Monthly Archives

December 2008

Happy Christmas

By | Announcement | 5 Comments

This is my last day in the office before the holidays and I wanted to sign off by saying Happy Christmas, and thank you for taking the time to read me and espescially for taking the time to comment.  Without the comments this blog would be nothing.

I hope you all have a great break.

Music – the value is in the services around the content

By | Content, free, Google, Music | 6 Comments

Last week I wrote about Universal making millions from music videos, largely via YouTube, and then this morning I read on Techdirt that Warner is going the other way.  It’s content is now starting to disappear from YouTube after it failed to reach agreement on terms with Google.  It is unclear which side walked out of the talks, but it is pretty clear to me that Warner is the bigger loser.  Both YouTube and Warner are desperate for revenue at the moment – but Warner is the only one that is potentially in terminal decline.

As Mike on Techdirt says this is consistent with earlier behaviour from Warner where they overvalue their content – and he refers to earlier examples of the same phenomena.  The one I like best is their complaint that they don’t see enough money out of games like Guitar Hero and Rock Band.  Warner, and presumably others in the music industry misunderstand where the value is created.  Techdirt puts it well:

The industry simply assumes that, if something makes use of their content, all of the value is in the content. That’s incorrect. Yes, the content is a part of the value, but it’s the game that’s making that content valuable.

It is the experience rather than the underlying content that people pay for.  This is true for music – think concerts, merchandise, games, and even watching videos – and also for other forms.  To borrow some thinking from Techdirt experiences are the scarce good which you can charge for.  Content wants to be free.

I think that everything we are watching play out in music will follow in TV, movies, games and even books.  In many ways these other industries face greater problems than the music industry as the experiences components are less obvious. 

YouTube finding a business model

By | Advertising, Content, Music, Social networks | 2 Comments

This post on CNET yesterday describes how Universal Music is making ‘tens of millions’ of dollars via its relationship with YouTube via revenue share deals.  If Universal is making that much you can bet that YouTube is doing ok too.

How are they doing it?

Premium content.

Universal posts videos to YouTube and then the two companies share in the ad revenues.  In order to make the deal work YouTube has had to become more rigorous in taking down illegally posted videos, and they also share revenues from advertising next to Universal songs that are posted by other users.

DailyMotion also seems to have a strategy of driving revenues from professionally produced content rather than UGC.  Both of these points are germane to the more general debate about the revenue potential of advertising on social media sites, including social networks – advertising next to UGC is tough.

The other interesting thing about this is that the music industry is also getting a new revenue model.  Until recently music videos were little more than promotional vehicles for CD sales.  Now Universal is saying they will make nearly $100m from them, largely in the form of ads on free to consumer sites.  Certainly I find myself watching more and more videos on YouTube.

To round off I’m going to finish with a big number – Universal’s YouTube channel has had almost 3bn views!

Some thinking on virtual goods

By | Business models, Virtual Worlds | 3 Comments

Susan Wu gave a talk on virtual goods at Leweb last week.  I have been meaning to post the following excerpts from her talk since then.

Regular readers will know how much I like frameworks.  Thanks to Susan, we now have one for virtual goods.  For her there are three types:

  • Decorative – e.g. avatar dressing
  • Functional – e.g. buying user names
  • Behavioural – e.g. gifts for flirting

‘Virtual goods’ is a sufficiently general term that it is confusing for many people, and I like this framework for the way it demystifies by making it obvious which type is going to be applicable for which site and/or which part of which site.  For example options to buy gifts for flirting are going to perform best when profile surfing or messaging, whereas buying stuff for your avatar will work best in game oriented scenarios.

Secondly she listed three benefits that people derive from virtual goods:

  • The receiver has the emotional benefits of receiving a gift – not dis-similar in Susan’s eyes to receiving a real gift.  I would agree with that
  • The receiver also gets a ‘trophy’ that sits on their profile
  • The sender has the pleasure of making the gift

The third thing she said that I wanted to reproduce was a piece of advice:

Find ways to capture the passion of verbs that people are already doing on your site [apologies if I got the precise wording wrong]

One of the most successful virtual goods companies in Europe is Flirtomatic and they do this brilliantly.  People are on the site to (you guessed it) – flirt.  And they sell virtual goods that enhance that activity.  Flirting has more meaning if you give someone a virtual heart as well as (or instead of) sending a message.

We have recently launched virtual goods on WAYN which will be aligned around one of the core use cases on the site – meeting new people.  You can find more details towards the end of this post on the WAYN site which details the release which went live the weekend before last.

Are internet economics undermining trade shows?

By | Blogging, Business models | One Comment

Scoble has an interesting post this morning which posits that big companies – Apple, EA, AMD and others are reigning in spending on trade shows because it is less efficient than having a small party with 40-50 bloggers and watching news spread like wildfire over the web.

I’ve watched as Apple invites a few hundred bloggers and journalists into a conference room at its headquarters in Cupertino and gets the news out to the world without having to go to an expensive venue.

What changed?

Blogging and online video.

Big companies are looking at the millions of dollars they spend for booths (not to mention bringing employees to) and are realizing that it’s just not getting the return on investment that they should get.

Two thoughts:

  1. This is a great example of internet economics radically undermining existing value chains
  2. Small companies should take note of this as well

Traction or revenue

By | Business models, Entrepreneurs, Startup general interest, Venture Capital | 11 Comments

Last night at a Techrunch event in London someone who was at a talk I gave in Manchester earlier this year asked a VC panel if they still shared the view I expressed at the time that for many consumer internet startups the right strategy in the initial stages is to prioritise growing traffic over building revenues.

The point being that now we are in a credit crunch a more conservative strategy might be appropriate.

Unfortunately I wasn’t in the room to defend myself having irritatingly arrived too late (my fault), but if I had been there I would have stood by that comment – with the two caveats that you still need a strategy for monetisation even if you prioritise traffic in the early days and that I was talking about VC scale businesses.

I think those arguments apply equally in good times and bad.  My logic then, as now is:

  • For mass market (primarily) free to use sites unless you have got a lot of traffic then garnering meaningful ad revenues will be impossible.  Minimum critical mass to get advertisers to really engage comes in at around 1m uniques in the UK and maybe 5m in the US.
  • Generally speaking, for a business with VC scale funding and ambitions the revenue available with traffic under these levels is secondary in terms of value creation to reaching minimum critical mass in your user base.
  • Therefore growing traffic is more important early on than growing revenues

This strategy worked for Google and Facebook across cycles and is working for Twitter now.

Note though, that these are all very successful businesses and if there is any doubt that VC funding is available then finding revenue to ensure survival makes a lot more sense.  That can be either for pre VC companies or businesses that have had a Series A.  And VCs are getting a lot more conservative at the moment.

The other caveat is that the display advertising market is getting soft and there are new and legitimate doubts about whether straight forward banners on social media sites will ever generate much revenue.  Simply having hundreds of millions of page views (or the potential for them) is therefore less attractive.  That monetisation strategy is getting trickier.

The other point I want to make is possibly more important: focusing on what VCs want is not necessarily a good idea. 

Venture capital is only appropriate for a small percentage of businesses – i.e. those which have potential to exit at significant valuations (for us around $200m+) and which need at least $5-10m to get them there.  For businesses that fall outside of those parameters then raising venture capital can be value destructive – and often is.

So for me the right thing for any business is to focus on what is best for it’s existing shareholders and then only if there is a natural fit with what a VC wants to do you go ahead and raise some money.  That is very different to bending the strategy out of shape just to get a VC on board.

Phorm – back from the dead?

By | Advertising | 14 Comments

“Rumours of my death have been greatly exaggerated” is a phrase I believe first used by Mark Twain.  I was reminded of it this morning by reports of Phorm‘s resurgence.

As a reminder, Phorm is a UK based online adveritising business that works by cutting deals with ISPs to monitor your surfing habbits.  In this way they build a profile of individual users and then target ads against that profile.  They have become embroiled in privacy issues when some of the trials they were running didn’t make it easy enough for users to opt out.  As a result their share price has crashed 86% this year.

Until yesterday.

Yesterday, on news that BT was going to take it’s trials to the next stage Phorm’s shares surged 40%.  Now this morning the Guardian is reporting that Virgin Media is still working with the company.

My take on this has been that Phorm’s apparent lack of concern over privacy issues has created sufficient media outcry that life was likely to remain very difficult for them.  That still might well be the case – the BT and Virgin announcements both fall well short of a commitment to use Phorm in anger – but clearly there is still some potential.

Overall I am with Scott McNealy when he says “you have no privacy, get over it”, and the company that is successful in bringing the public to that point of view will do very well.  My belief is that the best way to do this is via the side door, building trust slowly and then asking people if they mind giving up access to their private data.  Phorm’s approach has been more through the front door, with a battering ram, but maybe, just maybe, they will prevail.

If so, that will be good for all of us in this industry as anything that increases the effectiveness of advertising increases the size of the market we are operating in.

Advertising on social networks

By | Advertising, Social networks | 23 Comments

There was a good article in the New York Times on Saturday: Advertisers Face Hurdles on Social Networking Sites.  It charts the problems social media sites are having in making advertising work for their clients and therefore converting traffic their own traffic into cash.

The following paragraph sums it up well:

When major brands place banner advertisements on the side of a member’s home page, they pay inexpensive prices, but the ads receive little attention. Seth Goldstein, co-founder of SocialMedia Networks, an online advertising company, wrote on his Facebook blog that a banner ad “is universally disregarded as irrelevant if it’s not ignored entirely.”

For me it is increasingly obvious that unless the adverts hold some kind of interest for consumers then they aren’t going to work well.  As the NYT article notes that can take the form of good old fashioned promotions, but for me the more interesting approach is to get the community excited about (and discussing) some aspect of the brand or it’s products.  Further, brands who build profiles on social networks are unlikely to succeed unless they find ways to genuinely engage with their potential customers – see this NYT write up on Cartier and Myspace.

Which really means that the advertising becomes content.

I have long been sceptical about the notion that advertising can be content, but I have been changing my mind in recent weeks.  My reasons for scepticism are that it is really hard to turn brand messages into interesting content, but the new news is that people are starting to make it work, and, as shown in the NYT articles I linked to above, the seemingly easier alternatives are proving ineffective.

Arrington on the entrepreneurial lifestyle

By | Startup general interest | 12 Comments

This from Arrington’s report on Leweb:

And the fact that the panelists on stage, all either American or living in America, suggested that you can somehow succeed with a startup while maintaining a healthy work-life balance is unfortunate.  Too many people choose to be entrepreneurs as a lifestyle, without realizing that it takes everything you have and more to win. And if you aren’t in it to win, why not just take that nice job down the street that gives you five weeks of vacation.

Two hour lunches are great. But when you have investors to answer to and employees (and their families) to provide for, something has to give.

Couldn’t agree more.