My Thoughts on the Friendfeed Acquisition by Facebook

Facebook, the leading global social network, dropped a bomb on the sociosphere on Monday by announcing they had bought the very innovative social streaming service called Friendfeed. I gave an interview to Marketing Magazine (Canada’s Advertising Age) explaining the rationale behind the acquisition. Here are the highlights:

  • First and foremost, Facebook bought a great engineering team and excellent technology assets. The 12 Friendfeed employees and co-founders were innovating at a breakneck speed. Two of the co-founders, Bret Taylor and Paul Buchheit, used to work at Google where they respectively created Google Maps and Gmail.
  • It’s all about the search war. Google vs. Facebook. Algorithmic search vs. real-time search. Machines vs. humans. Facebook had pretty much been beaten by Twitter on the real-time activity and real-time search front. Rumor has it that when Twitter turned down a rich offer from Facebook to buy them, Facebook decided to take a better look at Friendfeed.
  • The transaction has been estimated at close to $50 million by the Wall Street Journal. According to the newspaper, “The company paid roughly $15 million in cash, with the rest in Facebook stock that vests over several years and would be worth roughly $32.5 million based on the $6.5 billion common valuation an investor recently placed on the company.”
  • Such an exit for Friendfeed is very good given that their traffic had plateau-ed at 1 million users per month, they didn’t have any revenues and they never managed to become popular outside of the Silicon Valley digerati. They created amazing and innovative technology though.
  • The founders did not sell because they wanted to cash out. They already did that with their Google options (Buchheit was employee #23 at the Mountain View search engine). They must have felt integrating Facebook was the right move at the right time.
  • The Friendfeed team will pretty much become Facebook’s R&D department.

What it means: Smart move by Facebook. Very good move for Friendfeed. Working inside Facebook will give the Friendfeed team more resources to execute on their innovative ideas. It gives Facebook great technology, amazing people and faster execution.

I’ve seen similar moves happen in the Local Media industry in the last few months. For example,

  • Truvo, a directory publisher in 6 European countries, acquired yelloyello, a startup from the Netherlands, in December 2008. Truvo transformed yelloyello into Truvo Labs to leverage social media technologies within the Truvo network.
  • AOL, who recently restructured to put “local” as one of their corporate strategic pillars, bought Patch, a US citizen journalism startup, and Going.com, a US local event portal in June 2009.
  • Herold, the Austrian Yellow Pages owned by European Directories, made a strategic investment in Tupalo, a social Yellow Pages site from Austria, in June 2009.
  • Canpages, a Canadian directory publisher, acquired ZipLocal, a social Yellow Pages destination site in June 2009.

Facebook Was Never Worth $15 Billion

Back in December, Valleywag and Silicon Valley Insider tried to estimate the current valuation of Facebook by calculating the price at which employee shares are transacting on closed markets.  Valleywag wondered if Facebook was only worth $1.3B while Insider said it might be worth around $2B, thereby facing the prospect of a down round in their next financing round. As we all remember, Microsoft had invested a $240M in Facebook for a 1.6% stake in the company in October 2007, valuing the company at $15B.

I don’t buy it.  Not Valleywag or Insider’s calculations of Facebook’s current valuation. I don’t buy the fact that Microsoft thought Facebook was once worth $15B (even though their press release says so).

Let’s review what I think happened. In October 2007, Microsoft announced that they had taken a 1.6% stake in the company. The Wall Street Journal wrote at the time: “Facebook sells ads on its own and also struck a deal last year that allows Microsoft to broker display ads on Facebook’s U.S. site until 2011. (…) As part of yesterday’s agreement, which lasts through 2011, Microsoft will sell advertisements on international versions of the Facebook service”. The press release adds “Microsoft will be the exclusive third-party advertising platform partner for Facebook” Interesting.  An exclusive search/contextual/banner ad deal is part of the agreement.

Go back one more year, in 2006.  Fox Interactive Media announced in August 2006 that they had “entered into a nearly $1 billion, 3+ year deal with Google to exclusively power search across most Fox online sites, including Myspace.” That deal had minimum revenue guarantees for Fox. If I remember correctly, Microsoft had bid for that business and lost it.

Go back further, in December 2005. Google and AOL announced the expansion of their strategic partnership through a $1B investment from Google in AOL (for a 5% stake).  Microsoft had previously lost that one as well.

With a fledgling search advertising business and a recently acquired ad network/ad technology (through the purchase of aQuantive in May 2007), Microsoft needed strategically to have at least one sexy partner. When Facebook exploded into the scene, they had found the deal they needed to absolutely make. I remain convinced today that the partnership business case was mostly built on the ad deal, which allowed Microsoft to claim Facebook as a partner, offer more inventory in their ad network and keep Google at bay. The small investment made sure the Facebook’s exec team remained aligned with that goal. Facebook must have made the request to include the valuation in the press release and Microsoft obliged. In a sense, this really worked for Facebook given that the Microsoft deal might have helped them strike two subsequent consecutive funding deals (for a total of $100M) with Li Ka-shing in November 2007 and March 2008.

In conclusion, Facebook raised (hopefully) enough money ($340M!) for a good runway and Microsoft got the strategic partner they needed while shutting off Google. But I don’t think Microsoft ever really thought Facebook was worth $15B.

Why did Cox Buy Adify?

From the press release:

Cox Enterprises, Inc. today announced that its subsidiary Cox TMI, Inc. will acquire Adify Corporation. Adify will operate as a stand-alone company and will continue to be led by Russ Fradin, CEO and co-founder of Adify. (…) Adify is the premier technology and media company focused on vertical online advertising. The company’s comprehensive technology and services allow major media companies, venture-backed businesses and entrepreneurs to build and operate targeted ad networks that support their advertisers’ goals. Vertical advertising networks offer marketers the reach, targeting and quality that brand advertisers increasingly seek in the online advertising space. More than 100 premium ad networks currently operate on Adify’s technology platform.

What it means: A bit late blogging about this news, but wanted to come back to it as it validates two of my key predictions for 2007 and 2008. I said in December 2006 that 2007 would be see more site “verticalization”. I also wrote in December 2007 that 2008 would be the “year of ad networks”. Adify sits at the confluence of these two major trends. They’ve seen amazing traction in the marketplace. Why would Cox buy them? I see two reasons: i) it’s a great business to be in, major growth to be expected in the next few years, and ii) it provides Cox with access to many ad networks to push their own ad networks (newspapers, television, autotrader, etc.) as an optional backfill, thereby extending their reach tremendously. Very smart strategy!

 

Praized Media News: The Praized team in a Montreal Gazette Article

Montreal Gazette’s Roberto Rocha writes about the effervescent Montreal Web ecosystem today and the Praized team is featured. Excerpts:

But now Montreal is witnessing an Internet renaissance. New Web companies are sprouting up and venture-capital firms and “angel” investors who fund early-stage ideas are starting to pay attention, sowing the seeds of a new economic sector in the city. The activity is being driven not by government subsidies or by tax incentives, but by a desire to create something new and to meet like-minded people who see the Internet as the great new business frontier. (…)

Inspired by the collaborative nature of the Internet, local geeks with bright ideas started meeting at informal, community-organized events called BarCamps. The global movement that began in the Silicon Valley was the grassroots retort to stuffy, invitation-only tech conferences. In a BarCamp, computer whizzes show the first drafts of their garage projects to anyone who will listen. (…)

In a nondescript downtown office, Harry Wakefield and Sébastien Provencher are having one of their final meetings before taking their own startup, Praized Media, global. Their walls are barren save for an expanding pile of empty Guru cans by the windows and diagrams scribbled with the lingo of the new Internet economy – words like widgets, Ruby on Rails and tags.

“These kinds of get-togethers help good ideas bubble to the top,” said Provencher, who met his co-founders at YULbiz, a monthly gathering for business bloggers. Through their BarCamp connections, they assembled a team convincing enough to raise $1 million in venture capital from Garage Technology Ventures, a Silicon Valley VC firm that opened a Montreal office. Established industry groups “haven’t clued in to the fact that there’s a vibrant Web community here,” Provencher said. (…)

Praized Media is also mentioned in this list of Montreal networking venues and start-ups.

Who Will Own “Where”?

Most of my business readings this weekend have been various analysis of the potential Yahoo/Microsoft deal. Unfortunately, I haven’t been impressed by the level of the debate as many of the comments were all about “Microsoft is evil” and its corollary “Google is not”. I was hoping for more level-headed reflections but I think the involvement of Microsoft in the story created a highly-emotional environment in the tech blogosphere.

One of them stood out for me. Tim O’Reilly looked at the big picture and tries to extract some industry meaning, showing once again his crystal ball is one of the most polished in the industry. Talking about industry consolidation in general and Yahoo in particular, he offered:

The web companies that have a chance of surviving as independent entities are those that truly understand and exploit the rules of the new platform: harnessing collective intelligence to build rich troves of data that literally get better the more people use the application, running ahead of any possible competitor simply because of the network effects that pile on to keep them improving faster than any newcomer. Some of Yahoo!s properties (e.g. Flickr) have that characteristic, but Yahoo!’s business as a whole did not. It was ultimately a halfway house on the way to Web 2.0. It’s original business was based on a literal aggregation of user generated content, but it quickly became a more traditional content and services portal. Later companies like Google leapfrogged it by building services that tapped more directly into the native network effects of the Web.

The other important characteristic of the winners, of course, is that they tap into a data stream that really matters. Owning network effects around consumer photos, for instance, is much less powerful than owning network effects around paid search. So one of the key questions we have to ask ourselves going forward is this: what are the major data subsystems of the future Internet Operating System. Location, identity (and social graph), search (and not just web search but also product search, in which Amazon has a very strong position) come to mind. In a lot of ways, finding the data associated with the old vectors who, what, when, where, and how is a good place to start.

What it means: O’Reilly posits that local search (Location + Search) is one of the key elements of the future Internet Operating System. I completely agree with him. I would add that no one has locked the market yet. No one in that field is deeply embedded yet in the Web O/S. So, this still represents a major market opportunity. And the big question remains: who will own “where”?

Digg is an Oligarchy (or Why Digg Must Constantly Update Its Algorithm)

Digg.com, the social news site, did a major algorithm update last week to tweak the way submitted content get to the front page of the site. As Kevin Rose explained, “As we’ve talked about in the past, Digg’s promotional algorithm ensures that the most popular content dugg by a diverse, unique group of diggers reaches the home page. Our goal is to give each person a fair chance of getting their submission promoted to the home page.”

digg

(Flickr picture by donlbe)

The reaction from Digg power users was scorching. Wired explains: “For those who missed it, several of the top diggers — including Andrew “MrBabyMan” Sorcini, Muhammad “msaleem” Saleem and Reg “Zaibatsu” Saddler, held an emergency chat/podcast to discuss their response to a recent change in the Digg algorithm which made it more difficult for veteran Diggers to get their submissions on the front page. After nearly a couple hours of debate, it was decided that they would boycott the site. They backed down from the plan, though, when Digg founder Kevin Rose and Jay Adelson showed up and talked them down from it.”

Now, why is Digg constantly updating their algorithm and making their power users angry? Let me explain…

Since their launch, Digg’s mission has been about democratizing the news by using the wisdom of the crowds. Jay Adelson repeated it a year ago in the company blog “Our goal is always to maintain a purely democratic system for the submission and sharing of information – and we want Digg to continue to be a great resource for finding the best content.” In addition, there have been multiple rumors around traditional news media firms wanting to buy the site. If you’re in traditional media, what’s sexy about Digg is that promise of real news democracy. It’s a very noble mission but, unfortunately for Digg, the site is currently not a democracy. It’s an oligarchy, where home page results are controlled by a few hundred individuals. If you’re not part of the “Digg club”, getting an article to the front page is a very difficult task. And no traditional media firm will want to buy a site that’s controlled by a small group of people, especially not for $300M (one of the rumored prices). So, for Digg.com, it’s “Democracy or Bust”.

Update: someone suggested we submit the post to Digg to prove (or not) the point. Here it is, if you want to “digg” it.

Update2: “Slashdot Founder Questions Crowd’s Wisdom” in the New York Times.

Local & Social Media Predictions for 2008

Yesterday, I wrote about what I thought were the most important news in 2007 in the local and social media space. Today, I’d like to propose my 2008 predictions, an always interesting exercise.

  1. The year of Identity. One of the big challenges of social media is having to sign-up and add your friends in a multitude of web sites. Expect 2008 to be the year where this problem becomes a major issue and gets potentially solved through identity interoperability initiatives like OpenID.
  2. Social is now everywhere and open. The last few months of 2007 have set the stage for a very social 2008. Any new major initiatives will include social elements by default and will use existing standards like OpenSocial, DiSo or Facebook.
  3. Fragmentation & personalization of media. Given the lower barrier to entry for new local/social projects, user and advertiser fragmentation will continue to accelerate in 2008. From a user point of view, this will lead to new personalization tools allowing consumers to create their own unique media view.
  4. The year of ad networks. As a corollary of point #3 above, given that user fragmentation will accelerate, an increasingly large number of ad networks will pop-up to aggregate consumers into a critical advertising mass. It’s all about advertiser defragmentation. Directory publishers will want to become ad networks themselves to push their ads outside of their core destination sites in order to increase their total reach.
  5. Content wants to be distributed. That’s the second corollary of point #3. Increasing user fragmentation requires content producers to atomize their content and push it in the fabric of the web. Think of your business in terms of content units or atoms (some inspiration came from Clay Shirky’s “fame vs. fortune” post from 2003).
  6. Social graph-based search. I am now a firm believer that social graph-based search will be the future of search (including local search) and we will see this concept gain some tractions in 2008. I think humans will always trust recommendations and advice from people in their “social network” (friends, family, colleagues, known experts, etc.) more than a machine. Online word-of-mouth is the biggest local search opportunity out there.
  7. More M&A activity in local. 2007 was quite active from a local M&A (Idearc buying Infospace’s directory business, Citysearch/InsiderPages, AT&T/Ingenio, Marchex/Voicestar, etc.) but I expect 2008 to be even more active given i) the need for directory publishers to execute on their strategies and ii) the need to aggregate traffic to increase advertiser ROI.
  8. Mobile: the year before the big bang. 2008 will be the year where a solid mobile development base (open devices, networks, platforms) is established leading to an explosion in 2009. Watch for the Google spectrum bid in January.