Needham & Company on Internet Services & Digital Media: New Rules of Engagement Drive Consumer Internet Valuations

Needham & Company on Internet Services & Digital Media: New Rules of Engagement Drive Consumer Internet Valuations

Needham an alyst, Kerry Rice, said, "Webster’s Dictionary defines the verb “engage” as the ability to hold the attention or to induce participation. We believe engaging the consumer is the key driver of valuation for consumer focused Internet companies. While engagement is not a new Internet term, we believe innovative social, mobile, and personalization strategies will be become more visible Internet trends in 2012. While social is not new, we expect social to expand beyond Facebook, Twitter, and LinkedIn to become a pervasive feature across the Internet for marketers. A mobile strategy is a must in order to engage with untethered consumers 24x7. Finally, personalization is the ability to transform analytical insights into curated offerings that appear tailor-made for individuals. Each of these trends should raise the level of engagement, lead to higher revenues, and ultimately higher valuations."

1) Social networks, particularly Facebook, have raised the level of engagement between consumers and marketers. We believe the engagement is results of social networks’ ability bring “word of mouth” into the digital age...

2) How do you reach 7 billion people, 24 hours a day, regardless of location? The answer is through their mobile devices...

3) Personalization is the ability to leverage consumer data to create tailored experiences for each consumer, which should improve consumer engagement, leading to higher return on investment and increased revenue...

"Within our coverage universe, we believe Google (Nasdaq: GOOG)(Buy) has been the most effective at integrating all three of these trends into its go-to-market strategies, particularly with its own social network Google+ and its Android mobile platform. While Google leverages consumer data to provide the most relevant search and display advertising, over time we expect the company to utilize Google+ to make search, mobile, Picasa, gmail, and other services more personalized. Amazon (Nasdaq: AMZN)(Hold) should also benefit from these three trends. Mobile commerce surged this holiday season, and we expect Amazon to continue to benefit as mobile purchases become a larger channel for consumer spending. The company also personalizes recommendations, and we expect Amazon to continue to enhance the consumer experience through curated offerings. Finally, Amazon has integrated social features, such as sharing purchases with friends via Facebook. As a leading advertising network, we believe ValueClick (Nasdaq: VCLK)(Buy) should prosper from the continued growth of online and mobile advertising given its recent acquisition of Greystripe, a brand focused mobile advertising network. We are also positive on Zipcar (NYSE: ZIP)(Buy) and ReachLocal (Nasdaq: RLOC)(Buy). Zipcar has successful launched a Facebook page and mobile app that enables subscribers to reserve or extend vehicles reservations from either option. ReachLocal enables small and medium businesses (SMBs) to shift their advertising budgets online. The company’s ReachCast product creates and publishes buzz-worthy content to Facebook, Twitter, and YouTube pages to engage and grow the base of fans and followers for SMBs."

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