After Buying AOL, Verizon Is Going To Have To Confront This Problem Soon…

Tim Armstrong, Chairman and CEO of AOL, talks at a media summit, Thursday, March 10, 2011 in New York. (AP Photo/Mark Lennihan)

Big news today: Verizon is acquiring AOL for $4.4 billion in cash, or $50 per share (on Monday, AOL was $42.59, which means Verizon paid a 17% premium). This deal came right after Goldman Sachs placed a “Sell” rating and $38 price target on AOL, which is basically a hint for its clients to sell the stock (although one could argue that getting AOL for $4.4 billion is a steal given that AOL generated $2.5 billion in revenues last year alone).

Now, the “business” side of the deal makes sense. AOL, under CEO Tim Armstrong, has been steadily building out its ad tech stack. Armstrong wants AOL to become one of the top three biggest players in the realm of online advertising, next to Facebook and Google. It is currently at number 11, and one of the easiest ways it can get to number three is if it uses Verizon’s scale to do that. In exchange, AOL offers Verizon a ready-made ad tech platform that shows a lot of promise. It’s a logical symbiotic relationship. 

But for $4.4 billion, Verizon will also get AOL’s media properties (the biggest being TechCrunch, Engadget and the Huffington Post). That’s a lot of baggage Verizon is not going to want, especially since Verizon most likely only wanted AOL for its ad tech stack and a shot at getting AOL’s 2.1 million dial-up subscribers.

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Ad tech stack refers to the ability for marketers to buy and sell ads using an algorithm, rather than human-to-human interaction. Here’s Bloomberg describing why it’s important: “Automated ad buying is an essential tool for companies such as Verizon as they increasingly offer content over mobile phones and the Internet. Digital marketers are demanding a streamlined buying and selling process — leaving those without a programmatic platform at risk of losing those ad dollars.”

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So, what’s going to happen to those media properties?

(AOL spent a lot of money acquiring these properties. In 2011, the company spent $315 to acquire the Huffington Post.)

The easiest thing to do for AOL would be to absorb these media properties and let them run independently. But that would be a bad idea for Verizon: AOL’s media properties aren’t only not profitable, they’re often operated at a loss too (AOL had more revenue from subscription products in 2014 ($606.5 million) than from display ads ($593.1 million).

Ideologically, owing these media properties would not advance Verizon’s agenda either: the company has tried to own the media narrative before with its own site SugarString, and failed spectacularly in doing so after banning its reporters from writing about certain subjects that made Verizon uncomfortable (NSA, privacy, etc.).

The only logical thing to do is for Verizon to spin out AOL’s media properties.

There are two ways this can happen.

One of the ways Verizon can do so if it spins out the media properties with a third partner (other than AOL and Verizon), such as German publisher Axel Springer, as Re/Code’s Peter Kafka reports.

But there is a more exciting (and possibly profitable!) alternative: Yahoo could buy up AOL’s media properties.

Yahoo, under CEO Marissa Mayer, has developed further and deeper into the content business than her predecessors in an effort to cover its falling search market share across the world.

Today, Yahoo’s editorial team includes star reporters such as David Pogue and Katie Couric (word is on the street that Yahoo is actively pursuing Bill Simmons after his breakup with ESPN late last week).

It has created digital “magazines” for its politics, fashion and tech verticals, among others.

It’s clear: Yahoo is serious about its content business. And if it wants to go all out on the content business, the easiest way to do so would be to absorb AOL media properties’ talented writers and editors, along with the sites’ established brand names.

Doing so would also make it easier for Yahoo to penetrate the content industry of other matured markets, such as China, Korea, and the U.K., where sites like the Huffington Post have already established a strong presence (the Huffington Post generates 1.1 billion views across 9 different markets each year).

If Verizon decides to spin out AOL’s media properties, it could also provide a nice exit for Armstrong, who currently owns 1.9% (~$7.4 million) of AOL (not taking into account the hidden clauses/sweeteners usually thrown into contracts like this one).

Overall, the market seems pretty happy with the deal: AOL shares surged 18% (~$50.26) after the deal was announced.

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UPDATE: Verizon is indeed looking to spin off its flagship Huffington Post content unit, reports Re/Code’s Kara Swisher

Quick summary of what Swisher reported:

  • AOL had been planning to spin off the Huffington Post while negotiating its deal to sell to Verizon.
  • “… talks have been most serious with Axel Springer, the German media conglomerate, but a number of private equity firms have also expressed interest…”
  • Price: $1 billion (this is more than three times what AOL paid for the Huffington Post a few years ago)
  • Will either be a complete sale, or more likely, structured as a joint venture.
  • “AOL’s other content properties are not part of these talks.”

 

The Countdown To Uber’s IPO Starts Now

Uber angry taxi vs

Don’t be surprised if mobile ride hailing startup Uber goes public in the next year and a half.

According to an exclusive report published on the Wall Street Journal earlier today, Uber is planning to raise a $1.5 – 2 billion round by the end of this month, citing people with knowledge of the deal. A later report by the New York Times confirmed the news, and added another interesting fact: instead of using the new funds for expansion purposes like the company usually do, Uber plans to use it for “strategic [purposes], with an eye on partnerships.” With the new funding round, Uber is aiming for a ~$50+ billion valuation, although that number can quickly balloon as Uber talks to more investors.

This new round is interesting for a few reasons.

First of all, it would make Uber the most highly capitalized private startup in the world, beating Chinese smartphone manufacturer Xiaomi (last valued at $45 billion).

Secondly, if Uber’s post-money valuation  reaches or exceeds $50 billion, the company will join Facebook as the only Silicon Valley startups to have attained a $50 billion valuation as private companies.

But the third point should be the most interesting for Uber observers: going public.

Late last year, as we were preparing our huge “State of Uber” post, we talked to a few of Uber’s investors.

They told us a bunch of stuff about the company, but the one notable thing that stuck out was this: most of Uber’s investors expect the company to IPO when it reaches a valuation in the ballpark of $50 – $100 billion. This belief was established based on several factors: Uber’s aggressive foreign expansion, the predicted maturity of current markets and trajectory that the company is headed towards under the guidance of CEO Travis Kalanick.

On average, Uber raises a new round every seven months. Which means that if Uber hits the predicted $50 billion valuation (which I don’t doubt at all that it will) sometime soon, then it would certainly not be too far-fetched to think that Uber might  go public in the next year and a half or so.

As the WSJ highlighted, it is important to note that all current/future investors are/will be investing on Uber’s potential, and not on its current performance (although it has, statistically, been nothing short of spectacular).

When Facebook raised their final round at a $50 billion post-money valuation in early 2011, the valuation was worth about 25 times its prior-year revenue of $2 billion. But given that Uber’s net revenue last year was $400 million, Uber may eventually be worth 120 times its trailing revenue – a legitimate cause of concern for investors who are worried that the company may have taken its eyes off the road of profitability.

Uber’s ubiquitous service currently exist in some 250 markets around the globe, and has secured more than $5 billion in debt and equity financing from investors just five years since inception.

DON’T MISS OUT: The Uber Playbook, Revealed

BONUS: Want to get a marketing job at Uber? Make sure you can answer these tough questions…

Snapchat Is Scrambling To Salvage Its Key Money-Making Product, Discover

snapchat discover failing

Snapchat Discover, the section of the social networking app where brands (such as the Daily Mail and Cosmopolitan) can post short stories and videos, is not performing as well as the company thought it would, we’ve learned exclusively from sources close to the matter.

Earlier this week, The Information‘s Tom Dotan reported that traffic to Discover has been steadily declining, ever since the service launched four months ago.

While viewership to Discover channels was significant in the first few days after the portal’s Jan. 27 launch, it has dropped an average of 30 percent to 50 percent since then, according to two people who’ve seen the traffic data. One media firm with a channel on Discover saw its unique views drop from one million to around 700,000 and is trending downward, according to a person close to the media company.

The repercussions of this decline in traffic could be huge for Snapchat. Snapchat, which is currently valued at $15 billion, has been plagued with the age-old problem facing social media networks since day one: how is it going to monetize and bring in revenue, without being annoying and antagonizing its current user base?

Discover was Snapchat’s answer to that question. With Discover, Snapchat set the price at $100 CPM (cost per 1000 ads shown), which was twice as much as most video ad products can command online, and way more than what publishers can command for banner ads.

For a while, every thing seemed great for Snapchat.

Discover was even hailed as “the biggest thing in news since Twitter.”

But soon enough, the buzz wore off.

Upon seeing a steady decline in views to Discover, Snapchat began an internal investigation into what was going on, specifically focusing on the users’ behavior within the app. The investigation found that most people never went back to the Discover section more than twice (ever since the service launched), and the times they did, they left within a few seconds, often without interacting with the content in the section.

The conclusion Snapchat arrived to was troubling: Discover was facing a user-retention problem, and more importantly, people were not satisfied with the product – most of its traffic had come from accidental swipes and touches.

While the content lineup can be tweaked once the current contract with Snapchat’s media partners expire this June, Snapchat is also looking to revamp the layout of Discover, we’re told by sources with knowledge of the company’s roadmap.

Snapchat is currently looking at a few apps with proven track records of retaining users to inspire its redesign of Discover – one of them being BuzzFeed’s app. We’re also told that the company may switch to a vertical, scrolling layout for its next iteration of Discover, thus ditching its current “button” based layout where users have to specifically pick a media company’s button to view its content.

Snapchat’s competitive product offering to Square’s Cash, Snapcash, is also struggling to gain traction amongst the app’s mostly millennial demographic. With Snapcash, users can securely send money to one another just by typing a $ into the text field and pressing the green button. While the product launched to huge media fanfare, it has since languished according to data viewed by a source.

At a $15 billion valuation, Snapchat is under tremendous pressure to prove itself to investors that it can generate revenue. If it succeeds, the company has the potential to be the next Facebook, at half the amount of time it took Facebook. If it fails, it may very well become the next Twitter.

BURIED: The Biggest Hint From Apple That It’s Making A Car

apple-car

Apple just had an amazing quarter of earnings.

The company, overall, is in great shape in the hands of its CEO, Tim Cook.

The Verge noted in an article that “Tim Cook’s Apple is now worth twice as much as Steve Jobs’ Apple three years after his death, with enough cash to buy all 319 million Americans a $599 stainless steel Watch.”

Here are some numbers from the earnings report, just so you could see how much Apple blew expectations out of the water…

Data compiled by Bloomberg:

  • EPS: $2.33, up 40%, versus $2.16 expected
  • Revenue: $58.01 billion, up 27%, versus $56.03 billion expected
  • iPhone units: 61.2 million, up 40%, versus 58.1 million expected
  • iPhone ASP: $658.53
  • iPad units: 12.62 million, down 23%, versus 13.6 million expected
  • iPad ASP: $430
  • Mac units: 4.56 million versus 4.7 million expected
  • Gross margin: 40.8% versus 39.5% expected
  • Q3 revenue forecast: $46-$48 billion versus $47 billion expected
  • Cash on hand: $194 billion

A table from Apple with all the key product units broken out…

We’ve lightly annotated it to highlight some important points:

Click to zoom in.
Click to zoom in.

Now, these results are great – amazing, in fact.

Apple shareholders love the company now more than ever before.

BUT, we think there’s something very important that Apple included in their earnings report… which the company may or may not have intentionally buried: the fact that Apple’s research and development expenditure had increased 35% from last year.

In the earnings call with analysts, Apple’s CFO Luca Maestri even said that Apple has got no plans to decelerate the company’s outsized R&D budget (emphasis ours):

Katy Huberty from Morgan Stanley: R&D well ahead of revenue, what is driving that? Bigger bets?

Luca: We said several times, look at current product portfolio, we now develop two iPhones, two iPads, we have Apple Watch, we are also developing some core foundational technologies. Also spending ahead of products that generate revenue. When you combine, that is why you see R&D increases year over year. Innovation is core of company. Look at last 2 quarters, revenue growth higher than OP EX growth. Expense to revenue ratio lower than a year ago, some thing we consider competitive.

Make no mistake here: company R&D expenditures don’t just increase 35% over the course of a year, unless it is trying to build an entirely new product category – one that it never had experience building before.

In the case of Apple, that could only mean one product: the Apple Car.

The Car, currently codenamed “Project Titan” within Apple, is rumored to be the company’s first foray into the automobile industry (hardware-wise, excluding Apple’s own CarPlay software), and will feature an electric powered vehicle that takes on the shape of a minivan. Other rumored features include a self-driving mechanism, as well as innovations that would, according to an employee, give “Tesla a run for its money.”

The project is currently led by Apple’s VP of Product Design Steve Zadesky, who, according to earlier reports, has Cook’s permission to recruit as many as 1,000 employees (most of them already working at Apple) for the project. According to Bloomberg‘s Tim Higgins, Apple plans to release the Car in 2020, following a five year development period.

So, there we have it: the reason why Apple’s budget increased 35% y/o/y.

Of course, nothing is confirmed at this point – Apple may even scrape the entire project at the last minute.

But there’s no denying that something huge – revolutionary – is going on at Apple now.

You’re Crazy If You Think The Watch Won’t Be Apple’s Most Profitable Product Ever

10476-2713-140912-Apple_Watch-l

It was just three years in the making…

Quick Look

Here’s the quick summary for those of you who don’t have time to read the next 3,000 words.

The Apple Watch went on sale for pre-orders on April 10, 2015, and the Apple Store tells us that delivery dates for all orders now stretch into summer and beyond. We know that the initial production run of Apple Watch has sold out; what we don’t know is how many Apple Watches that represents. I’ve built a simple model that predicts that the initial run of watches was more than 3 million units and will yield Apple Watch revenues of over $2 billion for the first two weeks of sales. While this figure is smaller than first weekend sales of iPhone 6 and 6 Plus, it dwarfs all other smartwatch sales to date and represents a milestone in wearable sales. The model suggests that while Sport Watch will lead sales in volume, selling 1.8 million units through May 8, Apple Watch will actually lead in revenue during that period, garnering about $900 million versus Sport’s $675 million. I also believe that Apple’s decision to introduce the Edition will be validated by $500 million in sales on only 40,000 units.

While I believe that these figures will be considerably below the number of pre-orders for Apple Watch, I believe Apple did this for an important reason. Apple is offering 38 different models of Apple Watch and it has no order history to go on. Instead of guessing at the right mix of models to manufacture, I believe that while Apple has manufactured a large number of Apple Watch electronics modules, it will perform the final assembly of actual products—the unique combinations of module, case, and band—to order. This approach will allow it to keep inventory costs low and satisfy as many consumers as possible.

The Origins Of This Model

Now the long version.

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Yahoo Isn’t Buying Foursquare

Yahoo Foursquare not in talks

Earlier today, TechCrunch published a report indicating that Yahoo may be in talks to purchase local search and discovery service Foursquare for $900 million. “One source says that the “deal is done” but details are still being ironed out. Others have also confirmed a Yahoo/Foursquare deal is in the frame,” TechCrunch wrote.

However, just a few minutes ago, Peter Kafka of Re/Code debunked TechCrunch‘s report after talking to “multiple people familiar with the companies.” WSJ reporter Doug MacMillan (particularly notable for his direct access to Yahoo CEO Marissa Mayer) also cited a source saying that Yahoo isn’t in talks to buy Foursquare.

Sources The Michael Report have pinged since the news broke  confirmed both Kafka and MacMillan’s account, adding that the rumors originated from Foursquare’s side rather than Yahoo’s.

The Down And Dirty Details Of Hillary Clinton’s Secret Spy Network And Rogue Intel Operation

Hillary Clinton presents the annual Hillary Rodham Clinton Awards for Advancing Women in Peace and Security - DC

Presidential candidate Hillary Clinton recently announced her bid to run in the 2016 presidential election, which would exert the influence of the Clinton dynasty further into the lives of Americans. In fact, Hillary Clinton is such a dominant candidate for the Democratic Party that it has been generally accepted by many in Beltway that she’s not going to have an opponent for the Democratic presidential nomination (senator Elizabeth Warren comes close, but there hasn’t been much indication that she’s planning to run, or if she’s even considering the possibility of it at all – “I’m not running, I’m not running”).

Clinton’s lack of a political opponent from the Democratic party is a double-edged sword: on one hand, her path to the general election is virtually guaranteed… on the other hand, an uncompetitive primary means that if the press wishes to attack a candidate from the Democratic party, there’s only one viable target, and that’s Hillary. Over the last few weeks, we’ve indeed seen this version of the narrative play out in the press, with the resurfacing of Clinton’s old and damaging emails.

The mainstream press chased the original story and milked it for all its worth: that Clinton used a private email instead of a government-issued one during her time as the Secretary of State (for what it’s worth, that email address is HDR22@clintonemail.com), thus violating standard federal record-keeping regulations. Once that story died down, however, a more sinister narrative began to emerge – one that was barely covered by the mainstream press, and one that has a potentially devastating effect on Clinton’s political campaign, not quite unlike how the Watergate scandal affect Nixon’s campaign.

After a deep investigation and reviewing email records available on public domain, we’re now revealing the down and dirty details of Clinton’s secret spy network, which included an off-the-books intel operation, which she directed under the cover of her personal email address.

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