Facebook’s success in mobile media can’t be left to F8

Contact: Scott Denne

As Facebook opens its annual F8 developer conference today, it’s worth noting that while the company is clearly ascendant in mobile, it’s not dominant in digital media, where it is very much the challenger to Google. Facebook’s growth is impressive. Revenue spiked 44% to $18bn (80% of that in mobile) in 2015, a number it reported just after its 11th birthday: Google passed the $20bn mark in nine years and today is nearly quadruple that size. In the next phase of growth, where Facebook is positioning itself as a mobile media vendor, not just a social media vendor, Facebook faces a distinct set of challenges than Google was up against when it grew from its base in search to owning the Web.

Once Google sewed up the search market, it faced scant competition as it soaked up much of the digital advertising landscape and was the clear winner in the first phase of digital media. The same isn’t true of Facebook. It finds itself facing an incumbent in Google and its future lies in the outcome of a comparatively fluid media market. Now that it’s emerged as the dominant social media platform, the company is taking a subtler approach as it seeks to win the next phase of digital media. In addition to facing a strong incumbent, Facebook is saddled with higher expectations – its stock trades at 16x trailing revenue, while Google was valued between 5-6x at the same moment in its own history.

Facebook plans to own the next phase of digital media by offering measurement, metrics and distribution to enable advertisers and publishers to transition into mobile. The best indication of the difference in strategy is that while Facebook was widely expected to launch a media-buying platform along the lines of Google’s DoubleClick Bid Manager, its recent relaunch of Atlas instead focused on measurement and attribution. And most importantly, it focused on measurement of people and demographics, the lingua franca of today’s television business, not cookies and intent – the currency of display advertising. While Google made a mint dismantling the print media market, Facebook is pursuing a potentially more lucrative opportunity in capturing the shift of TV budgets to digital and hoping to do so wherever those dollars land – in-apps, in online videos, on its network or in any new format that could emerge from mobile.

Facebook’s bet is that once advertisers see that mobile works, more will shift to that medium and the company will be the largest beneficiary. It’s well positioned to do that. Nearly one billion people per month engage with the social network across multiple devices, making Facebook better positioned than anyone to link different devices into a common digital currency. The challenge in that strategy is that Facebook must not only be the dominant social network (to power its measurement capabilities), it must also remain the dominant mobile media provider – the money’s in selling the media, not the measurement.

That’s a more difficult and unpredictable path than the one it (or Google) faced in building out a browser-based business. Innovation and change is no longer limited to what can be done at a desk and on a PC. The mobile medium is still nascent. The next phase of digital media will play out across many types of devices (phones, TVs, watches and more to come), and many of those devices are part of consumers’ lives in a way that a TV set or PC never was. All of this makes the future of mobile media challenging to predict. Facebook’s need to own the unpredictable explains its wildly valued – though reasonable – purchases of Instagram, WhatsApp and Oculus VR and will be justification when the company bets on the next new media. Over the next two days, we’ll be watching to see what Facebook thinks that might be.

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A new face for Google’s enterprise cloud

During last week’s GPC NEXT 2016 conference, it became pretty clear that Google is hoping that Diane Greene can do for the enterprise cloud what Andy Rubin did for mobility. In both cases, the search giant has set about acquiring a well-known ‘face’ to give it a credible and visible presence in a market that it cannot organically move into but – at the same time – can’t afford to miss. (See our full report on the conference, where the company bolstered its Google Cloud Platform with multi-cloud management, a machine-learning engine and more scalable containers, among other announcements.)

A decade ago, Google’s acquisition of Android Inc not only brought the company a fledgling OS for mobile phones, but also included the high-profile figure of Rubin. From those early days, Rubin served as a kind of ‘rock-star engineer’ as Android soared to become the world’s most-used mobile OS. (Rubin stepped out of his role in Google’s mobile business in 2013 and left the company altogether the following year.) More recently, Google made what could be characterized as one of the tech industry’s largest-ever ‘acq-hires’ when it paid $380m in cash and stock four months ago to snag bebop, a startup headed by VMware cofounder (and Google board member) Diane Greene.

Just as Rubin served as a senior VP at Google as part of his company being acquired, Greene is serving as a senior VP at Google as part of her company being acquired. However, where the parallel breaks down between the two executives is around timing. Google bought Rubin’s company in August 2005 – a full two years before Apple introduced its iPhone. In contrast, Google purchased Greene’s company just last November – nearly a decade after Amazon launched its Amazon Web Services and had grown it to a $10bn run-rate business. (Click here to to read more about the remarkable growth of AWS.)

That’s not to say that Google, led in its efforts by a proven executive such as Greene, can’t make inroads into the enterprise cloud arena, thereby closing the gap with AWS and second-place Microsoft Azure. After all, the company wasn’t anywhere among the earliest search engines, but it overtook every single one of them as it netted billions of dollars on its way to becoming the world’s most-popular search engine.

But there are challenges in Google’s ‘people and products’ strategy, as demonstrated by Rubin’s own experience at the company after he left the Android division. A true gadget guy, Rubin moved over to head the search giant’s grandly ambitious robotics unit when it launched in 2013. It was built on a series of acquisitions, most notably the December 2013 pickup of Boston Dynamics. However, Rubin couldn’t replicate in Replicant (the name for Google’s robotics business) the success he had with Android, and left the company in 2014. Google is now reportedly in the process of selling off and repurposing the Replicant assets.

Cloud computing as a service MarkMon

Source: 451 Research’s Market Monitor

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Verizon makes latest play for OTT business with Volicon buy

Contact: Scott Denne

Verizon makes it latest move to push more video content across its network with the acquisition of Volicon, a maker of video archiving and analysis software. Though smaller than its previous efforts on this front – the purchases of CDN vendor EdgeCast (see our estimate for that transaction here) and media and advertising provider AOL, the deal highlights the continuing appetite among Verizon and other media delivery and storage suppliers to take a share of the expanding market for digital video.

Volicon offers broadcasters workflow software that enables clips and content to be pushed from broadcast to digital, as well as the ability to archive content for regulatory compliance (such as FCC mandates around sound levels). The company will be tucked into Verizon Digital Media Services, which itself is now part of AOL though was founded in 2010 to help Verizon capitalize on its Fios fiber-optic network to enable broadcasters and other content providers to deliver digital services.

Video consumes substantially more bandwidth, storage and compute capacity – and therefore more revenue – than other forms of content and communications, leading other infrastructure vendors to expand into services that attract broadcasters and other video content suppliers. IBM inked a pair of deals for more than $100m each in December and January, while Amazon Web Services spent heavily on Elemental Technologies back in September. Video consumption continues to move beyond linear television and into mobile, connected TV and other digital channels, and the providers of pipes and plumbing will be watching as it does.

Amid Super Bowl fever, the sports business needs to take its medicine

Contact: Scott Denne

Super Bowl ad prices continue to rise each year, and that masks the symptoms of the sporting world’s concussion. Sports had previously blocked television audiences from completely heading to the sidelines in favor of video on demand, video games and other forms of media; no longer is that the case. Yet networks continue to increase investments in sports – the NFL just sold a package of Thursday Night Football games next fall for $450m, up from $300m last season. This comes during an exodus of subscribers from the sports-industry’s flagship network, ESPN. And as networks, teams and leagues look for ways to stanch the losses, we expect to see increasing investment in technologies that enable them to keep those audiences.

Time may not be on their side (always good news for bankers). Our surveys suggest acceleration in linear TV’s declining audiences. Only 35% of respondents to one of our 2015 consumer surveys reported seeing a TV ad in the previous week. In a separate survey, 8.4% said they had altogether canceled their traditional TV service, while another 16.7% said they are ‘somewhat’ or ‘very’ likely to cancel within the next six months – the highest level to date on both figures.

Increasing fan engagement was the logic behind the heavy investments into daily fantasy sports. The two leading companies in that space – FanDuel and DraftKings – raised more than $700m combined, much of it from networks, sports leagues and team owners. Although those bets don’t look set to pay off, the lure of free cash isn’t the only way to keep fans interested. We recommend the sports industry’s heavy hitters start acquiring and investing in areas that are beginning to change how fans interact with sports.

The first is the technology and talent that power mobile apps. Buying and developing apps gives teams, leagues and networks a direct link to their fans today. Broadcast signals and ticket stubs don’t generate data. Apps do, and having such data will ultimately make their audiences more valuable, and help them find ways to grow and keep them. The second area is in emerging categories of virtual and augmented reality. Madison Square Garden Company, owners of the New York Knicks and Rangers, has already made two venture investments in virtual reality – NextVR (along with Comcast) and Jaunt (alongside Disney). A ringside seat to the growth of these technologies would help sports grow within the next generation of media, rather than succumbing to it, as might happen within the current one.

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Social media primed for advertising M&A

Contact: Scott Denne

Advertising already generates billions of dollars for Facebook and Twitter, but the market for tools that enable advertisers to target social audiences is still nascent. As the importance of advertising on social media grows and the platforms become more diverse, businesses from different corners of the marketing and ad-tech ecosystem will likely add offerings to address this need.

There have already been a few tuck-ins by advertising and social media marketing companies such as Sprinklr, MediaMath and Buddy Media (before becoming part of salesforce.com). Now, changes to Facebook’s News Feed algorithm that limit the reach of organic marketing mixed with a host of diverse social platforms beginning to sell advertising could spur dealmaking and generate attention for social advertising software vendors that can execute and optimize social advertising budgets.

Businesses built around social media marketing or those that focus on paid advertising in other, non-social channels have, so far, been the acquirers of social advertising firms. We believe the categories of acquirers should and will expand to include enterprise software providers, small business software vendors and, of course, continued activity from ad-tech firms.

Subscribers to 451 Research’s Market Insight Service can access a detailed report on this sector.

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At the Wall Street box office, Alibaba is a blockbuster

Contact: Brenon Daly

In Hollywood, a blockbuster debut that is expected to help support the release of other films around the same time is known as a ‘tentpole.’ And while that phenomenon may have also played out in the IPO business in the past, no one is expecting the Alibaba debut later this week to help prop up other offerings. Quite the opposite, in fact.

To understand why, think of Alibaba as Godzilla (the monster, not the movie). The Chinese e-commerce giant is looking to come to market – backed by no fewer than 20 investment banks – and create almost a Facebook-size valuation overnight. The sheer size of Alibaba’s record-setting offering of some 320 million shares at (currently) $68 each basically pushes other IPO candidates outside the awning of any Alibaba tentpole.

With Alibaba and its underwriters looking to place billions of dollars of equity, buyers are unlikely to step right back in to buy smaller-ticket tech IPOs. That means solid offerings that are in process, such as Cyber-Ark and HubSpot, may initially open a bit soft at the box office that is Wall Street.

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Google ups premium video play with mDialog buy

Contact: Scott Denne

ABC, CBS and their peers can’t be expected to dump their primetime lineups onto YouTube alongside cat videos and ukulele covers of ‘Stairway to Heaven.’ That’s why Google’s premium video efforts are built around DoubleClick, including the just-announced acquisition of mDialog, a maker of ad-insertion technology for long-form and live-streaming video, which will support DoubleClick’s efforts to build an ad exchange for premium video.

Through owning YouTube, Google led the first phase of online video: short clips, occasionally pirated and often user-generated. Owning the second phase, as traditional television (not to mention traditional television advertising dollars) goes digital, will take a new technology stack as well as relationships with a new set of advertisers and content creators.

Google is not the only company to recognize the need for new teams and technologies to accompany this latest phase. For example, Comcast picked up FreeWheel Media in March to provide traditional media companies with services and software to monetize and manage their digital video. And last month, Kaltura, a maker of video editing, streaming and management software, bought over-the-top video specialist Tvinci in a deal that was as much about the target’s relationships with broadcasters as it was about its technology.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Survey: Ma Bell won’t get ‘churned’ with DirecTV

Contact: Brenon Daly

AT&T’s planned $48.5bn purchase of DirecTV has one thing going for it that Comcast’s similarly sized acquisition of Time Warner Cable doesn’t: customers don’t necessarily hate the providers. That’s at least one way to handicap the outlook for the two proposed pairings, which total, collectively, about $94bn in transaction value. The two deals represent the second- and third-largest tech transactions since 2003.

In the end, the return on both of these mammoth bets by telcos will be determined by how well the new owners serve customers. On that count, AT&T – both by itself and with the addition of DirecTV – has much more goodwill among TV consumers that Comcast-Time Warner Cable, according to ChangeWave Research, a service of 451 Research. In a March survey of 4,375 North American residents, about one-quarter of respondents said they are ‘very satisfied’ with AT&T U-verse and DirecTV. That was more than twice the level that said they are very satisfied with Comcast (11%), and four times the level for last-placed Time Warner Cable (a paltry 6%).

Perhaps more importantly, the ChangeWave survey indicates that TV subscribers aren’t planning to stick with the service they don’t like. (We would note that for service providers, which rely on monthly billing subscription fees to offset huge capital expenditures, churn is particularly corrosive to business models.)

According to ChangeWave, one in eight respondents said they plan to switch from either Comcast or Time Warner Cable in the next half-year – half again as many who planned to jump from either AT&T U-verse or DirecTV. And where are the dissatisfied TV subscribers likely to look to get their fix of The Real Housewives of Orange County or SportsCenter ? Well, it just so happens that DirecTV and ATT U-verse are the most likely replacement service providers, according to ChangeWave.

CW TV switch


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Facebook focuses on mobile video

Contact: Scott Denne

Having seemingly solved its earlier problems with mobile revenue, Facebook is turning its attention – and M&A activity – toward the next emerging media trend: social video.

The social networking giant has already shown that it can shift its business to meet emerging trends. When it went public less than 18 months ago, practically none of its revenue came from mobile. In Facebook’s most recent quarter, its mobile advertising products brought in 41% of its total ad revenue. More than a little of the growth can be tied to its rapid-fire acquisition program. After spending $1bn on photo-sharing app Instagram, Facebook has pursued a strategy of smaller deals to shore up its mobile technology and team, including its purchases of facial-recognition company Face.com and location-based app maker Glancee.

Its latest addition to the mobile business is Luma, a two-year-old startup based in Palo Alto, California. Facebook had hinted that a deal like this was a possibility. In its most recent earnings call, CEO Mark Zuckerberg said that Instagram’s newly launched video-sharing capabilities were in need of technology to stabilize the amateur videos on the app. That technology is at Luma’s core.

Acquisitions have always been a big part of Facebook’s business plan, but it has spent relatively little money in picking up new businesses, aside from its $1bn purchase of Instagram in 2012. Excluding that deal, Facebook spent $155m buying about 26 companies in 2011 and 2012. Through the first half of this year, the company has spent $246m on six transactions.

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Adobe back in the market for marketing, drops $600m on Neolane

Contact: Brenon Daly

In its second-largest acquisition for its Marketing Cloud, Adobe Systems says it will hand over $600m in cash for marketing automation (MA) vendor Neolane. The purchase of Neolane, which is expected to close in Q3, trails only Adobe’s pickup of Omniture for $1.8bn in 2009 in terms of spending on deals to build out its Marketing Cloud. Collectively, these transactions have cost Adobe more than $3bn.

Although Adobe declined to discuss Neolane’s financials, the Paris-based startup has said it generated 2012 revenue of $58m, which would put it at roughly the same size as rivals Marketo and HubSpot. In terms of valuation, however, Neolane is a good bit off of Marketo’s market cap of some $870m.

We would chalk up the disparity in valuation to two main reasons. First, Neolane’s on-premises business is about as large as its subscription business, while Marketo is a pure SaaS company. Further, we understand that Neolane grew about 40% last year, which is a solid rate but just half the pace of the free-spending – and deeply unprofitable – Marketo. Through midyear, we would pencil out that Neolane generated roughly $70m in trailing 12-month revenue.

Adobe’s MA move comes after many other tech giants have already snapped up MA vendors, including salesforce.com paying a record $2.5bn for ExactTarget earlier this month. Other tech giants that have made significant MA acquisitions include IBM (Unica), Teradata (Aprimo), Oracle (Eloqua) and Intuit (Demandforce). Valuations for those transactions have ranged from 4.4x trailing sales to 11x trailing sales.

Select marketing automation transactions

Date announced Acquirer Target Deal value Price-to-sales valuation
June 27, 2013 Adobe Neolane $600m 8.6x*
June 4, 2013 salesforce.com ExactTarget $2.5bn 7.6x
December 20, 2012 Oracle Eloqua $956m 9.7x
April 27, 2012 Intuit Demandforce $424m 11.4x*
December 22, 2010 Teradata Aprimo $525m 6.3x
August 13, 2010 IBM Unica $523m 4.4x

Source: The 451 M&A KnowledgeBase *451 Research estimate

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