Business Models

Talking about Sexy New Media Startups being as poor as churchmice, here 's an example - the iconic LOLCat site is that most poverty-attracting thing, being a sexy and new media site. And it would appear its using Slave labour (or something like that) - Gawker:

Cheezburger Network might be the internet's largest "meme aggregator," according to Wired, with upwards of $4 million per year gleaned from other people's pet pictures, supplied to the company for free. But that doesn't mean the 30 or so employees share fairly in the bounty; as we reported last week, Huh has blogged about proudly offering jobs at Seattle's minimum wage of $8.55 or slightly higher, at $10.

Those low wages permeate the company, insiders and their associates tell us, with some former workers also describing worker misclassification unpaid overtime.

On the bright side, it sounds like people have fun with their co-workers, as even some detractors tell us, and one employee wrote in to say his experience at Cheezburger Network beat the pants off her/his (other?) minimum wage jobs — not exactly a high bar, but, given the state of the economy, a practical one.

Seemed like it was only right to put up an appropriate LOLCat picture then (hat tip Patrick Hadfield for the caption)

While we're on the subject, Techmeme's Mahendra Palsule pointed me towards this C:Net article arguing that the media focus on what is sexy, not a decent business (he was noting it as a part-answer to this article I wrote awhile ago). The gist of it is:

A new report by ITDatabase that examines tech coverage over the last six months from eight top business news publications raises some questions, in particular: Does the business press factor companies' revenue and profits into their tech editorial agenda?

The report shows that Apple and Google dominate, while Twitter and Facebook are far more discussed in the business press than Intel, Dell, IBM, or even HP (the largest tech company in the world).

The eight publications surveyed are: The Wall Street Journal, The New York Times, Forbes, Fortune, BusinessWeek, The Economist, Financial Times, and USA Today. Over a period of six months, ITDatabase measured coverage by the number of times a tech company was mentioned in print and online in these publications, including blogs such as All Things Digital, which is affiliated with the Journal. (Disclosure: I am an adviser to ITDatabase.)

There is a chart in the post that shows Apple and Google getting the lions share of the publicity - its a power law graph by the looks of things - and it reminded me of a graph I saw many years ago, drawn in semi jest by a McKinsey colleague at the time, Ralph Lewinski. This curve explains the Hype Hyperbola (see the diagram above), ie the truism that sexy industries tend not to be profitable. This is typically due to one of 2 reasons:

- They are new industries, which usually tend to be unprofitable because they are giving away value to get market share (and/or have yet to find a business model)

- They are established and still sexy, in which case people will enter the market, and even work for them, for much less money than for less enjoyable industries

Which is of course why New Meedja startups are the poorest churchmice (its not a LOLcondition) of all as they fit both conditions Social Media profits (if you exclude the purchases of sites by the Dumb Money) drive the current "biggest $0 billion industry" going.

Google and Apple are exceptions in that they are both sexy and profitable and so really get the press attention. Typically they are profitable because (like old fashioned TV, which was once sexy) they have built strong barriers to entry. They are also both very powerful, especially in the Valley - the difference in coverage tone on Google Buzz between the independent bloggers and the Tech Media (including the big blogs) was quite remarkable.

Well, if this wasn't predictable.... Twitter is apparently starting to build the successful features that 3rd party sites on its ecosystem have pioneered - SAI:

It seems Twitter's had enough with other folks taking control of millions of Twitter users (and the money they represent). If Twitter's new business model is based on copying Google with Twitter AdWords, controlling the end-user interface will be very valuable. And this move seems designed to address that.

Specifically, it's the difference between Google Sites revenue (Google.com), in which Google keeps 100% of the money and Google Network revenue, in which Google has to hand over 50%-80% of the money to a distribution partner.

It was predictable (this is a standard tactic of an open ecosystem play - get YOU! to do the work and then clean up once one knows what works), we predicted it*, but of course that didn't stop hordes of companies developing applications, all hoping to get a small place in the sun early. Its not all said and done of course, the Twitter functions still have to delight the customer - but of course "transactional troubles" may plague the competing sites of les autres until the end user gets the message.

So what do you do if you are a Tweetdeck, or Tweetmeme or Tweetthang etc etc? Traditionally, the ideal would be to sell the platform to Twitter - that's an exit for one (probably the most heavily used) in each area (mobile, PC, alerts, etc). After that the options look nastier in the medium term - essentially its a franchise model similar to small shops in a mall - renting space on the Twitter platform, continually worrying that your subniche is the one that Twitter goes after next.

Or maybe not - maybe Twitter will run a "big tent" model for quite a while longer, using the 3rd parties to continue to push its services ever outward to expand reach via resources it cannot command internally, and take a cut of a potentially bigger pie. If it were a Facebook the former is the no brainer option, but Twitter culture (and the game theory to beat Facebook and Google) is sufficiently different to suggest this may be on the cards for quite a while longer.

But you all know the endgame........right?

Update - Ian Betteridge points out in the comments that this story is being rubbished. I think that while this story in itself is based on small datapoints (and its a Henry Blodget story - 'nuff said), the big picture is directionally correct. To me it is very risky to assume that Twitter, over time, will not pick off the bits of its own ecosystem that maximise its own business model.

*As, of course did all the other observers with some savvy. The thing that fascinated me was all the VCs pumping money into the 3rd party ecosystem when the underlying company had no declared business model. They are clearly betting on Twitter being slow to eat its own hit head (the long tail can be given to 3rd parties ad infinitum)

There is an interesting article in the San Francisco Chronicle today about Google's strategic mis-steps:

The recent privacy backlash over Google Buzz, the company's new social-networking service, is the latest in a series of launch fumbles that some argue reveal troubling blind spots within the Internet giant.

The huge amount of cash generated by the Mountain View company's search business has enabled it to hop from product to product, moving into mobile, software, social networking, broadband and other areas.

But in the process, it's overlooking predictable consumer concerns, like privacy worries, the need for prompt customer service, or the importance of intuitive products, industry observers say.

"Google is clearly looking like a company that is doing a lot of things, few of them well," said Rob Enderle, principal analyst with the Enderle Group. "They have this attitude that if you're getting it for free, you should be happy with what you get."

Putting my strategist's hat on, and looking at Google through the lens of the venerable old Boston Consulting Group matrix, you can see what Google is trying to do.

Cash Cow - The Search-Ad business is Google's Cash Cow, and at the moment makes all the profit Google earns - they have a very large (dominant) market share, but over time it is a slowing market (relative to the rapid growth of technology sectors and under increasing competitive pressure). They are thus doing what every company is advised to do in this position, ie to invest their surplus in faster growing industries and so keep up the pace. To this end their rate of acquisition has been phenomenal, not least because - by and large - their ability to launch their own successful products has so far been pretty lacklustre (Buzz is just the most recent to join the list)

Question Marks - most of Google's acquisitions tend to be in the Question Mark camp - small market shares but in rapidly growing markets. No doubt the strategic thinking is that the Google infrastructure will be able to rapidly ramp up the growth of these small companies. In the pst, Google has been quite good at this, and refined the offerings before finally launching - problem is that by and large it hasn't worked more recently, and many of the acquisitions have withered, finding themselves becoming...

Dogs - these are plays that lose market share and/or the sector declines. Google places some bets early so the sector fizzles out, which is fine - low cost option plays are a creditable achievement. The problem is when too many Google acquisitions look like Jaiku - it was a decent competitor to Twitter but died as Twitter exploded, forcing Google into some far more high cost/high risk plays (such as Buzz) later in the day. Chrome could be a dog - the browser market is mature, they have a low market share - if the current consumer Ad campaign doesn't massively increase market share then its likely to be another failure.

Stars - the aim of all the acquisitions is clearly to become Stars, those businesses that surpass the old business and launch Google into new areas. GMail / Google Docs and YouTube are the current successes - but none of them make any money, in fact YouTube would be spectacularly bankrupt if it wasn't for massive subsidies. And Stars have to make money eventually - very large services that lose money are a millstone around any company, and may well attract regulatory attention for being anticompetitive. So right now, these ain't real Stars, given their unprofitability they are more like black holes. So Google has to engineer something more here.

But this, as the SF Chronicle implies, is something that Google is increasingly struggling to achieve, especially in the realm of social media services:

Observers say there are two things in particular that Google isn't paying adequate attention to in its rush to deliver the next new thing: privacy and complexity.

.....


Both blind spots are byproducts of the engineering-centric culture of Google, several analysts said. Their typical hires can puzzle out eye-crossing brain teasers the company famously issues in job interviews but can't always predict how real people will react to their services.

Google "doesn't always recognize or anticipate some of the human problems, the people problems, the customer service, the concerns over privacy," Sterling said. "They tested Buzz internally and everyone liked it, so they just had no idea it would cause the fear it did."

In other words Google may well have the wrong sort of company culture - if not the wrong sort of people - for these new services. This is not uncommon, often it's the company "DNA" - the skills, economic priorities and culture among other things - that prevent successful companies in one phase of the industry moving on to the next. Google will hardly be the first large corporate not to follow the next turn of its industry.

Perhaps Android is the success waiting to happen, but its early days and - with the best will in the world - Google's DNA is not in the business of flogging mobile handsets (nor is its infrastructure) either.

So, what next if one is a Google? If the past is any guide to the future, Google will now settle down to be a a Search / Ad behemoth - a new Microsoft or IBM or AT&T, dominating its space increasingly via legal muscle and scale economics rather than great innovation. It will use its market power to drive into ancillary markets as Microsoft did with browsers. But the very culture that drives it to success in its traditional areas may well militate against its success in new sectors. Historically, companies that have succeeded in building new businesses have had to create totally new cultures, in one of a number of ways:

- Independent Business / Spinoffs - businessesses given a lot of independence to find their own way.
- Joint Ventures - infusion of DNA with others' hopefully dilutes the business culture enough
- Tough Times - companies under severe pressure can change culture sufficiently to break out into new industries. Nokia is a prime example, moving from rubber to mobile phones.
- "Re-Invention" - a business sets out to re-invent itself without prodding - very rare, 3M with its race towards employee-sourced innovation and Toyota with its approach to JIT are the only large successful ones that come immediately to mind.

Google is not in tough times, so that is a hard act to imagine. Independent business units and Joint Ventures are currently near anathema to their culture and business models, so those are probably not going to happen anytime soon (though in my view, if anything is crying out for a joint venture it's the Android project). 3M may well be a model Google could study as it has no shortage of smart people.

In fact, if 'twere me, rather than acquiring a lot of the companies they do, I would look more at taking a stake in them but leaving them at arms length to grow into their own space.

Interesting article in TechCrunch Europe about the SecretLondon startup, mainly for its exploration of the economics of getting a local B2C service off the ground (see chart above). The issues started when the Facebook group SecretLondon (a sort of crowdsourcing site for Londoners to find and/or report great bits of the Metropolis eg places for coffee) hit 180,000+ members, it became too hard to find what you wanted on the facebook group - so the need emerged to build a proper website. But as Tiffany Philippou, who has moved from being starter of a Facebook group to starter of a startup in under a month notes, it was community built, over a weekend, and the economics were amazing:

Including the domain names for us and future secretcities, catering and all the other out of pocket costs, our total cost for the entire process have been less than £3,000.

When I went round the room on Sunday night and asked all the contributing designers, developers product managers and editors what motivated them to give up their weekend they said it was the feeling of being part of something amazing. They astonished us with their enthusiasm and talent.

secretlondon has shown the power of the community. The group has always been about engaging its members every step of the way. We ran a logo competition to get a logo design, and then asked members on our blog to vote for their favourite. We sought the opinions of the community on the functionality of the site and tried to incorporate as many of the ideas as possible into the launch site.

I must admit to being a great fan of this sort of grassroots development for B2C sites, as by setting up a facebook page you demonstrate that the concept is good, and clearly being able to leverage the community to give a kickstart to the beta-build gives an amazing economic advantage - that looks like a £30k (minimum) project otherwise. To be fair, this would not have happened if it wasn't deemed a worthy thing to do - but its a different sort of worthy to the pious "charitable" plays - this is worthy because its worthwhile, because it adds real value to the participants and to Londoners (and tourists)

However, the issue for these sorts of sites is not the Build phase, its the Operate - as Tiffany is clearly aware - so one approach is to crowdsource ongoing development:

Since this is an ongoing project, anyone who wants to get involved to take the site to the next level – whether that’s helping Tim maintain the code, or making improvements and widgets – is extremely welcome. We’ll be building an API shortly, so if you’re an iPhone developer and want to work on an app to access the thousands of secrets then we want to hear from you. We also want to cluster data for better recommendations and make recommendations based on places your friends have liked. Get in touch if this is something you can help with.

A fascinating experiment. They will get by, they plan, with a little help from their friends......

I'd suggest one lesson from successful Open Source developments such as Linux here though - someone will need to hold the design authority and configuration management keys as it develops, or all hell will break loose over time. Also, the hard part of systems like these is fielding the support calls at 3am on a Sunday morning. This means staff.

In other words, at some point SecretLondon will need a business model that brings in real money - fortunately a site like this is great for sponsorship and other forms of advertising as it would almost be expected - the trick is just not to make it intrusive.

I also like sites like these because to me they get the "Right to Brand" in the Location Based Services space as they offer a service first and foremost, and Location is an added value - whereas so many of the LBS service startups seem to put Location as the core proposition and then trry and find reasons for it to exist. They are also the most user-benign as they fit into the Top Left quadrant of our LBS matrix (see here).

I am also amused that "food" and "pizza" are different line items in the accounts. That's probably right...

Bo Peabody, writing in SAI, makes a number of good arguments as to why Social Media makes for a lousy standalone consumer business. As he points out, its a case of mistaken metrics.

The venture capital community is enamored because social networks grow fast and growing fast is a very difficult thing to do. Venture capitalists have never liked content networks because of the costs associated with creating the content. Social networks present the perfect solution to that problem. The content on social networks is created for free by people who derive some other psychic or social benefit from creating it.

Here are the main points from his argument:

What all these businesses have in common is that they are based on people communicating with each other.

They are communications businesses. Communications businesses are very rarely, if ever, good places to advertise. However, they are really interesting and necessary products, and on the Web they may be the most interesting and necessary products.


What about other forms of revenue beyond advertising?

Indeed, most communications businesses charge users for their services. Telephone companies have made a lot of money for a long time charging consumers to express themselves and communicate with each other efficiently, privately and in multiple formats. Does charging users make sense for Tripod, Facebook and Twitter, the communications businesses of the Web? We tried this at Tripod back in the mid-nineties and many others have tried it since then. It doesn’t work. The barriers to entry for Web-based communications businesses are so low and the switching costs for consumers so minute that charging uses will never amount to much revenue.


What about direct to consumer revenue streams beyond subscriptions, like verified accounts, virtual goods, and commerce?

In the same way that the fundamental nature of social networks as communications products renders them subpar advertising venues, monetization schemes based on extracting money from the social networkers themselves faces yet another problem resident in the fabric of social networks: what I call the “ubiquity paradox”. The value of social networks is their ubiquity. What makes Facebook such an incredibly fun and useful experience is that virtually everyone is on it. Any monetization efforts are going to drive some users away and that will in turn erode value for the users that remain. Most of the moneymaking ideas contemplated by Facebook are good ones and I think many of them could work. But all of them require Facebook to get more commercial and more intrusive, and therefore less personal. This will result in a smaller Facebook.


What about selling data from the “social graph” as Twitter recently did to Google and Facebook?

I don’t know a lot about the business of selling data, but I do know that there is a lot of valuable data created on social networks. But my hunch is that once users know revenue is being generated by selling their personal data or data associated with their actions, they aren’t likely to rejoice. If social networks can sell data in a way that feels harmless to users perhaps they can make some money, but not a lot of money and certainly not enough to justify the values placed on them today.

Now Peabody makes one point which is useful to keep in mind:

Search engines are amazing businesses, much better than most media and communications businesses. However, they are an anomaly. Media companies and the venture capital community have been chasing the next “search engine” business model for over ten years; this elusive creature that creates highly valuable advertising inventory without the costs associated with actually creating content, and has the financial and cultural profile befitting a public company.

The fervent hope is that just because we are replacing Search with Social Media as a way of finding things, that the same transfer of spot Ads can happen. We don't believe it will, as the output is not the same and doesn't really support Ads.

We couldn't put it better ourselves, so we didnt - As readers of this blog will know, we agree - and have made these points for 3 years or so (and in some detail - just search for Freeconomcs on this blog). To us, Social media is like email - essential, but no one will pay for it directly. And we think the despreate attempts to sell off the social graph will rebound in spades, probably leading to regulation (as is happening with the banking industry already)

Incidentally, our view is that no one will pay for generic consumer Social Media - niche media with valuable content, or content that has value by being rare, and business social media are different things entirely

Apple Fanbois are not happy that Other People do not love the iPad sufficiently, and at first reading I thought Fraser Speirs was going down this line:

one can't help being struck by the volume and vehemence of apparently technologically sophisticated people inveighing against the iPad.

Some are trying to dismiss these ravings by comparing them to certain comments made after the launch of the iPod in 2001: "No wireless. Les space than a Nomad. Lame.". I fear this January-26th thinking misses the point.

What you're seeing in the industry's reaction to the iPad is nothing less than future shock.

But after reading the whole article, I come to praise, not to bury - his argument is essentially around reducing the level of difficulty in using new technology. He notes that:

The tech industry will be in paroxysms of future shock for some time to come. Many will cling to their January-26th notions of what it takes to get "real work" done; cling to the idea that the computer-based part of it is the "real work".

It's not. The Real Work is not formatting the margins, installing the printer driver, uploading the document, finishing the PowerPoint slides, running the software update or reinstalling the OS.

The Real Work is teaching the child, healing the patient, selling the house, logging the road defects, fixing the car at the roadside, capturing the table's order, designing the house and organising the party.

Think of the millions of hours of human effort spent on preventing and recovering from the problems caused by completely open computer systems. Think of the lengths that people have gone to in order to acquire skills that are orthogonal to their core interests and their job, just so they can get their job done.

If the iPad and its successor devices free these people to focus on what they do best, it will dramatically change people's perceptions of computing from something to fear to something to engage enthusiastically with. I find it hard to believe that the loss of background processing isn't a price worth paying to have a computer that isn't frightening anymore.

Amen to that - and its a powerful business model, as Apple sadly is able to keep on proving over and over again in various sectors, to the discomfit of the crusty incumbents in them. There is an interesting argument that Apple is able to this as it has near - dictatorial design authority. But future shock? I think that could just be a linkbait headline playing to the present hypefest - as is mine

(Our initial thoughts on the iPad are over here)

Brian Solis details the slow, reluctant and painful movement of the social media movement towards justifying its existence economically. First came denial, then avoidance:

Adaptations included:

Return on Engagement: The duration of time spent either in conversation or interacting with social objects, and in turn, what transpired that’s worthy of measurement.

Return on Participation: The metric tied to measuring and valuing the time spent participating in social media through conversations or the creation of social objects.

Return on Involvement: Similar to participation, marketers explored touchpoints for documenting states of interaction and tied metrics and potential return of each.

Return on Attention: In the attention economy, we assess the means to seize attention, hold it, and measure the response.

Return on Trust: A variant on measuring customer loyalty and the likelihood for referrals, a trust barometer establishes the state of trust earned in social media engagement and the prospect of generating advocacy and how it impacts future business.

But, as the chart by eMarketing above shows, even getting Social Media Gurus to measure anything is hard. Which is not surprising, as when they do:

MarketingProfs recently published a study by Bazaarvoice and the CMO Club that revealed the true expectation of chief marketing officers.....

.....However, the study found that the exact implications of social media still evade CMOs.

- 53% are unsure about their return on Twitter

- 50% are unable to assess the value of LinkedIn or industry blogs

Most importantly, about 15% believe there is no ROI associated with Twitter, and just over 10% cannot glean ROI from LinkedIn or Facebook.

In fact, good old fashioned management technology is intruding further into the SocMed world

2010 is the year that social media graduates from experimentation to strategic implementation, with direct ties to specific measurable performance indicators.

In 2010, CMOs will seek to establish a connection between social media and business goals. The study documents the adoption of three metrics:

- 333% surge in tracking revenue

- 174% escalation in monitoring conversion

- 150% increase in measuring average order value

....333% rise in following the money! And - guess what - even FreeConomics is coming under scrutiny now:

Even though much of social media is free, we do know the cost of engagement as it relates to employees, time, equipment, and opportunity cost (what they’re not focusing on or accomplishing while engaging in social media). Tying those costs to the results will reveal a formula for assessing the “I” as investment.

When we truly grasp the ability to define action and measure it, we can expand the impact of new media beyond the profit and loss. We can adapt business processes, inspire ingenuity, and more effectively compete for the future.

All good stuff, and a good summary, but the sad thing is its really a history of an industry being dragged kicking and screaming to justify itself economically. Thing is though, its 2010 and the industry has p*ssed off so many people outside of the pure Social Media Believer community with its inability to demonstrate value so far (apart from giveaway free consumer services that sell to dumb money, that is). Needs to really come up to the plate in the next 2-3 years to continue.

(Even the current darling Facebook's business model of scraping user data for on-sell is in our view unsustainable)

Can it do this? My own view is that raw economics will kill off the bits that don't work over the next few years, enterprises will pick up the bits that they think work, and it will probably metamorphose into something else that is absorbed into the infrastructure - probably with a different name.

(Update - yes, I've just described the tumble down the Hype Curve from the zenith of inflated expectations to the nadir of the slough of disappointment and the slow climb out as a useful service)

We've been keeping a lofty distance from the unseemly cr*pfest that is the speculation about the Apple Tablet, or iSlate or whatever. We do do market intelligence for products that have yet to be invented, in markets that don't exist - but only for real clients who pay money that does exist

Anyway, when I saw this from Crunchgear called "The Killer App fo Apple's Tablet is gaming" I decided to withhold on this no longer, and join the sordid multitude mud-wrestling in the Breughelian ooze of the Apple fanboi blogosphere.

And if one is going to be sordid, one might as well be more sordid-than-thou.

Now, as you know:

(i) The internet is for Porn, (see the Avenue Q YouTube song above) and the Apple Tablet is the perfect size and design for - ahem - "appreciating" dirty pictures.

(ii) Porn as an early adopter market has often driven adoption of one end-user device over another, and this is a crowded field with tablets, high end e-Books, new smartphones et al. Whoever gets an early rise from porn (as it were) gets better production economics, and may well take the market

And its easy to use - just wipe the iSlate clean, as it were.

This is a public service announcement. It is to be taken as an antidote to Tablet Hype with a tongue in cheek (wanna see the pictures....) and a pinch of salt.

Quite a bunfight about Web Metrics this weekend, I read it first in SAI:

Comscore is changing its web ratings methodology to include site-side server tracking. In connection with this change, it is charging all sites who want to be measured with the new methodology a $5,000 "set-up" fee ($10,000 for a year's access to the data).

Comscore's logic here is that the new site-side tracking costs money, so sites should pay. We disagree with this. The site-side tracking is a cost required to improve Comscore's product. The change will likely boost traffic for sites that participate, so Comscore is effectively waving the threat of relatively poor traffic metrics in the face of every company that chooses not to pay. We see that as blackmail.

Yesterday, Jason Calacanis called for an industry-wide boycott of Comscore. Comscore investor Fred Wilson and CMO Linda Abraham defended the company. The argument has gotten heated and personal, and many of the points being made have gotten away from whether the setup fee is fair.

Techcrunch and various others weighed in too. Now some of our clients use ComScore, and there is also Alexa, Hitwise, Google Analytics, various server-side packages, Neilsen etc etc. And they all disagree with each other!

Our view is that no system is "accurate" yet. You have to cross correlate across them all at the moment to get a "fix" on one site vs its competitors, and its relative and not absolute. Two years ago Will McInness kicked off MeasurementCamp in London because so many of us were finding this problem - and in fact one of the things we quickly wondered about was are they even measuring the right things, never mind measuring things right. It is a b it frustrating that 2 years later not much more light has dawned.

But its not surprising. This is an industry in its adolescence, still trying to work out the right way to look at itself. Television went through this decades ago and it took a while for enough empirical evidence to come through as to the best rules of thumb. And liek all adolescents growing up, we expect to see histrionics every so often

As to whether Comscore is right to charge for server-side monitoring, two thoughts:

(i) The market will ultimately decide whether paying $5,000 for a different number to the one you get for free is better.
(ii) If it becomes clear that companies who pay for server side monitoring have higher reported traffic than those that don't, ComScore risks tarnishing its currency, or at least having to report those who are and aren't server side.

With the bigger websites, you can sort of calibrate them against each other anyway, and I would argue thats as good an approach as any right now - ie its pointless trying to talk about 2 decimal place output when the input is a finger in the air.