Analysis:
IS AGLOCO SCAM ?
SIMMONS
Environmental Services, Inc.
213 Elm
St.
Salisbury, Ma 01952
Telephone:(978)-463-6669
Simmons
Report: AGLOCO
This analysis is centered around the amount of personal
value anAglocouser could get, with a
special focus on a user who is actively referring new users to AGLOCO. Material
used included theAGLOCO
website(membership agreement,
privacy policy, FAQs and general information pages). management interviews,
critical blog postings concerningAgloco, internet advertising and
commerce data, valuations of other Internet communities and the business model
economics of Google, Yahoo, MySpace, You Tube, etc.
Conclusions:
The valuation conclusions are based on AGLOCO reaching two
million users in a two year time span:
-
A user who has no referrals should receive ownership in AGLOCO worth on
average about $150. (plus monthly cash distributions)
-
The average value of an AGLOCO user’s referral network should be $30 each
in ownership shares plus the referrer’s share of monthly cash
distribution.
-
The average AGLOCO direct referral should be worth in excess of $3,000 each
(see example below for details)
-
The analysis also
shows a range of monthly cash distributions of between $5 and $15 a month per
user.
-
The AGLOCO business model looks theoretically sound – (assuming they get to
a decent size quickly - at least 500,000 users within nine months to a
year)
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The cost of recruiting new users toAglococan vary. For many users it
is simply sending an email to friends or contacts – or talking to them
directly. For others it is blog postings or website notices and for some users
paid ads on search engines. The privacy and anti-spam policies
ofAglocoand the track record on
these issues of Ray Everett-Church (AGLOCO’s Chief Privacy Officer) makes the
risk of getting spam, pop ups and other trash as a user a non issue. In
general, given the low level of work needed to recruit new users to AGLOCO and
the zero cost in terms of money, the cost/benefit ratio of recruiting new users
to AGLOCO seems to be highly favorable. Because there is no limit as to the
number of referrals a user can recruit, the upper end on this opportunity could
be high (which means it can be worth putting in the effort to promote
actively). This analysis was done two weeks afterAglocolaunched and there have
been user postings noting referral networks of 4,000 and 5,000 already. At $30
value each this would be $120,000 to $150,000 so far, which means AGLOCO could
make some serious recruiting users a high return on their
efforts.
Referral Example:
- A user
recruits ten people (10 direct referrals) –
- If on
average, each direct referral recruits 3 new users (some will recruit many and
some none, but the average is 3 for each level of your network) -- Value of 10
referrals $300
- The user
would have 30 indirect users one person removed. – Value of 30 referrals
$900
- The user
would have 90 indirect users two people removed -- Value of 90 referrals
$2,700
- The user
would have 270 indirect users three people removed -- Value of 270 referrals
$8,100
- The user
would have 810 indirect users four people removed -- Value of 810 referrals
$24,300
- Total
referrals the user would have in the network would be 1,210.
-
- At an
average value of $30 for each referral the total value would be
$36,300
It should be
noted that the AGLOCO referral system achieves two tasks:
- Aglocosaves all the costs of
marketing its services to potential new users. This is sometimes a major cost
many Internet companies face. Other network companies like MySpace, Skype and
YouTube also achieve this goal of users telling users, but in those cases users
do not benefit in the value created by the growth of the user
base.
- Users who
help build the AGLOCO network are financially rewarded for doing so. Because
most the value of network oriented companies is based on the size of the
network, it isAGLOCO’s stated goal that the people building the network share
in the value they help create.
Detailed Analysis:
Business model:Three major aspects of the business were analyzed; the
people who drive it, the revenues and the expenses.
- People
- Management
ability - – for a start up AGLOCO seems to be pretty good as it has combined
experience with raw talent:
- The raw
talent – is in the form of current Stanford MBAs.Aglocois a revenue driven
business model – passion and aggressiveness are good attributes to have for
part of the team. The average age of a Stanford MBA graduate is 28 years old –
these are not just passionate and aggressive, they come with a few years of
experience behind them as well.
- The
experience –Aglocohas some –
it may need more. Jorgensen was CEO of AllAdvantage, Ray Everett-Church was the
Chief Privacy Officer there and Sam Flax was the Chief Architect for technology
at AllAdvantage. AllAdvantage grew to over 10 million users and over $30
million in first year revenues. A good fit for on point
experience.
- Management
reliability - The reality of the internet is such that every new entity should
be investigated from this perspective. Below, is why AGLOCO should not raise
any Internet scam worries:
- Revenue
sources– this is the core of the business model. Some revenue sources are very
dependant on the size of the user base. Here are the major ones:
- Search
revenue – AGLOCO can become a significant source of search volume. Google gets
40% of its ad traffic from third parties (the biggest one being AOL whom Google
pays an average of $0.10 per search). The average Internet user searches over
35 times a month. AGLOCO should be able to capture virtually all search revenue
and its users are more likely to be active Internet types (given that the
active users are the early adopters who will be the first to find AGLOCO’s
proposition appealing ) – When AGLOCO is of sufficient market size, its search
revenue should grow to between $30 and $50+ per user per
year
- Advertising
– the AGLOCO toolbar software is stated to contain a thirty second targeted
text ad:
- The
targeting is further defined as being related to the current site a user is on
or based on past user behavior or demographic information.Aglocoalso has very granular
location information with city and postal code for users.Aglocoshould be able to take
advantage of Google, MSN or Yahoo’s ad engines immediately (AdSense, adCenter
and ‘Panama’) and during the next two years add a local ad
overlay.
- AGLOCO’s
available monthly ad inventory should be somewhere between 600 and 1,800 ads a
month per user (1 ad per 30 seconds, 120 ads per hour and 600 ads per month
given 5 hours or 1800 ads given the more likely scenario of 15 hours surfing
per month). With 100% of these ads being available for ‘keyword’ targeting as
it now exists. This is substantially more inventory than leaders Yahoo or AOL
have and this will definitely increase the attractiveness of the AGLOCO user
community for advertisers.
It is difficult to estimate what ad revenue per user will be two years
from now. It should start low and grow substantially over time. A quick
starting place for analysis might be a $10 to $25 run rate in this period and
much higher later. Targeted keyword CPC rates vary dramatically with Google and
Yahoo both averaging over $0.50 per click in search (non-search ads are
substantially lower, but do not have AGLOCO multiple targeting.)
-
- Commissions
- Sales commissions (and affiliate fees) should be a substantial source of
revenue for AGLOCO. Almost every online merchant pays them. Link Share and
Commission Junction each have thousands of companies in affiliate programs.
Sales commission varies from quite low 2% on some airline tickets to nearly 50%
on some financial transactions, and is generally in the 10% to 15% range..
Spending per active Internet adult users (one on line in excess of five hours a
month) is estimated at more than $2,000 a year – twice as much as the $1,000
overall online spending average.) . For valuation at the end of year two, an
estimate between $50 to $150 per user in commissions was
used
- Distribution – The distribution of products and services may become the
largest source ofAglocorevenue.
This revenue source is different than the sales commissions
sinceAglocostates it would be a
direct distribution source (or a direct signup source). There are four basic
areas of distribution:
- AGLOCO can
distribute to its members products and services ranging from new credit cards
to home loans and to computers or software. Credit card and loan revenue can
vary from $50 to $500. Online software distribution should be a normal AGLOCO
activity (for example backup software should earn at least AGLOCO $1 a
month.)
- Upgrades on
paid-for or free software – This includes payments from companies like Adobe
which will pay for each time a user upgrades free program like Flash or
upgrades of paid for software like Norton anti-virus.
- Referral
fees of online communities – This includes payments for new active users.
Examples include: eBay ($22), Skype (a % of anything spent), eFax ($10 -$50)
–there are at least one hundred of these
- Offline
large buying group – AGLOCO can act as a large buying group. (Example; referral
fees on car sales are anywhere from $200 to over $1000. Using a $400 average
and a one-in-ten to one-in-twenty annual user participation rate (5% to 10%),
then cars alone will be a $20 to $40 per year source of revenue for the entire
user base. Similar but smaller sources exist in other
products.
- An
annualized distribution revenue amount of $100 a year per user by the end of
AGLOCO’s second year should be a reasonable estimate.
Total Revenue – With the above detailed analysis, the total revenue would
be estimated to be between $200 and $300 per user – (annual revenue run rate at
the end of year two). Below is a chart showing potential revenue growth per
user by category over a two year period.
- Expenses –
operating costs seem to be dominated by:
- Servers and
bandwidth – since most of the communications with users are coming from search
company servers and ad network servers it would seem should be a relatively
small amount.
- Sales and
business development – passionate MBAs etc –while expensive people, this should
still be a low cost as a percentage of total revenue
- Customer
services – lots of users, lots of questions – AGLOCO has started by using teams
in India, China and the Philippines. Most communication is email so language
should not be a significant problem
- Technology
- should be much simpler than a Yahoo or Google as AGLOCO is not building much
(a toolbar is a known and simple technology platform.)
- General and
administrative costs need to include processing user payments (PayPal and
others make this cheaper) and the management company fee of
10%
A reasonable estimate two years out (assuming 2 to 3 million AGLOCO
users) would be a 20% to 30% cost structure - as a % of gross
revenue
Valuation:
To make this
a bit stable and understandable, the time for valuation chosen was the end of
year two for AGLOCO (approximately December 2008) and with AGLOCO having two
million or more active users at that time. Also the projected revenue was
reduce from the $200 to $300 per user range to $100 (again to be
conservative.)
-
Given market comparisons,; a growing community of two million users with
revenue above $100 per user and heading toward $200, $300 or $400 per user and
a profit margin of 70% prior to cash distributions to users should have a
sizeable value, anywhere from $200 to $1,000 per user (depends on the rate of
growth of users, rate of growth of per user revenues. With very little per user
revenue Facebook valuation was near the $200 amount this summer. MySpace had
very little revenue and was losing money when sold and YouTube was
similar.
- With a 15%
to 20% net profit margin (after cash distributions to users), annual profits of
$15 to $40 per user would justify a value of at least $300 per
user.
AGLOCO is in
the advertising and sale/distribution business – somewhat similar gross profits
of Yahoo and Google. Yahoo and Google both have valuations exceeding 35 times
earnings. A 35 times profit per user would value AGLOCO at $350 to$1,400 per
user. Yahoo has a value of 6 times revenue and Google has a value of 16 times
revenue. Even at the lower estimate of $100 of annualized revenue per user at
the end of the second year, the corresponding value of AGLOCO would be $600 per
user.
- With a $300
per user valuation and 2 million users, AGLOCO would have a total valuation of
$600 million. A good range to be in for a fairly new public
company.
-
Per the AGLOCO website statements, about half of the AGLOCO ownership is
given directly to active users and about half is given to the referrers who
build up the network. With a $300 per user valuation the average each regular
user would have been given $150 worth of ownership in AGLOCO (of course people
who started earlier would have more than average and people who started later
less.)).
-
That also means that the referrers would (on average) receive $150 of
shares for eachAglocouser – again
with the early referrals providing more. There are five levels of referrals in
the AGLOCO user referral system, so the $150 is split equally between five
levels of referrers, $30 each.
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