MIT Forum, 25 December 2007

The Internet Money MathBusiness Models on the Web

Rina Shainski, General Partner, Carmel Ventureswww.carmelventures.com

Investment Areas

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Carmel Areas of Interest

Internet & Digital Media

Digital Home and IPTV

On-line Advertising

Next Gen. Enterprise Software

Next gen. Infrastructure applications for Telco & Mobile

TeraOp Displays

Internet MediaInteractive, Flexible and Measurable Measurable indication of user interest: page views, minutes Variety of business models – all convertible into page views clicks and actionsCollaborative and Viral (UGC, Social Networks)Ease of update – always fresh Ease of access – just a click or two away

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Internet advertising, as of 2007 is growing faster than other types of media

US advertising market ($M)

Internet advertising spending is taking money from the print mediaSource: T Weisel Partners.

‘06 US media consumed (hrs/wk)& total ad spend ($B)

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Online ad spending was disproportionate to the time spent surfing the net in the US in 2006.

Source: Jupiter research

Billions Hours

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Ad-funded value chain

•Page Views

•Minutes

•CPM•CPC•CPA

Content Ads$$$

How ad $$ are split

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Advertiser

Agency$0.15-0.18

$1.00

Ad Network$0.05-$0.07

Ad Server & Technology$0.01-$0.02

EnginesComparison

shopping$0.04-$0.06

Search$0.32-$0.40

Publisher $0.32-$0.40

An advertiser has a $1 budget and hires an Agency to manage the spending and creative strategy.

The agency gets a percent of theBudget as a fee for its services, then decides how to allocate the remainder.

The agency could choose to purchase inventory from an Ad Network. The Network owns a collection of inventoryit purchased from Publishers. Alternatively , the agency could purchase inventory directly from a Publisher or Engine.

A 3rd party typically places the ad on the site and sends information back to the Agency on howthe ad performs.

The Publisher or Engine displays the ad ontheir site, where visitors will see or otherwiseinteract with it.

Source: CIBC World Markets Corp.

Internet business models – variety and creativity

Free Service – Ad-funded (Facebook, Myspace, eSnips)

Free Service – Ads & Referral fees (Tripadvisor, MyThings)

Freemium – Free & Premium services (Skype, Linkedin)

Transactional – Ebay, Kasamba, Zopa (p2p lending)

Subscription – eHarmony (dating), Games (Blizzard)

Ad-networks – Google, Quigo, Kontera

The Penny Gap- “freemium” content

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But really…..

. The getting your users to pay you anything at allit's -toughest part of a new venture biggest gap in any venture is that between a service that is free and one that costs a penny.

At some point, the cost to acquire a paying customer is so high, it makes sense to consider shifting from a pay model to a free model.

Source: Josh Kopelman, First Round Capital

What Impacts CPM – wide range $0.5 - $20Demographics (age, gender, ethnicity)Category (health, weather, finance, cars)US vs International Direct or through ad-network

Getting Started – simple ad-funded modelAnnual Expenses

Staff: 5-8 employees at 100k-120k 500k-960kInfrastructure: 10K-15K/mo 120k-180kOther (legal, admin) 150k – 200k

Total: 770k-1240k

Breaking Even – Ad-funded model

Revenues 2.4M 100%Marketing - -Cogs* 1.2M 50%Expenses 1.2M 50%

EBIDTA - 0%

* Assuming ad sales through ad-network

Reaching 2.4M Annual RevenuesAt $1 CPM need 2.4B PV annually = 200M PV monthly; which at 5PV/visit needs 40M monthly visits

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Rank Property Unique Visitors (000) Rank Property Unique Visitors (000) Total Audience 182,362

1 Yahoo! Sites 136,180 26 Shopzilla.com 25,0232 Google Sites 131,538 27 Best Buy 24,8073 Microsoft Sites 119,194 28 Craigslist 24,4274 Time Warner 119,084 29 Yellowpages.com 24,2215 Fox interactive media 81,325 30 Disney Online 23,8226 ebay 80,510 31 Sears sites 23,5227 Amazon sites 59,058 32 Monster Worldwide 23,3908 Wikipedia sites 55,157 33 Bank of America 23,3549 Ask network 51,636 34 Gannet sites 22,272

10 New York Times Digital 47,997 35 ESPN 22,18611 Apple Inc 43,775 36 Expedia 21,79612 Viacom Digital 42,796 37 EW Scripps 21,04513 Wal-mart 42,462 38 Real.com 20,24214 Target Corporation 41,933 39 Photobucket.com 19,62815 CNET Networks 35,731 40 United Online 19,30516 Weather Channel, The 34,124 41 WebMD Health 18,34617 Facebook 33,660 42 Lycos Sites 18,33518 Adobe Sites 31,848 43 Circuit city stores Inc 18,26819 AT&T 29,843 44 The Mozilla Corp 17,98120 Verizon Comms 29,072 45 JC Penny 17,97621 CBS 28,714 46 Artistsdirect 17,74322 Gorilla Nation 26,556 47 Overstock.com 17,47823 Comcast 26,479 48 NFL 17,39724 Superpages 25,603 49 Hearst Corp 17,12225 Glam media 25,394 50 CareerBuilder 17,021

Top 50 US Properties ( September ‘07)

Source: ComScore Media MetrixCategoryDemographics

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** Denotes ad network

US Top 50 Ad Focus Ranking (September ‘07)

Source: ComScore Media Metrix

Rank Property Unique Visitors (000) Reach % Rank Property Unique Visitors (000) Reach %

Total Audience 182,362 100%

1 advertising.com** 156,962 86% 26 Vibrant Media** 72,273 40%

2 Yahoo! Ad Network** 155,430 85% 27 eBay.com 69,272 38%

3 Google Ad** 139,496 76% 28 Myspace.com 68,746 38%

4 Blue Lithium** 134,754 74% 29 Gorilla Nation 66,605 37%

5 Yahoo! 134,227 74% 30 CPX Interactive** 66,319 36%

6 ValueClick** 133,430 73% 31 Undertone Networks** 60,564 33%

7 Tribal Fusion** 131,898 72% 32 MSN.COM 58,678 32%

8 Specific Media** 131,088 72% 33 PrecisionClick** 56,093 31%

9 Google 123,992 68% 34 YouTube.com 53,521 29%

10 Casale Media Network** 115,172 63% 35 AdDynamix** 51,882 28%

11 AOL Media 107,573 59% 36 Ask Networks 51,636 28%

12 DRIVEpm** 105,266 58% 37 Amazon 49,775 27%

13 MSN-windows live 103,586 57% 38 Business.com 46,148 25%

14 Traffic marketplace** 96,608 53% 39 Mapquest.com 45,592 25%

15 Yahoo.com 95,012 52% 40 Kontera** 44,164 24%

16 interCLICK** 93,829 51% 41 eBay.com 43,123 24%

17 24/7 real Media** 90,690 50% 42 Walmart.com 39,902 22%

18 Tremor Media 90,684 50% 43 about.com 39,873 22%

19 AOL Media 88,826 49% 44 The Nabbr Network 35,917 20%

20 adconion media** 84,206 46% 45 Facebook 33,660 18%

21 Colective media** 82,955 45% 46 Vizi Media** 27,556 15%

22 Burst Media** 81,368 45% 47 Real cities 26,486 15%

23 AdBrite** 79,907 44% 48 Superpages 25,603 14%

24 Centro 78,592 43% 49 CNN 25,581 14%

25 ADSDAQ** 73,863 41% 50 Weather.com 25,176 14%

Web Analytics - example

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Source: quantcast.com

Web Analytics - example

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Source: quantcast.com

Important Metrics

CPM – cost per mille – wide range of values $0.5-$20 Page Views - PVCPC, CPA – cost-per-click cost-per-action typically used between ad-networks and advertisers

Uniques/mo – correlates with reach and exposurePV/Unique – important for cost of user acquisitionCTR – correlates with responseVisits/mo; PV/Visit - CPM*(Visits/mo*PV/Visit)/1000 = revenues/mo

The rise & rise of social networks

2005

Rank Web site

1 yahoo.com

2 msn.com

3 google.com

4 ebay.com

5 amazon.com

6 microsoft.com

7 myspace.com

8 google.co.uk

9 aol.com

10 go.com

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2007

Rank Web site

1 yahoo.com

2 google.com

3 youtube.com

4 live.com

5 msn.com

6 myspace.com7 facebook.com

8 wikipedia.org

9 hi5.com

10 orkut.com

Source: Alexa

•Consumption patterns are changing•New major players have gained traction quickly, in UGC and social networks

Opportunities in social networks, targeting & video

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By 2011, 50% of all online adults and 84% of online teens in the USeach monthsocial networkingwill use

Behavioral Targeting:•Advertisers want to engage larger audiences with fewer ad impressions

•Publishers want to better monetize their “long tail” for less.

•Individuals want to see more personalized ads

Source: emarketer.com

Content Partners with DistributionContent owners partner with on-line distribution channels.

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Source: avenue a razorfish

New distribution technologies: AJAX, RSS, and Widgets

Summary

Advertising budgets are shifting from traditional media to on-line

Internet advertising is expected to keep on growing

Social Network ads, targeted ads, display ads and video ads are expected to lead the growth

Variety of successful business models

Lots of opportunities and lots of competition

Easy to start but challenging to grow big – distribution is key!

Monetization drives value

Many small exits side-by-side with big and huge successes

Confidential

Thank YouRina Shainski, General Partner, Carmel Ventures

rinas@carmelventures.com