The alarm bells are ringing in the web world (see the Techmeme discussion) – one of the gorillas in the space is flexing its muscle and protecting its turf as MySpace is preventing Photobucket photos and videos from appearing on its site. As Om Malik mentions, this happened once before and I am sure the MySpace folks have done some hard thinking about whether or not their users will vote with their feet and leave, and if they do, what kind of impact it will have on its business. I guess they figure it won’t be too large of an impact for them. Anyway, all of this is not a surprise as this is the way business works. Forget about Web 2.0, this is Business 2.0 (ok, someone else already has the trademark). The world of openness is only open so much because if you get to0 big and threaten someone’s turf and livelihood, guess what…they will fight back. I put a timely post up two days ago titled "Why Startups Must Control Their Own Destiny." The point is that the only person you can really rely on is yourself and in this world of mashups, widgets, and open APIs, distribution is easy…getting money is hard. Well guess what-distribution via widgets on MySpace was relatively frictionless, but now that Photobucket is a serious player, the Gorilla is fighting back and that is just the way the world works. I am not saying that you should not leverage free distribution, but that you should prepare yourself for the day that it may disappear. In one of my portfolio companies we have a saying, "Google giveth and Google taketh away." The point is you should take a hard look at your business, and if you are too dependent on any one partner or distribution method, you should stay awake every night thinking about how to diversify your business. And for those who built their business off of one partner and think they are worth hundreds of millions or billions of dollars, I can assure you that if that one partner is not buying you, there will be appropriate discounts paid to your business based on the fact that the acquiring company’s competitor could shut your lifeline off tomorrow. Yeah, this is nasty stuff, but this is business and companies need to make money.
As a VC that invests in early stage companies, part of my job is to discover new opportunities and business models. While much of today’s online and social networking growth is being driven by teens and college students, very rarely do I get the opportunity to learn about interesting companies through the eyes of my young children. It started about 6 months ago, when my son came home from school talking about a build-your-own penguin site. He did not know the web address, but said it was a cool place to create your own penguin, play games online, and earn points to further dress up your penguin. He also said that we had to sign up and pay to become a member and kept asking me to visit. After doing some diligence, I found ClubPenguin, created my own penguin, and discovered that it is basically like second life for kids – a virtual world of penguins designed for kids to interact in a safe manner. While the stated target demographic is for 8-14 year olds, I suspect that the user base is much younger. To its credit, it has built in some nice safeguards for privacy with the ability to limit chat to precanned menu items and parental involvement in the signup process. If you log into the site right after school, you can see a number of overloaded servers where penguins are living in a virtual world, earning points to decorate their igloo, playing games with others, and socially interacting. Luckily most of my children’s time is spent doing their own things and less on the social networking aspect of the community.
Within weeks of that discovery, the next big thing in our house became Webkinz. Webkinz is another virtual world for kids but with a twist. You have to buy a stuffed animal and on that pet there is a special code you enter to bring your animal to life on the web. I must say that Webkinz is also brilliant and well done. My kids wake up in the morning asking to log on to feed their pet before they go to school and to also earn some kinzcash to decorate their rooms. Kids can earn kinzcash by answering math and educational questions, playing games, and answering surveys. In addition, you can add friends to your buddy list and invite them to your room to interact. So far Webkinz strikes the happy balance between being a fun and entertaining place for kids without too much marketing. I could envision down the line branded items for sale through the W Shop but for now the site is just selling generic stuff.
Together both of these sites have become the hottest destinations on the web for young kids. As a VC, the big question I have is what is the staying power of sites targeted towards young children as we all know that children are fickle and trend-oriented. In addition, I am paying close attention to the revenue model as it has been notoriously hard to extract dollars from kids. For now, ClubPenguin earns cash through the premium model having free users pay a monthly or annual fee for the special privilege to customize and buy items for their penguins. Webkinz seems to make its money from selling the real stuffed animal which has a virtual equivalent. It also manages its product line and inventory closely by constantly developing new pets so kids can have multiple pets/adoptions. In fact, to further encourage purchasing of new pets with every 10 adoptions kids earn a "priceless" prize for their room. All I know is that based on an informal poll I have taken amongst my children’s friends that the penetration of these services is quite high and most users are paying users. And so far through the eyes of my children I can see that the more time they invest in these services the harder it is to extract them. So from this standpoint there may be some staying power for both services. As a parent, the big question I have is are my kids too young to be on these virtual worlds and what am I socializing them for in the future. Where do they graduate to after they tire of ClubPenguin and Webkinz? Being a technology VC, I would be a complete hypocrite if I did not let my children try these services. While I do question how early is too early, ultimately I have come to recognize that this is the world that my children live in and the best thing I can do is monitor closely, teach them what is real and not, and make sure to constantly educate them in terms of safe web practice. In addition, there are some educational benefits as well pushing my kids to read and do math. I know their world today is much different from mine when they tell me to go to Answers.com (full disclosure-I am a board member) or Google to get more information.
Given these factors, it is pretty clear that there will be more virtual worlds for kids created. From an exit standpoint, I wouldn’t be surprised if one or both of these web properties eventually gets bought by Fox Interactive Media or Disney as a way to reach this young, impressionable demographic, develop brand relationships early in life, and upsell them on various social networking options as they get older. It is also important for us to realize that we are still just in the second inning when it comes to new advertising models. All of the groundwork we are laying to reach today’s teens and young adults is just the beginning and my question is how will the world look 10 years from now when today’s 5 year olds are 15 and todays 10 year olds are 20. What will be the best channel to reach them and with what kind of message and in what medium? I can bet that wireless will definitely be one big component of that. Striking a balance, the parent in me will ask how will we be able to protect our children (to the extent that we need to) from overcommercialization and other security issues (this is a huge topic that can be addressed at a later time)? I don’t have any answers now, but trust me I have a vested interest in monitoring this space carefully for multiple reasons. I would love to hear your thoughts and opinions on this as well.
I was in a board meeting last week, and as we reviewed the results one item quickly jumped off the page – the company did a great job signing up a couple of Tier 1 partners but a less than stellar job driving results. This was not surprising as what happens more often than not is that we can get caught up in the thrill of the chase, signing a big deal for example, but forget that the real work begins after the deal is inked and the press release hits the wire. Signing a deal in and of itself does not bring on any new customers and the more successful startups understand that. The teams that can drive successful relationships keep pushing its larger partner, putting together a plan with expected goals, driving implementation, creating product literature for the new partnership, offering new ideas, asking for marketing dollars, and coming up with new innovative campaigns to drive adoption. They just make things happen and are just as relentless after the deal as they were before the deal was signed. The less successful teams will let the big partner move at its own pace, dictate the terms, and wait for them to take the next step.
This brings up another interesting point. Even if you follow the steps above, this does not guarantee success. Big companies move slowly and often change their minds. A relationship with a big company will surely take time and cost you money whether in upfront dollars or expenditures on resources. And while we would all love to build our business off the back’s of other brands and distribution, at the end of the day, in order to create a big winner, it is imperative for startups to control their own destiny. This means that your business has to be able to grow organically and not have its fate fully dependent on its partners. What this means is that first and foremost you have to have a killer product, one that people love, can’t live without, and share with others. In this new world of mashups, open APIs, and widgets, startups can easily get distribution. Getting customers and revenue is a different story altogether. Remember, distribution doesn’t matter if people don’t use your product or service so start with the basics and figure out how to make your product a must have that someone will pay for.