@gordonbowman

What I'm looking forward to in tech this year

• The digital living room. The connected and smart TVs were all the buzz at CES. From Samsung to Microsoft to Google to Roku and others. Yet I think hanging over the head of every announcement was Apple's long rumored TV. The rumors of an Apple TV have been in overdrive ever since Steve Jobs said in an interview that he had "finally cracked it". Did he? Is Apple going to "pull an iPhone" on the cable industry?

• The mobile wallet. The idea that we might be able to use our mobile phones to pay for things offline makes sense. Imagine for a second using your phone to pay for things in stores, coffee shops, taxis, BART, etc. Merging the phone and wallet into one thing seems like a no-brainer. And it’s been happening in places like Japan for years. Will we in the U.S. finally be able to? It's going to take a leader to sort through a lot of mess. To make it happen involves a lot of moving pieces from the handset makers to wireless carriers to banks and credit card companies and finally the retail merchants themselves. Can Google do it with Google Wallet? Will Square try something to push the envelope? 

• The connected car.  Knowing the glacial pace of automotive development, I have been surprised by how quickly automakers have been embracing new technologies in recent years. The dream of a connected car is getting closer to a reality. The announcements out of this year's CES were many: Ford with updates to their Sync Applink, Toytota with Entune, and new releases from Kia, Hyundai and GM. Virtually every car maker is coming on board with new, connected systems after hearing the feedback and demand from consumers. But can the automakers bring the connected car to the masses and not just the high-end, luxury drivers? And can they do so in a simple, safe and easy-to-use way?

• Microsoft & Mobile. Microsoft has been astonishingly late to the mobile party with Windows Phone. Laughably late really. Still dominant in PCs, Microsoft is basically nonexistent in mobile smartphones and tablets ceding the crown to Apple and Google. However, Windows Phone has gotten some rave reviews recently. And through their partnership with Nokia, Microsoft would seem to have the distribution part. The flagship Windows Phone unveiled at CES, the Nokia Lumia 900, seems especially impressive. But does Windows Phone have what it takes to last? Can Microsoft woo app developers? Will it be a Zune (bust) or an XBOX 360 (hit) story for them?

Undoubtedly, these are are all wide open. There are certainly some big ones that I've missed. I mean who would have thought that Google would try to buy Motorola last year?

Some of these may take years to play out. As Bill Gates famously said, 

We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.

Still, there should be significant progress for each of these this year. And it should make for a very exciting year. 

Also: How Square was Almost Named Squirrel

Millenial Media's IPO Filing: 5 big takeaways

I’ve gone through much of Millenial's IPO filing. Here are some key points:

1. Revenue is growing rapidly and its loss is shrinking, but Millenial is not yet profitable.  The company is now doing about $100M of annual revenue, generating $70M in revenue in the first nine months of 2011, from just $6.2M in 2008. While not yet profitable, their net loss improved from $5.4M to $417,000 during the same period.  
2. Millenial is the #2 player in the huge mobile advertising market and its growth is taking away from Apple. The mobile advertising market is forecasted to double this year to $3.3 billion and be a $20.6 billion market by 2015, according to Gartner. And while Google/AdMob is the leader in the market, with nearly a quarter of the market share, Millenial ranks No. 2, with nearly 17% of share. Millenial's growth is also coming at the expense of Apple/iAds, who comes in at No. 3 with 15%. 
3. The mobile app market is just exploding. Gartner forecasts that the total number of downloads from mobile application stores worldwide will increase from 17.7 billion in 2011 to 108.8 billion in 2015. That's a compound annual growth rate of 57%.
4. Millenial is BIG and growing pretty fast. In December 2011, Millennial reached 200 million unique users. They also processed a whopping 40 billion ad impressionsin December too. In terms of apps, more than 28,000 have Millennial integrated across more than 7,000 different mobile device types and models. 
5. The executives at Millennial are all in their late 30's and 40's. I point this out only to highlight that much of Millennial's success so far is because of seasoned executives, not fresh-faced hackers out of college that we so love to glamorize here in Silicon Valley. Speaking of which, chalk up another big win for non Silicon Valley or New York startups -- Millenial is based in Baltimore. 

Bottom Line: Millennial is growing fast and going after an enormous market opportunity. If they can continue executing well, they will be an important, independent player for years to come.

Also: Zynga's IPO Filing: Analyzing the S-1

2012 New Years Resolutions

And here is my full 2011 list with notes. Here's a recap: (6 FAILURES and 4 SUCCESSES): 

3.  Drink more water - SUCCESS!

4.  Read more - FAIL (reason: didn't track, take enough notes)

5.  Write more - FAIL (reason: work/life balance, didn't do much short form posts)

10.  Compete in a marathon and triathlon - FAIL (reason: ran 3 half-marathons but never committed to a full or tri)

Hopefully I can do better in 2012 than I did in 2011. How about you?

The Groupon, Angie's List and Yelp IPOs Proved One Thing: Local Is Really, Really Hard

That's the one thought I'm left with after reading through the S-1's of Groupon, Angie's List, and Yelp.

Let's dig into the numbers. Here's a look at the losses and revenues for each:

• Groupon 
  • FY 2010: a loss of $456M on revenues of $713M. 
  • Q1 2011: a loss of $146M on $644M in revenue.  
• Angie's List
  • FY 2010: a loss of $27.2M on revenues of $59.0M. 
  • First six months of 2011: a loss of $25.8M on $38.6M in revenue. 
• Yelp
  • FY 2010: a loss of $9.51M on revenues of $47.7M. 
  • First nine months of 2011: a loss of $7.6M on $58.4M in revenue. 

And what's the main driver of these losses? 

• Groupon
  • $208M spent on marketing in the first quarter of 2011 and another $178M on sales people and the rest.
• Angie's List
  • $48M spent on marketing (of which $35 million was on TV ads) and $22M on sales.
• Yelp
  • $38.5M, or nearly two-thirds of its revenue, spent on sales and marketing.

So a very large contributing factor to the losses for each of these companies comes down to marketing and sales. The marketing side of this is pure customer acquisition (read: advertising). And the sales side is simply feet on the street. Or warm bodies hitting the phones.

As Rocky Agrawal noted in his analysis of Yelp, there is very stiff competition in the small business advertising market so earning and keeping their business is difficult and expensive. 

Of course, there is a good reason why these companies are putting so many bodies behind the phones: the local advertising market is massive. So massive in fact that when I tried to find a number for the size of the local advertising market I came across a range from $14 Billion all the way up to $130 Billion. Companies realize that "to the winner go the spoils" so they're dedicating lots of resources to local in order to get out ahead of the competition. 

Indeed, local advertising is such a big market that my own company Pandora is aggresively going after it as well. Although it's a slightly different market in that we're going after local radio dollars specifically -- an area where I think we're well primed to gain market share in.

There are of course many strengths in all of the above businesses. The rate that each of them has grown revenues is no easy feat and should be applauded. I am personally a huge fan of Yelp the product. It's by far the most comprehensive source of reviews out there and the best place to go when I want to find a new restaurant. I am no longer a Groupon subscriber because the emails got to be too much but I've been impressed by their efforts with personalization. And I've bought deals through Groupon Now a couple of times too and been happy with the experience. Marc Andreessen nailed it when talking about Groupon recently in his predictions for 2012:

I've always felt that the criticism of Groupon has been unwarranted. People have really underappreciated what Groupon has done, which is they've created a way for small businesses that aren't online to spend money online and be able to dial up customers on demand. That's a really big deal. 

But investors have to look for the strengths AND the weaknesses of a company. One weakness (if big enough) is enough to cripple even the best company despite its many strengths.

The question, that we've asked before, is can these companies get their marketing and sales costs down even in the long term? I'm of the opinion that a more automated solution is the answer. I know it might be sacrilege for a salesperson to say so, but if a local advertiser wants to book $1,000 worth of ads, should they have to go through a sales rep in order to do so? At some point it is just not scalable.

More importantly, the question gets put back startups: is there a better way to do things in local? 

Two Opposing Views on Groupon

Given all the news, I have been thinking a lot about Groupon's business model. When they initially released their their S-1 back in June it generated a lot of dicsussion on the long-term viability of their business model. I would say that most of the comments were negative, with one even going so far as calling Groupon a “Ponzi Scheme.”

However, I was most struck by two opposing views/analyses.

The first was from David Heinemeier Hansson who said to pass on this deal. Hansson argued that it is costing Groupon $1.43 to make $1.00 with no signs of getting any cheaper:

" ... They’re currently losing a staggering $117M per quarter, despite revenues of $644M, they’ll be burning through that cash almost as soon as it hits their account.

... The S-1 tells us the reality is far from that ideal. Groupon had to spend $208M on marketing in the first quarter and another $178M on sales people and the rest. Surprise, surprise — it’s costly to buy enough ads to reach the volume of consumers needed to produce such staggering revenue numbers. Likewise, hiring an army of 7,000-and-counting employees to cold-call every small business owner in the world costs a pretty penny, too.

... Groupon has a great tagline in “the fastest growing company in history,” but don’t underestimate how incredibly risky an investment it still is. There’s a very real chance Groupon will never figure out how to tune the revenue machine enough to produce even a penny of profit. They’re asking the public to value them at an alleged $25 billion (or 1/12th of AAPL, a company that generated $6 billion in real profits last quarter) on a hope, a prayer, a song, and a dance about fantasy metrics.

Buyer beware."

(via shortlogic.tumblr.com)

On the other side, there was Steve Cheney who argued that Groupon is worth $25 Billion. Cheney proposed that Groupon will be the centerpiece for the future of daily deals, a real-time bidding system for remnant inventory at places around you:

" ... And that’s the exact issue in question that people are puking over. Those reading the S1 believe this merchant to customer link is very weak, because Groupon left out key metrics for effective customer acquisition cost and merchant churn. 

That would be a sensible conclusion IF today’s email-based daily deal world were to remain static…  if that were the case all this would be extremely worrisome. But things are changing. We’re entering the next phase for daily deals, something Groupon has been public about: real time bidding on remnant inventory at places around you. 

... So the real end-goal for daily deal sites is in assembling a marketplace and exchange that has enough inventory and users to support these types of new online to offline behaviors at massive scale. And if Groupon doesn’t figure it out, someone else will. There is way more money to be made in offline commerce than there is in online commerce. Everyone knows that by now.

... The reality is we’re in inning 2 or 3 of deals and local commerce. We’re moving away from these static one-time deals toward a marketplace for your attention in the physical world. And someone is going to make a lot of money off of it." 

(via stevecheney.posterous.com)

Both have very good points. Time will tell who is more prescient here. One thing is clear, in going from founding to IPO in under three years, Groupon is the fastest growing company we have seen in a long time. But with all this growth comes lots of losses too:

(via businessinsider.com)

Summary. Is Groupon's business model sustainable? Time will tell. Certainly competitors are coming from all angles: LivingSocial is right on their heels and coming on strong, Google is pushing hard into other markets and national deals, and many are focused on certain niches (Lot18 for wine, CoupTessa for women, etc.). Combine all of these and you only get higher customer acquisition costs and tighter margins. The key will be if these customers become loyal repeat customers or not.

I am with Vinicius Vacanti on his great Yipit follow-up post that it is far too soon to tell.

We should however take a moment to reflect on what they have accomplished in such a short period of time. As Henry Blodget reflected, it is nothing short of remarkable and America does need more companies like Groupon.

I love reading S-1s by the way. You can talk all you want, but the GAAP numbers don't lie. Everything is laid out for all to see. 

Know of any other interesting analyses? Feel free to email any I might be missing. Just shoot me a note or comment below.

The Google Reader Redesign

Google has rolled out a new design to Google Reader. Previously announced, this release primarily includes a new design and Google+ integration. 

My friends and family know that I love Google Reader. Over the years I have curated my RSS feeds carefully into a heirarchy that I like. It's a bit messy but it works for me. I have broken my feeds into folders for the startups, entrepreneurs, VCs, etc. that I like to keep daily tabs on.

The general breakdown is like so:

• Startups
• Entrepreneurs
• Big Tech Companies
• Tech News (Hacker News, Techmeme, PE Hub, etc.)
• Venture Capitalists (Fred Wilson, Ben Horowitz, Mark Suster, etc.)
• Design
• Advertising
• Sales
• Sports 
• Financial news
• Investing/Traders

Essentially I can glance at any folder and get a good snapshot of all the blogs and news that I care about and follow on a regular basis. 

A lot of my reading typically takes place within Google Reader itself. Yes, I'll occasionally click through to look at and engage in the comments or explore other articles. But I like having all of them in one place for quick reading and scanning. Since so much of my reading is done within Google Reader, this redesign was pretty impactful to me. And after playing around with it for a few days, I have to say that I'm dissapointed.

I didn't use the sharing features within Reader all that much (only to push to Twitter really) so I am pretty apathetic to the Google+ integrations. Do I think I'll share more of what I'm reading on Google+ now because of it? Not really. But perhaps it will grow on me. 

My beef is mainly in the visual and UI changes. Now, don't get me wrong. I am all for visual consistency. And I have been really impressed with Google's new design across all of their products, including the new Gmail design. 

However, my sentiments on the Reader redesign echo the feelings of Brian Shih, formerly a project manager for Google Reader. Here's what he had to say on the redesign:

In the name of visual consistency, Google has updated the visual style to match Gmail, Calendar and Docs. I have nothing against visual consistency (and in fact, this something that Google should be doing), but it's as if whoever made the update did so without ever actually using the product to, you know, read something.

When you log into Reader, what the hell do you think your primary objective is? Did you answer "stare at a giant header bar with no real estate saved for actual reading"? Congrats, here's your prize:

Shih also does a comparison of old Reader vs. new Reader so we can see the difference side-by-side down to the first subscription (click to enlarge):

As you can see, there is a lot of more room for text and reading in the old design. On laptops and small screens every pixel is important so this space really matters. 

Another more obvious change is the full grey-ing out of Reader. There are now no blue links within titles or posts which leaves a pretty bland, boring reading experience. 

Most importanly, my favorite feature -- the reading pane -- is now gone. It allowed you to hide the subscriptions panel to let you have the full screen for reading. I loved it. 

I am all for the use white space and a clean design. But Reader is a product built to read and read quickly. The old UI wasn't perfect, but it was designed for the primary use case of reading. I hope Google takes more note of this in their next iteration.

Update: I just came across a post by Kevin Fox, a former UX design lead on Google Reader, who has offered his services to restore and enhance Reader while keeping in line with Google's new visual standards. I hope they take him up on it.

In This Market, What's An Intelligent Investor To Do?

By all accounts, it looks like we are in for a wild week. A lot of factors are coming into play at once giving rise to a lot of uncertainty in the markets:

• The U.S. debt ceiling debacle
• S&P's downgrade of U.S.'s credit rating
• Europe's soveign debt crisis 

With so much uncertainty, it's a good time to reflect on what makes an "intelligent investor." It's been a while since I've posted some reading notes (the last were for Born To Run) and the timing worked out well since I just finished reading The Intelligent Investor by Benjamin Graham. I recommend getting the version with updated commentary by Jason Zweig.

The Intelligent Investor is the one, must-read book that Warren Buffet recommends to any beginner investor. And for good reason. Anyone serious about investing in stocks should give it a read. It gives a great overview of "value investing" -- which shields investors from error during downturns as well as from their greatest enemy, themselves. 

It is also a timely book to keep in mind since this is the year of Internet IPOs. Graham makes the clear distinction between investing and speculating (see below) and regards IPOs in the clear camp of speculating as the companies don't yet have a history of strong performance. It's a challenge I routinely have to remind myself on (see related post: Why I'm Buying LinkedIn).

The markets are in for a bumpy ride this week (and months?) but as with all downturns there will be some very real buying opportunities presented to us. As Warren Buffet famously said, 

We should simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.

I think if you stick to the basic tenets of Graham (high value, strong financial history, low P/E ratio, good dividend, etc.) then you will be fine in the long run. And if you invest intelligently in this downturn, then well, you could even make out like a bandit. 

Here are my notes:

Why Apple Even Now Is Still Very Cheap

On a trailing price to earnings ratio, usually the most used metric in judging what makes a stock expensive, Apple sits at a very reasonable 15.5. Here is a chart of Apple's share price and P/E ratio over the last year:

Let's look at a few other tech companies for comparison:

• Amazon - 92.6
• Netflix - 65.9
• Salesforce - 420.9
• Google - 21.7

And those are just tech stocks. It gets better when you look across other industries. 

The kicker is that Apple's revenue is actually still accelerating. Their revenue growth on a year over year basis is an astounding 82%. 

Where do other tech companies stand?

• Amazon - 51%
• Netflix - 48%
• Google - 32%
• Microsoft - 8%

It's actually kind of silly when you compare these growth rates to the P/E ratios above. With these growth rates, Apple is still very much a growth stock. So it's no suprise that some analysts think its stock will reach $1,000. And he's not the only one. 

Other than these purely financial metrics, here are a few other reasons why I am bullish on Apple:

• iPad's dominance of the tablet market - there still really isn't a “tablet” market — just an iPad market.
• The iPhone has no competition where it matters most — profits. Apple now controls over 66 percent of all the profits in the mobile space.
• iCloud - the first reviews in are positive. iCould should drive people to purchase even more on iTunes.
• The new Macbook Airs are just plain sick.
• China - Apple is rumored to be partnering with China Mobile, the world's largest mobile carrier, offering the iPhone 5 to their over 600mm customers 

With all these bullish signs going Apple's way and looking at the stock's fundamentals, it is clear that Apple is still dirt cheap. 

Needless to say, I am buying. If the institutions / big boys want it badly, then I want it badly too. I plan on buying and holding while also trading the swings. In fact, just yesterday I picked up some Jan '12 option calls. 

To the folks that say, "oh I don't have a lot of money to invest and you need a lot of money to buy Apple for it to be worth your while", I say that's simply not true. It doesn't matter about the share price, just the percentage gain. You could buy one share at $400 and if it goes up to $500 you have still made 25% on your dollars in. And honestly I don't see a surer thing in the market. 

Mark Pincus and the role of Game Mechanics in Startups

I was talking with a friend over the weekend about Zynga's filing for IPO. We were discussing Zynga's impressive business model but the conversation quickly shifted to Mark Pincus and the impact that he has had on the startup world. Pincus is an idol to many startup entrepreneurs and for good reason. He has likely been the single biggest source of inspiration behind the role of game mechanics in software.

Game mechanics in startups, also known as gamification, is the notion that game elements such as points or levels can be used in software to increase engagement and elicit a desired response from a user. These game elements make applications much more engaging and addicting. (The best recent example I can think of is Turntable.fm's successful social engagement loop.) Every entrepreneur should think long and hard about game mechanics and feedback loops if they want to make software that people keep coming back to over and over again.

Here are three must-reads for entrepreneurs wanting to learn more about the role of game mechanics in startups: 

• Bing Gordon, former EA exec and venture capitalist at KPCB, on how Every Startup CEO Should Understand Gamification. Here are the slides:

• Wired's article on Harnessing the Power of Feedback Loops. My favorite quote from the article:

So feedback loops work. Why? Why does putting our own data in front of us somehow compel us to act? ... Feedback loops are how we learn, whether we call it trial and error or course correction. In so many areas of life, we succeed when we have some sense of where we stand and some evaluation of our progress. Indeed, we tend to crave this sort of information; it’s something we viscerally want to know, good or bad. As Stanford’s Bandura put it, “People are proactive, aspiring organisms.” Feedback taps into those aspirations.

• And last but not least, Stanford Entrepreneurship Corner's video from 2009 with both Mark Pincus and Bing Gordon. It's an oldie but is still one of the most insightful lectures I have seen.

Zynga's IPO Filing: Analyzing the S-1

In the year of Internet IPOs, social gaming juggernaut Zynga finally filed for its IPO today. So we finally get to get a good look at its financials. And they are strong ... to quite strong. 

Here's a quick snapshot:

• Total 2010 Revenues: $597mm
• First Quarter 2011 Revenues: $235mm 
• Cash and Cash Equivalents: $996mm
• Operating cash flow: $103mm

Revenues have grown at an incredible pace, up 392% last year alone. Nearly 95% of the company's revenue comes from selling virtual goods, which has increased 127% between Q1 2010 and Q1 2011. The profit margins on these virtual goods is good at 28% but not as high as some were forcasting (~40-50%). Turns out that there is still a lot of R&D, sales and overhead costs that go into making highly addicting, successful games. 

All this adds up to good things for the most important numbers for investors, profits: 

• Total 2010 Net Income: $90mm
• First Quarter 2011 Net Income: $12mm

They also have a TON of cash stockpiled up, to the tune of almost $1 billion. As Dustin Curtis noted, if Zynga's revenue dropped to zero right now and their costs remained constant, the company would not go bankrupt until June, 2012. In short, they have enough cash on hand that they don't really need to go public right now. I think they are absolutely right to take advantage of the hot IPO market though. 

Certainly there are risks. Zynga is quick to acknowledge the importance of Facebook to its business model, saying that it generates "substantially all of our revenue and players through the Facebook platform." Indeed, Facebook is mentioned over 204 times through Zynga's S-1. 

Here are some other numbers that stood out to me:

• 62 million - Daily Active Users
• 236 million - Monthly Active Users
• 38,000 - virtual item are created every second
• 2 billion - minutes a day spent on Zynga games

My favorite part of the S-1 though was when Zynga founder and CEO Mark Pincus leads the prospectus off with a personal letter, which I think is a great touch:

At Zynga, we feel a personal connection to our games through our friends and family. I love that my brother in-law, who has five kids and no free time, religiously plays our game Words with Friends.... My kids decided a few months ago that peek-a-boo was their favorite game. While it's unlikely we can improve upon this classic, I look forward to playing Zynga games with them very soon. When they enter high school there's no doubt that they'll search on Google, they'll share with their friends on Facebook and they'll probably do a lot of shopping on Amazon. And I'm planning for Zynga to be there when they want to play.

via sec.gov

By the way, have I mentioned that I really love S-1s? You can talk all you want, but the GAAP numbers don't lie. Everything is laid out for all to see. Know of any other interesting analyses of their S-1? Feel free to email any I might be missing. Just shoot me a note or comment below.