Thursday, May 16, 2013

Amazon's Waters Could Flood Google

Jeff Jordan, a partner at Andreessen Horowitz with the Midas touch, recently opined that’s e-commerce capabilities and successes represent a meaningful threat to Google’s product-search-related advertising business.

I will take Jeff’s thesis — with which I fundamentally agree — one step (maybe even more) further by saying that I believe is one of the few companies that has the ambition, permission, structure, and, maybe most important, data, to actually beat Google at its own game.

As an Internet equity research analyst from 1996-2009 (go ahead... throw your drink on your screen and curse me loudly enough that the barista hears you...), I had a front seat to The Show.  I covered from its days as “just” a bookseller and Google when it was still a private company, in addition to eBay, Yahoo!, Excite,, Netflix, Omniture, aQuantive, CNET, E*TRADE, and many other industry-defining companies.

From the earliest days, it was clear to me (and a few others, obviously) that was no ordinary company, at any level.  However, three attributes set it (far) apart in my mind:

  1. Vision and ambition that were orders of magnitude beyond those of other teams that I encountered (until, that is, I met Google);
  2. A cult-like dedication to customer experience / satisfaction that permeated every decision made by every person at the company; and,
  3. A business model that not only valued long-term cash flow and absolute profit potential, but also deemed near-term profits and profit margin largely irrelevant.

Individually, these characteristics have been powerful; in combination, they have been revolutionary.  Jeff Bezos’ worldview gave his entire team permission — in fact, it gave them the mandate — to think Big, with a capital “B.”  Customers’ pure delight with every interaction gave the company permission to sell (almost) anything to (almost) anyone.  And, finally, management’s clarity of financial intent (i.e., to perpetually focus on long-term potential) has, from day one, conditioned shareholders / Wall Street to expect a business that will forever be amorphous and unpredictable, with razor-thin margins.

Liberated from more typical corporate constraints, has evolved like few other companies in history — from its humble origins as an online bookstore into: Amazon Elastic Cloud Compute, Amazon Marketplace, Amazon Flexible Payments Service, state-of-the-art warehouses (~70) everywhere, Amazon Cloud Player, AmazonFresh, Amazon Mechanical Turk, Amazon Prime, A9, Amazon Simple Storage Service,, Silk, Amazon Cloud Drive, Zappos, Amazon CloudFront, Kindle...

Sound familiar?  It should, because this transformation mirrors that of Google, itself, which began as “just” a search engine company focused on “organizing the world’s information,” and has now become: Gmail, Maps, Apps, Drive, Chrome, Android, Motorola, YouTube, Wallet, Voice, Google Cloud Storage, Shopping, Chromebook, Google App Engine, Google+...

While not perfectly matching each other solution-for-solution, and Google now find themselves overlapping across, and competing within, most major categories of Internet-fueled technology and business.  SaaS.  Hardware.  e-Commerce.  IaaS.  Enterprise.  Media.  Consumer.  Applications.  Browsers.  Storage.  Payments.  Consumer.  Tablets...

And, yet, for all these evolutions and comparisons and similarities and overlaps, I actually think there’s one final aspect to’s business with which Google cannot (yet) directly compete, and which may prove to be the difference-maker in this faux-ish battle: Data.

With +17 years of history and hundreds of millions of transactions across almost every category of goods, now has massive quantities of data about the actual buying habits of tens, if not hundreds, of millions of consumers around the globe.  Not just what people are searching for (Google, though actually has it too).  Not just what people “like” (“like” that, Facebook).  Not just what people want (Pinterest, though actually has it too).  Not just what people tweet about (Twitter).  But, the items that people actually pay for with their own hard-earned dollars!

Armed with this unique transaction- and SKU-specific data, at scale, has the potential to become one of, if not the most signficant advertising platforms in the world, in my view — matching, if not besting, Google.

Look at it this way: if advertisers pay Google $44 billion per year for connecting them with consumers that it oftentimes thinks have interest in their product(s), what might those same advertisers be willing to pay for connecting them with people they know are interested in their products (or those of their competitors, or those in which they will soon have interest...)?

For instance, do you think Volvo, Toyota, Lexus, Ford, et al., might be willing to pay a small fortune to be introduced to an individual in Huntington Beach, CA, who suddenly begins buying newborn diapers by the pallet?  What about Gymboree?  Gerbers?  Whole Foods?  Safeway?  Fab?  Gap?  Pottery Barn?  Ross?  Home Depot?...

Similarly, how much interest might be generated among home decor vendors, local service providers (e.g., physicians, athletic clubs, veterinarians), home maintenance vendors, etc., by a change in shipping and billing information for one of’s long-time customers, whose pattern of purchases are highly suggestive (remember, has developed one of the best predictive commerce models in the world for its own e-commerce franchise) of a home with at least one child and one dog, an avid athlete / runner / yogini, with a taste for gourmet cooking and a passion for gardening, among other attributes?

And these hypotheticals say absolutely nothing of the extraodinary value could (theoretically) deliver to its customers / partners by sharing with them relevant online transaction activity that might follow said advertisements, effectively offering a closed loop marketing environment unlike any other.

By some accounts, has (finally) started focusing on the business potential of advertising.  For years, it has run ads on its own sites.  Then, in late-2010, the company also began serving advertisements on others’ sites, introducing what is, in effect, a full-fledged online advertising network.  But, these are just warm-ups in my mind — methodically experimenting (as is its custom) and purposefully tiptoeing around the edges of its potential.

I’m convinced the day will come — sooner rather than later — when unleashes its data and announces itself as an advertising powerhouse.  And, when it does, I think the gloves officially come off and the real battle with Google commences.

Wednesday, May 15, 2013

The Android Worm Keeps Eating Apple's Core

Android, it seems, is the worm that continues to eat away at Apple's core.

According to Gartner, Android-based handsets outsold iOS-based handsets 4-to-1 on a worldwide basis in Q1:2013, up from a ratio of about 2.5-to-1 in Q1:2012.  As such, Android accounted for 74% of global smartphone sales last quarter, up from 57% in Q1:2012, while iOS accounted for just 18%, down from ~23% last year.

Apple bulls / fans (and even some critics) will likely race to highlight that: Apple didn't have a major new release last quarter; tablet sales should be weighed in this discussion; the installed base of iOS devices should be taken into account; developers still generate more revenue through iOS than Android; and, that Apple continues to generate the majority of the industry's profit, among other defenses.  

Blah.  Blah.  Blah.

All very true; unfortunately, though, also largely irrelevant going forward, given the alarming rate at which consumers worldwide are speaking with their wallets and selecting Android handsets over iOS handsets.  With just a few more quarters like this, coupled with the cumulative effect of similar such sales data over the past 2-3 years and the likely coming wave of Android-based tablets, it is a given (to me, anyway) that Android will be soon be effectively ubiquitous around the globe.

In the world of technology platforms, ubiquity matters (a lot) when developers, manufacturers, etc., are considering future products / solutions.

And, so, I will reiterate the view I've held for some time now: the mobile battle that Apple started, first with the launch of iPod in 2001 and then moved into hyperdrive with the introduction of iPhone and iPad in 2007 and 2010, respectively, is over (or, will be over shortly), and Google / Android is the victor.

Make no mistake, Apple will clearly continue to play a prominent role in the industry and maintain leadership in some respects.  It will also continue to boast a large installed base and a substantial number of loyalists and devotees.  But, the company's days of dominance, let alone being an effective monopolist, are behind it.

To this point, I urge pundits, analysts, and investors to get their heads wrapped around one simple notion: Apple's product cycle and performance between 2001-2012 was a once-in-a-generation event.  In my view, no company in history has had (or, likely, will soon have) so many successive "grand slams" as did Apple with iPod, iTunes, Mac, iOS, iPhone and, finally, iPad.  The company's hardware, software, and "it-just-works" approach to integration absolutely annihilated existing competition and ignited massive new markets in which Apple had a multiyear near-monopoly and from which Apple was able to generate once-in-a-generation revenue growth and profitability.

As unfair as it may be, the inevitable comparisons to those days are going to be bleak for Apple for some time.  The hard reality is that the company's future — even under the best of circumstances — will likely reflect diminished influence and declining revenue (perhaps substantially so), with the prospect of shrinking margins to boot.

To make matters worse for Apple, I think the company is poorly positioned for the battleground of tomorrow: Web (or, cloud) services that function like utilities — seamlessly, across all devices, across all operating systems, all the time — at low or no incremental cost.

As discussed in prior post on One Blind Squirrel, “Welcome to Google’s Playground, Apple,”  the increasing importance of Web services substantially diminishes the value of Apple’s closed-loop hardware/software core, while simultaneously highlighting the strengths of Google’s business.  To this end, Web services are Google's lifeblood, and the company prints money, either directly or indirectly, from use of many of these cloud-based services, even if those services are accessed via an Apple device (e.g., Maps or Gmail for iOS).  Apple, on the other hand, is almost at ground zero and, as a result, may be forced to acquire a string of services that have proven themselves in the hands of consumers at scale.

Fun days for Apple, I know.  But, hey, at least it's not Dell!

Tuesday, May 7, 2013

Throwing Sand In Apple's Eye

Yesterday at the playground, Google threw a handful of sand in Apple’s eye.

With a subtle, yet powerful update to its Gmail for iOS app, links to YouTube, Google Maps and Chrome now go directly to those relevant apps (if installed), instead of the mobile web.

In my view, this is an absolutely brilliant backdoor play through which Google can not only neutralize Apple, but also leverage Apple’s tremendous success to its own benefit, by enhancing the experience of Google’s dedicated users, deepening loyalty to Google’s own products, and driving incremental revenue for Google.

Perhaps more important, we see yesterday’s Gmail for iOS update as a textbook example of why we think Google will emerge victorious (at Apple’s expense) in the battleground of tomorrow, Web services.

As discussed in our March 14, 2013, post, “Welcome to Google’s Playground, Apple,” we think mobile hardware and core OS functionality have largely reached a near-term point of peak innovation; as a result, the product itself will become effectively transparent to the end user, with attention, instead, shifting to the Web (or, cloud) services/content that those devices allow easy access to on an anywhere, anytime basis.

Unfortunately for Apple, this shift substantially diminishes the value of its closed-loop hardware/software core, while simultaneously highlighting the strengths of Google’s business.  To this end, almost everything Google has done since inception has focused on anywhere, anytime cloud services that function like utilities — seamlessly, across all devices, across all operating systems, all the time — at low or no incremental cost, in the face of stiff competition. Moreover, Google absolutely prints money, either directly or indirectly, from use of many of these cloud-based services, even if those services are accessed via an Apple device (e.g., Gmail for iOS).  Apple, on the other hand, is almost at ground zero.

We continue to think that for Apple to compete broadly on the battleground of tomorrow, it must quickly introduce a broad spectrum of high-impact, high-value, mass-consumption Web services that function seamlessly across all vendors, all OSs, and all devices.  And, the only way I see it doing so expeditiously and successfully is through acquisition — buying services that have already proven themselves in the hands of consumers at scale.

If Apple doesn’t, it risks seeing its precious hardware turned into little more than access devices for Google’s services, even as it continues losing marketshare to Google’s own Android-based hardware devices, which do an even better job of accessing Google’s services.

Seems like a slightly less painful lose-lose to me.

Wednesday, May 1, 2013

The Economics of Passion at Scale

Pinterest is a three-year-old start-up with what is rumored to be no revenue to date.  Zero.  In fact, by all accounts, it hasn’t even attempted to generate revenue yet.  In three years.  Hard to fathom in this day and age, isn’t it?

And, yet, some of the sharpest minds in the venture capital community are so confident in Pinterest’s team and business that they recently invested in the company at an eye-popping valuation of $2.5 billion.  Yes, billion!

If you were involved in the Internet economy of the late-1990’s, as was I, you may be rolling your eyes right about now and muttering to yourself about, Kozmo, Webvan,, govWorks,, eToys, and all the other so-called-companies that were, for one brief moment in time, valued as if they had discovered the cure to cancer, only to be out of business a few short quarters later.  Ahh... the memories.

Logically assuming that Pinterest’s investors share many of the same recent memories (or, more aptly, nightmares), what could be so compelling about the company and opportunity that would justify their support of such a lofty valuation this time around?

In short, I believe it is the economics of passion at scale.

Pinterest, in its own words, is “a tool for collecting and organizing things you love (italics added for emphasis).”  By pinning images from around the Web to their own board(s) or browse others’ pinboards for images (which can then be “liked” or “re-pinned” to their own board(s)), users are able to create, manage, share, and discover highly personalized image collections that define their passions.

Vintage fashion.  Wind surfing.  Gourmet cooking.  Disneyana.  Digital photography.  Wedding gowns.  Home decor.  Camping.  Italian design.  Rolex watches.  Travel planning.  Architecture.  Mid-century furniture.  Urban farming.  Knitting.  Cross-Fit...  The list of people’s passions is literally endless; and, Pinterest helps its users collect, organize, and maintain all of them.  On their own (or, with the help of the broader community).  In granular, image- and/or SKU-specific detail.

Self-identified passionistas on a product-by-product basis — are you kidding?  I’m not sure a marketer or merchant could dream of more fertile ground among a set of unknown people, short of seeing a prospective customer standing directly in front of items on a shelf, with cash already in hand.  And, I’m not even convinced that would be more compelling on a long-term basis.

What could possibly be better?  How about having that level of insight into the interests and intents and aspirations of not hundreds of thousands, but tens of millions, of people per month!  According to press reports, Pinterest is already doing just that, hosting roughly 30 million unique monthly visitors who are generating more than 2.5 billion page views, the majority of which are likely coming through little more than domestic word-of-mouth promotion.

Fast forward three years and I think it’s entirely reasonable to assume that Pinterest is successful at growing its user base and traffic flows by 5x, fueled by existing users continuing to build out their identities, waves of more mainstream domestic users finally catching on, and contributions from millions of new pinners (their word, not mine) in overseas markets.  That’s a lot of passion under one roof!  

On the business side of the house, passion pays.  Extremely well.

Advertising, alone, could generate several hundred million dollars of revenue per year.  Let’s say, hypothetically, that Pinterest follows in the footsteps of virtually every sizable media company on the planet, by introducing advertisements of some sort across its pages in the next few years.  With marketers across every vertical likely salivating at the prospect of reaching into the company’s massive, impassioned, and finely segmentable audience, it seems more than plausible that advertising rates across the company’s site could be at least 50% higher (if not considerably more) than the current industry average.  Accordingly, with 12.5 billion page views per month (three years from now) and a site-wide CPM of, say, $4.00, Pinterest would be generating advertising revenue of roughly $50 million per month, or about $600 million per year.

And yet, despite this sum, the more intriguing revenue opportunity at Pinterest lay in its role as a direct facilitator of online commerce.  

Passions, as we all know, cost money — lots of it, over extended periods of time; and, it is money that we are, on some level, actually excited to spend.  So, whether it’s a weekend warrior who pins a Burton snowboard, or a hobbyist portrait photographer pinning a Zeiss lens, or a budding interior decorator who pins the perfect accent table on Fab, Pinterest has the potential to become an economic kingmaker, when these enthusiasts transition into consumers looking to purchase the very goods/services that bring their passions to life.

To appreciate the financial implications of Pinterest’s role in the transaction cycle, think of the company as a massive affiliate that gets paid for delivering customers to online merchants.  If just ~3% of its +150 million users (three years from now) decide to indulge in their passions by clicking from a "want-to-have" product image on one of their own Pinterest boards to a relevant online merchant, the company could claim a direct role in driving 4.5 million transactions per month.  Assuming an average transaction size of $200 (remember, people are buying their passions, not everyday staples), Pinterest’s users would account for ~$900 million worth of monthly purchases.  Were the company to receive a 7.0% affiliate “take” / lead fee / commission on these sales, it would generate transactional revenue of about $60 million per month, or $720 million per year.

As if annual revenue of $1.3 billion (from just two sources) weren’t enough, the company’s margin profile has the potential to be the envy of most.  Based on my +15 years of experience evaluating a wide variety of online Marketplace business models, it wouldn’t surprise me if Pinterest were able to sustain gross margins of +90% and adjusted EBITDA margins comfortably in excess of 25% (even while continuing to invest heavily in future growth).  At these levels, the company would generate adjusted EBITDA of approximately $325 million per year.

So... were Pinterest’s investors ultimately wise to value the company at $2.5 billion?  No comment.  Will the company generate any annual revenue, let alone $1.3 billion, and adjusted EBITDA of $325 million in a few short years?  I don't know.  Will Pinterest eventually be worth $5 million or $50 billion?  I can’t wait to find out.

Those purposeful vagaries aside, though, I clearly see the underpinnings of a company with tremendous potential and, if I squint just enough, a business that could be the driver of billions of dollars of passion-fueled online commerce each year — and that’s a position that few companies ever even have the chance to dream about.