The Praized Blog

Seeing Niklas Zennstrom’s name on LeWeb’s list of speakers along with the news that Joost’s assets were being acquired by Adconion Media Group got me thinking about the dynamics of that specific startup. Joost was founded in 2006 to build a online video portal with the core idea that legal video streaming would be more efficient if it was built on peer-to-peer technology. The company signed content licensing agreements with major media companies, they had major funding ($45M), 150 software developers and experienced founders/entrepreneurs (Zennstrom and Janus Friis) who had had major successes with Kazaa and Skype. It seemed they would be successful once again.

It didn’t happen. Why? CNET explains that their technology choice of a downloadable application certainly impaired their chance of success. The arrival of Hulu, a big hit with users, also didn’t help  but I was specifically struck by this other reason: “Some of the big-name content partners seemed to be putting in a halfhearted effort with Joost, offering up reruns and esoteric programs instead of the new programming that people actually wanted to watch”. Hmmm…

Think about Kazaa and Skype. What did Zennstrom and Friis successfully achieve with these new initiatives? They directly attacked major players in large mature markets using industry weak points. Kazaa was an assault on the music industry, Skype took on telcos. They didn’t say “let’s work with these guys”. They just did it and leveraged the fact that these two industries were very profitable and slow to innovate. They foresaw the disruptive impact of technology and created a lot of value for their shareholders. Venture capital firms usually love these startups. When they created Joost, they changed their entrepreneur paradigm and it failed. Zennstrom and Friis’ new startup Rdio is in the online music space and it looks like they’re going to be working with the music industry. Will it impair their chance of success or has the music industry matured enough in the last 10 years to embrace innovation?

It got me thinking about newspapers, directory publishers, the movie industry, radio, magazines, and other traditional media companies. At one point or another, all these industries (who generate or used to generate fat profit margins) fought technology and we’re slow to innovate. I think it’s getting better (still not fast enough in my own opinion) but I was reminded it is still very slow in Canada by this blog post (in French) written by Yannick Manuri. He says that 40% of all online advertising spent in the country benefited foreign media companies and anecdotally he doesn’t see the sense of urgency in Canadian media companies. It’s a reality in other countries as well.

Why do we need industry disruptors to stimulate innovation in media? Couldn’t it happen by itself?

This is a post about the Kelsey Group’s DMS ‘09 conference which happened last week in Orlando.

Day two of the DMS ‘09 conference saw a brilliant keynote from Dave Swanson, Chairman and CEO of R.H. Donnelley (RHD). After hearing sobering thoughts from European Yellow Pages leaders at the EADP conference in May (see The Wake-Up Call: “Unless We Change, on the Long Run, We Are Doomed to Disappear” (EADP 2009)), I was really looking forward Swanson’s keynote given the situation RHD found itself in (they filed for Chapter 11 protection in May) after having an amazing stock market ride in the last few years. the Kelsey Group “wanted someone who has had his butt kicked” for this keynote, someone who could explain what happened and what’s ahead for the industry and he didn’t disappoint.

Here’s what happened according to Dave Swanson:

• The economy
  • “It changed everything for everybody. If you look at the timing of ad sale declines, it compares exactly with the economic contraction. If you index Google’s financial results with RHD’s, you realize they have suffered as well. We’ve seen broad-based sales compression. We had enjoyed the longest growth period in history, but it created unsustainable bubbles: housing bubble, advertising bubble, credit bubble (with mergers & acquisitions and leverage buyouts). It was an unsustainable situation because we needed to refinance regularly. There was no money left after the financial bubble burst. When I’m asked “Dave, do you regret this strategy?”  I answer, “no, absolutely not. RHD might not exist today.” “
• Secular changes
  • “Print competition is intense. We keep pointing out the shortcomings of each other’s products. Other local media companies (i.e. newspapers) pitch “against” Yellow Pages also. Media Fragmentation didn’t help as well. Finally, the media trumpeted “no one uses the Yellow Pages anymore” and we became an “environmental hazard” for a segment of the population. We have been very good at shooting ourselves in the foot.”
• Execution
  • New products did not deliver and had a high rate of churn.

Where are we?

• “I hope the freefall from the economy has stopped but I think that we’re a long way to go before “main street” joins the current Wall street rally”
• ” We need multi-platform solutions, more creative pricing, more transparency”
• “Competitive environment is intense. We could see a shake-out. For RHD, the worst is behind us. Financial house must be in order.”
• “We need to challenge the premise of our business”. He gave as example: “do we need separate Internet Yellow Pages platforms and ventured to answer ”I don’t think so”.
• “We will never dominate consumer usage as we did in the past.”
• “We need to become have a service-centric model vs. product-centric model.” RHD’s objective is to be the number one provider of directional services in the eyes of the SMBs in the market they serve. Yellow Pages publishers are provisioning more keywords on search engines with small businesses than anyone else. Because of the channel, this has been a natural extension of their existing product.
• “Execution hasn’t been very good, but we’re getting better and we’ll dominate”
• “Publishers have to look at micro-strategy, geo-vertical opportunities. It’s not one large homogeneous search business.”

Swanson observed it would be very easy to be pessimistic but his philosophy is that when things are going very good, something very bad is about to happen and vice-versa. The next several years will be all about climbing out of the hole but ”it’s going to be a hell of lot more fun than the last two years”.

Following his keynote, I sat down with Dave Swanson for an exclusive interview.

On print innovation

I asked Swanson if he thought there was innovation left in the print product, what he thought a print product would look like in 5 years. He said he thought the print book really works in smaller markets and that he didn’t see much change needed there. But he confirmed he thought the format wasn’t right for urban centers. He suggested limiting geography (smaller scopes), having more relevant information in the books (possibly a subset of headings instead of all of them) and more specialty products. But he also added Yellow Pages were not supposed to be glamorous. They have to be efficient.

On online innovation: verticalization & micro-strategy

I then asked RHD’s CEO where he thought DexKnows.com, their main online property, was going. He said he was extremely happy to have Sean Greene heading their RHD Interactive division (I interviewed Sean a few months ago), bridging print and online culture. He mentioned DexKnows’ future lies in two directions: verticalization and Micro (which I would call hyperlocal)

Verticalization is the improvement of high-potential verticals within Dexknows.com. It means depth of content, aggregate categories/headings and a combination of expert and user content. He gave the example of “wedding” as a meta-category, an interesting vertical.

Micro is recreating a community, a subdivision, a neighborhood within Dexknows.com (or maybe more “local” brands. He wasnt’ allergic to trying other online brands for this initiative). User recommendations would play a big role there. When asked about aggregating hyperlocal information that’s not directly merchant-related (classifieds, neighborhood information, municipal government info, etc.), he remarked that a lot of community information already appears in the print Yellow Pages and said there’s no reason why it shouldn’t appear online.

On social media

Swanson acknowledged that social media has the potential to be a big disruptor in local search (which made me very happy as I’ve been saying that for a couple of years). He called social media “word of mouth on steroid”. He confirmed that Facebook and Twitter are both an opportunity and a threat to directory publishers.

On combating the negative industry press

RHD’s CEO wasn’t too optimistic about industry-wide efforts to combat negative press. He suggested we change the way directory publishers market themselves and start talking to SMBs more to improve their image (instead of doing consumer advertising to garner usage).

What it means: perfect tone for the Swanson’s keynote. Things are not going as well as they used to in the Yellow Pages industry and it doesn’t serve any purpose to hide it. “We will never dominate consumer usage as we did in the past” is most realistic statement I’ve heard in industry recently. At the same time, the industry has tremendous assets it can leverage starting with the direct relationship publishers have with small advertisers. Very happy that RHD is looking at improving the print product in large urban areas. I believe there’s a lot of leg left in a print product that’s tailored to an urban consumer. Ecstatic that Swanson is talking seriously about social media. I sometimes felt like I was preaching in the desert in the last two years… We’ll have to follow RHD closely as they come out of Chapter 11 in the next few months.

This is a post about the Kelsey Group’s DMS ‘09 conference which happened last week in Orlando.

In a presentation titled “Global Yellow Pages: A Prescription for Future Success”, Charles Laughlin and Neal Polachek from BIA/Kelsey (the new name of The Kelsey Group) exposed important trends and offered a new way to look at the future for directory publishers.

Current trends:

• Over time, print Yellow Pages usage (as an advertising vehicle) is down for SMBs
• Advertiser volume (i.e. the total number of advertisers with a relationship to a directory publisher) is decreasing
• Average average revenue per advertiser (ARPA) is up (i.e. squeezing more money out of current advertisers) but EBITDA margins are down
• Share of revenue coming from online products is up (10% of total directory publishers revenue in North America, 25% in Europe)

Future trends:

• Publishers will sell leads instead of products (i.e. need to move away from print/online nomenclature)
• The business model will evolve (blends traditional and performance-based advertising + fee-based services)
• There will certainly be a change in the publishers’ cost structure (when revenues go down, margins go down also)
• We will see a changing sales force (training, recruitment, smaller channels, outsourcing)
• We will see a changing core print product (more local, more vertical, smaller, less categories)

Neal then exposed what I think is a revolutionary new way of seeing the world and coined a new era for the Yellow Pages business: ” Presence, Performance, Permanence”

“Presence” is defined as ”Be found”. It’s usually fee-based. It includes product like signage, listings, print, banners, search/SEO, digital outdoor, door hangers, radio, cable TV and mobile TV. I think we could also include things like website building, Facebook & Twitter profile management, etc.

“Performance” is all about driving leads. It’s performance-base and includes clicks, calls, forms submitted, store visits, inquiries, etc. It could also include coupons exchanged.

“Permanence” is to help the advertiser retain customers. This works on a fee for service business model and includes ratings, reviews, online reputation management, online booking, customer reminders, customer updates, retention strategies, telephone training, etc.

The list of business opportunities Neal presented was certainly not exhaustive but I like how this model helps organize product initiatives under large umbrellas. I also like the fact that social media is now part of the overall Yellow Pages strategy via things like ratings, reviews and reputation management. The whole industry seems to be waking up to the disruptive power (opportunity and threat!) of social media I think we’re just seeing the tip of the iceberg there.

In less than 6 weeks, many decision makers from the Yellow Pages industry and other directional media companies will be attending the next Kelsey Group conference called Directional Media Strategies ‘09.  Two of BIA/Kelsey analysts (Charles Laughlin and Matt Booth) organized a preview web conference yesterday to explain the “meta-themes” of the conference. They are:

1. Embracing accountability (for example, with print pay-for-perfomance ads)
2. Transforming the sales channel (becoming multi-product, digital and explicitly performance-based, sales training needs with those changes)
3. Reinventing the business model ( every aspects of the Yellow Pages business model is under scrutiny, 12-month cycles, etc.)

The session became very interactive when Charles asked the attendees (more than 100) to vote on three different statements.

The first one, “In 5 years, what percentage of total directory revenue will be generated by performance-based advertising programs?”, produced some interesting results. 35% think that between 25% and 50% of total directory revenues (print and online) will be performance-based. That’s what I think as well. It will be a combo of preserving current advertisers with some advertiser gain as well.

The second question, “in 5 years, what percentage of directory advertisers will be handled entirely by an automated/self-service sales channel?”, also produced some interesting results. 37% think that it will be “between 10% and 25%”. I’m not a big believer in self-service in the short/medium term. I think it will be “less than 10%”.

The third question, “In 5 years, what percentage of large metro print directories will be produced in a size similar to that of a mini or companion?”, did not produce a clear winner. For my readers not in the industry, mini or companion directories (also called neighborhood directories in Canada) are smaller, more geo-focused print directories. Based on my personal experience, I always feel my neighborhood directory is always more relevant than the big Montreal-East book and when I use a print directory, I usually use the neighborhood edition. I think publishers will have no choice but to embrace this new format/model. I voted for “between 50% and 75%”.

The conference is being held at the Hyatt Regency Grand Cypress in Orlando. You can register here.

I will be attending the conference. If you want to meet, make sure we connect by e-mail (sprovencher AT praizedmedia.com) beforehand to schedule some quality time.

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.

A few weeks ago, RHD announced that Sean Greene, their SVP of corporate strategy and business development, had just been named SVP of interactive. Greene who will be moving to Santa Monica to lead the interactive team (the former Business.com team) brings 17 years of print and online local search experience with him. I caught up with Greene a few days ago to discuss this announcement. 

Sebastien Provencher: Tell me about yourself and your new role.

Sean Greene: I joined RHD in 1993 starting in sales, after which I worked in a variety of roles in marketing and sales planning. In 2003, I became responsible for interactive strategy (after spending two years at a startup). At the time, BestRedYP (seen here on Archive.org) was already running. I orchestrated the acquisitions of LocalLaunch and Business.com who were strategic both from a technology and resource perspective. In my new role, I will have leadership of the whole online team, about 150 people altogether: 125 in Santa Monica (the Business.com office) and the rest in Denver.

SP: What are you bringing to the online team?

SG: Interestingly enough, I’m viewed as the Internet guy within RHD but I’m viewed as the print guy in Santa Monica. This gives me a unique understanding of print & online but also a strong knowledge of Yellow Pages sales. This allows me to put in perspective the need of both consumers and advertisers.

SP: What are the current strengths of RHD’s online offer?

SG: I really like Dex Net, our search marketing product. Our goal is to find the best click we can get for advertisers.The Dex brand (and DexKnows.com) is also really strong in all our markets. Finally, our advertiser relationships with 500,000+ advertisers is also a major strength of our organization. 

SP: What are your main opportunities for improvements?

SG: Our legacy around fixed-fee products (print and Internet). Those products don’t scale well (upwards and downwards) when usage volume change and, because of that, we’ve been hurt by recent cyclical and secular changes.

SP: What is your short term and long term focus?

SG: Short term: educating both sides of the fence. On the traditional channel side, we need to let them know what products and features we’re working on. On the Business.com side, we need to make sure the team understands how sales works. Longer term: I want to bring greater synergies between  consumer & advertiser products, to integrate our story more tightly. We also want to continue working to attract online talent in our office in Santa Monica. We’ve been voted three years in a row one of the ”best places to work in Los Angeles” by the LA Business Journal and we want to continue remaining an employer of choice for online talent.

SP: what do you think of social media as an opportunity?

SG: We’ve been looking at it but I’m disappointed we’re not further along. For example, Work.com is all about consumer generated content and could be a great entry into social media. Next phase: how do we integrate social media in our big opportunities.

SP: What about mobile?

SG: I’m now very bullish on mobile and I hadn’t been until now. The arrival of the iPhone, the ability to develop applications that solve the needs of the person have changed that. I think we will soon learn from mobile and incorporate those thoughts in our Web strategy.

SP: One last question. I’m curious to know, why don’t you split print and online revenues in your quarterly conference calls?

SG: As I mentioned before, our strategy is to offer the best leads to our advertisers wherever it’s coming from. It could be print, online, voice, Dex Net, etc. We provide local marketing solutions to SMEs. It wouldn’t serve our long term vision to split revenues that way.

SP: Thank you!

On a related note, RHD reported second quarter 2009 results last week. Net revenue was $566 million , down 15% second quarter 2008. Adjusted EBITDA in the quarter was $293 million , down 20 percent from second quarter 2008. 

Fascinating morning at this first day of the EADP conference in Barcelona. We heard from a variety of top executives from European directory publishers but two of them stood out: Donat Rétif, CEO of Truvo (the multi-country publisher), and Alon Raz, VP head of customer division, at Golden Pages in Israël.

Rétif started the morning with sobering thoughts about the industry. He talked about the fact that directory publishers are facing both cyclical and structural challenges. In terms of structural challenges, he mentioned:

1. Online will not offset Print decline (usage, advertisers and revenues). He added that “the print product will not prosper in its current form” and “online directories will not be enough” to offset loss of usage and revenues in print.
2. ROI is becoming increasingly important
3. Large and small accounts behave differently (larger accounts are impacted much more)
4. Significant variation in user needs, usage and revenue across categories
5. The importance of search continues to grow

For cyclical challenges, he discussed about the fact that the recession means lower ad spending by SMEs, that print is more heavily impacted than online, and that everyone in the industry (including search engines) are feeling the pain.

Based on those thoughts, Rétif said the focus at Truvo is currently oriented around:

1. User focus to grow user engagement and usage
2. A rich network of traffic (first and third party)
3. It’s about leads, clicks and contacts provided to advertisers (the end of the paid inclusion model basically)
4. Simplicity in an increasingly complex world will be a differentiator

But this means having to radically transform organizations. In specific company departments, it means:

• Sales needs to go from “product focused and infrequent customer contact” to “cross-media and related service adviser with account management”
• Fulfillment needs to go from “shallow and with limited customer contact” to “deep expertise, frequent customer content with upselling”
• Online needs to go from “an add-on to a print business – peripheral to the business” to “drives the organization, people, technology, process, etc.”
• People (HR) needs to go from “majority of staff print focused and difficulties in recruiting” to “all online aware and skilled. Talent management focused”
• IT needs to go from “closed and proprietary approach built on print systems” to “open (ex: APIs) and flexible approach enabling speed designed for new world”
• Finance needs to go from “terms & processes designed for printed product” to “flexible payment terms with supporting systems and processes”

Rétif’s concluded by saying the directory publishing industry has strong assets (database, high customer retention, large experienced sales force, well-known brands, a collection of highly used directory products) but rapid and significant change is needed, moving from advertiser/product focus to customer focus, deepening the content and distributing it in a variety of ways, adapting sales and fulfillment capabilities and deploying agile technology and processes to support change.

Later in the morning, Elon Raz from Golden Pages, came on stage to tell us about their experience and it was eerily similar to what the Truvo CEO told us. Raz started by saying he thought Golden Pages had executed perfectly  on their online strategy but even with that execution, there was a problem, and that problem was the future. In terms of revenues, print is going down quickly, around 15-20% per year. Online average revenue per advertiser (ARPA) is far lower than print ARPA, large customers are not willing anymore to pay what they have paid in the past (large customers ARPA is down 36% in 2 years), and in many cases, directories are perceived as inferior to other media channels (ex: Google). He added that “the online business cannot compensate the loss of the print” .

They’re now deploying what they call a Second Step strategy involving these two elements:

1. Value: create it, measure & manage it, communicate it
2. New game: establish a new category of revenues, prepare it and attack

To change the rules of the game, they need to enter new territories while leveraging their assets. They consider their assets to be their sales force (1000 meetings/day), their customers (40K), their database (260K listings) and their brand. Golden Pages is good at “selling advertising”, “talking to plumbers” and “managing a sales force”. To some surprise, they clearly put a stake in the ground and declared their biggest competitive threat was Google. Most publishers say the relationship with Google is coopetitive but I think what Raz said openly what is said behind closed doors at most directory publishers, that the competitive aspects of Google are starting to outweigh the cooperative side.

So, where are they going? They’re going to enter what they call “the advertising area”, by selling customers an entire advertising solution (SEO/SEM, YP, radio, newspaper, direct mail, etc.).

Why are they doing it?

• The advertising market for SMEs is unaddressed. Only large firms work with ad agencies.
• Google is not active in that field in Israel (focused solely on AdWords).
• It’s a huge market, approx. 3 times Golden Pages sales volume.
• It’s natural, they possess the relevant assets.
• Gaining a leading position may strengthen their relationship with customers

They intend to become the largest advertising agency in Israel. The sense of urgency is there. As Raz said “shifting to online is insufficient! The Yellow Pages business alone cannot sustain the shift from print to other means. We have to be where Google isn’t. We have to bind the customer with services. Unless we change, on the long run, we are doomed to disappear. We could become irrelevant on an horizon of 5 to 7 years”

What it means: Wow. First time I hear directory publisher executives openly say that online directories revenues will not be sufficient to cover the loss of print revenues and that the future is possibly at risk. I’m a firm believer though that online revenues at directory publishers can cover the loss of print revenues but they need to be much more aggressive and much more innovative with their online initiatives, to build up usage on their own network of sites. They also obviously need to continue aggregating traffic from third party and re-sell it ad-network-like.  Elon Raz says publishers should go “where Google isn’t”. I agree but as I said in this post, publishers should go where Google is thinking of going (and where the online market is growing) and in my mind, that’s the real-time world and social media. As Rétif said, “Get prepared now to take advantage of the economic recovery and recognize we will be operating in a changed world”.

Last Friday, the exec team at Seat Pagine Gialle presented their 2009-2011 plan to financial analysts. I just read through the presentation and here are the interesting highlights:

2008 Overview:

• Difficult year 2008 for the group (total revenues are down 4.8%) but they met their ebitda guidance (nonetheless down 6.6%)
• In Italy, print revenues were down 1.1% but online revenues were up 18.4%. Online revenues represent more than 15% of all Italian revenues.
• Interestingly, Seat experienced explosive online revenue growth (+27%) in Q3 and Q4 2008 because of new Internet offers launched in September. I believe those new products are priority placement and SEO/SEM offers (see slide 10 of this presentation).
• Online product gross margins (72%) are almost as high as print margins (75%)

Usage and advertiser data:

• 22M print users
• 11M online users
• 500M look-ups per year (print & online)
• 500,000 advertisers

Ongoing strategy:

• Their main strategy: “Invest in the Italian core business and protect Seat’s strong cash flow generation to position the Group for successful refinancing of debt in 2011″. It could be summed up as “Italy and Online” + “International assets not core”.
• 2011: they expect Internet revenues to be higher than 25% of total revenues
• Online usage will be driven by improved functionalities, SEO and branding
• Online revenues will grow through product innovation and new salespeople
• Move to pay-for-performance in their voice product

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.

In  a op-ed column titled “While Detroit Slept“  in the New York Times this morning, Thomas Friedman talks about the US auto industry on the eve of a massive government bailout.  He says:

As I think about our bailing out Detroit, I can’t help but reflect on what, in my view, is the most important rule of business in today’s integrated and digitized global market, where knowledge and innovation tools are so widely distributed. It’s this: Whatever can be done, will be done. The only question is will it be done by you or to you. Just don’t think it won’t be done. If you have an idea in Detroit or Tennessee, promise me that you’ll pursue it, because someone in Denmark or Tel Aviv will do so a second later.

What it means: The troubles of the US car industry remind me of the issues facing traditional media today. US car manufacturers have (had?) a very profitable product line (SUVs, trucks), media publishers have a very profitable product line (print, TV, Radio).  Along comes a very disruptive environment created by a perfect storm of elements (credit crunch + high price of gas + lack of innovation in smaller cars & renewable energy technologies) and it creates a death spiral requiring government interventions to save jobs and companies.

Traditional media is also potentially at risk and might be facing that same perfect storm in the near future. Elements like high growth of Internet usage & revenues, slow decline in offline reader/viewership, high level of debt in many media companies, lack of innovation online (in some cases) and a negative perception (TV is dead, Newspapers are dead, Yellow Pages are dead, etc.) introduce challenges, that combined together make it difficult to surmount. I believe media publishers need to work on two fronts to avoid this situation: 1) they need to invest massively in online & mobile, increase innovation, reward risk-taking and allow project failures (but fail quickly if needed). 2) they also need to win the PR/communications war. Media need to embrace the Web, join the online conversations, prop-up successes but admit failures as well. I’m a firm believer in (and a staunch defender of) traditional media but the time for action is now!