A rough financial analysis of Zecco

Zecco has gotten a lot of press lately, both good and bad. If you haven’t yet heard of it, it’s a site that was launched in July and currently in beta whose business model aims to “revolutionize” the financial services arena by offering free trades and offering previously unavailable investing information and opinion all in one place, a la social networking.

Much has been written about Zecco already. Most of the positive news has been related to its PR and marketing department, while the online community has mostly voiced its doubts (see Techcrunch’s thoughts here or another blogger’s experience with them). But no harm, no foul. Every new business idea is fraught with naysayers and critics, and who knows? Maybe Zecco will succeed.

“Free” business models with expenses paid for by advertising revenue is no new concept, even in bricks-and-mortar businesses. Ryan Air is considering offering free flights to over half its passengers using this model by the end of the decade. There’s even a “restaurant” in Atlanta offering free food and drink (well, bread, butter, and sweet tea) called the Butter Trough.

What I haven’t seen discussed is how their business model will work. Assuming that they’ll be paying for the free trades purely through advertising revenue, I wanted to do some rough calculations and see what sorts of numbers came up. Obviously, I’m working with limited information, but here goes:

Zecco claims it will split revenues 50/50 with bloggers. Let’s assume they’ll be approved by and use Google Adsense, a staple advertising partner among bloggers. How much revenue will that bring in?

What you earn with Adsense varies depending on all sorts of factors, but I’ve made the following generous assumptions based on my own (admittedly limited) experience with this site so far:

Cost per click: $2 (very generous estimate)
Number of visitors per month: your guess is as good as mine, but let’s say a low end of 50,000 (the monthly visit rate of the most popular finance blogs) and a high end of 10M (the monthly visit rate of the most popular blogs). This is the equivalent of 1,667 and 333,333 visitors a day, respectively.
Number of page views per visit: 3 (generous for financial blogs)
% clickthroughs: 5% (generous estimate)

So, we multiply all those together and get between $15K-$3M per month in revenue for Zecco. Then let’s assume that half the pages viewed have blog content, meaning 50% of that amount goes to another blogger. Then Zecco’s looking at between $7500-$2.25M per month (3/4 of the original figures) in reality.

If Zecco signs up advertisers directly, that might be another source of revenue. Let’s assume:

50 advertisers are willing to pay $10K a month each to buy advertising space. (Here I’m out of my league, not yet having broached the level of having advertisers approach me to advertise directly!). Let’s further assume that bloggers also get 50% of these revenues on the 50% of Zecco’s pages where their content appears. Taking all this into account amounts to $375K a month (again, 3/4 of that figure) for Zecco.

That totals an estimation of $383K-$2.53M in revenues per month from all advertising sources. I’m sure when the idea was pitched to Mr. Morten Lund, the numbers were on the high-end, with Zecco being touted as the Google of the online financial world. Of course, if you’re Mr. Lund, it doesn’t hurt you to be a VC and put seed money into multiple high-risk/high-potential business ideas!

Zecco also estimates that trading costs at $2 per trade. Using our figures, that means that they can allow 192K to 1.27M trades a month (that’s 10 to 64K trades a day) before they run into the red, and that’s ignoring any SG&A (selling, general and administrative) costs like salaries and rents, or even payments to a bank or brokerage that will be executing the transactions.

Of course, their whole model is to let other people do the work by building the content and getting the word out, so overhead costs ought to be low.

But what does all this mean? Referring again to the assumptions on visitors a day above, this translates to mean either those 1,667 visitors are only making 10 trades total among them in a day (e.g. only 0.6% of visitors are trading, the low-end estimate) or 19.2% are trading (high-end estimate). Which means the rest are…just browsing for information and socializing?

Does this look like a viable and sustainable business model? Not really, at least on paper. It all depends on whether they’re truly going to offer something that draws people to the site. Personally, I think there’s plenty of investing information available already, through traditional media and blogs, so putting it all in one place won’t make that much of a difference. The real “problem” is that if you really want to make a good investment, you still must do your own legwork and research.

Free trades? This might be appealing to professional traders, but it doesn’t appeal to me because I don’t trade too often, and I am hesitant to put money into an as-yet unproven brokerage. If that’s really the big value proposition, then to remain free using our model and assumptions, they’ll have to pay for these trades using revenue from some other source or find a way to charge more to advertisers, because right now, they’re not able to pay for too many trades.

In the interest of full disclosure, I’ve been contacted by Zecco several times during the last few months asking me to join as a blogging member, but each time I’ve decided to wait and see instead. A lot of this is due to the lack of information — it’s unclear to me what they’re offering exactly, their terms of service don’t stipulate a lot of specifics (such as their revenue sharing agreement), and publishing your content elsewhere always increases the risk of losing control of where your content is used and violating the terms of service of your current advertising partners.

At any rate, this has been very much a back-of-the-envelope analysis, and I don’t claim to know the right figures for Zecco. What are your thoughts? Are my estimates grossly incorrect somewhere? Feel free to comment away.

***************************************************

Look Good at Work and Become Indispensable Become an Excel Pro and Impress Your Boss

***************************************************