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Archive for April, 2013

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Dear Friends, – by Brad Powers, Founder & CEO

April has been a tremendous month for Cupcake Digital Inc. and I’m extremely excited to share our exciting progress you.

App News:

April has not only been our strongest month for App production, but we continue to achieve top ranking positions for our releases on major distribution platforms.

In fact, yesterday Wubbzy’s Dance Party, an App released only this past Tuesday (4/23), achieved the “#1 Paid App” ranking for iPad in Apple iTunes books in just three days.

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Other April Releases Include:

pngApril 4: Wubbzy’s Magic School

In this feature-rich, deluxe storybook app, Wubbzy’s Magic School! After a day at Moo Moo the Magician’s Castle, the friends learn that magic really does happen when you believe in yourself and try your hardest.

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April 11: Wubbzy’s Space Adventure / Wubbzy en una Aventura Espacial

This is a very special release since it is our offering to include both an English and Spanish version within the same App.  Kids, parents, and caregivers now have the choice of language with which to listen to the narration or read the story themselves.

This initiative not only increases the addressable market for our Apps, but also expands our marketing capabilities.

We are currently working on adding a Spanish version to a series of English-only Apps in our existing library across all distribution channels.

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April 16: Animal Planet’s Hide and Seek Pets

Wubbzy’s Dance Party, an App released only this past Tuesday (4/23), achieved the “#1 Paid App” ranking for iPad in Apple iTunes books in just three days.

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This is our first App for Animal Planet marking the first property expansion for our library beyond Wow, Wow, Wubbzy.

We are extremely excited about both the sales generated and the reviews we have been getting.  Premium priced at $3.99, this App has already already reached the “#3 position” within HOT New Education Section on Amazon.

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Apr 25: Wubbzy’s Animal Coloring Book

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This marks the debut of our new coloring engine.  It will not only allow us to create “stand alone” coloring and activity books for all our properties, but it will also be integrated into all of our new Apps.
Looking Ahead:

Early May: Fraggle Rock “Fraggle Friends Forever”

This release will expand our App library to three active licensed properties.

As part of the preparations for its release, I have just returned from the 30th Anniversary Celebration for Jim Henson’s Fraggle Rock in Los Angeles.  We have provided sneak peeks to several national media outlets. The feedback has been fantastic.

The App launch in early May will be supported by a significant media campaign in collaboration with the Henson organization.

In June: Strawberry Shortcake

We look forward to our first App release for American Greeting’s Strawberry Shortcake in June with great anticipation.

Strawberry Shortcake is an iconic children’s property and we are proud to be their licensed partner. This will be the fourth active licensed property in our growing App library.

Like all our properties, the launch of the Strawberry Shortcake App will be supported by a robust marketing campaign to increase sales rapidly.

Properties & Licensing Pipeline

We continue to make great progress in our property acquisition initiatives.  We are currently in the final stages of negotiation with several “A+” properties and will be making announcements about them shortly.

Continued Accolades for Cupcake Digital Apps

In addition to increased sales, the positive accolades for our Apps continue to keep pouring in.

We have received a tremendous amount of press with the release of our first dual language App, Wubbzy’s Space Adventure/ Wubbzy en una Aventura Espacial, both in online and traditional press.

We also continue to win awards from Famigo (a site that provides recommendations for kid-safe apps and content) and Appysmarts (a resource that helps parents choose the best apps for their kids).

For a full list of our reviews and awards please visit: http://www.cupcakedigital.com/testimonials/

Distribution Partnerships

One of the key stones of our marketing strategy is building strong relationships with our distribution partners.

Recent results of those relationships include:

1.  iTunes featuring Animal Planet Hide and Seek Pets and Wubbzy’s Dance Party in their New and Noteworthy section.

2.  iTunes also selected Wubbzy’s Pirate Treasure as a feature in a special “Apps for Preschool & Kindergarten” selection.

3.  Amazon also continue to feature Cupcake Digital Inc. Apps throughout their App store. Barnes & Noble is currently planning several “curated” mailings and site positions especially for us.

4.  New Position Paper Regarding Parental Guidelines for Children’s Apps

We are delighted to have recently published a new white paper based on an interview with Dr. Natascha Crandall, PH.D.  Dr. Crandall is a psychologist and educator with a special interest in enhancing children’s growth and development through the power of media. This paper explores Dr. Crandall’s findings on App use by children while also establishing a framework for the continuous improvement of our own Apps.

As part of the white paper we also included parent and caregiver guidelines for using Apps as a supplement to children’s learning.

To read the complete position paper, please visit:

http://www.cupcakedigital.com/blog/new-white-paper-features-dr-natachsa-crandall-on-apps-for-children/

Make Your Opinion Count: Download & Review a Cupcake App Today!

As always, if you have not already done so, please visit http://www.cupcakedigital.com/apps/ and click on the store icon of your choice (iTunes, Amazon, Google Play or Nook) to download our Apps on any mobile phone or tablet device.

Give it a test drive and make sure to write a review!

Encourage your friends, family and loved ones to do the same. Help us create a bigger viral buzz about the quality of our products.

Thank you for your on-going support! I will continue to update you on a regular basis.

In the meantime, please feel free to contact me anytime with questions or comments.

Sincerely,

Brad Powers

Chairman

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San Francisco, April , 2013
The Advantages of a “Date-Certain” Mergers and Acquisition Process Over a “Standard Mergers and Acquisitions Process”
Every venture capital investor hopes that all of his investments will succeed. The reality is that a large percentage of all venture investments must be shut down. In extreme cases, such a shut down will take the form of a formal bankruptcy or an assignment for the benefit of creditors. In most cases, however, the investment falls into the category of “living dead”, i.e. companies that are not complete failures but that are not self-sustaining and whose prospects do not justify continued investment. Almost never do investors shut down such a “living dead” company quickly.

Most hope against hope that things will change. Once reality sets in, most investors hire an investment banker to sell such a company through a standard mergers and acquisition process – seldom with good results. Often, such a process requires some four to six months, burns up all the remaining cash in the company and leads to a formal bankruptcy or assignment for the benefit of creditors. In many instances, there are a complete lack of bidders, despite the existence of real value in the company being sold.

The first reason for this sad result is a fundamental misunderstanding of buyer psychology. In general, buyers act quickly and pay the highest price only when forced to by competitive pressure. The highest probability buyers are those who are already familiar with the company being sold, i.e. competitors, existing investors, customers and vendors. Such buyers either already know of the company’s weakness or quickly understand it as soon as they see the seller¥s financials. Once the sales process starts, the seller is very much a wasting asset both financially and organizationally. Potential buyers quickly divide the company’s burn rate into its existing cash balance to see how much time it has left. Employees, customers and vendors grow nervous and begin to disengage. Unless compelled to act, potential buyers simply draw out the process and either submit a low-ball offer when the company is out of cash or try to pick up key employees and customers at no cost when the company shuts down.

The second reason for this sad result is a misunderstanding of the psychology and methods of investment bankers. Most investment bankers do best at selling “hot” companies, i.e. where the company’s value is perceived by buyers to be increasing quickly over time and where there are multiple bidders. They tend to be most motivated and work hardest in such situations because the transaction sizes (i.e. commissions) tend to be large, because the publicity brings in more assignments and because such situations are more simply more fun. They also tend to be most effective in maximizing value in such situations, as they are good at using time to their advantage, pitting multiple buyers against each other and setting very high expectations. In a situation where “time is not your friend”, the actions of a standard investment banker frequently make a bad situation far worse. First, since transaction sizes tend to be much smaller, an investment banker will assign his “B” team to the deal and will only have such team spend enough time on the deal to see if it can be closed easily. Second, playing out the process works against the seller. Third, trying to pit multiple buyers against each other and setting unrealistically high valuation expectations tends to drive away potential buyers, who often know far more about the real situation of the seller than does the investment banker.

“Date Certain” M&A Process The solution in a situation where “time is not your friend” is a “date-certain” mergers and acquisitions process. With a date-certain M&A process, the company’s board of directors hires a crisis management/ private investment banking firm (“advisor”) to wind down business operations in an orderly fashion and maximize value of the IP and tangible assets. The advisor works with the board and corporate management to:

1.  Focus on the control, preservation and forecasting of CASH.
2.  Develop a strategy/action plan and presentation to maximize value of the assets. Including drafting sales materials, preparing information due diligence war-room, assembling a list of all possible interested buyers for the IP and assets of the company and identifying and retaining key employees on a go-forward basis.
3.  Stabilize and provide leadership, motivation and morale to all employees,
4.  Communicate with the Board of Directors, senior management, senior lender, creditors, vendors and all stakeholders in interest.
5.  The company’s attorney prepares very simple “as is, where is” asset-sale documents. (“as is, where is- no reps or warranties” agreements is very important as the board of directors, officers and investors typically do not want any additional exposure on the deal). The advisor then contacts and follows-up systematically with all potentially interested parties (to include customers, competitors, strategic partners, vendors and a proprietary distribution list of equity investors) and coordinates their interactions with company personnel, including arranging on-site visits. Typical terms for a date certain M&A asset sale include no representations and warranties, a sales date typically two to four weeks from the point that sale materials are ready for distribution (based on available CASH), a significant cash deposit in the $100,000 range to bid and a strong preference for cash consideration and the ability to close the deal in 7 business days.

Date certain M&A terms can be varied to suit needs unique to a given situation or corporation. For example, the board of directors may choose not to accept any bid or to allow parties to re-bid if there are multiple competitive bids and/or to accept an early bid. The typical workflow timeline, from hiring an advisor to transaction close and receipt of consideration is four to six weeks, although such timing may be extended if circumstances warrant. Once the consideration is received, the restructuring/insolvency attorney then distributes the consideration to creditors and shareholders (if there is sufficient consideration to satisfy creditors) and takes all necessary steps to wind down the remaining corporate shell, typically with the CFO, including issuing W-2 and 1099 forms, filing final tax returns, shutting down a 401K program and dissolving the corporation etc.

The advantages of this approach include the following:

Speed – The entire process for a date certain M&A process can be concluded in 3 to 6 weeks. Creditors and investors receive their money quickly. The negative public relations impact on investors and board members of a drawn-out process is eliminated. If circumstances require, this timeline can be reduced to as little as two weeks, although a highly abbreviated response time will often impact the final value received during the asset auction.

Reduced Cash Requirements – Given the date certain M&A process compressed turnaround time, there is a significantly reduced requirement for investors to provide cash to support the company during such a process.

Value Maximized – A company in wind-down mode is a rapidly depreciating asset, with management, technical team, customer and creditor relations increasingly strained by fear, uncertainty and doubt. A quick process minimizes this strain and preserves enterprise value. In addition, the fact that an auction will occur on a specified date usually brings all truly interested and qualified parties to the table and quickly flushes out the tire-kickers. In our experience, this process tends to maximize the final value received.

Cost – Advisor fees consist of a retainer plus an agreed percentage of the sale proceeds. Legal fees are also minimized by the extremely simple deal terms. Fees, therefore, do not consume the entire value received for corporate assets.

Control – At all times, the board of directors retains complete control over the process. For example, the board of directors can modify the auction terms or even discontinue the auction at any point, thus preserving all options for as long as possible.

Public Relations – As the sale process is private, there is no public disclosure. Once closed, the transaction can be portrayed as a sale of the company with all sales terms kept confidential. Thus, for investors, the company can be listed in their portfolio as sold, not as having gone out of business.

Clean Exit – Once the auction is closed and the consideration is received and distributed, the advisor takes all remaining steps to effect an orderly shut-down of the remaining corporate entity. To this end the insolvency counsel then takes the lead on all orderly shutdown items.

Gerbsman Partners focuses on maximizing enterprise value for stakeholders and shareholders in under-performing, under-capitalized and under-valued companies and their Intellectual Property. Since 2001, Gerbsman Partners has been involved in maximizing value for 76 Technology, Medical Device, Life Science and Solar companies and their Intellectual Property and has restructured/terminated over $810 million of real estate executory contracts and equipment lease/sub-debt obligations. Since inception, Gerbsman Partners has been involved in over $2.3 billion of financings, restructurings and M&A transactions.

Gerbsman Partners has offices and strategic alliances in Boston, New York, Washington, DC, San Francisco, Europe and Israel.

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Steven R. Gerbsman
Principal
Gerbsman Partners
steve@gerbsmanpartners.com
http://www.gerbsmanpartners.com

BLOG of Intellectual Capital
http://blog.gerbsmanpartners.com
Skype: thegerbs

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The Sapphires (film)

From Wikipedia, the free encyclopedia
The Sapphires
Four woman in sparkling blue dresses, a smiling man with a mustache wearing a red dinner, stands behind them.
Theatrical release poster
Directed by Wayne Blair
Produced by Rosemary Blight
Kylie Du Fresne
Screenplay by Keith Thompson
Tony Briggs
Based on The Sapphires
by Tony Briggs
Starring Chris O’Dowd
Deborah Mailman
Jessica Mauboy
Shari Sebbens
Miranda Tapsell
Music by Cezary Skubiszewski
Cinematography Warwick Thornton
Editing by Dany Cooper
Studio Goalpost Pictures
Distributed by Hopscotch Films (Australia)
The Weinstein Company (USA)
Release date(s)
  • 19 May 2012 (Cannes)
  • 9 August 2012 (Australia)
  • 22 March 2013 (USA)
Running time 103 minutes[1]
98 minutes (USA release)[2]
Country Australia
Language English
Budget $8-10 million[3]
Box office $18,040,837 [4]

The Sapphires is a 2012 Australian musical comedy-drama film produced by Goalpost Pictures and distributed by Hopscotch Films, based on the 2004 stage play of the same name which is loosely based on a true story.[5] The film is directed by Wayne Blair and written by Keith Thompson and Tony Briggs, the latter of whom wrote the play. The film is about four indigenous women, Gail (Deborah Mailman), Julie (Jessica Mauboy), Kay (Shari Sebbens) and Cynthia (Miranda Tapsell), who are discovered by a talent scout (Chris O’Dowd), and form a music group called The Sapphires, travelling to Vietnam in 1968 to sing for troops during the war. Production began in 2010, with the casting of the four members of The Sapphires, and filming taking place throughout New South Wales in Australia and Vietnam during August and September 2011.

The Sapphires made its world premiere at the 2012 Cannes Film Festival on 19 May 2012 during its out of competition screenings, was theatrically released in Australia on 9 August and received a limited release in the United States on March 22, 2013.

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370-1331851653
The Fashion Whip By Lauren A. Rothman

To schedule an interview with On-Air Political Style Expert
Lauren A. Rothman, please contact:
Jason H. Gerbsman
Phone: +1.202.631.8878
Email: jason@styleauteur.com
Web: www.styleauteur.com
Twitter: twitter.com/styleauteur
Facebook: facebook.com/styleauteur
TV Clips: styleauteur.com/press/

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Fashion Whip: What To Wear To The White House Correspondents’ Dinner

Fashion Whip is a political style column in the Huffington Post by Lauren A. Rothman, inspired by Lauren’s experience as the founder of  Styleauteur, a style and fashion consulting firm.

WASHINGTON — Saturday night brings us the annual star-studded White House Correspondents’ Dinner at the legendary Hilton Hotel in Washington, DC. This year,Washington’s best red carpet event is getting even better: the red carpet, filled with politicos, media mavens, journalists and Hollywood celebs, is getting the glamorous fashion coverage it deserves by none other than E! Entertainment. The channel plans to live stream fashion and style coverage straight from the event.

So those of us without tickets will be watching E! from the comfort of our couches. But if you did score an invite, what should you wear?

Several popular fashion trends from last year are likely to make a comeback this weekend. The District’s cool springtime temperatures should encourage a few long-sleeved looks — follow in the footsteps of Kate Hudson (in Jenny Packham) or Kerry Washington (in Calvin Klein) and you may win best-dressed. Floral, whimsical looks are always in style during cherry blossom season — First Lady Michelle Obama dazzled the crowd last year in a strapless, watercolor gown by Naeem Khan, as did Leslie Mann in a one-shoulder dress by the same designer.

Your best bet would be to stay on-trend and pop on the red carpet — opt for bright colors to celebrate the season, rather than subdued hues, and play with peek-a-boo styles, one-shoulder cuts and a tasteful slit on the leg.

Whether you plan to pose for the paparazzi or simply stroll the red carpet, greeting fans staked out at the hotel, here are 3 tips to enjoy a stylish evening:

*    Wear a floor-length gown: The WHCD is truly an old-school, black-tie event. Celebs wearing short dresses stick out every year (Alicia Keys, Martha Stewart, Sofia Vergara, Eva Longoria). Only the perpetual party-goers attending pre- and post-event soirées risk a shorter shift. This is Washington’s most formal “Pollywood” event after the inaugural balls. Follow someone famous, basking in their afterglow as you enter the Hilton — people will applaud, so be sure you dress to impress.

*    Leave the cleavage at home: There may be fabulous fashion on the red carpet, but take a cue from the Grammys and keep it just this side of appropriate. Celebs not to copy: Rosario Dawson, who really “opened up” to the country’s political royalty in 2012, and Lindsay Lohan, who revealed some seriously unattractive “sideboob.”

*    Have a car waiting or wear comfortable (yet stylish) shoes: Security screening and long lines can make transportation a challenge — you may have to walk a long way in heels to catch a cab. Some are experts at walking in 6-inch heels; but if you’re not, recall Lena Dunham at the Golden Globes and steer clear. (You don’t want to be remembered forever for your inability to strut the hall in high heels.) Follow the example of D.C. veterans: journalists and party-goers in-the-know always have a pair of ballet flats rolled up in their bag for those long, post-event walks on Embassy Row.

Host Conan O’Brian, dressed in a dapper tuxedo, is sure to make everyone laugh, but all eyes will be on Michelle Obama’s ensemble. Will she be loyal to longtime favorites Jason Wu (worn to inaugural ball), Prabal Gurung, Michael Kors or Naeem Khan (worn at the 2012 Correspondents’ Dinner and to this year’s Oscars) or surprise us with a gown from someone new? Whichever designer she chooses to wear, she is sure to be the center of attention!

Which means you can stop stressing about what you’re wearing and realize the focus is on the celebs. As for the rest of us, we’ll be watching on the live-stream… in sweatpants.

Follow @Styleauteur on Twitter & ‘Like’ Styleauteur on Facebook.

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Great article from Lanny Davis – a “Mensch”

Purple Nation

April 24, 2013

George Bush — the President and the Man…Revisited

By Lanny J. Davis

http://thehill.com/opinion/columnists/lanny-davis/295699-revisiting-a-former-president

http://dailycaller.com/2013/04/24/george-bush-is-a-good-man/

http://www.huffingtonpost.com/lanny-davis/george-bush-the-president_b_3149314.html

Tomorrow, April 25, on the Southern Methodist University campus in Dallas, Texas, four living presidents — Jimmy Carter, No. 39; George H.W. Bush, No. 41; Bill Clinton, No. 42, and Barack Obama, No. 44 — will honor one of their colleagues, George W. Bush, the 43rd president of the United States, at the dedication of his presidential library.

So I take this occasion to remind my fellow liberal Democrats, many of whom continue to attack Bush in harsh and personal terms, of three things about him that I don’t think they understand or appreciate.

First, while there were many polices under Bush with which liberal Democrats (myself included) disagreed — such as tax cuts, the Iraq War and not paying for either (as well as the Afghan war) with current revenues rather than borrowed money — there must be a distinction between disagreement and personal attack. For example, many Democrats still use the “lie” word in describing Bush’s rationale for the Iraq War — that Saddam Hussein had weapons of mass destruction. This turned out to be wrong. But Democrats in the Clinton administration also believed Saddam had WMDs, as did most experts in the U.S. intelligence community. Our politics have become so poisoned and our government so dysfunctional precisely because too many people — on both sides — can’t make a distinction between lies and being sincerely wrong.

Second, Bush is known for his brilliant slogan when he first ran in 2000, describing himself as a “compassionate conservative.” But let’s not forget that on many issues, Bush was more “compassionate” than “conservative” — indeed, he was sometimes closer to Republican Theodore Roosevelt’s free-market progressivism than William Howard Taft’s laissez-faire conservatism. Examples include “No Child Left Behind” education reform, presented together at the White House by Bush and the liberal icon Sen. Edward Kennedy (D-Mass.) in the early days of the Bush presidency; support for broad immigration reform, very similar to the bipartisan legislation recently proposed in the Senate; and an extension of Medicare to include prescription drug benefits — the most far-reaching and generous Medicare reform since Lyndon Johnson.

Third, it is important to remember what a good man with a good heart George W. Bush is.

I know from personal experience.

As I have written before, I remember sitting next to Bush when we were in the same residential college at Yale (Davenport — he graduated a year after me). I recall an evening when a group of us was sitting in the common room outside the college dining hall after dinner and a fellow Yale student walked by who was known to be gay, but in those days was not “out.” Someone said some ugly homophobic slurs. I didn’t like it, but sat silently. But Bush snapped, saying something like “Hey, knock it off. Why don’t you walk in his shoes awhile and feel what he feels?”

I remember thinking, “Whoa. This guy is much different inside than the fun-loving frat brother partying with me at Delta Kappa Epsilon.” As I watched him grow and evolve over the years, overcoming times of great personal pain and challenge to become a two-time governor of Texas and a two-term president of the United States, I only came to admire and like him even more than that evening at Yale.

My late mother always used to say you can judge people on how they love and treat animals — good if they do, bad if they don’t. When Bush’s beloved dog, Barney, died recently, the statement he issued exemplified for me the inner core of goodness on my mother’s scale of judgment.

“Barney never discussed politics,” he said in bidding Barney a sad farewell, “and he was always a faithful friend. Laura and I will miss our pal.”

I know my mom in heaven, who would never have voted for George W. Bush for president, would have read that comment about Barney and insisted:

“He is a good man.”

I agree.

Godspeed to you, George Bush, and blessings for your mom and dad and family on this great occasion.

#  #  #  #  #

Davis, a Washington attorney and principal in the firm of Lanny J. Davis & Associates, specializing in legal crisis management and dispute resolution, served as former President Clinton’s special counsel from 1996-98 and as a member of former President Bush’s Privacy and Civil Liberties Oversight Board from 2006-07. He currently serves as special counsel to Dilworth Paxson, and is the author of Crisis Tales: Five Rules for Coping With Crises in Business, Politics, and Life, recently published by Threshold/ Simon & Schuster. He can be followed on Twitter @LannyDavis. This article appeared in The Hill today.

www.lannyjdavis.com

Available on Amazon.com

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Above the Crowd

A Rake Too Far: Optimal Platform Pricing Strategy

In a casino, the term “rake” refers to the commission that the house earns for operating a poker game. With each hand, a small percentage of the pot is scraped off by the dealer, which in essence becomes the “revenue” for the casino. While casinos use the term “rake,” a plethora of interesting word choices exist which all describe the same thing – keeping a little bit of the revenue for the company that is running the service. Examples include “commission,” “fee,” “toll,” “tax,” “vig” or “vigorish,” “juice,” “the take”, and “graft” (although this last one is typically associated with corruption in politics).

Many Internet marketplaces also have a rake or vig. The percentage rake is the amount that the marketplace charges as a percentage of GMS (gross merchandise sales), which typically represents net revenues for the marketplace. As an example, eBay’s 2011 marketplace revenues were approximately $6.6B against GMS of approximately $68.6B for a rake percentage of just under 10%. It may seem tautological that a higher rake is always better – that charging more would be better than charging less. But in fact, the opposite may often be true. The most dangerous strategy for any platform company is to price too high – to charge a greedy and overzealous rake that could serve to undermine the whole point of having a platform in the first place.

Before discussing the merits of low rakes versus high rakes, let us first take a look at current examples of different rakes across the Internet. The table above shows estimated rakes for several online businesses as a percentage of GMS. Do not assume that these numbers are specifically accurate as some vendors make these very hard to deduce.*  There is also the added noise of kick-backs that are common in industries like ticketing. You can see very high rakes in the case of iTunes, Facebook, and GroupOn down to especially low rakes for the likes of OpenTable and HomeAway. Amazon marketplace fees are published on their website, and vary by category, but they basically range from 6-15%, so lets say the average is approximately 12%. eBay recently launched an aggressive campaign attacking Amazon’s rate table on a vertical-by-vertical basis (those percentages can be found here). One company with an astonishingly high rake is recently IPOed Shutterstock, a photo-purchasing marketplace where the content owner receives only 30% of gross receipts. As we will argue below, this could in fact be a very fragile situation.

When evaluating new marketplace investments, we are naturally biased towards entrepreneurs who understand the strategic rationale behind the argument for a lower rake. If your objective is to build a winner-take-all marketplace over a very long term, you want to build a platform that has the least amount of friction (both product and pricing). High rakes are a form of friction precisely because your rake becomes part of the landed price for the consumer. If you charge an excessive rake, the pricing of items in your marketplace are now unnaturally high (relative to anything outside your marketplace). In order for your platform to be the “definitive” place to transact, you want industry leading pricing – which is impossible if your rake is the de facto cause of excessive pricing. High rakes also create a natural impetus for suppliers to look elsewhere, which endangers sustainability. These reasons are likely behind the struggles in GroupOn’s core Daily Deals business (North America Third Party Revenue is down in Q4 both YOY and QOQ). With a rake of approximately 38% (and this is “after” asking the merchant to underwrite a 50% discount to the consumer) the recovery from each transaction for the supplier is only 30%, representing an “effective” rake of 70%.

High volume combined with a modest rake is the perfect formula for a true organic marketplace and a sustainable competitive advantage. A sustainable platform or marketplace is one where the value of being in the network clearly outshines the transactional costs charged for being in the network. This way, suppliers will feel obliged to stay on the platform, and consumers will not see prices that are overly burdened by the network provider. Everyone wins in this scenario, but particularly the platform provider. A high rake will allow you to achieve larger revenues faster, but it will eventually represent a strategic red flag – a pricing umbrella that can be exploited by others in the ecosystem, perhaps by someone with a more disruptive business model. As Jeff Bezos is fond of saying, “your margin is my opportunity.”

Many people do not know this, but one of the most amazing Internet success stories is the European division of The Priceline Group, which operates under the brand Booking.com. Booking.com is the unquestioned leader in online travel in Europe, and represents a substantial portion of TPG’s astounding $35B market capitalization. Booking.com was not always the online leader in Europe – in fact they were a disrupter stealing the flag from other large incumbents. In the late 1990’s companies like Expedia and Travelocity had become enamored with what is known as the “merchant model.” Basically, these companies would “package” vacation offerings for the consumer and sell them as a bundled offering. The merchant model could produce a rake of well over 30%, and was therefore attractive to companies like Expedia. Booking.com took a much more aggressive approach (perhaps because it was the only one available) . They started with a 10% “agency model,” which not only represented a lower rake, but also provided better cash flow terms to the supplier. As such, they were able to signup nearly every small hotel in Europe. This resulted in more selection for the consumer and more support from the supplier base. Dennis Schall at  Skift.com has a wonderfully detailed account of how Booking.com came to dominate Europe, along with a more recent article addressing the lingering ramifications of the industry’s natural shift to the lower friction (lower rake) agency model.

It turns out that the average rake at Priceline Group  is even higher today, as they allow merchants to voluntarily bid up their rake for better placement in the network (you can see this in the table above). This is one of my favorite marketplace business model “tweaks.” You start with a low rake to get broad-based supplier adoption, and you add in a market-driven pricing dynamic that allows those suppliers who want more volume or exposure to pay more on an opt-in basis. This way no one leaves the network due to excessive fees, yet you end up with a higher average rake over time due to the competitive dynamic. And when prices go up due to bidding and competition, the suppliers blame their competition not the platform (part of the genius of the Google AdWords business model). This also allows you to extract more dollars from those suppliers who desire to spend more to promote themselves (without raising the tax on those that don’t).

Here is another interesting story related to rakes. In 2006, Benchmark started spending time with Gary Swart and the team at oDesk. We were quite enamored with their marketplace for skilled global talent, and were amazed at how the tools in their online workplace allowed customers to hire, manage, and pay for work from distributed teams. Combined with a bidding and reputation system, oDesk had built an “ebay for work.” At the same time, there were several larger players in the market such as Freelancer and Rent-a-coder. After discussing competition at length, the team came upon the idea of lowering the commission from 30% (which was standard in the industry) to 10% of overall costs. We were excited to hear such aggressive strategic thinking from the team, and they were excited to hear from an investor with a long-term perspective (this change obviously reduced current period revenue to 1/3 of its current level).  The rest is history. By 2009 oDesk surpassed the nearest competitor, and they are now the clear leader (larger than their top competitors combined) in the rapidly emerging “online work” industry.

All of which leads us to two very interesting rake examples that are front and center in today’s Internet – Facebook and Apple. Both of these companies charge a hefty 30% fee for transactions on their platform. Because most of the developers building on these platforms make software, the developers do not experience immediate pain when they share 30% of top-line revenue. After all, marginal costs are near zero, and therefore the fee is tolerable. But the real question is: Does the 30% marketplace on top of the platform help to reinforce the strategic positioning of the platform itself? Or is it merely a revenue extraction exercise? And if so, is there a risk that a “rake too far” could be a net-negative from a strategic standpoint?
Let’s start with Facebook. For the first several years, Facebook’s application platform was a smashing success. The distribution power of their pervasive platform proved a remarkable vehicle for many companies; particularly games companies. The platform was so successful so quickly that many early adopters of the platform rocketed to hundreds of millions in sales. Zynga, which was particularly adept at surfing the Facebook wave, catapulted to $1 billion in revenue in its sixth year of existence! Everything looked incredible. Fast-forward to today (only a few years later), and games companies are no longer betting their whole company on Facebook. Oddly, they are aggressively and strategically looking to expand non-FB distribution.

It is really hard to pinpoint exactly what went wrong. One might question Facebook’s commitment to being a game platform. Some might also highlight the lack of breadth in its success, and argue that Zynga had it “too good” versus other players in the field. And some might point to the rise of mobile which created a difficult platform transition for Facebook (which we will address shortly). In addition to these issues, there is also a strong argument that 30% was simply an excessive rake.

When you consider that many of these same game companies were also large buyers of Facebook’s ad products, it suggests that the “actual” rake, the real cost of being competitive on the platform, was much higher than 30%. Given Facebook’s position as the leading global social network with high barriers to entry, there was no need to maximize revenue on day one. It was far more important to prove the platform as a viable and efficient distribution mechanism for a broad range of products and services, and to convince all partners of the unquestioned efficacy of the platform itself.

Last November, Zynga and Facebook together renegotiated their previous long-term business agreement. According to the old agreement, Zynga was required to shell out 30% of their revenue even if they generated revenue “off Facebook”.  That is a very aggressive rake. Now Zynga is freed from many commitments it had made to the Facebook platform, and is allowed to build independent revenue streams outside of Facebook. The reality is that Zynga is still highly dependent on Facebook. However, Zynga shareholders are now tracking Zynga’s percentage of revenue tied to Facebook and consider it a positive if they can reduce this dependency. The bottom line is that the entire gaming industry has lost some of its enthusiasm for the Facebook platform, and it will be difficult for Facebook to recreate the magic and momentum they once had.

The Apple case is more extreme as the impact is more consequential. Despite the fact that Apple had/has industry leading hardware margins on its incredible computing products, Apple felt the need to take 30% of the revenue that was created by its app ecosystem as well as 30% of the revenue from media rentals and sales. In retrospect, demanding to be paid on both sides was a sign of overconfidence. However, the truth is they made this work for a very long time. Many companies, thriving on the Apple platform, didn’t exist and wouldn’t exist were it not for iOS. For itself, Apple has created billions and billions of high margin revenue and corresponding bottom line profits as a result of the amazing success of its 30% rake. All of which helped catapult Apple to the very top of the business hierarchy – the largest market capitalization company in the world.

The single-biggest problem with Apple’s aggressively high rake was its impact on potential long-term strategic partnerships. Specifically, two companies that potentially could have helped to reinforce the success of the iOS platform blinked, paused, and then went on to support a competitive platform. Both Amazon and Facebook could have been and should have been BFFs with Apple. And if Apple could go back in time, they would surely opt to be BFFs also. The most threatening company for all three players was clearly Google. However, Amazon owns a digital media business built around Kindle. And Facebook, as discussed, has a 30% rake business helping game developers distribute and monetize games throughout its network. When Facebook and Amazon read the terms of service of the iOS platform, and came to grips with the reality of the 30% rake, they saw an instant road-block – a show-stopper to their potential success on that platform. It was very hard to imagine their business model and Apple’s business model coexisting, and so they eventually punted on a full commitment to iOS.

The bottom line is they could have been amazing partners. If Apple had a lower rake, or even had they been less obstinate about their existing rake, a partnership could have formed (ask anyone in Hollywood – “splits” can solve any problem). iOS could have been both the definitive Facebook mobile device, AND the definitive Amazon shopping device. They could have been integrated from the beginning at a deep level: your social network in contacts; your Amazon 1-click credentials a fingertip away. Jeff Bezos, Mark Zuckerburg, and Steve Jobs on a stage together talking about the truly amazing things these companies have done together. It could have been awesome. But it didn’t play out that way.

Instead, as you are aware, Facebook’s new Home mobile application is available only on Google’s Android, Apple’s key nemesis of the past decade. There are currently no plans to offer Home on iOS, and Eric Schmidt, Google’s esteemed Chairman, cheered along in appreciation at the recent Dive Into Mobile Conference, “I think it’s fantastic — I love it,” Schmidt said. Instead of becoming a platform differentiator for Apple, Facebook is now aiding and abetting Apple’s only real competition.

The Amazon situation vis-a-vis Apple is more severe. In stiff-arming Amazon over its “30%” Apple not only alienated a key partner but launched a competitor. Amazon has obviously designed its Kindle Fire system on top of an Android variant. But that is only half the problem. Amazon, in true Amazon fashion, is now attacking Apple’s exposed business underbelly: the fat margins they receive by charging both high hardware margins and a high rake on content. As outlined in its recent Letter to Shareholders, Amazon does not believe that its customer should have to pay fat margins on hardware AND content. “Our business approach is to sell premium hardware at roughly breakeven prices. We want to make money when people use our devices – not when people buy our devices.” Amazon plans to subsidize the hardware platform and live solely on the content margin. The 30% rake basically launched a nasty competitor with a disruptive pricing model.

Number one on the list of Peter Drucker’s Five Deadly Business Sins is “Worship of high profit margins and premium pricing.” As Drucker notes: “The worship of premium pricing always creates a market for the competitor. And high profit margins do not equal maximum profits. Total profit is profit margin multiplied by turnover. Maximum profit is thus obtained by the profit margin that yields the largest total profit flow…” Most venture capitalists encourage entrepreneurs to price-maximize, to extract as much rent as they possibly can from their ecosystem on each transaction. This is likely short-sighted. There is a big difference between what you can extract versus what you should extract. Water runs downhill.

*Please let us know if you have other names you would add to the table, or if there are numbers you think need correcting. I will update the table and put the rolling updates in the answer to this quora post on the same topic.

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With money in their pockets and change on their minds, some 700 angel investors flocked to the Angel Capital Association Summit in San Francisco this week.

Alexander Klein/Agence France-Presse/Getty Images

Along with macro issues like best practices for syndicating rounds and navigating the Series A crunch, attendees buzzed about the JOBS Act, new funding platforms and other recent changes to the $20 billion a year marketplace of private investing. One of the most popular panels however, focused on a topic that’s always been near and dear to investors: exits.

“We don’t know if we’re investors until the exit occurs–until then we’re merely donors,” said Ohio TechAngel Funds Founder John Huston, eliciting laughter and some wistful sighs in the packed conference room. The panel–“8 Steps to Lucrative Exits”–was one of five devoted to the topic, with Huston suggesting all angel investors set up a process for achieving an exit before they ever enter a deal.

Huston focused entirely on exits through acquisition–a topic worthy of tutelage given the sluggishness of late. According to a recent report by Dow Jones VentureSource, M&A activity declined 44% during the first quarter of 2013 compared with the previous quarter, with the most recent quarter being the lowest since the first quarter of 2009. Huston advised investors to set exit expectations with founders from the onset and build the company for acquisition–not shareholder value.

“If you are on the board then it’s incumbent upon you to drive the exit. All the other angels are counting on you,” he said, adding that if VCs are on the cap table “then you’re neutered unless you drove the VC selection process.”

He said simply growing revenue, although nice, was too slow a process to incite high bids.

To maximize buyer value he suggested compiling a hit list of the top five strategic acquirers based on their willingness and ability to do a deal. Determining which customers they’d like to secure [and then beating them to it] and mapping their organization chart to sell the deal should also be part of the process, he said.

“Your goal is to move the strategic acquirers from greed to fear mode which is ‘Wow, I sure hope my biggest competitors doesn’t acquire them first.’ We only hire bankers [to run the sale process] if we are convinced they can do this and run the process with multiple bids,” Huston said.

Greg Sitters, managing director of New Zealand-based Sparkbox Venture Group, said he began using a similar process about four years ago and has had four of his 40 companies exit so far. Striking a balance between growing each company with additional capital and securing a solid exit has been key.

He said: “If we can get companies to exit without VCs than that’s what we’re trying to do.”

Teresa Esser, managing director of Winsconsin-based angel group Silicon Pastures, said her group is constantly trying to bring more of a science to the exit process.

“This entire conference is really helpful with information and inspiration,” she said. “It’s motivational in reminding us that we are a $20 billion marketplace.”

Write to Lizette Chapman at lizette.chapman@dowjones.com. Follow her on Twitter at @zettewil

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