Friday, August 21, 2009

The Power of "Boring" Recurring Toolbar Revenues and Yahoo's Settlement with DivX

You know those search boxes on the upper right-hand corner of virtually any major Internet site's home page? Those -- and frequently other related items in that top "bar" of those sites -- are called toolbars. And, Yahoo! is reported to be forking over approximately $9.5 million to DivX for allegedly breaching a 2-year deal with DivX to provide its toolbar to DivX's site.

What's this all about? Well, those boring old toolbars -- one of which you likely have on your own PC or Mac because you intentionally or (or, more frequently, inadvertently) installed it when you downloaded other software from the Internet -- generate exciting (and HIGHLY predictable) recurring revenues. This is especially true for companies -- such as DivX -- that receive lots of traffic to their website and lots of customers who download its products. In fact, typically, DivX generates a whopping $20+ million annually from toolbar revenues alone -- and for, essentially, doing nothing! From DivX's annual reports, this appears to represent about 20% or more of DivX's overall revenues (and second most important revenue stream -- second only to its core licensing business)!

Why? Because Internet search -- of course -- is highly lucrative (just ask Google). And, companies like DivX which give (or, at least try to give) toolbars to their customers in get a significant cut of every search made via that toolbar. That cut is generally higher than 50%! And, the not-so-boring beauty of toolbar revenues is that -- just like interest on money -- those revenues compound month over month. Look at it this way. Let's say 10 of my customers install a toolbar from my site this month. That means I get a cut of every search they make from that toolbar this month. But, then I get 10 new customers taking my toolbar next month -- that means that I now have 20 customers from whom I get a cut of every search for month 2 ... and so on ... and so on ... These ongoing monthly revenue streams are called "recurring" revenues -- and every company wants them!

My own previous company -- SightSpeed -- saw the beauty of this "boring" revenue stream ourselves -- revenues were meaningful immediately and were growing month-over-month significantly. And, these revenues were "easy" -- we didn't have to do anything -- our customers already were downloading our free software, so a high percentage of them would download our Ask toolbar at the same time. And, voila ... the magic begins!

For DivX, historically, toolbar revenues have been significant -- in fact, a major revenue stream -- as indicated above, a whopping $20+ million annually! So, when Yahoo! yanked its toolbars from DivX, DivX was not pleased. Hence the lawsuit ... and, hence the settlement.

And, for DivX, the beauty of this settlement is that DivX replaced Yahoo! with Google after the fall-out so has been collecting toolbar revenues throughout its dispute with Yahoo! So, in effect, the $9.5 million from Yahoo! can be seen as a nice little "bonus" on top of the already easy revenues resulting from its Google deal.

So, essentially ANY website with any meaningful traffic and with any free downloadable product is leaving easy money on the table by not having a toolbar deal. After all, you have every right to monetize your business ...

Not so boring after all, eh?