Lessons from the trials and tribulations of Yahoo

By | Community, Social networks, Web2.0 | 2 Comments


Techcrunch wrote yesterday about Yahoo’s recent change of the Flickr logo and the other problems they have been having with  the site.  Collectively they show both the challenges of acquiring successful web communities in general and that Yahoo in particular still doesn’t understand how to manage a web2.0 property.

First the rebranding – all Yahoo did was add the ‘from Yahoo!’ that you can see in the picture to the existing Flickr logo.  Not too much to ask after owning the company for over four years you might think, but Flickr users reacted very badly, mostly because they don’t like Yahoo.  According to TC they complained on forums about Yahoo being stale and the logo being ugly.

These complaints illustrate the challenge in acquiring companies which are based on communities – unlike just about all other businesses the customers have a strong feeling of ownership which limits what you can do post acquisition – including your ability to wring out synergies, in this case at the branding level.  You may remember a similar furore when Yahoo tried to move Flickr users onto Yahoo IDs. 

Secondly, the Yahoo specific stuff.  One of the reasons that Flickr users don’t like Yahoo is that they don’t seem to understand what are probably best described as some of the key tenets of web2.0 – that you have to be open, transparent, balance your needs with that of your community and not be too high handed.  Yahoo got just about all these things wrong in a recent incident described on TC as follows:

Yahoo also got into a bit of a sticky situation with users when it removed a photoshopped image posted on Flickr of President Barack Obama that makes him look like the Heath Ledger (Joker) character from The Dark Knight. Flickr took the image down, citing a DMCA notice, adding that “We very much value freedom of speech and creativity.” Thomas Hawk had a good overview of all the gory details.

Strangely, the company not only took down the image, but also removed the Flickr page and comments, even though this isn’t required by the DMCA. And then, in what was a totally contradictory move, Yahoo shut down the forum discussions about the political controversy, cutting off further political discourse about the image.

These are examples of a general phenomena that we have talked about before – in community based businesses customers have a stronger than usual control over strategy.  UK football clubs are a good offline example of this.

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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.

From supply chain management to the future of web hubs

By | Amazon, Google, Innovation, Second Life, Web2.0 | 2 Comments

I bought a new video camera on Amazon this weekend, and I also bought an extra battery and a couple of SD cards.  So far so normal.  The amazing thing to me is that I ended up buying each of these three items from different suppliers on Amazon’s market place, and the last of the three arrived today, four days after the order was placed.  One came from the UK and two from Germany.  The postage was inexpensive.

That is an amazing piece of supply chain management, and if one company had tried to do it my guess is they would have screwed something up.

This is testimony to Amazon’s incredible transformation into an infrastructure business and also the power of the web.

John Batelle has a number of definitions of web2.0.  The one I like the most is:

companies that let other companies build their businesses

This is what Amazon are doing in spades now.  Third party suppliers open an Amazon Market Place account and their products become available to all Amazon’s traffic through the same search box that you use to buy books directly from Amazon.   When you buy something through the market place Amazon takes a commission and makes a 100% margin.  Amazon also gets to benefit from the innovation and creativity of their market place suppliers in product choice, presentation and pricing.

The website experience could have been a little slicker, but that is splitting hairs really.  Plus I didn’t find another website where I could buy all the items I wanted.

But the really incredible thing is the way Amazon have combined their brand/traffic with a piece of technology infrastructure to become the glue that holds a vibrant ecosystem of suppliers and customers together.  To borrow a thought from Umair this is increasingly how successful companies will operate.  Facebook and their apps are like this, and Myspace with their widgets, Google with search and adwords is similar, even Salesforce with their app-exchange is on the same model.  And I almost forgot ebay.

These examples show just how much value is created by these fluid hubs where people come together and are matched with each other and products they want.  The scale and fluidity these sites have is only possible because of the internet.  Excitingly as we see more scale and fluidity (more people on the web and more creative ways to match and bring people together) I believe the things that seem incredible today will begin to seem trivial.  Think about Second Life, for example.

All software to be social

By | Business models, Consumer Internet, Facebook, Social networks, Social software, Web2.0 | No Comments

Firstly – Happy New Year to you all. I hope 2008 brings you everything you want and more. For me, it is good to be back in the saddle.

Surfing Jay Deragon’s blog (seems to be down at time of writing) this morning I found the following quote from Marc Canter:

I believe that all software are social. As a vendor you need to be a parent. You need to know when to hold on and when to let go, as well as not only to talk but when to listen also.

I love the way this captures the opportunities and the challenges of the future on so many levels.

Firstly Marc is spot in saying that all software needs to be social. I think this has a couple of dimensions; social networking/web2.0 features and extensibility.

On the web2.0 feature side I think we will see more and more companies getting to grips with the fact that markets are conversations and building out the services that enable them to play in this arena. Also from Jay:

“The list of financial firms deploying Web 2.0 applications, both within the enterprise and externally, is growing. TD Ameritrade, Bear Stearns and Wells Fargo all have announced new 2.0 applications in the last few months. “Enterprise social networking is still in its exploratory stages,” observes Matthew Nelson, senior analyst with TowerGroup. [Ed. note: At press time, Nelson left TowerGrouo to join Omgeo as director, market intelligence.] “But it is going to become standard. The industry simply can’t afford not to go this way because that’s the way people in general — employees and customers — are shifting.”

On the extensibility side the success of Ning, Salesforce and Facebook in the last twelve months give a great steer on the way the world is going. These companies have all benefited greatly from opening their platforms to third party extension and customisation. Note that this goes much deeper than configuration. I’ve linked to it previously, but Marc Andreessen’s excellent post from last year on platforms captures this brilliantly.

But there is nothing so far that hasn’t been said before, in one form or another.

Which brings me to my second point, which is the analogy with parenthood. It captures brilliantly how you have to take chances to succeed and the fine judgments that are involved. It also talks to how difficult the execution is. As a parent you are continually faced with important decisions that have no clear right or wrong answer, this has not traditionally been the case in business (not to the same extent anyway), but as everything moves social that is changing.

Judging how open to make your platform or how to properly engage your customer base (current and future) is difficult – there aren’t many precedents to look at and the implications are huge. On the platform front being truly open has major architecture and code implications and on the engagement front once you start in social media, stopping will be counterproductive.

Making the right decisions requires a deep understanding of both the issues and your customer base and doesn’t lend itself to traditional strategic analysis. At this early stage of the market it is more about intuition and gut feel, which makes it doubly difficult for established companies run by people whose success came from having an altogether different mindset.

Consumer internet – the changing nature of the game – part II

By | Consumer Internet, Entrepreneurs, Venture Capital, Web2.0 | No Comments

Man carrying dollar sign 

This is a follow to my first post on this subject last week.

In that post I predicted that building web2.0 companies will start to become a more expensive business – driven by increased marketing and development spend. 

In this follow up post I will look at what that might mean for the way companies are built and how VCs think about investing in this space.

It might be tough to follow this post if you haven’t read the first one. 

If companies are spending more on marketing then it becomes more important that the product is right when the campaign dollars start flowing.  There will always be a trade off between waiting for the perfect product and wanting to get to market early, but when you are spending more on marketing the balance shifts more towards wanting to get the product right.  You are less likely to waste your advertising dollars that way, and there is always the feeling that your first shot is your best chance.

Getting it right probably means having high quality product design people on your team.  At the moment the dominant approach is ‘experiment and iterate’ – but if you need to open the cheque book before you can get traffic you will want someone who can get it right without iterating.

Another change is that distribution deals will become more important.  For example getting bundled Firefox could make a company.  Spending time and money on business development execs is an alternative to Adwords campaigns or offline PR.

For VCs things will change as well.  At the moment the general view is that consumer internet start-ups should be able to launch and get some good traffic before they need the sort of money we provide.  That has given us the luxury of being able to let consumers pass judgement on whether a product is great or not before we write a cheque (but it has also allowed many start-ups to get by without raising money from us at all).

If money is required before meaningful traffic can be generated we will have to find new ways of picking the best from the rest.  That will mean looking in more detail at the product and market.  We will also take confidence from having people on the team who have been there and done it before in this space – second time entrepreneurs, if you will.  The good news is that there are more and more of you out there.

All of which makes the financing and building of consumer internet businesses start to sound more like the building and financing of traditional software businesses.

That is the direction in which the world is moving, I’m sure of it.  The fact that it gets cheaper every day to launch a service will only increase the number of companies and make it more difficult to get heard above the noise.

Consumer internet – the changing nature of the game

By | 3D, Blogging, Business models, Entrepreneurs, MySpace, Venture Capital, Web2.0 | 2 Comments

I have been thinking for some time that the extreme capital efficiency of many web2.0 businesses is a feature of where we are in the cycle and will start to come under pressure as the sector matures.  So when Max Bleyleben – in his post on Web2.0 bubble debate in full swing pointed me to Tom Evslin on Fractals of Change writing about how marketing costs will go up I decided to post about it.
Tom’s main point is that before the blogosphere got busy it was easy for companies to get themselves noticed for relatively small amounts of money, but now that is getting harder and is starting to require more money.
I agree with that wholeheartedly – one of the reasons I have been able to achieve some success with this blog is that I was one of the first European venture capital blogs, and the first to post something pretty much every day.
Marketing into a void is easy.
Tom also hints that development costs may start to rise.  One of the features of the web2.0 phenomenon has been the use of open source software to launch beta services quickly and cheaply.  A lot of these services have been great steps forward, but are still primitive when compared with where we might end up.  Think about the early blogging tools or the challenges in setting up some of the early personal home page sites.
These services got fantastic traction because they were light years better than the alternative (which was often ‘do it yourself’).  Then they improved based on user feedback and were able to bootstrap themselves very effectively.
The next generation of consumer internet services might need to have more features and a more polished service to get that initial traction – if so that will mean more development time, and more money.
Factoring in an increased need for marketing spend makes the problem worse.  Getting good value out of a marketing campaign means getting the timing right – and the temptation for many will be to delay the marketing campaign until they feel really good about the product – further increasing the cash requirements.
I am generalising a lot here.  Many new consumer internet services will be in new areas and their challenges will be less.  But many will be seeking to challenge the likes of MySpace and Bebo, for example maybe by offering a more immersive 3D type experience.  Doing that will cost money.
I am describing a change in the way consumer internet companies are built and funded and I will have a look at some of the implications of that in a later post.

Musings on the wisdom of crowds and machine intelligence

By | Entrepreneurs, Social networks, Venture Capital, Web2.0 | 12 Comments

This is a very provisional post.  It has been swirling around my head since I was talking to Saul Klein before Xmas.  These thoughts are interesting to me as I think more about what it means to build social networks that do stuff, but they are new thoughts, and hence even more than normal I’d welcome your comments. 

It seems to me that you can build an online web service to derive insights from the wisdom of crowds and/or adopt a more mathematical approach.  Most social networks are about the wisdom of crowds – i.e. socially derived insights.  LastFM’s music recommendation service is a great example – finding music you might like by looking at what other people like.  Similarly Crowdstorm tells you what products are hot at the moment by figuring out what people are talking about most.

The other, more unusual, approach is to use machine based intelligence.  Pandora’s Music Genome Project is a great example of this in practice.  They have mapped out the different elements of music, much as the human genome maps out the different elements of our DNA, and are using that to make music recommendations.  Leiki also take this kind of approach – using taxonomies and categorisation at the heart of their recommendation engine.

People feel good about recommendations that come from people based (i.e. socially intelligent) systems, particularly if they come from friends.  The problems come with systems that are below critical mass where you can either get no meaningful intelligence, or sometimes unhelpful echo effects.  These systems are also typically less responsive to new categories/ideas/things than machine systems.  Competitive advantage is likely to come from scale and being the first in a space to hit scale.

Maths based systems are quick to add value once live, they can provide value for the first user of a system and they can be adapted quickly to changing circumstances, but they are more complicated to build in the first place, and I guess easier to get completely wrong.  You have to code the intelligence at the start and there will be no coming back from a big mistake.   Competitive advantage will come from scale AND the depth/uniqueness of your algorithm.

The other obvious thing is that the efficacy of each approach will vary with the problem you are trying to solve.  Some things lend themselves to mathematical approaches – e.g. the flight price forecasting on Farecast.  That said if Pandora can bring maths to music then I guess the same can be true of pretty much anything else.

I guess the so-what of this is that the more value that is crammed into a service the stronger it will be, so a start-up which adds a machine based component to its wisdom of crowds story might well be a more fundable proposition.  Assuming it works.

The next generation of social networks will have a purpose

By | MySpace, Social networks, WAYN, Web2.0 | 24 Comments

Social network graphic 

An oft stated theme of mine over the last few months is that the next generation of social networks will be about “doing stuff”.  The first generation – MySpace, Bebo, Piczo et al are primarily about communication and identity, with a bit of music thrown in.

Nothing wrong with that – they have hit on a clear and widespread demand for an online platform to provide a space for self expression and hanging out – networking for its own sake if you like.  The seemingly slightly pointless nature of networking for its own sake is what has the uninitiated (and the worried) asking all the time “what is that people do on MySpace”.  This echoes the emotions of my parents when they couldn’t understand what I did all day when I hung out with my mates on the common.  Just being in touch with people and building your identity within your peer group is a full time occupation for the young.  Always has been.

IMHO the next generation of social networks will harness the power of the web to allow a slightly older crowd to “do stuff”.  To break that down a little further I think social networks will form around interest areas and social networks will grow up around key decision areas in our lives (typically big purchases).  This trend reflects the differing needs of people of different ages – most adults don’t have the same need for self expression as kids and many or us are time poor – so we will focus our online time in our interest areas and to help us run our lives more efficiently.  (Interest areas and ‘big decisions’ overlap for many people – e.g. gadget freaks and their love of consumer electronics, or travel lovers and their holidays.)

This is not really new news.  Evidence of this trend is widespread already.

  • WAYN (one of our portfolio companies) is a social network for people interested in travel and with 7m+ members is perhaps one of the most developed examples of this trend.  People use WAYN to network with other travel lovers (interest area), to figure out where they might travel to next and organise their trip (big decision).
  • Crowdstorm is a social network that “helps you find what to buy by measuring the buzz around products.  You can also see recommendations from friends and people you trust”.
  • TrustedPlaces is a social network “where people can remember, share and discover great places”.
  • TouchLocal has added reviews and other community features to its

These examples are all from the UK and combine interest areas AND big decisions.  There are pure play examples as well

  • TouchLocal has added reviews and other community features to its online yellow pages business to help people make better decisions (e.g. which builder to use)
  • Over in the US Dogster (where my friend Jeff Clavier is an investor) is a social network for people who love dogs – purely and simply about an interest area.

There are many, many more examples (social nets are cheap to launch, after all) – I think, hope, believe that the best of them will hit the big time.

Traffic, measurement and the end of page views

By | Advertising, Entrepreneurs, Social networks, Venture Capital, Web2.0 | One Comment

Fred Wilson wrote a great post about the increasing problems with page views as a metric for websites.  His words have stimulated two post ideas for me.  Next I will write about widgets and the new challenges for VCs investing in web2.0 companies, but today I want to stay on the topic of measurement.

Much has been written about the problems with page views as a measure of the success of a website so I won’t repeat it in detail here, but in summary three developments all pushing in the same direction are making page views a very unreliable metric for measuring and comparing websites:

  • AJAX and Flash interfaces are delivering more content and functionality on some pages with less page views
  • Atomisation of content – e.g. feeds, widgets and customised home pages – is allowing people to read content without visiting the original website
  • Page views on social networks per hour are very high as people flit from profile to profile

So where does this leave us?

I get asked all the time how I analyse growth in sites and services, and unfortunately there is no easy answer. 

Alexa gives a useful ready reckoner abut where a site is and what sort of trajectory it is on, but is a bit volatile and unreliable as a measure.  It is free and very convenient though, so that is the first place I look.  If a site has a high ranking (popular sites have low rankings) then it is unlikely to have much usage.  Google rank is another (very) crude measure that is free and convenient.

Moving beyond that there is a basket of measures that are available and different combinations will be appropriate for different sites.  Page views is certainly one of these measures (no matter how much AJAX or how advanced your widget strategy if your service is popular you should be getting some hits..).  Others include time on the site, number of registered users, number of subscribers, number of times people come back, page views per member and contributions per member.

Figuring out which metrics are important is critical – the key thing is to demonstrate your site is getting used a lot, by the right type of users, and that usage is growing.  If your business model is advertising then volume related metrics are going to be up there, but if you use a lot of flash then you will be looking more at time on the site than page views.  If you are about subscriptions then acquisition costs, subscriber numbers, conversion rates and churn are likely to be your key measures.

My advice would be to figure this stuff out and put it on your site.  Admob do a great job of this – their key metric is ad views (they are a mobile ad network) and they put the number right up there on their front page.  Putting your key metrics in the public domain shows a confidence that is appealing to investors and customers alike.  It also puts you in charge – you decide the metric rather than having to explain why page views isn’t right for you.  Going through this process with sufficient rigour to publish will be a good discipline as well.

If you are a young company (and you have a good story to tell) then this can be your best way of getting noticed.  You can’t do this stuff when you too small though, and judging the point when your numbers and growth go from sounding tiny to sounding exciting in the context of a new market is part of the art of marketing.

Agencies – more English than tea and crumpets?

By | Aggregators, Real estate, Venture Capital, Web2.0 | 2 Comments

What is it with us Brits and agencies?

They are everywhere in this country, much more so than in the US, for example.

I`ve been feeling it most in advertising through our investment in Buy.At, and estate agents have been figuring prominently in my thoughts about the property sector (of which more below and in a later post). Then yesterday I had lunch with an old friend who runs a company that sells candidate assessment tools and he was complaining that recruitment agencies are a problem for him in driving innovation in his sector.

Don’t get me wrong, good agencies can offer tremendous value add, and my friends at Blue Barracuda are a great example of that. Unfortunately, however, not all agencies were created equal, and some can be a real drag on innovation.

The power of the web is that it can offer a lot of the services we typically rely on agents for. Two of the main services – finding stuff and pricing it are really done bettter via the web – that way you can be more sure the search is exhaustive and the benchmarking accurate. 

The other thing an agent does for you is help you figure out what you want. In this area the agency model is conflicted. The service here is really consultancy, yet the payment is typically a percentage of what you buy. So incentive for the agent is to get you to make a purchase quickly, without wasting his time. It is this dimension that can get in the way of innovation.

This is a bit of a rant, but I hope our love of agencies doesn’t hold back our internet sector. For example in the US property sector has an innovative model of building a permanent database of properties that the owner can simply mark as for sale when they choose (or can show a `make me move` price). This wouldn’t fly today in the UK because estate agents control 99% of the market, but it has a chance in the US where a much greater proportion of homes are sold direct.