knowing all proceeds will go to Women in the Struggle — a noble cause.

In short Ben, I have a great deal of respect for you. You are the type of person our modern economy needs.

Except that I don’t share your vision of the news business. In fact, I’m standing at the polar opposite of it.

Let me be clear: I do not question the goals and means of the VC business you’re in. In fact, I think this extraordinary ecosystem of financing innovation has long been a vital booster to the economy. Whenever I get the opportunity, I preach this in France, only to find out that my plea is beyond the cognitive grasp of the French governing elite (our VC perimeter is 33 times smaller than yours for a GDP only 6 times smaller.) The whole system sounds fine to me:  investors gives you money — $4.15bn for Andreessen Horowitz at my last count —  your mission is to multiply, you create scores of high qualified jobs. Great.

But is BuzzFeed really such a good multiplier?

Obviously, you know more than I do about BuzzFeed’s long term’s prospects: Impressive growth, heavy reliance to technology. From a pure business perspective tough, I would be very careful to put other people’s money in a traffic-machine that depends for 75% on social referrals because not all clicks are born equal. BF’s are myriad, but they are worth a tiny fraction of, say, a click on The New York Times.

I spent some time trying to overcome my reluctance to BuzzFeed’s editorial content. I wanted to to convince myself that I might be wrong, that BuzzFeed could in fact embody some version of journalism’s future. But if that’s the case, I will quickly resettle in a remote place of New Mexico or Provence.

BuzzFeed is to journalism what Geraldo is to Walter Cronkite. It sucks. It is built on meanest of readers’ instincts. These endless stream of crass listicles are an insult to the human intelligence and goodness you personify. Even Business Insider, a champion practitioner of cheap click-bait schemes, looks like The New York Review of Books compared to BuzzFeed. And don’t tell me that, by hiring a couple of “seasoned editors and writers” as the PR spin puts it, BuzzFeed will become a noble and notable contributor of information. We never saw a down/mass market product morphing into a premium media. You can delete as many posts as you wish, it won’t alter BF’s peculiar DNA.

Fact is, quality content does exist in BuzzFeed (an example here), but in the same way as a trash can contains leftovers of good food: you must go deep to find it.  It won’t change the fact that what people enjoy the most on BuzzFeed is unparalleled ability to package, organize and disseminate mediocrity broken down in this promising nomenclature:

334-buzzfeed

Ben, don’t tell me you’re proud of A16z investment in BuzzFeed. By funding it, you are contributing to the intellectual decrepitude of readers, the youngest ones especially — already severely damaged by Facebook and Snapchat sub-cultures. Did it ever cross your mind that these people are going to vote some day?

Two years ago, one of your competitors, the Founders Fund (I believed it held values similar to yours) published an essay titled What Happened to the Future?. Their article outlines the conflict between “funding transformational technologies (like search or mobility)” and supporting “companies that solved incremental problems or even fake problems”. Do you realize that, by funding a company such as BuzzFeed, you fall on the wrong side of the fence?

Look, I’ve no problem to see BuzzFeed or The HuffingtonPost thrive. They’re run by super-smart people (such as this one) who developed audience-building techniques that legacy media should pay more attention to.

What bothers me the most is to see smart money such as A16z’s being diverted to such a shallow product.

Ben: You want to invest in the information business? Consider what the Sandler Family did with ProPublica: they provided the seed money for a fantastic public interest journalism project (which, in passing, snatched two Pulitzers). Technology-driven ProPublica is now financially autonomous. Or consider emulating Pierre Omidyar who supports First Look Media, which promotes the kind of journalism a democracy badly needs.

Of course, these two ventures won’t produce VC-caliber ROI, but you already have plenty of items in A16z portfolio to keep your investors salivating. So, why wallow in BuzzFeed?

And if you want to put your excess of cash into something even more meaningful, hop on a Netjets plane and go to Africa. I recently bumped into an investment banker from Lazard who gave me the full picture of the economic potential of African countries, in every possible field — including leapfrogging technologies that build on the explosion of the mobile internet. For that matter, I’m personally exploring opportunities and the development of mobile apps for health and education in poor countries (a non-profit project). I started modestly by lending an Android phone and other items to an eye surgeon who runs (pro-bono) surgery campaigns in Sub-Saharian Africa. After her last campaign in Burkina-Faso last spring, we debriefed and the conclusions are staggering in terms of demand and opportunities. And I know the same thing is happening with mobile education. I decided to put €10,000 of my own money, just to see some of the ideas I’m nurturing could fly. If I were you Ben, I’d put a million dollars to explore this. And if I were running A16z, I would invest millions in long-term projects such as the automated large-cargo drones system described at the end of Alexis Madrigal’s recent story in The Atlantic that could change a whole continent economy. Or in mobile phone-based projects in Africa funded by PlaNetFinance Group or others. Tech investment in developing countries is indeed a Next Big Thing — much bigger than listicles. Risks and upsides are both huge. Right up your alley.

Best regards,

—Frederic Filloux

Schibsted’s High Octane Diversification

 

The Norwegian media group Schibsted now aggressively invests in startups. The goal: digital dominance, one market at a time. France is in next in line. Here is a look at their strategy. 

This thought haunts most media executives’ sleepless nights:My legacy business is taking a hit from the internet; my digital conversion is basically on track, but it goes with an massive value destruction. We need both a growth engine and consolidation. How do we achieve this? What are our core assets to build upon? Should we undertake a major diversification that could benefit from our brand and know-how?” (At that moment, the buzzer goes off, it’s time to go to work.) Actually, such nighttime cogitations are a good sign, they are the privilege of people gifted with long term view.

The Scandinavian media power house Schibsted ASA falls into the long-termist category.  Key FY 2012 data follow. Revenue: 15bn Norwegian Kroner (€2bn or $2.6bn.); EBIT: 13.5%. The group currently employs 7800 people spread over 29 countries. 40% of the revenue and 69% of the EBITDA come from online activities. Online classifieds account for 25% of revenue and 52% of the EBITDA; the rest in publishing. (The usual disclosure: I worked for Schibsted between 2007 and 2009, in the international division).

The company went through the delicate transition to digital about five years ahead of other media conglomerates in the Western world. To be fair, Schibsted enjoyed unique conditions: profitable print assets, huge penetration in small Nordic markets immune to foreign players, a solid grasp of all components of the business, from copy sales to subscribers for newspapers and magazines, to advertising and distribution channels. In addition, the group enjoys a stable ownership structure (controlled by a trust), and its board always encourages the management to aim high and take risks. The company is led by a lean team: only 60 people at the Oslo headquarters to oversee the entire operations, largely staffed by McKinsey alumni.

The transition began in 1995 when Schibsted came to realize the media sector’s center of gravity would inevitably shift to digital. The move could be progressive for reading habits but it would definitely be swift and hard for critical revenue streams such as classifieds and consumer services. Hence the unofficial motto that’s still remains at the core of Schibsted’s strategy: Accelerating the inevitable (before the inevitable falls on us). Such view led to speeding up the demise of print classifieds, for instance, in order to free oxygen for emerging digital products. Not exactly popular at the time but, thanks to methodical pedagogy, the transition went well.

One after the other, business units moved to digital. Then, the dot-com crash hit. In Norway and Sweden, Schibsted media properties where largely deployed online with large dedicated newsrooms, emerging consumer services built from scratch or from acquisitions. Management wondered what to do: Should we opt for a quick and massive downsizing to offset a brutal 50% drop in advertising revenue? Schibsted took the opposite tack: Yes business is terrible, but this is mostly the result of the financial crisis; the audience is still here, not only it won’t go away but, eventually, it will experience huge growth. This was the basis for two key decisions: Pursuing investments in digital journalism while finding ways to monetize it; and doing whatever it took in order to dominate the classifieds business.

In Sweden, a bright spot kept blinking on Schibsted’s radar. Blocket was growing like crazy. It was a bare-bone classifieds website, offering a mixture of free and premium ads in the simplest and most efficient way. At first, Schibsted Sweden tried to replicate Blocket’s model with the goal of killing it. After all, the group thought, it had all the media firepower needed to lift any brand… Wrong. After a while, it turned out Schibsted’s copycat  still lagged behind the original. In the kind of pragmatism allowed by deep pockets, Schibsted decided to acquire Blocket (for a hefty price). The clever classifieds website will become the matrix for the group’s foray in global classifieds.

In 2006, Schibsted had acquired and developed a cluster of consumer-oriented websites, from Yellow-Pages-like directories, to price-comparisons sites, or consumer-data services. Until then, the whole assemblage had been built on pure opportunism. It was time to put things in order. Hence, in 2007, the creation of Tillväxmedier, the first iteration of Schibsted Development. (The Norwegian version was launched in 2010 and the French one starts this year).

Last week in Paris, I met Richard Sandenskog, Tillväxmedier’s investment manager and Marc Brandsma, the newly appointed CEO of Schibsted Development France. Sandenskog is a former journalist who also spent eight years in London as a product manager for Yahoo!  Brandsma is a seasoned French entrepreneur and former venture capitalist. Despite local particularisms precluding a dumb replication of Nordic successes, two basics principles remain:

1. Invest in the number one in a niche market, or a potential number one in a larger one. “In the online business, there is no room for number two”, said Richard Sandenskog. “We want to leverage our dominance on a given market to build brands and drive traffic. The goal is to find the best way to expose the new brand in different channels and integrate it in various properties. The keyword is relevant traffic. We don’t care for page views for their sake, but for the value they bring. We see clicks as a currency.”

2. Picking the right product in the right sector. In Sweden, the Schibsted Developement portfolio evolves around the idea of empowering the consumer. To sum up: people are increasingly lost in a jungle of pricing, plans, offers, deals, for the services they need. It could be cell phones, energy bills, consumer loans… Hence a pattern for acquisitions: a bulk purchase web site for electricity (the Swedish market is largely deregulated with about 100 utilities companies); a helper to find the best cellular carrier plan based on individual usage; a personal finance site that lets consumers shop around for the best loan without degrading their credit rating; a personal factoring service where anyone can auction off invoices, etc.
Most are now #1 on their segment. “We give the power back to the consumer, sums up Richard Sandenskog. We are like Mother Teresa but we make money doing it….” Altogether, Tillväxmedier’s portfolio encompasses about 20 companies that made a billion of Swedish Kröner (€120m, $155m) in 2012 with a 12% EBITDA (several companies are in the growth phase.) All in five years…

France will be a different story. It’s five times bigger than Sweden, a market in which startups can be expensive. But what triggered Schibsted ASA’s decision to create a growth vehicle here is the spectacular performance of the classifieds site LeBoncoin.fr (see a previous Monday Note Schibsted’s extraordinary click machines): €98m in revenue and a cool 68% EBITDA last year. LeBoncoin draws 17m unique viewers (according to Nielsen). Based on this valuable asset, explains Marc Brandsma, the goal is to create the #1 online group in France (besides Facebook and Google). “The typical players we are looking for are B2C companies that already have a proven product — we won’t invest in PowerPoint presentations — driven by a management team aiming to be the leader in their market. Then we acquire it; we buy out all minority shareholders if necessary”. No kolkhoz here; decisions must be made quickly, without interference. “At that point, adds Brandsma we tell managers we’ll take care of growth by providing traffic, brand notoriety, marketing, all based on best practices and proven Schibsted expertise”. Two sectors Marc Brandsma says he won’t touch, though: business-to-business services and news media (ouch…)

frederic.filloux@mondaynote.com