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Monday, January 25, 2010
Jason Calacanis, the notorious web entrepreneur of Weblogs, Inc., and Mahalo fame, recently raised a flap by telling everyone to boycott comScore and indeed, to sell or short-sell its stock. I'm glad I came to my senses and decided not to get caught up in that catfight, though I sometimes have questions about the accuracy of comScore's numbers (which is the real point needing more sophisticated debate, but also more transparency on comScore's part).
Observers have been quick to distance themselves from Calacanis, but in fact this underscores an important point: bloggers, journalists, and company owners in the space are afraid to agree with Jason because they perceive some kind of threat of being ostracized or singled out in some way.
Watering down the fervor just slightly, I won't tell you what to do, but I'll tell you why I won't invest in the following growing Canadian digital media company when it goes public.
Avid Life Media, the notorious owner of infidelity dating website AshleyMadison.com, is looking to raise $60 million through an initial public offering on the Toronto Stock Exchange.
As much as many investors and underwriters will have turned up their nose at the share offering for moral or optical reasons, what it really comes down to is that you're buying into the people who run a company, and their attitude towards risk. You're also trying to gauge their likelihood of telling the truth, the whole truth, about the business and how it operates -- now, and in future years.
That's why I noticed the part of the story that states that part of the deal would involve a merger with Moxy Media, "an online advertising sales company based in Guelph, Ontario." Moxy Media is made to sound pretty big: $192 million in revenues in 2009, dwarfing Avid's $30 million.
The combined company plans to go public using the RTO method, finding a shell company already traded on the exchange.
Moxy Media's predecessor, TrueLocal, is legendary in the industry for making a lot of short-term money on something called "click arbitrage". Hint: what you found at the home page of TrueLocal had nothing to do with TrueLocal's actual business. Like their successor, the new, improved, Moxy Media, TrueLocal had a network of 300 websites (or actually, more like 3,000) "each providing consumers with information and access to products and services," as the Moxy Media site states. Meaning: TrueLocal built topical pages of (largely Yahoo driven) paid links, sending inexpensive Google AdWords clicks to pages that were well-engineered to create a high proportion of clicks on ads. Those ads would eventually get a user to a paying advertiser's website; vendors like fireplace manufacturers and bridal gown retailers would be typical targets.
For years, Google's top management has been against these "click arbitrageurs," because the user is being deceived and ultimately winds up dissatisfied with the extra clicks it takes just to find a vendor. All the extra clicking created revenue for Google, Yahoo, and TrueLocal alike, but at the price of dissatisfied users and dissatisfied Yahoo advertisers (at least, those who twigged to the problem).
In addition to that, arbitrageurs, like many affiliates, are "lowballers" in the Google AdWords system. They only wish to advertise if they can get a click for a very cheap price. Google's landing page and website quality guidelines were designed almost entirely to scrub such advertisers from the system, especially in the most mature market (the United States). While lurking in the sub-30-cents click arena, the arbs & affiliates can clog up Google's system with an incredible amount of data as they're willing to bid on pretty much unlimited numbers of keywords.
Few in the industry know the TrueLocal story, so even fewer are bound to look twice at the (cleaned up, less arbitragey, but still boilerplate) Moxy Media sites and question whether the story told about them is accurate.
Much the same as the owners of the company might have called Gator/Claria a "targeted contextual advertising product of an opt-in nature" (that company, once on track for a big IPO, went the way of the dodo when it proved closer to true that the industry saw Claria as a "scumware" company), or, for that matter, the owners of AshleyMadison.com might call their website "a dating site for funsters who just happen to be of an adulterous bent," it's possible to describe Moxy Media's business in bland terms of websites, ad sales, earnings, and EBITDA without explaining what really makes the business tick.
In the past, what made the business tick was Google's willingness to accept those lowball bids on clicks (but that was largely shut down), and Yahoo's continued willingness to partner with arbitrage sites to distribute these ad links to less savvy advertisers (this will undergo a review as the Microsoft partnership proceeds). Those assumptions are no longer valid. Anyone investing in Avid Life Media - moralizing aside - should be aware of those risks.
Now, some investors will be fine trading some stock based on putting one company they don't understand together with another company they don't understand, all run by management they don't respect because they seem strangely cool with advertising for infidelity on subway billboards. But I don't see Warren Buffett piling in anytime soon.
Posted by
Andrew Goodman
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D'oh!
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