Archive: revenue

Discussion: Monetization or Reach [English]

Frank Huber recently tackled my post about Monetization in his Blog

http://blog.firstmedia.de/?p=763 (in German)

and contradicted my views of the subject based on 2 reasons: in his opinion, YouTube has shown that “size does matter” and sevenload hasn’t followed my recommended strategy at all. Here’s my reply to his post:

1) It’s undeniable that the “natural market leader”, who’s the one that goes for reach first, is the one who can win the rat race for size. I did point this out myself in my own post. However, it would be wrong to believe that the YouTube strategy and more specifically the YouTube exit is something that can be replicated. Ex post, Google’s investment in YouTube makes a lot of sense for a company that gave up a fraction of it’s shares. But there is exactly one buyer fitting that profile, and that is Google. There’s always exactly one worldwide or www-wide dominant company per segment that can be successful with a sheer “reach” priorization and with such an Exit strategy – so it’s hardly good advice for startups to emulate that model unless the startup is entirely sure of being the first one in its category.

My argument wasn’t that reach or the number of users/clients won is irrelevant- in fact, it’s the opposite. I just think that it is healthier to achieve this reach or customer base with a working and efficient business model than without one. And XING is a good example of this: From its first day back in 2003, Lars Hinrichs (Founder of XING) was already charging 5- € in monthly membership fees, even though at the time subscription models were still widely perceived as unfeasable in the German internet market.

2) sevenload’s strategy is NOT that of gaining a gross increase in our reach at all costs. We’re following an approach of pure, organic growth (up to now we haven’t spent a single € for advertising) which allows us to best offer a differentiated platform and cover the “Long Tail” of content. This allows us to offer advertisers rates that are up to a factor of 10 greater than those of normal video portals – and of most most conventional internet portals as well. Because of this difference, we are the market leader as measured in:

- Unique Visitors (> 10 Mil real unique visitors per month),
- active registered users (> 300,000),
- average visit duration (> 25 min. per visit and registered users > 45 min),
- content volume and
- revenue (we will be the Web 2.0 company with the highest turnover in Germany this year and most likely the only one that will be profitable). We achieve all this thanks to a revolutionary advertising model that is highly effective for advertisers.

Interestingly, though gross reach was not a primary target, this strategy has led to an sustained increase in precisely our gross reach and has put us in second place in the German market in terms of gross reach, right ahead of Clipfish, despite Clipfish’s massive cross-media subsidisation by the leading German TV Channel, RTL, and a full integration in DSDS, Germany’s “American Idol” Format.

In my opinion this once again proves the wisdom of Al Ries’s main marketing theorem:

Create a new category, then dominate it

My post on monetization does nothing more than offer a methodic approach to defining the category a startup strives to dominate in business model terms rather than in media terms.

Monetization or Reach?

In a recent discussion I had at a meeting of which I am a non-executive member, the eternal discussion of

whether priority should be given to monetization or to reach and internationalization

was brought up. The debate centered around the question of whether or not the exit perspectives of the venture (of which I am also a shareholder) would increase or decrease, depending on whether the business model was first proven, at the detriment of international reach, or whether monetization should be allowed to lag because entry into several international markets at once would be a priority.

To me, this debate simply has the wrong starting point. While it is true that exit markets, such as the stock market or the M&A market, are – just like any other market – subject to buyer preference analysis, and while there is some credit to the claim that understanding the decision making “fashions” of typical M&A acquirers does help you in setting the price of your venture at exit,

timing towards such an exit market is more of a gamble than a company strategy.

In my experience, having now gone through two boom and one bust phases, the best strategy for a company to pursue is to

create a viable business model that creates value for customers that customers are prepared to pay for.

This may not always be the “sexiest” portrayal a startup can give itself (as opposed to: we are the next Facebook), but to paraphrase the old saying about design following function or form following function-

PR and the Elevator Pitch should follow the strategy and not the other way around.

This is why I literally get angry at classic venture capital thinking that sees company strategy solely in the dimension of “How will this fit my exit market? How can I sell this story to an acquirer?”. I would always strongly advise any founder

to have a clear and separate vision of their business model that cannot be influenced or swayed, save by the customer

and to work relentlessly on proving and creating that.

Incidentally, succesful American start-ups have often proven that this is the best strategy since they have always focused on gaining size and growth in their home markets before over-focussing on internationalization. In general, this has given them the size and clout necessary to, if need be, acquire whoever it was in a landscape within a specific market. It is true, that this does not always work and that some local markets have been lost even for giants such as Yahoo! and E-bay because they haven’t gone local on time, but conversely there is no known example of a company that went for reach without a viable business model and survived.

Eventually, you do have to pay the bills.

So if you do have to reach several international markets at once (because you are in a European market with too small a home market or because your board is adamant or because you have that peculiar megalomania that most entrepreneurs – including me – indulge in, I would advise the following order or priorities in formulating your company strategy:

1) Define your Business Model

2) Prove it by acquiring your reference customer base

3) Identify the growth factors in your business model with respect to paying customers

4) Identify the multipliers or incumbents in other international markets

5) Internationalize on a sales / business model driven basis by acquiring reference paying customers in those markets

The perceptions of your target exit markets can change faster than you can change the positioning of your company.

But a functioning business model and a continuous revenue stream are two realities that a) always let your survive independently of your VC backing and b) always find an acquirer.

Where there is a business model, there always eventually is an exit market.

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