Monthly Archives

January 2007

TV channels on their way out – you heard it here first

By | IPTV, PCTV, TV, Video | 10 Comments

Back in November I wrote about Why internet TV will mean the end for channels.

A Tiscali survey reported in NMA found that

63% of UK adults would prefer to watch on-demand programmes via their broadband connection rather than waiting for them on traditional TV

and that

42% of those surveyed believe that traditional TV schedules will be made obsolete within the next ten years

It was a big survey at 1,469 people.


The Long Tail theory is playing out well for music lovers

By | Aggregators, MySpace, Social networks | 6 Comments

Broken CD

Background – anyone unfamiliar with Chris Anderson’s Long Tail Theory can check out his book, his original Wired article (which gets it down to five pages).

I was reading in the Economist this morning about the death of the UK record store. HMV and Virgin are both struggling, and Music Zone with 104 shops has gone into administration.

Part of the story is that supermarkets retailing the top 100 bestsellers now account for a quarter of all album sales. (This fat head apparently accounts for a third of the album market, so the supermarkets seem to have captured the lions share.)

The other part of the story is, of course, the internet. Etailers like Amazon now account for 11% of the market, legal download sites for 3%, and illegal downloads are on top of this. All the internet channels are growing fast, while the overall music market is shrinking as rising download sales can’t compensate for falling DVD sales.

One of the conclusions of the Economist article is that all this is bad news for small record labels and those who love their music. The argument is these companies rely on record shops to stock their music and knowledgeable shop workers to recommend them to punters.

I am not so sure about that.

It ignores the other side of music on the web – sites like LastFM, Pandora and parts of Myspace and Bebo are all about music discovery.

These sites are offering new ways for people to find new music – either via automated recommendations on LastFM or Pandora, or via recommendations from friends (in the internet sense of the word ‘friend’) with similar taste on the social networks.  I would say that these tools are better at helping lovers of niche music find what they are looking for – the internet is great at aggregating small niches.  Indeed I have friends that were struggling to get sales via record shops who now excitedly show me their MySpace sites and the traction they are getting (one of them even reads this blog – Hello Scott!).

So far from getting left in the cold by the demise of the record shop I think that niche music lovers (and I am one) are leaving record shops because they are better served on the internet.  More choice, lower prices and greater convenience.

Over at the other end of the market, mainstream music lovers are also doing well.  They get their music much cheaper from Tescos than they ever did from HMV.

This is the long tail theory playing out in practice, and it is good for consumers.  It is not good for legacy distribution networks – from record shops to record labels.  For music artists, I think it is a mixed blessing.  Some have very successfully embraced the internet (look at Lilly Allen – warning, this link is to her MySpace site which isn’t exactly easy on the eye!) but many others feel they are suffering from a lack of copyright protection.

As an interesting aside – I’m not sure why, but whilst record shops are in decline, book shops are in resurgence.

Consumer internet – the changing nature of the game

By | 3D, Blogging, Business models, Entrepreneurs, MySpace, Venture Capital, Web2.0 | 2 Comments

I have been thinking for some time that the extreme capital efficiency of many web2.0 businesses is a feature of where we are in the cycle and will start to come under pressure as the sector matures.  So when Max Bleyleben – in his post on Web2.0 bubble debate in full swing pointed me to Tom Evslin on Fractals of Change writing about how marketing costs will go up I decided to post about it.
Tom’s main point is that before the blogosphere got busy it was easy for companies to get themselves noticed for relatively small amounts of money, but now that is getting harder and is starting to require more money.
I agree with that wholeheartedly – one of the reasons I have been able to achieve some success with this blog is that I was one of the first European venture capital blogs, and the first to post something pretty much every day.
Marketing into a void is easy.
Tom also hints that development costs may start to rise.  One of the features of the web2.0 phenomenon has been the use of open source software to launch beta services quickly and cheaply.  A lot of these services have been great steps forward, but are still primitive when compared with where we might end up.  Think about the early blogging tools or the challenges in setting up some of the early personal home page sites.
These services got fantastic traction because they were light years better than the alternative (which was often ‘do it yourself’).  Then they improved based on user feedback and were able to bootstrap themselves very effectively.
The next generation of consumer internet services might need to have more features and a more polished service to get that initial traction – if so that will mean more development time, and more money.
Factoring in an increased need for marketing spend makes the problem worse.  Getting good value out of a marketing campaign means getting the timing right – and the temptation for many will be to delay the marketing campaign until they feel really good about the product – further increasing the cash requirements.
I am generalising a lot here.  Many new consumer internet services will be in new areas and their challenges will be less.  But many will be seeking to challenge the likes of MySpace and Bebo, for example maybe by offering a more immersive 3D type experience.  Doing that will cost money.
I am describing a change in the way consumer internet companies are built and funded and I will have a look at some of the implications of that in a later post.

Euro venture returns to lead the asset class?

By | Entrepreneurs, Esprit, Venice Project | 2 Comments

According to data just out from the European Venture Capital Association Euro venture returns are looking like they might soon be category leading.  By Euro I mean UK and Europe. 

I posted back in October about how European Venture is starting to hold its own.  In that post I cited a Silicon Valley Bank study which showed that our top funds are doing as well as top US funds and that in Europe we have had more than our fair share of 10x exits.  This information warranted a post because for years European venture results have trailed US venture results.

Similarly European venture results have trailed European buyout results – but I made the point that the winds of change were blowing our way – the mid market buyout market has already passed its peak and the big ticket LBO market is looking decidedly toppy.

The new data from EVCA shows that European venture may already be the best performing category:

  • The rolling one year IRR for 2005 (latest year available) was 36.5% for venture and 31.7% for buyouts.
  • Since 2000 Euro venture returns have been better than US venture – (IRR of minus 3.0% versus minus 6.7%.

I have only cited one year rolling IRR figures, and obviously it is fund returns over 5-10 years that will count in the end, but the big picture trends are coming our way.  I would also argue that it is difficult to draw conclusions looking back over the last 5-10 years. European venture capital is still a young industry – we only really got going in the late nineties and since then we have had one crazy bubble, one huge tech recession and only now are we in a period of relative normality. 

The other obvious point is that even though our returns since 2000 are better than our American cousins, they are still negative.  I think that will change though.  The high positive rolling one-year IRR figure augurs well and when I look at our own fund here at Esprit and those funds where I have friends and know how they are getting on, I am confident that the current vintages will do well.  It is simply a great time to be building and investing in European companies.

Also interesting is that the best returns come from larger funds – €500m-1bn for buyouts and €100-250m for venture.

FMCG ad spend yet to come to the web – 2007 the year?

By | Advertising, Esprit, MySpace, New Media, Social networks, Venice Project | No Comments

Online Advertising - turn up the heat

The strength of the internet advertising market is well documented (The Internet Advertising Bureau puts the UK online ad market at just shy of £1bn for H106 and growing at 40%).  It is rare to see a large market with this sort of growth, and the good news is that it has still got a long way to go.  30-35% of media consumption is on the internet, and that is way ahead of the 10-12% of media spend that is online. The growth in online ad spend will continue until they are more or less matched. 

The strength of the market was one of the reasons we made our investment in Buy.At last year and our experience since has only served to deepen my conviction that this is a great place to be.

AOL gets it too.  Their bid (WSJ link to only half an article, unless you subscribe) for Buy.At competitor TradeDoubler at $900m is circa 4x revenues – showing that they share my enthusiasm for the sector and see the growth continuing for some time to come.

One of the reasons that media spend lags media consumption online is that ad budgets from FMCG giants like Proctor and Gamble and Unilever have yet to come to the web in a big way.  They want to get there, it is no secret that to reach the young they have to, but they are unsure how to do it.

In November 2006 Caroline Shootweg of Unilever said:

It’s important for advertisers to understand what’s happening across the media landscape and within their own sector as they monitor the progressive shift to online. Changing media consumption habits and the growing importance of digital technologies are prompting brands to review their media budgets and allocate an increasing proportion towards developing a consistent and strategic approach to online media.

FMCG companies are big spenders on TV advertising and that is all about brand. The biggest challenge they have is that internet advertising has been more like below the line marketing – driving transactions and clicks.  The strength of internet advertising is it’s measurability, but that doesn’t really work for brand awareness.

Coupons are one solution to this problem (and something we are working on at Buy.At).  The sponsorship activities on sites like MySpace are another, and I’m sure there will be others.

There will be rich pickings for the companies that find a way to move FMCG budgets online and 2007 might just be the year when it starts to happen. 

Broadband television – not as big as I had thought???

By | BT, HDTV, IPTV, PCTV, Social networks, Venice Project, Video | 9 Comments



By broadband television I mean TV delivered into the home via the broadband pipe.  It might be watched on the big set in the living room, on an iPod, on a laptop, or just about anywhere but it comes into the house via the internet.


The thoughts below are about open services like The Venice Project – i.e. those which deliver content to your broadband connection point and leave the rest to you.  They don’t apply to fully integrated closed services where the service provider provides a set top box and controls the end to end delivery of the service much, as Sky does today (in fact the only difference with Sky would be routing the signal through your broadband connection and maybe your PC instead of via satellite).


Reading this morning about the planned broadband TV service from Babel Networks in the FT (no link due to DRM restrictions) it dawned on me that recommendations of the ‘people who like what you like also like this’ type and other ‘social networking’ features might not be much of a differentiator.


There is nothing new in these ideas any more, and I would expect to see them in just about every service.  For sure they will be in Babelgum – the Babel Networks service.  Quality of execution of these ideas will vary, of course, but I wonder if the differences will be marginal in the context of the overall service.


The three key areas on which services will compete are:

  • Content
  • Quality of video experience (I am thinking primarily start speed and smoothness of stream here, not picture quality)
  • User interface (covers ease of use, convenience, and social networking features)

A lot of well funded companies are going after this market and they will all have experts in each of the areas above.  I am wondering if they will end up in similar places with regard to quality of video experience and user interface, but whether there will be big differences in terms of content.


To my mind there are two reasons why people will switch bother with broadband TV (beyond watching the odd YouTube clip) – new content and/or much reduced cost.


It seems unlikely to me that anyone is going to pay top dollar to acquire rights to premium content and then make them available very cheaply on the web.  The only logic for doing that would be if you believed it would massively increase the audience, and I don’t see that happening.


So our favourite content will remain locked into existing structures (for legal consumption anyway) and we will have to keep them live, and keep paying our subs.  By existing structures I mean end to end service provision from satellite companies, cable companies and their ilk – a new provider like BT might make a dent here, but the overall value chain won’t change much.


Therefore – if this train of thought is valid – we are left with non-premium content as the driver for people using open broadband TV systems – i.e. the long tail of professionally produced content or UGC.


And that means open platforms with video uploaded by producer and/or consumer – central control of the catalogue of available content will never get there.


This starts to sound like YouTube or DailyMotion but with an improved delivery infrastructure and a more developed revenue model.


I have arrived here at a much smaller vision than I had been anticipating previously for this sector – but I’m struggling to see premium content getting much traction via this channel shortly.


The other possibility of, course, is that TV on the web goes the way of music and becomes all about illegal peer to peer file sharing.


FYI – Babelgum from Babel Networks sounds almost exactly like The Venice Project.  They have a peer to peer delivery capability for a full screen video service and plan to launch in March.  The founder is Silvio Scaglia – founder of Fastweb – so he knows a thing or two about internet services.

New arrivals and uncertainty

By | Entrepreneurs, Venture Capital | 14 Comments

We had some good news in our family yesterday with the arrival of our second child – Stan.  All went as well as can be expected, which was great, and the family have rallied round and been really helpful.

Last night was a little disturbed, as you can imagine, and this morning when we were discussing what might have been upsetting Stan I was struck by how much we wanted to know the answer and how not knowing felt uncomfortable, so we all had a theory and settled on how it was probably stomach ache.

I see similar situations at companies all the time – where boards have to take important decisions in the absence of complete information.  That is unavoidable – we are talking about small businesses in fast changing environments.  Even if you had sufficient resources to devote a team of analysts to a problem you still wouldn’t have a full understanding of the issues – in fast changing markets a lot of things are matters of opinion, not fact.

Good boards recognise that sometimes it will be difficult, or impossible, to find more data and take quick decisions based on the balance of the information available and what their intuition is telling them.  This is all about trust and confidence – in particular giving the executive team the confidence to be open about the limits of their information and understanding.

After all admitting what you don’t know, and what you can’t find out, can be hard.  Not surprising given that not having a full understanding can be (seen as) a weakness.

When companies don’t deal with uncertainty well it slows down decision making, sometimes terminally.  You see it most often during strategy sessions where the conclusion ends up being that the (usually already over-worked) executive should go and find some more information.  Then at the next strategy session there isn’t much more information, and so a decision is avoided once again.  Meanwhile the competition is making hay.

The bad news is that the bigger the issue the more difficult this is – particularly if it is something controversial.

Don’t get me wrong, I am all for analysis.  I started life as a strategy consultant.  But you need to know when to stop thinking and start deciding.

I try to write something every working day, and 7.41pm on a Friday night doesn’t really cut it as a Friday post.  But bear with me, normal service will be resumed in a week or two.

The Global Private Equity Awards

By | Venture Capital | No Comments

Global Private Equity Awards banner 

The Global Private Equity Awards are going by way of an online poll this year.  If you have an interest in the sector and want to give your opinion then this is the place to do it.

If you know Esprit and rate our work (or even if you just like this blog) then a vote for us as European VC of the year would register that opinion and help us to do more of the same.

Thanks in advance to those of you that have already voted for us, or who intend to do so.

TV and Video – Its the content and convenience that counts, not the quality

By | Content, HDTV, IPTV, TV, Video | 10 Comments

People care about what they are watching much more than the quality of the picture.  This is something I’ve been saying for a long time, and posted about before in HDTV – do people care?

It’s a message that it seems a lot of people don’t want to hear.  So stimulated by Alan Patrick saying the same thing over on Broadstuff earlier this week I’m saying it again.

As Alan points out Clay Shirky makes the same point here.

A few of the key data points are:

  • Only 25% of owners of HDTV sets in the UK are forecast to bother getting HDTV services – the rest are happy with the cool look of their flat panel TV and not too fussed about the quality of the picture (from Screen Digest and cited my earlier post)
  • MP3s are destroying CDs despite the fact the audio is lower quality (Clay Shirky)
  • The popularity of YouTube – 100m+ streams a day despite the fact that the quality sucks (both of flash streams over broadband and a lot of the underlying video content)

By contrast the arguments in favour of quality counting are usually of the “once you have seen it you will understand” kind.