The Audacity of Hope – Silicon Valley Style

Back in 1999, you couldn’t turn your head without running into a confident (sometimes cocky) Internet entrepreneur with an incredible idea to change the world. In those days, it seems that the nom-de-jour for Internet companies was anything that started with an ‘e’: eTour, eHarmony, eBay, eBags, ePinions, eHow, eVite, eGroups, eBates, eTC, eTC.

Some of these companies did quite well. Most did not. Indeed, I could only seem to remember the names of the ones that were moderately successful; I’m sure that someone at that time got money for eDate, eStore, eMoney, and eNews, only to see their dream of riches get sucked into the blackhole of the eBubble in 2001.

The 2001 bubble was pretty drastic. Some estimate that more than 50,000 people left the Bay Area in just a few years and over 180,000 jobs were lost. Unable to find a job and unable to pay rent, a mass exodus occurred. My favorite metric from this period was the “U Haul statistic.” As noted by The San Francisco Chronicle in 2002:

During the Memorial Day to Labor Day peak moving season this year, 4.1 percent
more U-Haul vehicles and trailers left the Silicon Valley region than arrived,
the company calculates. That compares with 1.8 percent more households taking
moving equipment out of the region than during the same period in 2001.

As we all know, the dark days of 2002 have now mostly faded from our collective memory. Of course, those of us who made it through that period are perhaps a little more gun shy than we were when we first came out here, but the rise of Google and Web 2.0 has given a lot of people a lot of confidence about Silicon Valley’s future success.

For the most part, I agree with the vote of confidence. But I also see history repeating itself. This was most evident to me last week when I perused photos from the TechCrunch meet-up in Menlo Park. It’s hard not to look at these photos of hip nerd girls and just plain nerds and not see both youthful excitement and eventual disappointment for most.

Of course, today, the eHows and eBates of the world have been replaced by URLs missing vowels, like Flickr, Revvr, AntiDsEstblismntr, and the like. But there’s no doubt that the outcome of the Web 2.0 entrepreneur generation will be largely the same as the 1999-2001 wave: most will fail, many will leave SF forever, and a few will make out like bandits and drive housing prices up in Los Altos Hills and Woodside.

But that’s the beauty of Silicon Valley. Every few years we get knocked down, venture capitalists store their money away in secret vaults on Sand Hill Row, and disgruntled youth leave the area and apply to grad school. But it’s only temporary. In a few years, all is forgiven as the new wave of entrepreneurs come into town with a confident swagger and the next game-changing pre-IPO idea.

Since we’ve already run out of e and i domain names, and apparently the non-vowel names are also taken, my prediction is that the next wave will have to combine letters and numbers; things like CUL8R.com and IB4U.com. Basically virtual license plates. Now’s the time to start cyber-squatting on these URLs, my friends, because the next wave of entrepreneurs will definitely want to spend some VC money on a catchy domain.

 

Did the Supreme Court Just Kill Comparison Shopping Engines?

No doubt most online marketers didn’t lose much sleep when they heard that the Supreme Court was going to hear a case called Leegin Creative Leather Products v. Kay’s Kloset. Today’s decision, however – overruling legal precedence that has stood for almost 100 years – should wake some marketers from their slumber. Let me explain why.

Prior to today’s Leegin ruling, the concept of “minimum advertised prices” or “MAP” was illegal under US anti-trust law. In other words, Sony couldn’t send a letter to all of its vendors telling them what they could sell a Sony product for. They could set a “manufacturer’s suggested retail price” – better known as a MSRP – but they couldn’t prevent vendors from choosing to sell below the MSRP.

And in fact, as consumers, we are all accustomed to seeing advertisements proclaiming “25% off MSRP!” or “Save 40% off all Best Sellers!” Who in their right mind, after all, would go into a car dealer and actually pay the sticker price listed on the car, right?

In reality, a lot of manufacturers have been preventing vendors from selling at below MAP. For example, open any photography magazine and you’ll see a lot of products that say “call for our lowest price.” This is a clear indication that the vendor is selling below what he is suppose to be selling the product for and doesn’t want to risk losing a relationship with the manufacturer.

At the same time, manufacturers have understood that setting a MAP was illegal, so it was often difficult to actually punish any renegade vendor who broke MAP. In fact, a friend of mine told me that one of his competitors appeared to be purposely and flagrantly violating MAP in the hopes of getting cut off by the manufacturer and thus having grounds for a very profitable lawsuit.

Today, however, the Supreme Court has made MAP legal. To quote the Court’s opinion:

“Minimum resale price maintenance can stimulate interbrand competition–the competition among manufacturers selling different brands of the same type of product–by reducing intrabrand competition–the competition among retailers selling the same brand. See id., at 51-52. The promotion of interbrand competition is important because “the primary purpose of the antitrust laws is to protect [this type of] competition.” Khan, 522 U. S., at 15. A single manufacturer’s use of vertical price restraints tends to eliminate intrabrand price competition; this in turn encourages retailers to invest in tangible or intangible services or promotional efforts that aid the manufacturer’s position as against rival manufacturers. Resale price maintenance also has the potential to give consumers more options so that they can choose among low-price, low-service brands; high-price, high-service brands; and brands that fall in between.”

The consequences of this decision on the online commerce world could be substantial. Here are the online players who stand to be most impacted by the decision:

1. Comparison Shopping Engines (CSEs): Imagine what happens to comparison shopping engines if, well, there are no prices to compare. I guess they just become “shopping engines?” In fact, the likely outcome would be that the comparison engines would become nothing more than repositories for consumer satisfaction ratings. Since the price would be the same across all vendors, the user would simply need to sort the vendors based on the number of positive reviews.

Of course, in such a scenario, I can’t imagine too many vendors with low ratings wanting to stick around for long on the CSEs, nor would it be likely that poorly reviewed vendors would get too many clicks in the first place.

The end result, then, for the CSEs seem pretty bleak – less utility to consumers and fewer paying vendors.

2. Small Online Merchants: New online vendors won’t fare much better in the new MAP world. Forbes had a good piece on this point today, noting “opponents [of the ruling] argue that it will serve to raise prices, which will prevent small retailers–particularly those who are trying to break into burgeoning markets on the Internet–from being able to compete with established retailers.”

Imagine how big Overstock.com would be today if they had not been allowed to sell at deeply-discounted prices. Any new merchant looking to establish a foothold in a market by underselling the competition is in trouble. Indeed, the Consumers Union issued a press release today noting: “The emergence of Wal-Mart and Amazon.com can be directly traced to the ban on [MAP]. Unfortunately, today’s ruling may very well serve to prevent The Next Big Thing in retailing.

3. eBay: In many ways, eBay is at the center of the storm for this ruling: it owns Shopping.com – a leading comparison shopping engine – and a good chunk of its core business comes from vendors selling “buy it now” items on eBay below MAP. In a way, you could say that eBay’s entire business model is based on helping consumers find ways around manufacturer’s minimum prices. This could be a huge blow to that model.

4. Google: Of course it is silly to talk about any issue impacting the Internet economy without discussing Google. I actually think that this ruling won’t impact Google one way or the other, simply because much of Google’s revenue comes from advertising that is not price-sensitive. For example, most Google AdWords ads make murky claims about “save 50% or more” but these claims will continue regardless of this ruling.

To put it another way, eBay and Shopping.com base their value proposition on price, Google bases it’s value proposition on “relevancy”, which is not always price-related.

On the other hand, Google has been gradually trying to bring Google Base front and center in their search results and company strategy. If it is true that this ruling hurts comparison shopping engines, Google Base may not be as lucrative a strategy as Google once hoped.

5. Web 2.0: Amazingly, this ruling may actual help Web 2.0 companies develop a profit model! Wow! Insofar as many Web 2.0 companies revolve around consumer opinion (Yelp, blog sites, StumbleUpon, etc), the gradual decline in the importance of price may make sites that capture masses of consumer opinion the de facto destination for shoppers looking to choose between different vendors.

And unlike CSEs, which tend to have stodgy surveys as their proxy for consumer opinion, Web 2.0 companies tend to get much more mainstream and thorough opinions from their loyal users. I can envision some sort of affiliate revenue-sharing model where the 2.0 company stays out of endorsing any one vendor but makes a few bucks on any sales that result from a user’s reviews.

Over the next 3-6 months, I predict you will be hearing a lot more about this case. And after reading this post, you won’t be too surprised when eBay buys Yelp either.

 

Is Online Lead Generation Bubble Proof?

Now that every Web 2.0, local search, or mobile commerce start-up is getting showered with money, Newsweek cover stories, or $750 million offers (which they are rejecting), I think it’s high time to stop asking “is this a bubble” and instead start wondering “just how big and silly will this bubble become? Clearly, many a VC has forgotten 1999, and there’s a lot of fat in the Valley these days. I’m actually beginning to wonder if SFGirl is going to come back into prominence.

So while we wait for the imminent collapse, the question on my mind is how a downturn in the Internet economy will impact online lead generation companies. My sense is that, while lead gen is not entirely recession proof, the industry should be largely unaffected by a 2001-like bubble burst. I have three reasons for my confidence. As follows:

Lead Gen is an “Established” Industry

Lead generation companies hate reinventing the wheel. Once you find a vertical, a media channel, a landing page, a sales rep – whatever – that works for you, you ride that winner as long as you can. As a result, the successful lead gen companies today have refined their models over and over again to the point that they are highly metrics driven, produce relatively stable monthly revenue, and have well-developed relationships with their clients. Moreover, the price per lead each company in the space receives is relatively similar, a sign that customers have also figured out the metrics that work for them.

Unlike, say, mobile photo sharing, this is an industry that has a demonstrated track record of success – both for advertiser and publisher. It’s not an experimental part of a marketer’s budget – in some cases, it’s almost the entire budget.

Lead Gen is a Safe Harbor in the Storm

Advertisers love lead gen because it is a form of media that enables them to control risk. When you buy a CPM advertisement, you are only guaranteed impressions. With a CPA (or better still, a rev share) ad campaign, you are guaranteed leads or even sales.

In a down economy, advertisers will no doubt flock to less-risky media campaigns. The result will be an erosion of CPM media buys and experimental buys (Podcasts, RSS feeds, etc), with an increased spend on CPC and CPA deals with more secure returns. I suppose a good analogy is the stock market. When times are good, people make risky bets – for example, paying $400 a share for Google. When times are bad, municipal bonds, CDs, and value mutual funds look mighty attractive.

Lead Gen Doesn’t Rely on Start-Ups For Revenue

When you look at the major lead gen verticals – mortgage, education, shopping – the focus is almost entirely consumers. As a result, the sudden death of hundreds of start-ups and the equally rapid dismissal of dozens of venture capitalists has little impact on the business models of lead gen companies. Granted, any economic recession will reduce consumer spending, as well as reduce the over-inflated valuations currently being given to Internet companies.

At least with respect to consumer behavior, however, you can argue that some of the major lead gen verticals could be consider counter-cyclical. For example, when the economy is booming, interest rates rise and mortgage refinancing falls, while the opposite is true in times of recession. Lead gen companies do much better on more refinance leads than they do on new home purchase leads. Similarly, when the economy is hot, people tend to stay at work; when the economy cools, applications for schools increase. Thus, another win for lead gen.

Conclusion

Lead generation isn’t flashy. It’s rare to hear words like “AJAX” or “social networking” in the halls of an online lead generation company. You’re far more likely to hear “revenue per click,” “conversion rate,” and “clickstream analysis.” You’re also likely to hear lines like this: “The company has enjoyed 20 quarters of profitability with annual revenues in excess of $100 million two years running.” That pays a lot of bills, something that you can’t say about a Newsweek cover story.

Tags: online lead generation, internet bubble, web 2.0, newsweek cover, monetization

 

Is This an Internet Bubble or Not?

It’s easy to reminisce about 1999 and laugh at all of the silly dot coms getting millions of dollars in funding. Hindsight, after all, is 20/20. Of course “eyeballs” aren’t enough. Of course paying consumers to surf can’t work. The list of silly business plans is very long.

Today – six years into the new millennium – many think we haved learned our lessons. The shining stars of the Internet world are companies that have actually produced revenue and profit. Companies like Google, eBay, and LowerMyBills have huge valuations (or have been acquired for hundreds of millions of dollars) simply because these companies make money, and lots of it.

Thus when people asked “has the bubble returned” it’s easy to point to these Internet highflyers and conclude that this is not a bubble but rather the emergence of a more mature, legitimate Internet economy.

I think, however, that using Google as the posterchild of Internet legitimacy only tells you half the story. The truth is that there are a lot of real businesses getting attention today, but there are also plenty of questionable business models getting major VC funding and acquisition dollars.

In 1999, the hot verticals were portals, shopping, and web services. Today, the “in crowd” includes search technology, social networking, and affiliate marketing. As in 1999, some start-ups will do very well. These are the companies that combine smart people with experienced technologists, and who try to build for the long-term, instead of the quick IPO.

But the feeding frenzy has begun, and that means that some VCs aren’t learning from the mistakes of seven years ago. Companies are being funded simply because they have something to do with search engines (the next Google!) or because they are a Web 2.0 business (the next del.icio.us!).

A good benchmark to determine bubble mentality is the Ad-Tech exhibitor list. Like Comdex years ago, Ad-Tech has become the show of online marketing. And when you look through the list of over 100 companies, you can’t help but wonder what some of these companies do, and whether they’ll exist 18 months from now. For example, check out the number of companies with the word “Ad” in the name exhibiting at Ad-Tech San Francisco:

• Ad Pepper
• AdBrite
• AdDrive
• AdDynamix
• AdFusion
• AdJuggler
• AdKnowledge
• AdMedian
• Adsertive
• Adteractive
• AdValiant
• Advit

Some of these companies are definitely legit and are going to be around for a while (Adteractive and AdBrite in particular). But there can only be some many successful “Ad” companies, just like the “e” companies of 1999 (eTour? eFax? eBusiness anyone?).

Maybe this is what VCs are supposed to do – invest in a lot of silly companies in the hopes that one out of ten will get acquired for hundreds of millions of dollars. And I have to admit, all this money flowing around the valley is nice. I get a lot more free lunches, free t-shirts, and calls from recruiters promising millions of dollars of pre-IPO stock.

In the long run, however, frenzy always leads to panic. I think it was Jack Trout and Al Ries who said that you never want your product to be a “fad”; rather you want your product to be a “trend.” Dot bombs that blow up a few years from now will only tarnish the overall Internet industry, causing all valuations to drop.

A friend and I once joked about starting a dot com called “ShoeRepair.com”. The concept was simple – people would mail us their shoes (after ordering online, of course), we would fix them and mail them back to them. We had our 30 second elevator pitch ready to go. Everyone in the world wears shoes – that’s 6 billion potential customers. If we only got 1% of this market . . .” And of course we would hire a lot of sharp young Stanford MBAs to add legitimacy to our business, as well as a few consultants to create PowerPoints. We’d raise $20 million, go public for $150 million, and cash out in 18 months to live in Hawaii.

Internet success stories like Google and eBay show that the Internet has matured into a real force in the US economy. But replace “shoe repair” with “Web 2.0,” and it’s clear that there are more than a few bubbles still waiting to pop.