How to measure how well an online media company is scaling. December 8, 2009Posted by jeremyliew in Consumer internet, Digital Media, Internet, media, start-up, startup, startups.
Two years ago I posted about the three ways to grow an online media business to $50 million in revenue. In this article I focused on RPM (Revenue per thousand pageviews, = CPM x sell through rate x # of ad units per page) and drew the distinction between three strategies, and the traffic needed for each strategy to get to scale:
1. Broad Reach, low RPM, traffic in the 10s of billions of pageviews/mth
2. Demographic Targeting, moderate RPM, traffic around 1 billion pageviews/mth
3. Endemic Targeting, high RPM, traffic in the 100s of millions of pageviews/mth
I think using CPM/RPM in this is a useful framework to think about strategy, but it isn’t necessarily the most useful way to think about howe well an online media business is scaling. In practice, most online media companies do not sell out their inventory through direct sales. Because direct sales generates RPMs so much higher than remnant inventory running through ad networks, the amount of direct sales is key.
Direct sales shows real economies of scale. While it is harder and more expensive to sell, support and serve a $1M insertion order than a $10k insertion order, it doesn’t cost 100 times more. Unfortunately, many media startups find that their campaigns are primarily in the 10s of thousands. This creates inefficiency and makes it difficult to scale. It is hard to get to $50M in revenue $10k at a time.
Right now, the key measure that I use to judge how well an online media company is scaling is by looking at quarterly revenue by advertiser. The more advertisers are spending over $100K per quarter the better. I like to see 10 or more advertisers spending over six figures per quarter. This shows that the site has grown beyond “experimental buys” and has become a core part of the advertising mix for a core set of advertisers. These sites are over the hump on scalability of their business as it is much easier to get repeat business from clients who are committed to the site, and to use these reference accounts to drive further sales growth.
What do readers think about this measure of how well an online media company is scaling?
Reducing (pricing) friction March 12, 2007Posted by jeremyliew in Consumer internet, Digital Media, Ecommerce, Internet, start-up, startups, VC, Venture Capital, web 2.0.
Josh Kopelman has a good post this weekend about the friction between free and one penny when charging consumers for goods that can be delivered digitally (e.g. articles, video, music, information etc). As he points out, price elasticity is not constant as price changes, but rather there is a huge step function (downward) in demand between prices of free and one penny.
A good example of this is the downloadable casual gaming space. The industry has standardized to a price point of around $20 for the unlimited version of a downloadable game. On average the industry realizes conversion rates of about 1% between the free (limited play) version and the pay version. Why do they not charge less and make it up in volume – after all variable costs are close to zero? Emperical testing has shown that price elasticity is relatively low once someone has decided to pay to play a game. The key friction point is between free and one penny.
Josh provides some different examples in his post which I recommend reading.
Three ways to build an online media business to $50m in revenue February 26, 2007Posted by jeremyliew in advertising, Consumer internet, Digital Media, Entrepreneur, Internet, start-up, startups, user generated content, VC, Venture Capital, web 2.0.
As a venture capitalist, I’m interested in investing in companies that could be big one day, that could get to at least $50m in revenue.
Here are three ways to get to $50m in revenue as an online media business; indulge me in some math:
1. Be a site with a broad reach (say general social networking, communications, news). At large scale, without a great deal of targeting possible, a startup’s “run of site” or “run of network” advertising might be able to get to the $1 RPM range (Revenue per thousand impressions, including CPM, CPC, and CPA models). To get to $50m in revenue you would need 50 billion pageviews in a year, or just over 4 billion per month. According to Comscore, Bebo had the 10th most Pageviews in the US in Janurary 1007, with 3.4bn, so you would need to be bigger than that.
2. Be a site with demographic targeting (say a Latino portal, or a sports site (targeted at men) or a social network targeted at baby boomers). Although in TV and in magazines, demographic targeting can generate double digit CPMs, online at scale, RPMs tend to be in the low single digit range. Lets assume a $5 RPM. To get to $50m in revenue you would need 10 billion pageviews in a year, or just over 800 million per month. According to Comscore, Microsoft had the 22nd most Pageviews in the US in January 2007, with 792 million, so you would need to be bigger than that. [Microsoft isn’t a demographically targeted site – i just use it as a comparison point for overall traffic size.]
3. Be a site with endemic advertising opportunities (say a site about movies that movie studios will want to advertise on, or a site about cars that auto manufacturers will want to advertise on, or a site about travel that hotels and airlines and online travel agencies will want to advertise on). If you have a highly targeted audience that is interested in buying a specific product, you can command RPM’s well into the double digits. Lets assume a $20 RPM. To get to $50m in revenue you would need 2.5 billion pageviews in a year, or just over 200 million per month. According to Comscore, Adelphia.com had the 125th most Pageviews in the US in January 2007, with 198 million, so you would need to be bigger than that. [Adelphia isn’t an endemically targeted site – i just use it as a comparison point for overall traffic size.]
Admittedly, all these Comscore #s are US only, and all businesses will have international traffic as well, but the principle still holds.
Which do you think is easiest?
UPDATE: If you liked this post you will likely like my prior post on why new forms of advertising are hard
UPDATE II: To all new visitors, if you like what you read, subscribe to the Lightspeed Venture Partners blog RSS feed. Its at the bottom of the Right Hand Side column. We post 2-3 times per week on topics including consumer internet, web 2.0, lead gen, ecommerce, startups and venture capital.
UPDATE III: I’ve posted more on the difficulties in building a media business to $50m in revenues here.
New forms of advertising are hard February 19, 2007Posted by jeremyliew in advertising, Consumer internet, Digital Media, Internet, Lead gen, Search, start-up, startups, web 2.0.
I’ve seen a few startups recently that are relying on launching a new form of advertising as their business model. These can include product placements, sponsorships of various flavors, new forms of local advertising, interactive out-of-home advertising, and lots of variations of mobile advertising. This is a hard business. If successful, it can be very, very successful (e.g. Overture/Google with sponsored links in search) but entrepreneurs often underestimate how long it will take for revenues to ramp.
To understand how new forms of advertising get adopted, you need to understand how advertising is bought today. In most instances, ad agencies control the ad budgets for the largest advertisers in the world. Within those ad agencies, one of the functions is media buying. A media buyer’s role is to optimize reach (and sometimes quality of audience) for their client across all possible advertising channels. The problem with new forms of advertising is that they are often not represented in the media buyers’ spreadsheets and models. And if it’s not in the model, it doesn’t get allocated any ad spend.
Startups sometimes get traction with a new form of advertising because there are always some forward thinking advertiers who are willing to experiment. This early traction is often a customized program negotiated with an advertiser that is friendly with the startup through personal relationships. However, crossing over from a “business development” focused model (where each new deal is custom crafted) to an “ad sales” focused model (where standardized products are sold off of a rate card) is the key to massive scalability of revenues. To do this you need to get into the media buying model; you need to sell a standardized product.
For internet companies, that usually means that you need to get the IAB (Internet Advertising Bureau) to issue a new “Standard” ad unit, in much the same way that the IAB issued its first set of “voluntary guidelines” that set up 8 standard banner ad units in 1996, a massive reduction from the over 150 ad sizes that were in use at the time. This standardization greatly eases logistical complexity for both advertiers and media companies.
The process of creating a new standard can be quite a lengthy one. It usually involves a coalition of both media companies and advertisers coming together and negotiating the key elements of the standard. The composition of the IAB board is usually dominated by larger online media companies and it can be hard for a startup to have much influence on this decision making process. It can often be easier to align youself with the interests of a larger media company and let them carry the water up the hill, rather than trying to do it independantly as a startup. If you’re Dogster, you’ll have less success pushing a new standard for “sponsored profiles” than MySpace/FIM or AIMpages/AOL. So making sure that your sponsored profiles packages contain the same elements as those of the big guys will make your life easier as they take this new ad unit through the standardization process
The alternative approach is to make sure that your new form of advertising so closely parallels an existing standard ad unit that it can be considered within the existing bucket. 30 second online video ads (same format as TV),online leads (similar to phone leads) and new variations of CPC advertising (similar to search) have all been “close enough” to an existing ad unit that they have been able to tap existing ad budgets and grow quickly.
In either case, when building business plans on the assumption of the adoption of new ad units, make sure you give yourself enough time in your plans for the market to be created before it can grow to scale.
What to do if you are a platform with two-sided network effects February 9, 2007Posted by jeremyliew in Consumer internet, Digital Media, Ecommerce, Entrepreneur, Internet, start-up, startups, VC, Venture Capital, web 2.0.
I subscribe to Harvard Business Review but rarely read it – the long articles intimidate me! However, a friend of mine recently pointed me to a fantastic article in the October 2006 edition entitled “Strategies for Two-Sided Markets” by Thomas Eisenmann, Geoffrey Parker and Marshall W. Van Alstyne that is well worth reading.
The article addresses a common phenomona in technology, where a platform brings together two groups of users, each attracted to the other group. Examples might include Ebay (bringing together buyers and sellers), Monster (bringing together job seekers and employers), Youtube (bringing together video posters and video watchers), even Gaming Consoles (bringing together game developers and players). The article discusses all such platforms, but I found the most interesting cases to be when members of both groups want to be part of the platform where there are the most members of the other group, or “cross-side positive network effects” in the parlance of the article.
The article answers two critical questions to owners of such platforms:
Who do you charge?
In a two sided market, you can charge one side or the other, or both. Typically platforms end up charging one side (the Money side) and subsidizing the other.The article suggests that there are six guidelines in making this decision, some more obvious than others. I’ll highlight three of them here:
Subsidize the more price sensitive side. E.g. Adobe gives away its PDF reader for free but charges for Acrobat.
Subsidize the side that is more sensitive to quality (i.e. charge the side that has to PROVIDE quality – and let suppliers use their willingness to pay as a signal of quality). E.g. console game players (PS3, Xbox 360, Wii) demand high quality. Developers pay a high fixed cost to deliver quality so they need a lot of players to make their business models work. They are willing to pay a high royalty and adhere to strict licensing terms to reach those big audiences.
If strong “same-side negative network effects” exist on one side (e.g. if one side would prefer not to see too many others on the same side, such as competitive suppliers), charge that side and possibly limit the number of available slots. E.g. Autobytel gives zip code exclusivity to dealers in a given territory and charges dearly for that limitation
Proprietary or shared platform?
Often in these sorts of markets only one platform will survive because both groups want to be on the platform where there are the largest numbers of the other group. Competitive platforms need to make a “bet the company” decision – to fight to be the winning platform, or to cooperate and share a single platform. The article says that there is typically a single winner if the following conditions apply:
Multi-homing costs are high for at least one user side – i.e. it is expensive to support multiple platforms. This is true in the case of online auctions (if I only have one antique cuckoo clock, it can only list it in one place) and not true in the case of job sites (its easy to post my resume on both Hotjobs and Monster).
Neither side’s users have special needs. If the market can be segmented then different platforms can co-exist, each serving a niche.
High definition DVDs looks like a market that fits these criteria. Blu ray and HD DVD are battling it out to be the winning platform. Typically the winner of such a war of attrition will have (i) Cost or differentiation advantages (longer play times, better image quality) (ii) Pre-existing relationships with prospective users (movie studios) (iii) Reputation for past success and (iv) Deep pockets. Often, because of the confidence of the executive teams in their products and the winner-take-all nature of these industries, competitors will choose to fight. However, cooperating can also bring benefits including a greater overall market size (when standards take longer to emerge many users delay commiting to either platform) and lower overall marketing costs.
The article also addresses questions such as when to be a first mover (and more importantly, when not to be a first mover), and how to deal with envelopment from adjacent platforms (relevant to those facing Microsoft’s “Embrace, Extend, Destroy” strategy). If your company is a platform that faces these “cross-side positive network effects”, I highly recommend reading “the article ”
Pitching a VC: Focus on these FOUR things January 25, 2007Posted by John Vrionis in Consumer internet, Digital Media, Ecommerce, Infrastructure, Security, startups, Uncategorized, Venture Capital, web 2.0, WiMax.
The best part of being a ‘VC’ is meeting passionate entrepreneurs and listening to pitches about how their idea is going to change the world. Since I joined Lightspeed, I’ve found myself meeting amazing people and debating revolutionary ideas on a daily basis.
I’ve had the opportunity to listen to hundreds of pitches and as a former entrepreneur I did my share of pitching. I firmly believe that all great plans highlight the four key areas that are at the heart of every good VCs decision process.
1. Demonstrate you are addressing a Billion dollar plus market. This is the most important thing. If you can’t convince the VC you’re solving a problem in a huge market, you’re dead in the water. Big markets make big companies. Big markets can also hide mistakes. Do the bottoms up analysis. Talk to your assumptions.
2. What is your unfair advantage? Describe this in 30 words or less. Repeat it as many times as you can in the presentation.
3. Does the team have a visionary? VC’s are NOT visionaries. The team has to have someone on it that sees where the opportunity is going to be and can pick the right products to take advantage of that market.
4. What are the capital requirements for the major milestones? VCs want to back capital efficient businesses. They want to understand what the major risks are in the busines, when they can be mitigated and how much money it takes to do it. A simple timeline with milestones compared to cash needs is one of the best slides an entrepreneur can provide.
My final comment. Have fun. Remember — your job is to inspire and compel!
As always, all comments are welcome. Or send email direct to firstname.lastname@example.org