From New York to Nicosia

The typically obscure and technical world of back-end online video processing is having its day in the press today as Google just bought ON2, the makers of the ‘VP’ line of codecs, one of the two leading encoding standards for web video (H.264 is the other). I realize I have already lost 90% of the audience which is why ‘video encoding’ is something that belongs in the back-room with the techies.

Dan Frommer at Alley Insider is excited about the acquisition.

Dan Rayburn, on the other hand, thinks this is no big deal, because, after all this is just a codec and H.264 is quite well embedded in a lot of sites and devices, so a small drop in royalties or a small improvement in quality by open-sourcing VP8 is not going to drive any real adoption.

Dan R is right on all the short-term implications, but I think there is a bigger, longer-term strategic angle here.

My guess is that Google bought On2 to support new HTML 5 standard. HTML 5 has the ability to natively support video in the browser without having a plug-in like Flash or Silverlight. In the long-term, this is a good thing for the web, but obviously Microsoft (with Silverlight) and Adobe (with Flash) don’t love it.

HTML 5 video right now is hindered by the fact that the default open-source video codec (Theora) is, quite frankly, lousy. It is based on VP3, an old ON2 technology that was contributed to the open-source community and is not up to par with modern codecs like VP8 or H.264.

I suspect what you will see is that Google open-sources VP8, not because this will get them an awesome controlling platform but because it will support HTML 5 video and *weaken* Microsoft’s or Adobe’s ability to be a platform for video.

If you parse this sentence from their announcement they are all but telegraphing this.

Because we spend a lot of time working to make the overall web experience better for users, we think that video compression technology should be a part of the web platform.

At VideoPublishing.com, we think this is overall good news. Over time, encoding and delivery will eventually fade into the background and innovation will be about managing workflow and interactivity with video, because that, ultimately is the promise of web video.

UPDATE: Some good follow-on comments by Tim Siglin here:

From TechCrunch

Boy, $8M is a lot of money for this type of early stage thing (they couldn’t have done it with say $3M to start? I guess it is time to “scale fast” again…) Still one of these how-to sites will be a big winner

The site is launching with professionally-shot instructional videos on everything from “How to Paint a Wall” (see embed below) and “How to Groom Your Cat” to “How to Get Laid.” There is a familiar formula for each one: The Howcast graphic, an intro explaining what you’ll need for the task at a hand, and step-by-step instructions explained in a voiceover. The video player on the site lets you jump to different chapters or steps, lets you zoom in for a better look, and provides the transcript as well. Viewers can add comments in the form of tips, warnings, and facts to each video. And the Flash-based site lets you browse the video directory on the left hand side while you are watching a video without interrupting it or going to a different page.

Great video from a cultural anthropologist for Kansas State University.

The Cypriots modernizing fast!

NAZARETH, Israel (AP) — Dressed in his embroidered robes, the Rev. Andreas Elime steps from the altar of St. Gabriel’s Church and into the view of the Web cams on the church’s marble pillars. His voice fills the empty 250-year-old sanctuary with a Greek Orthodox hymn, while a computer on a nearby pew transmits personal blessings to three Americans thousands of miles away.

Greek orthodox priest Andreas Elime prays near a laptop computer in the Basilica of the Annunciation in the northern Israeli town of Nazareth.

Christian pilgrims have long traveled to the boyhood town of Jesus to seek blessings. Now the Internet can save them the trip.

A service recently launched by Modefine Ltd., a Cyprus company, enables worshippers to log on and watch as a priest utters a prayer for them.

“This takes things to a new level,” said James Martin, a Jesuit priest and associate editor of the Roman Catholic magazine America, who has watched religious trends develop on the Internet. Martin said in a telephone interview that the technology also gives believers a new way to carry out an old practice: asking others to pray for them in sacred place

Full link here

Business.com on the block for 40x + its 1999 “bubble” valuation. That is because the site was developed out…

Business information directory and search enginame Business.com is for sale, reports the Wall Street Journal, and it may fetch as much as $400 million. Investment bank Credit Suisse is representing the company.

The domain name was purchased for $7.5 million back in 1999. Later, the purchase was widely ridiculed – in 1997 the domain was acquired for just $150,000.

Those were the days before CPC ads and parked pages, though, which brought the value of domains up exponentially. The risk paid off. Business.com now has EBITDA of around $15 million/year. A $400 million acquisition price is a 26 multiple on current revenue, which is on the high end of current valuations.

From TechCrunch

Post on TechCrunch summarizing Ebay v. Google dueling parties.

Minor issues blows up into big issue revealing a lot about the underlying tension among practically all the web giants…

Good reasonably accurate article about the second largest domain portfolio in the world. (500K domains v. 700K for Name Media)

Excellent analysis from TechCrunch on the positioning of these three parties…

No time to comment. Just read the article here.

Sorry for the lack of posts but I was at the NAFSA conference, the largest international education conference of the year.

Some quick relevant reading:

Mitt Romney’s PE background comes under scrutiny

Detroit in Play What isn’t?

Private Equity Shuns Tech No More
Private Equity shuns nothing no more…

Google Street View scares and thrills (My opinion: it is both fantastic and inevitable.)

Google pretends to say something, but does not, about how it ranks sites

Decipher your genome for $1,000!

And finally…

The biggest pig I have ever seen

NameMedia gets an positive profile in the NY Times. Domains are becoming mainstream…

Some quotes:

THINK you have a good handle on the Internet economy? Try this one.

What Internet business has raised $120 million in financing in the last year, owns 725,000 Web sites, and has as its chief executive the former head of Primedia and International Data Group?

If you guessed NameMedia, a privately held owner and developer of Web sites based in Waltham, Mass., you take the prize. Otherwise, consider reading on.

…

NameMedia, which began in 1999 as YesDirect, was reintroduced in May 2006 with an undisclosed amount of equity financing from Highland Capital Partners and Summit Partners, two Boston venture capital groups, and more than $100 million in debt financing from Goldman Sachs. The company used part of that money to buy the portfolios of dozens of domain-name consolidators.

…

Youssef Squali, an analyst with the investment firm Jefferies & Company, said NameMedia faces stiff competition, “but I see these guys as the front-runner.” Among other things, Mr. Squali said the profit margin at NameMedia was 40 percent — a number that other industry executives said fairly represents the category over all.

Full article is here.

Coolest thing you will see all day…

http://flickrvision.com/

Great article on Kevin Ham in Business 2.0

Great, long article. Excerpts below:

Kevin Ham is the most powerful dotcom mogul you’ve never heard of, reports Business 2.0 Magazine. Here’s how the master of Web domains built a $300 million empire.

…

Since 2000 he has quietly cobbled together a portfolio of some 300,000 domains that, combined with several other ventures, generate an estimated $70 million a year in revenue.

…

And what few people know is that he’s also the man behind the domain world’s latest scheme: profiting from traffic generated by the millions of people who mistakenly type “.cm” instead of “.com” at the end of a domain name.

….

Ham still buys 30 to 100 names a day, but he’s no longer getting them on the cheap. In fact, he and Schilling, who today maintains a $20 million-a-year portfolio from his home in the Cayman Islands, are often accused of driving up prices.

Take, for example, the $26,250 Ham paid for Fruitgiftbaskets.com, or the $171,250 for Hoteldeals.com. “The amount he will pay is crazy,” says Bob Martin, president of Internet REIT, a domain investment firm that has raised more than $125 million from private investors, including Maveron, the venture firm backed by Starbucks founder Howard Schultz.

Nonsense, Ham says. The names are expensive only if you value them the way people like Martin do. The VCs and bankers, who were late to the domain gold rush, assess names by calculating the pay-per-click ad revenue and attaching a multiple based on how long it would take to pay off the investment.

Viewed that way, Ham’s personal portfolio alone is worth roughly $300 million. But some of Ham’s recent domain purchases would also look silly: They’d take 15 or 20 years just to justify the price, and that assumes continuation of the pay-per-click model.

But Ham is taking a longer view. The Web, he says, is becoming cluttered with parked pages. The model is amazingly efficient — lots of money for little work –but Ham argues that Internet users will soon grow weary of it all.

When Ham buys a domain now, he’s not doing pay-per-click math but rather sizing it up as a potential business. Reinvent Technology aims to turn his most valuable names into mini media companies, based on hundreds of niche categories.

Chart from Valleywag (of all places), showing relative revenue growth or lack thereof between Yahoo and Google. Brutal

Click here for chart

Put’s things in context, doesn’t it?

More detailed financials from WSJ Deal Journal on the economics for Hellman and Friedman.

UPDATE: Turns out we were a little light in calculating Hellman’s take on this deal. The firm, along with a few other investors, put in about $330 million of equity to purchase the company. Adding in $435 million from the previous sale of the business that used to be called Abacus, that brings the total to around $3.5 billion. There’s even a word for this kind of return: A killing.

So we are talking (very roughly) about something in the range of a 8x return in a year and half (once the debt was paid off) and $500M in carry for the GP. Very impressive.

Of course the big loser is this is not Microsoft but the sellers of Double-Click in 2005, who left a few billion dollars on the table…

Google snatches away DoubleClick from Microsoft. At this price, it is a defensive move to keep Microsoft from getting a greater foothold in online advertising (we originally saw prices of $2B or so bandied around), but kudos to Hellman and Friedman who bought the compay for $1.1B in 2005 when it was not obviously underpriced. Very impressive on their part.

The sale was for 10x revenue (!)

Google reached an agreement Friday to acquire DoubleClick, the online advertising company, from two private equity firms for $3.1 billion in cash, the companies announced, an amount that was almost double the $1.65 billion in stock that Google paid for YouTube late last year.

Brief blurb at Dealbook.

Update:

More analysis from Paul Kedrosky
.

How much worse can things get for Microsoft? After having almost certainly begun the DoubleClick bidding, thus putting the online ad company in play, Microsoft has seemingly been outbid — again — by Google.

Some seemingly think the price is vertigo-inducing, working out to something like 30-times DoubleClick’s $100-million in 2006 ad placement revenues, or 12-times this year’s forecast ad revenues of $230m or so. Yoicks! Can you justify that price based on economics? Some people will try, and that is always good fun; others will go on endlessly about the bubble-ish price. Both sides are wasting their time because the more interesting rationale is mostly elsewhere.

To borrow a phrase from Microsoft’s past, this is a brazen attempt to cut off Microsoft’s future air supply. The latter company is losing share in search, failing at ad placement, trying to find a new leg to growth, and generally floundering expensively in these crucial new fast-growing markets. What better way and time for bid-’em-up Brin to stick the knife in deeper every time Microsoft spots a possible life raft than for Google to buy the target acquisition company — like DoubleClick — out from under Microsoft.