Local has been a category that has long attracted a lot of attention from internet startups. Not surprising given that it is a $130Bn market. Now that Groupon and Living Social (a Lightspeed portfolio company) are growing s0 fast, it is attracting even more attention from startups.
Most of these startups focus on innovating on their product, and aim to have a “sales light” approach.
Usually they start with a self service business model, expecting local businesses to go to the web to sign up for service on their own. They mostly point to Google as the evidence that self service can scale.
I’ve long been skeptical that self service works for selling products to local businesses. From my time at CitySearch in ’96 to today, I haven’t seen this work. In fact, I’d argue that ReachLocal exists as a public company solely because Google can’t get local merchants to self serve. Today, perhaps lost in the holiday shuffle, the WSJ notes that even Google has turned to a call center sales force to reach local merchants.
The Internet-search giant this year has hired several hundred sales representatives to call U.S. businesses such as spas, restaurants and hotels to promote new advertising initiatives, people familiar with the matter said. The effort includes an office in Tempe, Ariz., with around 100 sales representatives, one of these people said.
The other business model that startups attacking local hope to rely on is channel partnerships. Many startups have struck deals with local yellow pages, or newspaper groups, to sell their product too. They have typically been disappointed when sales numbers come in far short of projections. It is hard to get someone elses salesforce to know and care about your product as much as you do, especially when they are used to selling traditional media and not online media.
The winners in this category (Yelp, Groupon, Living Social, Yodle, ReachLocal, CitySearch etc) have all relied on a direct sales force, whether on the phone, or feet on the street, to drive their revenue growth.
If you want to make a business in local online media, you have to control your own destiny and build your own salesforce.
The ’05/’06 vintage of web 2.0 startups took advantage of much lower development costs and faster iteration cycles to build compelling products and sizeable user bases without thinking too much about monetization right away. For companies like Youtube and Facebook, this approach worked incredibly well and led to very fast value creation, often in advance of revenue growth.
One of the hallmarks of some of the current generation of “hot companies” is an early focus on business model and revenue generation. This is a cross genre phenomona, including social gaming companies like Zynga, Playfish and Playdom (a Lightspeed portfolio company), flash sales companies like Gilt, Ruelala and HauteLook, local deals sites like Groupon and Living Social, and subscription businesses like LifeLock or Zoosk. All of these companies have seen revenues grow into the millions per month within 12-18 months of launch, which is a pace that has not been seen from previous generations of internet startups.
The success of Zynga, Playfish and Playdom has been well documented. Zynga is doing 10s of millions in monthly revenue, and Playfish and Playdom in the single digit millions per month, all within 24ish months of launch.
In the Flash Sales category, last July Business Insider said of Gilt:
Yesterday, we reported the impressive success of Gilt Groupe, a two-year old ecommerce company that expects to generate about $150 million in revenue this year…
First, growing from $0 to $150 million in revenue in two years is pretty fracking impressive, no matter how you look at it. That’s way faster than Amazon grew in its first two years, for example. (Yes, the Internet is much bigger now).
The fact that Gilt’s US business is reportedly cash-flow positive is also very impressive. It’s one thing to generate a lot of revenue. It’s another to generate a lot of revenue with enough margin to put the company in the black, which Gilt has reportedly done in the U.S.
Part of the company’s cash-flow generation is the magic of the online sales cash cycle: When you sell online, you often collect cash for your product sales long before you have to pay the vendor you bought the products from. Amazon benefitted heavily from this dynamic in its early days, and was cash-flow positive long before it started to generate net income. But part of the cash-flow success is also the power of the business model.
Gilt thinks it can get to $500 million in revenue next year, which seems plausible. The company is expanding both horizontally into other product categories (it started with fashion, and is now moving into kids, travel, etc.) and other geographies (it already has 20 employees in Japan).
The Economist reported in September that RueLaLa wasn’t far behind:
Ben Fischman, the boss of Rue La La, which started in 2008 and expects to have revenues this year of around $130m, thinks the “theatrical environment” of his site keeps customers hooked. He says retailers became complacent during the boom years and failed to make the most of new technology.
Groupon is on a similar growth path. Since they put the number of sales and price of each day’s groupon on their website, it is relatively simple to estimate their revenue by adding the implied daily revenue across each of their cities. They went from around $100K in revenue in January 2009 to around $10M in revenue in January 2010 – a 100X increase in just twelve months.
Atul Bagga, Internet Equity Analyst at ThinkEquity, recently published a report based on an interview with the CEO of Zoosk where he notes:
Zoosk is a multi-channel global online dating service with presence on major social networks, online, mobile Web, iPhone application, and desktop client with 50 million registered users/14 million monthly unique users, a $2.5 million monthly revenue run-rate (as of October 2009) and a 20% month/month revenue growth. The company expects its revenue to be more than $200 million by 2011.
Of course, not all the current “hot” companies have taken this approach. Some, like Twitter or FourSquare, have seen enormous growth in usage that has outpaced their revenue growth.
But the categories I outlined earlier are all taking advantage of one of Lightspeeds consumer internet predictions for 2010, that direct direct response advertising is getting more efficient. A bad time to sell ads is a good time to buy ads. All these companies are taking advantage of relatively low customer acquisition costs.
If you understand your customer lifetime value, and you can acquired customers for 20-30% of the lifetime value, you are going to make money. Understanding lifetime value is hard for media companies, but it’s easier for gaming companies, ecommerce companies and subscription businesses. They have predictable customer behavior cohorts that can be extrapolated from a few months of data from a representative sample. Running an aggressive positive arbitrage while online media is cheap has allowed all of these companies to grow revenue very fast once they get the micro-economics right.
I get really excited about these types of companies. If you’ve got microeconomics that work like this, email me!
Contrarian viewpoint on the future of newspapers May 8, 2007Posted by jeremyliew in business models, Consumer internet, local, media, newspapers.
Walter E. Hussman Jr., the Publisher of the Arkansas Democrat-Gazette (the major paper in Little Rock), wrote a fascinating opinion column in today’s Wall Street Journal (subscription required) entitled “How to Sink a Newspaper“. He take a contrarian view to the prevailing trend for newspapers to embrace the web and make their content free to drive more online users. Indeed the Newspaper Association of America recently released a report saying that newspaper websites are growing twice as fast as other websites.
Instead, Hussman defends his paper’s practice of keeping the majority of his content behind a pay wall. Because the article require a subscription, let me excerpt a few key passages:
One has to wonder how many of the newspaper industry’s current problems are self-inflicted. Take free news. News has become ubiquitous, free, and as a result, a commodity. Anytime you are trying to sell something that becomes a commodity, you have lost much of the value in providing that product or service….
All of this would be fine if newspapers generated lots of additional revenues from offering free news. But the fact is newspapers generate most of their online revenues from classified advertising, not from news….
It turns out that a Web site is a very different medium from a newspaper. While consumers often find pop-up ads a distraction and banner ads as more clutter, readers often seek out the advertising in newspapers….
Our newspaper, the Arkansas Democrat-Gazette in Little Rock, does not offer our news for free on the Web site. We offer free headlines. On a few selected stories, we offer a few free paragraphs, designed to get people to read our paper. We also offer free classifieds…
So what are we doing with our Web site? We have hired a videographer to complement our text coverage in the newspaper. We have added photo galleries to increase the number of photographs beyond what we can publish. We offer an electronic edition where you can search the entire edition by keywords, something you can’t do in the print edition. And we offer breaking news email alerts, something else you can’t do in print. In other words, we are offering value on our Web site that complements, rather than cannibalizes, our print edition.
Collectively, the American newspaper industry spends $7 billion on news and editorial operations. This includes everything from copy editor salaries to sports travel expenses. In addition, the Associated Press spent about $600 million world-wide in editing and creating news. By offering this news for free, and selling it to aggregators like Google, Yahoo and MSN for a small fraction of what it costs to create it, newspaper readership and circulation have declined.
…it is not just the newspaper industry that gets hurt. Journalism will be diminished in America with less investigative and enterprise reporting; indeed, less reporting of state houses, city halls, school boards, business and sports. Clearly a lot is at stake.
It is time for newspapers to reconsider the ultimate costs and consequences of free news.
Hussman provides some data to back up his contentions, citing growth in his newspaper’s paid circulation against industry wide declines, and showing relatively better performance than the Columbus Dispatch (a comparable paper) in the 6 months after the Dispatch switched their website from free to pay.
Before reflexively dismissing Hussman as an old media dinosaur that “just doesn’t get it”, its worth while considering another newspaper transaction that is in the public eye, News Corps bid for Dow Jones and the Wall Street Journal. Since Murdoch bought MySpace, a move that earned him first ridicule, then praise, it is hard to accuse him of being an old media dinosaur. And as Hussman points out about the WSJ online, it has almost one million paying subscribers, more than all but three US newspapers (USA Today, WSJ and NY Times). Even the opinion piece that I’m quoting can’t be read unless you’re one of these one million!
Hussman gets to the core of an important point, but I disagree with him on the nuances. I don’t think that news has become a commodity because newspapers make it free. Rather, I think that news is free because its a commodity. In a world of wire news, where you read the story hardly matters. For most breaking news, a rewrite of a wire story by a staff reporter is not enough to differentiate one newspaper from another. One could argue that the wires shouldn’t sell to outlets other than newspapers, but that cat is well and truly out of the bag.
The important thing that allows papers like the WSJ, and like the Arkansas Democrat-Gazette, to continue to charge for subscription is that the content that they have is NOT a commodity. The journal covers business news to a depth and breadth that no other US paper does. It adds insight and analysis. What you read in the journal you often CAN’T read elsewhere. Similarly, I imagine that readers/subscribers of the Democrat-Gazette online are not turning to it for news on Iraq or the election, or topics that are well covered elsewhere, but rather news about local issues in Little Rock and in Arkansas that are NOT covered elsewhere. Its the local paper’s coverage of local news that allows it to hold its audience – not its coverage of commodity news.
What this gets to is one of the core premises of business – find your unfair advantage. For now, the Journal and the Democrat-Gazette have an unfair advantage; for the former in the coverage and analysis of business news, and for the later in coverage and analysis of Arkansas news. One could argue that over time these too could come under threat from bloggers both national and local, but for now their news is worth a premium. (As an interesting aside, the free daily BostonNow is now including some local bloggers in its print edition.)
The advice I would give to Huffman would be to take all the rest of his content, the commodity news (International, National, Business etc) and put that outside the pay wall and see what happens. He might be pleasantly surprised.
Comments on Insider Pages sale to CitySearch March 1, 2007Posted by jeremyliew in advertising, Consumer internet, Internet, local, user generated content, web 2.0.
There is lots of coverage today of the acquisition of Insider Pages by CitySearch. My first job in the internet industry was at CitySearch, in 1996, and some of the lessons I learned about how difficult it can be to build an online local media company have been seared into my brain.
In 1999 CitySearch bought Microsoft’s struggling Sidewalk cityguide business so this is not the first time that it has acquired a competitor. CitySearch is the dominant online cityguide business today, but it hasn’t all been beer and skittles along the way. Although quite profitable now, some have quoted that over $200m was invested into CitySearch before it ever turned cash flow positive.
There are two reasons that the online cityguide business is difficult.
The first is that the cost of building fresh, high quality local content is quite high, especially if it is done by professional editors. The new generation of online cityguides (Yelp, Insider Pages, Judy’s Book as well as CitySearch itself, Google, Yahoo and Ask, have all been addressing this problem by turning to user generated content over the last couple of years. While some models (Yelp in particular through its use of social networking incentive mechanisms) seem to be better tuned for producing high quality user reviews at volume and at low cost, this problem seems to be solvable.
The second problem is the cost of sales problem. This is a harder problem. An outside sales force tends to be too expensive a channel to use to sell online local advertising given average price points and churn rates. (It can work for high end advertisers, and for cross selling to local advertisers who already advertise in another medium).
The self service model that works so well in search advertising is harder to implement in local advertising. Unlike in search, there is often no clear link between advertising and transaction in the local space. Despite your best efforts of tracking, the vast majority of local offline transactions can’t be tracked back to a marketing source (whether online or offline). This makes self service CPC models difficult to implement for local merchants. (There has been some innovation on cost per call models and lead gen models in this space). Furthermore, many local merchants don’t have the time, nor the inclination, to actively manage their marketing budget. They prefer a predictable flat monthly fee. This also works against the mindset of many self service models.
This leaves inside sales (telemarketing). Most local online companies have settled on this model. The key challenge in local ad sales is always “getting to the decision maker”. The owner of a local business is often very busy, and talking to sales people on the phone is not high on their list of priorities. This is a viable sales channel, but it isn’t easy. Companies that have an advantage in their ability to get to the decision maker will find the most success in selling to local merchants. This is not about the value proposition of variable costs vs. fixed costs – you need to get to the decision maker to even be able to make that distinction! As this problem hasn’t changed much in the past 10 years, this isn’t about better sales training or tactics, but usually requires some fundamental shift in the marketing/sales message.
Insider Pages has healthy consumer traffic (2m UU/mth according to Comscore), a strong management team and reasonable review density across the verticals that it focused on (mostly services). Although I have no Insider Pages Insider Information, I suspect that it ran into trouble on the cost of sales problem. CitySearch can likely help with this issue given its scale and experience in the space.