Mike Berkley on ‘Preparing for the Next Web Boom’

[HTML2][Editor: The following is a guest post by Mike Berkley, who served as the CEO of Portland-based SplashCast until its recent demise. Mike and I have had any number of conversations about the startup scene here in town. And I asked him if we wouldn’t mind putting his thoughts into a post. The first post—of hopefully many—follows.]

Preparing for the Next Web Boom

Since putting SplashCast to rest a few months ago, I’ve finally had time to reconnect with the entrepreneur community here in Portland, as well as in the Bay Area and NYC.  I’ve packed my days full of coffee, apricot scones, phone calls, and meetings… lots of meetings.  I’ve talked to dozens of entrepreneurs and investors.

Two themes have surfaced in this process.

First, we are in front of a new wave of web innovation. It’s fuelled by the simultaneous emergence of location-aware mobile devices (GPS on iPhones, etc) and real-time, one-to-many communication tools (Twitter, etc).  For the first time, information about your life in the physical world (where you live, work, workout, eat, shop, drink, etc) can be readily known and indexed in the virtual world.  Mix that with real-time, always-on communication among friends, colleagues, local retailers and businesses, and we’ve got some amazing opportunities to chew on.  A few start-ups getting early traction here are Foursquare, redbeacon, and Portland’s ForkFly.

I think we’ve entered the next chapter in the evolution of the Internet.  On the heels of the now-passé “Web 2.0” era, we’ve embarked on what esteemed VC Fred Wilson calls the “Now Media” era.  FWIW, I don’t like the “Now Media” moniker because it captures only the time dimension, leaving out the geographic dimension.  I’d prefer something like “Here & Now Media”, which of course is too long and clunky to ever stick… but you get the point: for the first time, the Internet is reaching beyond pixels on a screen and into the real, physical world.

Second, I am observing that most entrepreneurs aren’t seeing the “forest through the trees.” They are so focused on the content of their business—their product, web site, iPhone app, user experience, etc—that they aren’t paying attention to the business itself.  Perhaps this is a timeless issue, one that has always challenged entrepreneurs.  But my theory is that a disastrous economy reinforces this tendency, since ramping revenue is so much harder now than it was just a few years ago.

Dear Web Entrepreneurs:

Call me a curmudgeon, but just because your product is FREE doesn’t excuse you from the hard work of making money.  You should be spending at least 50% of your time thinking about how to build a large and liquid audience.  By liquid, I mean easily milked, as in cash-cow.  And please do not utter the word “viral”… at least not until your product’s been in the market for 3 months.  Then we can review your viral record.

I think we need to get back to some basics of media.  First, are you operating your business like a media company?  Below is a simple structure for thinking about your business, in both concept and practice:

  • Content: Content is your product, your service, your iPhone app, your web site, your blog, etc.  It also includes all the ancillary features of your business, such as support, account management, community outreach, etc.  Content is almost always a loss-leader in media: it is usually provided to consumers for free (or below cost) in exchange for the consumer’s attention, which can then be sold to a marketer.  Content is where most entrepreneurs spend 90% of their time, but it is only 1/3 of their business.[HTML1]
  • Audience: Audience is the people who consume your content.  Building a large, high-quality audience is the most difficult component of media, I believe. The quality of audience can be defined in several ways: its value to advertisers, its propensity to buy your content, its ability to attract more audience and content, etc. The smartest time investment you can make when starting a company based on free content is:
    1. Clearly define the audience you want to build: “soccer moms”, “teenage boys”, “foodies in NYC”, “car enthusiasts”, etc…[HTML1]
    2. Validate that marketers will pay a premium to engage that audience.

    Audience should guide or at least heavily influence your content and monetization strategies.  The unique qualities of your target audience should impact how you design your product.

  • Monetization: Monetization is how you get paid for the content and audience you build.  This usually means some form of advertising.  If your content collects unique information about your clearly-defined audience, market researchers may pay an arm and a leg to access it.  Or perhaps you are able to convert your audience into paying customers, via a paid upgrade, freemium model.  Whatever the model, it’s critical to identify upfront who your paying customer is.  Otherwise you are blind, not knowing whether the audience you’re building will ever be worth anything.

This Content – Audience – Monetization framework is a 3-legged chair: take any one leg away and the business will fall over. At SplashCast, we were ultimately 2 for 3. Our Social TV business had great content (primetime TV shows via Hulu.com), a strong monetization model (Nissan, Honda, Right Guard, and Jack In the Box were among top advertisers buying directly from us), but weak audience growth (we couldn’t get consumers to sign up as fast as advertisers). In the end, we ran out of cash before finding the right balance.  Lessons learned.

The next Internet boom is coming; stay in front of it by staying focused on fundamentals.  When the economy swings back in 2010 you will be well positioned to ride the big waves of recovery.

P.S.  I love talking with entrepreneurs and helping where I can.  Reach me via LinkedIn, Twitter, or michael_berkley at yahoo.com.

(Image courtesy Aaron Hockley. Used under Creative Commons.)

  1. That is: “quite misunderstood.”

    Content (including product and service) + Audience (the people using the Content) + Monetization (generating revenue from the Audience) is the full media business. Need all 3 parts.

  2. @wink glad you liked the first part, but sorry that you quite mis-understand the second part.

  3. So, this seemed like a great article, much better than Startup 101 from David of MioWorks, but…

    I was digging everything until “Content: Content is your product, your service, your iPhone app, your web site, your blog, etc.[ …]” but then “Content is where most entrepreneurs spend 90% of their time, but it is only 1/3 of their business.” Um, so if it’s every part of my business but only 1/3rd of it – I mean, what the heck does that paragraph even say? It seems like it was written by a drunk guy. If it’s 99% of my business, I’m gonna have to spend a lot more than 33% of my time on it.

    And “Building Audiences”? Yeah, back in the late ’90’s and early 2000’s companies would buy other ones just because they had a lot of people, with their info, signed up to a service. But guess what? I can’t think of a company, other than Google, and now its imitators, who found a way to monetize that huge amount of personal info. And Google, et. al. didn’t buy it, they built it, and Gmail has *no* content at all. It offers a service. So if you look at who’s making money by “building audiences”, you’ll find they almost always offer service, not content. Newspapers are dying in print, but also online. advice above: FAIL.

    Advice about “paid upgrade” as a way to monetize the “built audience” is also a FAIL – I restarted two startups with that model – give away the basic service for free or cheap, then offer the “real stuff” for a higher price. Conversion rate to a higher, more expensive service was about 5%. Didn’t even pay for all the work to add the extra services.

    Having now read two articles with advice given from people who tried to build startups, and – key point here – failed – I think it might be a good idea to try to get some stuff from the companies that are doing well. How about blog posts from people from Tripwire or Jive about how to succeed, not “what I learned when I failed.”? Or is that too obvious?

    @J. Pablo – no, Twitter is one-to-many, physically and mathematically. One person, program, etc. creates a useless 140 character or less msg whch is usully wrtten in txtspk – which only makes it worse, then sent to many, many receivers. If they forward it on, they’re just repeating the one-to-many reality. Many to many is, at best, say, a collection of comments like these, written by many, then read by many. But no immediate tech (IM, txt msgs, Twitter) is anything but (1) one-to-many and (2) almost always a waste of time.

  4. I think Twitter is not one-to-many, TV is one-to-many; Twitter is many-to-many.

  5. Hey Vince — good points re innovation / progress. But it is true, humans need to compartmentalize in order to make sense of the world. So we get “web 2.0” and so forth.

    Regarding “Platform”, I think it falls under the Content category. A platform is strategy for getting other folks (developers) to build content for your Audience. It’s not too unlike a UGC strategy, from that standpoint. There are lots of different content creation strategies, and a platform approach is one of them.


  6. Don’t forget “Platform” in that matrix for the business. Also, in terms of being on the verge of a wave of innovation, I kinda feel like that wave never passed and we’ve been on it since the late 90’s. These are phases of an ongoing process and I think it’s human nature to try to compartmentalize periods of time so we can more easily understand progress.
    But the truth is, progress and innovation are happening, will happen and should happen all the time. If we become more comfortable with that concept and, more importantly, start talking about the business in that way, everyone and every business would benefit.
    Next is now.

  7. Agreed, Mark.

    Ray, building a HIGH-QUALITY audience is critical early on, I very much agree!

    Marshall, would love to participate.

    Tom, very well said. Audience is hard because it has to be earned the old fashion way: one happy user at a time. No way to game it or fast-track a high-quality audience.


  8. The framework is great. Audience is the biggest challenge. Building a meaningful audience requires resources (either time or money). In this sense, audience is the enemy of the bootstrap financing approach. Bootstrapping is almost a requirement in our market (for a wide range of complex reasons). This is why we see so many “small furry animal” startups in Portland, versus the larger digital media companies that have emerged in Seattle, LA, NY and Silicon Valley. Portland startups need coaching around creative ways to build audience.

  9. Mike, we’d love it if you’d join us at the ReadWrite Real-Time Web Summit next month to discuss these thought. http://readwriteweb.com/summit

  10. I really like the Content – Audience – Monetization framework and agree on the criticality of building Audience early. Nice post, thanks.

  11. I think it is nice for entrepreneurs and startups to remember that while the creative process of innovating is really fun, at the end of the day you really do have to exist for an economic purpose to enjoy that fun and to make it lasting.

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