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2011 Consumer Internet Predictions December 3, 2010

Posted by jeremyliew in 2011, advertising, Consumer internet, Ecommerce, ltv, mobile, predictions, social games.
22 comments

Once again Lightspeed is going on the record with some prognostications for what the future holds. Before I try gazing into my crystal ball to see what 2011 will bring for the consumer internet industry, let me first see how I did on last years predictions:

1. Social games overflow out of Facebook

Grade: C+. While the amount of social gaming on other social networks, especially the Asian networks, has significantly increased over the course of the year, the vast majority of social gaming still takes place on Facebook. While Farmville.com now has 6M UU/month, this is still only 10% of the number playing Farmville on Facebook.

2. Brand advertising starts to move online, boosting premium display, video and social media

Grade: A. The recovering economy has really boosted brand ad budgets in 2010, with online ad spend back to setting records again. Automotive and CPG in particular are both seeing significantly increased online budgets. The online video networks are doing terrific business, and even Yahoo is benefiting from increased brand spend, seeing revenue growth for the first time in a while. Many brand advertisers are spending their experimental budgets widely in social media as they attempt to figure out how to promote themselves through Facebook, Twitter, Foursquare and other platforms. The key driver of this renewed confidence from brand advertisers is better measurement of brand metrics that can show the impact of online advertising beyond clickthrough.

3. Direct Response Advertising becomes ever more efficient

Grade: A. According to Adsafe, approximately half of display advertising inventory is now moving through exchanges, Demand Side Platforms (DSPs) and realtime bidding platforms, with another 23% moving through Facebook’s self service ads. These platforms are rapidly commodifying a lot of “low quality” ad inventory, enabling the use of data and targeting to find the best use of this inventory, and thereby creating a very efficient marketplace. Direct response advertisers have benefited the most from this transparency.

4. Finding money and saving money online

Grade: B-. Saving money online has been a real driver of ecommerce growth in 2010. The breakout categories of 2010 are Local Deals (Groupon, Living Social* etc), and Flash Sales (Gilt, RueLaLa, HauteLook, Ideeli etc), and both are squarely aimed at helping consumers save money. Finding money online (principally online lending) has not seen the same level of explosive growth in the US, although in Europe and India there has been real growth in microlending (including “pay day loans”) from companies ranging from Wonga to SKS Finance. I think we’ll see more from the online lending space in 2011, so I may just have been too early on that part of the prediction!

5. Real time web usage outpaces business models

Grade: B-. Twitter continues to grow in usage, overtaking Myspace to become the third largest social network in the world. Foursquare and Gowalla have grown too, but off of much lower bases, such that only 4% of internet users currently use a check-in service. Facebook also joined the Location Based Services (LBS) party this year, enabling Facebook places, which some speculate is getting 30M users already. Last year I speculated that monetization would be hard for these businesses since CPM models have traditionally been hostile to user generated content, and local ad sales is an expensive and difficult proposition. But these companies have innovated new monetization models. Twitter, through its Promoted Tweets, Promoted Trends and Promoted Accounts, is not selling media on a CPM basis, but rather selling attention, and the early returns suggest that brands are willing to pay for more attention. Similarly, the check-in services are attracting experimental budgets from national retailers as well as forward thinking small businesses who are eager to attract new customers into their stores, and reward regular customers. While the revenue numbers may not be huge in 2010, there is certainly promise to the business models that are developing on these platforms.

Overall for 2010, I figure a B average, a little worse than last year. But there is always grade inflation when you grade yourself, so let me know what you think. Now, on to my predictions for 2011:

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1. Putting fun into ecommerce

In 1995, when Amazon was founded, e-commerce was like the proverbial talking dog. It wasn’t about how well the dog could talk, it was amazing that the dog could talk at all. The first generation of ecommerce sites were focused on functionality, getting the dog to talk better. We got everything from price comparison engines to aggregated user reviews to one-click checkout. These early innovations were focused on optimizing the “workflow” of shopping to get users into the checkout as quickly as possible.

This worked great for most internet users at that time because back then most internet users were men, and in general, men do not like to shop. They treat it like a chore, a necessary evil that would ideally be minimized and optimized to take the least amount of time possible. Then they could get back to doing something they enjoyed, perhaps playing video games, or watching football!

But a few years ago, that changed. There are now (a few) more women online than men. And in general, women tend to enjoy shopping more than men. Certainly more than playing video games, or watching football! If you enjoy shopping, you don’t want your “workflow optimized”. You don’t want to be rushed to the checkout as quickly as possible. Instead, you want to linger, to be delighted, to discover new things, to find great deals. You want shopping to be fun.

The Flash Sales sites and Local Deals sites both make shopping fun by offering deep discounts. This is the mechanism that they use to entice shoppers to buy something, even when they are not looking for anything specific. But discounts are not the only way to make shopping fun.

Sites like Modcloth make shopping fun through discovery. Modcloth highlights women’s clothes from modern, indie and retro designers. Because each item has limited supply, and selections are constantly changing, Modcloth builds an urgency that has users coming back frequently to see what’s new and to make sure that they don’t miss out.

Shoedazzle* makes shopping fun by democratizing the personal stylist experience. After users take a style quiz to assess their profile, they are shown a selection of shoes, bags and accessories that have been specifically chosen to match their taste. Each month they get a new selection of on-trend pieces that fit their profile. JustFab and JewelMint have subsequently launched with similar models.

More models keep popping up. Recently launched Birchbox focuses on sending cosmetic samples to its users to help them discover the perfect eyeliner or blush. Pennydrop is a Facebook app that lets users peek at discounted and constantly dropping prices on items and jump in to buy when the price is low enough.

All these sites play to the idea of making shopping fun. I expect to see more applications of these formats, as well as more new formats, all under this overarching theme. A little social shopping anyone?

2. Self-service ad platforms find their ceiling, and brand advertisers seek other avenues

As noted above, about half of display advertising inventory is now moving through exchanges, DSPs and realtime bidding platforms. Yet these platforms are only two to three years old. While perhaps only 10% of online ad revenue is currently flowing through these channels, the trend here is clear. Today, two thirds of online ad spending comes from direct response advertisers, and soon the bulk of these budgets will likely flow through bidded platforms such as these, including Facebook ads. Direct response advertisers move their budgets quickly to follow results, so this could happen within the next year or two.

Brand advertisers are also experimenting with bidded platforms. Each of the big ad agencies have their own trading desks. However, adoption on the brand side will likely be slower and far from complete. Many of the exchanges, DSPs and RTB platforms allow for bidding strategies that are easily optimized for click-through rates, but optimizing for brand metrics is much harder. Brands also care more about content adjacency and brand safe content, and these are harder to guarantee on an exchange type platform, where in some cases, ad impressions are traded several times before finding their final buyer.

In addition, exchanges by definition can only support standard ad units. Many brand campaigns incorporate custom elements, ranging from social media and other earned media components to custom microsites, site takeovers, roadblocks and other high impact units. These are often tied to specific publishers, and bundled into a broader media buy including standard ad units. Premium publishers depend on this sort of creative advertising to maintain the ad rates required to support the creation of high-quality content, and I think it is likely that this symbiosis between brands and premium publishers will continue to capture a large chunk of the brand ad budget. In fact, I expect to see a proliferation in custom ad units from the biggest and most premium publishers as they work to capture a greater share of brand budgets. Non-premium publishers that have reached the scale to become “must buys” are doing exactly the same thing. Twitter’s Promoted Tweets, Promoted Trends and Promoted Accounts, and Facebook’s Social Ads and Likes are all great examples of this trend.

3. Competition shifts from user acquisition to user retention

Today many e-commerce and subscription companies are growing very quickly through smart marketing. They are taking advantage of cheap media to cost effectively acquire new customers. As I’ve mentioned above, I think the exchanges will continue to make it easier for direct marketers to reach their customers. Facebook’s self service platform is still a relatively inefficient market, allowing savvy, analytical marketers to quickly and cheaply gain market share. However, in some categories (e.g. Local Deals) Facebook has quickly become efficient and there is already a “market price” for a new Local Deals subscriber. As more marketers take the plunge into Facebook’s platform, more categories will become efficient, just as Google became an efficient market over time for almost all keywords. Once this happens there will be a market clearing price for new customer acquisition across almost all categories, and smart marketing will no longer be as much of a differentiator.

On what basis then will winners pull away from the rest? Companies who are able to derive the highest lifetime value (LTV) from their users will squeeze out their competitors with a lower lifetime value. How can you improve LTV? There are three key factors:

  • average revenue per user
  • gross margin
  • average lifetime.

The e-commerce and subscription based companies that pull away from their competitors in 2011 will find a way to differentiate themselves from their competitors on one or more of these dimensions.

4. Social games chase hardcore gamers

Notwithstanding Disney buying Playdom* this year and EA buying Playfish last year, Zynga is still the market leader in social gaming. Their enormous installed user base gives them a real advantage in customer acquisition cost over their competitors; their ability to cross-sell installs to their new games at zero cost allows them to get a new game to scale with much lower marketing spend then smaller competitors.

To combat Zynga’s might, the other social game publishers have to focus on games with a very high LTV. High enough that the publisher can afford to rely on paid customer acquisition alone to build a user base, and still make money. Kabam (once know as Watercooler) pioneered this approach with Kingdoms of Camelot, a relatively hardcore social game that is reputed to be doing low to mid single digit millions in monthly revenue from  about 750k Daily Acitve Users (DAUs) – a monetization rate that is dramatically higher than the norm for social games. Other publishers have taken note, and I would expect more games aimed at the hardcore gamer market to emerge over 2011.

5. Year of the tablet

Smartphones transformed the mobile internet. Apps will drive $5bn in revenue in 2010. Mary Meeker presents some great insight into the future growth potential of mobile in her Web 2.0 Summit presentation, Ten Questions Internet Execs Should Ask and Answer.

The same thing will happen with tablets. While the iPad has the tablet market largely to itself this year, that will change dramatically in 2011 and beyond, just as Apple’s iPhone had the truly web-capable smartphone market to itself in 2008, but is now a minority as competition emerged from Android, WinMo7 and the modern Blackberry.

The key difference between these new platforms and the PC web isn’t mobility (although that is part of it), but rather that these devices are always on and always with you. However, use cases differ between the phone and the tablet.

Phones are with you all the time, in particular when you are out of the house and out of the office. The most popular genres of app fit well with this “on the go” usecase. Local information, “snacky” entertainment, music, games have all been killer apps on smartphones. Some web incumbents made the transition well, including Yelp, Flixster*and Pandora. Many new companies also gained ground on the phone through this disruption.

Tablets tend to live in the living room. They lend themselves more to leisure than PCs, and to more protracted content consumption than phones. Killer apps might include, video, music, games, and “reading”, broadly defined. Again, some web incumbents will make the transition well, but once again I expect to see new companies gain ground through this disruption.

What do you think will happen in 2011? This time next year ,I’ll look back to see how accurate I was. In the interim, stay tuned for more Lightspeed predictions in other tech sectors over the next few days.

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* A Lightspeed Portfolio company

2010 Cleantech Predictions December 18, 2009

Posted by Andrew Chung in 2010, biofuel, Cleantech, electric vehicles, energy efficiency, energy storage, predictions, smart grid, solar.
Tags:
4 comments

Lightspeed has invested across several cleantech areas, including solar (Stion), biofuels (LS9, Solazyme), clean coal (Coaltek), LED lighting (Exclara), and energy storage (Leyden Energy, f/k/a Mobius Power).

Peter Nieh and I (Andrew Chung) teamed up again this year to make a few predictions about cleantech in 2010 (see our prior year predictions for 2009 and 2008):

1. There will be increased availability of equity, debt, and project finance capital, along with an increased flight to quality.

Despite 2009 being a slow year for venture capital firms raising funds (Q3 featured the fewest number of VC firms raising money in 15 years), the cleantech category appears to have drawn continued commitments. Several domestic firms raised large cleantech-focused funds earlier this year. Internationally – from China to Singapore, India to South Africa – a number of local venture and private equity firms are now raising multi-hundred million dollar funds to target cleantech investment. As such, the global pool of equity capital targeted at cleantech will be greater in 2010, as investors continue to look at the sector as a source of investment opportunity. The emergence of the debt markets from the depths of the fallout from late 2008 and the growth in capital flows from an improved stock market should also increase the availability of debt, tax equity, and project finance capital.

Despite the rise in availability of capital in 2010, investors will likely remain cautious. We expect a larger share of dollars to go into emerging leaders and high-potential portfolio companies, as the number of new companies funded in first-time investments grows more moderately. Larger funds may preserve capital to make more substantial bets in later-stage, “winner’s circle” companies.

2. Massive project deployments and manufacturing capacity growth will be undertaken, as winners and losers become more apparent.

In 2010, we expect a number of prominent VC-backed cleantech companies to be tested, as they emerge from R&D and initial customer acquisition and move into full-scale production and/or deployment mode. Some companies will rise to market leadership, while others may fall, as the myths and reality of their technology, competitive edge, and ability to scale come to light.

The “shakeout” will likely impact the sectors that have seen the most investment in recent years, such as:

  • Solar: Many up-and-coming solar manufacturers have made bold claims about their capabilities. As these companies start to ramp their manufacturing capacity, their validity of their claims on efficiencies, yields, cost economics, capital efficiency, and field reliability will become more readily apparent. Companies will find it much more difficult to “scale first, optimize later,” as pressure on cash reserves increase significantly.

  • Smart grid: As some of the massive project deployments with nationwide utilities roll out, whether new technologies can truly scale to millions of endpoints cost effectively and reliably will become clearer. The utilities will also better judge the extent of the value created by the deployed networks and how far it extends beyond advanced metering into areas like demand response, distribution automation, and network management.

3. Momentum in plug-in hybrids and electric vehicles to continue, as a greater variety of vehicles starts to arrive to market. Electrical storage will be the key enabling technology.

Nearly every major carmaker claims it will launch a plug-in hybrid electric vehicle (PHEV) or all-electric vehicle (EV) some time between 2010 and 2013, as concept cars start to become production models. Notable target launches for 2010 include the Chevy Volt and Nissan EV-02. Numerous startups will also look to enter the market, despite the challenges in raising the funding needed to compete in the automobile industry.

Another trend to watch in 2010 will be an increased focus for fleet operators to consider adoption of HEVs and PHEVs, as the industry looks to rebound from the downturn and retire more of their aging fleet. Adoption will still be early, but sustainability initiatives and new emissions regulations should help.

The key enabler for the HEV and PHEV revolution will continue to be the battery technology. While established companies like Sanyo, LG, and Hitachi are all attempting to adapt their lithium-ion battery technology for the automotive market, limitations with traditional chemistries have made it difficult for a clear victor to become apparent; startups have an opportunity to disrupt the market and become alternatives for OEMs. For example, Leyden Energy (formerly Mobius Power, a Lightspeed portfolio company) is bringing to market Li-ion batteries that offer the high energy density that is critical for EVs, while providing a high degree of safety and long cycle life over a wide operating temperature range. We expect there to be some healthy competition and progress made here in 2010.

4. 2010 could see several public exits from some of the emerging leaders; consolidation, M&A, partnership, and JV activity expected to grow

With the IPO markets opening a crack in mid-2009 after nearly a year-long drought among VC-backed companies, investors appear cautiously optimistic about some public offerings in the cleantech area in 2010. We expect that IPO demand in this sector will be driven by factors like the success of the A123 offering (although the stock has come down 35% from its high and stabilized at where it opened in September 2009) and the scarcity of quality cleantech public companies.

Consolidation and vertical integration in areas like solar and biofuels will continue – many involving distressed companies that can no longer support the high cost of their assets and debt load. A number of solar M&A deals were announced in 2009, including First Solar acquiring Optisolar for $400 million and MEMC acquiring SunEdison for $200 million.

A number of biofuels companies have been active in the last couple of years developing strategic partnerships and joint ventures in order to speed up their market entry. LS9 and Solazyme (Lightspeed portfolio companies), for example, have teamed up with established giants like Chevron, Proctor & Gamble, and the U.S. Navy to further their development efforts.

We expect to see these types of transactions and relationships to continue in earnest in 2010, as large companies seek ways to tap into startup innovation, and startups seek ways to scale up in more capital-efficient fashion.

2010 Mobile Predictions December 14, 2009

Posted by jseid in 2010, mobile, predictions.
7 comments

We continue to be excited about the mobile sector and the opportunities for entrepreneurs to build large companies. The industry has seen the smartphone universe expand dramatically and now no smartphone is complete without an app store. New business models like mobile advertising, which were touted in 2005 and 2006 but failed to live up to early expectations now seem to be blossoming. That said, we believe we’re still in the early innings with many more innovations to come.

Here are our predictions for the mobile sector for 2010:

1. Virtual goods means real revenue in mobile

We’ve all seen the rise of the virtual-goods economy in the online world. Like its impact on the online world, virtual goods is poised to have profound positive impact on mobile-app startups for several reasons. First, unlike the subscription fee or one-time purchase business model, virtual goods can help eliminate the friction to adoption. The cost to the consumer to try the app can be $0 yet the app developer still has a way to make money by selling virtual goods.

Second, the virtual-goods business model has proven to be a very scalable one. It has helped to create multiple public companies valued in the billion-dollar plus range including DeNA (in mobile) and TenCent (in the online world). Finally, it’s not mutually exclusive with the existing purchase, subscription and advertising business models. Certainly widespread adoption of virtual goods in mobile will take time and, depending on the platform, various issues will have to be worked through. But this business model’s entrance into the mobile arena bodes well for the entire ecosystem.

2. Still waiting for “off-deck” to (really) happen

Well, in some ways it has happened—almost. Certainly, the iPhone App Store is a great step forward for the industry. But, compared to the success of the iPhone App Store, the rest of the industry’s major players—Android, Nokia (NYSE: NOK), Windows and RIM (NSDQ: RIMM)—have a lot of catching up to do. Those app stores are not quite functioning at where they need to be to give iPhone’s App Store a run for its money.

The most cynical in the industry may actually say the iPhone App Store is not truly “off-deck,” it’s just a different deck. But however you want to slice it, we’re still a long way off from mobile-app developers being able to create true direct-to-consumer offerings like their cousins in the web world.

3. Nokia or RIM buys Palm (and the next round of big battles begin)

Palm built a slick OS but it is in a tough spot as a standalone company. It’s not RIM and Nokia, big handset guys with material smartphone market share, and that creates a tough spot for Palm (NSDQ: PALM).
Apple’s iPhone not only created a great consumer experience but it created a great platform for developers. This platform allows developers to create compelling mobile apps, to reach the consumer without going through a carrier, and to bill the consumer leveraging the iTunes merchant
relationship. Apple (NSDQ: AAPL) set off the virtuous cycles that feeds both the growth in the installed iPhones (and iPod Touches) and the growth in apps (and developers).

Legacy software at Nokia and RIM and the lack of deep OS software expertise at other handset vendors meant Palm had a chance to create its own virtuous cycle. Until Android pulled the rug out and ran off with the momentum.

In the world of mobile operating systems, Palm has created a real asset. For large OEMs like Nokia and RIM that have solid hardware and massive distribution but legacy software, Palm may be an asset they can’t live without.

4. The enterprise moves past using mobile data for just email

RIM did a great thing for industry in driving mobile data into the enterprise. This was no easy task since the enterprise is complicated. It not only involves catering to the needs of the end user but also getting IT comfortable that you are conforming to and not breaking their network and security architecture. Mobile email now has a healthy adoption rate in the enterprise and the good news is that people believe in the productivity benefits and are looking for the next set of applications to mobilize (the bad news about mobile email adoption is that response-time expectations have shrunk to hours and there’s no such thing anymore as an “out of office” auto response for why you can’t read email).

Other smartphone platforms beyond RIM, such as the iPhone, have also seen interesting levels of adoption, and we expect that to grow. With a rich and growing smartphone base in the enterprise and a positive experience around the benefits of mobile data from both end users and IT, we expect 2010 will create an opportunity for a new generation hot mobile apps and technologies—this time focused on the enterprise.

In 2010, mobile innovations will branch out into new categories, while also benefiting as the recipient of long-awaited applications. Both these trends will create new methods for monetization in the U.S. and beyond, and ultimately, promise another important and profitable year for the category.

2010 Consumer Internet Predictions December 11, 2009

Posted by jeremyliew in 2010, Consumer internet, predictions.
17 comments

Once again, Lightspeed is going to go on record and make some predictions for 2010, in the areas of Consumer Internet, Mobile, Cleantech and Enterprise. I am leading off with our 2010 Consumer Internet Predictions, with my partners posting the other predictions coming over the course of the next week or so at the Lightspeed Blog.

This is the fourth year that I’ve been making predictions for the consumer internet.

First, let’s take a look at how I did on my predictions for 2009:

1. Consumers seek cheap thrills

Grade: A. I predicted an increase in time spent on social networks and on games. In fact, social games have been the breakout story of 2009.

2. Trading real money for virtual goods

Grade: A. Virtual goods has been the business model powering the growth of social games.

3. Web 2.0 leaders pull further away from the pack

Grade: B. Facebook has reached cashflow positive on huge revenue growth, but other web 2.0 leaders like imeem and ilike have had a bumpier ride.

4. Online ad prices continue to fall, alternatives help make up some of the ground

Grade: B. CPMs have continued to fall and behavioral targeting, the best hope for arresting the slide, is under a cloud from the FTC.

5. Getting serious about monetizing non-U.S. traffic

Grade: C. Most attention is still focused on the US.

Overall a B+ average – that’s not too bad! Now on to new predictions:

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1. Social games overflow out of Facebook.

I’ve said before that I think that social gaming is a tactic, not a category. 2009 was the year that social games overran Facebook (17 of the top 20 Facebook apps by DAU are games as of Nov. 23rd). I think that in 2010, they will overflow Facebook and spill into the open web.

We’ve seen the first indications of this with the launch of farmville.com recently. But Playfish was the first to take a game from Facebook to the open web when they launched petsociety.com in May. And companies like Bigpoint and Gameforge have been launching similar games on the open web for years.

Games optimized for Facebook will need to be modified to work well on the open web. Some of the elements of serendipitous discovery, such as the feed, will be lost, but the ability to use email and IM without any “platform rules” restricting communication channels may offer new channels for growth.

2. Brand advertising starts to move online, boosting premium display, video and social media

The cyclical downturn in advertising made 2009 a tough year for publishers. But, there were some real bright spots amid the darkness. The most promising trend is that brand advertisers are shifting their advertising dollars from offline to online. This is finally following the audience that started shifting several years ago.

The first wave of online advertising was dominated by direct response advertisers. The Internet promised measurability, and direct response was the easiest thing to measure. Brand advertising lift was not so easily measured by click through rate. However, measurement tools from companies like Vizu are improving and allowing brand advertisers to see the lift that an online campaign can deliver in key metrics like brand favorability and intent to buy. Big brand advertiers who will not see transactions consumated online, from Consumer Packaged Goods to Quick Service Restaurants to Big Box Retailers, are spending 10s and even 100s of millions on digital media. This money is starting to flow to publishers and networks with premium display inventory that truly understand the needs of brand advertisers.  These needs are quite different from the needs of direct response advertisers, and include safe content, brand metric measurement, real reach and frequency measurement, and guaranteed delivery across a campaign. Ad networks like brand.net, Collective, Specific and Undertone have been riding this wave.

Video content also lends itself to brand advertising because it allows the repurposing of 30- second TV commercials. Video ad networks like BBE, Tremor, YuMe and Brightroll have all benefited from TV ad dollars moving online, following users who are increasing watching their video online.

Social media sites are taking a different path towards capturing these brand dollars. They use integrations and take advantage of the native behavior on social media. Users affiliate themselves with the brands that they like, and implicitly recommend them to their peers. Facebook and MySpace continue to dominate in this category, but companies like Rockyou (a Lightspeed portfolio company) are also winning meaningful campaigns from brand advertisers.

3. Direct Response Advertising becomes ever more efficient

Whereas only 5% of brand advertising is now spent online, around 30% of direct response is spent online. With this volume comes experience and improvement. Direct marketing online is now very sophisticated. Additionally, the ever increasing volume of available advertising online inventory, driven by social media, means that there is always an oversupply. But various flavors of targeting, including demographic, behavioral and contextual targeting, are helping direct marketers to more efficiently reach their target customers. While the FTC may limit behavioral targeting in the future, the trend still favors direct marketers, who are able to acquire customers relatively inexpensively.
I expect this trend to continue through at least the end of 2010, with no near term pressure on advertising pricing. This will continue to favor direct response advertisers who will enjoy relatively low customer acquisition costs. Companies who realize a long lifetime of value from their customers (e.g. gaming companies like Playdom – a Lightspeed portfolio company, subscription businesses like Zoosk and ecommerce companies with a profile for repeat purchase like Gilt) will continue to be able to acquire fully valued customers at a discount in 2010, just as they did in 2009. Other direct response advertisers who realize one-time value (e.g. lead gen, big ticket ecommerce) can also do well, depending on the rate of rebound in demand for their products.

4. Finding Money and Saving Money online

Although the recession is officially over, unemployment is expected to continue to climb and consumer confidence about the current situation is still at historical lows.

Many consumer are looking online to save money, or to find money.

Discount ecommerce, whether in the form of discount shopping clubs like Gilt, Ruelala and Hautelook, single SKU sales like woot, or pay to bid auctions like bigdeal, swoopo or gobid, are all likely to see growth this year. Coupon and discount code sites, like retailmenot and savings.com, will also continue to do well. Local savings like Groupon and Living Social Deals are also showing real growth.

Finding money is harder than saving money. But there are a number of businesses that have helped consumer find sources of cash that they didn’t realize they had. Cash4Gold is the highest profile of these given its Superbowl ad earlier this year, and traffic has continued to grow for that site:

Online payday lending companies like payday one, peer to peer lending companies like prosper and lending club and reverse mortgage companies like golden gateway are all helping consumers to get access to more money. I expect further innovation in helping people find additional sources of cash.

5. Real time web usage outpaces business models

2009 was the year that Twitter really entered the public consciousness. But it isn’t just Twitter that is behind the rise of the real time web. Companies like Aardvark, Four Square, Gowalla and of course Facebook are driving real time content, including location info, and companies like bit.ly, oneriot and collecta are all trying to organize and make sense of the this data.

I expect this trend to continue in 2010. Real time information puts a new spin on categories like user generated content, news, vertical search, local information and Q&A. Unfortunately, these categories have been some of the hardest to monetize.

UGC and news are relatively low CPM categories, and real time is unlikely to change that. Vertical search has shown some success in transactional categories (e.g. travel, shopping) where there is an opportunity to buy traffic and arbitrage, but has not been nearly as successful in content categories (e.g. video search, picture search).  Many of the early real time search engines are more focused on content  than transactions. Local information has historically been a difficult business. It is an area where there is high demand for content, but cost of sales have been very high. The most successful companies in local have innovated on their sales model rather than on their content generation model. Real-time location info sounds more like a content innovation than a sales model innovation.

Q&A is one area where there may be some real opportunity. In general search, around 30% of queries are transactional, and hence monetizatable. Some real time and mobile Q&A sites are reporting that for them, an even higher proportion of their queries are monetizable (e.g. “Whats the camera for low light?”, “Where can I get a good pizza late night in Noe Valley?”). If this remains true, and if mobile is a key driver of real-time search, then there could be real promise in this use case.

This time next year, we’ll get to look back and see how accurate my 2010 predictions were. I’m hoping for another B+ or better.

Stay tuned for the rest of our predictions over the course of the next week or so at the Lightspeed Blog.

Stay tuned for the rest of our predictions over the course of the next week or so at the Lightspeed Blog.

Consumer Internet Predictions for 2009 December 11, 2008

Posted by jeremyliew in 2009, Consumer internet, games, games 2.0, gaming, Internet, predictions.
39 comments

For the last two years I’ve been making predictions about the consumer internet, and this year is no exception.

First let’s take a look at how I did on last years predictions:

1. Social Media advertising, Online Video advertising and In-Game advertising start to become scalable.

Grade: B-. We’re seeing much greater scale on social media and online video advertising, with a standard emerging for online video, and movement towards a standard for social networks. In-game saw some progress but not as much.

2. Structured web emerges.

Grade: C. Notwithstanding the Powerset acquisition, the structured/semantic web hasn’t been a real theme for 2008.

3. Games 2.0

Grade: A. This year was a breakout year for social networking games, web based games and free to play games. I see this growth driving several of next years predictions as well, as you’ll see below.

Now on to new predictions. Note that the remainder of this article is cross posted at the Wall Street Journal.
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Last year, consumer Internet startups sprung up left and right, looking for U.S. traffic growth and relying on the robust growth of the advertising market to make money. We enter 2009 looking down the barrel of a recession. In this environment, I predict the following trends for consumer Internet companies:

1. Consumers seek cheap thrills

Even in a recession, people will still want to be entertained. The Great Depression saw resilience and even growth in movie ticket sales as one of the cheapest ways for people to entertain themselves. As this economy tightens through 2009, we’ll find growing numbers of “time rich-cash poor” consumers seeking today’s lowest cost methods to entertain themselves. In general, this will benefit two categories of consumer Internet companies.

First, social media and social networks. These are free and endlessly entertaining. As mainstream media companies cut costs, the relative value and quality of user generated content increases. MySpace, YouTube and Facebook all rank in the top 10 Web sites by aggregate time spent according to comScore. The most popular applications on Facebook and MySpace are all games, entertainment and lightweight communication, and these can provide endless hours of entertainment for users. It isn’t just Facebook and MySpace that will benefit though. Smaller social media sites that have built enough of a critical mass to have a self sustaining community will also see growing usage over the next year.

Second, games. Games are one of the most cost effective means of entertainment available. While a $10 movie ticket can provide 90 minutes of entertainment, a $60 computer game can easily provide 50-100 hours of entertainment. Free-to-play web based games make this math even more compelling, whether they be casual game portals like Pogo, virtual worlds like Gaia or massively multiplayer games like Runescape. The Web site with the highest amount of time spent per visitor in October was Pogo.com with 444 minutes/visitor. Number two was Yahoo, with just 291 minutes/visitor in the same period. Games in general, and free games in particular, can provide a lot of cheap thrills.

2. Trading real money for virtual goods

In Asia people have been paying real money for virtual goods for years. It is the primary business model for games and Internet companies in China and Korea, far more important that advertising. We’re starting to see similar behavior in the U.S., also led here by online games and social networks. On the back of the rise of social networks and games, 2009 will be the first real breakout year for this business model in the US.

To people who do not spend time on social networks, it seems crazy that people would pay real money to buy each other virtual gifts – pictures of things ranging from birthday cakes to hugging penguins – and then display them on their profile pages. But estimates peg Facebook’s digital gifts sales in the $35 million – 50 million range this year. As more human interaction moves online, these social tokens of appreciation move online in parallel.

In the same way, gamers are more than willing to buy virtual goods In 2007, Nexon made $30 million selling virtual goods to U.S. players of their games. These items either allow players extra powers in the game (e.g a bigger gun), or allow players to customize the way that their character looks (e.g. cool sunglasses). People want to win, and they want to look good doing it. Dozens of other games companies are now employing this model in the U.S.

Why would this recession be a time for virtual goods to take off in the U.S.? It actually has nothing to do with the economy, Rather, two new payment mechanisms are becoming available now that allow gamers, many young and without credit cards, to play these games to their full capacity. The first is that prepaid game cards are now being sold at retail, with Target leading the charge. The second is incentive marketing. If a player take an action (like signing up for a ring tone service, or completing a survey) the advertiser who benefits will fund the purchase of that players desired virtual goods. One virtual world company, Gaia, used to have three full time employees who did nothing but open envelopes of cash that their teen and ‘tween players sent them to buy virtual goods. Since rolling out their new payment mechanisms, their revenues have doubled and they no longer have to open envelopes full of pocket money.

Asia and Europe have led the US in the adoption of free to play games because they have had good alternative payment mechanisms in place for longer, including mobile payments and credits available for sale at internet cafes. Now the U.S. is ready to catch up.

3. Web 2.0 leaders pull further away from the pack

In a recession, when advertising budgets are cut, there is a flight to quality among advertisers. Size and “brand name” are good proxies for quality. Advertisers will want to buy advertising on big, well known websites. The big online media companies like Yahoo and AOL will benefit from this. However, they are already so big that they cannot escape the overall shrinkage of ad budgets.

On the other hand, many Web 2.0 companies, like Facebook and Digg, have build large user bases but have not yet built out their capacity to monetize their traffic. These companies will see the benefit of the advertiser flight to quality. However, as they are only now building out their sales forces, they will likely continue to see strong revenue growth in 2009.

4. Online ad prices continue to fall, alternatives help make up some of the ground

The Internet advertising market, like all markets, responds to changes in supply and demand. In the current recession, demand for advertising is likely to decrease. At the same time, supply of online inventory, page views, is continuing to increase. Social networks and other social media sites in particular are creating masses of new inventory. As a result, the price of online advertising will continue to fall in 2009.

Targeting may mitigate some of this fall. Better targeting is steadily improving the effectiveness of direct response advertising (the equivalent of TV infomercials). This targeting takes many forms, but all have demonstrated an ability to lift conversion rates over “run of network” advertising. As targeting technology improves, and as the data that publishers and networks collect about users increases in quantity and quality, we will see a better ability to match the right ad to the right person, and charge more for that ad.

5. Getting serious about monetizing non U.S. traffic

The U.S. led the way on the internet, and for a long time the U.S. dominated overall Internet usage. In the past couple of years this situation has changed. China passed the U.S. as the country with the most internet users this year. Top sites like Yahoo, MSN, Facebook and MySpace all have more users internationally than in the US. Serving an international user costs the same as serving a U.S. user, but making money from an international user is much harder. In 2009, I expect Internet companies to get serious about making money from their international traffic.

The US market represents about half of all online advertising, which is partly what makes monetizing international traffic so difficult. Building up direct ad sales teams (and networks) internationally will partially help to bridge the gap, but this will not be enough. As noted previously, in Asia direct monetization models (i.e. selling things directly to users) have proven to be a better business model than advertising. U.S. companies will need to understand and embrace the direct monetization models that have worked well overseas, principally mobile monetization, premium subscriptions models and digital goods models based on selling greater functionality, scarcity or status.

Silver linings to dark clouds

These trends will benefit some internet companies but disadvantage others. I hope that your company finds the right way to navigate these shifting shoals. Let me know if you agree or disagree with these predictions, or if there are other trends that you think I’ve missed.

Mobile Predictions For 2009 December 9, 2008

Posted by jseid in 2009, mobile, predictions.
6 comments

Despite the troubles in the economy, the mobile industry is as dynamic as it has ever been.  The changing landscape creates significant opportunities for entrepreneurs and should deliver exciting products and services to the consumer.

Here are our predictions for what’s to come in mobile in 2009:

1. The iPhone’s impact is not directly due to iPhone usage.

With all the buzz around the iPhone and its great stats, people might question this. However, I think 2009 will show that it’s not iPhone usage that will have the greatest impact on mobile but the wave of iPhone/appstore-like offerings being created by Apple’s competitors. Apple showed the device manfuacturers that sell the vast majority of the world’s phones how to rethink the phone from the ground up to make sense for data and apps and that will be the iPhone’s biggest impact on the industry in 2009.

A number of other large players like Google/HTC, RIM, Samsung, LG and Nokia are each coming to market with multiple offerings that have large high-res touch screens and in several important cases app stores that facilitate mobile content discovery and payments. The number of iPhone-like products by the end of 2009 should outnumber the iPhone. Despite the down economy and people watching their pocketbooks, expect the growth of these more expensive smart phones to be a real bright spot for the mobile industry. Choice and competition is a great thing for consumers.

2. 3G networks break.

Well, what else would you expect with all those iPhones and iPhone-like phones out there? These networks were designed for voice not for data and the stress placed on these networks with this new generation of phones will be significant. Areas that will continue to see innovation will include the access part of the network which will make use of intelligent smaller cells and which will leverage wifi where possible. The backhaul portion of the network will also be ripe for innovation. In a year where telecom spending is likely to go down, we would expect spending on key stress points like backhaul to continue to grow.

3. Mobile app/wap business models are put through the crucible.

There have been a number of mobile app/wap startups funded over the last few years and 2009 will be the crucible test for their business models. I can’t predict which business model will win but I can predict that the winners will be the companies that have the capability to rapidly evolve and test different business models in order to move down the learning curve as quickly as possible. Unlike in the web world, mobile startups will have to think creatively about their business models given the complex ecosystem of carriers and phone vendors and will also have to understand from day one how their business model maps to geographies outside of the US.

All this change will create a lot of opportunity for the right mobile startups.

2009 Cleantech Predictions December 3, 2008

Posted by lsvp in 2009, biofuel, China, Cleantech, electric vehicles, energy efficiency, energy storage, predictions, solar.
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19 comments

Lightspeed has invested across several cleantech areas, including solar (Stion), biofuels (LS9, Solazyme), clean coal (Coaltek), LED lighting (Exclara), and energy storage (Mobius Power). Here are some of our cleantech predictions for 2009 (see our prior year predictions here):

1. Cleantech funding will slow significantly, forcing startups to seek alternative growth strategies

The level of cleantech VC investment reached its highest levels ever in recent years. With the market downturn, however, many of the key players in the recent wave – private equity funds, hedge funds, project financiers, and debt providers – have slowed or halted their funding pace, and the IPO window is effectively closed. VC firms will continue to invest, but at a more modest pace.

As a result, we expect many startups to delay their timing for achieving commercial production. Startups will need to rethink their scale-up strategies and sacrifice growth in favor of reaching breakeven earlier. Hardest hit will be the companies that need to make significant capital expenditures to prepare for commercialization, but still have substantial technology and scale-up risk.

As companies find it more difficult to attract funding and drive down costs, expect some to seek more creative solutions. For example, biofuel startups will increasingly leverage underutilized production assets owned by distressed corn ethanol companies for commercial production capability. Meanwhile, expect large, established energy enterprises to play an increasingly vital role in helping to support startups as a development partner, funding source, customer, distribution partner or acquirer.

2. Companies will come under increased pressure to achieve competitive cost economics

With oil and energy prices falling significantly from last summer’s historical peaks, cleantech startups have stiffer requirements for the cost economics needed to compete with traditional energy sources. Companies with technologies that enable disruptive cost economics and can target higher-value market segments will be best positioned to stay competitive. For example, biofuel companies that can produce higher-value specialty chemicals can thrive even with oil at $40 per barrel. In solar, even with polysilicon prices falling due to the impending supply glut, high-efficiency thin-film solar panel providers will have the potential to exploit an intrinsic cost advantage. Conversely, companies that do not provide compelling cost economics will find it tough to contend.

The downturn has also made consumers and enterprises increasingly price sensitive and less willing to choose products at a price premium for the sake of “going green.” As such, sustainability-oriented green building products without an inherent cost advantage will be a tougher sell with more cost-conscious building owners.

3. Investor interest in energy storage, especially for automotive and grid-scale applications, to grow strongly

VCs will continue to invest in areas with large market opportunities, significant headroom for innovation, and more capital-efficient expansion models. We expect energy storage to be one of these areas. In the automotive sector, batteries with improved safety, performance, and cost parameters will be crucial to the broader adoption of electric vehicles (EV’s) and plug-in hybrid electric vehicles (PHEV’s). In the utility sector, the dramatic increase in distributed generation expected in the next decade from wind, solar, geothermal, and other sources will continue to adversely impact grid stability. We believe that economical grid-scale storage will be a critical part of the solution.

4. Government will play larger role in cleantech, as policymakers around the country increase their support

With passage of the solar investment tax credit and the Obama Administration’s stated support for a $100B+ energy plan, we expect the seeds of key U.S. energy policies for the next decade being planted in 2009. Although policy enactment may not happen in the coming year, expect topics like carbon cap-and-trade/taxation, national Renewable Portfolio Standards (RPS) and Renewable Fuel Standards (RFS), biofuel incentives, EV infrastructure, and grid-scale storage to be hotly debated. We expect that the federal government will move to formalize a venture capital-like arm to invest in promising cleantech startups, with particular emphasis on commercialization as opposed to research & development. State governments will continue to drive cleantech policy, with more states establishing or tightening RPS and RFS, reducing permitting requirements involved in consumer renewables adoption, and offering tax breaks for startups.

Importantly, policymakers at all levels will continue to consult the private sector to understand benefits and risks of emerging technologies that could benefit from regulatory support to avoid legislation that could potentially be detrimental to the cause (see Lightspeed’s presentation to California’s Lt. Governor and the Commission for Economic Development).

5. Cleantech comes of age in China

During the middle of last year, China passed the U.S. as the world’s largest producer of greenhouse gas emissions (GHG). 300 million people in the country have no access to potable drinking water; over a million people each year die from air pollution-related disorders, with new coal-fired plants going into operation on a weekly basis.

The Chinese government has put its might behind increased support for cleantech, enabling viable technologies to achieve distribution more rapidly. After the Olympics ended, the national leadership passed the Circular Economy Law to stimulate cleantech spending through energy efficiency, water conservation, and tighter regulation of GHG emissions. Further, the government has committed to a renewable energy budget of ~$300 billion over the next 12 years, a ~15% renewables target by 2020, and a ~$200 billion environmental protection budget through 2010.

VCs have already responded to this building momentum, as local investment in cleantech rose from $550 million last year to an expected $720 million this year, according to Cleantech China Research. Sectors that look poised to attract VC investor attention in 2009 include wind, clean coal, waste-to-fuel technologies, and energy-efficient building materials.

2008 Cleantech Predictions: Solar December 7, 2007

Posted by Andrew Chung in 2008, China, Cleantech, India, predictions, solar.
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20 comments

Many of our readers may not know that Lightspeed has been very active in cleantech over the past year and a half. We have evaluated over 400 cleantech startups to date and have made investments in solar (Stion), biofuels (LS9), clean coal (Coaltek), LED lighting efficiency (Exclara), and batteries (Mobius). My partner Peter Nieh and I (Andrew Chung) lead up the cleantech effort here at Lightspeed, and here are some of our solar prognostications for 2008:

1. Solar will sustain its torrid growth, as costs continue to fall. The solar market has grown at ~40% per annum in recent years, and there are many reasons to think that it will sustain, if not exceed, that clip in 2008. Solar panel prices have followed a predictable experience curve since the 1970’s, with prices dropping by 20% with each doubling of manufacturing capacity. As the silicon-dominated industry moves to thinner and higher-efficiency wafers, increases manufacturing scale, improves wafer and cell processing technologies, sees polysilicon prices return to rational levels, and migrates production to lower-cost countries –- costs will continue to drive towards parity with grid rates, and solar will become increasingly more attractive. Companies have developed creative PPA (power-purchase agreement) financing models to reduce or eliminate upfront installation costs, which will make solar more accessible for a wider range of corporate and residential customers. The election year should also see more state subsidy support for solar and a renewal of the federal tax credit, which will further bolster growth.

2. Emerging startups that benefit from the polysilicon supply shortage will face increased pressure, as the poly-Si crunch begins to ease. Solar veterans can debate the timing endlessly, but many expect additional poly-Si supply to come online by late 2008. Startups that tout silicon-independent solar solutions, like concentrators and thin film (CIGS, a-Si, CdTe, etc.), will face pressure to come to market more quickly, as their cost/supply advantages erode with greater availability of poly-Si and a retreat from spot-pricing. E.g., none of the CIGS thin-film startups, which have collectively received hundreds of millions in investment in recent years, managed to reach mass commercialization this past year as many had projected. They will continue to be under pressure to reach market before the window of opportunity closes.

3. Entrepreneurs will increasingly look beyond cell and module production. As the technology-heavy areas of cell and module production get crowded, more and more entrepreneurs look to startup opportunities in the downstream balance-of-systems part of the value chain. This area has seen less attention to date, yet makes up ~50% of the total installed cost. Novel packaging techniques, distributed inverter / MPP tracking / power management technologies, systems monitoring solutions, streamlining of the installation process, and creative solar financing models — entrepreneurs increasingly recognize the ripe opportunity in this part of the solar business, and 2008 should see heightened startup activity in this area.

4. China and India will begin to emerge as strong domestic markets for solar. With a 500 MW coal-fired plant going up in China every week, the growth of greenhouse gas emissions has reached dizzying levels. China already “boasts” 16 of the 20 most polluted cities in the world, with hundreds of thousands a year dying prematurely from such pollution. Many experts expect that the government will spend tens of billions of dollars in the next 5-10 years –- a significant portion going to solar -– to reach the mandate of 15% from renewables by 2020. In India, where the energy shortfall has reached 15% and domestic coal reserves will run out in ~50 years, the government is actively pursuing incentive policies and feed-in tariffs to help drive the use of solar and other renewables. 2008 should see further policy refinement in both countries, which will spur increased domestic adoption of solar.

5. More IT entrepreneurs will continue to start or join solar ventures. Cleantech has captured the imagination of many seasoned IT entrepreneurs, and we expect that 2008 will be another high-water mark for crossovers into the space. Solar, in particular, has been attractive to IT veterans due to a high translatability of manufacturing skills from semiconductor production in the upstream part of the value chain; and the applicability of IT-related disciplines like power management, systems management and monitoring, supply chain management, and financing arbitrage in the downstream part of the value chain.

If you missed them, here are our 2008 predictions for consumer internet, enterprise infrastructure and mobile as well.

2008 Consumer Internet Predictions December 3, 2007

Posted by jeremyliew in 2008, ad networks, advertising, casual games, Consumer internet, games, gaming, mmorpg, predictions, semantic web, social media, social networks, structure, user generated content, video.
16 comments

Last year I made some predictions about the consumer internet in 2007 and they were at least directionally correct. So let me take a crack at 2008. Regular readers will not be surprised at some of my predictions as they are themes that I’ve been talking about for some time. Later in the week my colleagues will take a crack at predictions for Mobile, Infrastructure and Cleantech.

1. Social Media advertising, Online Video advertising and In-Game advertising start to become scalable.

Social media, online video and games are at early stages of development as advertising vehicles. Even more than the internet at large, a disproportionately small percentage of advertising dollars are being spent on these three media relative to time spent. Some people have even questioned if social media will be a media business at all, or online if video is a good way to monetize.

The slow start is because there are no standards yet in any of these media. If an advertiser wants to buy TV advertising across NBC, CBS, ABC and FOX, they can buy a common unit, the 30 second spot. If she wants to buy print advertising across Time, Fortune, Forbes, Newseek and Businessweek, she could similarly buy a common unit (e.g. a full page ad). But to buy across YouTube, Metacafe and Break, or across Myspace, Facebook and Bebo, or across GTA, Wild Tangent games and Pogo.com games, she needs to buy custom ad units in each property. This makes ad sales look more like business development – she is negotiating not just price, demographics and reach, but also what the actual units are. This is what makes new forms of advertising so hard. All three industries need ad unit standards to be able to scale. Otherwise they will be trapped by demands for customization.

This year, standards will start to emerge in each media. Some candidates for standards include (i) for social media; behavioral targeting, content targeting, demographic targeting or social ads, (ii) for online video; contextual targeting, overlays or pre-roll and (iii) for in game advertising; rich media or product placements. I don’t know which of these candidates will become standards, but I am confident that we will start to see growing support from both advertisers and publishers for the more successful units.

Ad networks will also gain share in each media, helping make the process of both buying and selling advertising easier.

Viewed through this lens, Facebook’s recent Beacon launch and subsequent adjustments are simply early moves towards figuring out what will be the native social media standard.

2. Structured web emerges.

The last couple of years have seen an explosion of user- generated content, across blogs, social networks, social media sites and user reviews. Previously, when most web content was created by editors, there was good structure and metadata around it. As most of the user- generated content has been unstructured, there has been an overall decrease in the level of structure, and hence a decrease in the ease with which people and computers can access and use this data.

But Meaning = Data + Structure. Search on user-generated sites has not been a great experience so far. This year we should start to see some point solutions emerge to help add structure to unstructured data, substantially improving the user experience. This will include both explicit (user-generated structure) and implicit (inferring structure from domain knowledge or user behavior) methods.

3. Games 2.0

Tens of millions of users are now using casual immersive worlds and playing MMOGs. These sites are some of the stickiest on the web, resulting in some of the highest levels of time spent per month online, and indicating that this is becoming a primary form of online communication for some users. Many of these users skew young, and if you believe that demographics is destiny, then you will expect this behavior to spread. The social aspects of these games is key to their popularity

Even more people are playing casual games online. These people often don’t have the ability to commit the time that MMOGs demand. They want to play with their friends, but instead of spending hours online together, they want to do it on their own schedule and in bite sized chunks.

These trends are likely to come together in asynchronous multiplayer games.

Other key drivers of growth for these products will include innovation in business models (free to play, ad- based and digital goods- based models) and channels (in- browser gaming, mobile, widgets).

Note – this post is cross posted to Venturebeat.