Category Archives: Digital Media

Re-commerce: The reinvention of e-commerce

With the announcement of our investment in Groupon, it makes sense to provide some context for why we were compelled to make the investment at this time. Josh Kopelman has recently written about, the innovation that is taking place in the e-commerce market. At Battery, we’ve been following this same overall trend of innovation and referring to it as “re-commerce”, the reinvention of e-commerce. We believe that Groupon is a major player in this reinventing of the huge and growing e-commerce industry.

For the past 15 years, the Internet has been centered on community, content, collaboration and commerce. Community has been revolutionized by social networking. Content has been changed forever by user-generated content. Collaboration has been re-imagined by myriad online services. Until recently, the modern online shopping experience was nearly identical to shopping online many years ago. We believe that there are fundamental changes taking place in the e-commerce world, similar to what happened in offline retail over many years, with the advent of discount retailers, big box specialty retailers and warehouse clubs.

There are many innovations that we have seen over the course of the past few years, but there are five that have been particularly exciting for us at Battery (*Represent Battery investments) .

  • Private flash sales (Gilt, RueLala)
  • Collective buying / demand aggregation (Groupon*, LivingSocial)
  • Customization (J. Hilburn*, CafePress)
  • Crowdsourcing (Threadless, Modcloth)
  • Democratization (Fingerhut*, Etsy)

The new models of e-commerce that are emerging are not fads. They are tapping into all of the same trends that are impacting the broader web, including social, personalization and gaming. Most importantly, they are yielding e-commerce businesses that deliver better experiences for consumers and are more profitable than their predecessors. Many investors look at the valuations of public e-commerce companies and dismiss the entire sector. You can expect Battery to invest heavily in the sector as we view re-commerce as an opportunity to create enormous wealth by reinventing an industry that has been stagnant for too long.

Why OpenGraph helps Facebook become a $100 billion company

I had the good fortune of being able to attend Facebook’s F8 conference today. While I’ve been quite the Facebook (as a business) fanboy for some time, after today I’m absolutely convinced that with OpenGraph, Facebook has finally exposed the true power of its platform in a way that will help it create incredible value in the coming years. Today’s discussion at F8 didn’t directly touch upon the value of OpenGraph to Facebook, but I believe that the value of the data that Facebook will collect and organize via OpenGraph will allow it to build search and advertising businesses potentially more powerful and sizable than those of Google.

I’ve written before about the importance of data in advertising and the trend towards buying audience rather than impressions. Facebook’s OpenGraph will create the richest user profiles yet, enabling advertisers to target specific audiences based on their friends, Likes, and activity, anywhere that audience can be found on the web. This kind of data and targeting differs from Google’s search-based intent data in that it helps advertisers reach their target consumers earlier in the purchase funnel, enabling what Facebook has called demand generation. This data, combined with the potential of earned media via Facebook and its social plugins, could be the key to shifting billions of dollars in brand advertising spend to the web.

Potentially more important is what I consider to be an entirely new category of search, which I refer to as “subjective search”, that may finally be realized because of OpenGraph data. While Google will likely continue to dominate search for queries where there are objective results, my view is that Facebook will become the default search provider for queries that are subjective in nature. After all, with a graph of my preferences, those of my friends and those of the broader web population, won’t Facebook be in the best position to tell me what Italian restaurant to eat at in Palo Alto, what action movie to see on Friday night or where to go on vacation with my family?

I’m not sure that anyone could have honestly envisioned that we would see another Google-type business in our lifetimes. But by wielding the power of OpenGraph, Facebook could build yet another incredible business based on search and ads. My frequent comment that Facebook will be worth $100 billion sometime this decade has regularly been met with laughter and ridicule. I wonder if that statement will still get the same response after today.

4 sources of long term differentiation and competitive advantage

Despite the slowdown in venture investing during most of last year, it seems like venture activity picked up significantly in Q4. The data is consistent with my own experience during the quarter, where I saw a huge increase in companies seeking financing, the return of multiple competitors for every investment opportunity and incredibly compressed fundraising processes. I fear that we’re returning to an investing and startup environment much like the one prior to October 2008. One impact of this behavior is that we’ll likely see, as before, the funding of many companies in the same market or with similar offerings (many people point to location-based social networking companies such as Foursquare, Gowalla, Booyah, etc. as a good example). That’s led me to try to outline what I think are the only ways for web technology companies to truly have long term differentiation. Clearly, with time and money, talented people render most software and user experiences alone indefensible. So how do Internet and digital media companies create sustainable competitive advantage? 

Network effects: Businesses with network effects have products or services that increase in value as more customers use them. When a network effects business achieves scale, it can have incredibly lasting differentiation because recreating that network poses significant challenges to competitors. Microsoft Office, eBay and Yelp are good examples of these types of products and services. Some network effects businesses can have both positive and negative network effects. For example, as many social media businesses grow in use, the volume of content to filter and absorb can become overwhelming.

Switching costs: Products or services that make it difficult or expensive to use an alternative product or service have switching costs. Creating this kind of lock-in is a true barrier for competition. DoubleClick’s DFA product is a great example of a product that had tremendous value because it was embedded in the agency online media buying process and was used by many people within agencies.

Scale: For a product or service, differentiation can be derived from scale in customer usage, capital expenditure or data. As an example, Google enjoys incredible differentiation and competitive advantage from all three sources. Hundreds of millions of people conduct billions of searches on Google each day, leading websites that want to integrate search to turn to the de facto standard in the industry. Google has spent untold sums of money on hundreds of thousands of machines in datacenters around the world to deliver the fastest, freshest and most relevant search results to its users. The hundreds of millions of clicks generated each day on search results provide Google with a vast quantity of data and insights that help improve search quality. Any new search competitor not only has to deliver a superior consumer search experience, but it also has to spend enormous amounts of money recreating the underlying infrastructure and data that makes Google such a powerful competitive force.

Culture/People: Given that web technology itself is largely indefensible, the greatest source of differentiation and competitive advantage is often execution, and that is predicated on people and the culture in which they operate. Whether it’s the culture of innovation at Google, the culture of customer happiness at Zappos or the culture of freedom and responsibility at Netflix, I’m certain that the management teams from those companies would point to the employees and the DNA of the organizations as the primary reasons for their success. I find that when the culture of a company is well-defined, it is usually a direct reflection of the founder(s) and their conscious decision to establish a well-defined company culture from the start. I only know of a few instances where the culture of an organization was either instilled in the organization at a later point in the company’s development or successfully recast by new leadership.

When choosing what investments to make, I try to keep these sources of differentiation top of mind. It’s easy to get caught up in the appeal of a sexy new consumer application or a seemingly novel approach to a business problem. But lasting, significant equity value is often only created when one or more of these differentiating factors are at play. Are there other sources of differentiation that you would add to the list?

YouTube and FreeWheel grease the wheels for online video advertising

I try not to write about portfolio company news or announcements but some recent press about FreeWheel Media is worth trumpeting given the potential significance it has for the entire online video advertising ecosystem. YouTube has historically made it incredibly difficult for content owners to sell advertising against their content distributed through YouTube. Unlike traditional online advertising which is automatically delivered and optimized via third party ad servers, video content owners working with YouTube needed to hardcode the advertising or have YouTube’s ad operations team traffick the campaigns on their behalf. The integration of FreeWheel’s platform with YouTube changes these old rules of engagement for all of YouTube’s content partners. Now, using a single platform, those partners can easily and automatically scale their video monetization efforts across distribution partners, including YouTube. Some of the specific benefits of the YouTube and FreeWheel integration are:

– Greater ad format options, including pre-rolls and companion banners

– More ad targeting options, including contextual and behavioral

– Automated ad optimization across campaigns and third party ad networks

– Consistency of campaign and metrics across YouTube and other distribution points

The net result is that the online video advertising market can begin to operate more like the traditional display advertising market. Advertisers can expect consistency in delivery and metrics. Content owners can offer consistency in formats and targeting. And distribution partners can expect lower operating costs and greater sell-through. Everyone wins. And that is why all of the players in the online video ecosystem should be paying attention to this news and coming announcements from other FreeWheel partners and customers, like Blip.tv. The YouTube-FreeWheel announcement represents a major tipping point for the online video advertising market and the ability of companies to turn online video in a viable business.

3 reasons that data will save online advertising

It’s been nearly 15 years since Rick Boyce and HotWired famously popularized the use of banner advertising campaigns as a model for generating revenue online. Since then, there have been many, significant innovations in online advertising, including new ad formats, new pricing models, new targeting technologies and new metrics for effectiveness. Yet the value of online display advertising is being questioned now more than ever before, particularly in the current economic environment. Numerous organizations are projecting that online display advertising spend will be flat or slightly down in 2009. Growth is expected to recover in 2010, but at much lower rates than earlier in the decade and than search advertising. But the explosion of data and its increasingly effective use hold great promise for online display advertising. There are many types of data for online advertising, including keywords, contextual, behavioral, semantic, demographic, psychographic and social. The relative value of each of these forms of data is still an unknown, but I believe that the value (and cost) of data will soon exceed the value of inventory, which is already deteriorating. Here are three reasons that the use of data will save online ads and help restore their growth.

– Data makes media buying easier: Data from comScore, the IAB and others suggests that while the top 50 online publishers only account for 25%-35% of user attention, as measured by page views or time spent, they represent about 90% of online advertising spend. Why is that? As I’ve written before, the job of an online media buyer is seemingly impossible. Audience fragmentation, the proliferation of ad networks and the emergence of ad exchanges have created incredible amounts of complexity in the marketplace. Learning about all of these sources of inventory, let alone buying from them, is an unenviable task. On the other hand, buying from large, known publishers is simple. This is the default behavior for many online media buyers because it doesn’t entail extra effort or risk. Further, the buying of traditional media, rightly or wrongly, is done largely based on gross rating points, viewership, circulation, listenership, etc. Media buyers purchase audiences at scale. In the online world, media fragmentation has made it a necessity to buy from multiple places to achieve desired scale. Data allows traditional buying behavior (again, independent of whether it’s good or bad) to be replicated online. Data enables media buyers to purchase a specific, consistent audience at scale across many different publishers. Data makes the jobs of media buyers easier, allowing more dollars to be spent online.

– Data increases the value of remnant inventory: Somewhere between 30%-40% of online ad inventory at most major publishers goes unsold by their direct sales organizations. That number is closer to 80-90% for most social media sites, the fastest growing segment of inventory and the one with the most ad effectiveness challenges. Remnant inventory is the direct result of highly ineffective ads that are not relevant to the consumer. There was a time when NYTimes.com could sell its inventory because of the association with its brand. That time is long gone as metrics have told advertisers that they are not earning a return on their dollars. Getting value from advertising on social media, where consumers are largely not engaged in commercial activity, is even more difficult. And inventory, both premium and remnant is increasingly being commoditized by the ad exchanges. Effective use of data for targeting (with more engaging creatives) the right audience yields better ad performance and generates real value from remnant inventory. In the end, today’s gap between demand and supply diminishes as data-defined audiences, rather than impressions, are being purchased.

– Data is available to all: The traditional ad agency model is widely recognized as broken. The economics of the agency business dictate that they find more efficient and effective ways to engage consumers on behalf their advertising clients. Along these lines, agencies have come to realize that one of their greatest assets is their consumer and ad performance data. Data, in combination with more innovative creative, can target the right audience at the right time with the right conversation, interactivity and engagement. Publishers also see that it’s becoming more difficult to aggregate sizable audiences and to sell their ad real estate. Differentiation in the face of commoditization comes from their data. And ad networks know that they are in danger of being disintermediated unless they bring unique value to the both advertisers and publishers in the form of greater access to data or better targeting through data. Fortunately, all of these players have their own data assets and increasingly have access to data from traditional offline data vendors, such as Acxiom and TARGUSinfo, as well as from emerging online data exchanges, such as BlueKai (where I am an investor) and eXelate. The competitive dynamics in the online ad industry dictate that the various players leverage data to provide greater value to their constituents.

While data doesn’t solve all of the problems in the online advertising market, it’s clear that data is going to have a huge impact on the future of the industry. The companies that develop the platforms, tools and services to make it easier to aggregate, analyze and utilize data will be the next category of winners in the online ad market. More importantly, they will help grow the online advertising market for all of us. Even as the value of inventory decreases, the increasing use and value of data and the resulting greater sell-through of inventory will yield a larger online advertising market.

Bigger (advertising) is not better

Recently, two dozen members of the Online Publishers Association, a trade organization comprised of some of the most well-known and well-respected publishers on the web, announced their solution for attracting more brand advertising dollars….bigger ads. While I’m over simplifying the group’s initiative, it shocked me to see that the best that some of the leading online media brands could come up with was combining a few (already commonly used) interactive elements with a larger number of pixels. If this is the state of the art in online advertising, it’s no wonder that brand advertisers have been reluctant to invest more.

I previously wrote about how the model for so much of online advertising is broken. And I think it remains true that the industry’s approach to creative has not evolved to engage consumers on their own terms and in their own language. The fact is that the value of media (the real estate) in the online advertising equation is diminishing greatly. Volume growth in the online media exchanges is commoditizing media. Recognition by agencies that their long-term sustainability is tied to their data assets is increasing the importance and availability of high quality targeting data across the industry. While media and data are getting increasing attention, it seems that the third leg of the online advertising stool, ad creative, is still being ignored by most agencies and marketers. Without question, attempting something new with creative entails risk. But you rarely get skewered for attempting to engage your audience. In fact, in most cases, you only incite the wrath of consumers when you ignore, insult or bore them. Take the well-publicized Skittles example or the myriad other brands that have embraced the fact that online media allows them to engage and listen to consumers in an entirely new and valuable way. Consumers have spoken and they want to participate in or direct the conversation, not be broadcast to by brands.

Smart companies such as AppsSavvy, Context Optional and Dimestore Media are taking the lead in reinventing ad creative to deliver unique experiences to consumers and greater value to advertisers. I’m hopeful that we’ll see more of this innovation from the larger agencies as well as from startups. As an industry, we need widespread acknowledgement of the need for new creative models to avoid stunting the growth of brand advertising online.

If you build it, they might not come

A while back I wrote a piece for The Battery Charger, my firm’s quarterly newsletter, about our investment focus within the Internet and Digital Media sectors. As I noted in that article, we invest in both consumer-facing media properties and enabling technologies. In my meetings of late, I’ve noticed a disturbing trend amongst companies that belong to the first category. While almost all of the presenting media companies have slick demos and whiz-bang product features, very few of them have gone to the trouble of outlining their strategy for possibly the most important and difficult piece of building any successful media business: acquiring consumers.

 

As a VC, one of the fundamental questions I ask when meeting entrepreneurs is about the unit economics of their business. How much does it cost to acquire a consumer and what is the lifetime value of that consumer once you acquire him or her? Most thoughtful entrepreneurs have considered this issue and can offer an answer. However, when I ask what strategies they are using to acquire users at the cited costs, I’m surprised by how often the response I get is a simple statement about some combination of SEO, SEM and viral marketing. Without fail, the entrepreneurs cite examples of other products that have been built on largely word-of-mouth alone.

 

I would argue that the next level of detail is critical to a well-thought out strategy for user acquisition. What are the specific tools and techniques that will be used to improve and optimize your SEO and SEM results (e.g., avoid dynamic URLs, use descriptive page titles, etc.)? What other steps will you take to create awareness for your product or service (e.g., blogging, content syndication, email marketing, etc.)? Which aspects of your product encourage sharing and linking or generate network effects? Good investors or advisors will not only ask these questions but offer some tips and tactics or relevant contacts of their own. They’ll also look to understand the overall quality of the traffic that is being generated, seeking that coveted shift in traffic from paid sources and organic search to direct navigation. My rule of thumb is that 30% direct navigation indicates the beginnings of brand loyalty and that 50% is evidence of strong traffic quality.

 

Admittedly, tackling the problem of user acquisition is extremely challenging and complex. But that doesn’t mean that it should be ignored or given short shrift. There are many resources that can help identify best practices for various consumer acquisition strategies and tactics. For example, Google itself publishes some good SEO guidelines and other helpful hints can be found on SEOmoz.org and SEObook.com. However you identify the strategies or whatever the approaches you choose, the crucial thing to remember is that a good product typically isn’t good enough, especially if you’re competing against incumbent players. Investors are certainly aware of that fact and entrepreneurs should demonstrate that they are as well.

The short form vs. long form video holy war

As a board member of a company in the online video advertising market (FreeWheel), I regularly get to chat with many video content producers, owners and distributors. Without fail, the fervent “holy war” between short form and long form video zealots arises as a top of conversation. Without getting into the nuances of the debate, the short formists argue that the web audience wants its video in bite-sized chunks, unlike a traditional television viewing experience. They inevitably point to the popularity of YouTube as evidence for their perspective. The long formists maintain that short form video only dominates online video viewing because long form content has been slow to come online. Of late, long formists have cited recent data from Nielsen that shows the growth in the online video streaming of Hulu. Neither side seems willing to open their minds to the possibility that there might be a little grey in their black and white worlds.

 

I’ve found religion and my faith lies with the availability of high quality online video of any length. The only thing that matters online, like across all media channels, is the value that someone gets from the content. There are vast audiences for both books and magazines, arguably the long form and short form, respectively, of the print world. On television, I can get my comedy fix from 23 minutes of Seinfeld or from short sketches on Saturday Night Live. Why can’t the same coexistence of content be true for online video? After all, I’m just as happy to watch two minutes of low production value Riegel & Blatt as I am 43 minutes of Lost in high definition because each video provides me with (very different!) entertainment value. Content producers should not be occupying themselves with discussions about the appropriate duration of online video. Instead, the path to salvation is will be found by focusing on creating quality content and on working to get that content distributed, discovered and monetized.    

 

 

 

Under the Radar Conference

My friends at Dealmaker Media are hosting their Under the Radar Conference on Social Media and Entertainment this Tuesday, June 3rd. They’ve been kind enough to offer readers of my blog a $100 discount. Be sure to attend as there is a stellar group of companies presenting. And please stop by and say hello if you’re there as I’ll be roaming the halls.

Dude, that’s so meta

In recent weeks, everyone that I have spoken with claims to suffer from some form of information overload related to digital media. As content creation has become cheap and simple for the masses, and the cost of building online businesses has dropped, the volume of online content, activity and communication has grown enormously. According to a recent Deloitte & Touche study, nearly half of all U.S. media consumers are now creating content for others to see. People are not only explicitly creating content for consumption, but they are also increasingly broadcasting their online and offline activity via services like Facebook and Twitter. All of this information has led to the development of “meta layer” applications and services to help consumers filter and organize information so that they can find and consume what is most relevant and timely for them.

Examples of these meta layers can be found in many areas. Digg and Google News are meta layers for news. Friendfeed and Socialthing are meta layers for social networks. Bloglines and Google Reader are meta layers for blogs. Mint and Wesabe are meta layers for personal finance. (Even ad networks have meta layers, such as Rubicon Project and Pubmatic.) Unfortunately, the challenge for online consumers remains. Seemingly, the number of meta layers will soon present the same problem as individual sources of information do currently. Further, these meta layers take varying approaches to filtering and organizing information for the consumer. Fine-tuned algorithms, wisdom of the crowds, trusted networks, expert curation, explicit consumer actions and implicitly derived interests are all techniques utilized by meta layers.

Ultimately, consumers only care about the value that they get from using a meta layer and not the approach taken to providing that value. Consumers will want many different filters for content but will want to control when and how content is filtered and presented. Networks effects will be the true differentiator that separates the winners in the meta layer wars from the losers. If a person extracts greater value whenever another person uses the same meta layer, both the value proposition and the adoption of the layer will grow exponentially. Depending on the meta layer application, scale in the user base can provide consumers with higher quality benchmark data, greater market liquidity, more relevant results or unexpected personal connections. I haven’t come across a meta layer that really provides differentiated value via network effects. Until I do, and despite the need for them, I’m skeptical that any single meta layer application or service will reach the critical mass needed to provide outsized venture returns.