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Aug 18, 2010

State of the Web Economy 2010

Chris Anderson at Wired Magazine led another lively discussion about the future of the web. On TV, Meg Whitman says she created 15,000 jobs at eBay, enabled lots of entrepreneurs, and now wants to become the Governor of California. Thousands of blogs write daily about the future of the web.

What is the factual state of the web economy?

We collected first-hand research to estimate the state of the web economy. While some may blog about the bad economy and the new web - our data concludes that it's already alive; supporting some 600,000 entrepreneurs; and growing despite the recession.

Long Tail of Entrepreneurs

The 80-20 rule states that 80% of the rewards are earned by the top 20%. Lemming analysts would even argue for 90-10 or 99-1. I've personally wondered whether any of these analysts truly know the economic power of the 80%, 90%, or 99% in the long tail that thrives on today's web.

Who are these entrepreneurs?
  • Most are statistically labeled as unemployed or moonlighting.
  • Huge numbers have blogs (millions), apps (hundreds of thousands), websites, and social pages (tens of millions.)
  • Many have storefronts at eBay, Yahoo, Amazon, Apple...
  • In short, entrepreneurs explore any and all sources to dig for revenues.
  • Most offer consulting to support their web explorations.
Sourcing the Data

With no public reporting sources, we chose to mine the financial reports of public companies to estimate the size of this web economy. I ferreted out the advertising, app, and commerce revenues that represent the gross margins paid to the long tail.

Here's what's included:
  • 100% of the payments from Google to the long tail of AdSense affiliates - while excluding distribution fees that are paid to the larger affiliates like AOL and Myspace. Google does not itemize Checkout transactions or the Android Marketplace payments in their SEC reports, which would represent additional payments collected on behalf of the long tail.
  • An estimated 50% of the affiliate revenues from Yahoo that are paid to partners - large and small. Yahoo does not report payments from Yahoo retail.
  • 70% of the Music (ie itunes) and Software (ie appstore) revenues reported by Apple. Although this includes revenues for Apple's own products and software; and thus, overstates what is paid to the long tail - this estimate does partially compensate the many independent appstores that don't publicly report their payments.
  • eBay reports GMV (gross merchandise value) and Paypal transaction volume. These numbers tend to overlap when Paypal is used to clear the GMV purchases at eBay. Since most of the GMV and Paypal transctions involve high cost of goods, we chose a rough 10% for each revenue stream to estimate the value-added by the entrepreneur; thus estimating an average 20% gross margins for goods sold on eBay using Paypal.
  • Amazon increasingly depends on third-party products where Amazon earns referral, listing, and shipping fees. Amazon charges higher referral fees for media products and lower fees for tangible products. We've estimated the gross margins earned by the long tail through Amazon for each of these product groups.
  • Microsoft pays substantial Traffic Acquisition Costs (TAC); and royalties to game publishers, but does not itemize these payments in SEC reports; and has reorganized so often that its impossible to estimate the payments. Since most of the payments reward larger companies like Yahoo and EA, it does not benefit the long tail. Thus, the omission of this data in the chart above does not significantly bias the results of this research.
What's missing from the earnings of the web economy includes:
  • Consulting earned by prominent bloggers, app developers, SEO consultants, and social entrepreneurs.
  • Payments by the hundreds of advertising networks that are still private - including those that pay Zygna and other game developers. This also should include revenues received by Federated Media that is paid to their blog network; and Techcrunch's revenues from their events, advertising, and other creative sources, but there is no way to estimate these sources.
  • Online games that don't use Paypal for monetization.
  • Earnings from other app networks, that is partially covered with our over estimation of Apple payments.
  • Craig's list transactions.
Am I missing significant other sources? Can you think of other factors to fully estimate the value of the web economy?

Surprising Conclusions

Here are my conclusions:
  • Earnings easily exceed $10 billion a quarter. Since this estimate represents gross margins available to pay salaries and rent, the web economy is roughly three times the size of Google.
  • Revenues are seasonal, reflecting the sources that includes eBay, Amazon, and Apple.
  • This earning stream can sustain over 600,000 paid jobs; probably from multiple millions of participants where hundreds of thousands have already gained self sustaining status.
  • We guess that most of this stream is paid to North American entrepreneurs. Asian and European entrepreneurs have their own store fronts that are not included in this study.
  • About half of this stream is exported outside of North America; with the payments repatriated to North American entrepreneurs.
  • In two years, Apple has become a significant payer to the long tail; and could pass eBay, Amazon, and Google in 2011.
Is the issue really about choosing among advertising revenues, commerce, or content subscriptions? Savvy entrepreneurs know to chase a little from all the above.

Why is Obama struggling with creating jobs? Perhaps Meg Whitman really knows the answer. It does not matter whether our leaders are Democrats or Republicans. What matters is that they need to be aware of and understand the growth engine that is already part of this slow economy.

Maintaining the Web Economy Index

These six companies (and dozens of new enterprises like Facebook, Motorola, HP, Cisco, ...) who seek to build app stores, must take their vision of supporting the long tail seriously. After all, entrepreneurs depend on them to make a viable living.

Conversely, the long tail needs to speak with stronger voices when web leaders make choices that adversely influences the long tail.

Do you agree?

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Jun 7, 2010

iPhone4 and iOS4 Updates from the WWDC

It's official. Apple has been on a roll and the momentum continues as they move to become the highest market cap company in the world.

Here are the latest announcements during the Worldwide Developer Conference in Cupertino, CA.

Four, New Billion-Dollar Businesses

We previously described four new billion-dollar businesses for Apple. 90 days later, how is each business doing?
  • iPad has shipped over 2 million in less than 90 days. Since most are sold through Apple stores, this is a billion per quarter business with minimal, marginal overhead where most of the revenue gains contribute directly to Apple's bottom line.
  • The AppStore has become a self-sustaining Billion dollar business, separate from the iTunes store that is a separate multi-billion business selling music. The new iBooks store has already seen millions of downloads, capturing 22% of the ebook sales from the top 5 book publishers in the world.
  • The iAds store is to set debut on July 1; and $60 million in business has been booked.
  • There was no announcement about the social network for subscription-based gaming revenues - which is still in beta test.
Apple has already passed Microsoft to become the second highest market cap company. What's required for Apple to pass Exxon/Mobile?

The iPhone4, iOS4

The theme of the latest iPhone is video.
  • 5 megapixel camera that also captures video.
  • 960x640 retina display for the highest resolution that can be seen by the naked eye
  • iMovie as an app for capturing, editing realtime movies on the iPhone. This app is likely to gain multi-millions in revenues.
  • Facetime as a free, open-source app for free, iOS4 to iOS4 video conferencing. The open-source aspect opens the door for development of more innovative apps based on video conferencing.
  • A gyroscope also adds an innovative catalyst for more cool games.
Does this add revenue growth for Apple?
  • As pointed out by Mr. Jobs, Google has attempted to confuse with overstated claims of Android market share. The iPhone will continue to gain share, unit shipments, and overwhelm in terms of hours of use - when compared to any other mobile platform. Our first-hand data collected from our mobile apps confirm the same.
  • The new iPhone adds heat to Apple's clear leadership of this category.
  • This move also targets Adobe as Apple seeks to take back leadership among the creative communities at ad agencies, advanced blogs, and Hollywood wannabees.
  • BTW, the developer community is already a billion dollar business for Apple as membership fees; Macintosh, iPod, iPad purchases; and WWDC conference fees contribute multiple billions to Apple. Google, Palm, Microsoft, and Nokia with different business models have not had the same measurable success.
Exxon on the Radar Screen

Exxon still leads by $47 billion in market cap, down from $63 billion difference when we first wrote about this subject. Exxon's quarterly earnings is $5 billion, but flat.

Apple reported $3 billion, but during a quarter when traditionally Apple reports seasonally lower figures. When the new businesses report another billion in quarterly earnings, and an expected trajectory that is clearly better than Exxon's outlook, Wall Street will value Apple higher than Exxon.

Is this outcome likely?

May 22, 2010

It's Simple - iPhone Rules

Whether an Apple fan or doubter, ask this question:
Is Apple still a niche community?
  • 70% of MP3 players, globally - dominating digital distributor of music and saving the industry from piracy-death.
  • Ignore Admob data that understates, because the plurality of apps serve no ads.
  • Adding iTunes as a browser, Safari on iPhone to the Safari browser share - has Safari already become the leading browser over Explorer? My analysis suggests yes.
  • iPhone dominates mobile access of the web. Will unit share follow as mobile contracts expire?
  • Adding Verizon as a distributor of iPhones doubles customer reach for Apple in the USA.
  • China has banned Android - strangling global OEM acceptance of Android. Who will emerge as the leader of the largest mobile market?
  • iPad has already swamped the Amazon Kindle on the first weekend; and impacted the entire netbook segment after one month. Will Window-based laptops follow the downward trend?
  • iPad is moving toward saving the publishing industry from piracy-death - starting with books.
Apple is trending to become the highest market-cap company in the world - before the end of this year. Based on projected earnings, growth prospects, and reduced risk when compared to Exxon Mobile, the current leader - is this valuation justified?

Talk is cheap. Google and others talk big, but fails with hundreds of initiatives.

Apple executes.

May 5, 2010

Browser Wars - Wrong Data

Here is the typical miss-statement of the browser-war status.

IE8, Chrome have most momentum in browser wars

IE8, Chrome have most momentum in browser wars
Data source: Net Applications

Chrome is on a roll. It's the fastest-growing browser in terms of market share we've seen in a long time. And its rapid growth corresponds with Internet Explorer's steady decline. Keeping that in mind though, data from last month shows that IE8 has managed to grab 25 percent of the browser market, beating all versions of Firefox to the punch. In January 2010, only Chrome and Safari showed positive growth.

Between December and January, Internet Explorer dropped a significant 0.51 percentage points (from 62.69 percent to 62.18 percent) and Firefox slipped 0.20 percentage points (from 24.61 percent to 24.41 percent). Chrome jumped a sizeable 0.57 percentage points (from 4.63 percent to 5.20 percent) while Safari moved up 0.05 percentage points (from 4.46 percent to 4.51 percent). Opera, on the other hand, dipped 0.02 percentage points (from 2.40 percent to 2.38 percent), though we're still hoping version 10.5 will turn things around for the little guy.

Why is this picture wrong?

  • iTunes is a browser, used by 70% of the MP3 device owners. The browser stats don't track iTunes use.
  • Mobile devices already account for over 30% of web use. The iPhone is the top device, but it does not allow background tasks and third-party tools to track the use.
  • Top means to access social networks is via mobile apps.
  • Google Analytics fails to track data for Palm or iPhone app access.
If this data were trackable, has Explorer already lost the lead as the top browser to Safari? Is Chrome even a credible trend that would justify this headline?

The right headline, if anyone can see the entire web, is probably:

Safari Leads Among Browsers


Verizon Rep: It's just like an iPhone ;-)

While visiting a Verizon store, I overheard a customer conversation.
Do you have the iPhone?
Is Verizon listening to their customers?

Verizon's Challenge

Verizon is the largest wireless network in the United States. (FYI - very small when compared to China Mobile and China Unicom as an aside.) Despite the massive advertising pissing-battle on TV, their 3G network is marginally faster than AT&T's network, equal when using the Wi-Fi option, and behind when shared with telephony services.

Verizon rejected Apple and enterprise politics block adding the iPhone to their product mix. AT&T has already announced that they will add Android phones, opening the door for Apple to choose more wireless partners in the USA.

Verizon offers Blackberry for business users, Palm Pre/Pixi for female customers, and the Android Droid series for tech-savvy customers. Thus, they concluded that they don't need the iPhone.


Troubles on the Android Platform

Verizon has pushed millions of Android phones to customers - made by Motorola, HTC, and Samsung. (ed: still a small fraction of iPhone, iPad, iPod shipments) Unfortunately, of the six phones tested:
  • 2 failed to boot
  • 1 crunched its content to less than 320px resolution
  • 1 unit's touch typing failed to recognize any letter correctly
  • 1 worked great, but had a few small quirks
  • 1 worked perfectly
  • All had Android 1.5 or better
As an app developer, I've pointed out the weakness of the Android strategy. Who is to blame for this inconsistent user experience? Google, Motorola, HTC, Samsung, Verizon, Taiwan, or the developer? Let the fingerpointing start.

Although the press has accused Apple of taking tough stances with wireless partners, developers, and Taiwan manufacturers, it's clear that Apple takes the user experience seriously and takes ownership of the issue.

On the Android platform, who takes ownership?

What the Verizon Customer Wants

Let's get back to the customer.
  • She wants to stay with Verizon
  • Her kids have asked for the iPhone
  • She is told that the Droid is just like an iPhone. Is it? Which one?
  • She asked about iTunes
  • She is told that Verizon already has iTunes -- using MP3
  • She asked when Verizon will offer the iPhone
  • The rep lied, soon ;-)
Should Verizon make their reps look like a bunch of out-right fibbers? Politics aside, isn't it time for Verizon to listen to their customers?

Apr 8, 2010

Apple on a Roll

Can any company match Apple? It's time for an update.

Billion Dollar Units

Cisco coined the strategy to organically grow new, billion-dollar businesses. Over the last few years, they have failed to execute the strategy.

Enter Apple. Count the business successes.
  • Macintosh PC's, particularly laptops.
  • Apple stores.
  • iPod music players
  • 70% share of digital music distribution
  • iPhone
  • Top share of purchased games
  • Annuity from wireless subscription plans

Recent Announcements

In 30 days, Apple has introduced the iPad and iPhone OS4 - entering multiple new businesses. I count four new, multi-billion enterprises.
  • The iPad overwhelms all eReaders on the opening bell, and may overtake the entire netbook segment.
  • Digital book distribution looks to become an easy, new, billion-dollar market for Apple - displacing long term players like Amazon, Sony, and Barnes & Noble.
  • Advertising has been boring for many years. iAds target billions of high-end ads delivered over the Apple franchise - and brings fresh excitement to the market.
  • Social gaming portal to gain a share of subscription based gaming.
Other segments where Apple is making progress include:
  • Magazine subscriptions
  • TV show and movie distribution
  • Difficult markets like enterprises
Is Apple becoming the distribution giant for all things digital? Apple has legs.

It's not just Steve Jobs, It's a Culture

What is truly amazing about Apple is its unique culture. Clearly, Mr. Jobs has been the incredible leader, but for a company to execute on so many fronts simultaneously - many leaders need to have the same clear vision to market leadership. This requires a huge team of members with a clear, common plan for success.

It is not a one-man show.

A success culture is not that easy to build. By comparison, Google has been an amazing technology company - with unique hiring plans, 20% innovation time, Marrisa Meyer, and other innovative cultural traits. However, despite thousands of projects, the company has failed to produce a second billion-dollar source of income.

Further, Google has chosen to cut-off-their toes by ending relations with the huge mobile and search markets in China.

Apple is executing.

Despite its newbie status in many new categories, few would argue that they have gained four new billion-dollar businesses.

Top Market Cap

MG Siegler, at Techcrunch, observed that Apple may be passing Microsoft on market cap, soon. Note that Apple has already left Google in the dust.

Could Apple become the market cap leader in the world?

You be the judge.

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