Where the Bloody Hell are You Network Effect ?
There's a 2WEB discussion about the value of a business being in the eye of the paying beholder. There is of course the very rare Skypelike Co's who savage the cost structure of mega-huge industries (which in itself is a very calculated economic strategy), and thus have high value to a buyer who can increase the amount and speed by which others lose customers and profit ! Similarly a player like edgeio will target classifieds because of the hugh economic value around the listings of jobs, cars, property, dating and 'commercial search' in general.
Many horizontal plays (esp for new geeky web free software) will however strongly "bet" on the 'network effect' (eg launch an ajax wordprocessor without ads hoping to grab share in the "wordprocessing" market) - This network effect (it is argued) is the secret sauce of a consumer play, where like flickr, it's the place to go to "be". Fred Wilson of course nails the two step equation, but unfortunately like filmmaking its very hard to say what ingredients are needed that makes one business a success over another. It's a combination of timing, people, technology, execution, focus and uniqueness, but it cant be J'Lo bottled.
The sustainability and long term value of such a business increases dramatically once the site actually launches, and gets significant user traction. I've worked or seen closely alot of sites launch and nothing. No users, even after substantial marketing - on a concept that had worked before. (in different geo-markets) It aint easy. But if you can get organic uptake, like the first weekend box office of a film, you can tell with a website within a few weeks, if it should be put down (isnt done enough), or whether major surgery is needed (not enough surgery usually done ala boring redesign is NOT surgery) If you are lucky you may have a growth problem which only more servers can solve !!!!
But once a business has this "user traction" it should then be aiming at converting this into attractive metrics such as revenue, revenue growth, and attractive gross profit margins, once capital and one-off expenses are taken out (that Herman Miller chair or new 30" PowerMac Screen) Google's real economic value is in Adsense and the lack of viable industry alternative to date. (companies like adbrite are doing so well for exactly the same reason)
I for one will never be betting my future on eyeballs :) as keen as I am to monetize them. There is nothing a buyer likes more than to think all the hard work and dollars have been sunk and they are getting a business that is about to become a overflowing cash box. For that, they will always pay a premium !
Fred Wilson : "Give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing, etc, then offer premium priced value added services or an enhanced version of your service to your customer base."
"The best examples of this business model are when the customer implicitly understands why the paid service has to cost money. More storage costs for photos or virtual storage are good examples. Termination costs on other carriers networks in the Skype model are another. When it is just additional features that don't carry an incremental cost to offer, it may be harder to convert free users to paid users. But if your free service is loved and you do a good job articulating the value that comes with the paid service, you can convert to paying users with good results."
Many horizontal plays (esp for new geeky web free software) will however strongly "bet" on the 'network effect' (eg launch an ajax wordprocessor without ads hoping to grab share in the "wordprocessing" market) - This network effect (it is argued) is the secret sauce of a consumer play, where like flickr, it's the place to go to "be". Fred Wilson of course nails the two step equation, but unfortunately like filmmaking its very hard to say what ingredients are needed that makes one business a success over another. It's a combination of timing, people, technology, execution, focus and uniqueness, but it cant be J'Lo bottled.
The sustainability and long term value of such a business increases dramatically once the site actually launches, and gets significant user traction. I've worked or seen closely alot of sites launch and nothing. No users, even after substantial marketing - on a concept that had worked before. (in different geo-markets) It aint easy. But if you can get organic uptake, like the first weekend box office of a film, you can tell with a website within a few weeks, if it should be put down (isnt done enough), or whether major surgery is needed (not enough surgery usually done ala boring redesign is NOT surgery) If you are lucky you may have a growth problem which only more servers can solve !!!!
But once a business has this "user traction" it should then be aiming at converting this into attractive metrics such as revenue, revenue growth, and attractive gross profit margins, once capital and one-off expenses are taken out (that Herman Miller chair or new 30" PowerMac Screen) Google's real economic value is in Adsense and the lack of viable industry alternative to date. (companies like adbrite are doing so well for exactly the same reason)
I for one will never be betting my future on eyeballs :) as keen as I am to monetize them. There is nothing a buyer likes more than to think all the hard work and dollars have been sunk and they are getting a business that is about to become a overflowing cash box. For that, they will always pay a premium !
Fred Wilson : "Give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing, etc, then offer premium priced value added services or an enhanced version of your service to your customer base."
"The best examples of this business model are when the customer implicitly understands why the paid service has to cost money. More storage costs for photos or virtual storage are good examples. Termination costs on other carriers networks in the Skype model are another. When it is just additional features that don't carry an incremental cost to offer, it may be harder to convert free users to paid users. But if your free service is loved and you do a good job articulating the value that comes with the paid service, you can convert to paying users with good results."
posted by redbarren at 1:28 PM
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