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Some rough waters for Kayak IPO July 16, 2012

Posted by David Card in Uncategorized.
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Travel search company Kayak Software filed an updated S-1 last week, implying that it will finally make its long-delayed IPO sometime this week. Kayak aims to raise as much as $100 million in a valuation that, at the high end of its pricing, would approach $965 million. The debut bears watching. A successful offering would bode well for the overall startup environment and as a proof of concept for vertical search. But Kayak also raises a few caution flags.

Kayak’s would be the first consumer Internet offering after Facebook’s, and the world wonders what it will take to take to remove that somewhat bitter aftertaste. Facebook raised $16 billion and kept tight control of the company, but priced the offering so close to demand that it failed to “pop” on opening day, and the stock has been sluggish ever since.

Kayak is something of a “traditional” consumer web play based on search, e-commerce, price transparency and consumer choice. Kayak isn’t riding any of the biggest buzz trends – cloud computing, big data or social media – and another, mobile, may be some cause for alarm. Consider:

  • Data. Kayak depends on real-time access to data about inventory, pricing, etc., but not in the unstructured formats that characterize big data analytics. The reason Kayak delayed its IPO for nearly two years was because it was fighting Google’s acquisition of ITA, the source of the bulk of Kayak’s airfare info. As part of a consent decree to enable the acquisition, Google’s ITA contract with Kayak can extend into 2016. But Google is building out its own vertical travel site.
  • Social. TripAdvisor, a bigger competitor, has built user reviews that, in fact, Kayak references, and integrates Facebook more deeply, resulting in higher engagement activity for its Facebook app than Kayak’s.
  • Mobile. Kayak says its mobile application has been downloaded 15 million times and that mobile users generated 17 percent of Kayak’s travel queries in the first quarter of 2012. But Kayak – like Facebook and Google – is a little nervous about its ability to monetize mobile activity. It estimates that mobile queries only generated 2 percent of Q1 revenue.

Hints of vertical search success

Kayak is one of the few examples of a vertical search business outside of retail. Amazon, Best Buy and others use search technology effectively on their own shopping sites, but few companies have made a go of a standalone, specialized search site. Although Kayak does enable hotel booking on its site, most of its revenue comes not from direct transactions but from bounties paid by travel sites it sends traffic to, and from advertising. Kayak had $225 million in sales in 2011, up 32 percent from $171 in 2010. It showed an operating profit of $15 million. Kayak’s growth rate increased in Q1 to 39 percent, and the company said it expected the June quarter to show revenue of about $75 to $76 million, up 31 to 34 percent from a year ago.

Those are solid if not spectacular numbers for an ageing startup in a market that’s probably already seen its big disruptions. Search engines and the first wave of online travel agencies rocked the travel industry when they exposed airline pricing and availability and put control in the hands of consumers, wiping out huge swaths of the off-line agency business. Kayak continues to fuel those online agencies, perhaps at the expense of revenue diversification. During Q1, 63 percent of its total revenue came from Kayak’s top ten travel suppliers and online travel agencies. Expedia alone accounted for 23 percent, while Priceline and Orbitz produced another 10 percent each.

So Kayak has begun to make the case that standalone vertical search can work, at least as long as it can add differentiation to the search experience through its speedy and efficient user interface. Unlike a lot of sites in the e-commerce ecosystem, Kayak doesn’t depend heavily on Google for traffic. According to its S-1a, 75 percent of Kayak’s query volume originates from people who directly visited its site or mobile apps, and only 10 percent from general search engines.

Kayak has to pay for that awareness. The company spent $58 million on brand advertising (including TV and billboards) in 2011 and a whopping $21 million in the first quarter of 2012. It expects to invest at this level or higher for the foreseeable future. And online marketing expenses – including money it spends on Google search keywords or contextual advertising – increased even faster, at over 60 percent to $18.5 million in Q1. But even with these expenses, Kayak’s margins are holding up.

Can Kayak continue to thrive in the face of general search and Google’s own vertical search efforts? Well, in 2008 Microsoft acquired Kayak competitor Farecast, and subsequently launched Bing Travel. But since 2011, Kayak has had a co-branded, revenue-sharing partnership with Bing Travel. If Kayak can continue to differentiate, maintain customer loyalty, and ride its partners, it should continue to show steady growth.

Question of the week

How can Kayak continue to differentiate in travel search?

Social commerce remains a licensing play May 21, 2012

Posted by David Card in Uncategorized.
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One theme attached to Facebook’s IPO was the company’s need for revenue diversification. Advertising and virtual goods pay Facebook’s bills, but delivering on the promise of social commerce – connecting the dots between content, curation, communications and commerce – would be golden. That’s something Facebook has failed to do so far. Meanwhile, a startup like FindTheBest is tapping an established social commerce revenue stream while Pinterest raised $100 million on e-commerce hopes.

Three main categories of services drive social commerce: 1) reviews and recommendations, 2) group buying and daily deals and 3) shopping communities. Facebook’s strategy is to use its platform to enable developers to weave all three together. But, while Likes are ubiquitous and Facebook is adding shopping-friendly “verbs” to its Open Graph, its own deals and coupons Offers product is off to a sluggish start and retailers and merchants have seen little success for their Facebook storefronts.

Beyond impulse purchases

Online commerce is largely directed shopping, playing off the web’s strength in search and price transparency. But social commerce – especially when it’s delivered within the confines of a social network – seems better suited to casual impulse purchases. Two areas where social technologies could add fuel for e-commerce are:

Potential players

FindTheBest began life as a consumer site, but increasingly positions its vertical comparison engines and aggregated and curated reviews as “content” for publishers. The company does revenue-sharing deals – from advertising, affiliate fees and lead generation – rather than pay-upfront licensing. That’s an intriguing model, if a little far removed from where the transaction occurs, and FindTheBest has signed 30 deals with publisher sites this quarter.

In contrast, even though the lead funder behind Pinterest’s latest round was the Japanese e-commerce holding company Rakuten, the transaction connection still seems a little whimsical. Content sites and some merchants show compelling anecdotal evidence that Pinterest can drive traffic, but they’re sketchy on conversion data. It would be wise for Pinterest to tap into this phenomenon by charging for marketing pages or collecting affiliate fees before it leaves too much money on the table.

Pinterest might turn out to be better at delivering licensable technologies than e-commerce transactions. In fact, that may be Facebook’s role as well. Right now, social commerce feels like a technology platform play rather than a retail business. According to our GigaOM Pro 1Q12 U.S. consumer survey, only 7 percent of social network users regularly shop on social networks. That’s a condition likely to continue for 24 to 36 months at least.

Question of the week

When will social commerce actually drive significant transactions?

Microsoft raises bar for social search May 14, 2012

Posted by David Card in Uncategorized.
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Last week, Microsoft showed off what it called the biggest redesign of its Bing search engine in its three-year history, featuring a results page loaded with social features. The new Bing will roll out to users over the next few weeks. Microsoft seems to have achieved its stated goal to balance social signals and an easy way to ask friends for advice “without compromising the core search experience.” In demos it’s a far deeper and more graceful implementation than Google’s justly criticized “Search plus your world” social personalization scheme.

What it means

Search is still vital for Microsoft. With this release, Microsoft has set the standard for social search. It has fine-tuned social results and presents them in their own sidebar that encourages but doesn’t depend on user interaction. Microsoft says its research shows that 90 percent of people tap into friends or experts before decisions, but it doesn’t bury algorithmic results beneath social data that may not be useful.

Microsoft is taking in data from a broad variety of social media sources including Facebook, Twitter, Quora, Foursquare, LinkedIn and even Google+. Microsoft has licensing agreements with Facebook and Twitter but also uses publicly available “scraped” information and data from social networks’ APIs. Google has alienated Facebook and Twitter to the point where Twitter reportedly blocks Google from using what would be normally public data.

Microsoft enables users to take direct actions based on results in what it calls the Snapshot section of a results page. It looks like Microsoft has been less heavy-handed than Google in promoting its own services, and pulls up info from Yelp, Open Table and others. Likewise, the social pane dispenses with the need to ingest social annotations directly into search results, yet still offers up logical actions with friends or “people who might know.”

Microsoft got social right; Google did not. (Danny Sullivan is skeptical that either has the formula.) No, social media won’t replace search. But Microsoft has a great demonstration of how to incorporates social signals into search. Google’s flubs have so far cost it no market share, and Microsoft’s own slim gains have come mostly at the expense of Yahoo, its partner in search technology. Microsoft still needs to get users to try out Bing, even before it can prove whether social media adds much to the search experience. It’s not clear whether big audience aggregators Yahoo or Facebook, that also uses some Microsoft search technology, will adopt these new conventions. AOL’s still a Google distributor. So it’s going to cost Microsoft a lot of advertising dollars to expose Bing.

Whom it affects

Google. Before Microsoft can gain any awareness, Google should do whatever it takes (i.e., spend liberally) to get its old Twitter license re-done; Facebook may be hopeless. Google should also tone down the promotion of its own products within general search results, and focus on building out vertical search sites. If they’re legitimately competitive, they’ll show up in organic results.

General-purpose search. Yahoo, AOL and Ask could copy or license Microsoft social results. The portals can focus on personalization based on their own extensive user data.

Vertical search. Sites that offer search of specific categories, like Kayak, media companies and retailers can all observe, adopt or license techniques from Microsoft. Social search should remain one facet of results – not the dominant method. That’s because there are no simple rules for when social search works. It’s not a matter of casual versus considered purchases. Friends can make valuable travel and local service provider recommendations, but their advice on medical, financial and entertainment choices may be suspect.

Key takeaway

Bing represents social done well, and it could lead to minor market share gains; but this is hardly the death of Google.

Question of the week

Will social search integration gain Microsoft any market share?