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December 27, 2005
Leaping from "Digerati-Facing Services" to "Consumer-Facing Services"
In his post “First 300,000 is Easy,” Om Malik questions “if the whole Web 2.0 thing is still in a very-early adopter stage… I get a feeling that it will be a long time before the concepts filter into mainstream usage.”
I share his concern that many of the emerging web services are actually only being used by a small subset of the total overall internet population – the extreme techie set. Of course, by definition, early adopters come first. But I wonder if many of the recently launched services emerging are consciously (or more likely, subconsciously) “digerati-facing” services, as opposed to true “consumer-facing” services. While a nice mention in a high-profile tech blog will jump-start a start-up site, that exposure doesn’t necessarily translate into widespread usage.
To me, this situation seems a symptom of both product design and marketing positioning. Design & market a service for the digerati; it will attract the digerati. Design & market a service for the masses; it will attract the masses.
Is attracting the first 300K users easy? Hardly. But perhaps in some cases growing from 30K to 300K users is less difficult than growing from 300K to 3MM.
It will be very interesting to see which of the online services who’ve gained initial techie-focused traction will be able to convert that momentum to a wider audience. Sure, not all recent startups are just for the techie crowd (Clipmarks and Meebo come to mind as counter examples, along with many others). I’d speculate that in 2006, a couple of the “breakout” services will leapfrog the digerati set altogether, gaining early acceptance of general consumers via techniques like search engine optimization and peer-to-peer marketing. There are many paths to mass adoption, and I think that it can be accomplished either with or without extreme techie acceptance first, depending on the strategy deployed.
December 22, 2005
The Far Web Expands to the Everywhere Web
Back in late September, I attended the MIT Review Emerging Technologies Conference, which included a speech by Bill Joy (current Kleiner-Perkins partner and co-founder of Sun Microsystems). In it, he reiterated his “Six Webs” framework of how he categorizes the taxonomy of different webs comprising the entire Internet – the here, near, far, weird, B2B, and D2D (device to device) webs – from the perspective of how and when they are viewed and used. (Read this and this summary for a further explanation).
One of his notions, “the far web,” is the “the Internet you see when you sit back from a big screen.” A user’s experience in this situation is much different than it is on a laptop/desktop computer (“the near web”) or mobile device (“the here web”). The first place where consumers are experiencing this far web is on what is now our private television screens. With the ongoing convergence, this device will increasingly become webbed into various networks.
The second component is the screens in public places. In the past, we’ve only seen only a handful of instances of it, namely a few (marginally successful) kiosks. However, it appears as though we are perched on the proliferation of digital signage, the first step in moving the “far web” to the “everywhere web.” In recent months, I personally have seen flat-panel advertising displays pop up in malls, elevators, and retail outlets. While visions of screens everywhere were prophesized during the bubble, today low flat-panel screen costs and near-ubiquitous connectivity give this vision a tangible reality that wasn’t available six years ago. (Forrester recently wrote a piece entitled “Digital Signage Grows Up.”)
As the number of these screens explodes, they will transition from mere digital slideshows to truly “everywhere web” connected devices. Yahoo, with its eyes on becoming the interactive media giant, sees this coming, and made a unique partnership with Clear Channel’s Malls unit and Digital Advertising Network, a Montreal-based provider of digital screen networks. While Yahoo is merely a content provider in this agreement - supplying news headlines, financial information, and blurbs about sports and entertainment – it marks a notable venture for the company into the proliferation of the networked web information into public spaces. (To be honest, I am surprised how little hype this announcement drew given the ramifications, at least from my perspective.)
The transformation from dumb screens to connected ones, coupled with their upcoming flourishing, will take the far web out of the house and move it everywhere. And if Yahoo sees this coming, then notable (and soon-to-be successful) emerging startups can’t be too far behind.
December 20, 2005
Flip to Revenue
In the context of Don Dodge’s and Dare Obasanjo’s conversation about flipping a web startup to one of the major internet players (Google, Yahoo, Microsoft, AOL), Greg Yardley writes about the “build-to-flip” mentality which seems to be circling these days:
“But if you’re deliberately planning to quit your day job and start a business from scratch, why go with a zero-revenue model that’s going to be sold for $50 million tops when you could pick a business model with the potential to generate some really, really serious cash?With all the Web 2.0 competition out there, the chances of your built-to-flip start-up selling to Google or Yahoo or Microsoft are slim. Instead, take the time to find a compelling revenue-generating model - run correctly, it’ll require as little or less VC than a built-to-flip one, and the upside is an order of magnitude greater. If you’re going to take the risk that comes with entrepreneurship, don’t ask yourself what you need to do to get sold to the usuals - ask yourself what you need to do to bring in some serious money.”
There is a very legitimate argument that the sole initial focus of a startup should be developing a viable product first. And if a company delivers true value, a revenue (and business) model will subsequently follow. Many of the startups we are currently seeing are consciously following this route, which is understandable.
However, I completely agree with Greg’s assessment that there is danger in completely concentrating on the service (after this initial phase) at the expense of any revenue attention whatsoever. There are certainly some out there with a “build it and get bought” mentality which Greg challenges above. However, my suspicion is that some startups aren’t thinking about revenue not because of this mindset, but rather because of the team’s genuine and relentless passion for the product itself clouding the vision.
Whether in web services, enterprise software, or other technology-enabled service, the trick is to find the right balance between devoting resources to pressing sales/distribution of the product and development of the next rev. It’s certainly not an either/or proposition, and my opinion is that unabashedly ignoring revenue is a high-stakes game. I’m excited when I meet entrepreneurs who want to build a great business, not just a great product.
Of course, if the right acquisition offer comes along in the meantime, by all means, hit the bid. But don’t count on it.
December 14, 2005
Network Effects and Connection Strength
In yesterday’s post, I argued that the value of a (online social) network is not only determined by the number of nodes in it, but also in the ability for the network to monetize those nodes. (I believe, however, that this line of reasoning can apply more generally to other “networks.”)
Today, I wanted to introduce the idea that the value of a network also is determined by the strength of the connections between the nodes. And as a result, the degree to which positive “network effects” are experienced depends on the strength of those connections.
Wikipedia states that the “network effect causes a good or service to have a value to a potential customer dependent on the number of customers already owning that good or using that service.” That is, services in which the more people who use it, the more valuable it becomes.
However, not all network effects are created equal because the strength of the connections in various different networks isn’t equal.
On the lower end of value, Amazon experiences network effects when consumers contribute to the user reviews. The more people who contribute reviews, the more valuable the network (and Amazon) becomes vis-à-vis other online retailers. One of the reasons I prefer to use Amazon is due to the fact that a rich set of user-review data is integrated into the product description. (It should be noted that one shouldn’t confuse the network effects that Amazon enjoys with two other distinctly different benefits it possesses, economies of scale and economies of scope). However, the strength of the connection between the users who contribute user reviews is limited and weak. To a single user, it doesn’t matter who contributed the review, but just the fact that many others in the public have.
Contrast that situation with that of Skype or IM networks on the other extreme. The strength of the connection between the nodes is high. A user doesn’t care how many other people use the service generally, just that the specific people who s/he wishes to talk to use the service. In this case, because there is a direct desire to connect to a specific node, the strength of the connection between these nodes is high, and the resulting network effect benefits are higher.
In between these two polar examples are many shades of gray. Some networks necessitate that a general subset of a group of people become a part of the system, but don’t require one person specifically. Examples of these are professional networking sites like LinkedIn. I use this service not because one person specifically is on it, and not because the absolute total number of people using it is large, but because a certain level of the group of people I know are included. This intermediate-level strength of network can take many variant forms, all with corresponding degrees of network effects.
In sum, when assessing a network as a whole and the amount of “network effect” benefits it receives from its users, I believe that the tighter the connections, the greater the value.
December 13, 2005
Don't Just Look Left and Right, But Also Up and Down
I like the quote last week from Fox Interactive Media’s President Ross Levinsohn (via paidcontent.org):
"[ FIM will focus on ] social portals... Why have one portal when we can have 70 million?"
There is a lot of merit to this strategy.
Many of the “Web 2.0 businesses du jour” that are emerging seem too horizontally focused to me – they are really exploring features which should and will be incorporated into more vertically focused applications. A month ago, there was some blogosphere discussion around Metcalfe’s and Reed’s laws which state that the value of a network increased at a non-linear rate with the number of notes in the network (see Fred Wilson, Tom Evslin, and Nivi.)
However, in the long run, the value of the network is not only determined by the number of nodes in it, but in the ability for the network to monetize those nodes.
Thus, it seems to me that in calculating the value of a network, any equation describing it should contain a variable with the monetization rate (or proxied by the value to the user which can be monetized in the future). So while the number of nodes in a network surely is a fundamental (if not the majority, in many cases) driver of value, the value of the network itself to the user is also a very important component to the overall total.
General all-purpose networks work well in many cases and applications (e.g. Skype for voice communication). But deeper vertical-specific social portals have the potential to drive value as well. Take Dogster, a social network for dogs (via Jeff Clavier). At first, the size of the potential audience seems limiting, but my hunch is that the value which individual dog-owners derive from it is substantial, as they are truly passionate about the subject.
Where’s my “social portal” for me as a skier enthusiast? Better yet, where’s the “About.com of social portals?” Or why isn’t About.com more social?
If Fox Interactive Media wants 70M social portals, then Dogster should be one of them. The trick of both entrepreneurs and investors in the space is to find the couple of the 69,999,999 others which fit the calculus of maximizing total value between both the number of nodes and the ability to monetize those nodes.
December 12, 2005
The Search for Delicious Bookmarking Revenue
The news on Friday about Yahoo acquiring del.icio.us is spreading throughout the Blogosphere. Of course, many congratulations go to Joshua, Union Sq. Ventures, Yahoo, and everyone involved. I am sure that many bloggers will have their own interpretations and analysis, so I won’t unload onto that pile of commentary.
Instead, I thought I would highlight the opportunity and challenge that this acquisition creates for the many “delicious permutations” out there. For a fairly exhaustive list of “bookmark managers,” this page summarizes them well. With the Yahoo Delicious acquisition, there is one less acquirer out there available to shop for a competitive service. This situation leaves the remainder of the field “validated” by the acquisition, but challenged to truly build a business model around their offering. With an early acquisition one degree less likely, it’s time for these players to start thinking about revenue generation. Unlike others who don’t see the value (if you don’t, then read this post) in the service or viable business models (Paul Kedrosky calls the product “largely unmonetizable”), I see both. Currently, I view four possible revenue streams for the category which I’d call “bookmarking services”:
Contextual Ads in a Social Search Engine. It wasn’t until Fred Wilson posted about “Delicious Search” in October did a little lightbulb go off in my head. Delicious and many of these other tagging services have the potential to either supplant, or more likely augment, algorithmic search. In the 90’s, Yahoo’s in-house editorial team originally decided what to include in its directory, until the limitations of scale hit. Algorithmic classification of sites succeeded this approach, but perhaps a decentralized editorial team of taggers could replace or supplement it? The contextual ads business model is well-demonstrated. The difficulty is, of course, gaining enough critical mass in any keyword, let alone large set of keywords, before the search results are meaningful or useful to any degree. But it makes sense to me to start with users tagging first and the social search second, as opposed to what others like Raw Sugar have done.
Selling “Tag-Stream Data.” A dirty little secret in the online marketing world is that many, many ISPs sell their click-stream data to data-mining companies like Compete. I am more than a little skeptical about companies who pitch the notion of “selling their data” as the main revenue stream. Yes, almost every web company generates buckets of “interesting” data – the difficulty is in harnessing the valuable sets, package it into a digestible format, and find customers willing to pay for it. That being said, perhaps a bookmarking company might be able to pull the above feat off.
Advertorial Tags. Bookmarking services with a social shopping spin, like Kaboodle and Wists, integrate a monetization component directly into the service through advertorial content (read my previous posts on the subject here, here, and here). A significant number of product links could be monetized through relationships with merchant advertisers who offer these items.
Other Contextual Advertising based on User Value. These services offer more than just social bookmark value, but also trend discovery and content organization. (Digg, Tailrank have geared their offering more to the former, while many others have shifted to the latter.) If users find these services valuable, but won’t pay for them outright, other marketing opportunities might fill that void. For example, knowing every users e-mail address and the fact that they’ve tagged many pages with the keyword “skiing” could give opt-in direct marketers with a rich list of users to target with advertisements, coupons, and other information. Once marketers know specific interests (and to a certain degree, their behavior), advertising can move beyond simple AdSense contextual ads on the side of a page.
The problem is that none of the services – including Delicious – are close to really capitalizing on any of the above models. At present, these are just concepts that would need full testing and experimentation to refine. I personally, was excited to see the Delicious acquisition announcement. My only disappointment, however, was that the Delicious team didn’t have a chance to fully experiment and discover a business model that worked and scale it. Granted that they’ve given the above (likely along with a few others) some serious thought – perhaps selling the company was a signal that the above ideas aren’t as fruitful as I conjecture? Regardless, I am looking forward to seeing similar offerings give it a shot to see if a profitable business can be built.
December 7, 2005
First, Second, and Third Pages of Search
I turns out that I’ve been citing Charlene Li’s blog post about the Third Page of Search in a number of conversations recently. She summarizes the concept:
“The first page of search is the query page (like www.google.com), the second page is the search results, and the third is a destination page on yet another search engine or aggregator that's been optimized for that query.”
And continues,
“[A]s vertical search engines develop, they will actively try to source much of their traffic from the general search engines, training consumers to actually seek out these brand names in the general interface and then drilling down into parametric, structured search on the vertical search site that's better suited for their original intention…. I think we're seeing a subtle but fundamental shift in consumer search usage away from trying to find perfect destination page and instead, turning instead to aggregators and vertical search engines that understand (and can optimize for) the query better than the destination pages.”
Her post has got me thinking in the past month about where the traffic of vertical search sites is and will be coming from. However, the examples that she cites, pages from AllRecipes and CitySearch, are distinctly those of content sites – not of vertical search engines per se. I agree that aggregators of specific niche content (especially that which is user-generated, like the above two examples) will increasingly look for their permalinked pages to become the “third page.”
But I wonder if true vertical search engines, which don’t own their own content but rather point to other sites for the consuming of content, are experiencing or even view the third page strategy as a key component of generating traffic. Kayak (travel), Indeed (jobs), BusyTonight (local), Blinkx (video) don’t appear now to have spent sufficient resources devoted to generating SEO-friendly content landing pages. I’ve heard whispers, though, that some of these are making move in that direction, and will look for those changes. People vertical search site, ZoomInfo has already made strides in this approach, however (example). And it appears that Healthline (health) is working on it.
My hypothesis is that the line between vertical search engine and content aggretator will blur as more of these companies optimize their offerings to become the third page. With increased primary search engine visibility, perhaps vertical search engines will build their audience not by brand/destination building, but through an SEO focus.
December 6, 2005
(The Beginnings of) Social Commerce
There have been a few recent developments in “social commerce,” and I believe that we will (hopefully) see a number of new ones in 2006. For me, I view social commerce as one subset of “advertorial content,” where content is the advertising. (I’ve been writing about this notion recently (here and here), and believe that there is a great deal of power behind it.) With social commerce specifically, what better way to advertise a product than to have a friend recommend it to you? When a product is directly integrated into becoming content itself, it bypasses the normal filter that consumers put up to ignore or at least be skeptical of the advertising. And when this advertorial content is generated by a friend, a special element of trust is integrated into the advertorial relationship that wasn’t present otherwise.
I would consider Amazon to be one of the pioneer in social commerce, introducing(?, or at least popularizing) the Wish List and “Tell a friend about this item” features quite a few years ago now. The company’s recent addition of tags adds another social component to their existing commerce offering. Yahoo explicitly pursues social commerce with their Shoposphere and Pick Lists initiative.
Startups are getting into the mix as well. Kaboodle (profile: here and here) gives users the ability to create WishLists and Giftlists. Zoundry offers a toolbar which lets users “share product recommendations… using email or saving the page to a social bookmarking site like del.icio.us or Yahoo! My Web 2.0.” I’d also consider social music recommendation services like Musicmobs to be a social commerce offering.
The above are probably just the tip of the iceburg. I envision a day where you can search your social network to find and see what products others who you know own –and– whether or not they like them. Moreover, you could learn about the people you don’t know when they recommend a product (which you don’t know now on “traditional” shopping engines). With this information, you could make a more informed buying decision about products you are considering – and keep up to date on the ones you don’t yet know you should be buying. This info would more than just allow individuals to keep up with the Joneses… True social commerce would provide consumers with rich social context and relevancy to the purchases which they are making.
Posted by at 10:53 PM | Permalink | Comments (3) | TrackBacks (3)December 5, 2005
Dead Raw Fish = Sushi
The best part of the VC job is opportunity and privilege of meeting with so many entrepreneurs. My favorite days are the ones in which I spent the entirety meeting with a couple of company founders. It’s both exciting and engaging to talk with people who are in the midst of the process of creation – acting on an idea transforming basic elements into something elegant, useful, and valuable.
In many ways an entrepreneur is like a sushi chef, creating something very rich out of something very basic. The raw elements of their craft (dead raw fish or people & ideas, respectively) are ubiquitous and available to nearly everyone. But only a select few have the skills and initiative to transform these into something wholly different.
Now that’s unique, exciting… and tasty.
Community, Content, and Commerce -- Oh My!
When I saw John Battelle’s post from Saturday about MySpace’s classified site, the thing that immediately popped into my mind was the 90’s boom mantra of a web property’s three pillars: community, content, and commerce. With the latter two in the bag, it seems like a natural step for MySpace to venture into the third.
With everyone’s (including my own) new and improved structure for looking at Web 2.0, it’s interesting, however, to look at the current state through an “old” lens. What is old is new again, especially in the classified arena, given this MySpace development along with Microsoft’s and Google’s recent forays.