16 4 / 2012

It’s Not a Bubble, It’s Valleywood

(Originally published on Techcrunch, 4/14/2012).

There is a certain type of company that can only exist in Silicon Valley.  People outside of the Valley scratch their heads at how a company with no revenue and no apparent business model can be called successful, much less be worth $1 Billion.  But maybe the problem is that we’re mis-categorizing Internet and mobile products as businesses in the first place.  What if we looked at them as TV shows instead – where success and failure is determined by ratings not revenue?  Isn’t Instagram closer to American Idol than it is to Oracle?  It entertains millions of us for a few minutes every day – maybe that’s enough.  Perhaps the Valley is pioneering a new business model, one where revenue isn’t the goal but where distribution and engagement are paramount.

 

The titans of new media have a distribution channel that’s always hungry for more entertainment.  They need to feed the beast – and they can’t innovate fast enough.  They need to rely on the Pinterests, the Instagrams andthe Paths to give them the entertaining new hangouts for their audiences.  Big companies aren’t known for their ability to innovate, and certainly not as effectively and nimbly as startups.  That doesn’t stop them from trying, but frankly my advice to them is to give up on innovation (Google+, ahem) – focus on your strengths - monetization and distribution, and outsource your weaknesses.  Be more like a big movie studio.  They don’t make The Blair Witch Project, they make $700 Million budget James Cameron action movies that are filmed on the moon and in the burning core of the Earth.  So translation to Google – keep going on the self-driving car and the augmented reality glasses, nobody else has the balls or the cash to do that anyway.  And see if you can get James Cameron involved somehow.

What big new media companies do well is sell advertising.  So think of them as a TV Network – NBC doesn’t make shows, they buy them and sell ads around them.  You have relationships with the distribution channel, so you get the entertainment in front of the eyeballs, and then you sell it to big megabrands.  Little production companies can’t do this, and neither can a little photo-sharing startup.  When I was at Digg, we were lucky to even see a seven figure RFP come through the door from a big brand, much less win it, and we had an audience of 40 Million people.   At AOL, it was just a given that we were getting a piece of it – when you’re a top five Internet property, the advertisers have to spend there if they want to reach enough people.  The big companies should stick to monetization and distribution, and let the Instagrams focus on building the cool stuff.

This isn’t to say that all Internet startups should take this path.  At Digg, we grew so big, so fast, that we aspired to be a network ourselves.  If you’re going to turn the corner from TV show to network, you’ve got to have your own ad product.  Our idea for this was DiggAds - ads that behave like news stories and could be voted upon.  We had aspirations that these ads would be the answer to the online news industry’s monetization woes.  We were off to a good start; the ads were extraordinarily successful – so much so that you can see echoes of them in Twitter’s Promoted Tweets and Facebook’s Sponsored Stories.  Despite our early success with DiggAds, Digg failed to become a studio ultimately because people stopped watching the show – we didn’t build a network so all our bets were on a single show.

Welcome to Valleywood where talented creative people can come up with a crazy idea that no big company would ever take a flyer on, and getting rewarded if it becomes a hit.  I think we should encourage this model – maybe even have ways for the big companies to participate without having to purchase the entire company.  Maybe startups will form themselves into labs and crank out multiple products, build up followings, and then license them off to big companies.  Maybe incubators like YCombinator and Techstars will become the mini-majors or the great independent production companies.

21 3 / 2011

Stop Calling it Content

 

With the New York Times finally erecting its paywall last week, I thought it was relevant to write about the subject of content, and how we value it.  A good friend of mine is a film director and the closest person I know to a professional creative person. Despite having directed multiple studio films, my friend still hasn’t found financial success.  He is currently living on the floor of his brother’s house, and is pretty much broke.  And at age 36, he has no plans of giving up any time soon.

I once tried to explain AOL’s business strategy to him – I told him we are trying to produce high quality content for the web – and his response has been ringing in my head ever since: “your first problem is that you’re calling it content.”  He doesn’t live on the floor of his brother’s house so that he can create “content.” He does it to create artful, beautiful, and emotional experiences.  He does what most of us dream of doing as kids and most of us eventually give up on.  It occurred to me that calling it content commoditizes it and sends a message to the creative community that quality doesn’t matter.  It’s not unique to AOL either, everyone in Silicon Valley calls it content - it was eye-opening to see how repulsive that was to my friend and probably to most of Hollywood and the artistic community.

Journalists and reporters are also artists of a certain kind – maybe better described as passionate professionals.  The business model of news distribution is changing dramatically, and we all agree that journalists need to get compensated if we want them to continue the important work they do.  But I would argue that charging consumers to read news articles is not only bad for consumers, it’s also bad for journalists.

I have had a chance to work with hundreds of publishers over the last several years, first heading up business development for Digg, and now as VP of business development at AOL.  Publishers have two revenue models: subscriptions or advertising – and in some cases both.  The benefit of the advertising model is that the publisher and the writer have mutually aligned interests.  They both want as many people reading each story as possible.  The writer gets famous, and the publisher has more pageviews on which to sell more ads.  However with the subscription model, the writer and publisher have misaligned interests because while the writer still wants broad distribution, the publisher wants to keep the best stories locked up for only the paid subscribers to see.   The better writer you become, the less distribution you get.

The New York Times released what seem like complicated rules allowing readers to access up to 20 free articles per month, but the first five clicks from Google don’t count toward that 20, nor do any clicks that come from Facebook. They are trying to delicately balance the conflicting needs of getting massive exposure for a story while still protecting the value of a subscription.  While I think they’ve done an elegant job with a complicated problem, I worry that the underlying model just isn’t feasible.

The fundamental question is whether readers will pay to access stories from one publisher when others offer the same news for free?  Even if you believe that the New York Times writers have the best prose, analysis, and access to newsmakers, is it really $180 a year better than all the other free sources on the web combined?  Then consider that you are probably reading the article on a three-inch screen while stopped at a red light, and it’s even more difficult to justify the subscription model.

If writers need to get paid, subscriptions don’t work, and ads aren’t paying the bills, then what will work?  I think the answer is out there.  One possibility: Netflix reportedly bid close to $100 Million to distribute a TV show with David Fincher and Kevin Spacey.  Netflix is a brand that offers a broad range of value and convenience to consumers, and is enhancing that value proposition with top tier premium shows.  That’s a much easier sell to a consumer than an individual publisher charging to access its own news articles.  I also think there are ad models that will work, but that’s a subject for a different post.

By analogy to what Netflix is doing, an aggregated news reader like Flipboard (or AOL’s upcoming Editions) is something that offers value beyond just the articles.  I could imagine paying a subscription to Flipboard if it gave me access to multiple premium sources, I could read the articles within a really slick interface, it made smart recommendations for me and constantly added features that made my news reading experience better.  Then Flipboard could share that subscription revenue with the publishers.  I think the money is there to pay for the cost of creating and publishing the news, but it is going to take more creativity than we have seen so far in the publishing industry.  As business people, we need to do better.  Let’s start being more creative about how to get creative people paid.

20 4 / 2010

Steve Jobs presenting the iAd strategy

Permalink 6 notes

20 4 / 2010

Apple’s iAd Strategy is like Mexican Food in New York – It Should Be Good But It’s Not

 I love Mexican food, and New York has the best restaurants in the world, yet somehow that doesn’t translate into New York having good Mexican restaurants.  Let me explain - there is currently some great innovation happening around advertising right now, and Apple is known for making some of the most innovative products in the world, yet somehow iAd seems to have missed the mark for me in terms of being the game-changing advertising equivalent of the iPhone. 

Let me start by enumerating some of what I think Apple got right with the iAd announcement.

- It’s good that they keep you in the app when you click on the ad.  That is ticket-to-play functionality, there’s almost no point in putting an ad in an app if the user experience opens a link in a browser, particularly when you can’t run multiple apps at once.

- I like Apple’s motivation - or at least their declared motivation - to help app developers monetize their work through means other than or in addition to charging per download.  I doubt that’s the only motivation, but it makes sense and it’s a good story.

- I like the idea that you can essentially create app-like functionality within an ad, including the ability to actually download another app.  Much like Zynga (creator of Mafia Wars and Farmville) on Facebook, I predict some of the biggest advertisers to adopt iAd will be the App makers themselves. 

Two of the biggest challenges that I see Apple facing with the iAd platform are that the ads are not integrated into the user experience, and Apple is setting themselves up as the exclusive ad seller.

The ads are not integrated into the user experience:

After launching DiggAds, I’ve become convinced that the future of advertising will be to integrate ads into the user experience of the site.  This doesn’t mean just sticking them in the middle of the page, it means including the functionality of the site within the ad itself – essentially, transforming ads into content.  Examples of this include DiggAds, Facebook’s social ads, Twitter’s new Promoted Tweets product, and of course Google AdWords.  I was disappointed that Apple did not follow this model.  In the demo, Jobs doesn’t mention the integration of the ad into the app, the entire demo focuses on what happens after the user clicks (or taps, I guess).  In fact, by setting it up with Apple selling the ads, that virtually ensures that the ad unit must be consistent across the network and therefore won’t be custom fit for each app.

Apple selling the ads:

Apple is positioning itself as an ad network that will sell the iAds, and then distribute them across the apps.  At Digg we use ad networks, but only for our remnant inventory and only when it’s sold on a blind basis.  For example, we might give an ad network some impressions from the Digg technology section and they will sell them as part of a block of general technology inventory without saying that Digg is part of it.  We do this to avoid conflict between our sales force and the ad network’s salesforce – we don’t want them selling the same product for different prices.  What we’ve found is that when an advertiser, particularly the big brands that Apple used in their demo, is making a larger investment in a custom ad (like an iAd), they tend to want to buy directly from the site so they know where that ad is going to run.  Ad networks work well when the ad is a low cost, easy to build unit that can be sold on a self-service basis, but for immersive experiences like iAds, I’m not convinced that brands will want to buy from an ad network, even if it is Apple.

What should Apple be doing then?

Despite the aforementioned challenges, there is a huge opportunity for Apple in the advertising industry.  Apple should focus on building a technology platform to support advertising within the iPhone ecosystem.  The low hanging fruit for Apple would be to allow apps to link to each other, to pages deep within the link structure or flow of the app.  Apple could perfect a standard around this type of advertising, offering ad serving, targeting, reporting and other features to justify taking a few cents from every ad that is served on the platform without ever hiring a single ad sales person.

I am glad to see Apple entering this market and taking advertising seriously.  I truly appreciate the intention of helping to subsidize the cost of apps through a real advertising platform.  However, I think Apple’s vertically integrated strategy that they’ve used for hardware and software could get in their way and limit the potential for growth in the context of advertising.  My prediction is that as long as Apple is selling the ads themselves, they will not be able to truly fulfill on that promise of selling ads at sufficient volume to be a viable business model for the long tail app developers on its platform.  I hope to see them continue to invest in the ad platform, but as more of a Doubleclick-for-mobile strategy - as the backend technology provider to enable the app developers to create and sell more integrated and better advertising.

To put it more simply, I’m saying Apple should make the guacamole, but leave the burrito making to each individual restaurant.

http://twitter.com/bobbuch

Tags:

Permalink 36 notes