Financial Post Business
Blown Away
Sat Mar 1 2008
Page: 30
Section: Financial Post Business Magazine
Source: National Post
Illustrations: Color Photo: Photography By Kevin Hewitt / (See hardcopy for Illustration)
Color Photo: Photography 2001 The Record, Waterloo Region, Ontario Canada / Geosign founder Tim Nye
(right, in 2001) declined comment for
Color Photo: / Ex-CEO Ted Hastings survived Geosign to take on the top job at
It started simply as another "town hall." No
surprise in that -- Geosign Corp. employees
were used to town-hall meetings because
they happened almost monthly. Staff would
leave the office, pile into cars and make the
short drive to the Holiday Inn on the south
edge of sleepy Guelph, Ont., where
Geosign was located. Once assembled,
they'd typically get an earful from
management about the business, new
initiatives and big plans for the future.
The only difference this late May day was
that the meeting had been hastily arranged,
with employees directed to the hotel that
morning. But why worry? Just 12 weeks
earlier, Geosign had joined the elite list of
hottest Web companies in the world. After
operating for seven years in
near-anonymity, an hour's drive from the
prying eyes of Bay Street, Geosign landed
the largest-ever venture-capital investment
for a Canadian tech company: $160
million, for which U.S. investor American
Capital Strategies Ltd. got a "significant"
minority stake. At that time, Geosign said
it had more than $100 million in sales. And
it was hiring new employees like crazy. At
the previous town hall in mid-April, CEO
Ted Hastings, who took over from
Geosign's founder and chairman Tim Nye
that January, discussed a new facility they
were planning for all the staff, then
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numbering more than 250. There, they
would keep building their online media
"powerhouse." Geosign boasted a network
of 180 websites, with consumer news and
information content ranging from hockey
to girlfriends to lawn furniture. It said it
had created a technology that drove traffic
to its sites through placements in search
engines, with up to 35 million unique
visitors landing each month. Given the
red-hot interest in Internet advertising,
American Capital managing director
Virginia Turezyn said Geosign's true value
lay in its "automated systems," not its
content.
For everyone arriving at the Holiday Inn,
the future seemed golden. But as soon as
they were assembled, things turned strange.
Each employee was handed an envelope. In
the envelope was a piece of paper with a
geometric shape on it -- triangle or square.
That's when the bomb dropped. Hastings
told the assembly that there had been a
massive change to the company's business
model, brought about by search engine and
Web advertising giant Google Inc. It would
require massive adjustments, but Geosign
would persevere, he said. Stunned
employees tried to decipher what was
happening. Many had just joined the
company to create "webzine" content
packages for its sites. What did Google
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have to do with their online magazines
anyway?
Those with triangles in their envelopes
were directed to speak with human
resources staff on the premises. Regardless
of their circumstance or how long they'd
been with the firm, the triangle indicated
their time at Geosign was over. Between 50
and 100 people were cut that day, with
many more to follow. "It was awful," says
one former employee. "None of us knew
what was happening. It didn't make sense.
The woman standing next to me had just
quit her job and moved to the city to start.
She burst into tears when she realized she'd
just been fired."
Companies fail all the time. Sometimes
with little warning. But companies that are
highly profitable and only weeks removed
from a record-setting venture capital
investment? Not so much. Yet in Geosign's
case, the cuts that began last May
continued through the summer. Late last
year, fewer than 100 employees remained.
Today, Geosign itself no longer exists, its
still-functioning website an empty
reminder of its former promise. And while
the national business media has, until now,
overlooked the story -- surprising, given
the size of the investment and the fact that
Google played a direct role in the outcome
-- within Canada's technology and
venture-capital communities, the
$160-million investment is known as the
deal "that didn't go well." When the
collapse happened, even jaded industry
watchers accustomed to financial debacles
in the tech sector were stunned. "I've seen a
lot of meltdowns," says Duncan Stewart, a
technology and investment analyst in
Toronto. "But something happening like
this, over just a few weeks, that's
unprecedented in my experience."
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The same question occurs to everyone:
How did a business making $100 million a
year, a company so full of promise,
disintegrate so quickly? With Geosign, it
turns out, there's more to the tale than
anyone directly involved has so far been
willing to say. And much of it revolves not
around its plans for a content powerhouse,
but the story of how the Guelph startup
found a loophole in Google's vaunted
advertising model, enabling it to make
boatloads of cash -- until Google decided
enough was enough.
It's hard to know exactly what Tim Nye
had in mind when he established Geosign
in 2000, the same year Google launched its
first keyword-targeted ad program, the
money-spinner at the core of its enterprise.
"Geosign wasn't much more than a shell at
that time," says Jim Estill, CEO of Synnex
Canada, a Toronto-based computer
distributor, who invested in two of Nye's
earlier ventures. "But it had Tim, and he's
one of those consummate entrepreneurs
who fails sometimes but keeps coming up
with new ideas." Nye's first company,
Carbotek Computing, had been a computer
parts distributor. His second, a software
company called CadSoft, was a "marginal
success" according to Estill. Nye sold that
in 1998.
Estill says Nye bucked conventions, wore
his hair long, preferred jeans to suits and
had bold ideas. "He's technically creative,
the type who knows what computers can
do," he says. "There's a tendency in the
press to make everyone either a dog or a
god. The truth is most people are
somewhere in between. Tim is no different.
He has shortcomings, but he's also a highly
creative guy."
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Retracing Geosign's origins through old
news stories, Nye sounds like he spent
considerable time searching for a business
model. In early interviews, he described
Geosign's business in vague terms,
suggesting it was somehow linking online
consumers with local businesses. "The
market is connecting buyer to seller, and up
to now, the consumer has been left out,"
Nye told the Guelph Mercury in 2001. He
called his new technology "geosearching,"
and added that his company had inked an
arrangement with an Internet search
engine, but wouldn't disclose the name.
Still, he told confidantes and investors that
he had grand ambitions for Geosign
extending far beyond Guelph, concepts that
would create a business with huge upside.
Not that anyone outside of a small circle
knew of Nye's plans. For the next five
years he stayed out of the limelight. Even
in a small city like Guelph, he and Geosign
garnered no media attention.
Meanwhile, as Nye tinkered away in
silence, Google was doing just the
opposite, laying claim to the title of most
popular search engine. More significant,
perhaps, was the success of its
keyword-targeted ad program. To recap,
Google began selling advertisements
associated with keywords that would be
searched by Internet users. Pricing of
keywords was based on a combination of
bidding and click-through use. As Google's
popularity soared, so did the price it could
charge for linking an ad to a keyword. For
example, if your company wanted the
phrase "car accident lawyer," it could cost
upwards of US$38 per click to have the
most prominent ad link on the Google page
when that term was searched. Less
common phrases cost less, as little as 5.
In 2003, Google made another huge leap
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forward on the advertising side, with the
launch of its AdSense program. Essentially,
this application allowed people to put
keyword-targeted ad links, served by
Google, on their own websites, with them
and Google splitting revenue tied to the
volume of user click-throughs. As its
popularity grew, a cottage industry began
to develop called "search arbitrage."
Essentially, search arbitrage involves an
individual or company buying Internet
traffic through the acquisition of keywords
from Google, then sending viewers who
click on the ad links to a site ("landing
page" in Google terminology) that appears
to have content, but is actually just full of
online advertising linked to the original
search term. Anyone clicking an ad link
there makes money for the keyword holder.
For example, a company might bid for the
Google rights to the phrase "small town car
sales" and send traffic to a website it
controls, filled with more car
advertisements, called
"Alltheautomotive.com." The keyword cost
only 20, while a click on the advertising
on the website might yield $1.50 return.
According to Niki Scevak, an analyst at
Jupiter Research in New York, the majority
of those initially involved in search
arbitrage were small players. "These were
guys running search arbitrage out of their
basements, making maybe $20,000 a
month," he says.
As the possibilities of the arbitrage
business became apparent, however, other
more ambitious players got interested. One
of them, it seems, was Geosign. While both
Nye and Hastings declined to comment
when contacted for this story, former
Geosign insiders who spoke on the
condition of anonymity confirm that the
possibility of a big payoff in search
arbitrage caught Nye's attention after he
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created Geosign. What's more, he
envisioned a network of thousands of
websites all automated by software linking
keywords to pages filled with ads,
returning millions in cash in the process.
By 2005 that was exactly what was
happening. Nye crafted a maze of Internet
sites that included tens of thousands of
Web pages and bought up even more
keywords from Google. By connecting the
keywords and the websites, Geosign was
indeed generating more than $100 million
in annual revenue and was extremely
profitable. To put a value on the company
at this time, analyst Scevak points to
Marchex Inc., a publicly traded company in
Seattle, Wash., with a comparable business
model. At its peak in 2006, Marchex had a
market capitalization of US$500 million.
Meanwhile, Nye began to run Geosign like
his version of a California dot-com at the
peak of the investing craze in the late
1990s. He brought three Segway Personal
Transporters into the office. "They didn't
make any sense at all given the size of our
offices," says one former employee. "But
we used them anyway." Wolfgang Puck
gourmet coffee makers were soon
introduced, free Perrier abounded and
rumours circulated that staff lunches would
soon be catered. A lavish Christmas party
thrown at the end of 2006 saw employees
head home with iPods and gift certificates
worth of up to $1,000. The grand prize was
a lease on a Toyota Prius. Fittingly, Nye
dressed as Santa for the event. "It was
amazing while it lasted," says another
former employee.
Even as the perks flowed, many Geosign
employees, especially those the company
hired in 2006 to start developing a new
online publishing division of the business,
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weren't necessarily of where the money
was coming from, especially as the
websites they designed struggled to find an
audience. "It didn't make any sense to me,"
says another former employee -- one of
many contacted through a Facebook group
set up after the first big round of layoffs
last May. "There was all this money
around, but the website I was working on
had like 1,500 visitors a day."
There were other oddities, as well. One
Geosign staffer recalls being asked to work
through weekends in late 2006, in order to
add text to Web pages that appeared to be
nothing but ads. "They told us it could be
our B-grade writing," the ex-employee
says. "We were writing for strange sites
like roundtables.info and sticks. info. And
we were just writing a paragraph or two. It
didn't seem to matter what we wrote."
The change in atmosphere had everything
to do with measures that Google was taking
to rein in those doing search arbitrage. This
action was a response to two main
concerns. First, that the practice was
becoming so widespread, it was hurting
legitimate advertisers by artificially
inflating keyword prices. And second, that
if too many keyword-targeted ad links only
took users to pages filled with other ads,
that users would lose interest and faith in
the online ad system. Obviously, with
advertising revenue being the key to
Google's finances, it had to respond. It did
so by expanding the terms of service for its
AdSense program (published on its
website) to place greater restrictions on the
way links could be used and by spelling out
detailed landing page and site quality
guidelines. A top priority there: relevant
and original content. By these standards, a
landing page full of ads is inadequate -- as
this text in its current guideline explains:
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"Provide substantial information. If your ad
does link to a page consisting mostly of ads
or general search results (such as a
directory or catalog page), provide
additional, unique content." Since most
companies doing search arbitrage bought
both their keywords and landing page ads
through Google, it was easy for the
company to isolate and monitor them.
Noncompliant parties risked being banned
from the AdSense program. A simpler
tactic, however, saw Google target those
abusing the process, raising their fees and
making it too costly to continue.
For the moment, Nye and Geosign were
still a step ahead. Instead of buying ads and
keywords from Google, Geosign had
always purchased keywords from the
search engine company and directed the
traffic to sites filled with ads from rival
Yahoo! That meant Google was receiving
millions of dollars from Geosign for access
to its keywords, but didn't know where the
traffic was directed. Given the amount of
money flowing to Google, most in Geosign
thought the search engine would turn a
blind eye.
But not Nye. Geosign insiders say Nye
voiced concerns that Google could
eventually move against arbitrageurs
utilizing the Yahoo! model. That left him
with a decision -- to continue running
Geosign and hope Google would continue
to accept the company's money even if it
didn't like the business model, or to search
for something that might one day replace
the arbitrage revenue. With the online
advertising market for content-oriented
sites growing rapidly, Nye decided to move
into Web publishing. He purchased still
more domain names and began hiring staff
to create "webzines" focused on everything
from sports to travel. Nye's plan, insiders
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say, was to develop a legitimate content
business before Google cracked down on
its arbitrage angle. This explains why
Geosign quickly began hiring so many
reporters and editors, and why it begin to
talk about itself as a big-time online media
play.
Nye knew he had to move fast. He also
knew he needed to make acquisitions on
both the content and advertising sides of
the business. That would require more cash
than Geosign had on its own. Soon, Nye
began seeking venture capital and
private-equity investments. In early 2007,
American Capital, which calls itself an
"alternative asset" management firm, won
out over several suitors.
The deal was announced in the first week
of March. But even that had an odd twist.
Nye was not available for any interviews,
with the exception of some comments he
gave to a couple of tech industry bloggers.
In one case, he said the money was critical
to his "BFE -- big empire strategy. I forget
what the 'f' stands for." For his part,
Hastings only spoke publicly for a very
short time before he, too, clammed up.
A source inside the company says their
behaviour stemmed from fears that the
more they talked, the more they would
attract Google's attention. For this same
reason, some insiders had
apparently advised against partnering up
with American Capital prior to the deal,
because it was a public company and
therefore had to disclose the investment.
While no one at American Capital would
comment for this story, sources say it was
well aware of how Geosign made its
money and what it was planning going
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forward. It was, in other words, placing a
bet that Google would not take steps that
would alter Geosign's lucrative business.
"Since we didn't know Google like we do
now, the question always was, 'Is someone
really going to shut off the kinds of dollars
we were paying them?'" a former Geosign
employee says. "It turns out the answer was
yes."
The end came suddenly, well before Nye
and American Capital could reposition the
business -- in fact they were still hiring
new employees in the days leading up to
the layoffs. Google had started to look
more closely at companies like Geosign,
which were buying keywords from Google
and ad links from Yahoo! or another
provider. And soon Geosign got word that
Google would now begin penalizing its
Web pages that had "a low landing page
quality score" -- that is, lots of ads and little
or no original content. While Google won't
comment specifically about Geosign,
sources say it raised the prices it charged
Geosign for keywords overnight. "When
Google 'shuts you down,' that isn't exactly
what they do," explains Jupiter's Scevak.
"Instead, what they do is start charging you
$50 for what they were charging 10 for
previously. They make the model
financially unfeasible."
Sources say the American Capital deal
included provisions whereby it would
recover its money if things fell apart. "As
any private-equity firm does, they find a
way to make sure they come out OK," says
one former Geosign executive. "If they are
going to put $160 million into a company,
they are going to make sure that if
something bad happens, they are holding
the keys to the castle."
Negotiations dragged on through 2007.
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Ultimately, American Capital reached a
settlement with Nye that saw two new
companies created. American Capital got
control of Geosign's marketing and
advertising assets and spun it off in a new
company called Moxy Media Inc., with
ex-Geosign CEO Hastings as chief
executive. In early January, a spokesperson
for Moxy Media confirmed that it has
about 50 employees and had recently
acquired Florida-based SWI Digital Inc.
"Life goes on," says one insider. "You
might not be thrilled with where it is,
considering what it had been, but search
marketing is still a viable business."
American Capital's latest securities filings
peg Moxy Media's value at US$128 million
-- which means the sum of Geosign's
former assets are worth less than American
Capital's original minority investment.
Besides remaining tight-lipped about its
Geosign experience, American Capital has
apparently tried to keep a tight leash on
Geosign's former employees, many of
whom were asked to sign a non-disclosure
agreement before receiving their severance.
An employee who spoke with the Guelph
Mercury was sent a letter warning about
the repercussions of talking with the media.
As for Nye? He came away from the
breakup with what one former executive
describes as "assets with little value" -- a
few domain names, such as hockey.com
and golfcourses.com, a few staff and little
else. He created a new company called
eMedia Interactive Inc., where he is listed
as chairman.
A final attempt to contact him to see if he'd
be willing to put his version of events on
the record for this story yielded a short
response. "As part of the transition, I
signed a confidentiality agreement, which
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would prohibit any comment from me," he Innovance Networks Inc.
wrote in an e-mail. "I have some exciting
things in the works. But I am not $ 115 12/ 5/ 00 Next-generation platform
comfortable adding anything else at this for photonic transport
time."
Hyperchip Inc.
In time, he might talk about his new
venture, he says, but there is "no benefit for $ 100 9/ 1/ 00 Developer of core IP
any press at this time." Those close to Nye systems
say he did very well financially with
Geosign even before the American Capital Oanda Corp.
deal, has a home in Barbados, and often
uses a local service to charter private jets. $ 100 9/ 17/ 07 Automated online currency
Even though his dream of creating a trading
publishing empire in Guelph seems to have
ended -- a handful of staff were recently let Ceyba Inc.
go from eMedia -- those around him
wouldn't be surprised if he resurfaces with $ 93 5/ 31/ 01 Develop/ deploy optical
another company. "There won't be any networking solutions
penny sales for him," says Estill, who
thinks Nye could produce a lasting hit if Q9 Networks Inc.
the right concept catches his fancy. "He
knew he was living on borrowed time at $ 89 4/ 10/ 01 Internet infrastructure and
Geosign. He had a golden gooseit just managed services
didn't lay eggs forever."
Innovance Networks Inc.
CANADA'S 10 LARGEST TECH VC
INVESTMENTS $ 88 2/ 25/ 02 Next-generation platform for
photonic transport
Geosign isn't the only failure in this group
-- but none fell as far or as fast Catena Networks

Company Amount ($ mil) Date Business $ 75 1/ 23/ 02 Broadband access systems

Description builder

Geosign Technologies Inc. Hyperchip Inc.

$ 160 3/ 9/ 07 Online publishing and Financial Thomson source: $ 70 1/ 18/ 02

targeted searches Developer of core IP systems

Norigen Communications Group Inc.

$ 122 3/ 31/ 00 Competitive local exchange

carrier

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