Felicis Ventures Blog

Why Combination of Social Networking & Mobile Platforms Will Be Big

  (image courtesy of InsideFacebook) eMarketer predicts that people accessing social networks on their mobile phones world-wide will grow ten-fold in the next five years, from 82 million in 2007 to over 800 million people in 2012. This major trend will have multiple implications. Usage of current popular social networks via mobile phones should grow rapidly. According to Brandon Lucas, head of mobile business development for MySpace, MySpace recorded 7 million unique registrations for MySpace Mobile within six months of launch. What's interesting is that these numbers are comparable to growth figures of mobile-only social networking players such as mig33, airG and Mocospace which also claim several millions users shortly after launch. If you thought abundance of available ad inventory on current social networks was an issue, the potential mobile ad inventory in the same segment will be much larger. The appeal of mobile social networking for carriers should be huge. Already large carriers like Vodafone are moving quickly to cut deals with leading social networks like Facebook and MySpace anticipating huge demand for mobile data access.

Results of a Forrester Research Study show that popular social networking activity of US Adult Mobile Internet Users (in Q2 of 2007) was uploading photos and videos at 44% and 38% respectively (60% of all phones in the US are estimated to be camera phones). Posting ratings of products/services at 42% was second only to uploading photos, followed by maintaining or updating a blog at 39%. It's surprising that we're not seeing many more leading websites launching mobile versions of their services with a design geared towards the mobile users. FriendFeed, despite being a relatively new service, understands the value of the mobile interface, as they launched a new iPhone interface recently.

As for monetization, at least 20% of US mobile users have seen SMS ads, while in Europe the number ranges from 31% in Germany to 73% in Spain, according to M:Metrics. Up to 10% of US mobile users and on average about 4% of European mobile users have purchased ringtones, while more than 9% of mobile users played downloaded games in Italy, Spain, UK and the US. Jupiter Research expects mobile entertainment revenues to grow from $20 billion in 2007 to over $64 billion in 2012 globally.

While there's a striking difference in usage patterns between iPhone users and other mobile phone users - for instance, 21% of iPhone users watched on demand video compared to 1.4% of total mobile phone users - the gap should narrow as RIM and HTC are expected to launch more compelling Blackberry and Windows Smartphone models respectively to compete with the iPhone.

In summary, the monetization and growth potential of mobile platforms shall remain extremely exciting on a global basis and this trend is unlikely to stay limited merely to the potential of iPhone.

Asian Internet Users Poised for Strong Growth

With 530 million users, Asia has the world's largest internet user population according to Internet World Stats. The penetration of internet users compared to the total population however is lowest in the world with 14%, except for Africa. Given internet penetration rates in North America and Europe of 73% and 48% respectively, that bodes well for strong growth in the number of internet users in Asia for years to come, making the region important to watch in the coming years.

While China has more than double the internet users of Japan with 210 million, it has less than one fourth of Japan's internet penetration at 16%. India has third largest internet user base in Asia, almost twice as much as in South Korea, but its internet penetration is 1/13th the rate of South Korea. More details of the specific Asian countries and their internet user statistics can be found here.

Google Leads in European Search, But Yandex Ahead of Yahoo

Google dominates the European Search Market with 80% share of all searches according to comScore's newly released European Search Rankings for March 2008. What's most interesting about the rankings is that the countries with highest searches per user happen to be places where Google dominates searches like Finland where it has about 92% market share.

It's surprising to see Yandex ahead of Yahoo with 2.2% market share of all searches in Europe. Especially considering Russia was at the bottom of the list in terms of searches per user, where each Russian user does a little more than half the searches compared to their Finnish counterparts, this number is even more intriguing. If Yandex could improve that searches per user number, it has a chance to solidify its position as being one of the top 3 search engines in Europe. It's interesting to hear many new upcoming search engines strive for that elusive "just 1% of the search market goal" and actually see the Russian search engine Yandex achieve that goal with over 2% market share in Europe.

Consumer Web is Still King (at least for me)

(image courtesy of Consumer Internet Barometer) Imagine Facebook working to win customers one at a time, climbing on the roofs of their users' houses, install solar panels and hand them a bill several days later...That's how Steve Jurvetson from DFJ compares  Consumer Internet companies' potential with their counterparts in other industries in a Cnet interview regarding how Consumer Internet is tops when it comes to most consistent / highest returns in venture capital. While I feel it's too early to count out the alternative energy space, it's clear that it's a completely different playing field. Nanosolar, one of the sector's stars, recently raised $50M, bringing its total investment since it was founded in 2002, to over $100M for a valuation around $2B. Compare that with Google, founded in September 1998, which raised one round of venture capital at $25M in 1999 (besides some seed funding by angels) and then went public in August 2004 at an initial valuation of $23B, less than 6 years after its inception. Capital efficiency is certainly one of the most important factors that make investing in consumer internet attractive.

Viral marketing plays a major role in the success of internet companies as well - in this case, Jurvetson gives the example of Skype which was able to grow to 309 million members world-wide mostly by word-of-mouth.

To put it in comparison, I wanted to see aggregate value created by the different sectors in technology. The best data source I could find was on Forbes Global 2000 from March 2006 - after manually regrouping companies (only based in the US and excluding alternative energy since I couldn't find any such companies on this list) into their respective buckets, the following table came out - Highlights:

• Internet companies have the highest average market capital created at $74B per company
• The top US companies in the technology sector (Internet, Software, Hardware, Storage, and Networking) generated over $1.8 trillion in market cap
• Software wins the top honors in terms of highest overall market cap created with over half a trillion dollars

 

This table would be even more interesting if I had the aggregate venture investment numbers to go along with it. However, I personally believe, consumer internet companies still have room to grow, and there is more value to be created in this sector. Combined with the philosophy "invest in what you know", I remain bullish on consumer internet...

Microhoo - The Story The Numbers Tell...

It might have been best to comment on the Yahoo Microsoft deal until tomorrow when Yahoo's Q1 Earnings Report comes out. But the key numbers already tell a pretty clear story: Google has outspent Yahoo on R&D, 2.3:1, and generated operating cash flow at a rate of 2.7:1 compared to Yahoo (caveat: I'm comparing Google's Q1 numbers to Yahoo's last Q4 numbers based on Financial Times' coverage from last week). When it comes to cash, the contrast is even more striking: Google's cash is 6 times as large as its competitor. According to Attributor's analysis of content monetization across 68 million domains, the combination of Google and Doubleclick have almost 69% market share in monthly unique users versus Yahoo's 12% and MSN's 10%. The difference is even larger if market share is reviewed in the context of unique domains.

While Yahoo could really use a partner like Microsoft with deep pockets, R&D strength, Microsoft is running out of major players to buy or partner with to stay competitive in this space. I find it extremely hard to imagine how either party could simply let this deal not materialize. They both have too much to lose.

Tomorrow's Q1 earnings report will be interesting to watch but is unlikely to change the fundamental dynamics significantly. Silicon Valley Insider has actually gone through the trouble of running through a number of scenarios in great detail here.

In the meantime, Yahoo keeps bleeding executive talent, including senior old-timer engineers like Eric Boyd who recently defected to Mochi Media. It's painfully clear that steering Yahoo to be a media company in the past worked disastrously for the company. What's even worse is the hesitation to sharply return to the company's roots and be more engineering / product focused. Given Google's razor sharp focus on improving its core products and relentless drive to excel in key technical areas, maybe the real picture is even worse than the one painted above by the sheer numbers.

Vkontakte.ru - Russian Facebook Clone Growing By Leaps & Bounds

If you've never heard of Vkontakte.ru before - you're not alone. It was shocking to discover that it rose all the way to Alexa #34 in very short order. The site is growing so fast and is so popular in Russia that the country's secret service FSB got concerned that it might become a security risk because the Russian soldiers are signing up in droves. Social networking keeps demonstrating phenomal international growth. This shouldn't be a surprise: according to comScore's "State of the Internet" report from March of this year, Social Networks are the fastest growing vertical on the internet globally (60% annual growth) with under 40% penetration rate (versus 90% for portals).

What's even more amazing is that as far as I can tell, the site seems to be a carbon copy of Facebook - but localized in Russian and cyrillic alphabet. According to third party sources, the company has a team of only 20 people. It ranks among the top ten sites (based on Alexa stats) in Russia, Ukraine, Belarus, Kazakhstan and Tajikistan.

Russia is the country in Europe with the lowest market share for Google at 32% (versus Portugal's 94%) and its top 3 sites are all homegrown: Yandex, Mail.ru and Rambler. Facebook might find itself fighting an equally uphill battle in this important BRIC internet market.

BRICs Make an Increasingly Large Impact on the Internet

BRICs (Brazil, Russia, India, and China), the group of 4 countries, first coined by Goldman Sachs, are exerting a much greater influence on the global state of the internet: While in 2004 only China and India were in the top 10 countries for TMT (Tehcnology / Media / Telecom), in 2006 Brazil and Russia replaced South Korea and Canada on that list (source: Morgan Stanley Research, 2008). China has recently become the global leader in the following key TMT categories: population (1.3B), credit cards (1.1M), mobile subs (446M), telephone lines (368M), cable / satellite subs (155M) - [source: Morgan Stanley Research, 2008]. Only less than 1% of world's internet users were in China in 1995, but in 2007, 16% of the Internet users originated in China (~210M).

The importance of the BRIC countries like China have an ever growing consequence for the top US sites as well. The top 5 global properties, consisting of Google, Microsoft, Yahoo, YouTube and eBay derived virtually three quarters of their traffic from non-US users (source: comScore 2008). The ratio is as high as 78% for Microsoft and Google.

While the BRIC countries already established themselves among the top 10 countries in the world with the highest number of internet users, the penetration rate of internet usage is still incredibly low in these countries. In my opinion, it is exactly this contrast that makes these 4 countries highly interesting to watch.

South Korea - Harbinger of Internet Trends

For the future of Internet trends, look no further than South Korea. According to statistics released by OECD and ITIF on April 2007, Korea ranks #1 in broadband penetration [90%], #2 in average internet access  speed [45 mbs], and #2 lowest in internet access cost [$0.45 per 1mbs per month], among 30 OECD countries surveyed. Given its roster of Internet companies, one would guess that the US wouldn't be far behind. However, it merely ranked 12th on the list with 51% broadband penetration, 4.8 mbs average internet access speed and average internet access cost of $3.33.

Other interesting comparison points were in the following areas:

• Popularity of Virtual Worlds: Korea's CyWorld had 14.8 million subscribers versus Second Life's 3.1 million as of June 2007 based on comScore Media Metrix data [Source: eMarketer] - Contrast this with South Korea's population of 49 million versus US population of 301 million
• Popularity of Social Networking: 55% of Active Internet Users in South Korea visited a Social Networking site in the last 30 days versus 24% for the US [Source: eMarketer / Ipsos Insight, 2007]
• Newspaper Penetration in South Korea fell 17% between 2004 and 2006 from 48% to 40% [Source: eMarketer / Korea Press Foundation, 2006]
• South Korea's $ 14 billion B2C E-commerce sales represented more than 25% of all e-commerce activity in the Asia Pacific Region in 2006 (Japan and China were at  $33.5 billion and $2.5 billion respectively, for comparison) [Source: eMarketer, 2007]
• Internet retail sales grew fastest among all retail channels at 23.5% per year, twice as fast as second most popular channel: convenience stores [Source: eMarketer / Korea Times, 2006]
• Clothing, shoes and sporting goods were purchased by 62% of all active internet users in South Korea, ranking number one among all products and services. Music was a close second at 49.1% [Source: eMarketer / MIC, 2006]
• While Music was #1 content purchased online, with 75% of active internet users, Education was not far behind at #4 with 27%
• Mobile TV is a huge growth area with expected subscriber growth of more than 8X in 6 years - from 2.5 million subs in 2006 to 21 million subs in 2012 [Source: eMarketer / TU Media Group, 2006]

Personal Conclusions:

• Keep watching the social networking space for interesting vertical implementations (examples: Maya's Mom, Dogster)
• E-commerce volume will keep going up and personalized recommendations will keep playing an important role in that growth
• Online Education is an overlooked segment and should become much more visible in the next few years
• Mobile TV space should get a lot more exciting if the wireless carriers could improve their user experience and abysmal bandwidth faster