UGC: Just a Loss Leader in the End?

Back in the late 1990s, dot coms were all about the land grab. The idea was the more eyeballs and shoppers you got- POOF!- the more valuable you were. Never mind, the advertising market wasn't quite there yet and you were selling bags of dog food at a loss. The common wisdom has been that this was irresponsible, and truth be told, none of these companies had any business being publicly traded. But, more than half of the companies started during this time, actually stayed in business-- incredibly high odds for startups. To many, that proves that the problem wasn't that too many companies were started and nor was it their unfounded business models. It was that too much money was wasted on each one, and that it was never a game the public markets should have been playing.

There was, of course, one very important benefit to that land grab and wasted millions in investment capital: All those free services and cheap bags of dog food did bring a ton of people online. And they stayed online, even as many of the companies that did survive did so by charging realistic prices and shipping if they were in ecommerce, or switching to premium services and subscription fees if they were in content or entertainment. In fact, throughout the post 2000s, nearly every Web startup pitching venture capitalists or reporters were all talking up their premium services and subscription fees. You can still see vestiges of it with The Wall Street Journal's stubborn resistance to giving away content for free and early Web 2.0 companies like LinkedIn that didn't wait for an ad market to develop, but rather charged fees for things like job posting and "InMail."

As the wet blanket of recession has settled around the Valley and startups have come under pressure to monetize what they've built, I've wondered when we'd see the same flight to subscriptions and fees. Instead we're starting to see something similar but with a Web 2.0 twist: The rejection of user generated content in favor of professional content that's more consistent, reliable and palatable to advertisers.

This is bold shift, as the whole Web 2.0 movement was predicated on user generated content and the engineer-centric idea that you could build an easy to use platform, everyday people would create content for free, and other everyday people would navigate it, consume it and push the very best up to the top. It was rooted in the conviction that you didn't need the kind of doomed content partnerships of the past between New York, Los Angeles and Silicon Valley, because Web 2.0 was democratizing media and entertainment and ultimately that platform was the future, not the content gatekeepers.

This was clearly the most pronounced on YouTube, where the viral sensations like the Evolution of the Dance and the Grape Lady (ow! ow! owwwwww!) became the lexicon of an entire generation and the myth sprung up that everyday stars of viral videos would become household names with their own movies and HBO shows. (They never did.)  Sure there were whispered claims that as much as 50% of YouTube's views were actually of copyrighted material. Still, the company never would have sold to Google for $1.65 billion without UGC.

In other words, user generated content was to Web 2.0 what free-bags-of-dog-food was to ecommerce.  But flash-forward to 2009, and there's still no clear way to monetize user generated content, either from the sites themselves or the would-be stars.

Guess what? The Web has evolved to the point where you can monetize professional content. And that's why you see most of the smarter members of the Web 2.0 elite doing the very content deals they would have rejected a year ago. First, there was YouTube's rumored deal with the William Morris Agency, and now Slide has teamed up with the Valley-addict Ashton Kutcher and his company Katalyst Media. Katalyst also launched its site The Blah Girls at TechCrunch50 and produced 24-hours-at-Sundance with Kevin Rose last month, to mixed reviews.

Under the deal, Slide's FunSpace application on Facebook will be the exclusive distributor for Katalyst's reality show about its own company, KatalystHQ. Cheetos will sponsor the show. (What's that? ACTUAL REVENUES!? Between Cheetos and BlahGirls' sponsor Vitamin Water, Ashton's poor fans are going to need gym memberships, stat.)

Liz Gannes over at NewTeeVee questioned the logic in limiting distribution to an application within a site, even if it is the highly popular FunSpace on the highly popular Facebook. That was my first question too. But, Ashton's approach to all things Silicon Valley is very hat-in-hand, you-guys-are-the-experts, teach-me-your-techy-ways. He wants to learn what works as much as he wants to make each particular project a raging success. I think that's smart. And Max, with his metrics-watching obsession, knows what works online.

I talked to Ashton and Max yesterday, and while they noted the shift from UGC to professional partnerships was real, both said "loss leader" was too harsh a term for User Generated Content. They were both careful to extol UGC's virtues. Max talked it up as an unparalleled way for sites to get a volume of cheap and frequently highly viral content, and Ashton said that professional content had learned a lot from more on-the-fly lifecasting and the interactivity of user generated video. Indeed, the content of KatalystHQ is little more than Ashton's receptionist shooting video of life around the office.

But the inconsistency and unpredictability makes UGC nearly impossible to monetize. Said Max, "It's a much easier ad sale to do product placement in professional video where advertisers can control how they want it to be. They don't really want to rely on thirty second clips of people slamming into trees."  So UGC is a tool for bringing in users and content, but not very monetizable. Hmm...Sounds like the very definition of a loss leader to me...

But I grant their point that the shift hardly means that the move to democratize content is over. It's very possible there is still a genius way to monetize UGC, we just haven't found it yet. Remember how long it took the industry to come up with paid search ads? Back when Google was founded, many VCs deemed it too late to an already mature market with no good business model. It's also very possible a huge star does arise from YouTube and actually does cross-over to traditional media. But just like in the post-March-2000-era, companies need to focus on where advertisers want to spend money now, versus trying to sell them on the future. The future, simply put, will still be there when the economic crisis is over.

But why should we believe ties between Hollywood and the Valley will finally bear all that much-promised fruit? Max pointed to nearly every broadcaster voluntarily making content available online, the surprising success of Hulu, and viewers increasingly choosing the Web as the place to consume even long-form content. "A year ago, I think (Slide's sassy head of business development) Keith (Rabois) would have spit in the face of anyone suggesting a content deal with us," Max said. "Now you can't argue against it." The wake up call for Ashton? Five years ago, if you made people chose to get rid of their TVs or computers, most of the ones he knows would have said computers. "Now, you ask the same question and hands down everyone would get rid of the TV. You don't need it anymore."

When I teased Ashton about his third splashy Valley press tour in just a few months, he added, "By the way, I'm not going away so people can brace themselves for that."

Is a deal with Twitter next?

Do I Know the Digg Guys or What?

Some of us (Read: those who don't plan/have a book to promote in November) choose to go to London at a different time than everyone else in Silicon Valley. So since I'm the only person in the Valley not at FOWA in London right now, I didn't hear Kevin Rose's keynote. But apparently I didn't have to. It nicely echoes what I wrote here: That Digg has picked a fork in the road and is ready to grow up and prove it can be more than a fan boy site filled with Microsoft ads. (Convenient timing for me too, since I'm updating "Once You're Lucky" for paperback.) As someone who has spent a lot of time giving Digg tough love, but also defending what Kevin and Jay have done well, I'm rooting for them.

(Sorry for the crowing, but I'm getting a lot of kudos on my latest Valley Girl column and am enjoying feeling like an actual reporter again today, less obnoxious self-promotional media persona. Well, except this somewhat self-promotional post and my upcoming interview on KQED's Forum in an hour...)

Finally a Decision: Digg Isn't Selling (for Now)

I'm totally removed from the Valley and its water cooler gossip having been on the road for what feels like 25 years. The good thing about that is I'm getting a crash course on national entrepreneurship, ie life outside the echo-chamber. The bad news is I'm totally outside the Valley loop. But I wanted to give a shout out for Digg's new $28.7 million funding round.

I don't have tons of special insight here. I've mostly given the Digg guys some space after the book, because there were some mixed feelings on how they were portrayed. But my sense from knowing them well and seeing the flood of speculation over rumored acquisitions, was that they've spent much of 2008 staring at a fork in the road. As I've said before, they were the only company in my book that didn't raise a "recession round" late 2007/early 2008 which was to me a sign that they frankly were assessing their options and if a much rumored and talked about sale was going to happen.

Oh, Wait, Katie Couric Actually WAS Wearing a Digg Shirt on YouTube?

I thought it was a hoax at first, then I saw the whole video. Ok, ok, it's easy to mock, and a lot of people are doing that. But as Mr. Lacy pointed out, "It's really cool that she gets it or her people do at least." As he further pointed out: The Inquirer doesn't even get the basics. Good point.

More from Mr. Perspective, via IM:

"it's a huge break. it's still really mainstream and people are getting it. it must be exciting. Kevin is just a guy who started something that people really like. maybe some day it will happen to us."

That is pretty much the magic of Web 2.0, isn't it? Also puts our own little echo-chamber in perspective. It's fashionable to think Digg is done these days, but it's clearly still spreading.

No, It's Not Game-Changing

Here's Henry and Aaron's coverage of Microsoft's announcement this morning. Although Henry says it won't work, I think the "knobs" (as they're affectionately known in-house thanks to a snarky Yahoo commenter) give way Microsoft too much credit for creativity and strategy here.

Search engines that reward people with prizes and cash have been tried before with the idea, "If you're searching anyway, why not search where you can make money?"  Because I don't search to make money. I search to find information fast. A few pennies here or there isn't going to pay my mortgage. It's not enough of a value add to accept an inferior search engine (sorry, MSN still is. It pains me to say it, but Yahoo is too) or even enough to change basic customer habits. I don't even have ads on my blog (yet) because the take home would be so low, it wouldn't be worth even a marginal annoyance to my readers.

Similarly, there was a big debate back in 2006 about whether or not user generated content sites should share in advertising fees with their content creators. The most famous example was the smack-down between Jason Calacanis when he was running Netscape and Digg. Calacanis was actually offering substantial money to switch and few top Diggers did. I have long said the key to successful UGS sites is tapping into human needs like connecting with friends and validation. Those are so much more rewarding than cash. People use and love these sites because they are not work. I don't want to get paid by Facebook, I don't want to get paid by Yelp, I don't want to get paid by Digg. I want to use the sites because I love them and conversely I want the founders to have to WORK to retain me as a contributor. I'd rather them plow that money back into making the site better than give me a cut.

In short, this strategy is only new and innovative if you have a time machine. And it has almost never worked. Nice try though, Redmond!

VCs + Crystal Balls = Mobile Boom?

This is a little delayed, as I wasn't at the event. But here's a video Eric Savitz and I did for Tech Ticker on the Churchill Club's Top 10 Tech Trends event, held last week. Interestingly, almost half of the trends were about mobile. I've also reported on Tech Ticker that some Web entrepreneurs like Kevin Rose also thing real mobile innovation is about to happen. Here's Eric's report:

It's hard to know. Anyone who has been around the Valley has heard the mobile hype before and we have little in the name of real innovation or huge public companies to show for it. Two good things could come out of the current mobile excitement. (It's not quite hype yet.)

One: We will finally see some true innovation in mobile apps. Handsets are great and all, but software is where the magic happens. A bad UI can make the sexiest phone abominable to use. Thanks to the iPhone real software and real apps are possible for the first time on phones. Who isn't excited about that? Even I am and my fingers are too cloddy to work a touch screen keyboard!

Or, two: Companies aiming for the mobile market will get bogged down in regulation and fragmented markets, die a slow death after raising too much money, and we won't have to hear about MOBILE! for another few years.

Let's suspend reporter cynicism and hope it's different this time, that younger people and products like the iPhone will actually make us as mobile-centric as Asian markets-- hell, even European markets. I'd love to have a phone that didn't anger me at some point in the day for one reason or another.

Discuss the Book: Who Is Your Favorite Mogul?

So given the Twitters from a dozen or so people who tore through the book this weekend, it's time to start a series of discussion threads. (Yay!) They'll all be tagged under "Discuss the Book" so feel free to weigh in later, if you haven't started reading or -- gasp-- haven't gotten a copy yet. ;) I promise I will read every last one, and probably comment back to all of them too.

I always like to discuss books I've read-- I was a literature major after all-- so this is just for fun or in case anyone has questions for me. A book has certain disadvantages over a blog when it comes to interaction, so this is also a somewhat clumsy attempt to skirt that. If even one person responds, I'll keep posting questions for discussion once a week. If no one does, I'll cry. JK, but I will likely focus my energies on other posts.

I'm starting with the first question I always ask readers: Who is your favorite "character"? I have to put it in quotes, because these are actually all real people and the book is not fictionalized in any way. But because it's written in a narrative style, people who don't know them tend to talk about them as "characters." You can take this question in any way: who is the most inspiring, who is the most entertaining to read about, who do you love to hate.

So far, I should say most people I've asked feel they "know" Max Levchin the best, but the favorite -- particularly for people outside the Valley-- tends to be Jay "F--- the Sweater Vests" Adelson. What do you think?

The best answer will win a prize. By best I mean either articulate, surprising or, ahem, the only one. Prize TBD.  Maybe a Tech Ticker T-shirt, maybe a signed galley, maybe one of those annoying Yahoo! buttons that yodels when you press it, maybe my sxsw speaker's badge- ha ha.

Ok, ready, set, comment!

Photos from My Party!

First from Valleywag's nice (shocker!) post about it. Second, from sarahlacy.com on flickr. More on the way!

I'm stunned everyone looks so great given how hot and sweaty it was! A few teasers down below from my brilliant personal photographer Geoffrey Ellis (aka Mr. Lacy). Me signing through throngs of people, then two guys working on being "good" Evan Williams of Blogger and Twitter and Jay Adelson of Equinix, Digg and Revision3. (Although people tell me the "Once You're Lucky" cupcakes were tastier...) Again, my friend Johanna did an amazing job on this party for a shoe-string budget. All you people should hire her!

Hey Look! My First Snarky Review!

From the San Francisco Chronicle. His main critique is that my title is misleading because I don't write about every single company in Silicon Valley. Wow. There are thousands of Web 2.0 companies, and frankly, most of them not that interesting. Even I wouldn't want to read that book. I wonder if he had a problem with Moneyball only being about the A's when the subtitle refers broadly to baseball? It's definitely a new one as critiques go, but Mr. Banks I am sorry to mislead you so.

And per the critique that the title doesn't apply to Jay or Zuckerberg, I'm not sure you got what the title means and reflects in terms of an overall Valley mindset. Quite possibly my bad. Jay took a company public that was worth more than $1 b. and is still in business today. That's actually considered a "win" in the Valley. Netscape ultimately was beat my Microsoft, so not sure if you're going to not count one you should probably not count both. [UPDATE: Marc sent me a note point out this was unfair. Microsoft "won" because of a monopoly, and AOL bought Netscape for a pretty penny.  I just meant a lot of huge wins aren't necessarily huge, profitable brands years later. But that doesn't take away the "win." It came out wrong though.] And the point re: Zuckerberg was he benefited from the phenomenon by being mentored by people trying to prove their second time; hence Facebook's financial structure and the reason Zuck has been able to hold onto such control.

But, my snarking back to him aside, they're valid points. What truly stunned me was this:

"Lacy portrays Adelson and Rose's mutual "man-crush" with good humor and relish, in a way that seems possible only because she is a woman. Despite their ritualistic grumblings about the media, the numerous men Lacy interviews have no trouble opening up to her over crepes at Ti Couz or drinks at the Fly Bar."

Wow. Usually it's only snarky gossip bloggers or anonymous Twitters that are comfortable being so outright sexist. Way to go, Mr. Banks! I applaud your absolute lack of a filter or political correctness! Of course, it could just be because I've been a business reporter in the Valley for ten years and built a lot of sources, but no, no you're right. It's because I'm a girl. 

My Husband Gets Transported Back to Junior High (In a Good Way!)

(This is the second in a series of guest posts that I hope will become more frequent on sarahlacy.com-- despite the name of the site! Especially the next few days because I'm in New York absurdly pimping my book and shooting for Yahoo. This one is by my lovely husband Geoffrey Ellis, who couldn't stop gushing about this site, so I asked him to write about it.)

I was a total mixtape nerd back in the day.

Before the whole CD revolution, I was all about vinyl. I'd make at least one mixtape a week. It was a huge challenge to fit the exact amount of songs onto one side of a cassette. Not only was fitting the songs a challenge, but ordering them so they made sense was part of the fun.

Here is the ultra-geek part of it all: It was exhilarating. I lived for it - thinking about it all week, making little notes to myself. So the second I discovered muxtape.com and read the words-- "Muxtape is a service for creating mixtapes"-- I felt transported back to my days of skateboarding, working part-time in record stores and living the life of relatively low responsibility.