68% of New Zealand’s Internet traffic is to online auction site TradeMe, CEO Sam Morgan and Development Manager Rowan Simpson told me when I visited their Wellington office last Thursday. TradeMe is New Zealand’s version of eBay, even down to the color scheme. But it’s more than just an auction site now – over the past 7 years it has expanded into major verticals like jobs and motoring. Also it’s probably NZ’s biggest social networking platform (even though it’s not strictly speaking an SNS).
Even considering all that, when TradeMe sold for a cool $700 Million dollars earlier this year – to Australian media company Fairfax – the price tag astounded many people in NZ and Australia. That’s NZ dollars, but at the time it amounted to nearly $500 Million US dollars. To put that into perspective, it was a deal worth approximately 15 times more than the much more hyped sale of Flickr to Yahoo the year before.
But TradeMe only operates in New Zealand, a tiny country of about 4 Million people – so how on earth did it command such a high price?
In this exclusive interview with TradeMe CEO Sam Morgan ($220 Million richer after the sale to Fairfax) and Development Manager Rowan Simpson, we discuss how TradeMe became so dominant in the NZ market and how localization is a big part of their success.
The interview is edited for length. We started by talking about what makes TradeMe so successful…
Sam: “I guess the thing that is sort of unique about TradeMe and the New Zealand market really, is the fact that you can have one brand that can diversify so much. Even a market the size of Australia, you see one guy leading the property segment, one guy leading the motor segment, etc. Whereas in NZ, the population is ready for e-commerce and the good things about the Web – but unfortunately there aren’t a lot of things that create standalone business models to generate enough revenue to be successful in a market this small. So the way it’s kind of panned out in NZ has been much more about us expanding continually until we find the edges of what we’re possibly able to do. We’ve basically just grown and expanded horizontally into new areas. Launched a website, people joined, they told their mates, keep growing and growing and growing. We’ve always been awed by the growth and running to keep up. And we’re still growing and running to keep up. We’re doing nearly a billion page views per month. For New Zealand, that’s 60% of all of the ones served out of NZ – so it’s a lot.”
Rowan: “68% actually.”
Sam: “That’s of all the ones tracked by Nielsen, so it’s not everyone everyone. But definitely all the big sites and most of the ones with any business model.
So we’re now at a point where some of the things we’re trying to do really well are to make sure the site is easy to use and ensure our engineering side (running of the servers) is tip-top as well. And that’s a major, major piece of work – to run that sort of traffic, at an auction site especially where you’ve got competing bids and all those other kind of dynamics you need to deal with.”
Richard: Recently you got sold to Fairfax. The sale price amazed a lot of people and even in comparison to some of the deals in Silicon Valley, it was a pretty big deal. So how did that deal come about in a small market like NZ with only 4 million people?
Sam: “I think the thing that really surprised people was actually that we [TradeMe] earned as much money as we did [i.e. from day-to-day business]. And that valuation is a manifestation of that – it’s a multiple of that. So if you look at the way we were valued, it’s not the same level as you’d get at Google – by any stretch. As a multiple of revenues, or profits. This year we’re forecast to make $45M in profit, so if you take a reasonable multiplier on a fast-growth company doing a profit of $40-50M profit, that’s kinda the number you get to. So I think it’s just an amazing business and generates an amazing amount of money – and the valuation is simply another way of saying that. But unfortunately it glosses over the fact that it’s actually a great business as well.
The impression is that we’ve done this marvelous deal that’s just talked up a tinpot business to be worth $700 million dollars, and pulled the wool over some guys eyes. But it’s real, it’s a serious serious business – that’s just what businesses of this nature, that generate this sort of money, are worth.
The other thing is 1.7% of the advertising revenue in NZ is online – $20-30 M of a $2B market – so if we’re [i.e. NZ] to reach the level of the US, which is about 10%, then 10% of a $2B market is $200M. And we [TradeMe] own 70% of it, so it doesn’t take you long to convert the advertising revenue potential, which is the material part of our revenue today. So if the Internet [in NZ] gets 10% of the advertising spend, and we get half that, that’s $100M of revenue just by itself. And at the moment we’re doing $4-5M, so the growth potential – ok it is only a market of 4M people, but if you’re the only fish in the pond, it’s a pretty nice situation to be in. We don’t have the level of competition as in the US or Australia, so the returns you can earn in this market with a site like TradeMe are very good.”
Richard: Social software is a big part of what I write about on R/WW and it’s playing a big part in today’s Web – we’re seeing a lot of companies building social networks and platforms, to expand their user base. Obviously the success stories are MySpace and YouTube – and those kinds of companies. On the local scene, TradeMe has done a lot in that respect as well – it’s been a large part of your growth. So how much of your success do you attribute to that social networking platform?
Rowan: “It’s a reason why the site has got as big as it is, purely because people were telling their friends about it. It’s a large part of it, but obviously execution is the other side of that coin. The site needs to be solid and easy-to-use, and all of those kinds of things as well.
But I think when you hear a lot about web 2.0, companies like eBay and Amazon have been short-changed in those discussions a little bit – because that’s how they’ve gotten big as well. In terms of getting out of the way and letting users contribute content, things that are now being talked about as web 2.0, sites like eBay and Amazon have been doing those things for a while – and TradeMe is another example of that.”
Richard: Are you working on any social networking things to improve your platform – any special projects coming up?
Sam: “Our project pipeline is largely defined by what people expect – not trying to be clever. Because we’re in a position in New Zealand to look at the rest of the world and see what is cool and what is working, we can be a little bit slower. We don’t have to be right on the cutting edge of that stuff and disorientate our users every ten minutes with new features – [we] make sure that when we do go out with [new] things, they’re seriously baked into the platform. In TradeMe itself, that’s our approach. In our other sites [maps, jobs, etc] it’s slightly different…
We’re a really Web 1.0 kind of business. We’re a lot more 2.0 than eBay, say, but our innate business models are actually web 1.0 business models. […] We don’t need to go and do crazy things in order to come up with a business model. We have a business model that generates tens of millions of dollars per year – and if we simply make it better for people to buy and sell, by making processes better, by making it easier for you to interface with the website, by making it work more like you expect it to work, all those sorts of things… the yields are in our core product, and that’s what people appreciate the most.”
Richard: In the bigger countries like America, you’ve got the big portals doing a lot of verticals – like Microsoft, Google, Yahoo. But they haven’t really come down to this part of the world yet and branched out. However a lot of companies in the US are threatened by the likes of Google, thinking that they might enter their vertical markets in the future. Do you think that’s a concern for NZ too, for example Google coming into the online real estate market [which TradeMe recently entered]?
Sam: “I think that Google coming into real estate would be like McDonald’s coming into the local kebab market – you know, it’s kind of unlikely. So we’re really lucky that no one really focuses on NZ at all, because it’s so small. But typically those large American companies don’t actually get the cultural gaps – so they serve fries rather than rice with their meals in Thailand or whatever. So I think there are big cultural issues there that are just not well understood. For example the Americans think that everyone has a zip code.
I think ultimately there’s not enough of an opportunity for them, here, to localize enough. Real estate [in NZ] might be a $5-10M per year market – it’s great business for us, but I don’t think it’s worth the while of those big guys. I think where we’re slightly at risk – and where we try not to do any work – is in areas that can be delivered on from international players. So if you take applications that need very little localization and work really well around the world, like Skype or IM clients or Google [search] or Windows… you put a bit of language regionalisation on it, but basically it does what it does and it works everywhere.
Whereas what we’re doing is – e.g. if I’m selling my couch, it’s really important for me to sell it to the biggest market of people who are practically able to buy my couch… not to the world. So that’s a very local application. We try and focus on things where we have the ability to basically get the first mover advantage and get very very strong locally. And customize our product to be local, where we’re the best. [But] we’re not going to build Skype or anything, because Skype is always going to be better at that than we will be.”
Richard: Just on that point, why do you think eBay was never successful in the NZ market? Or did they just not notice it until it was too late and you guys had too much momentum?
Sam: “Bit of both, they were a little late in and then they launched in US dollars.”
Rowan: “And they had a cheesy picture of a kiwi holding an All Blacks jersey – it just didn’t quite gel.”
Sam: “And they didn’t really spend the money. What they did well in Australia – and they were successful in Australia – was they put some people into it, they built a new AU dollar ‘only search Australian things’ website. They spent a shitload of money on advertising and they basically got first mover and got on the spiral first…they never got on their spiral here [in NZ] because they fucked up a few fundamentals, like currency…”
Richard: Will you expand into the Australian market – even the Asian market in future? Or will you remain rooted in NZ and that’s where your core business will be and you won’t expand much from there?
Sam: “I think the businesses we’re in at the moment are largely geographically confined to where we are. Auction, classifieds etc – the biggest website always wins. There’s one already in Australia, so we can’t take auctions there really. It’s very competitive in classifieds. There are big winners in those markets already. Same with jobs… So I don’t think there’s anything there.”
Rowan: “In terms of new innovations, it’s very possible [we’ll expand]. We have a lot of smart people – at some stage something might come up that’s a global application rather than just for New Zealand. I think we’re better placed to hit markets like Australia and the US, purely from a language and localization perspective, than we are Asia.”
Summary
We also chatted at the end about the NZ market in general and what potential there is for web startups in NZ, but I’ll include that discussion in my upcoming ‘Top New Zealand Web Apps’ post – as part of my international web apps series.
In summary I think there’s a lot to learn from TradeMe’s example, particularly for smaller countries – where being first mover and capturing key vertical markets can be the secret to success.
But also the big countries like the US and UK can learn from this that localization matters – a lot more than the giant Internet companies perhaps think.
Originally published on ReadWriteWeb (archived copy)