SharkJumping

The Social Network Service Quest for Premium Revenue = Virtual Items

What's become clear in the past 24 months is that the rise of social network services (SNS) is changing the face of the consumer Internet through a massive user base combined with enormous engagement metrics.  What is obvious is that advertising alone isn't going to pay the freight for these services, at least not at the rate their owners would prefer.   An article in the NYT today about MySpace's quest for advertising revenue (see here) points out the same dilemma, but without providing any solutions, outside of better targeted advertising.

The fact is that most successful media models offer 2 revenue streams - premium/subscription and advertising - Newspapers, magazines, XM/Sirius, and cable television come to mind.  It doesn't mean you can't create value with only advertising, as broadcast radio and broadcast television have done, but the holy grail is an additional revenue stream, and preferably one which doesn't reduce the overall audience count through a "subscription wall".

As you might expect from me at Meez, we believe that the required secondary revenue model should be a virtual item-based one.  Why?  Because at a SNS, roughly 10% of your unique users provide roughly 50% of your overall engagement (no one calls them page views any more).  This means that your best customers are actually your worst advertising targets since they are on your site so much that they "frequency cap" on advertising since they have seen every single ad you can possibly show.  Yet they are your most loyal users, so they are usually most willing to pay if you give them a good enough reason (and a convenient method, but that's another upcoming post).

The best reason for them to pay is that in an SNS, which is really about people interacting with each other, the #1 goal is STATUS - how can I be different, better, have more authority, etc, and most importantly, how can I impress those around me with that status?  It's so basic, and is sometimes overlooked.  It's not about getting loyal users to pay for premium services like Music since those are generally solitary services which don't take advantage of a social network filled with people checking each other out. It can be as basic as a virtual gifting system, and as sophisticated as a fully built-out virtual item marketplace.  The "online bar" FUBAR is probably the most developed in the US, with a relentless focus on getting users to pay to impress members of the opposite gender, or to somehow benefit the group through happy hour sponsorship, but there are numerous other examples emerging.

In an SNS, a well structured virtual item program should be able to generate, on average, $5-7 monthly from 5%+ of the monthly unique users, and I've seen both numbers go higher in certain cases.  That compares to $3-5/year in advertising from a unique user.  If a SNS can't technically implement this system, there are now virtual item platform providers like TwoFish (where I sit on the board) which can accelerate a site's development of this revenue model.

This doesn't mean I believe only in virtual item models, as you see with the now popular "Free to Play" MMO model in gaming.  It's the combination of the two revenue models which is so powerful since it matches harder core users with a great way to monetize them, while still leaving completely open all of the advertising opportunities that come with large audiences.  So if you're an SNS, you MUST consider implementing a virtual item/gifting program as a way to generate additional revenue which uniquely fits the social aspects of an SNS vs just subscribing to premium service.

Richard Wolpert Starts LA Media Fund - Great Move

The news broke yesterday (here)that yet another early stage digital media investment fund is starting, this time to invest it LA-based companies.  The investment partners are William Morris Agency, Accel Ventures, Venrock and AT&T.   None of that is too surprising, and I wouldn't normally focus on it since there are numerous players chasing the Hollywood Meets Silicon Valley dream, just as there were last Bubble, and most of them go away quietly or blow up spectacularly.

However, for me the key difference here is that Richard Wolpert (picture), my former boss at RealNetworks (NASDAQ: RNWK) will be overseeing the fund.  Richard helped lead the acquisition of the Rhapsody music service when I was running it, and then he did a great job at managing Real's consumer business for the year that I was there.  For those who don't know Richard, he is one of the few executives who can actually fuse business, technology and media, and he has a great track record of doing so, including running Disney's Internet Group, being Chief Strategy Officer at Real, and originally starting his own software company, which he successfully sold.

In addition to his executive roles, Richard is an angel investor in a bunch of early stage entertainment companies, such as 3 Rings, home of casual MMO Puzzle Pirates, and he's a frequent blogger as well (here).  Finally, he's a power player in the LA media scene, having formerly had an interesting partnership with billionaire Ron Burkle and super-agent Michael Ovitz, so all in all, it's a great mix of skills, experience and relationships for the new fund. 

It's too bad Meez is located here in SF :(

Great NYT Article on Children and the Internet

New York Times technology columnist David Pogue recently posted one of the best articles I have seen rationally discussing how dangerous is the Internet actually for children.  I have posted an excerpt below, but the entire article should be read here.

“Sure, there are dangers. But they’re hugely overhyped by the media. The tales of pedophiles luring children out of their homes are like plane crashes: they happen extremely rarely, but when they do, they make headlines everywhere. The Internet is just another facet of socialization for the new generation; as always, common sense and a level head are the best safeguards.”

As a father of 3 children and CEO of social entertainment company Meez with millions of teenage users, I spend a lot of time looking at how young people use the Internet and drawing the line in the sand over different types of behavior, whether at home or at Meez.  But I find myself constantly arguing with friends who are completely and irrationally convinced that stalkers are after their children, whether it's in the local park or on a PC.  I recently even sat on a panel with a young social network CEO who repeatedly argued that the key differentiator for his service was that he had hired a former FBI profiler (Jodi Foster, maybe?) as a key part of his team.

I realize that fear-mongering is a way for certain companies or reporters to break through the clutter of every day news, and that some individuals will try to play up the risk in order to help their businesses, but it's nice to see the subject tackled in a rational way unlike most of the drivel I normally see around the topic.

Friendster - SE Asian Tiger Social Network

I love living in the Bay Area, but there are some times when it amazes me how provincial some of the amazingly smart tech folks are here, mainly when it comes to discussing Los Angeles (loathed) or Twitter (loved).  However, this strange behavior recently occurred when I told friends that Meez had negotiated a deal to be featured as a games and avatar partner for large social network Friendster - this was followed by blank stares and eventual questions as to why we bothered to do so.  Well, this is the answer.

Friendster is a top 15 web site in the world (that's the whole world, not just Northern California).  It gets over 30M unique visitors a month and more than 10M daily visits - those are extraordinary numbers.  Its users are clustered primarily in a contiguous region (Southest Asia) whose GDP and populations are increasing quickly and which is relatively US-recession proof.   Oh yeah, the site is growing rapidly.

Once you hear those facts, you have to make a couple leaps of faith.  First you must forget that Friendster was once the hottest and arguably first social media network in the US since that is no longer relevant, but most Silicon Valley people can't seem to forget that missed opportunity - now they have a different team, different investors and mostly different site.  For a somewhat harsh view of the company's earlier trajectory, see INC Magazine article here.   And then you must agree that there are countries outside the regions of Northern California, Western Europe, China and India that matter, and in fact, matter a lot - that's as hard for my peers to believe as it is that there might be great companies in the US mid-west.

Southeast Asia has over 500M people, and has multiple economies growing at 7+% per year.  As a comparison, SE Asia had 1/3 of Europe's population 100 years ago, and is now larger than it - and Friendster is the dominant social media network in many of those countries, and that they form a mostly contiguous region, unlike being the top network in Turkey, Ecuador and Bulgaria, for example.   

Is the short term SE Asian revenue potential much lower  than the US or UK, especially when it comes to advertising?  Of course.  Could other players like Facebook and MySpace start to take share in the region?  Yes, but it's not a core focus for them, and Friendster is evolving rapidly, with local language support and an open developer platform just being two of the most recent feature releases.  Is it logical to assume that some of the growth we see in China and Korea in gaming, SMS revenue, and virtual items would come to at least some of the countries in SE Asia?  Of course, which is why we chose it as our first expansion area.

Does that mean some people will never forgive Friendster for not being Facebook or MySpace?  Yes, but once you point out the geographic opportunity and the dominant position the company currently enjoys, then it's no surprise that we believe Friendster is are our key partner for Meez in SE Asia.  I'm not the only one starting to see the value - see recent post by TechCrunch here.

Testing Twitter Journalism with Silicon Alley Insider

As part of the GDC experience, I'm contributing a bit of reporting to Silicon Alley Insider through an ongoing twitter feed.  Still not sure if it's good or bad that journalism has been reduced to 140 characters per post, but it's a good experiment for a great tech news site (of which my brother is Chairman).  You can subscribe directly at seadine@twitter.com or see it at the SAI site.

Best Web 2.0 Lines

After an exhausting 36 hours of Web 2.0 mayhem, I'm calling it a day, even though there are another 36 hours to go.   The MySpace party at MOMA last night was a really fun event, with Rupert Murdoch bringing a splash of So Cal to the Bay area, but what really stood out for me were 2 lines from very smart people who will go un-named to protect the innocent.

1.  "Remember you're raising cattle, not pets" - a veteran entrepreneur explaining how he looks at each company he starts.

2.  "I sold them a thin-slice exclusive" - a bus dev veteran explaining how he extracts the highest fees possible from his intellectual property

There is another post coming about how we have now officially checked all of items in the "how to recognize a bubble" checklist, but that will have to wait...

The Rise of Amazon Web Services - S3 and EC2

At Meez, we're in the process of switching the majority of our bandwidth, storage and computing power to Amazon's Web Services group.  AWS is a suite of web services which seems to be catching fire with many of the smaller web start-ups in Silicon Valley, especially those who are launching Facebook applications when you're not sure how successful it will be when you first launch them.

After spending a reasonable amount of time with due diligence on various current customers of AWS, the benefits seem clear.  Amazon has built a series of massive storage/bandwidth (S3) and server farms (EC2), and they're willing to lease computing power on them to other companies in a utility-like way, meaning you just pay by the byte in most cases.  Your upfront costs are ZERO, and the ongoing costs are incredibly competitive, although there is no guaranteed level of service and it doesn't currently support MS technologies, just Linux.  In addition, there are apparently some growing pains in the services, such as inadequate tools, occasional bugs, and some possible latency issues with certain services.

That having been said, we're huge fans, and it looks to us and everyone I survey that its a really compelling offering vs our alternatives.  So why is Google not doing this, or IBM or Sun?  Rumor is that Google's offering is 6-12 months away since they're over-thinking it, that IBM hasn't even seen the opportunity yet, and even stranger, that Sun has had an offering similar to AWS for a while now, but no one actually uses it since no one I asked could even remember the name.  So it means that Amazon has quite a runway for the next 6+ months, and so far, I'd say the buzz is really good on it.

The Chris Sherman Rule: Virtual Worlds are Next

Chris Sherman (bio here) is someone I have interacted with for 10+ years across digital media.  Starting with Multimedia Wire, followed by UGO, and multiple other mobile, music and conference companies, my personal rule of thumb is that if Chris Sherman is involved in the new sector in some way, then we're 1-2 years away from it being a mainstream phenomenon. 

It doesn't always mean that Chris knocks it out of the park personally on each venture - it just means that he's generally right about what's going to be big, just like the first Casual Games conference he hosted 3.5 years ago in Seattle before anyone major paid attention to the category.

So what's Chris promoting these days after selling his Austin game conference company?  Virtual Worlds 2007 - so obviously, I'm pleased with where Meez is located since it means we have 18 months to make it big :)  That is the Chris Sherman rule...

Meez completes its financing round

As word has leaked out today due to regulatory filings, we closed a $5M+ financing round with Battery and Transcosomos for Meez here at Donnerwood, and we also completed a key corporate acquisition in August, so it was a busy month.

Now we're focused on rolling out additional features and partnerships to drive Meez avatars farther into the mainstream, and to continue to increase our revenue through our integrated advertising program which has worked so well with Clinique, Metropark, Marshalls, Panasonic, Hairspray movie, etc.

Given that the most recent Pew Internet study indicated that only 9% of Internet users have created an avatar, we all have a rich market to mine in the next few years.

The Absurdity and Jealousy around Google/AMES Jet Deal

As was announced everywhere earlier this week, the Google founders & CEO have struck a $1.3M deal with NASA to park their corporate jets at Moffet Federal Air Field, a pristine gov't airfield 2 miles from Google headquarters - see NYT article here, and exact locations here -

This is no longer news.  What's astonishing about it is the amount of jealousy that it has triggered among what I call the "geekerati" of Silicon Valley, especially the wealthy venture capitalists who work just a few miles away on Sand Hill Road.  It was one thing when the G founders bought at 767 - that just showed they had more money than anyone else, which may be obnoxious, given the "Do No Evil" mantra (imagine the Terra Pass carbon offset required), but that was just cash, like any other random sheik from the UAE could do. 

What's causing waves here is that this deal is about INFLUENCE, and not cash since no one else could even get this deal done.  It may be that Google has pillaged AMES for a series of employees and discussed building a campus there, but this was the first known instance of the founders getting absolutely preferential treatment in this manner - thus the Valley jealousy and incredible banter about it.

So why the absurdity title?  Here is the big issue.  We all know that Moffet is the most desired real estate in the entire Valley, and that landing rights are insanely valuable, not just from a time perspective (longer runway than SFO, few other planes), but more importantly, from a bragging right perspective.  There are at least 100 people in the Valley who simply have too much money to spend in their lifetime - since most of them have private planes, why doesn't the government open up the bidding on a limited number of slots at AMES? 

Does anyone realistically think that Larry Ellison, Jim Clark, or any random very wealthy Benchmark or Accel partner wouldn't bid more than $1.3M to park their jets there?  I have no doubts that 20 wealthy folk would pony up $5M each per year to park their jets, brag to their friends, and show off to their mistresses - that's $100M a year, far better than the lousy payment NASA is getting now.  So why does the Google gang get this deal?  I love the chutzpah personally, but as a US tax payer, it strikes me like so many other no-bid deals one finds in 3rd world countries, or wherever Halliburton is bidding in the US - let's open it up to a true free market rather than favor one player.