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March 31, 2006
Musing on Freemium and Ad-Supported
Earlier this week Fred Wilson (with Jarid Lukin) coined the phrase “Freemium” for the business model described:
Give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing, etc, then offer premium priced value added services or an enhanced version of your service to your customer base.
This model (a free tier of service upsold to a premium) along with a “pure” ad-supported appears to be the two primary revenue-models for the recent emerging crop of web services. Why is this situation and what do these two models have in common? The answer is that they separate the initial delivery of value to the customer away from the ultimate monetary payment corresponding to that value. This time lag minimizes the risk involved for the customer, thus prompting increased usage.
Take the case of ad supported content and services. Value is delivered to the consumer in conjunction with advertisements. It appears “free” to the user, but a certain percentage of those ads will entice consumers to ultimately make a purchase based on the messages contained within. Thus, the monetary payment (i.e. cash out of the pocket) doesn’t occur until further in future, seemingly dissociated with the initial value-transfer. As opposed to explicitly paying funds ahead of receiving the value (before s/he knows the “true” nature of what s/he is going to receive) or afterwards (when s/he is less happy to do so since the value has already been received), this dissociation both reduces the risk involved in paying up front or the reluctance to do so afterwards.
On the model of “freemium,” the thinking continues along the same lines. Risk is mitigated by the user because s/he isn’t paying up front. It isn’t until the consumer is comfortable with the relationship where s/he is ready to overtly pay to upgrade it. And by this point, the initial value delivery is in the rearview mirror because the connection between customer and service-provider has strengthened in the meantime. Again, the separation of initial value-delivery from eventual payment helps both parties – by alleviating risk for the consumer and building loyalty/allegiance for the business.
One could perhaps take this thinking and apply it to other technology-enabled services outside the consumer-facing realm (i.e. isn’t enterprise SaaS really transferring the traditional upfront payment of technology prior to value-delivery and spreading it further into the future?), but that’s the subject of another (somebody elses?) post.
The theme is the same: with the abundant number of technology-enabled services and content available today, customers want to mitigate risk in the usage and purchasing of them. By apportioning the clear payment associated with the value away from its initial transmission, business which do so address this need, fostering viral spreading, usage, and loyalty of their service.
(Thanks to Mark Withington of the Boston PHP group who inspired and helped generate many of these thoughts in our discussion yesterday.)
Posted by at 4:36 PM | Permalink | Comments (1) | TrackBacks (2)March 30, 2006
"There's Something Going On" in Boston
Last night I attended the Geek Dinner organized by Pito Salas, Bela Labovitch, and Adam Green. It was an opportunity for “geeky-but-not-exclusively-geeks” people to “hang out, casually munch on cheap food and compare notes on stuff that people are working on.” There were probably about forty people there, and the energy-level was high. Various people made announcements about local startups which are hiring (always a positive note) and the large-group had a spontaneous informal-yet-spirited discussion (which ranged in topics from viability of web-based MS office-like apps to advertising-based business models).
There were a number of friends from and familiar faces which I’ve seen at the Web Innovators Group (WebInno), the group which I organize, a collection of people engaged in internet and mobile innovation in the Boston area. Last night’s crowd, true to its moniker, was definitely “geekier.”
We held the most recent WebInno event last week, and Brian Del Vechhio’s photo shows our successful 100+ person turnout. You can read two good summaries of the event on Adam Green’s and Ray Deck’s blogs.
There’s an inaugural session of Mobile Monday Boston this upcoming Monday night, which should be a great event as well. Shimon Rura’s Startup Meetup Group, though I haven’t been, sounds like it’s gathering some momentum, too.
All of this activity was summed up nicely in a conversation I had with Mark Withington today, who organizes the popular Boston PHP group. He said, contrasting to just a couple years - and even months - ago, “There’s something going on in Boston.” I couldn’t agree more. A year ago, I lamented about some of the cultural dynamics in town, but I am now seeing a resurgence of excitement and a trend towards change. All of the groups mentioned above each aim at partially distinct constituencies with differently formatted events addressing different needs, but they all promote the larger tech community in Boston. And I am happy to be a part of it.
Posted by at 5:26 PM | Permalink | Comments (2) | TrackBacks (1)March 26, 2006
One Year of Blogging
As of a few days ago, I hit the one year mark with this blog, Genuine VC. 181 posts later, I am extremely happy with all of the time and effort that I’ve put into it over the past twelve months - it’s been very rewarding on both a personal and professional level. Like I mentioned at the turn of 2006, the paramount benefit of blogging has been the communication with everyone who reads it. And while the in-person meetings with people who I’ve “met” in the blogosphere have been the most rewarding, all of the interaction has been great. Accordingly, I wanted to look back to highlight some of my most “popular” posts, those that seemed to resonate and engage people.
First, by far, my “Sevens” Series of posts have received the most amount of traffic:
Seven Founding Sins
Seven Reasons To Become a Founding Entrepreneur
Seven Questions Employees Should Ask Before Joining a Startup
Seven Common Tactical Mistakes Entrepreneurs Make in their Initial VC Pitch which are Simple to Fix
Also popular from a traffic standpoint were these posts:
Know Your VC’s Magic Number (and the follow-up piece)
Vertical Social Networks
Friction is Multiplicative
Knowing Your (Incremental) Online Reputation
While the above were widely read, ones that sparked the most comments were probably more thought-provoking:
An Entrepreneur’s Perspective on Information Asymmetry in Bootstrapping
On The Edge About The Edge
Fear (and Loathing?) of DRM
And finally, I wrote a number posts, which from my own perspective, communicated either important thoughts or interesting opinions. My own favorite posts included:
Leaping from "Digerati-Facing Services" to "Consumer-Facing Services" and The Divide Between Geeks and My Grandmother
Bipolarization of Internet Acquisitions in 2005 (and the follow-up piece)
First, Second, and Third Pages of Search
The Importance of Being Authentic
Looking back, it seems that both the most popular (regardless of how you measure it) and my own favorites were the ones which I devoted notable time to forming and articulating a thought-out viewpoint, as opposed to merely communicating short & quick ideas or reactions. My own writing has evolved in this direction, and so it’s one in which I’ll likely continue, as I am looking forward to another year of blogging.
Posted by at 4:42 PM | Permalink | Comments (1) | TrackBacks (0)March 23, 2006
Scheduling Unstructured Time to Think
One of the first people who I ever worked for (Kelley Murphy, a partner at The Parthenon Group at the time) used to mandate something of his employees which I’ve rarely seen done since, though it significantly impacted me as I thought it was (and is) incredible valuable. He used to periodically ask everyone to take time to think. His team members would block off time during a critical juncture in a project or undertaking, and leave time for unstructured individual contemplation of the larger current work situation at hand. Requiring that people briefly pause from the action-oriented workday not only gave employees a brief respite from the pile of to-do’s, it more importantly provided an opportunity for everyone to take a step back to gain a broader (and fresh) perspective. It amazed me how many great ideas came out of doing “nothing,” as opposed to the normal workflow, or even structured brainstorming. In the frenetic pace that is startups (and venture capital), I suspect that if every so often everyone stopped (even if for an hour or two) to think, a lot of good would come of it.
Posted by at 2:59 PM | Permalink | Comments (3) | TrackBacks (0)March 22, 2006
Go Medium or Go Home?
Bernard Moon has a thoughtful article posted today, “Forget the Long Tail! For video, it will be the big and mid-size players that win in the end.” in which he argues that the real winners in the rapidly-changing video landscape will be the large and medium sized players, not the “long tail” of content producers that have been receiving all the blogosphere hype lately. He writes,
“But this isn't a story of the long tail; the hit makers will get richer. Instead, it's a story of the wide range of new revenue opportunities that are available to established and mid-size players in this evolving media landscape…. I'm talking about is a middle market in the video and movie industry where sustainable companies can and are being created… Just as the big boys can expect to profit from this changed video landscape, so too can the mid-size production groups that are able to develop content to fill the gap between big Hollywood productions and homemade video.”
His argument rests on his thesis, “In this new digital landscape, it's not simply about content but rather type of content and how it's distributed.”
The one important component in this equation which he doesn’t cover in his article, however, is the role of advertisers. The transition towards new digital distribution formats has traditional brand advertisers searching for the right medium to convey their message. This situation creates opportunity for large established who are nimble enough to capitalize on the change, as well as the emerging medium-sized players who can establish credibility. But large brand advertisers are reluctant to associate themselves with long tail user-generated video content, and they are going to be for a long time coming. The problem with this type of content is that you never know what you're gonna get – and unlike with Forest Gump, that isn’t a good thing for brand advertisers.
But don’t count out user-generated video content just yet. Even Bernard hedges a bit, “Whether in the service of journalism, entertainment, or art, user-generated content is here to stay…” Again, it comes back to advertisers. While big-name brands may shy away from this content type, there are plenty of advertisers who will desire this inventory (albeit, at a lower effective CPM rate). The market of direct response and performance marketers will demand and consequently determining the price of space associated with user-generated video content. Think next-generation punch-the-monkey ads at first transitioning to more “sophisticated” $19.95 knife-sets offers that you see on late night television.
With the increasingly prevalent proliferation of digital video content of all types, I believe that there’s plenty of opportunity to go around. The key is knowing the target, both consumer audience and advertisers.
Posted by at 10:09 AM | Permalink | Comments (3) | TrackBacks (0)March 14, 2006
On The Edge About The Edge
In the past couple of months, a number of thoughtful posts have been written about content on “the Edge” of the web. I’ve been reluctant to comment on it thus far, because I am really torn as what to think about this concept and the services emerging around it.
The idea is that web content is moving towards generation in a distributed fashion (on blogs and other “edge feeders” – Fred Wilson’s coined phrase) with edge aggregators and other services picking up and using the data/content as the web apps need it. This usage is in contrast to a centralized approach to content-generation and consumption (often in a wall-garden to some degree).
Obviously Michael Arrington, the founder of Edgeio, would take a hard line with the debate. For example, in this quote with respect to review sites,
“There is no way centralized review sites … can compete with the blogosphere over the long run. Those sites will also have to gather decentralized content, or become meaningless.”
Pete Cashmore makes similar points,
“I’ve said before, an aggregator that collects structured reviews from around the blogosphere... will beat a centralised silo... in the long run.”
And Pete follows up with another excellent comment about this scenario,
“One thing I would like to say: it seems to me that blogs are increasingly becoming the submit form for the web.”
However, is that what we really want? Blogs becoming the submit form for the web? Idealistically, one could make the case. But is that what’s really going to happen? Is my non-techie mother, uncle, or sister going to post a classified ad, a review, or other piece of microcontent, then tag and microformat label it? To be honest, these people not only want, but actually need a real submit form that centralized sites provide for many use cases. (Read my previous post The Divide Between Geeks and My Grandmother). This counter of what to do with people without blogs has been the main critique that I’ve read thus far.
In addition, Greg Linden talks about another problem with a pure Edge approach – spam.
“How many times does this cycle have to repeat before people start building systems designed from the start to deal with bad behavior, crap, and spam? There seems to be a repeating pattern with Web 2.0 sites. They start with great buzz and joy from an enthusiastic group of early adopters, then fill with crud and crap as they attract a wider, less idealistic, more mainstream audience.”
The above is a relevant quote from his blog in the context of Web 2.0 in general, not just the Edge, but it definitely applies here. Without a centrally managed service filtering at the creation end rather than the consumption end, the problem of incentives towards generating misguided content becomes more precarious.
Perhaps it’s not an either/or proposition. Is the real answer services which mix both effectively aggregated decentralized content and provide easy-to-use methods for creating it as well?
Fred Wilson writes about “interim step and that step are services that feel centralized but are really application specific edge feeders.” I wonder why it has to be temporary. Are we really headed into a world “where all the value is created on the edge.” All of it? I am not so sure. Maybe in the foreseeable future the right approach is a hybrid.
The answers are found in the who of the people actually doing the content creation and posting. Greg Yardley criticizes Yahoo’s Bradley Horwitz post “Creators, Synthesizers, and Consumers,” which assumes that 90% of a consumer audience is passive (i.e. not content-generating). Greg writes,
“Once you start believing 90% of your audience is passive you can’t help but shape your existing communities and design new ones with the passive consumers in mind. Talk all you want about making it easy to create - if you expect the bulk of your users to be passive gawkers your thinking’s never going to stray from CPM ad space. How disappointing - since it is possible to design a service that demands creation, and such services are far stickier than ones built around showing ads to passive surfers.”
Greg Yardley is correct in his assessment that consumer web services can be designed to demand creation, and that there is a tremendous value in that. So while aggregation of the Edge is definitely important, I am not convinced it’s the end all and be all.
The value behind the consumption of microchunked user-generated data/content is that it ultimately allows people to use it how they want it, where the want it, and when the want it. Shouldn’t the reverse be the same for how the data/content is produced in the first place? Consumers want to produce content how they want to, where they want to, and when they want to. And it doesn’t seem to be that that’s necessarily on the Edge.
(Forgive the long, wandering, theoretical, dense post – obviously I am still thinking through a lot of these issues, and my thoughts are still formative here.)
Posted by at 6:56 PM | Permalink | Comments (6) | TrackBacks (1)March 13, 2006
Doom & Gloom or Opportunity
In past twenty-four hours, I’ve read both:
• A New York Times article, Hungry Media Companies Find a Meager Menu of Web Sites to Buy. The theme portrayed is that despite all of the recent acquisitions in the consumer internet space, “media companies are still hungry.” Quoting Rafat Ali the article states, “Media companies ‘are looking at the new sites coming out of Silicon Valley’ to determine what to buy next.”• VC blogger Jeff Bussgang lamenting, “Put it all together, my friends, and I humbly submit that we have now hit the consumer bubble I feared a year ago.”
How can this be? Both a market void and a bubble? Perhaps it’s merely semantics, but I’d characterize the current situation as a “rush” to fill a real market need.
There is clearly opportunity in the consumer space – but alas, everybody knows it. I’ve written a lot in this blog about the many opportunities that I see for startups, given all of the dramatic digital changes occurring. So what does the above information tell you about guiding actions for entrepreneurs, VCs, and startup employees alike? Jeff offers two strategies, either to avoid the space altogether or “know when to get out of them [bubbles] before they deflate.”
I’d offer up a third alternative: aim to invest and participate in the creation of businesses with long-term sustainable value which are soundly justified by investment dollars and valuations attached to them. If an asymmetric acquisition offer comes along in the meantime, then obviously hit the bid; but the goal should be to build a company (not a feature or product) that will eventually sustain and thrive on self-generated cash-flow.
Sure, we saw enormous the value creation and destruction the last time around, but we also saw numerous companies (following the third strategy above) and wealth endure. I am hypothesizing (and hoping) that will happen again, but to what degree remains to be seen.
March 6, 2006
Temporal Content (and Advertisements) Need Expectations
By definition, the unique quality of temporal content (i.e. content that takes time to consume, like audio/video, either streamed or downloaded, either user-generated or “produced”) is that it cannot be easily scanned to quickly assess its value (like written content can). Rather, the consumer is required to listen/watch to the content in its entirety to fully appreciate the value contained within.
This fact leads to many consequences, but an interesting one is how it affects the need to set expectations about the content before it’s consumed, especially if it is ad-supported. Ads in temporal content (especially those which cannot be skipped) provide one more hurdle, one additional point of friction, which must be overcome to entice the user to consume it.
So in a future where media is microchunked, freed, syndicated, and monetized, the role of setting expectations about what is contained within temporal content becomes even more important. Accordingly, meta-data attached to that that content, whether is community-generated meta-data or producer generated, should increase in value. In other words, perhaps the more free temporal content is able to roam, the more we want to know about where it came from, who has consumed it, and what they thought of it. We want to know what to expect.
Just a thought…
Posted by at 2:17 PM | Permalink | Comments (4) | TrackBacks (1)March 3, 2006
Leaning in Different Directions
Consumers’ interaction with video content is dramatically changing these days, and the corresponding attention that fact is receiving is tremendous. I’ve been surprised, though, that in a number of conversations recently people have cited the (recycled?) distinction between “lean-in” and “lean-back” viewing. Distinguishing along this characteristic came into the vernacular (I think) nearly ten years ago (see this 1/98 CNN article as an example), but perhaps it is becoming more relevant again today. Or is it?
The two terms are representations using the physical state of the consumer as a metaphor for how s/he approaches the content. Lean-back viewing is largely television watching – passive, relaxing, non-interactive sessions. Lean-in viewing is at a PC or desktop device – active, engaged, interactive sessions.
My feeling is that this distinction will eventually become much less clear (and perhaps thus less important). But the real corresponding question is how quickly this change will come to fruition and what the ramifications of it are. An analyst back in 2000 (see report here) called the blurry grey between lean-in and lean-back an “edge-of-the-seat” experience. While he was obviously premature in his prediction, the essence of his thinking is largely correct. Consumption of video content will not strictly be an either/or lean-in or lean-back proposition, but rather somewhere along a gradient in between. It all depends on who, what, where, why, and when it is being consumed.
We are already seeing the beginnings of this transition with people becoming more active in controlling/interacting with their content in a traditionally lean-back environment through Tivo or cable on-demand clips, as well as (SMS) voting and audience participation in reality shows. With the wealth of video entertainment proliferating online recently, it was funny that I found myself earlier this week sitting back in bed and watching a few videos before retiring instead of flipping on the tube. Video on a portable device like an iPod adds another dimension to consider. Include the “third screen” of mobile into the picture (pun intended), and I am not sure which way consumers are “leaning” there – perhaps “hovering-over” instead.
The consequences of this distinction (or lack thereof) for both the content owners / publishers and advertisers is definitely meaningful. At the core, different levels of engagement from a viewer translate into different types of content. And my hunch is that the more active and attentive a viewer, the more valuable s/he is to an advertiser. If/when this distinction blurs, creating the appropriate content and advertising for the viewing situation becomes more challenging to match the consumers’ environment and situation.
The next time you are watching video on any screen, ask yourself if which way you are leaning - and how much it really matters.
March 2, 2006
Informative Answers, Enlightening Questions
In the venture capital raising process, entrepreneurs and the VCs spend a lot of time “getting to know one-another.” In a series of conversations/meetings, both sides ask a number of questions and provide plenty of answers. A lot of time is often spent examining and considering these answers, but I believe a useful set of information is potentially often overlooked on both sides – information in the questions themselves.
For the entrepreneur, the questions that a VC asks help reveal what type of partner he (and the team) will be. Does he have a good understanding of the startup’s domain or space? Are the inquiries perceptive, building on a progressively developing understanding of the business? Are the content and the tone of the questions like ones you would want from (a) productive board member(s)? On the VC side, entrepreneurs’ questions signal a lot about their experience-level (which isn’t measured in years), their ability to interact & lead a team of people, and the capacity to search for and uncover insights.
Answers provide necessary context and information for the capital-raising process, but the questions asked reveal more about the people engaged in it.
To Be (Vertical) or Not to Be
A lot of the comments that Nate Elliott, an analyst at Jupiter Research, voices in a recent Businessweek article about social networks resonate with me. He speaks to the opportunity that “niche-oriented networks,” or as I’ve called them “vertical social networks,” have in creating significant and sustainable business models, in contrast to some of the prevailing popular general-interest ones of the day. He also touches upon the subject of “social commerce,” utilizing uses social networking for people for "directly influencing each other's purchase decisions." The article is worth the read, highlighting some healthy skepticism to the space.