I have nothing against VCs. They get a bad rep.
In fact, the few times we’ve exchanged thoughts they have always had interesting things to say about our company, much-appreciated and valuable feedback. That’s not really sucking up since lord knows I’ve said enough critical things on this blog as well…
VCs are not good or bad, they just are… a necessary evil. Everyone that knows me is well aware that my goal is to build Mojo Supreme with no VC or outside financing, but having turned down a buyout offer last week, I sort of realize that given my ambition and where I want to take the company in 2007 and beyond, raising VC is a matter of when, and not if.
Anyway… reading this and this about the similarities between VCs and the mafia, I thought back to something from a screenplay I wrote a few years ago, when I was a younger, not-so-wise writer; instead of the mature and oh-so-wise entrepreneur I am today…
MICHAEL
Talking valuation with a VC is like talking money with a hooker. You know you have to at some point, but you prefer not to.
MARCEL
Come again.
MICHAEL
The difference is that with a hooker, you have to ask before the act because otherwise, you get in trouble with the pimp. But you have to ask because she will sleep with you anyway. It is your prerogative to turn her down after she tells you the price.
With VCs, the problem is that it is their prerogative to turn you down 9 times out of 10. If we ask them to talk valuation, we turn them off. Get it, we’re the whores… so let them bring this up.
Of course, we’re not really whores; the difference is that we don’t have any pimps to defend us, so we have even less leverage. By not talking valuation, you turn the table and gain some value, they have to bring it up, so in order not to offend us, they will probably offer us more… ideally anyway!
That’s from Fiduciary Duty, part two of a three-parter I am working on. Part 1 is White Lie. Part 3 has yet to be penned. Yeah, I know: too much time on my hands.
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WatchMojo NewsletterAn interesting thing is happening in the video sector that has broad repercussions for content in general. What we are seeing today is the Commoditization of Distribution and the Scalability of Content. This is something that has dawned on me from the conditions on the ground managing the WatchMojo.com Web TV property.
Digital Media Revolution
Apparently video now accounts for 60% of bandwidth online, and this is supposed to reach a suspiciously high 98% in the next few years. Of course, there is no real way to determine what kind of videos will make up that figure, but the trend is clear:
- the digital boom
- cheap hardware
- soaring broadband penetration and
- online advertising
have created an uptick in digital content. The audio digital content boom was manifested in MySpace’s explosion. It’s no secret after all that MySpace’s rise to the top of the social networking space had a lot to do with independent and unsigned music artists turning to the site to promote their craft. Similarly, YouTube’s rise was both a cause and consequence of the video digital content boom: more people creating more video files and sharing them with one another.
Herd Mentality Has Lead to a Surge in Distribution Points
Given MySpace and YouTube’s spectacular growth, everyone these days is suffering from envy and trying to create platforms to duplicate that success. Take for example Marc Andreessen’s investment and involvement in Ning. Ning was first hatched in 2005, but it finally hit the masses today. Ning empowers people to develop social networks. Great, the only problem is that for Ning (as a business) to succeed it needs masses to adopt it as their platform. And while the high end of the market will probably not want to build their social network on Ning’s platform, the low end of the market will probably stick to more popular alternatives like MySpace, Facebook, YouTube etc. In Ning’s case, the middle part of the distribution model it is targeting might prove elusive and too small to make a dent in the broader social networking landscape.
Commoditization of Distribution
Make no mistake about it, for social networks to succeed, you need size and scale. Otherwise, it ain’t a network. When Ning launches a plug and play social networking toolkit, they essentially further commoditize social networks. That is not good or bad, it just is. Distribution is valuable if you can plug in content, and content is valuable if you can distribute it. But when it comes to social networks, they are only valuable if they are popular. In other words, distribution and content can overnight become valuable if you add the missing element but for a social network to be valuable it takes time. Indeed, one out of a thousand will spread like wildfire - thanks to viral benefits - and hit paydirt. But 999 others will die and no one will notice them.
As VC money has poured into creating more YouTube and MySpace clones (what sane VC invests in media, after all… but technology, sure, let’s create a bubble, please!), there is now suddenly a glut in distribution points online. Frankly, if you were to strip the logos and look and feel of most of these sites to the barebones, you would probably not recognize one from another, and part of that is admittedly that the content found therein is eerily similar.
Why that is is simple.
Content is King
I’ve referred to the pyramid of video content frequently in the past few weeks:
Most of the content found on such file sharing social networking video sites consist of the low end of the pyramid: user generated content. Very few of these sites carry the high end content, that of TV networks and what not. What exasperates this is the lack of trust between Silicon Valley and Hollywood, which I wrote about here.
Call it greed, fear, whatever, the bottom line is that the media companies are going to try to protect their good stuff and keep it off of social networks like YouTube, Revver and company because the economics do not make sense. Lacking a high flying stock, media companies need decisions to reverberate financially on the income statement. That is something that tech outfits like Google need not care about, but Viacom, CBS, Time Warner, Walt Disney, News Corp. and company sure do.
The middle part of the video media landscape, the content created by online-only producers like WatchMojo.com, but many other great ones as well, is suddenly being valued at a premium. People are spending more and more time online and on wireless devices, but where’s the content to whet their appetite? User generated content is one source of content, but that is not what advertisers will look for. TV networks content? Nope. Not available. System error. Please call again.
It’s thus no surprise that not a day goes by where one of these video file sharing sites with distribution approaches us and wants to license our content. With 4,000 original clips on everything from cars, to fashion, music, drinks, dancing, video games, and much more, there is a sharp rebalancing in the relative value of content vs. distribution online.
The Scalability of Content
The irony of the media vs. technology debate is that video content is proving to be highly scaleable, far more than I had personally thought it could be. Forget the upside of putting content on wireless, that is an entirely new business that my small brain did not even anticipate for really and now is a major push for us. The online component is enormous in itself: every day that goes by, we get a request for our content from one of the distribution points and because there is a lack of “torso” content online (between user generated and TV networks) we get pricing power and leverage.
As the archive on WatchMojo.com goes from 1,000 to 2,000 to over 4,000 video clips today, we build a consumer destination to generate revenue from advertising. If that is not enough, with every deal that we sign, our content becomes commonplace across all of the distribution points online: that’s for branding and traffic, and trust me, that drives direct and indirect revenue as well.
That’s right, we’ll be part of the problem, the 98% problem. I encourage everyone to start creating more content. I welcome the competition, though in my eyes, it’s not competition. The more quality content online, the better. Of course, you have to be crazy to run an operation like WatchMojo.com or any online-only Web TV content producer, but I’ve been called worst. Web TV is not sexy enough for TV networks and too much work for people who fancy user-generated stuff. To me, it’s the only place to be.
“If I had a Million Dollars…”
If you are still not convinced about just how much distribution has become a commodity, consider this: when you had ABC, CBS and NBC accounting for 80%+ of people’s attention, distribution was not a commodity, it was scarce.
Today the opposite is true.
In the Web’s 1994-2004 era, the major players changed but the fact remained that the Top 3 portals (independent of whether it was Lycos, AOL, MSN, Yahoo!, Google, etc.) captured most of the eyeballs. If you had content, you had to go to one of the major players and pay them for distribution. Not anymore.
Video might have killed the radio star but it also killed the portal to some extent or another: AOL changed its tune and went free, MSN is floating, Yahoo! is suffering from an identity crisis and Google is trying to remain a high-growth engine. Meanwhile, YouTube and MySpace need to generate financial returns befitting their exit price tags.
Today, if you had $1M in the bank you could go out and get distribution overnight and you would face a bevy of potential places to spend your money.
But if you had $1M in the bank for content licensing, it would not be as easy, now would it? With online advertising being robust, distribution is easier to monetize but only premium content will get the top advertisers and top ad rates. In other words, if both content and distribution were simple resources, $1M can go much further in terms of distribution than content. Everyone mistakenly points to the “kid in the basement uploading a clip on YouTube” as an example of the cost of content falling, but that is not monetizable content, after all. In this scenario, I am certainly biased to think that content is more valuable that distribution, but I think that most would agree that content is far and away a more scarce asset than distribution.
Disclaimer: the writer of this piece is biased as a content producer. Of the companies mentioned above, News Corp. was my employer briefly and I own stock in Yahoo!
Courtesy of a CNN money article on the pursuit of the perfect online ad.
I wish Niklas Zennstrom and Janus Friis all the luck in the world with Joost, really. If they can create the platform of Web TV, good for them. I have my doubts, frankly. But that’s not the point here.
My point has more to do with how media businesses seem to have no qualms about working with two guys who ripped them off for years and laughed their way to the bank. I wrote something earlier about how media companies would not want to get in bed with Joost. I was wrong.
This article from NYT talks about how the founders went out of their way to do things right because of their reputation. I am speechless, I understand money seems to bridge gaps etc., but these two guys could not set foot in the US (out of fear of getting arrested) and they are now hailed as liberators of TV content. That is just unbelievable!
What’s that saying from Once Upon a Time in America, every fortune starts with a crime. Indeed, the Skype boys parlayed their Kazaa heist into Skype, and then flipped Skype for $4.1B to eBay, while at eBay, they schemed Joost.
Last night, I was watching the Oscar’s [obligatory disclaimer: I am married] and within a one-minute interval, I heard a couple of the presenters mention MySpace and YouTube. I’m talking of Gwenyth Paltrow/Kate Winslet variety.
I realized: media is changing, there’s the proof. Hollywood might not “get it,” but they “know it.” (And you know what? they do get it, just give them some time to adapt).
Today Suranga Chandratillake, CTO and founder or Blinkx sent an email around to his address book (which I’ve reported to Can-Spam, obviously) that spoke volumes:
That’s the TV set, cinema screen of tomorrow.
You better recognize…
People always think I’m crazy when I tell them we developed a search product. The search battle is dead, or so say the wisemen.
Anyway, hold the eulogy, search is just getting started. Look at the leading stories:
I’ve been approached by a copyright agency to obtain the Chinese rights to my second book, The Confessions of Alexander the Great: 33 Lessons in Greatness.
I don’t even know where to start. If anyone’s got some good advice or knows a literary agent who has some good advice, feel free to drop me a line at ash@mojosupreme.com. I’m also working on my third book as we speak.
Ahm… I don’t think so. Could it?
What’s it? Apparently, this NYT article on Blinkx suggests that:
“…Today, owing to the proliferation of large video files, video accounts for more than 60 percent of the traffic on the Internet, according to CacheLogic, a company in Cambridge, England, that sells “media delivery systems” to Internet service providers. “I imagine that within two years it will be 98 percent,” says Hui Zhang, a computer scientist at Carnegie Mellon University in Pittsburgh.”
That’s pretty astonishing. Of course, one video file is much larger than one text file, but still, 98%?
I wrote something earlier (link below) on how Podzinger and Powerset can merge to take on Google, I guess that means Google will buy Blinkx?
Anyway, check out some of our previous posts on video search:
:: Powerset and Podzinger: Match Made in Search Heaven?
:: Why YouTube is Akin to Sex with a Stripper; Google Video to Become Google Search
:: Google: Search, Advertising, Video…
Interesting story in Yahoo! on Facebook not selling. I’ve chronicled Facebook’s reticence to sell quite a bit, read more here.
A lot of people thought that Mark Zuckerberg was crazy for not selling. I thought that Mark was doing the right thing given his personality and how much he would want to shoot himself the next day after he signed the deal. Trust me, when someone puts a lot of cash in front of you, or a pile of stock certificates, you have to understand that with that comes responsibility and expectations. I don’t, for one second, think that there is enough money within Yahoo!’s coffers to make a type like Zuckerberg want to give up his freedom.
Of course, some times it makes more sense to sell. 99% of the flash in the pan companies in 2006 were products or applications that belonged in a greater company. That is by no means a knock against the creators of such products, it’s just stating fact. But if you have an actual business plan that includes a revenue strategy, then by all means don’t sell too soon. The web garners 25% of people’s attention yet marketers spend at most 10% of their budgets online, can you imagine the upside for entrepreneurs and investors who hold out? Apparently, I’m not alone in thinking that.
That does not mean you should never sell. Especially for technology companies who need to be #1 or #2 in their space. For content companies, it’s different, to some extent.
We built our company as a diversified holding company / play on the Web: every type of advertising (search, video, classifieds, display) across all categories (auto, health, finance, travel, etc).
To some, it’s too ambitious, I admit. But the model is there and it boils down to execution. But being at my third startup - first two of which were successful - I have no doubt in my mind that in 1, 3 or 5 years, you have a proxy for the Web economy and one helluva IPO candidate right there.
Yeah, I know, sounds crazy. But so did Mark Z. when he turned down Yahoo!’s billion…
This morning I read something interesting on the dilemma entrepeneurs face between selling and building. Having myself been faced with such a decision just last week, I wanted to mull the topic over and then write my two cents on it without divulging too much. When I got back, I came across Scott Karp’s insightful and accurate observation on content creation vs. content aggregation (ie. technology platform, basically) and could not help but see how these two themes were inter-related these days.
Of course, when we think of companies who did not sell when they should have, we think Friendster. And when we think of companies who in hindsight are happy not to have sold, we think of Google. In the former, Friendster was a company with way too many cooks in the board who thought too high level and did not actually think of the nuts and bolts that users wanted. Furthermore, Friendster adopted a controlled environment whereas MySpace embraced an anything goes mantra. Last but not least, MySpace really took off thanks to indie, underground bands whose own long tail (I hate using buzzwords but in this case it applies) fan base helped MySpace take off. Friendster/MySpace and other in the social networking space are perfect examples of technology platforms that aggregate content and do not create any.
Similarly, Google is essentially a platform to index and organize the Web’s content, it does the aggregation, not users, as is the case of MySpace.
What is key to note with both, however, is that when it comes to aggregation tools, saying that these can scale is misleading. In other words, are they the leaders in the space because they scaled or did they scale because they are leaders?
The difference between content creation companies and content aggregation, technology platforms is that with content creators, you need not be #1 or #2. However, with aggregators, you do need to be #1 or #2 to succeed, and basically, be relevant.
Think about it, a content creator can succeed with a somewhat limited user base. Online this is even more applicable than offline (online magazine vs. offline magazine). But with a social network like MySpace, unless it reaches a critical mass, it’s not relevant.
There’s also plenty of talk today about the west coast being the new media capital. That too is misleading. Sure, Google sees $1 out of every $4 spent on online advertising in the US go through its door, but look at the challenges Google is facing with its YouTube subsidiary YouTube when it comes to wooing Viacom, CBS etc. Over time, technology has disrupted media quite a bit, and for the better.
But much the same way that 2006 was all about file sharing user generated media (at least in video), 2007 is shaping up to be the year of original content. Why?
Technology platforms are having a helluva hard time monetizing traffic. YouTube, MySpace, Digg and company are all great in many ways but their revenue per user is immaterial, at best.
