Monthly Archives

February 2008

VRM – vendor relationship management

By | Advertising, Business models, Online retail, Widgets | 23 Comments

VRM is CRM flipped on its head.  Instead of vendors collecting data in systems like Siebel and managing customers the idea is that customers start storing and managing their own data and using it to manage suppliers.

At the moment this is little more than concept stage stuff, championed by Doc Searls and being talked about and promoted by the likes of JP Rangaswami, Alan Patrick, Adriana Lukas and now Ian Delaney at NMK.

I think there is a lot of potential in this idea for a couple of reasons:

  • Traditional advertising is increasingly broken – people are less and less tolerant, they have more tools to avoid it, and they are increasingly spending their attention in places where advertising doesn’t work for one reason or another
  • VRM is a much more elegant solution to matching supply and demand than traditional advertising.  At the moment their are inefficiencies on both sides of the equation – advertisers waste a lot of money with machine gun campaigns and as consumers we have to put up with a lot of irrelevant ads.  VRM potentially eliminates both these problems.

So what is VRM?

These posts by Delaney and Lukas spell it out in detail, and this is the main Project VRM site.  For the quick version here are some excerpts from Delaney’s post.

VRM as an implementation of the Cluetrain notion that markets are conversations (finally):

Searls views the VRM project as unfinished business from the Cluetrain Manifesto. The central insight there, ‘markets are conversations’, has struck many people as true and right, but the technological implementation and management of that remains frustratingly tricky.

The basic idea:

Individuals record their preferences and the personal data that you normally need to use an ecommerce site …. So you have got all these details and preferences recorded in your online strongbox. Then – if you want – you let Amazon or Waitrose or whoever have access to the parts of that that you chose. The consequences might be that (a) you never have to fill in online forms again; (b) companies get to submit tenders for whatever it is that you want. I need to buy a new laptop – these are my preferences – I’m letting that information out to vendors. What have you got? (c) companies have access to rich data about what their customers actually want from them.

Ryanair bargains built by the guys at Nooked is an example of VRM working, but only with a single vendor.  You download their widget to your desktop, tell it which airports you are interested in and it sends you special offers for the places you have said you are interested in.

The bigger idea is that from the same widget you solicit offers from all airlines, and you do so using more parameters than are available in the Ryanair gadget.

Going back to the big picture, to me it all sounds very cool.  VRM will be an amazing tool/service, if and when, it is implemented successfully.  The challenges I forsee include buidling a service that really adds value from a consumer perspective, figuring out who hosts and pays for it, getting vendors to interact with the system responsibly.

If these problems (and doubtless many others) can be licked the opportunity is BIG here – the market you are going after is, um, all of the advertising in the world.

Advertising broken
Improved efficiency of system

Quotes from Ian’s post on what it is
And maybe Adriana

Question – will it work….

Social network traffic – maybe not declining after all

By | Facebook, Social networks, WAYN | 3 Comments

Last week I wrote about Forbes reporting declining social network traffic.

In the comments some of you said that traffic to niche social network sites is increasing – and this is certainly something we are seeing at WAYN (DFJ Esprit portfolio company), where monthly unique visitors this month will be up circa 185% on a year ago at around 6.3m.  All the other metrics there are moving in the right direction as well, total hits, page views, photos uploaded, comments on photos etc. and many of them with higher growth rates than the 185% figure for uniques.

And finally my partner Cedric pointed me to a Telefonica Tumblelog (dont’ know if this is anything to do with Telefonica??) with the following stats which cast doubt on whether Facebook is going backwards:

  • 25m users, growing 3% per week, which is 100,000 new users per day
    (up from 7.5m users in July 2007), projected to reach 50m by end of
    2007
  • The fastest growing demographic is the 25 and over age group
  • 1% of all time spent on the internet is facebook
  • 50% of registered users come back to the site every day.
  • 60 billion page views per month, 50 pages per user every day
  • 6th most trafficked site in the U.S
  • 1 bn photos hosted on the site, 6m uploaded each deay, 70k photos
    served per second, making facebook the biggest photo sharing site on
    the web
  • 1-2 m people are on facebook simultaneously at any one time
  • $100m per year advertising deal with Microsoft
  • Internal valuation of $8bn, based on projected revenues of $1bn p.a. by 2015

Unfortunately these are not sourced.  That said there is a good degree of overlap with the offical Facebook stats.

To try and sum up this contradictory picture, I guess it looks likely that niche networks as a category are growing, and we will have to wait for more data to know about the big guys.

Google’s video adsense based on banners and text overlays

By | Advertising, Google, Video | 2 Comments

This is from the Telefonica Tumblelog:

After nearly a year in closed beta, Google is expected to announce tonight that its AdSense for Video program is now open to publishers. When the program’s pilot was announced last May, AdSense for Video was intended to serve up video-in-video ads. Today the video part is gone, replaced by CPM banners and CPC text overlays.

It is getting clearer and clearer that the level of distraction people are prepared to put up with from advertising on the web is much lower than in traditional media. Hence Google abandoning video-in-video (e.g. pre-rolls) in favour of overlay.

The economics of free – and how they might change everything

By | Business models, Consumer Internet, Web2.0 | 14 Comments

My friend Alexis pointed me this morning to an awesome Wired article by Chris Anderson, author of The Long Tail. I’ve seen him speak a couple of times now and following his obsession with the long tail he is now focused on the impact of ‘free’ – which I think is having some far reaching implications.

There has been a lot of talk about free sites and the importance or otherwise of having revenue models, including a post here on The Equity Kicker in Jan titled Prioritising traffic over monetisation. This is also directly relevant for the recent conversation on music business models.

The focus of much of the debate has been on the right time to start thinking about monetisation. Chris Anderson takes a totally different tack – making arguments that everything is headed towards free anyway.

The article is a 6,000 word preview of his new book Free, and itself carries the title Free! Why $0.00 Is the Future of Business. If you have time read the whole thing – if not these excerpts and this post generally will give you the gist what is for me the main argument.

First some microeconomics:

It’s now clear that practically everything Web technology touches starts down the path to gratis, at least as far as we consumers are concerned. Storage now joins bandwidth (YouTube: free) and processing power (Google: free) in the race to the bottom. Basic economics tells us that in a competitive market, price falls to the marginal cost. There’s never been a more competitive market than the Internet, and every day the marginal cost of digital information comes closer to nothing.

We have known this about content for some time, but it is now increaasingly true for content delivery as well. To repeat in a competitive market, price falls to the marginal cost. For most web services that means zero. Pretty much full stop.

That doesn’t mean zero revenues though, just that the consumer doesn’t pay directly. Advertising is a big part of the story, but not the only part. You need to move to revenue models based on ‘because of’ rather than ‘with’ to borrow a concept from JP Rangaswami. (In fact when I surf to his blog the lead post is about the economics of abundance, artificial scarcity and the Because Effect.)

In a nutshell you make money selling things people buy because of the thing you have given away for free. Bands give music away so people come to their concerts.

How this works on large scale consumer sites still needs to be worked out however.

For Chris the implications go way beyond questions of monetising web sites:

anything that touches digital networks quickly feels the effect of falling costs. There’s nothing new about technology’s deflationary force, but what is new is the speed at which industries of all sorts are becoming digital businesses and thus able to exploit those economics. When Google turned advertising into a software application, a classic services business formerly based on human economics (things get more expensive each year) switched to software economics (things get cheaper). So, too, for everything from banking to gambling. The moment a company’s primary expenses become things based in silicon, free becomes not just an option but the inevitable destination.

In fact free is becoming so pervasive that parts of the internet are eschewing money (almost) altogether. Chris calls this a ‘gift economy’, and this is in some ways a return to a culture that existed in the tribes anthropologists were studying when they coined the phrase. Wikipedia is the largest and most pure example, but Craigslist and many user groups are very similar.

What does all this mean?

I guess at a minimum we can expect the current confusion around revenue models to persist for some time and at the maximum new forms of economics will be required. More practically, this confirms my view that for web startups building audience is more important than building revenues. Moreover innovation around free business models and monetising by bringing third parties to sites in ways other than straightforward advertising could be lucrative. Back to ‘because of’ rather than ‘with’.

I await further installments of the book with eager anticipation.

Labels unrealistic pricing assumptions holding back ad-supported music market

By | Music | 12 Comments

Last week I wrote a couple of posts about the music industry, firstly about the trend towards free ad supported music and then about how to combat piracy.

Thank you all for your comments and pointers to new resources and companies.

The big takeaway from the conversation so far is that the record labels are still part of the problem instead of being part of the solution, and the issue is pricing.  The labels have come a long way, and it is great that they are now at least open to the idea of free ad supported music, but as I mentioned in the piece on piracy last week, the industry may have to get used to radically lower unit prices.

Ironically music pirates use the high prices of CDs in the past to justify their actions today.  This quote is from the comments on the piracy post and is apparently typical of comments on blogs from Pirate Bay and other piracy services:

“For years I was forced to buy CD’s for $30+ where I’d find about three good songs and the rest fillers! Who are the real pirates here? The record companies got away with it for too long.. Drop CD.. drop the big production costs..”

In a video of a panel on free music at Midem Antti Ohrling, co-founder of ad supported mobile startup Blyk
makes the point that ad supported businesses need to start with audience not the product.  Spot on, the value of the attention determines the size of the industry and hence what the labels should expect to get, not per-track pricing levels from a bygone era.

If you are interested in this space it is worth watching the video.  As summed up on the Ad supported music blog the gist of the conversation is that unrealistic pricing expectations from the music industry are holding back the development of the ad-supported music market.

The startups in this space (We7, QTrax, Imeem, and new one for me Deezer) are all targeting the users who currently use pirate services.  Their bet is that the added convenience and legality of their service will be enough of a draw that people will leave Pirate Bay and Limewire and put up with the ads they don’t currently suffer.

If they are successful then they are creating money out of nothing.  Currently nobody makes money out of the users of the pirate sites (except the ISPs….).

The reason this isn’t quite the no-brainer it seems for the labels is of course the paid side of the market.  The record labels are starting to get substantial revenues through iTunes and other legal paid download sites at the 99 cents per track level.  I’m guessing that they are afraid of canibalising those revenues with an ad-supported service that nets them less revenue per track.

This is a difficult equation for them to work through because figuring out the right strategy requires you to compare apples with oranges and make wild guesses about how many people will use these new services.  The apples to oranges problem is that the current revenue model is to own a song, but with ad funded it moves to a per listen basis.  To me it is intuitively obvious that the labels will grow their revenues by pulling in the millions of users who currently use pirate services, even if they end up losing money on some users who move away from iTunes to free ad supported services – but to take that position at a big label requires a lot of vision and I suspect entails a fair degree of career risk.

A couple of you made good comments on the per listen v. ownership point.  Firstly, as consumers we are used to paying (by parting with cash) at the point when we choose to own a track, and for these new models to work we are going to have to get used to paying when we listen (by putting up with ads).  This is, of course, not unlike radio today.  Secondly, at the moment it is only possible to track the number of listens with a streaming service, but over time we are likely to get the technology which allows us to track the number of times a downloaded song, with ad embedded, is listened to.  That last one was from Steve Purdham, CEO of music download service We7.

Overall, it feels like this market is definitely coming, and the growth of companies like Imeem and We7 show that, but as ever in digital music it feels like the labels are holding things back.

Tottenham 2 Chelsea 1

By | From mobile | 4 Comments

Posted by mobile phone:
As a Chelsea fan I’m gutted. We didn’t maximise our chances today. IMHO we would have controlled the game better if we had started Ballack and Cole, plus somehow the team suddenly looks like they have never met before. I’ve never seen so many mis-placed passes.

I’m expecting Avram’s call for help any minute now…..

Well played Spurs.

European venture increasingly favours hi-risk, hi-return investments

By | From mobile | 6 Comments

Posted by mobile phone:
This is from the latest Go4Venture report (no link because I’m on my Blackberry);

*The market is increasingly driven by larger deals, with 22 transactions of more than EUR 20mn in 2007, compared to 15 in 2006 and 2005, and only 5 in 2004. This reflects European VCs growing taste for high risk/high reward transactions, which is closer to the behavior of their Silicon Valley brethren.

In my opinion we are moving in the right direction. Adopting a home-run mentality is the best way forward.

Social network traffic declining

By | Facebook, MySpace, Social networks | 6 Comments

I have only just seen this, but according to Forbes, Facebook, Myspace and Bebo are all going backwards in the UK as measured by unique monthly visitors. They are citing Nielsen.

If this is true, and holds up it is bad news for the internet sector generally. We need success stories.

Internet analysts at Nielsen Online reported that the number of unique visitors in Britain visiting Facebook fell in January, marking the first time it has seen a decline in the key metric in 17 months. Some 8.5 million unique users in Britain spent time on Facebook last month, down from 8.9 million in December.

and

Rival social networks MySpace and Bebo have also tailed off in Britain, Burmaster says: MySpace peaked in April 2007, with 6.8 million unique users, while Bebo peaked in July with 4.6 million. Unique user figures for January 2008 show 5.0 million visitors for MySpace and 4.1 million visitors for Bebo.

UK government warns ISPs over music piracy

By | Music | 4 Comments

The UK government announced yesterday that ISPs would be hit with legal sanctions from April 2009 unless they take concrete action to curb illegal downloads of music and films.

I think the government needs to be really careful here.

For sure I sympathise with the music industry – their copyright is being infringed left right and centre, to their massive cost.  But I think the answer lies in changing the way music is delivered, rather than legislation.  Hence my belief in  free ad supported music.

Remember that there has always been piracy, but because it was a hassle copying music to cassettes relative to the price of buying CDs not much of it went on and the music industry wasn’t that bothered.  With the advent of the internet and Napster that equation changed.  Copying music became much much much easier, but music has remained roughly the same price.  Hence piracy has exploded.

It is possible that with free ad supported models the music industry makes less per track than it used to in the past.  To that I would say a) something is better than nothing, and b) remember that the price of CDs was artificially inflated.

The structure of retail distribution (physical CDs and stores) previously allowed the industry to make super-profits, and going forward the structure (digital files and downloads/streams) might not.  That is unfortunate, but it may simply be a fact of life, of progress even.

So by focusing on ISPs I think the government is looking in the wrong place, and I have sympathy with the argument that asking ISPs to stop illegal downloads is akin to asking the Royal Mail to check the contents of every letter it sends.  I fear that legislation might have unintended side effects which would stifle innovation elsewhere.

That said, I suspect there are small things that ISPs could do which would make it a bit more difficult to pirate music and hence help the record industry a little.  They could probably work out a system for identifying and blocking offending URLs for example.  The way that ebay blocks the sale of items like Nazi memorabilia strikes me as a precedent for this type of action.

Let me finish by saying thank you for your comments on my post earlier this week on ad supported music.  I intend to digest those over the weekend and come back with a response next week.

Ronald Cohen on luck

By | Entrepreneurs, Venture Capital | 5 Comments

I have written a couple of times before about luck.  First I leant on Taleb to think about the necessity of distinguishing between luck and success when evaluating decisions and performance (focus on the process not the result) and then Andreessen to discuss the possibility of making luck for yourself (keep busy to maximise the chance of being in the right place at the right time).

These are important issues for a VC like myself and so I was interested to read Ronald Cohen’s chapter on luck in The Second Bounce of the Ball.  Ronald Cohen was the founder of Apax and is the Grand-daddy of the UK venture and private equity industry.

Cohen’s chapter on luck is entitled  Chance, perseverance and luck, and is sub-titled Luck is seldom just a matter of chance.  He understands these issues intimately.  Moreover, the differences between luck and skill and deserved and un-deserved luck are hard notions to get across, and the following three passages from his book capture them brilliantly.

Firstly on perseverance:

The first rule of luck is that you should persevere in doing the right thing.  Opportunities will come your way if you do.

Entertainment entrepreneur Haim Saban provides an … example.  He had gone through a challenging time as a television and video product salesman.  He was in Japan when, by chance, he say Power Rangers on television.  He realised immediately that the programme would have international appeal and he bought the world-wide rights to it.  He sold it to broadcasters all over the world and it became a television sensation.  The success of Power Rangers enabled Saban to build his business and then merge with a division of Twentieth Century Fox to create Fox Kids.  In 2001, he sold out to Walt Disney for $5.3bn.  The deal made him a rich man.

You could say that Haim Saban was lucky to be in Japan and to see Power Rangers when he did, before someone else bought it.  But many of his competitors were not as assiduous in their travels as Saban.  They were not in Japan.  Those who were, did not see in Power Rangers what he was able to see in it.  The fact that he was in the right place at the right time was a matter of perseverance, not luck.  Saban was an ambitious entrepreneur who was in search of a product that would have mass appeal.  He wanted to break away from being a mere salesman of other people’s products.  He came to the conclusion that he had to own or control the rights to something big.  He was constantly on the lookout.  He found what he wanted in Power Rangers.

Secondly, Cohen on networking:

Perseverance is only the first element in the luck equation.  The second is networking.  I would say that luck is directly proportional to the size and appropriateness of your network.  For many years, I was out several evenings a week with clients and contacts.  I intuitively understood that such networking was an important part of doing the job.  The more active you are, the more opportunities will come your way.  The more people you know in your sector, the more often you will encounter circumstances that help you cause.

And finally he quotes from Napoleon:

Napoleon famously required his generals to be lucky above all else.  But as Napoleon knew well, a great general does not depend on luck.  He anticipates the rain, he takes into account the ‘lucky’ downpour that might trap his enemy in the mud.

We all want to be lucky, and to work with other people that are lucky, but luck is no substitute for hard work.  Rather if you want to be luckier than the next person you had better to be working harder than they are.