"There is little the media companies can do to stop the havoc that the Internet is wreaking on their traditional business. They can slow the drain of profits for a while. But eventually, the companies will have to come up with new business models a little more adventurous than what was unveiled on Wednesday." - Wall Street Journal, Heard on The Street.
That to me was the most insightful section of the Wall Street Journal article discussing the Time Warner / Comcast TV Anywhere proposal announced on Wednesday. However, it was insightful not for only what it said but for what it left out. That is, the havoc the Internet is having on business models of what I refer to as the "traditional Internet companies" - Google, Yahoo, eBay, Amazon, MSN, AOL, and IAC. Of the group of seven, Amazon's business model is the most exposed to massive disruption. That's a tease to an upcoming write up on what I foresee as a head-to-head competition by the Internet's two most stable companies with one coming up on the losing end.
But first, Time Warner and Comcast announced plans to test TV Everywhere with 5,000 customers starting in July. Comcast video subscribers will be able to access shows from TBS and TNT, with more added later, for free over the Internet or on demand. Time Warner has been testing authenticated online access to HBO shows in Wisconsin for the past year.
The offer of cable shows online without charge to existing cable subscribers is an obvious defensive move to stem what I see, and as the article points out, as a huge consumer shift from cable/satellite pay TV in favor of content delivered online. I believe that the current recession/depression has permanently changed consumer consumption patterns with many trading down to less costly retail and media purchases. Add to that the 10-15 million unemployed, and we have a scenario where many consumers will strongly evaluate their needs versus their wants and chose to alternate from convenient luxuries such as pay TV towards free alternatives on the Web.
My write-up and graph several months ago about an economic reset captures this scenario.
Clearly that scenario is not showing up in the subscriber numbers today. DirecTV delivered 1.2 million subscriber gross addition and 460K net additions in the first quarter of 2009, the most gross ads since the third quarter of 2004 and the most net ads since the first quarter of 2005. Rival DISH Network, delivered 653K gross additions but netted a loss of 94K subscribers, however most went to DirecTV due to DISH's challenges such as customer service, technical, marketing, and lost AT&T subs. On the cable front, Cablevision lost 6K basic subscribers but added 9K digital subscribers in the first quarter of 2009; Comcast lost 78K basic subs but added 289K digital subs; and Time Warner Cable bucked the trend by adding 36K basic subs and 121K digital subs. Verizon FiOS netted 299K video subs in the first quarter.
Solid as these numbers appear today, there is trouble ahead for all within the pay TV chain, including the cable/satellite operators, the cable programmers, and to a lesser extent, content owners. As the article points out, there is a plethora of free content options on the web today such as Hulu, YouTube, TV.com, the broadcast networks owned websites where they post free content, and Apple iTunes where consumers can purchase individual episodes. The article left out options like Netflix and Amazon VOD which offer cheaper viewing alternatives to pay TV. Piracy is also lurking in the background and is very prevalent but very much ignored by the press and the media companies.
What will occur in the coming years is the disruptive power of the Internet reducing the economics of the traditional media players. Cash flows will start to diminish. Pay TV operators will slowly bleed subscribers as these subscribers access the web through their television sets and see no reason to, in essence, pay for TV, i.e, eliminate in-home cable connections. I believe that Americans will access the Internet through their TVs, which will connect through Wi-Fi, Wi-Max, DSL, or through a broadband connection. Viewers will be able to surf the web options mentioned above from a remote control device while sitting on a couch in their living rooms, at their desktop at work, or on a mobile device while traveling. Cable programmers will in turn see their distribution/affiliate fees paid to them by the pay TV operators shrink. For the cable programmers (&content owners) there won't be enough online advertising dollars from the move online to offset lost advertising and subscription fees. Even DVRs will be unnecessary as one will be able to quickly find replays of content by surfing the web from their TVs, putting TiVo's business model at risk. The 45-day DVD-to-VOD window will eventually collapse.
You will see cable operators, who are the most at risk, step up their campaigns to push usage caps on Internet video usage to curtail the defections. However, their efforts will ultimately be in vain due to public opposition and the competitive threat from DSL and WiMax.
What happens now? I am not advocating blanket short position on all media stocks because the disruption will take time to play out. In the meantime, media businesses are likely to chug along largely un-phased.
The writer suggested that "Time Warner and Comcast should offer an online-only option for consumers, so channels won't automatically lose viewers among people cutting off their video subscriptions." That can work.
What I see more is massive consolidation in the media space. The satellite operators will likely disappear into the arms of the telecom companies like Verizon. If government permits (a big if under the anti-trust focused Obama administration) cable operators will see the need to merge. The big content guys like Viacom, Walt Disney, Time Warner, and NewsCorp, who are already reeling from the pain of Internet disruption on their hugely profitable DVD businesses, will feel more pain. The good news in media is that out-of-home entertainment such as movie theaters is defensive to the secular threat from the Internet's disruptive impact, because of the need for people to leave their homes and offices. Further, the 72 foot wide and 53 foot tall IMAX screen experience is difficult to replicate in the home.
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Friday, June 26, 2009
Thursday, June 25, 2009
Yahoo!'s New Home Page Revealed
Yahoo! released its new homepage and it is clean and appealing.
Thumbs up to Yahoo and Bartz. Plus it is fitting that my screen shots captured Michael Jackson.
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Thumbs up to Yahoo and Bartz. Plus it is fitting that my screen shots captured Michael Jackson.
Read More!
Sunday, June 21, 2009
$30 EPS is Possible for Google in 2010
Google should report 2Q09 earnings sometime in the second week of July, and although I would not aggressively chase the stock at these levels, the bar versus consensus, once again, appears easy to beat. I aggressively accumulated shares in the stock around the $250-$275 levels late last year, when all was doom and gloom for the stock, but have taken profits along the way as the market rebounded and Google’s stock rebounded along with it. However, my work shows that the model has upside and we could see another 20%-plus appreciation in the shares from current trading levels. Further, if under the new cost conscious CFO, margins improve meaningfully, then we could see a clean $30 Adj. EPS figure in 2010, which would imply a $600 share price.
Consensus has Google delivering $4.031 billion in revenues in 2Q09, up 3.5% YoY but down 1% QoQ, $2.48 billion in EBITDA (61.7% margin), and $5.03 in Adjusted EPS.
My own model has Google reporting $3.993 billion in revenues (+3% YoY, -2% QoQ), $2.485 billion in EBITDA (62.2% margin), and $4.99 in Adjusted EPS. My revenue numbers are based on 15% YoY growth in paid leads and a 13% YoY decline in CPCs, with modest support from YouTube, CPM based revenues, and Licensing/Other revenues. The model assumes a less negative $375 million YoY FX impact and that Google is able to hedge $135 million of that figure for a net $241 million negative FX impact. The wildcard is the actual cost of the hedge, which shows up below operating income, and is difficult to predict. Another is the bonus accrual which is also difficult to predict. Both could lead to variability in the EPS report. Excluding those items, I believe Google’s new found cost disciple under the new CFO Patrick Pichette, should lead to significant margin improvement that is likely to start showing up this quarter. Supporting my thinking is a reduction in the growth rate of employee expenses due to the slowed hiring rate, less depreciation and some operating costs due to lower capex spending, removal of FX headwinds if the dollar goes into a tailspin due to the heavy stimulus spending (see my 2009 predictions), and tempering of the discretionary costs in the model.
Another positive is that commentary from several search engine marketers are suggesting that search ad spending is starting to pick up again.
Google continued to gain market share in online search in the first two months of the quarter but I am keeping an eye on the market share numbers for June and what it shows for the impact of Bing. Google has an enormous lead at 65% share in the U.S. but it is quite possible for them to lose some share if Bing’s recent gains are sustainable. Most pundits like Bing but think the share gains are temporary, with some pointing to the quick share gains after cashback was announced. Microsoft gave back the share gains after the hype from cashback abated.
Others are thinking that the share gains from Bing will come at the expense of Yahoo rather than Google. In my own experience, I used Bing for a few days aggressively after the launch but I am now back to Google. I consider myself an average search user so my experience could be telling. Nonetheless, I am refusing to write-off the beast from Redmond and I am taking a wait and see approach.
The shares are currently trading at 20x 2009 EPS compared to Yahoo!, which is trading at 40x 09, Amazon at 50x 09, eBay at 12x 09, and IAC at 40x 09. Thus relative to peers, the shares are attractive. I have Google generating $24.13 in Adjusted EPS in 2010 based off 10% growth in paid leads and 1.5% growth in CPC. If the economy recovers in 2010 and the non-FX component of the CPC declines experienced over the past quarters proves cyclical rather than secular, then my CPC estimate will increase and my EPS estimate will likely shoot past $25. If I use Google’s current trading multiple and apply it to the 2010 EPS estimate, then I am looking at a stock worth $500 for another 20% upside. My DCF values the shares at $508 based on a WACC of 9.5% and a 3% terminal growth rate (16x terminal multiple). If the margin benefits discussed above are realized then it is not unrealistic to see a $30 Adj. EPS number in 2010, which would imply a $600 share price.
A quick note on YouTube. My work shows that the online video site is on track to generate $185 million in revenues in 2009 and grow to $250 million in 2010. While I believe the site is unprofitable, recent loss estimates by Wall Street analysts are too aggressive principally because they are missing the fact that YouTube’s costs are spread across Google’s operating infrastructure.
Read More!
Consensus has Google delivering $4.031 billion in revenues in 2Q09, up 3.5% YoY but down 1% QoQ, $2.48 billion in EBITDA (61.7% margin), and $5.03 in Adjusted EPS.
My own model has Google reporting $3.993 billion in revenues (+3% YoY, -2% QoQ), $2.485 billion in EBITDA (62.2% margin), and $4.99 in Adjusted EPS. My revenue numbers are based on 15% YoY growth in paid leads and a 13% YoY decline in CPCs, with modest support from YouTube, CPM based revenues, and Licensing/Other revenues. The model assumes a less negative $375 million YoY FX impact and that Google is able to hedge $135 million of that figure for a net $241 million negative FX impact. The wildcard is the actual cost of the hedge, which shows up below operating income, and is difficult to predict. Another is the bonus accrual which is also difficult to predict. Both could lead to variability in the EPS report. Excluding those items, I believe Google’s new found cost disciple under the new CFO Patrick Pichette, should lead to significant margin improvement that is likely to start showing up this quarter. Supporting my thinking is a reduction in the growth rate of employee expenses due to the slowed hiring rate, less depreciation and some operating costs due to lower capex spending, removal of FX headwinds if the dollar goes into a tailspin due to the heavy stimulus spending (see my 2009 predictions), and tempering of the discretionary costs in the model.
Another positive is that commentary from several search engine marketers are suggesting that search ad spending is starting to pick up again.
Google continued to gain market share in online search in the first two months of the quarter but I am keeping an eye on the market share numbers for June and what it shows for the impact of Bing. Google has an enormous lead at 65% share in the U.S. but it is quite possible for them to lose some share if Bing’s recent gains are sustainable. Most pundits like Bing but think the share gains are temporary, with some pointing to the quick share gains after cashback was announced. Microsoft gave back the share gains after the hype from cashback abated.
Others are thinking that the share gains from Bing will come at the expense of Yahoo rather than Google. In my own experience, I used Bing for a few days aggressively after the launch but I am now back to Google. I consider myself an average search user so my experience could be telling. Nonetheless, I am refusing to write-off the beast from Redmond and I am taking a wait and see approach.
The shares are currently trading at 20x 2009 EPS compared to Yahoo!, which is trading at 40x 09, Amazon at 50x 09, eBay at 12x 09, and IAC at 40x 09. Thus relative to peers, the shares are attractive. I have Google generating $24.13 in Adjusted EPS in 2010 based off 10% growth in paid leads and 1.5% growth in CPC. If the economy recovers in 2010 and the non-FX component of the CPC declines experienced over the past quarters proves cyclical rather than secular, then my CPC estimate will increase and my EPS estimate will likely shoot past $25. If I use Google’s current trading multiple and apply it to the 2010 EPS estimate, then I am looking at a stock worth $500 for another 20% upside. My DCF values the shares at $508 based on a WACC of 9.5% and a 3% terminal growth rate (16x terminal multiple). If the margin benefits discussed above are realized then it is not unrealistic to see a $30 Adj. EPS number in 2010, which would imply a $600 share price.
A quick note on YouTube. My work shows that the online video site is on track to generate $185 million in revenues in 2009 and grow to $250 million in 2010. While I believe the site is unprofitable, recent loss estimates by Wall Street analysts are too aggressive principally because they are missing the fact that YouTube’s costs are spread across Google’s operating infrastructure.
Read More!
Thursday, June 18, 2009
Bing Paid Clicks Up 8%. Are Ad Budget Shifts Next?
Much has been said about Bing getting a bump in search and impression usage since its launch. But Efficient Frontier has taken it further, claiming that paid clicks on Bing is up 8.1% since its launch versus the previous week.
Importantly, the company believes that if the paid clicks growth holds, then advertisers are likely to shift ad budgets to Microsoft, the ultimate desired outcome.
Has Microsoft finally cracked the search nut? Let’s all wait and see, but if this holds, then both Google and Yahoo!’s multiple has to contract.
In a post several months ago I listed a number of items Microsoft should do to build their search business. See it here Closing the 3 to 65% Gap. Bing, in my view, has addressed a few of my suggestions.
Here is part of the post
"There are a few organic strategies Microsoft could employ that would help it grow share:
1. Change the mindset about search. The focus has been too much on generating revenues when the goal should be on improving the user experience and providing a differentiated product. MSFT’s number one problem is volume. If they improve the user experience then users will come. If users come then advertisers will come. If both users and advertisers come then monetization improves and revenues and profits grow. It is that simple.
Stated differently, to make headway in online advertising, then MSFT will need to significantly penetrate online search. To do so, they will need a steadfast commitment to online search from the CEO on down.
2. More Effective Marketing Strategy Centered on Search. This should be done to convince users that the online search experience and relevance is on par with Google’s. No cute ads like Ask.com which was ineffective and confusing. Just a plain ad that has the aim that search relevancy is on par with Google (provided the claim is true). Several ways to do this: 1) through word of mouth – this can be filtered through the press by attending more search related industry trade functions; 2) through a viral outlet like YouTube; 3) through banner ads on Facebook and other web properties; 4) go straight to MSFT users, which already has the number 2 web property in the world. The aim is to convince users that they do not need to jump off the MSFT pages to Google to conduct searches. In a nutshell, change user behavior through knowledge that their search engine is as relevant to Google and that the user experience is as compelling.
3. Need To Focus On Search Innovation. For the past 4 quarters, Google released 100 search monetization improvements each quarter. Point is they are constantly improving the search product and is letting the world know that or shows it to the world. MSFT should do the same.
4. Change the Brand. “Live” confuses everyone and is difficult to find. Plus the marketing effort behind Live Search was ineffective. Change the Live name to something else. Use either MSN or Microsoft Search as the brand. No need to deviate from the solid brands of those two.
5. Develop More Relationships But Be Careful Not To Overspend. Agreements with Sun, Dell and HP to include the Live Search Toolbar on new PCs, and the much-ballyhooed Live Search Cashback, which gives Web users rebates for purchasing products from participating Microsoft vendor partners through the Live Search site, are good examples. Others like Verizon and Facebook are important in that they create brand recognition. Management should go after MySpace if Google drops it. But management must be careful not to overspend or enter into deals that are uneconomical.
In all, if Microsoft buys Yahoo and in addition follows the recommendations above to grow organically, they will develop meaningful share in online search and as consequence develop a meaningful presence in online advertising.
This is the first in a series of discussions on Microsoft’s Online Services Business (OSB). In subsequent posts, I will discuss strategies for the company in branded advertising/ad agency/ad networks or what they describe as their online advertising platform or the newly created PubCenter, portal and information content products, communications and social networking, and cloud computing efforts.
My reasoning for focusing on Microsoft is because I believe they do have a competitive presence in the Internet space and it needs to be documented, given that it is largely ignored by Wall Street analysts in favor of other parts of the business model."
Read More!
Importantly, the company believes that if the paid clicks growth holds, then advertisers are likely to shift ad budgets to Microsoft, the ultimate desired outcome.
Has Microsoft finally cracked the search nut? Let’s all wait and see, but if this holds, then both Google and Yahoo!’s multiple has to contract.
In a post several months ago I listed a number of items Microsoft should do to build their search business. See it here Closing the 3 to 65% Gap. Bing, in my view, has addressed a few of my suggestions.
Here is part of the post
"There are a few organic strategies Microsoft could employ that would help it grow share:
1. Change the mindset about search. The focus has been too much on generating revenues when the goal should be on improving the user experience and providing a differentiated product. MSFT’s number one problem is volume. If they improve the user experience then users will come. If users come then advertisers will come. If both users and advertisers come then monetization improves and revenues and profits grow. It is that simple.
Stated differently, to make headway in online advertising, then MSFT will need to significantly penetrate online search. To do so, they will need a steadfast commitment to online search from the CEO on down.
2. More Effective Marketing Strategy Centered on Search. This should be done to convince users that the online search experience and relevance is on par with Google’s. No cute ads like Ask.com which was ineffective and confusing. Just a plain ad that has the aim that search relevancy is on par with Google (provided the claim is true). Several ways to do this: 1) through word of mouth – this can be filtered through the press by attending more search related industry trade functions; 2) through a viral outlet like YouTube; 3) through banner ads on Facebook and other web properties; 4) go straight to MSFT users, which already has the number 2 web property in the world. The aim is to convince users that they do not need to jump off the MSFT pages to Google to conduct searches. In a nutshell, change user behavior through knowledge that their search engine is as relevant to Google and that the user experience is as compelling.
3. Need To Focus On Search Innovation. For the past 4 quarters, Google released 100 search monetization improvements each quarter. Point is they are constantly improving the search product and is letting the world know that or shows it to the world. MSFT should do the same.
4. Change the Brand. “Live” confuses everyone and is difficult to find. Plus the marketing effort behind Live Search was ineffective. Change the Live name to something else. Use either MSN or Microsoft Search as the brand. No need to deviate from the solid brands of those two.
5. Develop More Relationships But Be Careful Not To Overspend. Agreements with Sun, Dell and HP to include the Live Search Toolbar on new PCs, and the much-ballyhooed Live Search Cashback, which gives Web users rebates for purchasing products from participating Microsoft vendor partners through the Live Search site, are good examples. Others like Verizon and Facebook are important in that they create brand recognition. Management should go after MySpace if Google drops it. But management must be careful not to overspend or enter into deals that are uneconomical.
In all, if Microsoft buys Yahoo and in addition follows the recommendations above to grow organically, they will develop meaningful share in online search and as consequence develop a meaningful presence in online advertising.
This is the first in a series of discussions on Microsoft’s Online Services Business (OSB). In subsequent posts, I will discuss strategies for the company in branded advertising/ad agency/ad networks or what they describe as their online advertising platform or the newly created PubCenter, portal and information content products, communications and social networking, and cloud computing efforts.
My reasoning for focusing on Microsoft is because I believe they do have a competitive presence in the Internet space and it needs to be documented, given that it is largely ignored by Wall Street analysts in favor of other parts of the business model."
Read More!
Monday, June 1, 2009
DOJ probes possible tech hiring pact by Google, Yahoo, Apple
The The Deal Pipeline (www.thedeal.com) reports that according to Washington antitrust lawyers, the Department of Justice has sent letters to at least a dozen major computer hardware and software companies, such as Google, Yahoo! and Apple. The letters suggest that antitrust division lawyers suspect that some of the targeted companies have agreed not to poach each others' employees, which is in violation of the nation's oldest antitrust law, the Sherman Act of 1890.
Here is the letter courtesy of Marielena Santana at TheDeal.com:
DOJ probes possible tech hiring pact
by Cecile Kohrs Lindell In Washington
Updated 06:13 PM EDT, May-29-2009
New Assistant Attorney General Christine Varney has launched an investigation into hiring practices among high-tech companies.
According to Washington antitrust lawyers, the Department of Justice antitrust division's networks and technology section, led by chief James Tierney, has sent letters to at least a dozen major computer hardware and software companies. Google Inc., Yahoo! Inc. and Apple Inc. are believed to be among the recipients, as is at least biotechnology firm, Genetech Inc.
A DOJ spokeswoman did not respond to a request for comment.
Google spokesman Adam Kovacevich declined to comment on the matter.
The letters suggest that antitrust division lawyers suspect that some of the targeted companies have agreed not to poach each others' employees. Such an agreement, if DOJ lawyers can prove it exists, could be a violation of the nation's oldest antitrust law, the Sherman Act of 1890, which prohibits agreements among competitors that result in restraint of trade.
Although a potential violation of antitrust law, if confirmed the suspicions may not rise to a criminal violation. Sources said the letters appear to be in the form of a Civil Investigative Demand.
The DOJ's staff has been increasingly active since the arrival of Varney and her deputies, who include two top antitrust litigators, Molly Boast and Bill Cavanaugh, and a well-regarded economist, Carl Shapiro, who held the post during the Clinton administration. Another marquee staffer, Phil Weiser, is yet to arrive from his teaching post at the University of Colorado Law School.
An antitrust lawyer said that the DOJ's staff has been authorized to investigate matters that would not have been given serious reviews under prior Assistant Attorney General Tom Barnett.
Varney promised a departure from previous practice quickly after arriving at her post. Barnett, an experienced antitrust lawyer who has returned to private practice at Covington & Burling LLP, the former firm of Attorney General Eric Holder, was criticized by a vocal contingent of the antitrust bar for approving some controversial mergers, including Whirlpool Inc.'s purchase of Maytag and the combination of XM and Sirius Satellite Radio Holdings Inc.
In recent speeches, Varney has invoked the foresight and commitment to antitrust demonstrated by Thurman Arnold, President Franklin D. Roosevelt's pick to head the antitrust division.
Arnold tripled the number of cases the division files, and has drawn praise for helping restore competition to troubled Depression-era markets
Read More!
Here is the letter courtesy of Marielena Santana at TheDeal.com:
DOJ probes possible tech hiring pact
by Cecile Kohrs Lindell In Washington
Updated 06:13 PM EDT, May-29-2009
New Assistant Attorney General Christine Varney has launched an investigation into hiring practices among high-tech companies.
According to Washington antitrust lawyers, the Department of Justice antitrust division's networks and technology section, led by chief James Tierney, has sent letters to at least a dozen major computer hardware and software companies. Google Inc., Yahoo! Inc. and Apple Inc. are believed to be among the recipients, as is at least biotechnology firm, Genetech Inc.
A DOJ spokeswoman did not respond to a request for comment.
Google spokesman Adam Kovacevich declined to comment on the matter.
The letters suggest that antitrust division lawyers suspect that some of the targeted companies have agreed not to poach each others' employees. Such an agreement, if DOJ lawyers can prove it exists, could be a violation of the nation's oldest antitrust law, the Sherman Act of 1890, which prohibits agreements among competitors that result in restraint of trade.
Although a potential violation of antitrust law, if confirmed the suspicions may not rise to a criminal violation. Sources said the letters appear to be in the form of a Civil Investigative Demand.
The DOJ's staff has been increasingly active since the arrival of Varney and her deputies, who include two top antitrust litigators, Molly Boast and Bill Cavanaugh, and a well-regarded economist, Carl Shapiro, who held the post during the Clinton administration. Another marquee staffer, Phil Weiser, is yet to arrive from his teaching post at the University of Colorado Law School.
An antitrust lawyer said that the DOJ's staff has been authorized to investigate matters that would not have been given serious reviews under prior Assistant Attorney General Tom Barnett.
Varney promised a departure from previous practice quickly after arriving at her post. Barnett, an experienced antitrust lawyer who has returned to private practice at Covington & Burling LLP, the former firm of Attorney General Eric Holder, was criticized by a vocal contingent of the antitrust bar for approving some controversial mergers, including Whirlpool Inc.'s purchase of Maytag and the combination of XM and Sirius Satellite Radio Holdings Inc.
In recent speeches, Varney has invoked the foresight and commitment to antitrust demonstrated by Thurman Arnold, President Franklin D. Roosevelt's pick to head the antitrust division.
Arnold tripled the number of cases the division files, and has drawn praise for helping restore competition to troubled Depression-era markets
Read More!
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