The Consumer Internet has been a focus area for
Outlook Ventures since our inception in 1996. Our early
involvement in Overture (acquired by Yahoo), Wit Capital
(IPO in 1997), eCircles (acquired by Classmates), eTeamz
(acquired by Active Networks), and Impulse Buy Network
(acquired by Inktomi/Yahoo) gave the firm a bedrock
of experience. Today, Outlook remains active in Consumer
Internet, investing in disruptive companies that are
emerging in Web 2.0, such as LoyaltyLab. In this article,
Outlook Managing Director Randy Haykin discusses the
difficulties Web 2.0 technologies are creating for traditional
media.
Since 2003, venture capital’s focus on the Consumer
Internet market has returned to a healthy interest,
recovering from a near-death experience suffered following
the dot-com bust [a]. For those of us who invested successfully
during the 1990s, many of these newly-funded Consumer
Internet businesses look surprisingly reminiscent of
past attempts. Even some businesses that did not survive
in the post-bubble “hangover” are suddenly
deemed viable in today’s market and are receiving
new venture capital funding. Why? For sure, Google’s
IPO in 2003 renewed venture capital interest in the
consumer segment, but there is more involved than VC
greed in today’s market. More fundamentally, new
Web 2.0 technologies mixed with emerging profitable
business models are now at play. The combination of
new technologies and business models is allowing many
entrepreneurs to revisit businesses that did not make
sense in the 1990s, and, of course, to innovate in new
businesses that these technologies and models are making
possible. This combination is having a disruptive effect
on traditional media.
Much has been written about Web 2.0, a term created
at O’Reilly Media to describe the new generation
of sites and services that use the web as a platform.
O’Reilly’s complete thesis on Web 2.0 can
be read online at:
http://www.oreillynet.com/lpt/a/6228
From Outlook Venture’s perspective, the Web 2.0
shift in thinking embraces several trends, from user-generated
content to “snippets” (bite-size content)
to personalization and social relationships. Outlook
has been tracking these trends and Consumer Internet
companies within the market segments of search, content,
digital media, and social networks. It is within these
areas that we are seeing the disruptive combination
of new technologies and compelling business models change
the landscape of traditional media.
Traditional Media Disruption
Traditional media and communications -- print, television,
and radio-- are losing a very visible battle to the
Internet. Television is being usurped by digital devices
and services (Tivo)
and by IPTV on-demand services (Comcast
Digital, Akimbo).
Radio is being changed by satellite, podcasting, and
peer-to-peer (P2P) content sharing. Newspaper readership
is trending downward, while readers turn in droves to
blogging, RSS feeds, tagging, and online content aggregators.
In an attempt to stay competitive in the late 1990s,
many traditional media firms embraced new media firms
– TimeWarner acquired AOL,
NBC acquired Xoom, Disney acquired Infoseek/Go,
and @Home purchased Excite.
Many of these mergers created corporate meltdowns and
failed to return value to shareholders. However, certain
more recent mergers have fared well, such as the New
York Times acquisition of About.com
and Fox/Rupert Murdoch’s acquisition of MySpace.
With successful mergers being the exception to the
rule, traditional media companies are at a distinct
disadvantage to more savvy “new media” companies
like Google
(acquired Picasa,
Keyhole,
Blogger.com,
Dodgeball),
Yahoo
(acquired Overture,
Flickr,
De.licio.us),
IAC/Barry
Diller (acquired AskJeeves),
and eBay
(acquired Skype).
These new media companies understand the shifts in the
tide earlier, and are making strategic purchase of promising
new innovators before they are even known to the top
brass at larger media companies. As a result, authentic
and innovative Web 2.0 companies are being swallowed
up by Google, Yahoo, and eBay long before they can be
acquired by traditional media companies.
Fundamentally, the new media companies will continue
to innovate in their business models, and grow in value,
while old media companies will continue to be under-valued.
This could be why Google is today worth $140 billion
in market cap, equivalent to the market caps of Disney
($50b), Knight-Ridder ($4B), NY Times ($4B), and Comcast
($57b) combined. Time to short your Disney, Tribune,
Viacom, and SBC stock?
Market Segment Insight
As stated earlier, it is the combination of new Web
2.0 technologies with revenue-generating business models
that allows the new media companies to disrupt traditional
media. Because Outlook Ventures has surveyed a wide
range of Consumer Internet companies over the past year,
we can share our insight on disruption-generating technologies
and business models. We address these by market segment:
search, content, digital media, and social networking.
Search
The business model for paid search has gone through
many evolutions, from free to paid listings and paid
inclusion to relevance-based advertising. In 1995, the
rise of Yahoo, Excite, and Infoseek proved that organizing
a worldwide Internet with simple categorization and
search was valuable. Initial business models called
for banner advertisements that were priced according
to impressions in CPM (cost per thousand) and primarily
based on keywords. Additional models incorporated CPC
(cost per click) models for monthly promotional banners
on Yahoo’s homepage.
In 1999, Overture pioneered three new concepts: paid
positioning for advertisers; pay-for-performance advertising;
and syndication to other websites for its search approach.
Several years later, Google adopted Overture’s
models but implemented them using automated algorithms
(ranking pages for relevance of user results rather
than by only keywords). Google continues to pioneer
in a variety of fresh advertising models and it is looking
for new ways to monetize its traffic. One example is
Google
Local that is monetizing local SMB market by now
testing pay-to-call technology.
The success of Google, coming at a time when search
technology was taken for granted, has revived interest
and investment in the search space. There have been
several companies focusing on incorporating user behavior
to denote relevance. Snap,
in particular, is shifting to the most recent performance
model of CPA (cost-per-action), in which advertisers
will pay if an action is taken (purchase, fill out form,
etc.).
In the past two years, advertisers have shown increased
interest in reaching customers locally. Retailers (national
chains) or small- and medium-sized businesses (SMB)
are increasingly turning to the web to find ways to
drive traffic into brick-and-mortar stores. Outlook
has invested in Loyalty
Lab, a firm that creates closed-loop customer loyalty
systems for retailers to better track existing customers.
Yahoo and Google have embraced local search. Each has
created corporate divisions for local search over the
past few years, providing advertisers with ways to geographically
target search users.) Several funded local search start
ups deliver customers on a per-lead basis, including
Reach
Local and WebVisible.
Experimentation is also underway with a new business
model, called PPC (pay-per-call), that allows for the
insertion of 800- or local “mock” phone
numbers into yellow-page listings Example companies
in this area include Thinking
Voice, Jambo,
and Ingenio.
The business model innovation for these companies is
not just in lowering the cost-per-lead to the SMB market,
but also in lowering overall costs involved in obtaining
these leads, by avoiding the expensive feet-on-the-street
approach used for decades by traditional yellow-page
vendors. In this manner, the hugely profitable yellow-page
businesses owned by telecos will see many of their dollars
shift online, demonstrating another example of Web 2.0
disruption.
The next-generation search business models will likely
integrate consumer behavior and input with search technologies
to improve relevance and personalization, especially
around verticals. Companies such as Become.com
and Insider
Pages are already starting to do that for e-commerce,
while Sidestep
is focused on travel. In this manner, we can expect
to see the next “Google” emerge from the
ranks of start ups or out of university work.
Companies such as Claria
and Revenue
Science are focusing on next-generation models incorporating
behavioral advertising. Their client side software creates
a comprehensive understanding of consumers by analyzing
user behavior on the Net. This allows advertisers yet
more targeted knowledge of the consumer, and raises
effective CPM. One of the challenges in this model is
getting users to download the client side software.
Claria offers complimentary consumer software applications
in order to entice users to download the free client
application. These companies are also driving efforts
to overcome privacy concerns and the backlash against
spyware.
Overall, Web 2.0 search technologies and innovative
business models are disrupting traditional media by
pulling advertising dollars away from radio and newspapers,
where people previously sought information.
Content
The Web 2.0 trend that is most disruptive to traditional
media is user-generated content. With much of the population
now on fast-bandwidth access and the rise of technologies
such as blogs, tags, and wikis, users are now contributing
to the generation of content as well as consuming content.
Blogging, tagging, and wikis are all examples of a
strong Web 2.0 trend of user-generated content. Many
sites are depending upon the user to generate their
stickiness, thus lowering the cost of doing business,
enhancing their business model, and making profitability
a closer reality. Because of the lower cost, utilizing
these technologies is more competitive than advertising
through traditional media companies.
Blogs are online diaries containing personal thoughts
or recommendations or ramblings of the author on any
manner of topic in the world (favorite things, insights,
rants, opinions, etc). In the past, blogging was a relatively
unknown phenomenon reserved for the digitally cool,
but it has now joined the mainstream. Today, blogging
is enabled on most popular sites, including Yahoo, Google,
and AOL. Several high-traffic independent sites, such
as BlogLine,
Technorati,
Blogger.com,
and Xanga,
offer search of blogs or communities of bloggers.
With millions of bloggers blogging, and millions more
reading these blogs, a market for advertising on these
sites has emerged. For example, on the site alwaysonnetwork.com,
bloggers pipe in on various technologies and trends,
and AlwaysOn’s
business model of advertising and sponsorship is dependent
upon the freshness of these blogs to attract users back
daily.
Several companies, like Blog-It,
are developing alternatives to advertising models for
blogging. Blog-It finds exceptional writers with good
content, much in the same way a magazine seeks out great
reporters, and charges its users a subscription fee
but offers half of the subscription fee generated to
its writers in proportion to the readers each writer
attracts.
A relative of the blog, the tag, (think social book
marketing) is now becoming big among information seekers.
Tags, most visibly brought to life by the site called
De.licio.us
(acquired by Yahoo!), allow users to point to their
favorite websites, blogs, or locations on the web and
create a list that can be shared with others. This is
equivalent to being able to share your personal bookmarks
with others. The power of the tag goes beyond bookmarking
in that it is socially shared. Also related to the blog,
but much better at structuring information, is the wiki.
A wiki is a type of website that allows users to add
and edit content and is especially suited for collaborative
authoring. Wikipedia
is the site that has popularized this phenomenon –
it is today the largest encyclopedia in the world and
is read by millions of users. Tags and wikis add stickiness
to a site but, to date, in and of themselves do not
generate a viable business model. Although there have
been few investments by the venture community in this
area, emerging companies such as SocialText,
which provides tools for corporate/enterprise communications
use of wikis, are emerging.
As mentioned previously, some traditional media companies
are now incorporating user-generated content into their
offerings, such as Fox working to integrate MySpace
into its empire, and The NYTimes acquiring About.com.
About.com was an early pioneer in the user-generated
content area. Thousands of individual subject matter
experts donated their time to build a high-volume website
on thousands of topics.
New media companies like Yahoo and Google are also
buying up user-generated content sites. Flickr
was acquired by Yahoo for its fast growth due to user-generated
content (photos and text primarily). A recent article
in Business 2.0 entitled “Flickrization of Yahoo”
(Schonfeld, December 2005) featured many anecdotes explaining
how Yahoo management is consciously moving itself into
the Web 2.0 generation by fostering user-generated content
in nearly every aspect of its site. Yahoo has asked
members of the Flickr team to circulate and assist with
its many other businesses and help keep the company
on the leading edge.
Dovetailing on the trends in the search segment discussed
earlier, user-generated content has come to local search.
Yelp
and Insider
Pages, for example, are driving their business models
for local advertising by attracting users to the site
to read. TripAdvisor
has become a favorite among vacation planners for looking
up user-based opinions on hotels and attractions around
the world.
Digital Media
Web 2.0 technologies have fostered a disruption of
digital entertainment media from music to photos and
images to video and television. Consumers today have
a much wider variety of options for media purchase and
use than they had in the past. Music led the disruption
in Web 1.0 with the online sharing of songs and has
continued in Web 2.0 with the pay-per-song business
model. Easy access and online sharing of photos, video,
and even television are Web 2.0 trends that are disrupting
traditional entertainment media.
Apple
Computer got it ‘right’ when it opened
its iTunes
web site with the support of many of the largest music/record
labels in 2003. Since that time, the music industry
has opened up to a variety of new business models, including
pay-per-use and pay-per-song music. Today’s music
buffs are personalizing their own music experience by
selecting and paying for only those songs that they
want to hear. The album is becoming extinct. An interesting
new technology-enabled music service is Pandora,
which offers users suggestions of related music types
and songs, based on sophisticated musical algorithms
(called the “music genome project”)
While music led the way of traditional media disruption,
photos, video, and now even television have followed
close behind. With the explosion in digital cameras,
there is much consumer activity in photo sharing. The
basic business model for photo sharing and printing,
pioneered by early entrants Shutterfly,
Ofoto,
(acquired by Kodak), and Snapfish
(acquired by HP), has been to host pictures for free
and charge printing fees for prints and merchandise.
eCircles, funded by Outlook Ventures and Adobe in 1999,
was an early pioneer in sharing of photos and building
community around them. Flickr (acquired by Yahoo) brought
Web 2.0 tools and techniques to the idea of combining
user-generated photos, comments, and blogs. Flickr allows
users to upload pictures from any device through any
service to any destination, thus delivering on the promise
of ubiquity through the Internet. It also allows users
to collaboratively organize and interact with each other’s
content, whether they are trusted or anonymous.
Many sites are now going beyond photos to encourage
the sharing of video. With the growth in videophones
and ease of using a digital video camera, the video
market appears to be poised to follow the photo market.
Companies such as YouTube,
Vimeo,
and ClipShack
offer consumers a place to host and publish their video
clips and interact with other users’ clips. According
to a recent article in the Wall Street Journal (Delaney,
January 5, 2006), Google is planning to offer video
downloads so consumers can pay to download and view
videos and television shows on their computers.
The trend toward “snippets” of content
could further disrupt traditional media by creating
a revenue-generating business model for sites offering
video and television. A snippet is a short segment of
content – discreet enough to create value in the
consumer’s mind. A recent phenomenon of ring tones
in the phone market is an example. Millions of users
have been wiling to pay for discreet ring tones that
allow them to customize their phones, creating a multi-billion
market in just 4-5 short years.
Snippets are now starting to be offered in the area
of video and television. MeeVee, for example, holds
a patent on the idea of serving up video snippets that
are tagged and searchable. If you wanted to watch a
segment of the TV show “Larry King Live”
featuring an interview with Michael Jackson, MeeVee
will allow you to search, retrieve, and play back just
this segment – for a price. Tivo and internet
protocol television “IPTV” players such
as Akimbo
will likely offer this in the future, and companies
serving up video to telephone playback will certainly
be looking for snippets in the future.
The business model for video and TV access to the mobile
and home entertainment market shifts considerably with
the advent of snippets, because a value can be placed
on the media itself: its length, its exclusivity, and
its ultimate consumer value. Think of it, in some ways,
like the sale of a song via iTunes or a movie via Comcast
Digital’s on-demand service.
Lastly, the lines between stored or user-generated
digital content and broadcasted video are blurring,
in part due to the snippet effect, but also due to the
concept of time shifting. Today, millions of homes have
a Tivo (or a digital video recording (DVR) device).
These first-generation devices essentially capture broadcasted
video and make it available to the user at any time.
Web 2.0 technologies such as podcasting are another
form of time shifting digital content where users can
listen to or watch prerecorded audio or video on their
mobile devices. Apple’s recent announcement of
the video iPod likely heralds a revolution in user-generated,
stored, and broadcasted transportable video. Apple already
has agreements with two major studios to distribute
snippets of popular television series on its iTunes
service, and this will lead to essentially a new era
of video-on-demand services using the pay-per-snippet
model.
These time shifting and snippet trends of video and
audio will lead to some interesting new models in both
the living room and mobile markets, continuing to disrupt
the traditional entertainment media of radio and television.
Social Networking
Companies such as Friendster,
Facebook,
and MySpace
(acquired by Fox) have re-defined how people relate
in the Web 2.0 world, disrupting traditional media by
creating an entirely new place for advertisers to put
their money. On MySpace, now accessed by over 50 million
worldwide users, members can create an expression of
themselves or their passions and share it with a closed
or open group of “friends.” Sites, like
MySpace, create stickiness because they attract regular
users to return to the site daily, weekly, or monthly
to update their web presence – blogs, music, photos,
etc.
In addition, relationships are redefined on MySpace
– you can “meet” others, explore interlocking
friendships, post photos, music, even video. Newsweek
recently dubbed the teen crowd of our new millennium
the “MySpace Generation.” (Newsweek,
Brad Stone, December 26, 2005)
Social networking companies such as Facebook and MySpace
make money initially through advertising. Although the
jury is still out on the killer business model in this
space (besides advertising), it is pretty clear that
the social networks/communities that will be successful
will be the ones that tailor their services and marketing
to reach specific consumer groups. Sticky communities,
especially those that address a market segment currently
unaddressed online, are attractive to advertisers and
to large companies. These large companies find start
ups attractive for acquisition and partnership if they
offer a Greenfield customer base. Advertisers are much
more savvy this time around and know that it is not
just quantity but also quality of traffic that is crucial.
Start ups building communities also prefer quality,
targeted traffic because that is easier to convert from
a free service to a paid service.
Web 2.0 Summary
In summary, new Web 2.0 technologies and business model
approaches are turning traditional media on its head.
As new and old media competitors scramble to gain a
foothold into this huge Consumer Internet market, we
will continue to see start-up companies innovating and
disrupting the status quo. The following chart summarizes
the Web 2.0 changes.
