August 2007
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Month August 2007

Fotolog + Hi Media

With mixed emotions – a combination of great excitement and a slight tug at the heartstrings – we announced today the sale of Fotolog to Hi-Media, one of Europe's largest advertising and micro-payment networks. This transaction forms one of Europe’s best positioned Internet companies, with huge audience reach and great monetization tools. Our release lays out key elements of the rationale for this transaction, but here are the high points:

· The opportunity to bring together Fotolog’s rapidly growing audience of more than 10 million members, 15 million visitors – and its top 20 ranking among the world’s most trafficked websites – with Hi-Media’s huge ad-network and great optimization capabilities

· The tools for Fotolog to extend its platform and community services with one of Europe's largest micro-payment networks · The jump-start Fotolog brings to Hi-Media’s Publishing Group

· The strong geographic fit, combining Fotolog's growing strength in European markets like Spain and Italy with the reach Hi-Media will give Fotolog in rich and valuable Internet markets such as France,Germany and Sweden. · The outstanding opportunity the Fotolog team and investors will have to participate in the growth of the combined company.

· And equally important, the matching of two teams of people who know how to run Internet businesses. Cyril Zimmerman and the Hi-Media team have been building one of Europe's foremost online ad networks for more than a decade.

With Adam Seifer, Warren Habib and Scott Heiferman, we have a pedigree that goes back to the earliest days of social networking. The result will be one of the largest publicly traded Internet pure plays in Europe. Without the tangle of cable, DSL or old media properties that so often come with and encumber European online companies, our combined company will be able to focus on the hottest and fastest-growing media segment on the continent, and in some areas, around the world.

Seen from that perspective, it becomes clear why Hi-Media considered Fotolog so valuable and why we considered them the ideal partner, strategically, geographically and philosophically, to accelerate our growth and fully leverage our team and our audience. So those are the deal highlights. Now to some background on both companies, and why they are such a great strategic and geographic fit.

Hi-who?

Hi-Media, based in Paris, is a leading European advertising network and micro-payment aggregation platform listed under HIMD-PA . Hi-Media’s current management team is the same one that started the business ten years ago as an ad network. Over time they added micro-payments to the business and, more recently, a publishing group. The first two businesses are large and growing rapidly – the third is younger but with the acquisition of Fotolog now reaches scale.

We’re encouraged by Hi-Media’s demonstrated ability to grow through successful acquisitions and integration. The micro-payments business (today one of the largest in Europe), the local ad-sales business (today one of the largest in Scandinavia) and their current content business (a leading French gaming site) were all acquisitions. Hi-Media’s geographic center of gravity also gives reason for doing this deal. Hi-Media's roots are European, but they have a growing presence in South America, based out of Brazil.

This represents a great fit given Fotolog's recent growth in Europe, and with the acquisition of Fotolog, the Hi Media South American business should become an even more significant area of growth. Most importantly, Hi-Media is one of a small handful of companies positioned at the epicenter of European internet growth. I have blogged about this before, but broadband penetration today stands at approximately 60MM HH in Europe – and is poised to double in the next 3 years. Overall, Internet penetration in Europe in '07 will surpass 30% — an important number that has in other geographies represented a step function in growth, usage and monetization. Net based advertising, spending and direct micro-payment services are set to grow proportionally even faster, with analysts estimating CAGR's of over 20%.

Finally, macro trends aside – Hi- Media is well positioned to benefit from the growing needs of long-tail publishers to optimize and monetize their customers. The Ad- Network provides a CPM based platform for publishers to advertise through. The micro-payments platform is an aggregation service, one that offers customers the choice of more than 40 payment providers and access to more than 160,000 premium content sites.

Photo-blogging?

Fotolog was created five years ago by Scott Heiferman. Adam Seifer joined him shortly after and, working out of their apartments, the two of them birthed photoblogging … and created a global phenomenon. It’s strange, but here in the US, the rapid growth of the Internet often reduces business to a set of categories, at which point companies tend to retrofit services to fit those categories. Blogging in the US was initially defined as a text-based experience. Moreover, today daily people post photos to Facebook and Myspace – but those sites are defined as social networks – no one would seriously refer to them as a photoblogging platforms. But look at actual usage data.

The primary media types on Facebook are, first text (messages between members of the community) and second, photos. And that’s exactly what we see on Fotolog — where we host close to 300M photos and billions of conversations … all woven together in a complex social network. Myspace is substantially similar. Today, Fotolog is one of the 20 most-trafficked sites in the world, and the simple magic of Scott’s and Adam’s creation is still seducing our members. I first came to the company as an angel investor, and then Scott and Adam asked me to join as CEO late last year. In the space of seven months we have doubled the membership, inked partnerships with AOL, Google and Sun and brought the company close to breakeven. Our audience has grown in Europe such that today we almost 30% of our traffic is coming from Europe — 2.2 of our 15M unique visitors are coming from Spain. In terms of membership growth — last month — Italy, Germany, and France were right behind.

So why do a deal?

While Fotolog has grown at an incredible pace, it’s only now becoming a business. We have expanded our ad revenue base significantly in '07, yet we have done this with a tiny sales team, based in NY. There are limits to what you can do with 25 people based in NY, serving an audience mostly in South America and Europe. We have a worked with the Google team to use their AFC and AFS networks with significant successes – yet for media companies to build large, sustainable businesses, across both established and emerging markets, we have learnt you need to complement the ad networks with direct sales capabilities.

Fotolog needs room to grow … and with access to Hi-Media's ad-network, we will have an instant ad-sales capability in our largest and fastest growing markets. Longer term, I am big believer in the promise of peer-to-peer advertising among our members. Ads are often blunt instruments that fail to offer value to a membership engaged in a dynamic conversation – targeting and metadata only get you so far. Offering our membership the ability to buy and sell real and virtual items is something we are keen to offer at Fotolog, and a necessary capability to that end is access to micro-payment services across our footprint. Allopass, Hi-Media's micro-payment service, could fill that bill. Finally the agreement we struck with Hi-Media is a great return for our investors – many of whom (including me) are opting to hold stock in the combined company.

To close, a personal note …

As I said in the first paragraph, it was with mixed emotions that I recommended to our board that we do this deal. Fotolog is on a tear. Our international audience is coming of age, there is so much promise ahead, and it’s been a lot of fun running and building the company. The company has a group of very dedicated people. Adam's heart and soul is in the community. And since I came on board, we have weathered some fun operational challenges including user strikes, drowned servers, vendors trashing core databases … not to mention and some pretty hairy and exciting product launches.

Adam, Andrew, Warren, Olu, Frank, Elke, Yossi, Rodrigo, Andrew and many others have all pulled together through many a long night to make the company what it is today. I’m well aware that mergers and acquisitions don't always work out the way you hope. But Fotolog is truly poised to take off – and with the right mix from Hi-Media, there is a lot of potential in this merger that I hope we can make real for our membership, our team and our investors.

Alexa whiplash

Early in the week Fotolog's Alexa rating nose dived:

Alexa nose dive

And then 2 days later, we were up at #11 worldwide:

Roaring back

Alexa needs to start to operate more like a business.   They have a huge lead in terms of toolbar based traffic analysis — they might be a standard but the product hasnt evolved much, the toolbar is considered by many to be sypware and there is little to no customer service for publishers.   Quantcast and others are building businesses and Alexa is standing still.    There are quirks in there system that just need to be sorted out, like doubleclick is #200 or so — they have to be reading iframes and banners wrong to track that ranking.   As for our numbers, I know our geo mix is wrong — there should be a way for publishers and users to interface with Alexa.   We have settled back down to #16, a three month average of 21 — #11 was fun for a day.    

Customer service story from … heaven

Thursday afternoon, August 2nd: Fotolog operations team sent me the following photo of a shipment of a Sun 6540 disk array. Essentially our new backup system:

Sun boxes

The equipment on the bottom was damaged, the boxes were stacked (inspite of Sun stickers saying "do not stack") and the entire package was wet, from what I gather not soaked, just wet.  

Backup is important to Fotolog — with 280M photos, billions of guest book messages and a vendor mess up a few weeks ago that corrupted our guestbook database, this wasn't what we needed.     But what started as a mess turned into a customer service story from the gods. The Sun team went right to work, through the weekend — by 9.24pm on Monday (2 working days) we had this sorted out and the shipping details for the replacement boxes.

Shortly after getting the picture and alert from my CTO I forwarded it to Jonathan Schwartz at Sun, asked for his help in sorting this mess out.    Within hours I got the following note back:

—————————–

From: Jonathan Schwartz .

Date: August 3, 2007 12:30:10 AM EDT

To: John Borthwick .

Subject: Re: Contact info

Instantly – stay tuned.

Let me know if there's anything I can do to help out – we will get this right asap.

Jonathan

—————————–

Instantly is a tall order but by Friday morning things were moving, they moved all weekend and by 9.24pm on Monday we had shipment details for the replacement boxes.   Great service, no finger pointing, no discussion of why and who let this happen — the organization and everything I saw was focussed on execution and getting the client (us) the drives.  

Communication was excellent the team sent frequent updates and Schwartz checked in periodically to make sure things were on track.     I know Schwartz from college days, but we haven't spoken since I left Time Warner — this was essentially an email sent into the dark morass of corporate America, which yielded fantastic results, way better than I could have expected.   I dont have the time to cull through the emails but I noted one from Schwartz cc'd a core customer service group email — suggests he has setup a mechanism to respond to issues like this, building processes like this is hard, particularly as you transition a huge business.   

Good stuff is happening over there at Sun.

betaworks / offsite

beta

I did the betaworks off-site this week.  Good discussions, many of which couldn’t run to completion given time and setup constraints.   Decided to use an un-conference format, seemed to work fairly well — the topics people wanted to discuss were good, but hard to determine if anything was really concluded on any one topic,  sometimes the questions are more informative than answers.  We covered many aspect of social media sparing ourselves the overarching discussion defining social media — from reputation systems, trust, to agents to simplicity in design to many a questions about what causes interaction and what interactions matter we covered a lot of ground.

Some of the interesting questions I heard are below, commentary in []’s:

– In five years, when you wake up what will the device you turn first?  what will it look like and who will own the data you are looking at?  [the last part of this question is particularly interesting, I suspect the answer will be your own data.   And many of the tensions emerging today between users vs. content/IP owners, users and content/IP owners vs. search engines and monetization platforms — in general open and transparent systems vs. open vs. closed system will emerge as a central issue]

– Given the personal relationship people have with a phone (vs. a pc) what services will emerge as core?   [People are willing to share and store personal data of a very different nature on the phone vs. the pc, interesting when you consider how much time and effort is meant to harmonize data across these end points / devices]

– Think about pagerank as a reputation system?    [Someone also referred to pagerank as an agent, which was interesting, we had a good brief discussion about agents, havent done that in a while.  Someone also referred to Fred Wilson as primary information agent, agents are complex, maybe we end us the agents]

– Designing for simplicity … how does less become more? [good discussion here re: Fotolog’s one picture a day restriction and what it yields, and how simplicity as an over arching design principle is hard to execute in our medium and why]

– Is the US falling behind Europe and Asia in terms of infrastructure and innovation?  [the group had a real rant about broadband deployment, wireless access and restrictions placed on devices by connectivity providers, wireless and wireline.    I was surprised at the frustration level — hopefully it will begin to spread to DC, where the effectiveness of US policy vis broadband deployment is still, seemingly , a debate??!]

– What is it going to take to get tech and tech vc’s to enage in what is happening in DC, the incumbents are driving the DC agenda and wild eyed techno-optimism isnt going to save the day?

– Where is your company going to be in 25 years?  [Push to think about the long term, beyond the cycle of pumping and selling companies — how can we build sustainable innovation cycles, real innovation that over time, significant time not just a few years or the next turn of the screw]

– How does the advent of people centric interactions and data exchange effect the evolution of the internet? [more than crowdsourcing, which is already becoming a blurred meme, we are seeing the importance of human interaction and human brains to the network, as human intelligence becomes wired into the network does it make us more network dependent or the network more human, both?]

– Why would most people in the world, pretty much all of them have little idea about what we are talking about? [I hear this at many meetings like this, good grounding statement but then we all trudge back into our technosphere’s]

Other findin(.)gs were:

– People care enough about international and GTD as issues to put it on the white board but not enough to participate in a breakout group!

– Introductions always, always, take tooo long

Participants included people from:

TsumobiWhat is everyone looking at?
Ideeli
outside.in
Im in like with you
Fotolog
Index/Seed Camp
Tumblr
Divmod
Downfly
Fichey
Center Independent Media Public Square
Meetup
Buzzfeed
Social Media Club
Next New Networks
Time Warner
β etaworks team

thank you to all and to

Close digital