Monday, December 20, 2010

A New Year's Resolution for Google: Buy MySpace, Stat!

This post was also published in VentureBeat.

For all the money Google has thrown at MySpace over the years, the search giant of Mountain View might as well have bought the troubled social network. For years, News Corp. CEO liked to brag that Google paid him more in its landmark $900 million search deal than he paid to buy MySpace in the first place.

Oh, sure, no one’s bragging now. News Corp. executives are openly talking about dumping MySpace, and Google only recently renewed its advertising agreement with MySpace, after months of delay, in a deal that smacked of throwing good money after bad.

But that’s a sunk cost, as economists like to say, and chump change for Google’s multibillion-dollar money machine. What Google really needs is a convincing social strategy to get Wall Street and Silicon Valley’s collected punditocracy off its back. MySpace is for sale. And Google should jump at the chance to buy it.

The stratospheric success of Facebook in 2010 has put Google on edge. Five hundred million-plus users, $2 billion in advertising revenue forecast for next year, the gaming and e-commerce platform of the future, and one out of five pageviews. Can you blame Google for flailing at finding a strategy to compete with Mark Zuckerberg’s social juggernaut?

The reality is that Google will have as much success replicating Facebook as Microsoft has had replicating Google with Bing. Google’s engineers keep thinking it can use standards to win against a proprietary platform, a strategy that Sun Microsystems — remember them? — employed against then-nemesis Microsoft when Googel CEO Eric Schmidt worked there. Ranging from OpenSocial, a widget platform, to XAuth, a content-sharing protocol, all of these “standards” have failed to stop Facebook and its magnetic attraction for users, developers, and advertisers.

The dealmakers of Mountain View, meanwhile, have acquired a grab-bag of companies like Slide and Jambool with the hopes that their key talent somehow understands social Web apps better than Google’s famously cosseted and out-of-touch nerdocracy.

The apparent fruit of these efforts — a toolbar-like add-on to existing Google sites called either Emerald City or +1 — does not seem like a viable strategy either. There is no there there: a social network requires somewhere to be social.

The right strategy for competing with Facebook is not to take Facebook head-on. Facebook is great for sharing links, photos, and events with people you do know. With recent upgrades to photos and groups, it’s getting even better at that.

But there is still a huge opportunity for communicating with people you don’t know, something Facebook is weak at by design. It doesn’t take much observation to see that people love to gather together around common interests, particularly around media properties like bands, TV shows, and movies. It can’t hurt that those also happen to be major advertising categories.

During former Facebook COO Owen Van Natta’s painfully brief stint at MySpace, he actually put a viable strategy in place. His experience at Project Playlist, a music-sharing startup, showed that users were very interested in sharing their tastes with friends and strangers. At MySpace he soon put in place a playlist system using MySpace’s legal music content. Acquiring iLike’s recommendation system promised to accelerate that, and a redesign would make it all look great.

However, the corporate overlords at Fox were only interested in maximizing revenue rather than adjusting and growing the business, and Van Natta was out. Only after further revenue declines did his concept of “social entertainment” actually ship. At the time MySpace still had more revenue than Facebook; it still has roughly as many unique users as Twitter — a persistent object of Google’s acquisition interest, despite its unproven revenue strategy.

So what would Google do with MySpace? It already has some fantastic properties that it can tie into the site. Vevo, the music site spawned from YouTube, is fast becoming the premier destination for music videos on the Web, the MTV of the social generation. That and the rest of YouTube ties in perfectly with MySpace’s music core. Like MySpace Music, it’s also a joint venture with the music labels. YouTube videos, already ubiquitous in MySpace user profiles, could spread throughout the network.

Though Google’s Orkut social network, a Friendster clone, is fading, it still has pockets of strength like Brazil. Those users can be migrated into MySpace to create an international beachhead. Google News can feed into the MySpace homepage.

MySpace has a reputation for bad design, but its new design is remarkably good. Those cats in Hollywood actually know how to do mass-market fun, something Googlers just can’t grok, and even Facebook can't match with its boring, tightly controlled brand Pages.

Sure, there’s a downside — the institutional pain of integrating disparate cultures and creaky technology. But both Google and MySpace need a radical shakeup to succeed in social, and an acquisition could be the galvanizing event that forces change on ossified organizations. And fear is a powerful motivator. Google and MySpace can grow irrelevant separately, or challenge Facebook together. Eric, Rupert, there’s never a bad time to make new friends.

Wednesday, December 08, 2010

Introducing PostPost and a New Way to Finance Startups

Yesterday we launched PostPost, a realtime Facebook newspaper that I created over the past few months. The launch was covered in Time, CNN, Mashable, and other news sources. PostPost lays out all of the interesting links, videos and photos that your friends have posted to their Facebook profiles, in the familiar format of modern news sites like the Huffington Post. Since it is the Post of posts, we called it PostPost.

Previous attempts at this type of solution relied on strangers choosing what is interesting like Digg, an algorithmic solution like Google News, and editorial solutions like the Huffington Post and Drudge Report. Facebook’s underlying platform lets PostPost display what your friends have found interesting, a truly personalized news experience.

Does this sound like a company or a feature? Can’t someone else create something like this in a couple months? In fact, we can ask this about a lot of the “startups” that we read about every day.

I wrote the first version of PostPost in the midst of selling Transpond, a social marketing platform company that I had founded, to Webtrends, a period of "merger stasis" when not much gets done since decisions are deferred. PostPost was an experiment in technology, in that it is a 100% clientside. I first wrote it in Python on Google App Engine, then in PHP since Google App Engine would be expensive if the app popped, and then chucked that and rewrote the whole thing in just JavaScript on the browser so that there would be no server and it would scale infinitely and in real time direct to Facebook.

Once I finished the first version of PostPost and showed it to a few friends, we were all pretty enamored with it. It is addictive. And then we realized that it was potentially valuable. It’s the next Digg! The next Huffington Post! The standard course of action here is to raise money, hire ad sales people, do deals, and create a company around it.

In the midst of writing PostPost, Flipboard and launched with very different approaches. Both have servers that have choked and offer news that is significantly delayed. Flipboard is well funded by KP and targeting the iPad only, and provides an innovative user interface for pad-based browsing. Techrunch is raving that VC's were dying to invest in, but I found it to be pretty lacking since its server based architecture updates your news once a day - to be frank, if I want to read 24 hour old news, I'll go buy the paper version of the New York Times.

I completely understand how Techcrunch, super angels, and feature startups are all highly invested in creating "companies" out of features. However, I did not want to participate. I had just been through this whole process, was now at Webtrends and committed to helping drive social and mobile there. From a technology perspective, PostPost was boring – we wrote the entire shipping version in less than 120 manhours, and that included the two server side versions that were tossed, and there isn’t even a big data server to scale and optimize. There are some more fun features to add, like sorting by Like velocity and mobile versions, but all in all the product was fully baked in short order, and was competitive with much larger organizations due to its unique technical architecture.

In the midst of this, I showed it to friends of mine at TigerLogic (Nasdaq:TIGR), where I serve on the advisory board. Among its products, TigerLogic has an innovative search product called Yolink that searches within a set of links for your search terms and surfaces the relevant paragraphs. And we had a joint epiphany: PostPost was the perfect use case for Yolink, since with Yolink search users could search within all of the posted links from all of the disparate data sources. A deal was quickly consummated for TigerLogic to pay to add design polish and finalize the product and for us to share downstream revenue, and PostPost is now being launched by TigerLogic.

I think that this type of outcome will become more and more common in Silicon Valley and elsewhere as more and more of these types of “feature companies” launch and search for alternative means of financing beyond seed financing. It is that rare situation where everybody wins: Entrepreneurs get a share of downstream revenue and don’t have to be attached to a project for four years. Corporations get access to innovative products that add new revenue streams and promote and cross-sell their existing products. Investors can focus on the bigger opportunities. And we can all stop pretending that features are companies.

Saturday, December 04, 2010

Why Google Needs the Video Digital-Rights Technology behind Netflix

This post was also published in VentureBeat.

Google announced yesterday that it’s purchased Widevine, a video digital rights management company mostly known as the technology behind Netflix’s video protection. Widevine gives video sites the tools to license, encrypt, and distribute videos to a variety of device platforms.

So why does Google suddenly need a credible DRM solution? It’s all about gaining the trust of the networks. Bear with me, and I’ll explain.

People have been saying for years that hordes of consumers would soon unplug their cable boxes and rely exclusively on streaming video. In the last few weeks we’ve seen signs that might actually happen. Cable subscriber numbers have dropped two quarters in a row, accentuating that last quarter’s first-ever drop in subscriber numbers was no fluke. And organizations like HBO have made the leap to online streaming and may soon charge direct subscription fees that skip cable providers once the price is right, thereby maintaining their growth in response to cable’s TV’s demise.

As Hulu and Netflix have figured out, people are more than willing to pay an $8 monthly fee for access to good television content, and they’re even happier to not pay their cable companies $60-$100 per month. The networks were only getting $1 of that cable bill per subscriber, so they are now increasingly happy to cut the cable companies out and put more per subscriber in their pockets. From this context, it’s no surprise that Comcast is buying NBC in order to secure its valuable television and cable television programming like Bravo and USA Network.

In the midst of this accelerating transition to streaming television, Google has been struggling to promote its streaming products such as YouTube and Android/GoogleTV as preferred viewing platforms. There has not been much uptake after striking deals to stream content like older CBS shows on YouTube, and the networks quickly blocked GoogleTV from running their content soon after its launch.

Owning Widevine’s technology will enable Google to negotiate content deals from a position of trust, rather than as the owner of YouTube. It can tell networks, “Hey, it’s the same technology that Netflix is using, and you signed a deal with them!”

A “YouTube Plus” akin to Hulu Plus, with trusted DRM that offers network television and movies under a well-known brand will finally give Google a counterweight to the iPhone/AppleTV and iTunes hegemony. People say that YouTube isn’t a place for premium content, but the YouTube music-video spinoff Vevo, which has emerged as the “Hulu of music,” has proved them wrong.

Friday, December 03, 2010

Groupon is Google’s $6 billion Facebook Hedge

This post was also published in VentureBeat.

Why is Google willing to spend over $6 billion for Groupon? The local advertising market is massive — yellow pages ads still bring in more revenue than Google’s annual revenue. Local has been an extremely difficult market for online ad solutions to capture. Consider how a yoga studio in Cleveland can advertise. With Google AdWords, the yoga studio can target people searching for the keyword “yoga”, but this is an expensive, nationally bid-up keyword, and not a word the people search every day. Adsense provides a bit more context, and the ad could be placed in websites that talk about yoga, but there aren’t that many people looking at pages like that to click on the ad. Google Maps lets the yoga studio ad coupons to its location, but it has not had much uptake. The incredibly large local ad market has remained primarily elusive to Google, to the point where it considered purchasing Yelp for a large sum even though it did not have that much local ad revenue.

Facebook’s Growth is Fueled By Local Ads

By contrast, Facebook has had tremendous success in the local advertising market. Facebook was the first platform to provide cheap and effective geographic, interest, and age targeting. So the yoga studio in Cleveland can now target college-educated women aged 25-35 who live in Cleveland and have listed yoga as an interest. In a few short years, these local, highly targeted ads have grown Facebook’s ad revenue to over a billion dollars a year from zero. What is amazing about Facebook’s local advertising success is that these local ads are being purchased self-service by businesses, a beautifully scalable model in a business dominated by direct sales organizations. Facebook is soon expected to allow its ads to be displayed on third-party sites like AdSense currently does. These highly-targeted local ads can be placed everywhere you go on the web.

Enter Groupon, the new Valpak

What makes Groupon special is not its much talked about tipping point where a deal does not happen unless a certain number of people sign up. Due to Groupon’s broad traction, virtually every single one of its deals gets sufficient signup to convert. Groupon was the first company to use the tried-and-proven sales technique of the yellow pages and Valpak to target local advertisers — direct, door-to-door salespeople who sign up local services and retailers. Groupon has quickly built a direct salesforce that has signed up local businesses across the country.

While detractors of the Groupon model point out that the net of a Groupon campaign often results in a loss to the local business, they are not considering that all advertising at the outset is typically a loss to a local business. A local TV ad, local newspaper ad, or Valpak coupon also costs money that could be considered a loss and typically does not produce immediate positive cash-flow relative to the ad investment. The value of a Groupon promotion produces cash over time with new repeat customers and should be viewed as a customer acquisition cost, which typically must be amortized over time. In addition, Groupon is also launching a service with 10% discounts that is much more in line with typical couponing systems.

Will Groupon Salvage Google’s Local Ad Hopes?

As a way for Google to quickly enter the nascent online local ads market, Groupon is definitely a better acquisition target than Yelp. Coupons are simple and understandable to local businesses, do not have the baggage of negative reviews like Yelp, and have a very high conversion rate. There are no other advertising companies that can match the rumored multibillion-dollar acquisition price, so Groupon is there for Google’s taking. The challenge for Google as it attempts to maintain its revenue growth is that the Groupon model is not a direct self-serve ad business like Facebook’s or that of Google AdSense. Google’s next step will be to attempt to transition its businesses to doing self-serve ads. The reality here is that Google has to spend $5 billion, whereas Facebook could achieve Groupon scale within a few months by adding a self-service deal a day per geographic region to the right rail of its homepage or directly within a user’s homepage feed with about 2 weeks of coding.