Gridley & Company

Last Thursday’s Mobile in May thought exchange yielded some dynamic discussion and interesting insights. Topics included M&A Trends, The Connected Experience, Mobile Advertising and Measurement, and The Future of Mobile Transactions. Here are some of the key takeaways:

 M&A Trends in Mobile

• The mobile ecosystem is changing rapidly and will affect all enterprises.
• Most early M&A deals have been in advertising, marketing and metrics, plus some content.
• Key mobile drivers include rapidly increasing smartphone adoption…dropping pricepoints … and increasing network speeds and ubiquitous connectivity.

 The Connected Experience

• In 2010, ubiquitous connectivity became a reality. 2011 is all about the connected user experience.
• Mobility is enabled by both wireless and wired ecosystems; both are necessary components for mobility.
• Mobile will drive the biggest change in our lifetime, as well as trillions of dollars of economic activity across all devices, content and networks.

 Mobile Advertising & Measurement

• Mobile devices are now shopping companions, as consumers compare prices on the go.
• Content providers and media companies are relying more on mobile applications than the mobile Web.
• Tablet prices will drop considerably, with sales expected to reach 60 million in the US alone.
• Apple will win on margin, Android on volume.
• Like digital advertising, mobile advertising requires a new mindset, a new understanding and new partnerships before it becomes mainstream.

 Mobile Transactions

• The majority of smartphones sold today have embedded NFC chips that will enable mobile transactions. NFC standards and infrastructure are now in place.
• Still to be determined: who will pay for, and who will make money from mobile payments and transactions? Merchants? Card issuers? Banks? Consumers?
• Security and privacy – both in reality and perception — are critical components for mobile transactions to gain acceptance. 

 We’ll be posting video excerpts from Mobile in May in a few days. In the meantime, we’d love to hear your thoughts on what lies ahead for mobile.

Mobile marketing is on everyone’s mind these days, but the interest in today’s Mobile in May thought exchange, which we’re co-hosting with The Yankee Group, has far exceeded our expectations. Registrations filled nearly as soon as the conference was announced last month. We’ll be addressing topics such as:

• Recent changes in consumer connectivity about to spark a tipping point, driving a $2 trillion market opportunity for companies that act quickly.
• New advertising opportunities, expected to top $100 billion over the next few years, resulting from the recent explosion of mobile sales.
• How card networks, retailers, device manufacturers, application developers and other key stakeholders are capitalizing on consumers’ mobile access to real-time price and product information.

We’re looking forward to discussing these topics and more with top executives from leading industry companies, as well as emerging private companies and active investors. The discussion is sure to be lively and informative. Check Digital Dealings tomorrow for highlights of what we learned.

The flash sales sector has been red hot lately with the recent announcements of successful fundraises for industry leaders Gilt Groupe and ideeli. In addition, Amazon launched its own version of high end flash sales site MyHabit in April, and the France-based forefather of the sector, Vente Privee, also recently announced plans to enter the lucrative flash sales market in the U.S. in a joint venture with American Express. All these momentum drives home the thesis that the flash sales market is maturing. Discount shopping in the U.S. is fairly structured, with companies like TJ Maxx, Marshalls, and others bringing in billions in revenues each year. We are not only seeing the tectonic shift of bargain hunters moving from offline to online; flash sales sites appeal to a much broader demographic — the most loyal flash sales frequenters can be affluent, or aspirational, or both.

One thing is certain: competition in the space is going to become that much more intense. We have already covered Amazon’s foray into the space in the previous blog post, so we’ll dissect what the rest of the players are doing here. Vente Privee’s entry into the U.S. can pose a huge threat to the existing players, who all try to co-exist in a highly fragmented space. Vente Privee will bring with it ten years of expertise; the company literally invented the flash sales model and has been perfecting it since then, crushing both startups and big contenders like eBay in the process. Vente Privee boasts 13 million members in Europe vis-à-vis Gilt Groupe’s 3.5 million members (as of last year), and Gilt is the leader of the pack in the U.S. In addition, Vente Privee is reining in $1.5 billion in revenues and has been profitable since 2004 whilst almost no flash sales site in the U.S. has yet to attain profitability. Vente Privee is definitely one formidable force to watch for in the coming months.

Gilt Groupe, the New York-based flash-sales site that offers discounts on apparel, travel, home decor and other categories, raised a whopping $138 million in capital two weeks ago. Participants in the fifth round include the Japanese-based telecom conglomerate Softbank Group as well as Gilt’s previous investors, General Atlantic and Matrix Partners. Other new investors include: Goldman Sachs, New Enterprise Associates, Draper Fisher Jurvetson Growth, Pinnacle Ventures, TriplePoint Capital and Eastward Capital. Softbank’s involvement is two-fold. Not only will it be contributing $62.5 million of the round, which will all be going toward Gilt’s U.S. operations, it will also invest a smaller undisclosed amount into Gilt Groupe Japan. The two companies will each own 50 percent of the joint venture. In all, Gilt has raised $240 million. The fifth round values the company at roughly $1 billion before the round is taken into account. The funding will go toward launching new verticals and making acquisitions to get into new markets. In the next couple of months, Gilt has committed to launching a gourmet food site and a full-priced men’s online retail apparel site, but others are also on their way. With the introduction of full priced items, Gilt is morphing into more of a traditional ecommerce company. Gilt’s CEO Kevin Ryan launched the members-only site in November 2007. In roughly four years, the company has created a name for itself as the online destination for discounts on brand-name luxury items. Targeting affluent young professionals, the site lures consumers in with beautiful photography and creates a sense of urgency because the deals are gone once the inventory sells out. In addition to selling men’s and women’s apparel, it has branched out into new markets, such as children and home decor. It has expanded into travel and local deals through its Jetsetter and Gilt City brands respectively. One thing is for sure: the round will be helpful in establishing Gilt from among the copycats flooding the market.

Another high profile fundraise was announced on April 28 by ideeli, which was founded in 2007. ideeli has raised $41 million in Series C funding that was led by Next World Capital with Cue Ball Capital, StarVest Partners, Constellation Growth Capital and Kodiak Venture Partner participating in the round. This round of fundraise brings ideeli’s total funding to nearly $70 million. With over 4 million members, ideeli offers 50 to 70 percent discounts on clothing and accessories over a several day period. The sales are private, available only to members, with upcoming sales from brands announced via emails. Products include clothing for men, women and children as well as jewelry, handbags and home accessories. Ideeli also recently expanded into travel and daily deals, similar to Gilt Groupe’s Gilt City deals. ideeli is the fastest-growing members-only online shopping company in the U.S. and has emerged as one of the leaders in the highly desirable mass affluent market. “We are thrilled to welcome Next World and Cue Ball to our team,” said Paul Hurley, CEO and founder of ideeli. “Their respective deep expertise in retail and media is essential for our next stage of growth.” The financing will enable ideeli to support its phenomenal growth trajectory through a variety of new initiatives, including category expansions, partnerships, technology enhancements, marketing campaigns, attracting key talent and enhancing the ideeli member experience.

Amazon announced the launch of its very own private sales site MyHabit (www.myhabit.com) on Tuesday. MyHabit features flash sales that last for 72 hours, in categories ranging from women to men to babies, and is poised to be a direct competitor to Gilt Groupe, Rue La La, ideeli and the likes. The private sales sector has had tremendous momentum in the last two years, and it is rumored that the grandfather of all flash sales sites, Vente Privee, will expand its empire across the pond to the U.S. in the near future, which will shake up the landscape even more.

While Gilt and Rue La La are clear leaders in the flash sales category, there are a couple of key differentiators that set MyHabit apart from its competitors. First of all, MyHabit is able to leverage Amazon’s seamless logistic network and offers free 4 day shipping. Credits for returns on MyHabit can also be used on amazon.com, which is a huge advantage given the wide range of categories / products on amazon.com. The design of MyHabit.com clearly targets aspirational customers, and features 360 degree and videos with zoom in capabilities for the clothes on real life models. All MyHabit sales start at noon, and that makes it a direct competitor to Gilt as most other flash sales sites have sales that start at 11am EST.

Amazon’s 137 million user base is a force to be reckoned with, although how much of those users fit the flash sales demography will remain a question. Myhabit also recruited 40 buyers and a former senior executive at Bergdorf Goodman to create a highly curated products selection and the site features direct links to the designers’ websites that help promote their brands. Amazon has long ago proven itself to be king when it comes to perfecting the consumer experience; that said, success of the flash sales business lies directly on securing desirable brands’ excess inventory at attractive prices, which is a completely different B2B game that Amazon is accustomed to playing.

In many ways, the U.S. private sales sector is still at its infancy. We remain very bullish on the sector and believe the best is yet to come…

We attended the 23rd Card Forum & Expo in Miami from April 27 – 29. Payment industry experts who gathered for the first time in a few years reflected an attitude that seemed genuinely ready to greet certain disruptive changes instead of brace against them. A strong turnout of some 750 attendees from countries and companies around the world exceeded that of the past few years, suggesting participants on all sides of the industry – from issuers to merchants to those promoting systems to improve loyalty and prevent fraud – are feeling more optimistic about their businesses in the aftermath of the Great Recession.

In presentations, panel discussions and general discussions during the event, participants that included entrepreneurs and top executives from all four major card networks sketched bold new directions for payments, with a strong emphasis on emerging markets–both within the U.S. and abroad. Among the five difference industry tracks, we chose to participate in Emerging Payments, since it’s the closest to our heart. Our takeaway from the conference can be summarized below:

Mobile Evolution
The mobile revolution is being driven by the advancement of network speeds, access to the cloud, growth in smartphone uptake and the arrival of applications. Mobile is enabling new partners and new business models to be introduced to the traditional payment value chain, and new technology / new services must add value to the consumer since customers want unified services that are ubiquitous and work across multiple geographies. The result is an urgent need for standardization to ensure effective cross industry, truly global implementation. We will also likely see continued innovation and partnerships between payment networks, mobile carriers, merchants and financial institutions have helped drive the highly competitive mobile payments space in 2010. With commercial programs and NFC-enabled devices forecast on the horizon, mobile payments should continue to shape the conversation on the future of money. Informal payments are a trillion dollar market, and the opportunity to convert low margin, high-cost checks and cash into credit card payments is a win/win for consumers, businesses, card issuers, and alternative payment providers. The combination of innovative partnerships, ubiquitous Internet access, and mobile applications are transforming the way credit card payments are made without costly technology, RFID chips, or barcode readers. For example, we can expect to see a proliferation of mobile at the POS — the power of communications and engagement via mobile devices that ultimately translates into brand affinity and incremental transactions. With expected ecosystem changes in mobile payments, (i.e., NFC and alternative technologies), the U.S. could be set for significant expansion in mobile commerce, and mobile wallets will see explosive growth in the next decade. TSM will enable financial institutions to issue payment cards, including credit and debit cards, to the mobile device. The mobile wallet will provide consumers with a convenient, secure and easy-to-use tool to manage payment cards, access and manage account information and to make payments.

Internet PIN Debit
Pending debit card interchange regulation greatly threatens payments profitability; however, debit card usage is rising, particularly online where $81B of 2011 volume is expected to be debit. Financial institutions can leverage Internet PIN debit to reduce the cost of online transactions, improve margins and gain incremental sales, recouping lost revenue in a post-Durbin world.

Social Commerce
The recent sea change in consumer behavior, caused by phenomenon like GroupOn, Facebook, and Twitter, has put many issuers and banks at odds with the demands of an increasingly socially-oriented constituency. Uninformed and antiquated institutions are failing to grasp the new and innovative technologies that would allow financial institutions and the public to reconcile this growing divergence. Technology that enables social commerce will help banks and issuers embrace this behavioral shift and channel it into lucrative opportunities. Specifically, technologies like integrating features, such as social payments through Facebook and Twitter, and providing tools, like real-time payments analytics dashboard, can harness this tidal shift for future prosperity for the payments industry.

Yesterday, ValueClick announced the acquisition of San Francisco-based Greystripe for $70 million. We applaud this move by ValueClick and hope that others will follow. Greystripe is a logical complement to ValueClick’s online ad network business as it simply extends its reach into the “red hot” mobile sector. For a company that historically was known for its “value centric” acquisition strategy, this clearly isn’t. This is a solid, strategic move at a premium price. Well done. We strongly believe that more industry leaders across the digital marketing, media, and information services sectors need to be thinking about building up their mobile capabilities this year. Now is the time. That’s why we are hosting our “Mobile in May” event on Thursday, May 19th.

For more information, go to our website: http://www.gridleyco.com/whats-happening/.

Yesterday, Alliance Data announced that it was acquiring Aspen Marketing for $345 million. This represented approximately 1.43x 2011E revenue and 8.6x 2011E EBITDA. While the EBITDA multiple is a bit on the high end for a direct marketing business these days, Aspen is likely the largest independent company in the business with a solid, sales oriented, industry veteran as CEO and a strong presence in the automotive vertical.  Alliance Data currently trades at 3.5x 2011E revenue and 12x 2011E EBITDA so the deal is accretive for them. It is likely worth it for them to pay at the high end of the valuation range for this business.  While we prefer to see the traditional database marketing guys like Alliance Data/Epsilon make more moves into the digital world, this deal is a logical one for Alliance Data to do.

The explosion in sales of smartphones and tablets over the last six months spells radical changes for retailers, content providers and brands. For those who keep pace, there will be many new opportunities. On May 19 , Yankee Group and Gridley & Company will co-host “Mobile in May”. The afternoon thought exchange will bring together industry leaders from multiple sectors to explore those opportunities.

Themes will include:

• Setting the Stage: M&A Trends in Mobile to Think About in 2011
• The Next Tipping Point:  The Connected Experience
• Mobile Advertising in Measurement: What’s Hot, What’s Not, and What’s Different
• Bridging the Digital Divide: A View to the Future of Mobile Transactions

Mobile in May
Thursday, May 19, 2011
3:30 pm - 6:30 pm
Tribeca Grand Hotel
2 Avenue of Americas
New York, NY

For a complete agenda and a list of the moderators and panelists visit: http://www.gridleyco.com/whats-happening/

We are launching our e-commerce industry overview “Billion Dollar Babies: Trends and Opportunities in the New E-Commerce World” today. In the comprehensive study, we focus on the major disruptions that are changing the course of the e-commerce industry. More importantly, we have identified the opportunities necessary to capitalize on these trends.  

 The rate of change in the e-commerce world has accelerated dramatically in the last two years, spawning new business models, and turning traditional marketing and merchandising upside down. There have been very robust deal activities in the e-commerce sector. These deal activities and massive transformations of the industry landscape are creating tremendous opportunities for those who keep pace with the changes. A great example is eBay’s $2.4 billion acquisition of GSI Commerce that was announced on March 28. GSI has historically been an aggressive acquirer and Gridley served as advisor to GSI on multiple transactions that helped expand GSI’s capabilities. GSI’s sale to eBay is the perfect testament to the success of deploying a thoughtful acquisition strategy.

The ecosystem has advanced at a rapid pace, presenting new opportunities for emerging players and challenges for traditional e-commerce players. The key to staying competitive and succeeding in making the right investments is to understand and act on the changing landscape. In the report, we have laid out the market landscape and opportunities in the emerging, high-growth business models.

Download the report at: http://bit.ly/frYtYk

Congratulations to GSI Commerce and eBay on their announced transaction. We wanted to make several points about the deal and the implications:

1. This is an ultimate sign of success for GSI and e-commerce in general. The $2.4 billion price tag ($1.9 billion enterprise value) represents a 51% premium over Friday’s close and forward revenue and EBITDA multiples of 1.4x and 10.1x, respectively. This deal comes at the heels of Oracle’s $1 billion purchase of ATG in November, paying 4.1x and 17.2x forward revenue and EBITDA, respectively. Other big recent e-commerce deals include Walgreens’ purchase of Drugstore.com for $400 million last week and Amazon’s purchase of Diapers.com for $540 million in November.

2. With GSI, eBay gets a unique set of e-commerce assets. GSI has been much more aggressive than its competitors in deploying an acquisition program to enter adjoining, complementary businesses that clients wanted. Examples of this include: email (E-dialog), interactive agency (Silverlign), mobile (M3 Mobile Marketing), affiliate marketing (pepperjam), retargeting (FetchBack), flash sales (RueLaLa), and sports merchandise (Fanatics). We have helped GSI in much of their efforts in developing their marketing services capabilities and strongly believe that their strategy of expanding their capabilities via acquisitions has been the right one. This ultimate sale to eBay announced yesterday proves that.

3. Win/Win for GSI Management – Michael Rubin is showing his entrepreneurial drive as he invests $31mm to run a separate holding company that includes RueLaLa, ShopRunner, Fanatics and the licensed sports good business . Clearly, he is “putting his money where his mouth is” in terms of leaving the “mother ship” in the hands of Chris Saridakis and deciding instead to run these ancillary acquisitions/organic build efforts. In terms of Chris Saridakis, we think he is an exceptional leader that Michael brought over from Gannett, where he was Chief Digital Officer, to run GSI’s marketing services business. Chris is a very well respected guy in the digital marketing world having been an early leader at DoubleClick and then founder of PointRoll. So, for him to have the opportunity to run most of GSI’s core business is a great move for him and a real plus for eBay’s team. This deal seems really to have put both people in positions of their strengths.

4. Gridley has done an extensive study on emerging e-commerce models and the opportunities around them. We plan to distribute this report in the next few weeks. If you would like a copy of it, please contact Elena Goyanes at elena.goyanes@gridleyco.com. It will also be available on our website.