Tuesday, July 10, 2007
Monday, July 2, 2007
Detailed Analysis
Business model:
Three major aspects of the business were analyzed; the people who drive it, the revenues and the expenses.
1. People
a. Management ability - – for a start up AGLOCO seems to be pretty good as it has combined experience with raw talent:
*) The raw talent – is in the form of current Stanford MBAs. AGLOCO is a revenue driven business model – passion and aggressiveness are good attributes to have for part of the team. The average age of a Stanford MBA graduate is 28 years old – these are not just passionate and aggressive, they come with a few years of experience behind them as well.
*) The experience – AGLOCO has some – it may need more. Jorgensen was CEO of AllAdvantage, Ray Everett-Church was the Chief Privacy Officer there and Sam Flax was the Chief Architect for technology at AllAdvantage. AllAdvantage grew to over 10 million users and over $30 million in first year revenues. A good fit for on point experience.
b. Management reliability - The reality of the internet is such that every new entity should be investigated from this perspective. Below, is why AGLOCO should not raise any Internet scam worries:
*) There are over 50 people listed on the about page of AGLOCO.
-) The ‘development team’ has eight Stanford MBA students – not the type of people who would risk their pedigrees and reputations.
-) The ‘development’ team includes two veterans Ray Everett-Church and Jim Jorgensen – both of who are well known enough to have Wikipedia bios.
-) The ‘contributors’ include a couple of easy to spot people like; Gil Penchina, CEO of Wikia, Zaw Thet, CEO of 4info and Valerie Williamson a VP the Open Source group OSTG plus a sprinkling of major firm law partners and venture capitalists – not scam types.
*) Press interviews – some of the founders have been interviewed by major bloggers (VentureBeat, John Chow, GigaOM, and Red Herring). AGLOCO’s management is out front and visible.
2. Revenue sources– this is the core of the business model. Some revenue sources are very dependant on the size of the user base. Here are the major ones:
a. Search revenue – AGLOCO can become a significant source of search volume. Google gets 40% of its ad traffic from third parties (the biggest one being AOL whom Google pays an average of $0.10 per search). The average Internet user searches over 35 times a month. AGLOCO should be able to capture virtually all search revenue and its users are more likely to be active Internet types (given that the active users are the early adopters who will be the first to find AGLOCO’s proposition appealing ) – When AGLOCO is of sufficient market size, its search revenue should grow to between $30 and $50+ per user per year
b. Advertising – the AGLOCO toolbar software is stated to contain a thirty second targeted text ad:
*) The targeting is further defined as being related to the current site a user is on or based on past user behavior or demographic information. AGLOCO also has very granular location information with city and postal code for users. AGLOCO should be able to take advantage of Google, MSN or Yahoo’s ad engines immediately (AdSense, adCenter and ‘Panama’) and during the next two years add a local ad overlay.
*) AGLOCO’s available monthly ad inventory should be somewhere between 600 and 1,800 ads a month per user (1 ad per 30 seconds, 120 ads per hour and 600 ads per month given 5 hours or 1800 ads given the more likely scenario of 15 hours surfing per month). With 100% of these ads being available for ‘keyword’ targeting as it now exists. This is substantially more inventory than leaders Yahoo or AOL have and this will definitely increase the attractiveness of the AGLOCO user community for advertisers.
It is difficult to estimate what ad revenue per user will be two years from now. It should start low and grow substantially over time. A quick starting place for analysis might be a $10 to $25 run rate in this period and much higher later. Targeted keyword CPC rates vary dramatically with Google and Yahoo both averaging over $0.50 per click in search (non-search ads are substantially lower, but do not have AGLOCO multiple targeting.)
-) Commissions - Sales commissions (and affiliate fees) should be a substantial source of revenue for AGLOCO. Almost every online merchant pays them. Link Share and Commission Junction each have thousands of companies in affiliate programs. Sales commission varies from quite low 2% on some airline tickets to nearly 50% on some financial transactions, and is generally in the 10% to 15% range.. Spending per active Internet adult users (one on line in excess of five hours a month) is estimated at more than $2,000 a year – twice as much as the $1,000 overall online spending average.) . For valuation at the end of year two, an estimate between $50 to $150 per user in commissions was used
-) Distribution – The distribution of products and services may become the largest source of AGLOCO revenue. This revenue source is different than the sales commissions since AGLOCO states it would be a direct distribution source (or a direct signup source). There are four basic areas of distribution:
+) AGLOCO can distribute to its members products and services ranging from new credit cards to home loans and to computers or software. Credit card and loan revenue can vary from $50 to $500. Online software distribution should be a normal AGLOCO activity (for example backup software should earn at least AGLOCO $1 a month.)
+) Upgrades on paid-for or free software – This includes payments from companies like Adobe which will pay for each time a user upgrades free program like Flash or upgrades of paid for software like Norton anti-virus.
+) Referral fees of online communities – This includes payments for new active users. Examples include: eBay ($22), Skype (a % of anything spent), eFax ($10 -$50) –there are at least one hundred of these
+) Offline large buying group – AGLOCO can act as a large buying group. (Example; referral fees on car sales are anywhere from $200 to over $1000. Using a $400 average and a one-in-ten to one-in-twenty annual user participation rate (5% to 10%), then cars alone will be a $20 to $40 per year source of revenue for the entire user base. Similar but smaller sources exist in other products.
-) An annualized distribution revenue amount of $100 a year per user by the end of AGLOCO’s second year should be a reasonable estimate.
Total Revenue – With the above detailed analysis, the total revenue would be estimated to be between $200 and $300 per user – (annual revenue run rate at the end of year two). Below is a chart showing potential revenue growth per user by category over a two year period.
3. Expenses – operating costs seem to be dominated by:
a. Servers and bandwidth – since most of the communications with users are coming from search company servers and ad network servers it would seem should be a relatively small amount.
b. Sales and business development – passionate MBAs etc –while expensive people, this should still be a low cost as a percentage of total revenue
c. Customer services – lots of users, lots of questions – AGLOCO has started by using teams in India, China and the Philippines. Most communication is email so language should not be a significant problem
d. Technology - should be much simpler than a Yahoo or Google as AGLOCO is not building much (a toolbar is a known and simple technology platform.)
e. General and administrative costs need to include processing user payments (PayPal and others make this cheaper) and the management company fee of 10%
A reasonable estimate two years out (assuming 2 to 3 million AGLOCO users) would be a 20% to 30% cost structure - as a % of gross revenue
Three major aspects of the business were analyzed; the people who drive it, the revenues and the expenses.
1. People
a. Management ability - – for a start up AGLOCO seems to be pretty good as it has combined experience with raw talent:
*) The raw talent – is in the form of current Stanford MBAs. AGLOCO is a revenue driven business model – passion and aggressiveness are good attributes to have for part of the team. The average age of a Stanford MBA graduate is 28 years old – these are not just passionate and aggressive, they come with a few years of experience behind them as well.
*) The experience – AGLOCO has some – it may need more. Jorgensen was CEO of AllAdvantage, Ray Everett-Church was the Chief Privacy Officer there and Sam Flax was the Chief Architect for technology at AllAdvantage. AllAdvantage grew to over 10 million users and over $30 million in first year revenues. A good fit for on point experience.
b. Management reliability - The reality of the internet is such that every new entity should be investigated from this perspective. Below, is why AGLOCO should not raise any Internet scam worries:
*) There are over 50 people listed on the about page of AGLOCO.
-) The ‘development team’ has eight Stanford MBA students – not the type of people who would risk their pedigrees and reputations.
-) The ‘development’ team includes two veterans Ray Everett-Church and Jim Jorgensen – both of who are well known enough to have Wikipedia bios.
-) The ‘contributors’ include a couple of easy to spot people like; Gil Penchina, CEO of Wikia, Zaw Thet, CEO of 4info and Valerie Williamson a VP the Open Source group OSTG plus a sprinkling of major firm law partners and venture capitalists – not scam types.
*) Press interviews – some of the founders have been interviewed by major bloggers (VentureBeat, John Chow, GigaOM, and Red Herring). AGLOCO’s management is out front and visible.
2. Revenue sources– this is the core of the business model. Some revenue sources are very dependant on the size of the user base. Here are the major ones:
a. Search revenue – AGLOCO can become a significant source of search volume. Google gets 40% of its ad traffic from third parties (the biggest one being AOL whom Google pays an average of $0.10 per search). The average Internet user searches over 35 times a month. AGLOCO should be able to capture virtually all search revenue and its users are more likely to be active Internet types (given that the active users are the early adopters who will be the first to find AGLOCO’s proposition appealing ) – When AGLOCO is of sufficient market size, its search revenue should grow to between $30 and $50+ per user per year
b. Advertising – the AGLOCO toolbar software is stated to contain a thirty second targeted text ad:
*) The targeting is further defined as being related to the current site a user is on or based on past user behavior or demographic information. AGLOCO also has very granular location information with city and postal code for users. AGLOCO should be able to take advantage of Google, MSN or Yahoo’s ad engines immediately (AdSense, adCenter and ‘Panama’) and during the next two years add a local ad overlay.
*) AGLOCO’s available monthly ad inventory should be somewhere between 600 and 1,800 ads a month per user (1 ad per 30 seconds, 120 ads per hour and 600 ads per month given 5 hours or 1800 ads given the more likely scenario of 15 hours surfing per month). With 100% of these ads being available for ‘keyword’ targeting as it now exists. This is substantially more inventory than leaders Yahoo or AOL have and this will definitely increase the attractiveness of the AGLOCO user community for advertisers.
It is difficult to estimate what ad revenue per user will be two years from now. It should start low and grow substantially over time. A quick starting place for analysis might be a $10 to $25 run rate in this period and much higher later. Targeted keyword CPC rates vary dramatically with Google and Yahoo both averaging over $0.50 per click in search (non-search ads are substantially lower, but do not have AGLOCO multiple targeting.)
-) Commissions - Sales commissions (and affiliate fees) should be a substantial source of revenue for AGLOCO. Almost every online merchant pays them. Link Share and Commission Junction each have thousands of companies in affiliate programs. Sales commission varies from quite low 2% on some airline tickets to nearly 50% on some financial transactions, and is generally in the 10% to 15% range.. Spending per active Internet adult users (one on line in excess of five hours a month) is estimated at more than $2,000 a year – twice as much as the $1,000 overall online spending average.) . For valuation at the end of year two, an estimate between $50 to $150 per user in commissions was used
-) Distribution – The distribution of products and services may become the largest source of AGLOCO revenue. This revenue source is different than the sales commissions since AGLOCO states it would be a direct distribution source (or a direct signup source). There are four basic areas of distribution:
+) AGLOCO can distribute to its members products and services ranging from new credit cards to home loans and to computers or software. Credit card and loan revenue can vary from $50 to $500. Online software distribution should be a normal AGLOCO activity (for example backup software should earn at least AGLOCO $1 a month.)
+) Upgrades on paid-for or free software – This includes payments from companies like Adobe which will pay for each time a user upgrades free program like Flash or upgrades of paid for software like Norton anti-virus.
+) Referral fees of online communities – This includes payments for new active users. Examples include: eBay ($22), Skype (a % of anything spent), eFax ($10 -$50) –there are at least one hundred of these
+) Offline large buying group – AGLOCO can act as a large buying group. (Example; referral fees on car sales are anywhere from $200 to over $1000. Using a $400 average and a one-in-ten to one-in-twenty annual user participation rate (5% to 10%), then cars alone will be a $20 to $40 per year source of revenue for the entire user base. Similar but smaller sources exist in other products.
-) An annualized distribution revenue amount of $100 a year per user by the end of AGLOCO’s second year should be a reasonable estimate.
Total Revenue – With the above detailed analysis, the total revenue would be estimated to be between $200 and $300 per user – (annual revenue run rate at the end of year two). Below is a chart showing potential revenue growth per user by category over a two year period.
3. Expenses – operating costs seem to be dominated by:
a. Servers and bandwidth – since most of the communications with users are coming from search company servers and ad network servers it would seem should be a relatively small amount.
b. Sales and business development – passionate MBAs etc –while expensive people, this should still be a low cost as a percentage of total revenue
c. Customer services – lots of users, lots of questions – AGLOCO has started by using teams in India, China and the Philippines. Most communication is email so language should not be a significant problem
d. Technology - should be much simpler than a Yahoo or Google as AGLOCO is not building much (a toolbar is a known and simple technology platform.)
e. General and administrative costs need to include processing user payments (PayPal and others make this cheaper) and the management company fee of 10%
A reasonable estimate two years out (assuming 2 to 3 million AGLOCO users) would be a 20% to 30% cost structure - as a % of gross revenue
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