The Best Kind of Venture Deal

I have had the good fortune of backing many great entrepreneurs. I have been introduced to these companies in a variety of ways: through venture capitalists, angel investors, and other entrepreneurs. Some of these companies were investable from the time I met them. Others, less so. They were more ideas than companies, but with very talented founders who needed some input, mentoring and time to figure out the plan. While requiring the most time, energy and patience, I learn far more from the projects than the more fully-baked start-ups. And they also happen to be much more fun.

I just happen to be working on one of these deals as we speak. I am working with an entrepreneur with a big brain, lots of domain experience, endless enthusiasm and a persistence that borders on maniacal. In short, I liked him immediately. I met him probably eight months ago. He had lots of really great ideas, was focusing on a space I like a lot and understand pretty well, but was, shall we say, scattered in his approach. Focused on a Big Idea requiring big-time infrastructure and necessitating a first-round raise of $4 million or so. In my typically blunt way, I called bullshit.

I counseled that he was focusing on too many things that were initially on too large a scale. I recommended setting up a series of discrete, achievable milestones that would culminate with sufficient demonstrable traction to warrant a true Series A round. I wasn’t raining on his desire to execute the Big Idea, only the manner in which he was proposing to go about it. I connected him with a group of domain experts and professional investors he could pitch in order to continue getting feedback on and refining his idea. My associate Ben worked with him on his financial model, helping him define the milestones to be achieved and sizing a more sensible first-round raise of $2 million. This all happened over the period of a few months in the Fall. It was starting to come together. But it wasn’t ready - yet.

Armed with more realistic business and financial models, a bunch of people to talk to and a clearer sense of what constitutes an investable business (at least from my perspective), I said “Go bootstrap for a while, refine your plan, build an early product and get some early users. Then let’s talk again.”

At this point many things could have happened. He could have ignored my advice and gone on his way and succeeded or failed. He could have taken my advice and flopped. Or could have taken my advice and succeeded, and either come back to me as an investor or sought financing elsewhere. Well, over the ensuing months he stayed in touch, kept me apprised of his progress (e.g., finding a technical co-founder, securing three alpha clients, continuing to learn from discussions with both potential customers and investors), and basically did all the things he and I had talked about. And after five months he came back. And now I am leading his deal and building what will be a truly powerful, value-added investor group which will help make his Big Idea become reality.

This is the greatest part of being a seed-stage investor: having a positive impact on the vision and execution strategy of the entrepreneur. While it is terrific stumbling into those full-formed entrepreneurs with a substantially-baked plan that is fundable from the get-go, finding a truly great person who grows into the role and helping them get there is far more satisfying. It makes it fun getting up and going to work each and every morning.

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A new model for investing in “social”

I had the pleasure of sitting on a panel last night sponsored by GoodCompany Ventures, a very interesting shop that helps entrepreneurs with a “social investing” (but not necessarily a non-profit) mission get their start with advice, mentoring, and sometimes capital. I sat on the panel with some outstanding thinkers including Jacquie Novogratz (Acumen Fund), Fred Wilson (USV), Jacob Gray (Murex Investments) and Scott Edward Anderson (The Green Skeptic). I had never spoken on the topic of “social investing” before and, quite frankly, didn’t exactly know what it meant except I that generally thought of the term as pejorative from an investment perspective. Social investing? This means not really generating attractive returns, right? Well, after last night’s discussion and thoughts that came to me on-the-fly during the debate I have a very different perspective on what this burgeoning asset class really means, and how it has the potential to change the world in an array of positive ways.

First of all “social investing” is a really dumb term. If you’re going after conventional for-profit investors the social moniker will kill the pitch every single time. Fred Wilson raised an interesting point about the difference between short-term and long-term profit maximization. He is personally willing to take the long view on building an attractive, sustainable business even if its goal isn’t maximization of short-term profits (read: Etsy). And, in fact, he cites personal examples of companies that have been short-term profit maximizers that flamed out because of unhealthy business practices. But I think the issue is more fundamental than that. Many of the companies being incubated by GoodCompany or funded by Jacquie’s Acumen Fund wouldn’t make the grade even on the terms Fred laid out. It’s not strictly a short-term/long-term issue. It’s an issue of how you define capital and return.  

My hypothesis is that we need a whole new regime for quantifying the value of businesses that have goals other than strictly financial profit. We need hard numbers - real metrics - to demonstrate the value of initiatives that create value for society beyond the payment of staff and the generation of profits for shareholders. For instance, Jacquie brought up the example of a company Acumen funded that provides treated mosquito netting for families in Africa. These nets provide people from getting malaria, saving enormous amounts of money on acute health care and work time lost, while insuring economic productivity among the youth for their lifetimes that otherwise could have been cut short by infection and disease. These benefits are able to be quantified: we have the economic data to do the crunching, and the econometric modeling techniques at our disposal to quantify the ROI of these investments. But the “R” - the return - isn’t simply financial profit: it’s economic utility, real benefits being enjoyed by society. These are the terms we should be used to define the benefits of this kind of investing - this asset class - which really does need to be viewed as an asset class separate and distinct from businesses principally focused on financial returns.

So if the appropriate measure is economic utility (which encompasses both financial and social profits), how should these businesses and initiatives be funded? I would argue that it should tap into capital from two key sources: Government and funds that have traditionally gone toward conventional philanthropy. Fishing around in the traditional for-profit pond is a waste of time: utility in this sphere is generally uni-dimensional - profits first and last. Let’s be honest. Investing in this asset class has the potential to generate traditional financial returns, but they are tenuous. And if this is the benchmark by which capital is allocated among projects, many critical projects will go unfunded because the measure is wrong. So if we can all shed the stigma of “social investing” and acknowledge that you can still “invest” and “do philanthropy” at the same time, I think it would go a long way towards improving the messaging of this vitally important asset class. I see this approach as addressing the capital allocation problem among philanthropies. By taking a disciplined, numbers-based approach to quantifying cumulative benefits, it will become increasingly clear which businesses with a social mission should attract investment capital and which should not. It will no longer simply be a marketing issue, but one grounded in logic and reason. Will some projects go unfunded that would otherwise have attracted capital because of its PR? Yes. But will many more important projects get done that otherwise would have gone unnoticed because they might have a low Q score but massive economic utility? For sure.

These are only my initial thoughts on this topic. I will definitely be applying more mental cycles to these incredibly important issues. I’m looking forward to both stimulating and participating in this critical dialogue.

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Thoughts on Taking Venture Money

My (highly intelligent and experienced) friend Chris Dixon just posted on the importance of VC brands. He makes many good points and you should read his perspective. But the issue Chris raises begs a more fundamental question: whether or not to take venture money, and if so, from whom?

There are many variables that come into play. Are you a seasoned and successful entrepreneur? Do you have a functioning product with demonstrable traction? Does your team include a strong founder-technologist with a strong reputation? Taking venture money early is simply not an option for many, if not most, start-ups. If you are a guy like Chris who has already made top institutional investors money (Bessemer, General Catalyst) from a prior start-up (SiteAdvisor, sold to McAfee after 14 months), getting venture backing for your next company (Hunch) is not much of a struggle. But this is the exception and not the rule. And while raising money as a seasoned and successful serial entrepreneur from legacy backers isn’t difficult, it is generally a wasteful time-suck pursuing venture money early in the game. This is not the same as “Don’t talk to VCs.” Absolutely not! VCs are invaluable sources of input, contacts, and pitching experience for the new entrepreneur. These are opportunities not to be missed. But to spend enormous amounts of time trying to raise first-round money from venture investors is almost always a mistake.

So where to go? Strategic angels. Small venture firms and “super angels.” Entities, be they firms or individuals, whose charter is to take pre-revenue risk at a fair price and help these nascent companies succeed. At the seed stage it is critical, absolutely critical, to build the right investment syndicate. Getting money from mom, dad and friends is ok, but is not going to deliver the value-added of a strong seed-stage syndicate of professionals who may be tough on valuation, but bring a discipline and culture of support to the venture. Angels and small firms, just like brand-name VCs, can be due diligenced fairly easily. There are a finite number of these people and firms, and they can be tracked down through either VCs, online research or smart networking quite easily. But as is the same with venture firms, warm introductions are critical to getting the right meetings and being taken seriously. Fair or not, reality is that the best of these investors get bombarded with deals, and need to impose filters to effectively manage inbound traffic. And the most powerful filter is receiving a deal from a trusted source. So if you are a start-up seeking seed funding, I’d create my target list of angels and small firms/super angels and work my rolodex like hell to get the right introductions. Otherwise, you are fighting an uphill battle.

Let’s say that you’ve gotten that seed funding, something in the $250K-$1.5MM range, that has helped you prove out the business model, win early customers and generate some revenue traction. And let’s say that you are in a capital-efficient business, where you don’t need $20MM to ramp growth, but something in the $2-$5MM range. While it may make sense to take more money down the line, this amount is likely sufficient to build a very valuable business at scale (but perhaps not the $100MM+ business that we all dream of). Where should you get this Series A money? The “big brand” firms with huge pools of capital? Medium-sized firms? Small firms? Not an easy question, with virtually countless permutations. That said, t I do think there are three factors all entrepreneurs should keep in mind when making this decision.

1. Size of fund


2. Deal partner


3. Domain expertise

Size of fund: In general, the larger the fund, the larger the required exit in order for an investment to be worthwhile. A fund with assets north of $500MM is going to be hard-pressed to invest $3-$5MM in a company and be ok with an exit less than $100MM, assuming they own 20% of the company. The payoff simply doesn’t move the meter. They want to “lean hard” (e.g., put more money into and shoot for a mega-exit) on winners, because nominal dollar returns to pay back the fund are critical. This is where alignment of motives breaks down. ROI is not the measure, it’s dollars returned. This creates a problem for entrepreneurs who may want to accept the $60-$70MM exit (which, incidentally, is many times more likely to occur than the multi-hundred million dollar exit), but where the VCs have a blocking position and can force such a deal to be turned down. So it’s important to understand that taking money from large, “brand name” firms (and the two generally go hand-in-hand) often means that you are “going for it” - no sub-$100MM exit for you. It will either be a home run or you’ll be stuck for a long, long time. As long as you go in eyes wide open, then ok. But this is a material barrier to those running capital efficient businesses who want to preserve the optionality of exiting across an array of scenarios.

Deal partner: As mentioned above, having the right deal partner is critical, regardless of whether you are talking about the seed round, the A round, B round or beyond. A strong deal partner can help materially de-risk a business through sound mentoring, prudent board leadership and valuable connections. The brand of the deal partner is far more important than the brand of the firm. While having a brand name firm might help in future fund-raisings (unless they choose not to invest - then you’re screwed), it pales in importance to a great deal partner. Deal partners become great because of what they do, not who they work for, so raising the next round with a great partner, even if they’re not at one of the “elite” firms, does not in my experience represent a barrier to fund raising. And if the deal partner has good chemistry and a positive attitude towards working with the first-money in seed investors, so much the better. Then everyone can be pulling in the same direction. It is a powerful combination.

Domain expertise: An extension of the deal partner concept. Certain firms have experience at certain things. Those firms most active in your space and close to the end-users you want to sell to should be the highest on your hit list. They have the benefit of “pattern recognition,” having lots of data about firms like yours, how they might stumble and ways in which the growth plan can be better executed. They are also likely to have great contacts on the recruiting front, absolutely essential to building a Series A company in rapid growth mode. And while your deal partner is the one you work with most closely, having others in their firm able to help out with introductions, occasionally sit in on strategic Board sessions and to identify key recruits will prove invaluable over time.

While there are always exceptions, these are the factors I’ve found most important in helping entrepreneurs achieve their business and strategic goals. Good luck, and be careful out there.

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SIRI/XMSR Revisited: An Advertising-driven Google in the Sky?

Overview

Most of what’s been written about the SIRI/XMSR merger has put forth a vision of the future focused on two value drivers: (1) cost savings; and (2) sheer necessity, given the weakened financial state of both companies. Based upon my analysis of Internet data, I posited that while the magnitude of the potential cost savings couldn’t be denied, the opportunity for advertising revenues was substantial and largely discounted by the market:

Analysts are expecting Sirius 2006 revenues of approximately $615
million on about 6 million subs (up from 3 million prior to Howard’s
joining). Similar to the simple-headed but somewhat effective method I used
when justifying Google’s purchase of YouTube on a valuation basis, I
will seek to bring some back-of-the-envelope intuition to the potential
for Sirius’ ad revenues.

2 channels x 24 hrs/day = 48 hrs of programming/day

x 3 ad minutes/programming hour = 144 ad minutes/day

x 200 broadcast days/year = 28,800 ad minutes/year

x $5000-$10,000/ad minute = $144-$288 million ad revenue/year

Wow. Is this possible? Haircut these numbers by 50% and it still
looks like Howard has the potential to cover his basic $100 million nut
based upon ad revenues alone. Add in the value attributable to
those incremental subscribers (3 million x $120/year = $360 million)
and Mr. Clayton’s pie-in-the-sky deal doesn’t look so crazy after all.
Further, it appears that Howard’s Sirius’ ad revenue numbers could
eventually eclipse those from his Infinity days.

Further, there are some very interesting discussions concerning the technology issues embedded in the merger, i.e., whether SIRI and XMSR users have the ability to get both signals through their existing receivers, the ramifications of large numbers of terrestrial repeaters within key markets across the U.S., etc. These issues, while important, have certainly not been in the forefront (or even holding up the rear) of discussion in the wake of the merger announcement.

After collecting some additional data and attempting to connect the threads running across several important themes, I’d like to put forth an even bolder vision of the merged entity:

A subscription-based provider of premium digital content, with the ability to deliver targeted, relevant advertising through the airwaves as Google does over the Internet.

I know, this is a pretty bold vision of the future for SIRI/XMSR. Let me first validate the thinking around advertising as a key value driver of the merger, and then proceed to the somewhat more out-of-the-box thinking relating to targeted advertising through the airwaves. I’ve got to think that a big-picture, swing-for-the-fences, deal-making and advertising-savvy guy like Mel Karmazin has to be thinking about this stuff; he’s just keeping it to himself in order to shock the world. But not me.

Advertising and The Merger

Howard and Mel had a little chat about the merger at 7:30am this morning. Two big guys, two big personalities. Good stuff. Mel raised a lot of interesting points during the discussion, which you should definitely check out, but the key point related to advertising and governance is here (from MarksFrigging.com):

Mel said that each of the companies have advertising and it will be a
good thing when they can go to advertisers and tell them that they have
over 13 million subscribers to advertise to. Howard asked Mel where
they were holding these meetings and stuff. Mel said he had them over
to his apartment and that’s where they would go over all of this stuff.
He said that things didn’t work out for a very long time because there
were arguments over who was going to get 55 percent of the company and
who was going to get 45 percent. Mel said that XM was arguing that they
had more subscribers and more deals with car companies. Mel said SIRIUS
argued that they had better content and were growing faster. Mel said
that at the end of the day it was a 50/50 deal. Mel will be the CEO of
the company and Mel said that both boards agreed on that whole thing.
He said he would have been happy to step aside if that wasn’t
acceptable to them.

13 million and rising fast - that’s a pretty serious user base off which to work. It’s also interesting to note that a little visit to the SIRI website turns up seven recent job specs for Account Managers selling radio advertising. Mel knows that while the subscriptions are nice, advertising is the big embedded call option an investor is getting in the merger, an option which he fully intends to monetize for the benefit of SIRI/XMSR shareholders - including himself.

Another point I’ll make before getting into the technology discussion is that each satellite receiver has its own unique digital ID. So what? Well, presumably that unique ID is attached to a person or people that have preferences - preferences which can be gleaned by usage (i.e., this ID listens to these shows at those times and in these locations) or by selection (i.e., checking off interests on a secure website which then facilitates targeted advertising based upon user profiling). All I’m saying is that this is an interesting factoid that warrants a little consideration - and expansive thinking.

Advertising and Technology

Terrestrial repeaters. Huh? A little background, from CED Magazine 12/01/2006:

In 1997, XM Radio and Sirius each won satellite radio
broadcasting licenses in an FCC auction, each paying around $85
million. The FCC called the service Satellite Digital Audio Radio
Service (SDARS). From the start, SDARS was expected to need a network
of terrestrial repeaters to fill in shadowed areas.

This was flagged as a “hot button” issue between the satellite radio companies and the terrestrial radio companies (as represented by the National Association of Broadcasters - or “NAB”) several years ago. From audio/video revolution 06/30/2004:

Both satellite players use terrestrial repeaters (similar to cell phone towers)
in major cities to bolster reception of their signals. A spokesperson for Sirius
tells AudioRevolution.com that Sirius has terrestrial repeaters positioned on
top of buildings, including the McGraw Hill building in Manhattan and on top of
a medical building near the 405 freeway in West Los Angeles. In the case of
Sirius, these repeaters reach five to 10 miles in range and help broadcast
Sirius’ signal into the hard-to-reach canyons of Los Angeles, as well as into
the cement super-structures in New York.

Some repeaters have the
potential of more power – a lot more power. Several years ago, reports from
Inside Radio, a leading radio industry trade publication, said that some of XM’s
terrestrial broadcast capabilities in cities like Boston are as much as 50,000
watts, meaning they could compete with the strongest FM stations and have
exponentially more power than a smaller repeater. Thus the concern that has the
radio industry up in arms. Under this scenario, the satellite providers are just
an FCC ruling away from being competition for the local ad dollar. This would be
catastrophic for terrestrial radio, which depends largely on local, not
national, revenue to make its profit.

********************

No less than the radio trade organization NAB was an early accuser of satellite
radio’s intentions. Powerful chairman Edward O. Fritts came right out and said
it – satellite radio wants to get into the local radio business. While XM and
Sirius denied it, there is a general feeling among radio broadcasters that they
would not be surprised to see their satellite competitors try to win regulatory
changes that would allow such competition.

********************

What traditional radio does best in the world of advertising is reach customers
locally and regionally. The satellite providers are starting to legally provide
traffic for major cities, which possibly points towards their interest in
providing more local content for their users. The traffic move could also simply
be a way to keep their new and existing subscribers from having to flip-flop
back to terrestrial radio to get critical traffic information. This is not
dissimilar to TV satellite operators. When satellite television was able to
provide local channels, new subscribers signed up by the millions. The satellite
music companies would likely to see the same kind of bump. They also could sneak
in local ads that could potentially generate hundreds of millions of dollars of
revenue.

So you get the point. But what of this move to potentially attack the local advertising markets? Back for just a moment to our friends at CED:

Those poor folks at Sirius and XM Radio. They just get finished
with one FCC scandal–overpowered FM modulators that violate FCC
Rules–when they have to disclose that their networks of terrestrial
repeaters have been operating illegally. As it turns out, those
violations are no big deal. But as I began to investigate this latest
controversy, it suddenly hit me. They aren’t really satellite
broadcasters with terrestrial repeaters to fill in the coverage gaps. What they really are is terrestrial broadcasters with satellites to fill in the coverage gaps.

You can hear the terrestrial radio broadcasters right now shouting “Danger, Danger, Danger…” Now if you really want to adopt a “conspiracy theory” mind-set (e.g., the satellite broadcasters knew all along that this was the endgame, regardless of what they’ve said in the past to the FCC and the NAB), check out this link showing the Sirius control room. See that screen in the upper left? Those are the locations of its terrestrial repeaters. Notice the bunching in those heavily populated, super-valuable advertising markets? They’ve got local broadcast capabilities even through they’re a “satellite radio company.” Ha! And the punch line from CED:

From a spectrum policy perspective, there should not have been
any need for XM and Sirius to register the locations of their repeaters
with the FCC. They both have exclusive nationwide licenses for their
frequencies. If they cause co-channel interference, it would be only to
themselves. If the FCC gets around to adopting rules for these
repeaters, the rules will undoubtedly say that repeaters can be
deployed anywhere, so long as they meet the as-yet-undetermined
technical rules. But under the FCC’s temporary authorization rules,
every transmitter must be registered. So this “scandal” is much ado
about nothing.

On the other hand, this controversy has revealed that XM Radio and
Sirius have cleverly transmuted their satellite licenses into
terrestrial broadcasting licenses. Sure, the NAB is unhappy. But there
are millions of listeners who love it…and most of them don’t even
listen to Howard Stern.

The whole point of this line of discussion is to make the following argument: the real upside in the SIRI/XMSR deal is the advertising, not the subscription revenue. I think some of the biggest questions are:

1. How quickly can an integrated advertising strategy be developed?



2. How quickly can SIRI/XMSR users get access to both signals across a single device?



3. How quickly can ad rates reflect the combined subscriber base versus each in isolation?



4. How quickly can metadata be captured, collected and monetized based upon listener behavior and preferences, akin to cookies and/or memory of historic activity?

Getting the answers to these questions is, without question, worth billions in equity market value to the combined entity.

There has been a lot of discussion around the ability of the existing satellite receivers to pick up different signals, i.e., of SIRI and XMSR. The SIRIUS Backstage blog had a pretty comprehensive discussion of this very issue on 02/21/2007 in a post titled “Can Sirius and XM Radios Pick Up Both signals today?”

While there is no concrete answer, we have found a couple pieces of
evidence that Sirius and XM may be able to keep the current radios of
today and still offer all of their content to both sides. First, at Select Satellite Radio, the group that is in charge of making a dual-radio in order to ensure the FCC stipulation that they develop one, states this:

“It is acknowledged that SIRIUS, XM and their manufacturing partners
already produce receivers that permit end users to access all Satellite
Digital Audio Radio systems in compliance with FCC interoperability
obligations.”

It appears that this implies radios today can receive the entire
satellite digital audio radio services(SDARS, the technical term for
satellite radio) spectrum.

********************

Furthermore, for the first 6 months or so, XM used the same codec that Sirius does, Perceptual Audio Coder(PAC), before they switched over to AACplus in April, 2002.

So, right now we have two questions that need to be answered:

1) Do XM’s newer radios still decode PAC?

2) If so, does it mesh with the evolved version of PAC that Sirius uses?

If the answer to both is yes, then it looks like there is a strong
chance radios will be able to pick up both services down the road. This
of course assumes that the merged company broadcasts solely in the PAC
codec.

Ok, sounds pretty good, right? But in the comments to the post, there are some amazingly detailed and educated perspectives on precisely this issue, with the conclusion being that the existing receivers are not sufficient to pull down both signals. Check out comment #18:

I’m an engineer, so I know a bit about
how the radios work. Without getting too technical, the best likely
case is that an existing Sirius or XM radio might
be capable of receiving both sets of signals, but they’d always be
handled as two different sets of channels with a “hard” mode switch
between them (kind of like “AM” vs “FM”). In other words, you could
switch your radio from “Sirius” mode to “XM” mode, but it would take a
few seconds (maybe 20-50 seconds or more) before it locked on to the
new mode’s signal and authenticated itself.

That’s the best case. I’m not saying it’s definitely possible, just
that even under the most ideal circumstances, the best anyone with an
existing radio can hope for is to be able to reflash their radio and
switch it back and forth between “Sirius” and “XM” modes.

OK, I lied. I’m going to get techincal anyway. Here’s the hardcore explanation:

Sirius radios don’t tune channels. They tune 3 bitstreams — two from
the satellites above, one from the nearest terrestrial repeater. The
signals are combined together to produce a single encrypted bitstream
that carries all of the audio channels and meta information about them.
This encrypted bitstream gets passed along to the baseband chip.

The baseband chip checks its records to see whether it’s been
authorized to decrypt the bitstream. If it hasn’t, or it’s about to
need a refresh, it decrypts and examines the first chunk of the
encrypted bitstream’s datagram for the subscriber ID burned into the
chip at the factory. If it sees its number, it notes the authorization.
Otherwise, it waits for the next datagram and does nothing further with
the current one.

Once authorized, the baseband chip deserializes the bitstream into the
various channel streams. The desired stream then gets buffered and fed
to the codec, which transforms it into an uncompressed PCM datastream.
That datastream passes through a low-end DSP, and finally gets fed to a
digital amp, which is basically a high-power DAC whose output needs no
further amplification. Alternatively, it outputs it to the FM
transmitter for PnP use.

Anyway, the point I’m trying to make is that the chips involved are
fast enough to process Sirius’ bitstream in one gulp, but NOT fast
enough or equipped with sufficiently-large buffers to take in a
bitstream twice as large (encompassing Sirius and XM’s content) in a
single operation. They’re pretty fast chips to begin with, and
value-engineering will ultimately result in chips that are just barely
fast enough to do the task they’re designed for, but nothing more.

********************

by miamicanes
            

So maybe a quick fix to this receiver issue isn’t in the cards. No matter. The potential value we’re talking about far dwarfs the costs associated with either a retrofit or a receiver replacement program. Why? It’s all about the data.

Google in the Sky

When the services are integrated, you’ll have a broader array of programming available than if you were a subscriber to only one. This may encourage more people to enjoy the benefits of high-quality, crackle-free, proprietary content available from the merged entity. And even before more subscribers join, SIRI/XMSR will have 13 million+ legacy subscribers from which to entice advertisers. This is real power. But wait; remember that stuff we were talking about concerning the ability to deliver targeted ads locally (terrestrial repeaters dotting the densely populated, high-value landscape)? And remember the unique ID that each receiver has? And you know how SIRI and XMSR “push” information to subscribers, whether it is the name of a song, an artist, a sports score, the url of an advertiser (in the case of SIRI), whatever? What if they started to “pull” information concerning station choice, location, time of day receiver is active, length of time receiver is active, maybe user-provided preferences concerning various interests (restaurants, concerts, merchandise, etc.)? What’s to stop them from delivering tailored advertisements and content recommendations to you, a la Google and contextual advertising? All the pieces are there. It is simply a matter of putting it all together.

Does this sound crazy? It doesn’t to me. Now there is the small matter of the Justice Department and the FCC letting the merger happen, which is kind of the precursor to this whole line of discussion. But assuming the merger does go through, and SIRI/XMSR captures the benefits of the combined cost savings together with a larger and more attractive subscriber base, it will have the resources necessary to access, analyze and monetize the user-generated metadata to turbocharge their advertising machine. And this could represent a new paradigm for how value is extracted from the airwaves. Kind of like how Google showed us how to extract value from the Internet.

Am I dreaming? Maybe. But sometimes dreams come true.

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Google’s TSO Program Revisited: Let’s Get it Straight

I had a really busy day and was minding my own business when I came upon my friend Paul Kedrosky’s post concerning the initiation of Google’s Transferable Stock Option (TSO) Program. This is a topic I had written on back in December, taking a balanced view (IMHO) of the potential benefits of the program as well as the potential accounting artifacts. As I read Paul’s post I said to myself, “Hey, I don’t really agree with his points and think I’ll write a little comment.” But then I read a comment to his post that was so off the mark it got my blood boiling and I said to myself, “I think I’ll write a more detailed comment to this post to get some other (hopefully clarifying) thoughts out on the table.” Since this communication happened on Paul’s blog and since I thought my comment was, well, really good, I wanted to share it here.

First, Paul frames the issue and provides his views on Infectious Greed:

A quick refresher: Rather than non-executive Google employees either exercising
the options and selling at the current trading price (net the exercise price),
or holding them and hoping for higher prices later, employees will be able to
sell the vested options on a new secondary market created by Morgan Stanley.
Among many other things, this would attach a value to vested options, even
vested options having grant prices above the current trading price.

I
have said previously that I like the innovative thinking, but I’m not yet
convinced of the program. Two issues:

1. Where is the transparency? I have yet to see how outsiders get a window into
   this internal option market. I see how it’s informationally good for Morgan
   Stanley and for participating institutions, but how do the rest of us get a
   window into the option flow data?
   
   



2. I see how this is good for Google employees, as well as for management in
   increasing the perceived value of options used in hiring engineers, etc., but I
   have yet to be convinced that it sufficiently aligns interests with
   run-of-the-mill investors. The idea behind grant prices, vesting, and
   exercisable options is to keep investors and employees’ interests aligned. If
   Google employees can now make more money from options, and that doesn’t imply an
   increase in shareholder value, which this doesn’t, I’m uneasy.

Next, the comment that raised my ire:

1. Comment by Seth Finkelstein — February 22, 2007
@ 9:10 AM

As I said earlier, check me on this:

Exercised employee options turn into stock. Which dilutes the stock. Which
send prices down. Which leads to people exercising more options while they’re
worth anything . Which further sends the stock down …

But if they can resell the options, to someone else, the party continues that
much longer. ..

Options finance experts:

Is my cynicism correct?

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