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Casual worlds and MMOGs are proliferating February 29, 2008

Posted by jeremyliew in games, gaming, kids, mmorpg, strategy, virtual worlds.
6 comments

The casual world and MMOG space is getting increasingly crowded. Many of the big media companies are launching virtual worlds now, often targeted at kids. Disney just launched Pixie Hollow, to go with its other virtual worlds, Toon Town, Pirates of the Caribbean Online and Club Penguin, and have reorganized to focus on launching more – investing up to $100m in new online world launches. Nickelodeon, MTV, Cartoon Network, and others are all also throwing their money and brands against portfolios of virtual worlds launches.

Another trend is the expansion of physical toys into virtual worlds. Webkinz led the way here, but many more toy companies are leveraging their offline distribution and brand recognition to create virtual worlds loosely coupled to a physical toy, including Barbie, Beanie Babies, Lego, Build-a-bear, Bella Sara and many more. The BarbieGirls virtual world hit 10 million registered users in 10 months, a remarkable growth rate for a virtual world. (Second Life reports 12.5m residents, equivalent to a registered user, and has been around since 1999).

In addition to these branded launches, a number of companies are bringing a portfolio of asian MMOGs to the West, including K2 Network, IGG, Acclaim, Aeria and OutSpark.

Startups looking to launch a single title MMO in this environment should think carefully about their player acquisition strategy, and how they will be able to stand out in an increasingly crowded environment. It is not enough to simply build a better product. With such a plethora of choice available, your users may not even get to try you to discover how much better you are. Smart approaches may include explicit plans for viral growth, particular expertise in user acquisition, targeting a less saturated demographic or genre, and novel channel strategies. But the best teams will always find a way to be successful in even this highly competitive environment.

Litigation as a negotation strategy November 7, 2007

Posted by jeremyliew in business models, litigation, media, startup, strategy.
6 comments

Andrew Bridges of Winston Strawn recently spoke to a number of Lightspeed‘s portfolio companies about how to best manage IP, copyright and trademark risks. Andrew is a highly regarded litigator who has been the lead counsel in a variety of notable intellectual property cases, including involvement with the Morpheus, Napster, Grokster, ReplayTV, Rio MP3 player and Clearplay cases. Afterwards, I email interviewed him about how some big media companies use litigation as a negotiation tactic.

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Jeremy: Great seeing you this week Andrew. I heard great feedback from a number of portfolio companies on your presentations about copyright and trademark law, especially from the social media and user generated content folks. I was really interested in your comments about difference in mindsets between Hollywood and the Valley, and how some big media companies are using litigation as part of their arsenal of negotiation tactics. Viacom’s suit against Youtube of course comes to mind, as well as Universal’s against Veoh. What are some other high profile example that you can think of, and to what extent do you think they are a genuine attempt to get injunctive relief and stop a technology company from doing what it does, versus simply increasing the pressure for a negotiation?

Andrew: I think one recent example of this was Warner Music Group’s lawsuit against Imeem. WMG sued Imeem although the two companies had been negotiating an agreement for a while, and even after Imeem had announced its impending implementation of a filtering solution from SNOCAP. There’s a famous saying of von Clausewitz: “War is the continuation of diplomacy by other means.” Translate “war” to “litigation,” and “diplomacy” to “negotiation,” and the phrase describes some Hollywood attitudes.

One common strategy by media companies is to send woefully deficient DMCA notices, or not send any notices at all, and then sue a company for hosting or pointing to allegedly infringing materials. The copyright holders claim that the notices are unnecessary because the defendants blew the DMCA safe harbor, yet they don’t take advantage of easy tools for limiting infringement. Seems suspicious, don’t you think? Their actions suggest that they are not just looking to eliminate infringement, but for something else. Sometimes they are looking for immediate negotiation advantage to press to a quick conclusion. At other times they are designed to set up catastrophic damage claims so that they can secure favorable revenue shares, equity stakes, and so forth.

There are several of those cases pending right now.

Jeremy: Interesting. So in a sense it’s a privilege to be sued since it indicates that the media company thinks you’ll be the winner and want to push to a quick and profitable agreement with you? Would you say that some companies are more aggressive than others using this tactic?

Andrew: Being sued sucks. People who welcome it for the publicity change their minds very quickly once they discover all the disadvantages. But I do think that there is a parallel between being a litigation target and being deal-worthy. Hollywood is hit-driven both in its content and in its deal making. Labels and studios don’t want to waste time doing deals with insignificant companies, and they aren’t likely to sue companies they consider insignificant. When a company gets enough traction, it will attract the attention of both the dealmakers and the litigators at about the same time. For that reason, companies with disruptive business models who want to do deals with Hollywood need to accept a certain amount of litigation risk.

Universal Music Group is a very aggressive litigator. Look at the lawsuits brought by both Veoh and Divx against UMG. The suits are for “declaratory judgments”. Typically, it’s only companies that have been threatened with litigation that bring that kind of lawsuit. They are seeking declarations of non-liability, to clear the air without waiting for the threatening party to sue. The Supreme Court has made it easier for threatened companies to bring this kind of lawsuit. The availability of declaratory judgments curtails the ability of companies to make heavy-handed threats, intended to paralyze young companies and their investors, without ever actually following through and putting their claims to the test.

Jeremy: So at what point does it make sense for a startup to consider seeking a declaratory judgment? Is winning a declaratory judgment a “hall pass” that protects you against being sued by any similar company, or just the company that you’re suing? Both Voeh and Divx are well funded (in Divx’s case public) companies with very meaningful user bases. Does it only make sense for companies at that stage? And what are the costs of seeking a declaratory judgment through litigation?

Andrew: A declaratory judgment only protects you against the company you sued. However, it may cause other companies to take notice and temper their activities. Generally speaking, a startup should file a suit for a declaratory judgment only when (a) you’re certain you’re going to be sued and you want to choose the location of the suit by filing first, or (b) you can’t stand the paralyzing effect of a threat that won’t go away any longer and want to get the issue resolved sooner rather than later.

All this sort of litigation expensive, with costs over the full course of a case usually in the millions. Sometimes it is the burn rate, rather than the total cost, that is the important factor. For instance, Napster faced a preliminary injunction to shut the company down before trial. The fight to stop that was fierce and costly. When I was defending StreamCast (Morpheus) in the Grokster case, we filed a very early summary judgment motion to preempt the other side’s ability to seek a preliminary injunction. That worked to our favor. But the judge in that case then set the case on an impossibly fast schedule that required a brutal burn rate. Litigation is very much like war. Think about the failed predictions in Iraq. It’s an instructive exercise.

Jeremy: It doesn’t seem like there are any easy choices here. It seems like there are plenty of examples of startups that didn’t play this right and ended up going out of business. Are there any examples of startups that you would point to as people who played it right? Ideally folks that have seen an outcome, rather than stuff that is still in flight.

Andrew: The biggest and best examples weren’t startups: they were Sony in its introduction of the Betamax, Apple in its introduction of on-board CD burners (remember Rip. Mix. Burn.?), and Diamond Multimedia in its introduction of the Rio MP3 player. They faced down either litigation or some pretty heavy threats. Google has gone from startup to giant before our eyes, and it has carried litigation risk throughout, while being careful to articulate its legal justifications and enormous societal benefits for its technologies and business models. I think Google has to be counted as a major success whatever happens with its various pending cases. Among the very new companies I think Imeem has shown that it can be eager for deals while being prepared to defend itself vigorously if attacked. The recent declaratory relief cases by Veoh and Divx may show that a tide has turned — but only time will tell.

Facebook’s ads and standards in social network advertising November 3, 2007

Posted by jeremyliew in advertising, facebook, social media, social networks, strategy, widgets.
4 comments

Facebook is launching its new ad platform on Tuesday at ad:tech.

Mashable quotes Silicon Alley Insider with reports on one element of the launch:

Facebook is reportedly launching Pandemic, which is a program for advertisers to buy pages. It looks to be somewhat like a sponsored page system, and will offer an additional option for sponsored groups that advertisers can set up. The sponsored pages will have games and other applications that users can interact with.

More coverage from Venturebeat

Techcrunch says that there is more to the platform:

Project Beacon

Beacon is the internal project name at Facebook around an effort to work with third parties and gain access to very specific user data. An example may be a purchase of a book or DVD from Amazon. Under Beacon, the fact of that purchase will be sent to Facebook and automatically included in the user’s News Feed.

At the point of sale on the third party site, the user will see a “toast” popup asking them if they approve the sale information being included in their Facebook News Feed:

facebook beacon

The feed information includes the user name, what they did (bought something), what they bought, and where.

Both sound like exciting innovations. These new forms of advertising will help close the gap between the % of time spent on social networks and the % of ad dollars spent on social networks. It is inevitable that there will be a large advertising market for social networks

To understand if there is an advertising model for social networks and their widgets, you have to ask two questions:

1. Is this a mass market medium?
2. Is there value to an advertiser in having a user willingly affiliate herself* with their brand?

* e.g. Friending Scion in Myspace, or joining an “I love my ipod” group on Facebook, or skinning their personal photo slideshow with a Casino Royale theme on Rockyou.

The answer to these questions is clearly “Yes”. Based on that, I’m confident that we’ll see a large new form of advertising emerge over the next few years. Exactly when that occurs will largely depend on how quickly the big advertisers and the big social networks and widget companies can arrive at a standard for what form this social network advertising will take.

However, as I’ve noted in the past, new forms of advertising are hard. Before the ad market can really grow rapidly, there needs to be a standard for advertising across the social networking industry. When such standards exist, ad salespeople only negotiate price. When they do not, they also have to explain and negotiate the ad unit itself. That means that you’re doing business development, not ad sales, and making each ad campaign custom simply isn’t scalable.

Facebook’s new ad platform announcements will be a great step forward for the social networking advertising market, but they are only a first step. Only if and when the rest of the social networks embrace these ad formats (in the same way that they are embracing Google’s Open Social standard) will we start to see real scalable ad sales growth. Facebook, as important as it is, is only one player in the social network ad sales market.

Why did Myspace join OpenSocial? November 2, 2007

Posted by jeremyliew in business models, distribution, facebook, myspace, open social, platforms, social media, social networks, startup, strategy.
6 comments

Yesterday was a very good day for app developers with the official launch of Open Social. A particularly good day for Flixster (a Lightspeed company) which was on stage with MySpace, Google, Ning and others for the launch, and was the sample app used in many of the demos.

With so many platforms opening up, resource constraints are the key problem for many app developers. There are plenty of great opportunities, but they don’t have enough people to pursue them all. They are forced to make choices and prioritize.

Open Social helps a lot in that you can “learn once, run anywhere”. While it isn’t “write once, run anywhere”, the resource commitments required to support multiple social networks are much lower. As Andreessen notes:

As an app developer, you have three options:

* You can write purely to the Open Social API. If you do this cleanly enough, your app will run unchanged in any compliant Open Social container. (Google is actually not making this claim — they’re calling Open Social “learn once, write anywhere”, which is not the same as “write once, run anywhere”. But in practice, the API is simple enough that “write once, run anywhere” should work just fine.)

* You can write an app that is specific to one container. For example, there may be some apps that make sense only in LinkedIn — business-related apps, say. There may be other apps that make sense only in Ning — apps that presume that users are creating their own social networks, say. And there may be yet other apps that only make sense in Salesforce.com, which will also be an Open Social container. In those cases, you are targeting your app to one specific container, and so using whatever additional APIs that particular container provides, in addition to the Open Social APIs, is a no-brainer.

* Finally, you can write an app that behaves differently depending on which of several containers it’s running in. Your app just discovers which container it’s running in, and then does whatever it wants on a per-container basis.

No standard can possibly anticipate all of the different use cases and scenarios people will think up. Standards that try to anticipate all of the different use cases fail, because they are too complex and generally impossible to implement. Standards that standardize behavior that is clearly standard, while leaving open the ability to innovate on top, succeed. The history of this kind of thing is quite clear, and Open Social is on the right side.

For smaller social networks, joining Open Social is a no brainer. But MySpace is big enough that app developers would have written for its platform regardless of whether or not it was part of Open Social. So why did they join?

It comes down to the competition for app developer’s time and resources. In the few months since Facebook opened up its platform, Myspace has seen its lead eroded from being 3x as big to just 2x as big. Facebook was winning more users, and more share of user time, because app developers were adding new features to the Facebook experience much faster than Myspace could do on its own.

If Myspace had stayed out of Open Social, there would have been three platforms competing for developer time. By joining, there are now only two, and one (Open Social) provides potential access to far more users than the other. More developer time would be spent on Open Social, and MySpace would benefit more from the improved rate of innovation.

MySpace also knows that it can win more developer mindshare relative to other participants in Open Social if they help the developers make more money. It has a better developed sales force and ad network than many of the other participants, and if it opens up access to that salesforce to app developers, then you’ll see even more developers focusing even more of their time on Myspace (at the expense of Facebook and the other Open Social participants). If they were to go so far as to guarantee a minimum CPM for “canvas pages” on Myspace, then they’d see a surge of developer interest.

This will require a significant mindshift for Myspace which has traditionally not wanted other companies to monetize pageviews within Myspace, let alone helping them monetize. If they make the shift, MySpace will not have given anything up by joining Open Social. Rather, they will have gained something. They will be the place that app developers can make the most money, and hence be their first priority. The increased stickiness and loyalty to Myspace will accrue to Myspace alone.

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