The TMT space
If you follow the TMT space (particularly Internet Media), you might, like me, look forward to the time of year when Kleiner Perkins’ Mary Meeker presents the firm’s Internet Trends. Kleiner is at the forefront of investing in innovation in the Internet space, so it is fair to say that their opinion matters (acknowledging the positive bias, given they have to sell these trends to the public markets eventually). One of the big themes that KPCB points to as a bullish indicator for Internet/mobile media is the discrepancy between media consumption and dollars spent on advertising in those mediums.
% of Time Spent
% of $ Ad Spending
The basic bull case is that eventually $ of ad spending should revert to a mean that matches our actual consumption. Kleiner thinks that if this happens, there is $20 billion of opportunity (revenue) for the companies who hold the leading Internet and mobile platforms. One point of note here, the top three US newspaper companies (The NY Times, McClatchey, and Gannett) only earn roughly $4.5 billion a year in revenue from advertising.
How is the market valuing this opportunity, and is it reasonable?
If you take Kleiner at their word, there is somewhere around $20 billion of advertising revenue for these Internet/mobile properties to go after. The big question then becomes—how much credit is the market giving these properties for their ability to capitalize on this opportunity?
Enterprise Value (in $ billions)
Enterprise Value (in $ billions)
*Note: Per latest private market valuations
The market (public and private) is valuing this group of Internet media advertising platforms and properties at ~ $475 billion (Google makes up a large part of the gross number but they should participate in the trend and are clearly being credited for it at 6x revenue). It is hard to adjust these valuations for current revenue because a good number of those big private names haven’t yet posted financials, but if you look at the public names, they did about ~$51 billion of advertising revenue in the past year. Assuming that the private names trade near or close to the top-end of the range (i.e. 10x revenue), that would add about $1.5 billion to that number. That means that the market is assigning a ton of value to the revenue opportunity. You can play with the numbers to decide what you think they should trade at in steady state, but let’s assume they eventually trade at 2x revenue in maturity. That means that the market is ascribing $240 billion of value for a revenue opportunity of only $20 billion.
What are some other potential issues?
If you are on Facebook or Twitter, and have been for a while, you’ve probably noticed the large step up in advertising that the firms have undertaken over the past few months. For Twitter, this has come in the form promoted “tweets” from companies that get inserted into your newsfeed. Facebook has done a similar thing with the use of the promoted posts, in addition to their sidebar ads.
These actions are necessary to appease their stockholders, but what do their users think about the changes? One of the interesting “missing” data points from Kleiner’s presentation is how media consumption has evolved in terms of number of hours consumed. In other words, are we consuming more media today because we have constant access to it through our mobile device?
Without data to support this assertion, I think it is probably safe to volunteer a yes. One only needs to go to a restaurant or ride the subway to see people glued to their smartphones—trolling Facebook or throwing birds at piles of rocks. Smart phones are taking the place of the private moments we used to have for self-reflection or conversations with friends. But here is the rub—is that time we spend engrossed with a tiny screen really a time where we are open to be advertised to?
Intuitively, the best time to advertise to a person seems to be when they are a) engaged in passive media consumption (radio or television) or b) while they are at the moment of commercial intent (i.e. a Google search). When I am looking at my college roommate’s wedding pictures, it probably isn’t the right time to ask me if I want to buy a new pair of shoes. But that is the challenge many of these new Internet properties face. They’ve had us move our lives online and created these dynamic communities for us to share the details of our lives with our friends that weren’t feasible before. But that doesn’t mean it is necessarily the time to pitch us. The properties that will and have had an easier time are that of Google (commercial intent), Pandora, and Spotify because we are conditioned to be advertised to at those moments.
First, apologies if this weekly thought was a bit all over the place. The ideas discussed above are more wishy-washy than I prefer but I thought they would be fun to explore. To try to summarize what I hope are the key points, I would say:
- The revenue opportunity that Internet media bulls speak about is tangible but likely not as big as they tout. It is also likely that some of the “old” media properties will maintain that share by moving where their audience is
- The valuation being assigned to this opportunity is very optimistic. If you want to make money but take little risk, short a basket of the names (also look at IB reports written on these names for more detail—Yelp and Pandora)
- Another potential flaw with Kleiner’s work could be that the mobile time spent is really more additive to total media hours consumed versus replacement and therefore it is entirely possible that those extra moments are good times for advertising
The Market Realist Take
According to the IAB Internet Advertising Revenue Report, a survey conducted by PricewaterhouseCoopers (or PWC), Internet advertising revenue increased to $20 billion in 1H 2013—up 18% from the revenue for the same period last year. The report stated that search-related revenues accounted for 43% of 2Q 2013 revenue, while mobile revenue totaled 16% of 2Q 2013 revenues. Mobile advertising revenue increased 145% to $3 billion from $1.2 billion in the same period last year.
The mobile Internet advertising market is rapidly growing. Google (GOOG), Facebook (FB), and Yahoo (YHOO) are seeing more consumers accessing services on their mobile devices and tablets, which have lower ad rates than those for desktops. Google said in its recent 10K filing that its margins on advertising revenues from mobile devices and other newer advertising formats are generally lower than those from desktop computers and tablets. It expects this trend to continue to pressure its margins, particularly if it fails to realize the opportunities anticipated with the transition to a dynamic multi-screen environment. In 3Q 2013, Google said the average cost-per-click on its websites and Google network members’ websites decreased approximately 8% compared to 3Q 2012. In a move to sell more ads, Google recently announced a partnership with Facebook in which its DoubleClick service will participate in Facebook Exchange (or FBX). With this partnership in place, Google’s clients will be able to buy inventory on FBX via the DoubleClick service.
Facebook said in 3Q 2013 that its revenue from advertising was $1.80 billion, a 66% increase from the same quarter last year. Mobile advertising revenue represented approximately 49% of advertising revenue for 3Q 2013. It added in its 10K filing that if users increasingly access Facebook mobile products as a substitute for access through personal computers, and if it’s unable to continue to grow mobile revenues or successfully monetize mobile users, or if it incurs excessive expenses in these efforts, its financial performance and ability to grow revenue would be negatively affected.
Pandora (P) saw mobile ad revenues increase 92% to $116 million in 2Q 2014 over the same period last year, becoming the third largest generator of mobile ad revenues in the US, after Google and Facebook. It said in its 10K filing that as its mobile listenership increases, it faces new challenges in optimizing its advertising products for delivery on mobile and other connected device platforms and monetizing inventory generated by listeners using these platforms. It added that the mobile digital advertising market is at an early stage of development, with lower overall spending levels than traditional online advertising markets, and it faces technical challenges due to fragmented platforms and lack of standard audience measurement protocols.
eMarketer estimated in its latest report that Google (GOOG) has a 41.1% share of the US digital ad revenues in 2013, followed by Yahoo (YHOO) with 7.7% and Facebook with 7.1%. In terms of US mobile Internet ad revenue, Google is expected to account for 48.2% in 2013, followed by Facebook (FB) with 15.3% share of the market. YP, Pandora (P), and Twitter are expected to see only slight changes in their market shares this year.