Hotmail is credited with inventing online viral marketing. I am sure there were earlier examples, but the whole point of viral is that it's so infectious that it obliterates memory of earlier attempts. I was an early Hotmail user - it was just so simple, obvious and useful.
Most of the Web 2.0 success stories have been viral. Apart from Hotmail, this was not true in Web 1.0. The game at that time - hopelessly flawed in retrospect - was raising tons of money to advertise (online and offline) to get traffic. Flickr, YouTube, Twitter, Facebook type services don’t need to advertise to get mass scale.
Then use Amazon Web Services or equivalent for your infrastructure; you don’t even need to raise money for capital expenditures, you just pay as you go as a variable cost.
That is a major revolution in business; it overturns the accepted wisdom that you needed mega millions to build a consumer brand.
But there is a problem with all this. I don’t believe I ever clicked on a Hotmail ad. I don’t think I even looked at them. Here is the nasty law:
“The more viral it is, the harder it is to monetize”.
These are the three streams of the Internet - communication, entertainment and research. You go online to communicate, have fun or find some information. The viral properties of each stream are quite different:
- Communication. This is perfect for viral. Think Hotmail, Twitter, Skype and Facebook. The viral property is built into the service.
- Entertainment. Think You Tube or Second Life or any online game. I tell people about a really entertaining video. The viral property is weaker as it depends on a stream of loss-leader hits.
- Research. Google got viral adoption because the alternatives were weak and it was a major problem faced by millions every day. As it was free and dead simple to use, there was no barrier to adoption; but the viral spread was only possible because it was such a big problem and it was so much better than the alternatives. This happens very rarely.
Only Communication is a sure fire viral success. It only works when it is a genuinely new form of communication (webmail, social networking, microblogging). You cannot launch a web mail or social networking site today and expect viral adoption. But when it is a genuinely new form of communication, the viral adoption is stunning in its speed. I can see one new form of communication out there today that could get mass viral adoption, which is video conversations as exemplified by Seesmic.
When you look at the three streams of Internet services - Communication, Entertainment and Research from a point of view of monetization, the order is reversed:
Research is simple to monetize. It leads to a database of intentions and that leads to any number of advertising models that have a) proven returns to advertisers b) proven use for searchers.
Entertaiment can be monetized through advertising and “freemium”. We are used to the idea of ads to get free entertainment on TV/Radio and used to paying to go to the Movies or rent DVDs.
Communication is really tough to monetize through advertising. It has to be free to be viral (and it can be free because the marginal cost is close to zero). So the only way to make money is some form of advertising. It is just really, really hard to find a good way to offer advertising around a communication service that works for both the user of the service and the advertiser.
The big debate about Facebook’s value and their Beacon debacle is a reflection of this fundamental problem. So is the online debate about Twitter monetization and the heat that eBay got for not being able to wring the expected profits from Skype.
There have even been attempts to offer free telephone services in return for listening to ads. They were ridiculed and have failed. Yet we assume that it is OK to do this with online communication.
The simple fact is that when we are communicating all our attention is on communicating, so ads don’t get our attention. Entertainment can have breaks; TV has accustomed us to this idea. But try saying “we interrupt your attempt to get a date to give you this message from our sponsor”. I think the sponsor would suffer some serious brand damage!
Facebook is trying hard with some new models to monetize the social graph. But they all hit a fundamental problem. On page 44 of “Wikinomics, How Mass Collaboration changes Everything” it says “relationships are the one thing that you cannot commoditize”. That is like the law of supply and demand, you can count on it and take it to the bank. So any attempt at making social network relationships into either an Amway scheme (I make money by selling stuff to my friends) or a Beacon scheme (Facebook makes money by me selling stuff to my friends) will ultimately fail.
This does not mean that you cannot make good money on a new form of online communication. If you have a new form of communication and you get mass scale virally, you will get good returns on capital. Even if ad monetization rates are very weak, you make up for low rates with scale. As it costs so little to get that scale, it is still an OK business. Somebody who needs scaled-up features to add to their platform will pay good money to acquire you.
However that is a small prize compared to a Research service that gets mass adoption. Google is valued at over $200 billion because they got viral adoption for a Research service. They have even found a way to make email advertising effective. I now use Gmail and the ads are often bang on target and I have clicked on ads in Gmail. (They are also often totally, crazily wrong; my favorite was when I was writing about somebody called Cooper and got ads for Mini Cooper cars).
Services can mix Communication, Entertainment and Research. However the core proposition has to be clear. A new Communication medium is initially always Entertaining just because finding new ways to connect with people is a buzz. But once that “gee whiz” early adopter fades, the service has to be useful on a daily basis for mass markets. New entertainment models have to be social to break into what is already a hugely powerful entertainment industry.
Research is currently solitary. It is not fundamentally entertaining. I don’t see fun as a driver for Research beyond a gee whiz phase. However collaborative research, search with a communication angle, does look like the next big thing. My definition of Web 3.0 is:
The combination of Web 2.0 mass collaboration with structured databases.
If you can build a research tool that propagates virally and gets more useful with each person who uses it, you build a business with phenomenal power. That is a lot easier said than done. The purely technical challenges of creating structure out of lots of unstructured input is considerable. Much tougher is the chicken and egg problem; the tool has to be useful out of the gate, which is tough if the use derives primarily from the interaction of many people.
This means that funding has to be substantial to build enough value before the community kicks in to create value. That is why services such as Mahalo and Freebase raise VC measured in tens of millions of $. This is not like a pure Communication service that can get viral adoption out of the gate (but where the eventual returns are limited).
Image credit: Niall Kennedy