Thursday, November 03, 2011

MEDL Mobile Holdings (MEDL.OB) Stakes Claim In App Space

Forrester Research brought us expectations of infinite Internet growth during the dot-com era.  Their pronouncements induced plenty of investors to jump whole-hog into dot-com startups that later flamed out.  Now Forrester tells us that mobile technology is one of the greatest things since sliced bread.  Plenty of firms want a piece of that mobile pie.  MEDL Mobile Holdings (MEDL.OB) thinks its focus on custom mobile apps is a juicy slice. 

Mobile apps are shaping up to be a low-margin business where new entrants quickly become commodified.  Many app developers build their own apps and give them away for free or price them inexpensively just to get name recognition.  DIY developers understand the retail concept of products as loss leaders that drive their brand's visibility.  MEDL turns this on its head by positioning its apps as premium products with celebrity marquees.  That's certainly a unique strategy in tech. 

Their bet is that a small app library driven by custom content will be profitable on a per-user basis as users develop loyalty to what the MEDL brand produces.  I'm not sure that per-user value is the right metric.  If I were an app developer, I'd want to know which of my apps was the most downloaded so I could figure out which themes, styles, etc. drive an app category's ROI. 

MEDL's published financial results show the uphill climb they face with a business model focused on premium products and user loyalty.  Premium products have higher development costs, no matter what sector you're in.  Their SGA expenses more than tripled from 2009 to 2010.  Their focus on attracting marquee partners by promising back-end revenue sharing is interesting but I wonder if a lack of upfront revenue will diminish their staying power. 

Their unaudited financial results from 1H 2010 to 1H 2011 deserve a brief mention.  Consider that their revenue went from $295k to $952k in that period (good news), while net income dropped from ($12k) to ($208k) in the same period.  That's not so good news.  Net income that drops by a multiple greater than the multiple by which revenues increase signals troubling possibilities, that perhaps variable costs are hard to control or the company has to surrender more back-end revenue as app downloads increase.  These types of problems are only exacerbated by growth.  MEDL must seek some inflection point beyond which revenue growth turns into profits; a much larger app library with sub-premium brands and less generous revenue sharing licenses will help get them to that point.

Full disclosure:  No position in MEDL.OB or FORR at this time.