Thursday, April 20, 2006

Media Companies – Content in the Windshield, Advertising in the Rearview Mirror

In the recent weeks we have seen several ground breaking announcements regarding new content distribution policies from traditional media companies the likes of Disney, NBC and others. They have no doubt woken up to the dramatic shift in media consumption habits that threaten to undermine their distribution franchises. Users are increasingly spending more time and consuming more media online than through traditional outlets and if these outlets don’t figure out how to give users what they want they will become obsolete as distribution mechanisms. As Fred Wilson points out, “this is big big big”. And I agree this likely represents a major turning point. What puzzles me is on one hand Disney is smart enough provide time shifted free content on the internet in a form that likely to delight users, but on the other is going to tick off those same users because they are going to force them to watch the advertisements that can’t be skipped. And an even more ridiculous, but similar minded, is the announcement from Phillips that they patented a technology to lock user’s television sets during commercials so they have to watch the commercials.

The internet has opened the Pandora’s box of user choice when it comes to media consumption and I think this is even truer about advertising. Consumers don’t mind being marketed to; they just mind being marketed to badly. So why with all the richness and dimensions of creative freedom that the online experience has to offer why are marketers and media companies sticking with old habits and worse trying to force users into them. This isn’t just about embedded commercials in TV show downloads, we see it every day whether it’s some annoying pop-up, or a incredibly intrusive Coldwell Banker ad that seizes control of My Yahoo for the past three days. We can do better than that! I think we can make marketing and advertising less offensive more effective and even fun and useful for the consumer. We have been seeing evidence of this innovation in advertising for some time. Key word and context based text ads were that for sure. Others include recommendation based advertising on sites like Insider Pages, and even interesting online infomercials at ShopNBC. Even traditional media is looking at different models as this article on the increase in product placement indicates. But I think the best and most innovative is yet to come. Maybe even a marketplace for online product placements!

Dollars are flowing to online advertising at an every increasing rate because marketers are realizing that is where the audience is migrating. There is a fantastic opportunity for start-ups to accelerate this and reap the benefit. Several companies, including Clickshift whom I am involved with, are taking advantage of this opportunity by allowing marketers to buy and track advertising more easily. Another set of companies are beginning to emerge that provide unique marketing products and vehicles to take full advantage of the online experience and that are providing value to the consumers along the way. I have already seen several very interesing ones and if you have interesting ideas in this space would love to talk to you and help if I can.

Thursday, April 13, 2006

Fewer Board Seats – The Next Bay Area Fashion Statement?

The National Venture Capital Association (NVCA) published a report yesterday on CEO and BOD relationships that is causing a bit of a stir. Many people are commenting on the fact that there is a disparity in views between CEO’s and VC’s on the ideal number of Boards that an early stage VC should sit on. My friend John Rodkin, whose Board I sit on, had a first hand perspective in recent post.

According to the NVCA report the VC’s view is 4.6 and the CEO view is 4.0. It seems to me that isn’t a large disparity. The thing I found more curious is that my VC brethren are collectively reporting they are only on average are on 4 Boards (5 in the Bay Area). I looked at the number in amazement; given the people I know in the industry it seems way too low. Over the past few days I held an unscientific survey with a number of CEO’s and VC’s and they have a similar impression. So it raises the question, what is going on? Could people be underreporting?

I remember not too many years ago it was a badge of honor in the Venture community to be on numerous Boards. It was a sign of the economics of the time where spreading your bets as widely as possible was the ideal investment strategy. Times have certainly changed especially in early stage investing. It’s not a very scalable business and in my opinion seems to require more time per company not less to make an investment strategy work. So is there a change under foot? Is the new fashion statement in the industry how few Boards you are on? I hope so; I think it would be better for the entire ecosystem.

Wednesday, April 12, 2006

Web 2.0 Business Models, Friend or Foe?

Why Making Money is a Good Idea

Lately I’m seeing more and more Web 2.0 catch phrases in business plans and pitches. Here are some examples:

  • “if we build a better application users will find us”
  • “we have a viral application that will have exponential user acquisition growth like (insert your favorite social networking success story)”
  • “all we have to do is aggregate a large enough audience and (insert your favorite big media or online company) will acquire us and they will figure out how to monetize the audience.”

For me this is déjà vu all over again. We can all recall similar attitudes, familiar market conditions and even identical applications, services and content from the Web 1.0 era. Apparently I’m not the only one noticing this either. My friend Mark Pincus has a nice post noting similar observations. The famous philosopher George Santayana once wrote “Those who cannot remember the past are condemned to repeat it”.

But wait you say, things are different now. Certainly there are more people with internet access on a computer or mobile device, increased penetration of broadband, virtually ubiquitous wifi, new user modalities are being more easily adopted. Syndication technologies are making distribution easier and real cash flows and profits are being generated by a growing number of companies. New development and deployment technologies tools have lowered the barriers to bringing new services and content to the market.

The barriers are so low that there is an explosion of new web 2.0 companies; countless new companies each week. Hundreds of bloggers devote themselves to keeping up with the dizzying pace of innovation. It’s made it almost impossible for even those of us “Inside Baseball” to keep up. Imagine how challenging it is for the average consumer.

So how do you compete in this noisy environment? Obviously you must have a compelling product or service, but that is just a way to convert and retain users, not acquire them. The one exception is if you truly have a “viral” application that markets itself. Before you jump to the conclusion that “yeah, I got one of those”, sit back and consider the number of successful companies you know that were truly viral. The count will probably be less than the fingers on both hands. Now consider the number of successful internet companies you know of, that count is going to substantially exceed ten. Now consider what the common denominator might be in all those companies. I think upon reflection you will find that it was a well thought out business model where the life time value of the customer substantially exceeded the cost to acquire them.

In today’s crowded environment even if your product is viral, you are going to have to compete for users with other companies offering similar or seemingly similar products. You will have to spend considerable marketing dollars to compete for the minds of those users. The vitality and viability of your business will not only depend on being able to differentiate based on features for the consumer, but critically on your ability to acquire users for less and monetize for more than your competitors.

The conclusion I’ve come to is that even if you think its going to be viral, it probably isn’t. Far better not depend on it and plan to build the business the old fashion way. Create a vision and business model that has a realistic chance of being profitable.

This will give you the economic power to build your business faster than your competition. Having a business model and marketing plan that converges on profitability is key to achieving that success. One of my fellow VCs, Will Price, has an interesting post, Marketing Best Practices, on how to construct a marketing plan that addresses some of the issues. I'll review various Web 2.0 business models and their virtues as a future topic. Until then, consider building an appropriate business model for you business.

When things get tough, (or even if they don’t) that business model could prove to be your best friend.