Viral + Monetizable = StartUp Magic Quadrant

Viral + Monetizable = StartUp Magic Quadrant


Written by Bernard Lunn / January 21, 2008 8:19 PM

viralmarketing.jpg Hotmail is credited with inventing online
viral marketing. I am sure there were earlier examples, but the whole
point of viral is that it’s so infectious that it obliterates memory of
earlier attempts. I was an early Hotmail user – it was just so simple,
obvious and useful.

Most of the Web 2.0 success stories have been viral. Apart from
Hotmail, this was not true in Web 1.0. The game at that time –
hopelessly flawed in retrospect – was raising tons of money to
advertise (online and offline) to get traffic. Flickr, YouTube,
Twitter, Facebook type services don’t need to advertise to get mass
scale.

Then use Amazon Web Services or equivalent for your infrastructure;
you don’t even need to raise money for capital expenditures, you just
pay as you go as a variable cost.

That is a major revolution in business; it overturns the accepted
wisdom that you needed mega millions to build a consumer brand.

But there is a problem with all this. I don’t believe I ever clicked
on a Hotmail ad. I don’t think I even looked at them. Here is the nasty
law:

“The more viral it is, the harder it is to monetize”.

These are the three streams of the Internet – communication,
entertainment and research. You go online to communicate, have fun or
find some information. The viral properties of each stream are quite
different:

  1. Communication. This is perfect for viral. Think Hotmail, Twitter, Skype and Facebook. The viral property is built into the service.
  2. Entertainment. Think You Tube or Second Life or any online
    game. I tell people about a really entertaining video. The viral
    property is weaker as it depends on a stream of loss-leader hits.
  3. Research. Google got viral adoption because the alternatives
    were weak and it was a major problem faced by millions every day. As it
    was free and dead simple to use, there was no barrier to adoption; but
    the viral spread was only possible because it was such a big problem
    and it was so much better than the alternatives. This happens very
    rarely.

Only Communication is a sure fire viral success. It only works when
it is a genuinely new form of communication (webmail, social
networking, microblogging). You cannot launch a web mail or social
networking site today and expect viral adoption. But when it is a
genuinely new form of communication, the viral adoption is stunning in
its speed. I can see one new form of communication out there today that
could get mass viral adoption, which is video conversations as
exemplified by Seesmic.

When you look at the three streams of Internet services –
Communication, Entertainment and Research from a point of view of
monetization, the order is reversed:

Research is simple to monetize. It leads to a database of
intentions and that leads to any number of advertising models that have
a) proven returns to advertisers b) proven use for searchers.

Entertaiment can be monetized through advertising and “freemium”. We are used to the idea of ads to get free entertainment on TV/Radio and used to paying to go to the Movies or rent DVDs.

Communication is really tough to monetize through advertising.
It has to be free to be viral (and it can be free because the marginal
cost is close to zero). So the only way to make money is some form of
advertising. It is just really, really hard to find a good way to offer
advertising around a communication service that works for both the user
of the service and the advertiser.

The big debate about Facebook’s value and their Beacon debacle is a
reflection of this fundamental problem. So is the online debate about
Twitter monetization and the heat that eBay got for not being able to
wring the expected profits from Skype.

There have even been attempts to offer free telephone services in
return for listening to ads. They were ridiculed and have failed. Yet
we assume that it is OK to do this with online communication.

The simple fact is that when we are communicating all our attention
is on communicating, so ads don’t get our attention. Entertainment can
have breaks; TV has accustomed us to this idea. But try saying “we
interrupt your attempt to get a date to give you this message from our
sponsor”. I think the sponsor would suffer some serious brand damage!

Facebook is trying hard with some new models to monetize the social
graph. But they all hit a fundamental problem. On page 44 of
“Wikinomics, How Mass Collaboration changes Everything” it says
“relationships are the one thing that you cannot commoditize”. That is
like the law of supply and demand, you can count on it and take it to
the bank. So any attempt at making social network relationships into
either an Amway scheme (I make money by selling stuff to my friends) or
a Beacon scheme (Facebook makes money by me selling stuff to my
friends) will ultimately fail.

This does not mean that you cannot make good money on a new form of
online communication. If you have a new form of communication and you
get mass scale virally, you will get good returns on capital.
Even if ad monetization rates are very weak, you make up for low rates
with scale. As it costs so little to get that scale, it is still an OK
business. Somebody who needs scaled-up features to add to their
platform will pay good money to acquire you.

However that is a small prize compared to a Research service that
gets mass adoption. Google is valued at over $200 billion because they
got viral adoption for a Research service. They have even found a way
to make email advertising effective. I now use Gmail and the ads are
often bang on target and I have clicked on ads in Gmail. (They are also
often totally, crazily wrong; my favorite was when I was writing about
somebody called Cooper and got ads for Mini Cooper cars).

Services can mix Communication, Entertainment and Research. However
the core proposition has to be clear. A new Communication medium is
initially always Entertaining just because finding new ways to connect
with people is a buzz. But once that “gee whiz” early adopter fades,
the service has to be useful on a daily basis for mass markets. New
entertainment models have to be social to break into what is already a
hugely powerful entertainment industry.

Research is currently solitary. It is not fundamentally
entertaining. I don’t see fun as a driver for Research beyond a gee
whiz phase. However collaborative research, search with a communication
angle, does look like the next big thing. My definition of Web 3.0 is:

“The combination of Web 2.0 mass collaboration with structured databases”.

If you can build a research tool that propagates virally and gets
more useful with each person who uses it, you build a business with
phenomenal power. That is a lot easier said than done. The
purely technical challenges of creating structure out of lots of
unstructured input is considerable. Much tougher is the chicken and egg
problem; the tool has to be useful out of the gate, which is tough if
the use derives primarily from the interaction of many people.

This means that funding has to be substantial to build enough value
before the community kicks in to create value. That is why services
such as Mahalo and Freebase raise VC measured in tens of millions of $.
This is not like a pure Communication service that can get viral
adoption out of the gate (but where the eventual returns are limited).

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