Archive for September, 2006

Crowdsourcing? Say what?

Saturday, September 30th, 2006

I was in the midst of a discussion with a tech friend of mine the other day, when I nonchalantly mentioned the term ‘crowdsourcing’. I just assumed that he knew what it meant, but he had no idea. Upon further inspection, the term is more recent than I realized. Many may already know what it means, but here is a short lesson for the rest of you.

Everyone’s favourite online encyclopedia, Wikipedia, defines crowdsourcing as “a business model akin to outsourcing, but relying upon unpaid or low-paid amateurs who use their Wired logospare time to create content, solve problems, or even do corporate R&D”. The term was coined in June 2006 by Wired magazine writer Jeff Howe and editor Mark Robinson.

Examples of this phenomenon include LinuxWikipedia, and Firefox. All three products were created by unpaid (in most cases) individuals who volunteered their time and services. As you may very well notice, open source in general is a form of crowdsourcing that has existed for the years. The actual notion and term have only become more mainstream in recent times.

Cambrian House is a recent start-up out of Calgary, Alberta that has gained much press attention as its entire business model is based off of the idea of crowdsourcing. They combine crowdsourcing with Internet marketing to provide instantaneous access to consumer demand. And because of their unique business model, they pledge to be the first billion person company. Ambitious to say the least, but inspiring. Good luck kids.

Wow, this crowdsourcing stuff is cool. Sounds almost as fun as crowd-surfing.

MySpace-Age Valuation

Friday, September 29th, 2006

OK, who spiked the punch at the recent Fox Interactive analyst meeting? Apparently, some punch-drunk analyst, AKA Jordan Rohan from RBC Capital, claims that MySpace MySpace logocould be valued upwards of $15 billion in a few years. If Internet pundits believe this to be true and accurate, then we are most certainly in bubble 2.0 for sure (see Mathew Ingram post).

He pulls his facts and data from the most random and irrelevant sources at best. He factored Facebook’s potential $1 billion ‘valuation’ (ala Yahoo offer), YouTube’s apparent $1.5 billion valuation, and Google’s $120 market cap. Then, he threw in some advertising numbers (well, ridiculously high CPMs), mixed it all together, and came out with a $15 billion valuation (thanks to Pete Cashmore for this info). Sounds a lot like making a cake – a very expensive, inflated cake that is. I mean hey, I could have probably pulled a number out of my ass and BS’ed a couple of numbers to come up with a more accurate picture. But kudos to the guy for causing a stir in the online community (also see post from Mark Evans).

I’m not a hater of MySpace by any means. Well, it does have those tiled backgrounds and flashing text, which brings me back to my Geocities days. Urgh. But getting past that, MySpace does have a lot of things to offer. Most notably and obviously, it has an enormous userbase. It is by far the largest social network in the world. Why? Clean execution. Social networks had been done before the days of MySpace, but the company was able to simplify and execute. Navigation, product features, and even URL structure all add to the simplicity of the system. I don’t use it much myself, but I can definitely see how a teenager may find it appealing.

A definite downfall of MySpace (and a bonus for others such as Facebook) is the target audience. The majority of MySpace’s audience is in its early teens. It also attracts a large music following, including singers and bands. However, narrowing their market to one group and/or age is next to impossible. On the other hand, a site like Facebook is focused solely on university and colleges students (ignore the recent press release for now). A general age group and demographic profile can be developed. What does this mean for the company? Easy. Higher CPMs and ad dollars for Facebook. The more niche your focus, the better. I do understand that MySpace has the capabilities to target different groups based on their account settings and profile information, but the largest portion of their target audience is a group that will not attract the premium ad dollars. Niches and verticals are the future of the web, as well as the advertising and marketing world. If MySpace can somehow get a better grasp of this concept, then I see increased revenues, growth, and long-term success.

But I did hear that as many as half of all accounts may be spam… so maybe divide by 2, hey Jordan?

The Network Effect

Friday, September 29th, 2006

Much has been said about the network effect and the power that it brings. I truly believe this power cannot be understated one bit. In future posts, I plan on expanding on the topic, but for now, here is a glimpse into its magnitude…

Wikipedia defines the ‘network effect’ as a “characteristic that causes a good or service to have a value to a potential customer dependent on the number of customers already owning that good or using that service”. To me, the network effect simply means that with every user you add to your userbase, your network becomes more valuable and relevant to all. In addition, you are further adding barriers to entry against potential competitors in your industry.

The best two examples I can think of off the top of my head are Digg and eBay. In Digg’s case, it’s a little Digg logomore obvious. Having more users will likely result in better quality articles reaching the front page. Not only will more people be ‘digging’ or voting specific articles, but they will also be submitting articles they find interesting, further adding to the power of the system. No explanation needed here.

As for eBay, it may not seem completely obvious at first. But if you look deeper at this web 1.0 company, you will notice that the network effect has propelled it all along and is THE source of its success and rise eBay logoto fame. Let’s head back in time to the 1990’s. Around the time when eBay was still a small company, other auction sites were trying to make a go of it. So how did eBay prevail as the king on the online auction world. Who is in second place (who cares, by the way)? Was it eBay’s killer technology? Absolutely not. By many accounts, Yahoo’s auction technology was much more robust and sophisticated. eBay’s system was functionally simple, however. So, how did eBay rise to such heights?

Well, as eBay kept adding more and more users, their auction marketplace system became more efficient and effective. More buyers and more sellers meant better pricing and a better chance at selling your goods. In other words, with every user added to eBay’s userbase, the market became more valuable to everyone. Trying to coerce current users to switch to another service would be extremely difficult, as the user sees value in the network and market. A snowball effect occurs once the userbase hits a critical mass (threshold). For this reason, it was very hard (impossible) for competitors to try and catch up, regardless of their technology and/or functionality.

Looking beyond these two examples, the network effect can be witnessed all over the Internet. It’s power is unspeakable. Other new web companies that have taken advantage of this phenomenon include YouTube, Wikipedia, and Craigslist. I look forward to seeing more examples of this effect at work. It is productive and useful. May the force be with you.

Face Reality, Facebook

Thursday, September 28th, 2006

Much like YouTube, Facebook is facing a similar predicament – but based on different circumstances. Facebook should sell now before it’s too late. It even has an offer on the table. Come on Zuckerberg, wake up and smell the acquisition…

Facebook’s meteoric rise to fame has come to fruition not because of exceptional technology but because Facebook logoof its choice of target audience: university and college students. The exclusivity of the social network is what sets it apart from other potential competitors (i.e. MySpace, Friendster, hi5). This barrier to entry weeds out many teeny-boppers, spammers, corporate marketers, and illegitimate users. This is the very reason that the network is highly valued. The university crowd is the holy grail for marketers.

Ok. So what?

Now Facebook is opening up it’s network to high schools and corporations (coverage from TechCrunch). To me, this is probably the most ridiculous/sell-out/screw-over corporate move I’ve ever seen. Kiss your competitive advantage goodbye. This undermines the value and credibility of the network and severely compromises the company valuation.

Just like in a stock market crash: sell, sell, sell. Cut your losses and run. With every new press release from Facebook, the company seems to keep damaging its reputation and further pummeling itself into a hole.

Oh, did I mention the privacy issues Facebook was dealing with at the start of September in which it had to roll back some site changes as a backlash and anti-Facebook sentiment began to sprout? See Mashable article.

Also… university/college social networks are starting to pop up all over the world, providing a challenge to Facebook going forward. These niche, regional sites are slicing away at market share and may very well slay the dragon in the process.

So I say… Mark Zuckerberg… you’re 22, or whatever… and you could potentially make a couple hundred million from an acquisition. Just do it (apologies to Nike for trademark infringement). Sell the damn thing. You’ve had a nice run-up. It’s time to say, “Hey, I’ve done well and I’m going to move on”… Yahoo is offering a hefty sum and it would be unjustifiable to pass up the opportunity.

Oh ya, did I mention Mark’s arch nemesis from Harvard is starting his own social network… 

YouTube – Take the Money and Run

Tuesday, September 26th, 2006

If I was Chad Hurley… hmmm…

There comes a time in every business model when an exit strategy is necessary. YouTubeYouTube logo is at a key junction. With the current momentum and company hype, it would be a great time to a) exit via acquisition (good choice) or b) exit via IPO (less favourable choice). My thought is that if the company is unable to do so within the next 6 months, failure is certain.

Huh? Why? Well, there is really 3 reasons. First and foremost, the surge in traffic and rise to fame comes at a cost, literally. Video bandwidth costs are not cheap. We’re not talking text with the odd photo here. Users are streaming countless numbers of videos and rumour has it that the company bandwidth costs exceed $2 million per month and are climbing. Revenues are starting to take shape, but not fast enough. It is a numbers game at this point. Ad dollars (A) needs to exceed bandwidth costs (B), otherwise we see Chapter 11 (C). It’s a simple mathematical equation really.

The second reason YouTube is doomed: the record and motion picture industries. Obviously, YouTube has catapulted to such heights not based on family videos and little Joey breaking his ankle when he falls off his skateboard – but because of illegal, copyrighted material. The RIAA and motion picture industry are starting to mount their cases, and once all is in place, YouTube really has nothing to fall back on. The company is trying to make inroads with some of the large players, but at this point, it’s too little too late. And without copyrighted content, who wants to visit YouTube? It loses much of its luster.

Finally, we come to MySpace. Much of YouTube’s success has to be undoubtedly attributed to MySpace and a user’s ability to embed videos. This concept has created viral growth for YouTube through the distribution of branded video players. MySpace is now blocking the embedding of many external widgets and players. This will dampen growth and eliminate a valuable distribution channel.

Add these three factors together and I think it may be fair to say that YouTube should seek a take-over opportunity while the Internet community still values the video site as high as $2 billion. This seems a bit ridiculous to me, but then again, there was this one company called Skype…