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Posts Tagged ‘Revenue Model’

WildTangent cuts ad deal with social game firm Playdom

WildTangent said today it has scored a significant new customer for its BrandBoost ad platform for social games. It is now teaming up with Playdom to integrate ads into Playdom’s popular Facebook game, Tiki Farm.

BrandBoost will give Playdom’s gamers rewards such as virtual items and premium social games whenever the gamer agrees to view a video ad from inside the game. This is a big deal is since most social games are free-to-play and are monetized through virtual goods sales. But this ad-based revenue model could help balance that virtual goods model. About 85 percent of gamers told Nielsen in a survey that they would prefer not to pay for digital games. By bringing in brand advertising, WildTangent can help get around hurdles with the stingiest of players.

Playdom is one of the fast-growing social gaming companies, with tons of assets to oversee.

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Freemium is Weak, Subscription is Chic

As an entrepreneur, blogger and the investor in charge of the Founders Fund seed investment program, Dave McClure knows the importance of a proven revenue model. In a recent blog post he makes the assertion that “subscription models are the new black” despite the fact that startup monetization has focussed heavily on cost-per-click advertising. He writes, “This Don’t-Be-Evil-AdWords-Click-Happiness..It’s made us a bunch of lazy, ad-happy, Web-Tards with crappy ROI…We have largely WASTED an entire web decade of time, energy & venture capital on extremely inefficient revenue models.” While we might not have chosen this exact phrasing, we cannot agree with McClure more.

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Nowhere is freemium model failure more obvious than in the streaming music space. Even with millions of users and licensing deals with major labels, Imeem was acquired by MySpace last year and quickly dismantled. The cost of licensing content to unpaying users was enough to put the company into serious debt. The company’s subscription service just wasn’t enough to offset the cost of the freemium business. Meanwhile, in the mire of music sites that have come and gone, Rhapsody’s subscription-only service has managed to survive. Having learned from its predecessors, it’s rumored that Spotify will only launch in the US with a subscription model, despite its free European offerings.

Says McClure, “There is a role for freemium, but unless you missed the TPS report the FREE part is only a loss-leader for the MEE-YUM part — it’s a test-drive before you buy something. If your users are just kicking the tires then you need to kick them to the curb eventually.”

McClure is right. It’s been a long time since eyeballs have automatically equated to dollars. If you’ve got a product that even a small number of users will pay for on a regular basis, establish that paid user base as soon as you possibly can.

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Aol’s New Model: Fighting The Downward Trend

AOL may be brushing up its brand image in preparation for its spin-off IPO in December, but brushing up its underlying business will take a little longer. Barclays analyst Douglas Anmuth released a report on AOL today complete with an earnings and revenue model going out to 2014 (see below). He projects absolutely no growth in revenues over the next five years, and only a one-time bump in profits in 2011, due to cutting one third of its current labor costs, before declines set in again.

In other words, investors who buy AOL stock will do so because it is a cost-cutting and turnaround story not a growth story, and that will determine what kinds of investors will buy the stock.  Anmuth outlines some of the key factors which investors should be paying attention to.

Key things to watch for:
1) Time Warner shareholder reaction following the spin;
2) significant cost-cutting to drive free cash flow;
3) a new search deal beginning in late 2010;
4) whether AOL’s display strategy can gain traction;
5) trends in key metrics like Unique Visitors and Page Views.

Since all existing Time Warner shareholders will become shareholders of AOL, if a lot of them decide to dump their shares that would create downward pressure on the stock. But Anmuth feels that a fair valuation is $35 to $39 a share, giving AOL a market capitalization between $3.8 billion and $4.2 billion. As AOL goes through its layoffs and other cost-cutting, those measures should help its free cash flow by eliminating about $300 million in annual expenses.

However, AOL cannot cut its way to prosperity. The cuts will buy CEO Tim Armstrong some time to put his new content strategy into place and boost display ad revenues.

Even here, though, AOL is fighting against a downward trend (see chart above). Display ads are driven by pageviews, which are down 22 percent year-over-year across AOL’s sites to 14.3 billion. Unique U.S. visitors to AOL sites are down 11.5 percent from a year ago to 98.5 million people.

AOL also runs display ads across other sites, of course, but is able to charge a premium for its own audience. The core of that audience still comes from its 5.4 million access subscribers, who are declining but still account for about 60 percent of AOL’s EBITDA (earnings before income taxes, depreciation, and amortization). They are also AOL’s most valuable audience in terms of advertising, which explains why Armstrong felt it was necessary to hold onto the access business as long as possible.

The other big source of earnings comes from AOL’s very lucrative search deal with Google, Armstrong’s former employer. Anmuth estimates that AOL gets 92 percent of the search revenue generated by search ads on its site through its deal with Google, and that search ads account for 36 percent of its EBITDA.

Armstrong needs to renegotiate that deal and play Google off of Bing, which might end up with the business and pay AOL a higher revenue-share than the 88 percent it will be paying Yahoo through it search deal still awaiting approval. The problem for AOL is that its overall share of searches, while still a significant 3 percent in the U.S., is less than half what it was three years ago, and keeps going down.

That leaves Armstrong with getting display ad revenues back on track. Anmuth forecasts that AOL’s display ad revenue growth will lag the industry’s recovery until 2012, remaining essentially flat next year and then growing a tepid 3 to 5 percent annually after that. Fortunately, selling ads is what Armstrong does best, so he might surprise investors on the upside there. But as these numbers make clear, it is going to be a tough slog.

Crunch Network: CrunchBase the free database of technology companies, people, and investors

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A busy week for real-time search — here’s a list to keep tabs

After scarcely a peep for much of the summer, a handful of the real-time search startups we profiled earlier this year have ramped up their offerings this week. They’re part of a wave of companies that are mining the increasing amount of data shared on sites like Twitter and Flickr to offer search results based on what’s relevant now.

In general, we’re seeing more traction from companies that are trying to distribute their search and data collection technology rather than centralize it in one destination site. One of the older companies, OneRiot, turned on its revenue model this month by selling sponsored search results. (It has a distributed approach, partnering with at least 40 other companies to feed its results into other sites.) Tweetmeme, which has a retweet button that’s seen at least 50 million times a day in addition to a search engine, launched analytics for companies that want to track the viral spread of their content through Twitter.

(Here’s a basic primer on all of the companies for background.)
And then here’s what’s new:

Topsy, which raised $15 million over the summer, released two plug-ins: one for Wordpress and another one for your browser. When people tweet about a blog post, the plug-in will find it and include it as a “native” Wordpress comment at the bottom of the post. The browser plug-in adds a Topsy search bar to the top right-hand corner of a browser so users don’t have to navigate away from the page to search.

Crowdeye, founded by former members of Microsoft’s search engineering team, now lets users tweet directly from the site. Visitors can also track the most popular content from specific domain names like VentureBeat.com (see the snapshot below or click here to test it out).

Scoopler, founded by two recent college graduates who met in the U.K., cut the load time on its pages and added a “Discovery bar” at the top of its page to show trending topics and recent searches. The company also added channels of content, making it easier for visitors to keep track of popular links in topics like technology and sports.

To help publishers and brands figure out how much additional traffic Twitter is driving them and optimize it, U.K.-based Tweetmeme launched sophisticated analytics features. Tweetmeme will break out retweets by geography and show a publisher who their most influential readers are based on how far they drive a piece of content through their social network.

A little over a week ago, OneRiot, unveiled what it believes will be its primary revenue model. It’s selling text ads that will appear alongside relevant search results. The layout is similar to Google’s but OneRiot is selling sponsored placement for content, not commercial goods and services. This is because the company believes that when visitors search for real-time results, they aren’t necessarily in the state of mind to buy products. They’re looking for context or news, unlike in traditional search. Therefore, ads for goods and services won’t necessarily work. Instead, publishers will pay to have their relevant content promoted when visitors are looking for recently published items.

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Spotify Co-Founder: Notion of Overnight Success "Misleading and Harmful"

In a surprisingly candid post on Spotify’s blog, company co-founder Daniel Ek recently shared his thoughts about where the popular streaming music company stands today and where he hopes it can go in the future. The main point of his post was to clarify that Spotify, despite being a media darling these days, is nowhere near becoming a sustainable company with a stable revenue model. However, that’s their end goal, Ek says, and they’re in it “for the long haul” with no intention of simply “flipping” the company after the hype reaches its crescendo. But in the meantime, the company struggles with the exorbitant per-play fees enforced by the music industry while not finding success with an ad-supported model.

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Don’t Count on Overnight Success

According to Ek, the notion of overnight success is “very misleading and actually rather harmful to any hope for long term and sustainable growth in this industry.” Despite this fact, he calls out the music industry for doing just that and expecting to see business models proven “within months of inception.”  That’s just not how it works, he says, reminding us how iTunes was not initially the powerhouse it is today. In its first year, the company missed its revenue targets by 30% and most label executives doubted its staying power at the time.

While Ek realizes that comparing iTunes to Spotify is wrong given the very different business models for each company, it does prove the overall point: success in this industry takes time.

Spotify, which is currently hugely popular in Europe, has yet to launch in the U.S. due to contract negotiations over licensing agreements. However, as popular as the service is, it still has a long way to go both in terms of product and monetization. Ek acknowledges that one thing which needs to be addressed is how difficult it is for Spotify users to actually buy the music they’re listening to. Yet despite the fact that nearly 80% of the company’s users are unaware that they can purchase the tunes they’re hearing, Spotify is still one of the biggest affiliates to music downloads.

In addition, another challenge facing the company is how to earn a profit considering the large costs of licensing the music it plays… especially when reliant on an ad-supported model. (Spotify offers multiple service levels, one being ad-supported. It also offers subscriptions.) Earlier this year, another streaming service, Last.fm, had to do away with their ad-supported model for the same reason.

The Music Industry Needs to Change

If it was up to Spotify, the music industry would be embracing the future instead of constantly fighting against it. Ek says that in order for the industry to find success, they need to realize that the new business model is “a mix between ad-supported music, downloads, subscriptions, merchandising and ticketing where the user comes first and where the key to monetization comes from portability and packaging access rights.” If willing to adapt, the music industry could then have the potential to become a $40-50 billion industry and one that could grow stronger than it ever was.

Until that time, it looks like Spotify has a long ahead of them, but it’s good to know that they’re up for the challenge. “We aren’t interested in just trying to hype the company and then flipping it,” Ek says. “We are in this for the long haul.”

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Adobe Acquires Omniture: It’s All About the Revenue Model

Adobe is looking to stall falling sales and profit by entering into a new market: analytics. But rather looking to R&D, Adobe is instead coughing up $1.8 billion for analytics leader Omniture. This is the largest acquisition by Adobe since the purchase of Macromedia for $3 billion in 2005.

The acquisition has puzzled many, since Adobe and Omniture products really have no natural cooperation. There have been comments about the measurement capabilities that Omniture will give to content built with Adobe products. But in the end the entire deal revolves around two words: recurring revenue. Adobe’s quarterly earnings have fallen due to declining sales of software licenses, and the SaaS model of Omniture will bring the company a recurring stream of revenue.

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Omniture is a top dog in analytics. But even though it competes with just about everyone, including Google, in the measurement market, some industry analysts have pointed out that it’s really run out of new ideas. In trying to explain the acquisition during an earnings call, Adobe CEO Shantanu Narayen asserted that buying Omniture was meeting customer needs.

What we found is that as we’ve been talking to our customers, it’s clear that they would like us to do a lot more. For example, the chief digital officers that we talk to at media companies have been telling us that they want to understand which content was performing the best so that they could feature it more prominently and increase their ad revenue.

Advertisers and agencies were using Flash to produce rich ads but they were telling us that they really wanted to understand what the click-through rates of those ads were in real time, to be able to take more advantage of it.

But few analysts have agreed that adding measurement power to content is really the core of this deal. Adobe announced the acquisition alongside a decrease in quarterly earnings. Even if Omniture is no longer at the forefront of innovation in analytics, its steady stream of revenue from SaaS subscriptions is a cash cow that Adobe can’t afford to pass up right now.

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Radiohead Says Singles Only, But Albums Live On

Radiohead’s frontman Thom Yorke announced that the band will no longer release full-length studio albums and instead focus on downloadable singles. In response, Fast Company’s Kit Eaton, declared that the concept of albums is still alive and simply evolving. Part of that evolution is Apple’s Cocktail interactive album effort. He argues that albums maintain their purpose to communicate musical themes, “the same way that a curated collection of a painter’s works does”. Nevertheless, it may be that in some cases, the album will thrive for the exact opposite reasons.

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While Radiohead’s “In Rainbows” was an amazing success both as an album and as a new sliding scale revenue model, Yorke and band mates are poised to focus on singles, and for them this is great. Radiohead has a loyal fan base, enough money to survive, and the freedom to negotiate independent licensing and distribution deals. Basically, Radiohead can do whatever Radiohead wants to do. But perhaps more importantly, the band has the creative freedom to experiment – in fact, their fans expect it.

With the cost of professional music production and audio engineers, few bands have the luxury to put out experimental singles on major labels. Labels simply won’t put marketing dollars into something they aren’t sure is commercially viable. Albums are the perfect place to sandwich those sweetheart orphan tracks that artists love and labels simply can’t classify. In the past, an album’s B-side was a place where musicians could debut new styles and place less-commercial tracks. However, as music downloads outnumber physical disc sales, and singles outsell albums, the margin for risk taking gets smaller everyday.

For this reason, whether wrapped in interactive material or not, it’s likely that a number of musicians will insist on producing albums simply to leverage marketing efforts and challenge their fans.

Photo Credit: Taken from Radiohead’s Dead Air Space

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