28 June 2011
On June 14, 2011, I read “Getting a Great Rate—Why I’m Buying the BankkRate IPO”. Several ideas crossed my mind. First, I was in general agreement with the upside for a company that makes once, hard-to-find financial foundation data easily available. Pro or average citizen benefits when key metrics are easily available.
Second, Mr. Peck correctly identified some soft spots in the current IPO marshland. He said:
As we saw with some other Internet companies during the infamous Panda changes from Google, search engine results can have a large impact on a website’s traffic. Bankrate gets 80-90 percent of its traffic for free (that is, not having to pay for links), and about 50 percent of that comes from search engine optimization. Should Google somehow change its algorithm or other competition improves its rankings compared to Bankrate, then that could prove negative to RATE.
Frankly, I did not think that Mr. Peck was sufficiently aggressive in stating this risk. Across my own information network, I see how arbitrary changes in Web indexing methods can have significant effects on traffic. One example that one information service disappeared from one US vendor’s index while the same service rose to a top ranking on the new Chinese-friendly Jike.com search system. Many Web sites have lost control of their destiny as certain search engines mix human fiddling with “layers’ of code that wrap 1998-style indexing in an effort to achieve “efficiency.” I want to be clear. I agree with Mr. Peck in broad terms, but I think the degree of risk is sufficiently high to warrant additional caveats in a business sector in which Comenius Vanderbilt would be quite comfortable.
Armed with my close reading of his analysis of Bankrate, a promising online information service, I met with him in the cavernous lobby of the hotel adjacent Grand Central Station. (Thank you, Mr. Vanderbilt for providing a Google-scale setting for my conversation with Bob Peck.)
Robert Peck, CFA, institutional investor and Wall Street Journal ranked analyst, Columbia MBA. Mr. Peck is the managing partner at Quasar Capital Advisors
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The full text of the interview appears below.
The Interview
Arnold: Bob, thank you for taking the time to meet with me. What’s the focus of your new business.
Peck: No, thank you, Steve. I have been quite busy with Quasar, which is the name of my new company.
I thought you were at Baron Funds.
Yes, after I left BearStearns in early 2008, I wanted to work in a different business sector. I had been immersed in the interesting but volatile Internet sector for a number of years. Baron gave me the opportunity to broaden my work into other aspects of technology and media”, which was both challenging and refreshing.
significant projects which was both challenging and refreshing.
So what’s the focus of Quasar?
I kept close watch on some of the new business opportunities that were becoming evident where the Wild West of the Internet was intersecting with more traditional businesses. The burgeoning growth of the iPhone and android mobile ecosystems were tremendous for the Internet, as web sites became more accessible for people on the go. Apps only amplified the robustness of Web offerings and expanded the reach of Internet companies”
Give me an example.
Sure. You have one example in your hand. The Apple iPad is an exemplary product, and it has made clear that the Internet, consumers, and retail can be combined in what seems to be a category killer. I wanted to work in that type of confluent opportunity space. I needed a new vehicle to explore the intersection points that were being created by companies like Apple and other firms.
Okay, on my iPad I see this statement about Quasar: “Our vision is to leverage our long Internet and Technology industry experience, to provide premium strategic and financial consulting services in the Internet industry, helping our clients attain their corporate goals.” That does not sound like railroads meet the BlackBerry Playbook to me.
I can see your point. However, I see tremendous opportunities for a mobile device company which can infuse its traditional product with what I call “intersection opportunities.” BlackBerry may not be the poster child for this revolution, but other companies are. I am following closing some interesting developments in financial information and consumer services, for instance.
Can you give me some color about that opportunity space?
Yes, I see you have a print out of my Business Insider piece. As you know, I think Bankrate looks like an interesting opportunity. I identified several characteristics. Although I was talking about Bankrate, my observations provide an indication of the attributes my analysts and I are tracking.
Okay, let’s take a couple. You say, “Bankrate’s collection of sites make it #1 in insurance, credit cards, mortgages, and deposits. It is the clear leader, paring up top advertisers with good leads. The value of its leads is demonstrated in its scheduled 10-20 percent price increase the company is passing through next month, with no push back from advertising clients…This leading group of sites is run by a strong and seasoned team. CEO Tom Evans is highly respected and has been leading the company since 2004. CFO Ed DiMaria has been the CFO for five years; and Mikey Ricciardelli is an online marketing veteran having joined the company over five years ago.” Aren’t we talking about raising rates and having some savvy people at the top?
That’s part of my analysis. What’s happening at Bankrate is three important things. First, companies that are not encountering ad softness have an advantage over the companies that have to use an iron fist to grow. Bankrate is being pulled forward. Second, the company is not one site or one service. I like the notion of a “portal approach” combined with the laser focus of a vertical. Companies that can slice and dice the market have an advantage over “everything is a nail” operation. Finally, people are more important than technology right now. When a company has a solid management team, I know that technology is another item to be managed in a creative, healthy way. A firm that chases the 18 year old at an engineering school in Germany is looking for a silver bullet, not a business.
That’s fair. However, I want to push back a bit. Financial services no matter how one cosmeticizes the sector is crowded, chaotic, and under intense scrutiny. Aren’t their less problematic zones of confluence?
Sure, but the company that can bring coherence to a problematic area can win big. That’s what I think Bankrate has a chance to do. The opportunity is just that much bigger in a huge space like the ones Bankrate serves.
Let’s shift gears. Google is now in Microsoft’s anti-competitive hot seat. The most contentious action Google has taken in the last two years has been what’s now called Panda. What happens if Panda erodes traffic for sites that have a heavy dependence on Google?
I agree. Panda can make life difficult for many sites that get caught in the Panda tripwires. However, I applaud Google for taking actions that ultimately will force some Internet sites to improve quality.
However, as you know, some sites either though intentional or unintentional actions will lose traffic. If those sites are dependent on Google advertising, revenue will be lost. The damages can be in the hundreds of millions.
For some companies which are unable to adapt, bankruptcy is a potential outcome.
In the financial services sector, not just the narrow
Bankrate case we were discussing a moment ago, isn’t “findability” a
big challenge. What
must a company offering online financial service do to maintain its brand?
That’s a tough question. Different firms manifest different challenges. There is no one-size-fits-all solution.
Stepping back, financial services companies have to provide the quality of service their customers expect. A Web site has to be able to perform well on two vectors; for example:
- A solid user experience. Some consultants call this the UX or user experience. For me, the public facing presence has to be easy to use whether a Web site or an iPad application. A lousy experience will chew up the firm’s bottom-line more quickly than a year ago, for instance.
- Quality leads to advertisers. There is some talk about declining efficiency of certain online advertising methods. If these rumors prove to be true, then the Web site or app must find a way to deliver results. For a $20,000 online ad spend, the Web site must deliver more than $20,000 in actual value. My view is that such efficiency analyses are going to have to move from the superficial Excel chart school of thinking to a more robust, sophisticated approach.
Is that an area in which your firm is working?
At this point, I want to say that we are exploring new modeling and quantitative approaches. I can’t say much more than that, however.
I understand. Some what’s your work in this area suggest?
Okay, one quick observation. If you can’t be found, you don’t exist. This does not apply only to Google. It applies to Baidu and Yandex as well as the French system from Dassault Exalead. The split today is 50 percent of traffic is organic and the other 50 percent from SEO. If Panda tips the equation, you can see the cost implications of having to pay for clicks.
Let’s explore that idea. How do companies deal with the shift from key word search, traditional 1998 style searching, and Google’s 65 percent plus share of the online search market?
Remember Darwin?
Sure.
Web sites must adapt to Google’s changes. Web site must optimize for Bing. So, bottom line: “Adapt or die”
What happens to the existing business models of companies which have minimal marketing traction in non Google channels?
I think that it is now time for Web sites to find ways to diversify away from Google. This will be painful because for 12 or 13 years, many companies have grown fat and lazy riding in the free traffic bumper car of Google search.
Now multiple marketing channels are needed.
What are the financial implications of this shift?
I mentioned the challenges to online ad revenue. But there will be margin compression as well. Adept firms can gain a competitive edge by capitalizing on this shift. Time may be shorter than some believe. The wild card, of course, are the legal challenges to Google as well as in other adjacent sectors such as the Apple Samsung mobile issue and Oracle’s activities in open source software.
Could Google make changes in its shift to mobile that could trigger a domino effect of falling revenues in companies which exist to “surf on Google?”
I don’t want to convey any negative about Google or any other Web indexing service. Let me take a broader view. I think that Web search is declining. It won’t go away but it is falling behind mobile search.
And mobile search is different. The form factor is different. The use cases are different. The type of information the user requires is different despite some broad, general similarities.
Across a number of demographics, mobile information access is growing faster. With fast growth and a larger user base, mobile is becoming more important to businesses.
I am interested in companies that appear to have a way to capitalize on this phase change in information access. The highest value companies will grow with this opportunity or risk falling behind.
Optimization of opportunity is key.
How do stakeholders prevent this type of risk? Call Quasar Capital Advisors?
I am delighted you said that. Thank you for the commercial.
Seriously the shareholders must make sure their companies are aware of the changes and trends, with large amounts of revenue being generated via SEO, taking advantage of the trends becomes paramount for portfolio companies.
Thank you for taking time to talk. Before you go, any financial tips you can give me?
Sure, read my articles in Business Insider and other publications. We have a new information service coming soon. And, no, I can’t provide any details.
Stephen E Arnold for HighGainBlog.com, June 28, 2011
