Forget ads, every tech company wants to be a gaming giant now

Welcome back to Cautious Optimism. Today is May 29th, 2024. Today, we have notes on Robinhood’s financial choices, BuzzFeed’s future direction, why how we pay for software will change, and our Startup of the Day. — Alex

Trending Up: The Nasdaq, until this morning … U.S. consumer confidence … spats between our AI overlords … transparency from Google … real wages (U.S.) … AI ARR … Caitlin Clark’s WNBA start …

Trending Down: China-Taiwan relations … normal market dynamics in semiconductors … No, really … transparency from OpenAI … real wages (Japan) … making money on lunch … transparency from Google …

Trending Sideways: The value of software companies, leading to multiples compression. Again.

Upcoming: Tech earnings today from Salesforce, the grandfather of SaaS; HP, the company that once had a material footprint in my hometown; Pure Storage, whose bet on flash-based data storage and helped its market value rise by nearly 80% in 2024; Nutanix, which offers hybrid/cloud software and has gained 56% year-to-date; Okta, which offers identity software; UiPath, which works in the software automation space; nCino, the first Salesforce platform company to go public, and C3.ai, a company whose billboards I have seen many a time while traveling from SFO to the city.

Yesterday, Box beat earnings expectations, but light guidance left it largely flat after its report.

Help, I’m too rich

Robinhood is a consumer financial technology company best known for its zero-cost equity and crypto trading. It also makes piles of money from offering more advanced trading tools like options to regular folks. Recently it’s made a lot of money from interest-based income.

The 2021-era IPO had a great first quarter. Revenues were up 40% to $618 million, and net income reached $157 million. Average revenue per user rose 35% year-over-year, while some 500,000 users signed up for its subscription service:

However, Robinhood has a problem: Too much cash. With $4.7 billion in total cash (and equivalents) on hand, the company is far richer than it needs to be. Given that Wall Street is less interested in tech companies spending heavily (limiting their near-term profitability) to squeeze out more growth, Robinhood is sitting on a mountain of cash that it cannot spend.

On operational expenses, that is. It can dump that money into share buybacks. Which it will do now in a major way, the company announced this week. A $1 billion buyback is the plan. Shares of Robinhood are up a few points this morning in response. Expect to see more of this in 2024.

Startup of the Day:

Solutions by Text. TechCrunch’s Mary Ann Azevedo (co-host of the Equity podcast) has a piece up on the company’s $110 million growth round. Selling “conversational messaging tools to businesses that interact in real-time with customers via text,” the company bootstrapped for most of its life, and is now “EBITDA positive and is ‘working toward profitability’ this year,” she writes.

I love this sort of company, which is its own micro-niche inside startupdom.

Buzz(off)

Yesterday we looked into Vivek Ramaswamy’s vision for the future of Buzzfeed. Our take was that it sucked. Buzzfeed agrees, with its CEO Jonah Peretti writing in a response letter that:

“based on your letter, you have some fundamental misunderstandings about the drivers of our business, the values of our audience, and the mission of the company. I’m very skeptical it makes sense to turn Buzzfeed into a creator platform for inflammatory political pundits. And we’re definitely not going to issue an apology for our Pulitzer Prize-winning journalism.”

That about says it all, I reckon.

Everything is an ad platform a gaming service

A useful observation for technology products is that no matter where they start, when they reach sufficient scale they become ad platforms. Windows is an ad platform. Amazon’s ecommerce business is quickly becoming a search advertising product masquerading as a business that wants to sell you socks. Uber Eats? Ad platform. iOS’s App Store? Ad platform. Instacart? Ad platform. Amazon Prime Video? Ad platform.

But that’s old hat. The new thing in tech is that everyone wants to become a gaming platform. LinkedIn is getting into games, Netflix is getting into games, and YouTube’s latest news is that its games push is even more real than I imagined.

Why? Because games are sticky (people come back), time consuming (more time on site, boosting those KPI dashboards), and lucrative. The New York Times makes a mint off its gaming product. As it noted in its Q1 2024 earnings:

The performance of Games in the quarter provides further evidence for how creating more valuable products translates into user and business impact. We now have two puzzles — Wordle and Connections — with tens of millions of weekly users, and another homegrown hit in Strands, our daily word hunt game released in March. […] Given the very strong engagement with games and our focus on continuing to add product value, we expect to be able to increase monetization over time.

Games, coming to every digital surface you touch. Right next to the ads.

The bold shall inherit the ARR

Prepping for an episode of This Week in Startups, I listened to a recent chat between venture firm Kleiner Perkins and Intercom CEO Eoghan McCabe. Two quotes from the tech exec stood out to me:

Why software sales is about to change: “Every single software company that sells seats for people to do work is now about to be disrupted by AI, because AI is going to do the work that these people used to do, and the AI doesn’t need the seats.”

Why that rips up existing business practices: “Every company — us, Salesforce, ServiceNow — need to become AI companies. We need to make the majority, and then all, in the next few years, of our revenue from AI, and not [from] workflow products. That by necessity does upend all the things, but I see it as an opportunity for people who are willing to be crazy, rip things up, move fast, damage their revenue, break the rules and take a long-term approach, because the bigger companies are scared to do all the above.”

Summarizing: Selling seats is a shit model now because butts-in-seats is not the core unit of how businesses will extract value from software; ergo, the entire “X cost per user per Y period of time” pricing framework will become passé if AI accomplishes what many expect it to.

What will replace the SaaS seats model? I suspect we will see something akin to the API model (pay-as-you-use) for software become more common in the future, where the more AI you use, the more you pay, and the software in question becomes a conveyance mechanism for value.

More tomorrow morning!