Facebook needs a channel into TV-style video

Contact:Scott Denne

Hidden behind a 49% jump in its topline last quarter sits a do-or-die moment for Facebook – the social media company must develop a play in long-form video or risk its dominant position in mobile media. Facebook’s main product, its newsfeed, currently provides consumers with a tool to brush away the excess moments of the day. But its competitors are building out destination sites for longer video and threatening to pull audiences on mobile devices toward a product that Facebook doesn’t have.

For now, its strong position in short-form video continues to boost the company’s revenue. Facebook’s first-quarter ad revenue jumped 51% year over year despite increasing ad load by just 32%, pointing to a rising mix of video content and pricier video ads, although the signs point toward consumers spending more time with longer video.

The number of people watching long-form video on mobile is rising from an already significant base. According to 451 Research’s Voice of the Connected User Landscape Q4 2016 survey, 28% of people watch TV shows on their smartphone, up slightly from six months earlier, with 25% and 9%, respectively, saying they watch movies and sports on their smartphones. Few are doing so on Facebook, as barely one out of 10 cited Facebook Live as a source of video consumption, placing it behind YouTube by a factor of six and nearly a full percentage point behind Crackle.

In all likelihood, video consumption on Facebook outpaces Crackle, yet its low ranking in our surveys highlights that few people view Facebook as a destination for video, despite the copious amount of short clips and user-generated video on its app. The fight for longer video is intensifying fast. For proof, look no further than Amazon’s recent interception of NFL streaming rights from Twitter by paying 5x last year’s price, or the $6bn Netflix plans to spend this year on original content. Such outlays are causing a flood of TV-style programming on digital that’s likely to continue to attract audiences as the quality and amount of that content expands.

For its part, Facebook is pushing its way into this market through numerous product developments aimed at consumers, publishers and advertisers, including working with TV studios to develop content, launching an app for smart TVs and rolling out new video ad formats, such as ad breaks in Facebook Live. But it’s made its task all the more difficult by eroding trust among publishers with past measurement errors.

In some ways, Facebook’s current challenge resembles the shift to mobile that it successfully navigated in the months following its 2012 IPO – consumer attention then, as now, was moving to a new medium and Facebook had to keep pace. But in that first transformation, Facebook could rely on network effects to keep consumers in place while it built out mobile products. For this transition, Facebook will have to contort itself into a destination for active content consumption from the passive one it operates today.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

‘Eyeballing’ the farcical Snap IPO

Contact: Brenon Daly 

It might seem a bit out of step to quote the father of communism when looking at the capital markets, but Karl Marx could well have been speaking about the recent IPOs by social networking companies when he said that history repeats itself, first as tragedy and then as farce. For the tragedy, we have only to look at Twitter, which went public in late 2013. The company arrived on Wall Street full of Facebook-inspired promise, only to dramatically bleed out three-quarters of its value since then.

Now, in the latest version of Facebook’s IPO, we have last week’s debut of Snap. And, true to Marx’s admonition, this offering is indeed farcical. The six-year-old company has convinced investors that every dollar it brings in revenue this year is somehow three times more valuable than a dollar that Facebook brings in. Following its frothy offering, Snap is valued at more than $30bn, or 30 times projected 2017 sales. For comparison, Facebook trades at closer to 10x projected sales. And never mind that Snap sometimes spends more than a dollar to take in that dollar in revenue, while Facebook mints money.

Snap’s absurd valuation stands out even more when we look at its basic business: the company was created on ephemera. Disappearing messages represent a moment-in-time form of communication that people will use until something else catches their eye. (Similarly, people will play Farmville on their phones until they get hooked on another game.) Some of that is already registering at the company, which has seen its growth of daily users slow to a Twitter-like low-single-digit percentage. Any slowing audience growth represents a huge problem for a business that’s based on ‘eyeballs.’

And, to be clear, the farcical metric of ‘eyeballs’ is a key measure at Snap. In its SEC filing, the company leads its pitch to investors with its mission statement followed immediately by a whimsical chart of the growth in users of its service. It places that graphic at the very front of the book, even ahead of the prospectus’ table of contents and far earlier than any mention of how costly that growth has been or even what growth might look like in the future at Snap. But so far, that hasn’t stopped the company from selling on Wall Street.

Pricing out an alternate reality for Salesforce-LinkedIn

Contact: Brenon Daly

An enterprise software giant trumpets its acquisition of an online site that has collected millions of profiles of business professionals that it plans to use to make its applications ‘smarter’ and its users more productive. We’re talking about Microsoft’s blockbuster purchase of LinkedIn this week, right? Actually, we’re not.

Instead, we’re going back about a half-dozen years – and shaving several zeros off the price tag – to look at Salesforce’s $142m pickup of Jigsaw Data in April 2010. Jigsaw, which built a sort of business directory from crowdsourced information, isn’t exactly comparable to LinkedIn because it mostly lacked LinkedIn’s networking component and because the ultimate source of information for the profiles differed at the two sites. However, the rationale for the two deals lines up almost identically, and the division that Salesforce created on the back of the Jigsaw buy (Data.com) runs under the tagline that could be lifted directly from LinkedIn: ‘The right business connection is just a click away.’

We were thinking back on Jigsaw’s acquisition – which, at the time, stood as the largest transaction by Salesforce – as reports emerged that the SaaS giant had been bidding for LinkedIn, but ultimately came up short against Microsoft. Our first reaction: Of course Benioff & Co. had been in the frame. After all, the two high-profile companies have been increasingly going after each other, with Salesforce adding a social network function (The Corner) to the directory business at Data.com and LinkedIn launching its CRM product (Sales Navigator). And, not to be cynical, even if it didn’t want to buy LinkedIn outright, why wouldn’t Salesforce use the due-diligence process to gain a little competitive intelligence about its rival?

As we thought more about Salesforce’s M&A, we started penciling out an alternate scenario from the spring of 2010, one in which the company passed on Jigsaw and instead went right to the top, acquiring LinkedIn. To be clear, this requires us to make a fair number of assumptions as we revise history with a rather broad brush. Further, our ‘what might have been’ look glosses over huge potential snags, such as the fact that Salesforce only had $1.7bn in cash at the time, and leaves out the whole issue of integrating LinkedIn.

Nonetheless, with all of those disclaimers about our bit of blue-sky thinking, here’s the bottom line on the hypothetical Salesforce-LinkedIn pairing at the turn of the decade: It probably could have gotten done at one-third the cost that Microsoft says it will pay. To put a number on it, we calculate that Salesforce could have spent roughly $9bn for LinkedIn back in 2010, rather than the $26bn that Microsoft is handing over.

Our back-of-the envelope math is, admittedly, based on relatively selective metrics. But here are the basics: At the time of the Jigsaw deal (April 2010), fast-growing LinkedIn had about $200m in sales and 150 million total members. If we apply the roughly $60 per member that Microsoft paid for LinkedIn ($26bn/433 million members = $60/member), then LinkedIn’s 150 million members would have been valued at $9bn. (Incidentally, that valuation exactly matches LinkedIn’s closing-day market cap on its IPO a year later, in May 2011.)

On the other hand, if we use a revenue multiple, the hypothetical valuation of a much-smaller LinkedIn drops significantly. Microsoft paid about 8x trailing sales, which would give the 2010-vintage LinkedIn, with its $200m in sales, a valuation of just $1.6bn. (We would add that other valuation metrics using net income or EBITDA don’t make much sense because LinkedIn was basically breaking even at the time, throwing off only a few tens of millions of dollars in cash.)

However, LinkedIn would certainly have commanded a double-digit price-to-sales multiple because it was doubling revenue every year at the time. (LinkedIn finished 2010 with $243m in revenue and 2011 with over $500m in sales, while Salesforce was increasing revenue only about 20%, although it was north of $1bn at the time.) By any metric, LinkedIn would have garnered a platinum bid from Salesforce in our hypothetical pairing, as surely as it got one from Microsoft. But on an absolute basis, the CRM giant would have gotten a bargain compared to Microsoft.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Adobe buys Livefyre, strengthening its digital marketing push with social CRM

Contact: Mark Fontecchio

Adobe plans to acquire Livefyre for an undisclosed amount. Livefyre is best known as a commenting platform for sites like CNN and The Huffington Post. More crucially, it provides a social comment aggregation product that businesses can use to better engage with customers. Adobe plans to integrate the technology broadly across its Marketing Cloud to help spur growth in its digital marketing unit, which accounts for about 30% of the company’s total revenue.

The deal highlights the relevance that social media is gaining for digital marketing platforms, but there are still challenges to overcome, such as quantifying the impact of social media on a company’s overall marketing efforts. That uncertainty has led to mostly sporadic M&A. Aside from a brief burst of activity a half-decade ago, highlighted by transactions such as Salesforce’s purchases of Radian6 and Buddy Media, deal flow in the social CRM market has come in dribs and drabs, according to 451 Research’s M&A KnowledgeBase. Most have been smaller transactions, such as Sprinklr’s reach for Get Satisfaction last year (see our estimate for that deal here). Livefyre has 155 employees and had raised $67m in venture funding, so it stands as one of the larger players in the sector.

As we wrote last year, the social media management space is on a growth trajectory that we expect to reach $2.5bn by 2019, more than twice the $1.1bn we saw in 2015. The growth comes as social media management vendors are evolving beyond simple digital marketing toward business functions such as customer service. Livefyre fits the bill, as do recent announcements by Facebook and LINE.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

What happened to Alphabet’s M&A bets?

Contact: Brenon Daly

As part of an effort to provide more strategic focus as well as financial transparency, Google reorganized and renamed itself Alphabet last October. In the half-year since that change, the company has lived up to the ‘alpha’ part of its new moniker, handily outperforming the Nasdaq, which is flat for the period. But when it comes to ‘bet,’ it hasn’t been placing nearly as many M&A wagers as it used to.

So far in 2016, the once-prolific buyer has announced just two acquisitions, according to 451 Research’s M&A KnowledgeBase. That’s down substantially from the average of six purchases that Google/Alphabet has announced during the same period in each of the years over the past half-decade. (Nor do we expect this year’s totals to be bumped up by Google buying Yahoo, as has been rumored. That pairing would roughly be the sporting world’s equivalent of the Golden State Warriors nabbing the Los Angeles Lakers.)

The ‘alpha’ part of Alphabet is, of course, the Google Internet business, which includes the money-minting search engine, YouTube, Android and other digital units. This division generates virtually all of the overall company’s revenue and is the primary reason why Alphabet is the second-most-valuable tech vendor in the world, with a market cap of over a half-trillion dollars. For more on the company’s progress in dominating the digital world, tune in on Thursday for its Q1 financial report and forecast.

Google/Alphabet M&A

Period Number of announced transactions
January 1-April 18, 2016 2
January 1-April 18, 2015 6
January 1-April 18, 2014 8
January 1-April 18, 2013 4
January 1-April 18, 2012 4
January 1-April 18, 2011 8

Source: 451 Research’s M&A KnowledgeBase

The Glow of social media businesses

Contact: Scott Denne

ADTZ Group picks up Glow in the latest instance of a tie-up of two social media firms. Social media is arguably the most potent means for marketers to reach new audiences and engage with known customers. Despite that, there’s limited potential to build a business around this channel: there are few companies reaching significant scale and exits so far have run the (limited) gamut from strategic tuck-ins to outright fire sales.

London-based Glow was one of dozens of players that launched with a platform to enable marketers to make their Facebook ad campaigns more efficient. A few years ago, Facebook was lacking some basic functionality that gave Glow and its peers an opening. Lately, though, the ad formats and new features – including custom audience targeting, the ability to integrate broad product catalogs and a growing suite of ad formats – have limited the need for such tools, which has made growth hard to come by for many vendors servicing this ecosystem.

In the past two weeks, there have been three tuck-ins in this space. Last week, Rakuten Marketing scooped up Manifest Commerce, a provider of a social ad platform for retailers with noticeable overlap with Facebook’s Dynamic Product Ads service (launched a year ago). And in mid-February, Sprinklr inked its eighth deal with the purchase of Postano, a four-year-old social analytics firm with $3m in trailing revenue.

Glow’s focus was on direct-response advertisers and it had built several tools that go beyond what Facebook offers today, such as data integration for building custom audiences and reach into Twitter. Indeed, all companies serving this market struggle with finding the right balance between offering tools that add value beyond what the core platforms provide. If they go too far afield, they narrow the addressable market – if they don’t go far enough, they risk seeing their opportunity swallowed up by Facebook’s next product announcement.

Though the opportunity to launch many of these businesses came from a deficit of product functionality on the part of Facebook, we believe the best opportunity for these vendors today is to provide a range of workflow tools and services (both media buying and strategy) to link multiple social networks. Our surveys show that social media is gaining a leading share of people’s attention; however, if Facebook continues to be the overwhelmingly dominant platform – and from an advertisers’ perspective, it certainly is – there might be little any company can do to build a sustainable, scalable business around social.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.