Myth Busters

In an article in Silicon Valley Watcher, BlueLithium "burst[s] the myth of contextual ads."

The conventional wisdom, as proposed by Google et al, is that placing advertising on a web page in its context gets the best results. Mortgage ads on mortgage pages, etc. In fact, Google recommends to its AdSense partners that Google ads should blend into the page, same colors etc.

BlueLithium, the online ad network, says that this isn't true when it comes to serving ads based on users' behavior. Its BL Labs research division found that out-of-context ads perform better ...

Picking Apart the VC Model

Check out Matt's most recent post on Here's an excerpt:

We may be best-served to return to the old days of venture capital with smaller funds, earlier stages, smaller investments and more hands-on VCs. At a time when companies are more capital-efficient than ever, some firms have become too large to make appropriately modest investments. Their model can force the GP to invest too much money at each deal and sit on too many boards to truly add value.

No Fooling

The Motley Fool weighs in on Internap's acquisition of VitalStream.

... Internap, long known for handling bandwidth, will blend VitalStream's network into its own, which would, at least in theory, substitute for the Akamai services it is selling. And that seems to be a pretty strong business. SEC filings show that Internap derived $5.2 million, or 11.8%, of its revenue in the current quarter from partners. What's more, that business was up 29.4% year over year.

Meanwhile, VitalStream has been flourishing. Revenue and gross profit have risen by a compound annual growth rate of 52.4% and 47.2%, respectively, over the past three years. And a recent deal for Eonstreams put the company front and center in enabling streamed video advertising.

So, yeah, this deal poses problems for Akamai, but they're minor in comparison with the overall opportunity. Accustream media research reports that total video streams over the Web have increased to 18 billion last year from 284.6 million during 1998. That's an average growth rate of -- wait for it -- 70% (!) annually.

Internap To Acquire VitalStream

ATLANTA – October 12, 2006 Internap Network Services Corporation (NASDAQ: INAP), a leading provider of performance network services over the Internet, today announced it has reached a definitive agreement to acquire VitalStream Holdings, Inc. (Nasdaq: VSTH). VitalStream is a leader in audio and video streaming services and a global provider of integrated rich media content delivery services that enable businesses to broadcast digital media content to worldwide audiences via the Internet.

“The marketplace for content delivery services is rapidly expanding as the needs for companies to integrate streaming audio and video into their Web presence become more critical and more complex. The combination of VitalStream’s content delivery services and our high performance intelligent route control solutions positions us to create the market leading platform for distribution of rich media content and advertising” said James P. DeBlasio, chief executive officer of Internap. “We will offer our combined customers a wider range of complementary products providing peak website performance, global scalability and new revenue opportunities including content monetization and on-line advertising. Together, we expect to become a formidable force in the rapidly growing streaming media and content delivery market.”

Under the terms of the transaction, Internap will issue approximately 11.9 million shares of common stock in respect of outstanding VitalStream common shares, which will represent approximately 26% of the combined company’s shares. This is an exchange ratio of 0.5132 Internap shares for every VitalStream share. In addition, Internap will assume VitalStream’s currently outstanding stock option plans. Based on the closing price of Internap’s stock on October 11, 2006, the transaction is valued at an aggregate purchase price of approximately $217 million. The acquisition is expected to close by the first quarter of 2007.

Read the full press release here.

Do the Math

Interesting article in The Wall Street Journal on the economic rationale behind Google's purchase of YouTube. [Subscription required.]

Google paid about $23 per YouTube unique visitor, 10 cents per trailing 12-month page views and 10 cents per trailing 12-month minutes of use, Bear Stearns analyst Robert Peck said. In comparison, Peck said, Google trades at 14 cents per trailing 12-month page views and 37 cents per trailing 12-month minutes of use.

"This is reasonable in our view, given Google's longer operating history and its more favorable earnings and free cash flow profile," Peck wrote in a research note. YouTube, which was only launched in 2005, gets about 34 million unique visitors each month, according to Nielsen/NetRatings.

... Peck also compared the YouTube deal to Google's partnership with MySpace and the $1 billion price tag that Facebook reportedly is seeking. In terms of unique visitors, YouTube is priced at a premium to the MySpace deal - which is only a partnership, not an acquisition - but at a discount to Facebook. On page views and times online, YouTube is priced at a premium to both.

... Citigroup analyst Mark Mahaney projected YouTube generating $224 million in 2007 revenue and $112 million in earnings before interest, taxes, depreciation and amortization, which would be a percentage of his 2007 Google estimates for $10 billion in revenue and $6.4 billion in Ebitda.

Mahaney noted that the $1.65 billion price tag valued YouTube at 14.7 times Ebitda, below the 19 times 2007 enterprise value/Ebitda multiple that Google currently trades at.

"Not bad," Mahaney said. Citigroup has provided banking services to Google.

Social Networks Splinter

The Wall Street Journal wonders today whether the social networking world is beginning to splinter. [Registration required.]

Last month, Piczo attracted 10.2 million unique visitors, compared with Facebook's 15.5 million visitors, according to comScore World Metrix, a Web-tracking division of comScore Networks Inc. Piczo is also the No. 1 social-networking site in Canada, according to Chief Executive Jeremy Verba. The site's success has puzzled even its own founder, former software developer Jim Conning. "I didn't wake up one day and say, 'I'm going to start a Web site for teenage girls,'" the 40-year-old says.

The rise of these social-networking sites is another sign of the shifting tastes on the Internet, as niche audiences flock to new alternatives to MySpace and Facebook. That potentially spells trouble for those two incumbents.

The proliferation of these social-networking sites also comes as deal-making in the sector heats up. Big media and Internet companies, eager to gain more access to the young people who gravitate to social-networking sites, have recently eyed companies like Facebook. Facebook is in serious discussions to sell itself to Yahoo for an amount that could approach $1 billion. And last year, Rupert Murdoch's News Corp. bought MySpace for $650 million and quickly turned the site into a lucrative ad and promotional machine.

For now, however, the new sites are taking a modest approach to attracting visitors. Instead of trying to get people to ditch their MySpace and Facebook accounts, they're persuading kids to sign up for a third or fourth social-networking site, along with the ones they already use. "People used to pop up and say, 'We're a better MySpace,'" says Ben Bajarin, an analyst at the Campbell, Calif., research firm Creative Strategies Inc. "Now, all those sites have started to say, 'Well, we can't displace MySpace -- but we're complementary to MySpace.'"

This kind of evolution is inevitable, as the proliferation of cable television channels suggests, and it was one reason why we decided to invest in Real Girls Media, a digital network created by women for women. (There were many other reasons, of course, the principal one being our faith in Kate Everett-Thorp, RGM's CEO.) Glam - through its GlamSpace offshoot - also appeals to a very targeted niche of consumers who are interested in fashion.

Yes, there are too many social networks, but many of these are taking a completely undifferentiated approach to the market. A large number of these sites are chasing the same gaggle of high school and college students who are perfectly happy using MySpace and Facebook. RGM and Glam are definitely taking a different approach.