Facebook Buys Startup Parakey: Is an Acquisition of IncrediMail Next?
Written by: Zack Miller | July 22, 2007
Zack Miller
www.IsraelNewsletter.com
We’re certainly not the first to blog about Facebook’s first acquisition and why Parakey’s platform may soon rival Google’s (GOOG) move to the Web OS. See InformationWeek’s article which is a good summary of why the deal is so interesting strategically for Facebook. Paul Kedrosky has put his $.02 on betting that Facebook will file for an IPO by the end of the summer.
The blogosphere is also humming that this first acquisition might be just the first of many as Facebook tries to position itself as a platform, not just a social-website. I have to admit that I’m late to the party and only just opened a Facebook account 2 weeks ago. That said, I haven’t slept much in the past two weeks after connecting with high school classmates I haven’t spoken with in 20 years and with business associates with whom I’m working future deals. In fact, I’m spending a lot more time on Facebook than I am on LinkedIn — Facebook can conceivably edge LinkedIn out of the business networking space.
This all aside, one of the first things I wanted to do was “Pimp my Facebook.” This activity, generally associated with MySpace (see Pimp my Profile) or Xanga, entails finding lots of cool applications, photos, emoticons, color schemes (you get the picture) or just general “bling” to make my profile stand out. While MySpace users spend a lot of time and some money doing this, Facebook has instead opted to work with third-party application developers to create plug-in programs that integrate into the Facebook ecosystem. The result has been to keep a very high-level user interface that doesn’t get bogged down in TOO MUCH glitz.
The ability to keep the conversation high is to Facebook’s credit, not to devolve into a 12-17 yr old playground.
But Facebook will have to start opening up a bit, both from a revenue perspective (they have to make real money at some point) and from a usability perspective.
So, enter IncrediMail (MAIL). IncrediMail is a tiny Israeli company sporting a profitable, growing company with a market cap under $100MM. They sell all things email: from backgrounds and letterheads to sound effects and emoticons. They’ve recently diversified their product offerings away from just software downloads and into licensing their content library, an anti-spam solution and collaboration with casual games giant, Oberon and into personals via a deal with Yahoo Finance. Advertising has kicked in and the company is growing profitably and generating cash.
Why would Facebook buy IncrediMail?
Giving Users More Control of the UI: Let users start pimping away. Let users have some flexibility in terms of managing their profile and their messaging of other Facebookers. As I mentioned before, I think it’s important to limit users’ options, but Facebook would stand to benefit by increased lock-in if users can have more flexibility. Owning the service provider in this sense ensures QoS and platform-specific product development — not to mention, access to the whole revenue stream.
Ownership over a annuity revenue stream: Personalization is a huge revenue driver. From ring tones, to ring backs (see Vringo’s Video Ring Back), to MySpace pimping, consumers like personalizing both their real and virtual presence and have shown a willingness to pay for it.
Why Would IncrediMail benefit from a Close Relationship with Facebook?
Further diversification away from revenues derived from download: Anti-phishing/spyware concerns started with general warnings on websites devoted to studying these issues and have evolved to the point where applications are being integrated not only into the web browser but into the computer’s Operating System. It gets to be a harder and harder game to get users to install software. If I’m IncrediMail, I want to find distribution beyond the software game. They’ve done this with their partnerships with Yahoo but I’d like to see them get plugged-in into MySpace/Facebook/Xanga-type platforms. These platforms are growing like weeds and I think users are open to IncrediMail-type services.
It seems to be the making of an incredible tie-up. The future only portends whether we’ll see the like of IncrediFaceMailBook. It has a nice ring to it.
Disclosure: Author’s fund does not have a position in any of the stocks mentioned here as of 7/22/07.
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Zack Miller is the lead equity analyst for America Israel Investment Associates, LLC. and a former equity analyst for a leading multinational hedge fund. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email zack@profile-financial.com
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