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?

Yeah, so like I Said, OpenTable Is Gussying up for an IPO...

Earlier this month I made my feelings about OpenTable abundantly clear, and as I said then, the reason the company is most likely anxious to get all those unused dining checks off its books is because it's gussying up its financials to go public. Of course, I thought the company would wait until the market recovered. Nope, they filed today, which means OpenTable is either very optimistic about a turnaround in 2009 or really needs some cash.

Since flaming the company, I've had a few conversations with people who really do love it, find it useful and have not had my issues. (Although most everyone I've talked to agrees the dining rewards program is lame, at best.) Still, should OpenTable price, I don't think this is a stock you want to own for the following five reasons:

1. Did I mention it's 2009? Have you seen the markets?

2. OpenTable is essentially a local business. They have to conquer territory market-by-market, restaurant-by-restaurant. Local is one of the hardest and most expensive things to do well. It's also one of the only things that the Internet doesn't particularly make easier. Just look at Craigslist: The gods of local. The site's traffic is still dominated by a few big cities. Local hits tipping points and network effects but only in each city. There is traditionally no national tipping point for locally-oriented businesses. In other words, a restaurant in Memphis isn't going to do something because a restaurant in New York finds it valuable.

3. Margins. Imagine that! OpenTable isn't very profitable selling software-as-a-service. That's because it's a very expensive business model to scale, as I've detailed at length here. In short: The software doesn't sell itself, subscription revenues are monthly and steady, but lower in dollar amount and customers can cancel at any time. Such is the pay-as-you-go business model. You can build a huge business here as Salesforce.com has proven. Unfortunately, it's really the only one who has proven that. Even Netsuite, who I'm very bullish on, has struggled with profitability.

4. Restaurants are going to be closing and cutting corners as the recession wears on-- that can't be good for revenue growth. When fewer people are coming in your doors, do you need to pay for a reservation service?

5. The online travel agency effect. I could be way off here, but a lot of San Francisco restaurants just take reservations on their own sites, eschewing OpenTable. They don't want to pay the fees, and why should they when building and maintaining a Web site isn't exactly hard in this day and age? OpenTable may have brought restaurants into the online age, the way sites like Expedia and Travelocity did for the airlines, but increasingly vendors hate middlemen. Especially middlemen who control the customer relationship and take a cut of the proceeds. A lot of restaurants will still want to outsource, of course, but I think it's a risk when it comes to growth.

To OpenTable's credit, they reached out to me after that nasty early January post, and I was supposed to have a sit down with CEO Jeff Jordan. That's not happening now thanks to the quiet period! But I look forward to talking to him when he can talk again. OpenTable has always been ostrich-like when it comes to media so maybe there's something I'm missing here. I'm always open to someone changing my mind, as Tony Hsieh knows!

Amazon: The Exception to all the Rules

My new goal is to get Jeff Bezos on TechTicker. That's right. Fair warning Mr. Bezos: You are the new Moby Dick. (Larry Ellison, you toyed with me for too long.)

Since I've historically been a Valley beat reporter, I've never gotten to interview the Seattle-based Amazon CEO, and I am increasingly amazed with his leadership. Om Malik put it best on TechTicker several months ago, when he said Bezos is the closest thing any Internet company has to a Steve Jobs. Before you hit that comment button: Larry and Sergey aren't CEOs, and Facebook is too young to call.

First off, there are almost no tech founders who remain CEOs from starting a company through its IPO and beyond, particularly given the short-sighted nature of Wall Street these days. The only other one I can think of is Ellison, who I've said before deserves to be the highest paid CEO in tech, for his uncanny ability to get where his business is going from a technology point of view, a market point of view and a business point of view.

But more than that, Ellison is that rare breed who can inspire and terrify his people at the same time, and exert enough authority that Wall Street doesn't question him. Ok, maybe the question him, but they'd never dream of ousting him even in the bad times. In fact, over the last few months while everyone has been saying no other tech CEO has the same value to his company as Jobs, I've argued Ellison is a less-sexy version of the exact same dynamic. (By "less-sexy," I mean he sells databases and middleware, not iPhones. I only swoon for Mr. Lacy and this man.)

Bezos is the only CEO of the Internet generation cut from Ellison cloth. He has routinely stood up to Wall Street and was often considered an absolute dog next to eBay's "monkeys-could-run-us" lean and mean business model. Nonetheless, he thumbed his nose at Wall Street with his famous chortling laugh, which you can hear in the clip below.

Similarly to Ellison, Bezos was a visionary in terms of product (cloud computing and the Kindle), knowing his customers (a brilliant user interface, pioneering recommendation engine technology that actually works, and Amazon Prime) and business (investing more money and continuing to discount quarter-after-money-losing-quarter believing volume would win out in the end).

So I know what you're thinking: What about that Internet "four year curse"? Well, it only holds true for the do-no-wrong Internet darlings like Yahoo, eBay and Google. Amazon never quite fit that. It never had a golden-goose of a business model, so it never got lazy. It never had the luxury to get lazy.

In fact, Amazon is increasingly the exception to not only to the four year curse and the horrific 2008 fourth quarter, but a lot of stories I write. Back in August, I wrote about the antiquated publishing industry. One solitary bright light: The Kindle, which the fourth quarter results showed actually boosted book sales, something so counterintuitive even Amazon-bull Henry Blodget totally mis-calls it in the above video. In a time when Borders is fighting for its life and Barnes & Noble had to cut jobs for the first time in its corporate history, that's nothing short of amazing. (And as a reporter pitching a new book, I'm nothing short of grateful.) You have to wonder whether Bezos sold his soul to the devil during one of those post-2000 quarters when it looked like the company was going to go belly-up.

Then there was my December column on how stagnant ecommerce has been since the 1990s. My one exception? You guessed it: Amazon. There are a zillion small reasons why I always try to make purchases on Amazon, despite that old conventional wisdom that you can't build loyalty in ecommerce because it's so easy to click to a cheaper competitor. Among my reasons: Amazon's superior user interface and search, the ease of one-click purchasing and free overnight shipping via Amazon Prime, and the affiliate system. Amazon has given me more than $1,000 in credit this year, thanks to people clicking through my site to buy my book and other items on Amazon. Speaking of, anyone need to do some shopping? That link is up and to the left...

So, keep up the good work Mr. Bezos, and just know that me and my camera crew are coming for you.

It's Not Often I'm Speechless.

I really don't know what to say about Michael Arrington and the whole spitting thing. Let's start with the fact that the clip of me throwing water on him is no longer as funny to me as it was yesterday, even though it was clearly staged and you can hear me laughing as I walk off.

I thought about penning a quick column for BusinessWeek about the topic, but it was just too close to home. After all, I've got some experience here. I haven't ever been spat on (yet), but I have had a few very disturbing physical things happen to me over the last few years, and more than a few threats. And at least once a day someone, somewhere online says something brutally mean about me. Notice I didn't say "something about my work"-- something about me personally. And 99.99% of the time, they've never met me.

But more to the point, Michael is a good friend of mine and I know him. I know him well enough to know the characterization of this ValleyWag post is utter bullshit. Michael didn't seek out being famous. That doesn't even make sense. He started TechCrunch at a time when startups were utterly unsexy, and no one thought you could build a huge media business off a blog. Michael eschews the limelight more than he seeks it. He spends most of his time at home, working hard, not out talking about it. He does a fraction of the press and appearances he could do. (Trust me, he's bailed on me more than a few times!) And even at Valley parties, he's usually off to the side or sitting in the back somewhere talking to entrepreneurs. And he's turned down many funding and acquisition opportunities for TechCrunch. He's stashed away at least a year's worth of revenues, so this is hardly some Web 2.0 pony he was trying to run until it died, and now having failed, he's looking for an out. Please. Michael is hardly a saint; if you're going to say something mean about him, why completely make it up?

On the flip side was Paul Carr's column in the Guardian. Paul-- like the Gawker crew-- is outrageously snarky. And really, he's far better at that game than most of Gawker Inc, his excellency Nick Denton aside of course. Paul brilliantly writes about the online currency of mean, which I've written about a good deal too, but he writes about it from the point of view of someone who profits off of doing it, not being the subject of it. Paul and I are good friends, which strikes a lot of people as weird, since I'm one of the people he has profited off trashing. But if you read that column, you understand why.

The reason I'm so speechless given all the strong feelings I have about this issue, is that I fear there's no solution and that worries me. If Ivory Tower print media is truly dying, and we're all going interactive, it's going to severely limit the pool of people willing to be journalists. It's one thing to expect this kind of abuse and scrutiny if you're a Hollywood celebrity, a public company CEO or a politician. But someone writing about startups? Why? That shouldn't come with the territory. We shouldn't even be that interesting!

If Michael stays away longer than a month--which I don't think he will--it will be a huge loss for Silicon Valley. Look at TechCrunch50; look at the Crunchies; look at the daily blogging of a broader swath of tiny unheard of startups than any other site. TechCrunch is the best friend entrepreneurs have had over the last few years, and no offense to the team there, but Michael is hands-down the best blogger on the site.

As for me, I have no intention of running away. For one thing, a lot of the abuse I get is because I'm a woman. (Trust me, you just don't want details here.) For the sake of other women, I'm not letting anyone get away with that kind of gender bullying. But there may well come a time, as it has for Arrington for now, where my safety and the toll it takes on my loved ones is just not worth writing another story.

Prediction: LinkedIn Engagement Metrics Will Soar in 2009

I did something this morning I haven't done in a long time: I spent an hour on LinkedIn.

Anyone who reads this blog, watches TechTicker, or has read my book knows I have long been very bullish on LinkedIn as a company, and occasionally the site has proven a God-send for tracking sources down. But in a world where Facebook and Twitter meet most of my connecting needs, the only uniquely powerful application for LinkedIn in my view is job hunting, and I haven't had to look for a job since I've been a member. So while I've played around with the Answers application and go to the site once a month or so to sort through invitations, I've never had much reason to spend a lot of time there.

So what changed today?

OpenTable: So Web 1.0 It Hurts.

I have written a few times about my total dislike of OpenTable.com-- a site I adored when it first came out. Please. Someone take them down with a better product that caters to its users and not just the restaurants that buy its software. I will personally invest in the idea. OK, that's not true, because my freezing 100-year-old Victorian house takes all my money. But I'll throw you a launch party or a parade or something.

My problem in short:

OpenTable was founded amid the dot com bust and survived. Good for them. But it was infected with a lot of the worst of Web 1.0 thinking, particularly the belief that biz dev deals and partnerships with other businesses were more important than users. Back in the late 1990s, with a few exceptions like eBay and Craigslist the idea of a "community" mattering wasn't really a necessity of building a consumer Web business. It was enough that users could communicate, find things and buy things in the comfort of their living rooms using the brand new Web. Combine that with the crash and you had an environment that required any surviving company to find a way to make money quick and focus on users and features later. That's the story of OpenTable: A company that is ostensibly a consumer business, but actually makes its money from selling software and hardware reservation engines to restaurants.

Make no mistake, users: The company knows who signs the checks.

Louis Gray Nails the FriendFeed Dilemma

Whether you adore FriendFeed and don't get why your friends don't, or you're one of those friends who just doesn't get the hype, you should check out this post by Louis Gray on what FriendFeed needs to do to grow. (And, I'll add survive.) I'm one of the users he describes that has a good number of followers and has a ton of data pouring into the site, but almost never goes there. This graph absolutely nails my experience:

"New users signing up to FriendFeed, by default, see all updates from all friends who they are following, as well as updates from friends of a friend. This means that even if you start out following only a few dozen people, be they those automatically synchronized with your Facebook account, or recommended well-known Silicon Valley digerati, you can be flooded with updates from Twitter, Blogs, bookmarking sites, external commenting sites, BrightKite location notices, photos from Flickr and other sites, videos from YouTube, and even items from Amazon.com wish lists. And not only do you have to see all this from the people you know, but you'll even have to see updates from friends of those you know, if your friends have made an action on their updates.

What needs to happen is that FriendFeed must tier their offering, for "small", "medium" and "large" consumption. The Lite version would probably start out with blog postings, Flickr photos, and native FriendFeed entries. The default behavior should be that you would need to "opt in" to see a service, rather than be forced to opt out or hide every single one of them as FriendFeed adds them. FriendFeed already supports more than 50 different services, but the excitement this may bring to power users is just overwhelming to new folks."

As Louis suggests, FriendFeed has done nothing to reengage me as an inactive user with a lot of followers. Worse: I've reached out to FriendFeed's founders as a reporter for a get-to-know-you meeting more than once and never even received an email or call back. This is not an ego thing, I hardly get all my emails and phone calls returned, trust me. And frankly, I didn't doggedly pursue it, because I'm not sure my non-blog audience does care about FriendFeed. But I bring it up as a news flash for FriendFeed: You are a startup, that doesn't want to pay for a marketing department. I write a column and host a show that reaches millions and millions of people outside the echo chamber who have never heard of you. Why would that not rank a call back? Job #1 when building a consumer web business is to build something worthwhile, which I think conceptually FriendFeed has. Job #2 is to promote it. It's not rocket science.

As Louis says, the company has instead relied on bloggers and tech publications to spread the word. That is myopic and naive. It's one thing to be a lean startup with no marketing department. It's another to pretend even the biggest cheerleaders in the Valley ecosystem will be enough to make your company a mainstream product. After all, early adopters tend to treat Web startups like fads. It's the "real people" who build a sustainable, real business. LinkedIn, Twitter, Facebook-- they all get that and that's why they don't cater features to the Valley elite's power users.

I'm predicting a modest acquisition in someone's future, with a price tag that decreases as the brutal 2009 wears on. That's a shame for a company that had a bright future and a good product, but it goes to show it's as much about execution as it is idea and attention.

A Christmas Miracle that Literally Warms My Heart

Regular readers know that I'm not buying or accepting material gifts this year. But I'm making a quasi-exception right now.

Background: If you follow me on Twitter, you probably know we don't have a furnace and decided with the uncertain economy and all, we'd put off buying one for another year. Unfortunately, we also had the ceiling of our garage taken out to update our electrical work and ripped out a huge, crumbling brick chimney running through the middle of the house, so there's even less insulation and a big hole in our house.

Simply put: We are *dying.* Olivia and Geoff and the cats and I are basically the grandparents from Willy Wonka and the Chocolate Factory, all huddled under a pile of blankets with coats, fingerless gloves, leg warmers-- whatever layers we can find. It's somehow colder in the house than it is outside. The cleaning people came in Friday and looked at me sort of stunned and said, "Wow, it's freezing in here!" YES. WE. KNOW. My coffee gets ice cold in about 10 minutes, and then I just have to drink cold coffee because we don't have a microwave either. This is the opulent world of San Francisco home ownership.

As a result, I've become this crazy heat obsessed junky who checks out heat sources in every home or business I've gone into. I was wowed by the heat generating power of these bad boys at my Pilates studio. So, we ordered THREE of them from Amazon in various sizes. And guess what? Thanks to all the Amazon affiliate money we made from people clicking on that button to your left and buying my book, we got them for free! Thanks to Amazon Prime the shipping was free! It's the closest thing to a Christmas miracle that my ice-cased brain can imagine. And they just arrived. Thank God I hewed closely to blogger central casting today and didn't jump in the shower and miss the FedEx guy bearing this beautiful gift of heat.

Just more reasons I'm convinced Amazon is the only first gen e-commerce company that gets it. And, of course, one more reason I am grateful to anyone who bought my book via sarahlacy.com.

The Long but Very Skinny Tail

Interesting article today about a forthcoming study that says "The Long Tail"-- the idea that online niches add up to way more money than mainstream hits-- is only good in theory. Indeed, to give the Tail's creator Chris Anderson credit, it's more than just "good" in theory, it seems ironclad. I remember when I first saw it drawn on a white board. It was that perfect writer's dream of a concept that's universal but only obvious once someone else has uttered it. (Well, it's a dream if you're the writer who came up with it. The rest of us say, "Doh! Why didn't I come up with that?" It's usually accompanied by that dorky I-should-have-had-a-v8 head slap.)

But I've since wondered if the Long Tail actually is true in practice or like one of those baseball teams that looks great on an opening day roster, but somehow finishes dead last. Sure the Web allows us to buy that extra 80% of things out there. And if we did, in any kind of individual volume, it would surely add up to a huge number.

But do we? I know a lot of startups who pitched themselves as Long Tail businesses and are out of business now. Personally, I'm hard pressed to think of many examples where I've paid money for an obscure song, book, or product. For one thing search and discovery just don't work as well as they should on the Net. The study certainly backs up this anecdotal experience:

"However, a new study by Will Page, chief economist of the MCPS-PRS Alliance, the not-for-profit royalty collection society, suggests that the niche market is not an untapped goldmine and that online sales success still relies on big hits. They found that, for the online singles market, 80 per cent of all revenue came from around 52,000 tracks. For albums, the figures were even more stark. Of the 1.23 million available, only 173,000 were ever bought, meaning 85 per cent did not sell a single copy all year."

Anderson counters that this is but one example, and it hardly undercuts the whole theory, and that's a fair point. But I wonder if a better defense would be invoking one of the most important maxims of Silicon Valley: People frequently overestimate what a company, trend or technology can do in a year and underestimate what it'll do in ten years. Think online video: Remember when Yahoo was laughed at for Finance Vision? Today, TechTicker is arguably the most widely watched financial show in less than a year of its launch. We even shoot in the same studio.

Perhaps Anderson was a bit too breathless in just how much, how fast the Long Tail would revolutionize business. But with better discovery, search and even more targeted advertising through social networks, I could see a scenario where that tail fattens out. It's not that I don't want to discover obscure music and books, after all. It's just that most of the Web is aimed at demand fulfillment, not demand generation, and we're likely to want the things we already know exist. Those are likely to be the most well known and popular items, right? There's no doubt the infrastructure for the Long Tail exists online, it's really just a question of demand.

I Only Need 8 Jillion More Page Views to Make Rent. Call Your Friends!

In my continuing rant on how most of us are going about blogging monetization all wrong, we get this gem from AdAge.com this week. The headline trumpets that News-Oriented Websites Have a Future. First reaction: Oh thank God, my profession is saved.

We all know traditional media is hopelessly screwed, right? Right. And most of us know that online arms of traditional media agencies aren't really picking up the slack, creating a pretty worrying scenario. Especially because the last few years for media have already been looking like Fall 2008 looked for Wall Street, and now we're entering an undoubtedly horrible year for advertising with no Olympics, no election, no good one-time catalyst to give us a boost.

There is a future for media. There is a business model there. But I think I speak for most journalists when I say we're starting to feel like Moses's people wandering in the desert for 40-years. So was this headline from AdAge a coming attraction of the promised land? Hardly.