How to measure how well an online media company is scaling. December 8, 2009
Posted by jeremyliew in Consumer internet, Digital Media, Internet, media, start-up, startup, startups.5 comments
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?
New Media companies should emphasize “media” over “new” June 29, 2009
Posted by jeremyliew in advertising, business models, media, startup, startups.5 comments
AdAge has a good article today about how AOL has been attacking web publishing where it notes:
In the heady days of early 2000, the megamerger of AOL and Time Warner heralded the web-based future of publishing. It would create a digital platform for Time Inc., the biggest, most-prestigious magazine group in the world.
Needless to say, that didn’t pan out, and here’s where it gets ironic. Just as Time Warner is unwinding that mistake, AOL is figuring out the future of magazine publishing on the web. And it’s doing so without Time Warner’s content assets.
The model goes something like this: Find a vertical with an audience attractive to advertisers, brand it (Daily Finance, Asylum, Lemondrop, Politics Daily), hire five to seven people to run it and plug in AOL’s traffic fire hose. Repeat.
This reminded me a little bit of the continual tension in media companies caused by serving two constituents – readers and advertisers. AOL has clearly discovered one path to repeatable success, which is to start with the needs of advertisers. This is emphasizing the “media” part of new media.
The new media companies that are doing the best in this recession have taken a similar approach. Companies like CafeMom, Flixster (a Lightspeed portfolio company) and Glam have focused on creating highly valuable inventory for endemic advertisers, and on building excellence in sales execution.
In contrast, some other startups have focused on the “new” part of new media. They have often created incredible compelling experiences for users, and have generated impressive traffic. But their monetization ability has lagged; sometimes due to creating inventory that is hard to sell, sometimes because the startu’ps culture is not inimical to ad sales.
Here in Silicon Value there can be a tendency to overemphasize product and technology and underemphasize ad sales. Advertising revenue often scales with ad sales people. Yet I have seen some startups that have been disappointed with their revenue growth but have >10% of their employees focused on revenue.
Like AOL, new media companies should remember that they are also media companies, and organize themselves appropriately. This can include doing things like:
– Building traffic with a consideration for your ability to package and sell it to advertisers
– Placing significant company and senior management attention on revenue. This can mean up to 30-50% of employees working on revenue generating activities
– Adding advertising sales expertise and contacts to the management team
– Being flexible about tradeoffs between advertiser needs and user needs
Many new media companies based outside of Silicon Valley (especially those in New York) grasp this innately.
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For more in this vein read two prior posts; on the preeminent importance for sales excellence in ad networks, and on the three ways to build an online media business to $50m in revenue.
Mass customization drives online-offline hybrid business models November 12, 2007
Posted by jeremyliew in business models, Ecommerce, media, offline, start-up, startups, user generated content.11 comments
I’ve noted in the past that some online and offline distinctions are starting to blur. Some companies are finding that the easiest way to monetize their content is to turn bits into atoms and sell the atoms – people are willing to pay for things in the real world that they would never pay for offline.
There seem to be three major approaches to combining online and offline:
1. Single order custom manufacture
Over the last ten years manufacturing processes and technology have improved to the level where it is now possible to make single items on a custom basis. This has spawned a lot of the convergence in online and offline business models.
There has been the most activity in the market for photo books, including Apple, Shutterfly, Picaboo, LuLu, Blurb, Mypublisher and many others.
Zazzle, Cafepress and Spreadshirt take a similar approach to selling custom printed T-shirts, coffee mugs, mousepads and more.
A more collaborative example is Tribbit. Tribbit mirrors offline behavior by allowing multiple users to build and “sign” a group online card, which can then get printed out and presented to the recipient – in effect a group contributed photobook.
All of these examples are focused on user generated content. But rather than using user content, Tastebook, backed by Conde Nast, lets you choose from an extensive collection of recipes to create a customized cookbook. Techcrunch says:
TasteBook is a service that lets users take their favorite recipes from partner sites (starting with Epicurious) and create printed cookbooks that are delivered to them and/or friends. Users can add their own recipes as well, and customize the book with their name and other information.
2. Small order custom manufacture
Occasionally, one of the problems that can occur with single item custom manufacture is that the processes used for single items can result in lower quality. This is definitely true of T-shirts – many of the custom T-shirt sellers mentioned above have an “iron on” quality to them. The only way to make a high quality T-shirt with a silk screened print at a reasonable cost is make a batch.
Threadless takes this approach to it’s T-shirts. They have done a great job of building a community online, soliciting T-shirt designs, winnowing out the best designs for production through community input, and making batches of these shirts. This way they keep quality up, keep costs under control, and minimize inventory risk by selecting only to make T-shirts that are likely to sell out.
JPG Magazine takes a similar approach to the issues of its magazine. JPG is a physical magazine focused on photography. It solicits all its photos and articles online and its online community helps determine what gets printed. In a world where a new magazine launch can cost $40m before breaking even, JPG got to profitability at vastly smaller scale. A sister magazine focused on travel, Everywhere, has its first publication on Nov 27th.
3. Tying an online experience to an offline purchase
Whereas many of these companies start with an online experience and drive to an offline transaction, Webkinz starts with the offline transaction, and drives to an online experience. They have been able to draw synergies from their online casual immersive world and their physical plush toys and have sold millions of their toys to date. Barbie has had similar success with it’s online casual immersive world Barbie Girls which hit 3 million users in the first 60 days.
Another example is Hidden City, which was recently funded for a a horse themed trading card game aimed at little girls; each card unlocks a digital horse avatar online that girls can play with. The founder was behind the megahit trading card games Pokemon and Magic: The Gathering; he is clearly evolving with the industry as casual gaming moves online.
Conclusion
I expect more innovation in this area of combining online and offline business models. I am actively interested in meeting companies taking this approach. Let me know if you know of more!
How bad is web video for TV? November 9, 2007
Posted by jeremyliew in media, video.1 comment so far
Via NewTeeVee, the Freakonomics blog asks, “Is web video really hurting TV?”
Read the whole thing, but in summary it says that entertainment consumption isn’t zero sum. A study of typical web video viewers found that they watched 4 hours of video online but only reduced their TV watching by about half an hour. Most of what they watch online they wouldn’t have watched on TV, and in some cases, watching a preview or single episode online prompted them to watch more of that show on TV.
If this is true, then it suggests that if the right ways to monetize online video can be found, then we may see media companies stop suing internet companies.
It definitely makes the writers strike over new media royalties seem more understandable.
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.
Big companies have led the latest surges in virtual worlds October 11, 2007
Posted by jeremyliew in gaming, media, virtual worlds.1 comment so far
Virtual worlds are big and will continue to grow – over $1bn has been invested in 35 virtual worlds in the last year. A recent eMartketer report on virtual worlds notes that:
eMarketer estimates that 24% of the 34.3 million child and teen Internet users in the US will use virtual worlds on at least a monthly basis in 2007. By 2011, 53% of them will be going virtual.
Argueably, virtual worlds will become one of the dominant forms of online communication, supplanting email for this demographic, just as social networks have done.
Virtual World News notes in an interview with eMarketer Senior Analyst Debra Aho Williamson:
“I think we may well see a growth trajectory similar to what we’ve seen for social networking,” continued Williamson. “Virtual worlds can be an addictive, immersive, compelling environment. They offer a lot of things for kids and teens to do. Just over half of kids and teens will visit virtual worlds at least on a monthly basis by 2011. Already you’re seeing session times of a half hour, an hour, and ten hours a month. 2008 and 2009 are where the growth is slightly bigger than ’10 and ’11. You’ve got other media companies jumping in the game. Disney is getting aggressive. MTV and Nick are getting very aggressive. Right now what we’re seeing is a lot more development activity and figuring out how a virtual world fits into media assets. I think as we get into ’08 and ’09 is when you see a lot of traction.”
The Alexa graph below shows that Williamson’s observation about big companies jumping into the game is spot on:
Barbiegirls signed up 3 million members in the first 60 days – it took Second Life 3 years to hit the same metric. Some say that Webkinz is pulling users from Club Penguin. And IAC is driving massive growth for Zwinktopia, as they noted in their Q2 2007 earnings call:
Zwinky.com now has over eight million registered users, spending on average 64 minutes on the site each session. The recent April launch of the Zwinky Virtual World, Zwinktopia, has led to over 15 million transactions using the Zwinky virtual currency called Z-Bucks. In addition to monetizing through search, there are clearly e-commerce opportunities with Zwinky, as well.
Two of these companies are using offline channels to drive online growth, and many other companies (including MTV, Disney etc) will be taking the same approach. While the incumbent virtual worlds like Habbo and Gaia are unlikely to be threatened, I wonder if bigger companies, using their distribution muscle to get out of the gate quickly, will make it harder for new virtual world startups. What do you think?
