|SSP (Shameless Self-Promotion)||This
Week's Clue: Forward Into the Past
A big reason for predicting the demise of small Web stores with the rise of broadband is found in the history of the CD-ROM business.
What was then called the "multimedia industry" was launched with great fanfare in the early 90s. I was at the launch of a small Dallas company called 7th Level during one Comdex and witnessed firsthand the entry of Hollywood star power into the computer business. Co-founders included music producer Bob Ezrin and Scott Page, who'd played sax with Pink Floyd. I rubbed elbows with Quincy Jones (an investor), Linda Ronstadt (an interested party) and Charles Fleischer. The voice of "Roger Rabbit" had a column in "PC Computing" at the time (he also had a deal to do voiceovers on a future 7th Level project), and when someone approached the two of us, claiming to be one of my fans, I introduced Fleischer as just another writer. (Maybe you had to be there.)
7th Level made high-quality stuff. Their problem was that costs were too high. Tony Bove detailed it memorably in his "Bove & Rhodes Inside Report" (since sold). It was the classic line. "We lose money on every sale, but make it up on volume." Only monster hits, it seemed, stood a chance, and only if they watched their production budgets very carefully.
So it was that the promise faded. Only a few strong players are left. Some come from the games area, others from education, still others (like Microsoft) from what's essentially publishing. They all share economies of scale needed to make distribution through stores pay, eking-out margins on disks that now sell for $5-20 each. (Some now come free in cereal boxes.) Essentially, it became a lot like the business Ezrin had left, music production. The remaining players became the equivalent of Polygram and Sony Music, distribution outfits for labels they'd own, like Humongous Entertainment and The Learning Co.. Once in a while you see an independent outfit succeed in a specialized niche, like software that treats girls (and their feelings) seriously. But that's the exception that proves the rule.
Is this where we're going with the Broadband Net? I don't think so. The economics are very different. What killed the small CD-ROM publishers? Not high production costs, but high distribution costs. Advertising to draw buyers, incaps in stores to attract the eye, discounts to retailers to stock the product, the whole infrastructure of returns -- that's where the money went. When you sell on the Web, however, those costs are reduced - not eliminated, reduced. Instead of the distributors being the key players, it's the labels who become the key players, the people who aggregate, assist, and present the talent. It's talent that's the bottleneck.
Now, when the Fortune 500 elbow their way in (as they must) and come to dominate their home niches (as most will), Web ad shops have to scale-up to meet the need. That's what's driving the merger mania in that portion of the market. It will continue for some time. But the teams these companies build are building infrastructure - the design of marketing or creative content is just the tip of their iceberg. For the rest of us, meeting the needs of distribution represent an opportunity , a niche , or a no-brainer.
The key to success, I think, lies in knowing your niche, scaling to
fit it, and selling your knowledge. There are great opportunities here
for building teams, for running focused teams, and finding a market for
others' talent. (I maintain that's a talent in and of itself.) But the
key opportunity for the future lies in being talent. The power of talent
to get a good price for its service has risen steadily throughout this
century - it's the one constant of economic life. I don't see the Web changing
that. Instead, I see the Web spreading that.
SSP (Shameless Self-Promotion)
See you in Chicago. Yes, I got a gig for Internet World this week, and hope to see you there. We now have about 700 readers on the A-Clue.Com list, and there may be as many as a thousand more visiting our Web sites each week (including Sean Cafferky's PPN and Tom King's CompuTalk . That's because we not only deliver news and insight, we deliver it in a fun, entertaining way. It's the thought that counts, and as always I very much appreciate yours.
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And now back to our show...
Joseph P. Kennedy (father of JFK, RFK, etc.) said he got out of the market before the 1929 crash when he heard shoeshine boys trading stock tips. The current speculative fever in search-engine or "portal" stocks like Yahoo, Lycos , and Excite will be seen by history as the shoeshine-boy bubble.
While there is a valid business here, no company is worth 50 times its annual revenues. Until now, Yahoo's profits have been driven by interest on cash raised from previous stock sales - operations are marginal. Investment professionals have been warning people away from this for months, but the stocks just keep rising. One reason might be that some fundamental investors tried selling the stocks short (betting they'd fall). (As the speculator Daniel Drew said more than a century ago, "He who sells what isn't his'n, must buy it back or go to pris'n.")
How bad is the mania? DoubleClick , the Web ad network, got into an argument with privately-held LinkExchange concerning the reach of its ads. (It turned out LinkExchange ads are seen by more users, according to Media Metrix.) What happened to DoubleClick's stock as a result? It rose 63 percent!
When investors lose their minds over valid stock plays, invalid plays come along for the ride. Such dogs as Egghead and K-Tel have become darlings of Wall Street by switching to the Web, long before their strategies are proven. (Egghead's Web profits are coming from auctions , not its software store, by the way.) The mania's fueled by research like a June 30 report from ActivMedia, saying Web site spending will rise from this year's $1.2 billion to $24 billion in 2002. That may be true, but most of the money will be spent by consumer brands playing catch-up, and b2b sites moving their businesses online - it won't all be going to Yahoo.
We've already experienced an Internet stock mania - Netcom's stock price was among those that took a bath in 1996, when the last bubble burst. When the fall comes, moreover, it's too late to bail out. The Dow fell over 500 points in one day last fall, proving the case of three IBM scientists who recently published a paper on the wildly-chaotic price swings accompanying massive use of software "agents." . Word up, gentlemen, we're all software agents, and our ability to trade on information, good and bad, is just one-click away .
So when's the latest date for this bubble bursting? I'd say it's the launch of Start , the search site Microsoft's now beta testing through (among other things) re-directs of Hotmail users.
The always clued-in Larry Chase has a book out called "Essential Business Tactics for the Net" , available both online and offline. He's always had far more brains and energy than cash. His ideas for building a bestseller should be part of your required reading, if you want to make a big splash on a small budget.
First, he organized his own book signing, at Barnes & Noble's store in the Citicorp building. Next, he went on the chat circuit. He'll be on Talk City and CompuServe July 13, on America Online Wednesday. He also publicized the whole thing heavily, and unashamedly, in WDFM, and offered free access to his archives for a year to anyone who'd buy the book on Amazon.Com
Then there's this personal advice. It was aimed at A-Clue.Com, and my goal of reaching 10,000 readers via e-mail within a year. First, he urged, solicit testimonials directly from clued-in readers. Next, tell your friends (in my case, you) exactly what you want to do - I WANT TO REACH 10,000 READERS A WEEK WITHIN A YEAR. Finally, suggest techniques readers (like you) can use to reach that goal, like sending this letter to three of your friends, people you like and think might want to subscribe to it. (Don't spam on my behalf, please.) Using this technique, he ways, he's boosted his own subscriber list by 30-50% in a single week.
Want a quick summary of Larry's Clues? Do all you can to make new friends, and don't be shy in asking them to spread your good words.
Be Free Inc. is currently offering the future of "affiliate" programs. In a word, it's automation. The company's BFAST program automates the creation and tracking of affiliate networks, so you not only create an affiliate network quickly, you deliver your managers the data they need to improve results. BFIT, a companion program, works in the same way for advertising. It's all handled by the company's own servers. Among the early customers are Barnes and Noble , and Artuframe .
There are niches where human editors work best. Yahoo's index remains superior to any search engine. But all routine management tasks can do with automation, and that's what running a network of affiliates takes, routine management. Be Free may not win this race, but they've got some early foot.
Clued-in (and it's in contrast to our Clueless designee) is Russell Horowitz of Go2Net . After developing modest successes like StockSite and going public in 1997, he used $35 million in stock to buy Silicon Investor , a subscription-based investor user community. He's also launched (not bought, launched) WebMarket.com , a comparison shopping site, and offers multi-player games written in Java. His goal is to have multiple revenue streams - subscriptions, advertising, and e-commerce, treating each site as its own business with its own dynamic. This lies at the heart of smart business.
Clueless is Zap.Com , which continues to get big press for its debut of links to 21 sites it has purchased over the last few months. Some of those sites are valid businesses, others just offer good service. What's Clueless is the idea of buying in the middle of a mania, building none of your own software (so you don't know what good work really costs), then loudly proclaiming you're going to beat outfits worth billions. (Speak softly and carry a big stick, as Teddy Roosevelt said. Or at least speak clearly and carry a good schtick.) What's more Clueless are investors who pay more than the value of this fish oil company's assets (about $15/share, I hear) for the stock.