-Contact Thomas Rasmussen
Following Google’s purchase of AdMob in November, we predicted a resurgence in mobile advertising M&A. That’s just what has happened and, we believe, the consolidation is far from having run its course. Apple, which we understand was also vying for AdMob, acquired Quattro Wireless for an estimated $275m at the beginning of the year. At approximately $15m in estimated net revenue, the deal was about as pricey as Google’s shopping trip for its own mobile advertising startup. And just last week, Norwegian company Opera Software stepped into the market as well, acquiring AdMarvel for $8m plus a $15m earnout. We understand that San Mateo, California-based AdMarvel, which is running at an estimated $3m in annual net sales, had been looking to raise money when potential investor Opera suggested an outright acquisition instead.
These transactions underscore the fact that mobile advertising will play a decisive role in shaping the mobile communications business in the coming years. For instance, vendors can now use advertising to offset the costs of providing services (most notably, turn-by-turn directions) that were formerly covered by subscription fees. Just last week, Nokia matched Google’s move from last year by offering free turn-by-turn directions on all of its smartphones. Navigation is only the beginning for ad-based services as mobile devices get more powerful and smarter through localization and personal preferences.
While traditional startups such as Amobee will continue to see interest from players wanting a presence in the space, we believe the next company that could enjoy a high-value exit like AdMob or Quattro will come from the ranks that offer unique location-based mobile advertising such as 1020 Placecast. The San Francisco-based firm, which has raised an estimated $9m in two rounds, is a strategic partner of Nokia’s NavTeq. As such, we would not be surprised to see Nokia follow the lead of its neighbor Opera by reaching across the Atlantic to secure 1020 Placecast for itself.
-Email Thomas Rasmussen
It’s becoming increasingly evident that once-dominant makers of personal navigation devices, such as Garmin and TomTom, have lost their way. They have seen billions of dollars in market capitalization erased as smartphone manufacturers have encroached on their sector, largely through M&A. Consider the most-recent example of this trend: Research in Motion’s acquisition of startup Dash Navigation earlier this month.
RIM’s buy is more of a catch-up move than anything else. Rival Nokia has already spent the last few years – and several billion dollars – acquiring and building a dominant presence in the location-based-services (LBS) market. And let’s not forget about the omnipresent Google. Starting with its tiny 2005 purchase of Where2, the search giant has quietly grown into a LBS powerhouse that we suspect keeps even the larger players up at night.
The Dash Navigation sale may well signal the start of some overdue consolidation, a trend we outlined last year. Specifically, we wonder about the continued independence of TeleNav, Telmap and Networks in Motion. TeleNav, for instance, is the exclusive mapping provider for the hyped Palm Pre through Sprint Navigation. But with the trend for open devices, we wonder how long that will be the case.
-Contact Thomas Rasmussen
The consolidation in the mobile payment market that we outlined recently is still on. Startup Boku announced on Tuesday a $13m venture capital infusion in the form of what we understand was a $3m series A round followed quickly by a $10m series B round a little over a month later. Benchmark Capital led the latest round, with Index Ventures and Khosla Ventures also pitching in some cash. The money was used to acquire two competitors, Paymo and Mobillcash. We estimate that very little of the cash was used to buy the vendors. We understand that the purchase of Paymo, which raised a reported $5m itself, was primarily done in stock. The deals were largely a way for Boku to gain customers and technology, as well as expand its international reach. It’s increasingly important for mobile payment startups to do something to stand out among the dozens of rivals also trying to crack this market. What’s unusual about Boku is that this strategy is playing out so quickly. The company only incorporated in March.
The real question for Boku and other promising startups in the mobile payment space such as RFinity is what will ultimately happen to this hyped market. Despite hundreds of millions of dollars poured into startups, they haven’t been able to generate much revenue, certainly not to the level that would make them viable businesses at this point. We believe the best outcome for these firms is an exit to a larger strategic acquirer. An example of this that may well be in the offing is Obopay, which took an investment from Nokia a few months ago. We suspect that could be a ‘try before you buy’ arrangement for the Finnish mobile company. Research in Motion and others could look to use acquisitions to catch up, as well.
However, we wonder how long it will be before other smartphone providers, platforms and mobile operators do as Apple has done. Micro-transactions are a huge selling point for the new iPhone 3.0 update and, frankly, one of the few bright spots for the mobile payment sector. However, all transactions for iPhone applications are done through Apple itself, leaving companies such as Boku out in the cold. If other vendors – including RIM, Palm Inc, Google, Microsoft and even application platforms like Facebook – stay in-house to develop the technology, there isn’t much need to go shopping. That could well hurt the valuations of mobile payment startups, even those that survive this current period of consolidation.
-Contact Thomas Rasmussen
Mobile advertising startup Ad Infuse received an infusion of reality last week. The vendor, which has raised $18m in venture backing, had to put itself up for sale after it was unable to secure follow-on funding this year. After being shopped around since last summer, Ad Infuse sold for scraps to UK-based mobile advertiser Velti. We estimate that Velti paid less than $1m for Ad Infuse, which we understand generated just $1.3m in revenue in 2008.
The distressed sale of Ad Infuse comes on the heels of SmartReply’s tiny all-equity purchase of mSnap, as well as several deals involving other niche advertising networks this year. Where does this leave the remaining mobile ad networks that we were bullish on last year as the logical next step of growth for online ad startups?
We suspect there is more VC portfolio cleanout coming, since there are still too many mobile ad startups. That’s not to say there aren’t a few firms that haven’t had some success. For instance, three-year-old mobile ad network AdMob, which has successfully ridden the coattails of Apple’s iPhone AppStore’s rise by providing a way for iPhone developers to monetize their users through ads, is currently at an estimated $30m run-rate. (AdMob has raised nearly $50m to date from Sequoia Capital, Accel Partners, Draper Fisher Jurvetson and Northgate Capital.) And on a smaller scale, AdMarvel is just getting started with what we can best describe as a mobile version of the popular video ad startup Adap.tv. It has raised just $8m to date and is in the process of closing a $10m follow-on round, something its competitor Ad Infuse was unable to accomplish.
Much like what we anticipate will eventually happen in the online video ad space, there will soon come a time when ad giants such as Google and Yahoo will have to buy their way into the mobile sector. In a rare sign of foresight, AOL is the only media behemoth with a sizable presence in the mobile ad vertical following its $105m acquisition of Third Screen Media in 2007.
-Contact Thomas Rasmussen
Facebook’s rumored offer for micro-blogging site Twitter had the Web all atwitter recently. The $500m bid was reportedly rejected because it came in the form of a stock swap, with Facebook inflated to the infamous $15bn valuation that the social network got in Microsoft’s investment a year ago. Judging from our talks with insiders throughout the year, everyone knows this is a ludicrous valuation. Still, we wonder why some people – including big media – are still bandying this around, and more to the point, why Facebook thought Twitter would buy into the valuation. (More realistically, bringing the valuation down to earth, the offer amounts to $100-130m.) Nevertheless, the rumored run at Twitter confirms our speculation in June that Facebook, which has hardly ever dabbled in M&A, is gearing up to go on a substantive shopping spree. If that’s the case, it could do a whole lot worse than roping in Loopt.
When we first reported on this possibility, we had heard that initial talks were under way. However, the less-than-stellar adoption of the overhyped location-based services (LBS) applications probably put a damper on the enthusiasm. Nonetheless, recent developments have made LBS an attractive area again: Android devices have hit the market, the iPhone continues to sell well and Nokia is rolling out its own sleek new smartphone. Granted, the degree to which people are interested in having friends and family track their every move is debatable. But for Facebook and other social networks, which essentially base their entire business models on our instinct to pry into each other’s business, adding Loopt’s service to its currently static desktop and mobile offering is a no-brainer. And if Facebook was willing to hand over north of $100m to acquire Twitter, spending the same amount on Loopt, which is roughly where we pencil out its valuation, would make a lot more sense.
Social network M&A, 2006-2008
||Number of deals
||Total known deal value
Source: The 451 M&A KnowledgeBase
-by Thomas Rasmussen
Casual gaming is a serious business. Amid a decline in M&A across the overall gaming industry, casual gaming acquisitions are trending up slightly. So far this year there have been 28 social and casual gaming deals inked, which compares to 25 for all of last year. This is in stark contrast to a sharp decline of more than 30% in tech and gaming M&A in general. What might the reason be for this and what does it portend for the year to come?
The past month has authoritatively invalidated a long-held belief by those in the gaming industry: It is not a recession-proof sector. In fact, lackluster earnings from Electronic Arts (EA) and others have the industry anxious. EA posted a negative EBITDA of $310m, provided dire forecasts and announced across-the-board job cuts for the most recent quarter ended September 30. The bright spot, however, is the continuing growth in casual gaming among not only the big videogame companies such as EA, but other companies, as well. For instance, RealNetworks’ recent third-quarter earnings report boasts another 20% increase in its gaming business compared to last quarter. As the casual gaming industry continues to be seen more as a viable business model, we expect the shopping to continue for not only the gaming conglomerates, but also for large media companies looking to get in the game. Amazon’s recent acquisition of Reflexive Entertainment is an example of new acquirers shopping in the space.
Not that it is a hard trend to spot, but for what it’s worth, VCs, angels and serial entrepreneurs have been touting this development to us all year, and are putting their money where their mouths are. Among some of the startups to receive sizable funding recently are Playfish, which raised a $17m series B round last month for a total of $21m to date; Social Gaming Network Inc, which has won about $20m in funding so far; and Zynga Game Network, which has taken in $39m. That is a lot of money for companies in an industry previously regarded as a niche. And given the heavy consolidation experienced in the traditional gaming industry, all of these vendors are likely to be part of the many names mentioned in M&A chatter in the near future.
-by Thomas Rasmussen
Despite its stock trading near a five-year low and plans to cut 10% of its workforce, eBay managed to go shopping last week, picking up a pair of companies for a total of $1.3bn. The auction giant spent $945m on Bill Me Later, an online payment processor popular among big-ticket retailers, and $390m on Danish classifieds giant Den Bla Avis. The acquisitions mark a return by eBay’s recently appointed CEO John Donahoe to a focus on the company’s core operations. It also brings into sharper relief the largest strategic misstep by Donahoe’s predecessor Meg Whitman: the purchase of Skype. We believe that will soon be remedied, with the newly refocused eBay divesting its communications division.
It’s clear why eBay would want to return to its roots, and why the Bill Me Later acquisition makes a lot of sense. (The purchase of Den Bla Avis is another step in the company’s international expansion strategy.) Bill Me Later is a complementary acquisition to eBay’s PayPal payments division, which unlike the Skype acquisition has paid off handsomely. The payments segment now represents more than 25% of total revenue, or $2.2bn for the past 12 months, while Skype only brought in about $475m, or roughly 6% of total revenue. (Remember that eBay paid just $1.5bn for PayPal but handed over $2.5bn for Skype.) So who might want to pick up the Skype business?
Just because eBay has struggled to realize a return on its acquisition of Skype doesn’t mean another owner, particularly one focused on communications, couldn’t do well with the property. With about 340 million registered users, Skype is the undisputed leader in VoIP. That commanding market share is likely to attract attention from the existing telcos. It is particularly enticing once you factor in what is happening in the mobile space right now and Skype’s position to dominate mobile VoIP. So far, the wireless telcos have been fighting to keep Wi-Fi, VoIP and other services they do not control or profit from off their handsets. This is a battle they are quickly losing (case in point: Android, BlackBerry and iPhone). Much in the same way that the legacy telcos were quick to adopt wireless technology when it was still in its infancy rather than cling to the wires, it makes sense to try to profit from the trend rather than fight it. Another likely bidder for Skype is Nokia, which has been an avid acquirer of mobile content in its bid to move away from strictly hardware. In addition, Google, Microsoft and Yahoo might consider picking up Skype, since all three of these companies have used acquisitions to enter the emerging mobile communications market.
Performance of select eBay acquisitions
|Date of acquisition
||Current TTM revenue
||Current revenue to deal value multiple
|September 12, 2005
|July 8, 2002
|October 6, 2008
||Bill Me Later
||$130m (projected for calendar year ending December 31)
|October 6, 2008
||Den Bla Avis
Source: The 451 M&A KnowledgeBase
Nokia has been going navi-crazy lately. Last week, the Finnish conglomerate bought location-based social networking company Plazes for an estimated $30m. This comes as the company is wrapping up the largest acquisition in its history – the $8.1bn purchase of Navteq. We believe this is just the beginning for Nokia and others in the excessively hyped mobile location-based services (LBS) space. The question arising from this acquisition, as well as Vodafone’s $48.7m acquisition of Zyb in May, is what these acquisitions mean for the rest of the market. One implication is already clear: GPS technology has been commodified. (Just ask shareholders of Garmin, who have seen the stock skid to a two-year low.) With this technology popping up on dozens of devices, we expect hardware vendors to be even more active in snapping up LBS startups.
Nokia plans to roll Plazes into its Nokia Maps division, which itself was formed from the acquisition of gate5 in late 2006. It is part of Nokia’s overall strategy to have GPS technology play a large role in expanding beyond just being a mobile hardware company. Nokia claims it will sell upward of 37 million GPS-enabled handsets this year alone. The approaching worldwide release of the GPS iPhone, as well as Research in Motion’s push to include the technology in most of its BlackBerry devices, make it clear why high-profile backers such as KPCB and Sequoia Capital are so excited about LBS applications.
Beyond being a simple technology purchase, however, Plazes and other future deals will likely bring another important component to the apps: users. Despite their hype and position as leaders in the space, services such as Palego’s Whrrl, Loopt and Brightkite have fewer than a million users combined. Compare that to the hundreds of millions of users that ‘traditional’ social-networking sites such as Facebook and MySpace command, and one wonders what the hype is all about. By pairing up with larger companies, however, the services get instant access to millions of users. It is the technology and expertise that rumored suitors such as Facebook, Microsoft, Google and now the mobile carriers and hardware manufacturers are interested in. With continued consolidation, the fear of being left behind in a potentially important market will drive many to acquire first and ask questions later. Nokia might have just lit the fire in the M&A race to dominate the LBS market.
Seven signs of a consolidating LBS industry
||Location Based Technologies (fka PocketFinder)
*estimated, Source: The 451 M&A KnowledgeBase
After running up an M&A bill of more than $10bn on advertising deals last year, Internet titans are now taking the wraps off some of the platforms built on those acquisitions. This week, for instance, Google struck a content distribution deal with Family Guy founder Seth MacFarlane. Google will distribute a new Internet-exclusive cartoon series using the AdSense platform it picked up through its $280m acquisition of Applied Semantics back in 2003. Additionally, Google launched its Google Affiliate Network, which is essentially a re-branding of DoubleClick’s affiliate marketing product, Performics.
Through the AdSense deal, Google will syndicate two-minute ‘webisodes’ with accompanying advertisements to thousands of demographically chosen websites. Of course, other sites already offer Web video streaming. However, few of them have found a way to offer the content in a profitable way. Consider the online TV network Hulu, a $100m joint venture of NBC and News Corp that streams videos from its stand-alone website. Although it consistently sells out its ad inventories, Hulu still struggles to get viewers to its site, much less run profitably.
One boost to the flagging revenue outlook for this market may well come from online video advertising markets, particularly mobile video markets. While the top players, including Google, keep busy monetizing on previous acquisitions, we expect the scores of smaller players to get snapped up. Among those that might find themselves on a shopping list: VC-backed Qik, which streams live TV and video to mobile phones and enables users to upload content to social networking websites; a similar startup, Myframe’s Flixwagon, which has partnered with MTV Israel; and finally, decentral.tv’s Kyte.tv, based in San Francisco, is streaming video on the iPhone. If any of the big online advertising platforms want to go wireless, we expect they will probably take a close look at one or more of these startups.
Selected Google online advertising deals
|April 13, 2007
||Online advertising and marketing services
|April 23, 2003
||Online advertising and analytics platform
Source: The 451 M&A KnowledgeBase
As Apple’s Worldwide Developers Conference winds down, the hype for the new iPhone is only beginning. Amid all the hoopla, though, we couldn’t help but make an observation about not so much what was in Steve Job’s all-important keynote, but what wasn’t. Specifically, Kleiner Perkins Caufield & Byers’ much-touted iFund was only mentioned in passing, and none of the surprisingly few ventures were highlighted. (KPCB has written checks to just three companies, out of thousands of applicants.) In fact, a major competitor of iFund’s location-aware application Whrrl, Loopt, was a highlight of the keynote. This comes as somewhat of a surprise after Palego’s Jeff Holden and KPCB partner Matt Murphy spoke highly of their relationship with Apple in a May 27 BusinessWeek article and even speculated on the chances of being a featured app. This led many to believe they were a shoe-in for the keynote. Given Apple’s obsessive demand for radio silence prior to the event, perhaps loose lips do indeed sink ships.
Loopt is funded by KPCB competitors New Enterprise Associates and Sequoia Capital to the tune of $15m. It has a few hundred thousand paying customers, but more importantly, it is the leader in the mobile location-aware-social-networking space spanning several carriers and operating systems. This is a market that has seen a lot of interest from the likes of Google, AOL, Microsoft and even Facebook. In the aftermath of the conference, whispers and rumors of potential acquirers of this little app are all over the place.
Since Google let Plaxo go to Comcast and has failed with its in-house development (Orkut), the search engine has been itching to make headway in the sector through acquisitions. Given Google’s huge push into the mobile space, it is seen as a likely acquirer. However, we think the most probable acquirer is Facebook. The soaring social networking site has been serious about pushing into mobile-social-networking, and a pairing of Facebook’s mobile application with Loopt seems a perfect fit. Since valuations in the social networking space are like something out of the bubble era, it is not unrealistic to see a price tag of just south of $100m for Loopt, a 40-employee startup. With healthy cash reserves and an estimated $400m in revenue for 2008, Facebook has the resources. In fact, though this would only be its second acquisition, we understand Facebook has been gearing up to make more acquisitions in the coming year. If indeed Loopt is taken off the block, rivals Palego, Zyb, and Buzzd may follow in quick order.
Traditional social networking acquisition deals for more than $50m
|May 14, 2008
|March 13, 2008
|March 4, 2008
|May 30, 2007
|July 18, 2005
* official 451 Group estimate, Source: The 451 M&A KnowledgeBase