Khirman & Son

A View of the Consumer Internet

by Michael Olson  ,
http://PleiadesTechnologyFutures.com,
blog http://PleiadesTechnologyFutures.blogspot.com

At the February 7^th CTC meeting we had a great presentation by George Zachary of Charles River Ventures on his view of the social network-driven consumer Internet. George brought to the group insights derived from his experience in the venture capital industry, the social network Internet and the Hollywood movie culture. He shared his thoughts on what that means with the rise of social networks and the ability to derive revenues on the evolving Web. You will find my outline of his presentation below but let me highlight some of the thoughts embedded in the outline.

Perhaps the most significant is his suggestion that communities drive commerce. A catalyzing driver is communications which over the several millennia of human existence has gone from word-of-mouth in the tribal community to the modern Internet which has spawned global communities of like-minded (interests) members. Communications defines the community which establishes a culture that drives the rules of commerce and each of these aspects feed back into these four facets to continuously evolve each of them.

George believes that what people really want are interactions with those of like minds (thinking, interests, beliefs, etc.). The Internet has facilitated like-minded people joining in interaction beyond geopolitical boundaries which is shifting influence power from geopolitical groupings to "like-minded" groups of people.

A second factor in George's mind is that Content is really secondary. It is like middleware that allows a social group to have a common function that facilitates the real and virtual commerce component of societies. His model is that the like-minded social group is the core and that content expands the core - but is not readily monetized. The culture of the social group sees the middleware "content" as the necessary glue that keeps them engaged in the community. It has to be essentially free and is really what the community barters for your "time and attention" that makes you a part of the community.

What is monetized are the additional items that can be purchased or accessed as each member has a tendency to elevate their status in the community by acquiring these tradable goods or as Clayton Christensen notes in "The Innovator's Solution" you do the "real jobs that people want to rent your product or service to do for them". George provides examples: For music, there is less and less money in the "music" and more in the concerts for the name performers and in the case of Apple, the iPod hardware. For photos, the middleware is in the photo storage and sharing whereas the money is made in targeting the wants of specific user groups such as mothers with kids who want an easy way to print and share (e.g., www.Shutterfly.com). For MMO games like the World of Warcraft community and the Club Penguin for younger children the monetized commerce derives from the goods that enhance your experience that can be purchased with real world money like virtual goods. (Recommended reading on virtual world communities is Edward Castronova's "Exodus to the Virtual World" which touches on the aspects of human nature that drives social group members towards real and virtual commerce (in virtual worlds)).

In short my interpretation of George's message on the opportunities for monetizing Internet social networks start with providing a network community for like-minded people that offers some negligible-cost feature / experience / service in exchange for their time and attention. Then capitalize on the natural tendency for people to seek more fulfilling experiences (or time/cost efficiency) such as increase in community status, improving a skill, advancing in a game or accomplishing the "jobs" the members would like to hire the community's members / resources / services to do for them. Monetize this real / virtual commerce by providing the network applications and messaging services necessary to facilitate the resulting commerce.

A (5000 year) View of Consumer Internet

George Zachary - Charles River Ventures

1. Com(munication) among us drives Communities and Commerce
   History of Communication (Speed of Info Diffusion vs. Historical Time)
   • a) Word of Mouth -> Tribe
   • b) Print -> Religion and Government
   • c) Broadcast -> Corporations and Markets
   • d) Internet -> Social Global Communities
2. Ying & Yang -> Communities & Commerce
   • a)Ongoing cycle of Communication -> Communities -> Culture -> Commerce -> Communication, etc
3. Gartner-like Hype Curve for various Social Networks
   • a) Buzz -> Valley of Uncertainty -> Exponential Adoption -> Peak -> Maturity (and slow decline)
   • b) Examples ( Facebook (EA), Bebo (peak), My Space (Mature) )
     • i) Communities of Different Needs
     • ii) Example (Twitter user -> single, urban, users seeking trivial 'comm' akin to what families do)
4. KEY BELIEFS
   • a) What people really want are interactions with those of like minds
     • i) There is an analogy with why news shows and blogs stifle discussions since they only attract those of like opinions
     • ii) Social Networks are the driver
     • iii) There is a shift from geopolitical groupings to "like-minded" groupings
   • b) Hence - Content is Secondary - it is like middleware
5. Concentric Circle of CORE, MEDIA and COMMERCE
   • a) Core (innermost circle)  THE SOCIAL NETWORK
   • b) Middle (circle) -> THE CONTENT (digital media, e.g., mp3 audio, MPEG4 videos, etc)
   • c) Outer (circle) -> REAL & VIRTUAL COMMERCE (Real Money made here -> iPod, music concerts, Groove Mobile)
   • d) EXAMPLES of each circle
     • i) Music (iTunes 2.0? & My Space) -> Advertising -> iPod & Concerts = $'s
     • ii) Photos (Facebook?, Geni, Eons) -> Photosharing (no $'s) -> Shutterfly (moms w/ kids)
     • iii) MMO Games (WOW, Areae) -> CD download enabler -> $'s (fees, virtual goods, IGE auctioneer, Live Gamer, Conduit Labs)
   • e) Related NOTES RE. MOVIE BUSINESS
     • i) $'s are in the ‘name' actors and distribution
     • ii) The process includes getting ‘letters of intent' from name actors so producers / funders can ‘model' likely income. Note that only 2% of movies return the invested capital
     • iii) Distributers make most of the money (50% margin business). THE INTERNET ATTACKS THE TRADITIONAL DISTRIBUTION CHANNEL.
     • iv) Check out www.flickster.com
     • v) Hollywood is not populated by scientists. It's a different society. People are very attention-seeking (as we can tell from the news stories).
6. Survey of the top 50,000 social network sites
   • a) Studied the activity by demographic age group vs participant type
   • b) Demographic (young teens, youth, Gen Y, Gen X, and young boomers)
   • c) User Type (creators, critics, collectors, joiners, spectators and inactives)
7. Where the OPPORTUNITIES exist
   • a) Unique Sustainable Networks, with Cross-Network Applications, Message Layers and a Monetization System
     • i) Unique -> differentiation of Members - collect like-minded folks into a community
   • b) Example (kids with Club Penguin and premium memberships that allow user created content)
   • c) Example (Hot or Not website offering virtual roses for more than real roses!)
   • d) Example (Facebook with the Happy Hour)
   • e) What about Linden Labs "Second Life"? - "The Compuserve of virtual worlds." There is likely a better way for people to have a fun experience as George learned from working on the Nintendo 64 and engaging with the game guru of Donkey Kong (I think). My recommended reading on virtual worlds is Edward Castronova's new book "Exodus to the Virtual World".
   • f) What about Yahoo? "Like newspapers today, Yahoo is loaded with ads that just give the users a bad experience." (distracting rather than engaging)
8. Q & A (paraphrased comments).
   • a) Comment: The trend is from Atoms to Bits (remember Negroponte?)
   • b) Comment: Angel investors - tend to invests more or less depending upon whether the market (stock) is good or bad, respectively
   • c) Comment: The venture community has only returned 55 cents on the dollar since 2000. It has turned into a money management business due to salaries and ten-yr fund timeframes.

About George Zachary

George Zachary joined Charles River Ventures in 2004. He brings more than 17 years of operating and investing experience in computing and consumer technology. George's focus is on building great services and software technology companies. George led's investments in Areae, Geni.com, GoTV, Millennial Media, Skyrider, SocialMedia Networks and Twitter and is a board member at all but Twitter.

Previously, he was a general partner at Mohr Davidow Ventures (MDV). His directorships included: Accrue Software (Nasdaq:ACRU), Andale, Critical Path (Nasdaq: CPTH), Ovation Entertainment, Sandcastle (acquired by Adobe, Nasdaq:ADBE), Securify (acquired by Kroll-O'Gara, Nasdaq: KROG), Shutterfly, Supertracks (acquired by Centerspan) and Telebot (acquired by Z-Tel, Nasdaq: ZTEL).

Prior to MDV, George led the Nintendo 64 development business at Silicon Graphics, managed sales and marketing for virtual reality pioneer VPL Research, and served as a product marketeer at CATS Software. He is a board advisor at the MIT Sloan School of Business and Stanford BASES. He is also an advisor to X PRIZE. George earned a joint BS from MIT and MIT Sloan
School of Business.