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May 20, 2009 By Nathan Kaiser Leave a Comment
Music Product Value Curve

Given everyone loves music these days, why are artists still starving? Below is a theory I’ve been considering regarding the viability of various music industry business models. It helps explain recent business successes and failures, and provides a simple framework for evaluating and predicting future profitability.

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Theory: the perceived value of music related products and services is a function of the connection it creates between fans and artists. The “closer” the connection the higher the perceived product value and the more willing consumers are to pay for it. At the far left of the closeness scale (minimum) are recorded performances. CDs, radio, etc. To the far right is a face-to-face personal interaction with the performer. On the perceived value curve, recorded music is relatively low in value. Whereas a backstage pass is nearly priceless.

The curve looks something like this:

Specific examples of products and services in each closeness category include:

recorded performances: radio, mp3s, cds and dvds.
merchandise: t-shirts, dolls, underwear
anonymous participation: Tap Tap Revenge, Rock Band, remix contests
live performances: stadium concert, small venue show, bar gig
exclusive merchandise: limited edition albums, anything autographed
personal interaction: back stage pass, face-to-face conversation

Not surprisingly, record labels (and many artists) focus most of their effort on generating revenue from recorded music. Until recently this was a reliably lucrative part of the curve because labels control large catalogs of content that they market to massive audiences with a minuscule cost of goods sold. Sounds good, right? Well, it was.

So what’s changed to put record labels and their dependents in such a bind? Two things. For one, labels have effectively lost control of their content to rampant piracy. Listeners are simply unwilling to pay for something they can easily get for free. Secondly, their leverage with artists has greatly diminished as computers and the internet make self producing, marketing and distributing content easier than ever.

Looking at examples towards the other end of the closeness curve, it’s clear that music fans are still willing to pay a relatively high price for exclusive merchandise and live performances. Case in point, Trent Reznor of NIN recently hit one out of the park with the ultra-deluxe $300 album package for “Ghosts I-IV”, which sold out of all 2500 units in less than two days grossing $750,000. And judging from the price of a typical concert ticket these days (averaging around $100 for U2 or The Rolling Stones), I would argue the perceived value of live performances has only increased. The downside with these products is that their potential sales volume is inherently limited. In fact, scarcity is a big part of their perceived value.

Standard merchandise on the other hand is available in large quantities and is definately a solid source of revenue for bands. But these products suffer from relatively low margins mostly due to their production costs.

This leads us to anonymous participation. This is the category with the greatest growth potential. The sweet spot. Mass-producible, easily distributable, simulated closeness. The two standout successes in this category are the ridiculously popular iPhone app Tap Tap Revenge from Tapulous and the dangerously addictive video games Rock Band from Harmonix and Guitar Hero from Activision. Also in this category are remix contests and products that give fans an opportunity to interact with their favorite artists and music.

I expect we’ll see a fair bit of growth in the anonymous participation category as technologies advance and artists become more comfortable sharing the [virtual] stage with fans. We’ll also see a blurring of lines between anonymous participation and live performances as the real-time stream of web consciousness gains mainstream momentum.

I’m curious to hear what YOU think. Can this theory be extended to other industries? How about other intellectual property businesses like those based on newspapers, books, movies and software? Is there an analogous value curve for them?

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Brian McNaboe is the founder of Fremont Forward, creator of AudioFuse – a music engagement platform that helps fans get inside their music. He’s also a former rocket scientist, occasional software consultant and perpetual dreamer of crazy ideas. You can contact Brian directly at brian@audiofuse.com.

Filed Under: Brian McNaboe, business model, Revenue Model, Startups Tagged With: music

Beat the Economic Heat: Use Cool APIs

December 23, 2008 By Nathan Kaiser 1 Comment

Hi, this is Ike Singh with a guest post on how utilizing APIs has helped my company FilmJamr with faster, scalable, wondefully cheaper and reliable development of our films based social networking site. I’m sure most of you are familiar with the word: API (Application Programming Interface), so im not going to get into defining it.

We use a lot of APIs, prominent being Amazon, Youtube, Netflix, Flickr and are working on a few more like Facebook Connect, Open Social, Live ID and Open ID implementation’s currently.

In this post I am going to focus on the point of view of an API consumer instead of an API provider, two very different sides of the coin.

The Fast & Cheap mantra:

In today’s economic environment our #1 objective is to “get to market fast and as cheaply as possible”. APIs have helped us do exactly that. Here is our recommended development mix strategy….

As soon as you have come up with that wonderful web 2.0, 3.0…. business idea, make a list of all your features. I’m sure that in most cases you can find freely available APIs to cover 30% of your feature set, pay to play APIs to cover 20%, strategic relationships to cover an additional 20% and you will need to develop only about 30-40% of the entire feature set yourself. A good source to find a directory of API’s is Programmable web.

API’s deter differentiation: Not necessarily true, let’s take the Lego example

At a recent conference Allen Hurff (SVP Engineering, MySpace) talked about APIs being like Lego. Allen took the example of how all Lego sets are the same but when you give them to a kid; it is pretty mind boggling to see the innovation and what they can create with the Lego’s.

In the same way the MySpace or Amazon API set is the same for every developer, but it’s the “secret sauce” the unique value add that will uncover the innovative differentiation of how you use, mash, add on to the API to create a business advantage. So focus all your energy on building out the unique value instead of tinkering with basic building blocks available as APIs all over.

The “Cool, but how are you going to make money?” question:

I’m sure all the entrepreneur readers are far too familiar with this question. In the social web world a lot of companies are dependent upon advertising as their primary source of revenue. But in these hard economic times there is too much ad inventory and shrinking ad budgets, thus integrating with affiliate program APIs (Amazon being the best) has helped us with add revenue streams and hopefully it will become our primary revenue generator in the near future.

Our experience as a .NET developer:

Myself and Bally (cofounder) are both ex-Microsoft and still believe in the Microsoft .NET development stack. But this has actually been very challenging as a lot of web 2.0 companies are LAMP based and the API documentation, forum support and samples are geared towards LAMP developers.

This has particularly been the case with Facebook and the Netflix API implementation. Thus for all you .NET developers out there, please feel free to reach out for any questions you might have.

I hope this helped.

Contact: ike@filmjamr.com or Twitter.

And do visit FilmJamr to Discover, Rate and Share great films with friends.

Filed Under: Revenue Model, SaaS, social networking Tagged With: API, filmjamr, Social, web 2.0

Web 2.0 startups, are they profitable

January 14, 2008 By nathan kaiser Leave a Comment

more here.

Filed Under: Revenue Model, Startups Tagged With: profitable, Startups, web 2.0

AdSense Referrals, Not What They Used To Be

January 9, 2008 By nathan kaiser Leave a Comment

For those small sites that count of AdSense referrals for incremental revenue, they don’t deliver what they used to.

Filed Under: Revenue Model Tagged With: adsense referrals, Revenue Model

Who Will Be Able to Monetize Music

January 9, 2008 By nathan kaiser Leave a Comment

Jango and Seeqpod are trying…

Filed Under: Revenue Model, Startups Tagged With: monetize music

Netflix Set Top Box

January 3, 2008 By nathan kaiser Leave a Comment

Looks like Netflix is getting into the set top box business according to TechCrunch.

Filed Under: Interviews, Revenue Model Tagged With: Netflix, Set top box

Model for Future Startups

December 18, 2007 By nathan kaiser Leave a Comment

 

I recently had the chance to meet with Josh and Daniel of Robot Coop. It was quite an interesting meeting for a number of reasons. The main being that I am a big fan of the approach they have taken to their startup. Essentially, they have created a company that is profitable, scales, minimizes the need for people and keeps their costs extremely low.

In speaking with entrepreneurs, angels and VCs I have repeatedly come to the conclusion that as the costs for starting a company approach zero, that there needs to be a different investment model. While companies will continue to look for or are open to a large exit (sale, IPO, etc.) more and more companies are simply looking to be profitable and to build a sustainable business.

This doesn’t negate the need for an early round of funding as most companies will need at least a small amount of capital to land on their feet as there is almost always a lag between starting a company and generating revenue.

The Robot Coop took a seed stage investment and used that to build out the business, which is a community of sites; 43 Things, 43 Places, and 43 People to name a few that are centered around the concept of User Generated Content (UGC). They have created a framework by which users can share and track personal goals, share information about their city and location and find people that they want to meet. The brilliant thing is that Josh and Daniel count on their users to make the site what it is. It scales with the user base.

Interestingly this approach is an example of how the “long tail” works. Most of their traffic happens from the much lower trafficked keywords and search terms, which allows them to spend exactly zero on advertising and marketing.

They then monetize their traffic via advertising, which has worked very well for them. Having kept their costs extremely low, and by creating a horizontal vertical that is very keyword friendly, they have built a viable business.

Back to the funding. As I mentioned, they did take a seed stage round, which they pay back to their investor similar to a dividend. This might be a model for how startups engage with investors in the future as it is not dependent upon a single liquidity event. This model does not negate a big payday for entrepreneurs or investors, but it does create a new model for early stage investing without requiring an exit or even subsequent investment rounds.

Investors will need to change their approach and investment strategy. And honestly, I don’t know if this is practical or in their best interest. They will be looking at a long term income stream versus a single return based on a multiple of their investment.

A dividend return for early stage investments is dependent upon a higher ratio of success for startups and the ability to generate revenue. While the Robot Coop isn’t the first, it is definitely a great example of this new model.

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nPost features startup jobs, entrepreneur interviews and hosts networking events

Filed Under: Revenue Model, Startups Tagged With: 43 People, 43 Places, 43 Things, Divident Return, Early Stage Investment, Revenue Model, Robot Coop

Now, For a Change in Strategy

December 13, 2007 By nathan kaiser Leave a Comment
Faves.com Logo

Faves.com LogoI recently had the opportunity to sit down with Mohit Srivastava, CTO and Founder of Faves.com (formerly BlueDot.us). They recently had a change in strategy as well as branding.

Starting with the change in branding, as we spoke about why and how, it became pretty clear that no matter how much traction a company is getting, that having a URL that people understand is key. Unfortunately, the .us just didn’t work for them. My analogy was that it was like the game of telephone… No matter how much they tried to explain that it is a viable URL, people weren’t sure and it was made even worse when they tried to tell their friends. In my opinion, that is the deal breaker. If people can’t quickly share the site / service with their friends verbally, then it just doesn’t work.

They decided to changes their names to faves.com, which makes a lot of sense. It meshes well with your overall services, is five characters, and has a coveted .com. It will be interesting to see how this rebranding does for the company.

A key component of our discussion is their new strategy of leveraging their current users to launch a B2B strategy. This is a relatively new phenomenon for web startups; mostly due to the fact that it is difficult to build a profitable business around online advertising. That isn’t to say it isn’t possible, it is just difficult. You have to scale your users and page views with a low cost business (video or audio anyone?).

Faves.com B2B offering works with publishers to increase content distribution and user retention. Essentially, they are targeting magazine and news paper publishers. It will be an interesting few months for Mohit and the rest of the team as they look to finalize their first B2B deals. Especially, with the goal of achieving profitability by 2008. They are a pretty lean ship, with approximately five people, so they are keeping their costs down.

Towards the end of the conversation, Mohit and I got into the discussion of how difficult it is to reposition a company and how that is compounded by having more and more employees. Small teams can shift dramatically in strategy, 180 degrees if they need to very quickly. Large company, can at best shift strategy by a fraction as much. Simply due to the ability to communicate effectively, structurally reorient whole teams, and then having teams actually implement the changes to their tactical initiatives.

This is a pretty solid argument for keeping companies small until they have proven the product / service to the degree that they have build a solid business (yes, including revenue). How many startups don’t hit the target right off the mark? All of them? Most of them? If they don’t have the ability to adapt quickly, what are their odds of success?

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nPost features startup jobs, entrepreneur interviews and hosts networking events

Filed Under: Revenue Model, Startups Tagged With: b2b, bluedot, branding, business model, faves.com

Facebook Apps – More Sustainable than Ever?

October 4, 2007 By nathan kaiser 1 Comment

In a recent article titled “In Facebook, Investing in a Theory” at the NYT has some interesting insights into Facebook App arena. Here are just a few nuggets:

Yet there are questions about the ability of these Facebook-inspired businesses to create sustainable revenues. Developers are restricted to placing advertising on their “canvas page” — the portion of the site through which users install and interact with an application. Facebook does not allow developers to advertise on users’ profile pages, where the applications themselves are imbedded.

I wrote a post earlier about the viability of Facebook apps and whether a developer should actually build one… The above is an interesting requirement, especially when you take into account the number of people that actually will ever land on a “canvas page”. The numbers are not large and then you have to determine what the CTR will be for adds on the page… It isn’t looking good for advertising as a way to support Facebook apps.

Several companies have created networks to funnel advertisements to canvas pages, and Facebook itself has indicated it will soon introduce its own ad system for developers.

All of these ad networks suffer the same problems, which is simply not enough exposure. As long as developers are limited in their ability to generate revenue then Facebook Apps as a standalone business will be hampered. Some companies, such as iLike, which have an affiliate type model can work, but again that is only if the users are able to click from the application to purchase directly and don’t have to land on the canvas page.

Andrew Chen, an advertising executive and adviser to the Silicon Valley investment firm Mohr Davidow Ventures, “…Facebook users click on ads significantly less frequently than elsewhere on the Web. And Facebook members who add applications to their pages can just as easily remove or ignore them“

This is another problem… Because the site is a content and communication platform, the propensity for people to click on advertising is lower than it would be on a search results page (obviously). The key question is simply, will the CTR create enough advertising revenue to compensate for hosting and bandwidth costs and support sustainable businesses?

The answer is YES, if you happen to be Facebook although they aren’t there yet at least in terms of profitability (disclaimer, this is my assumption). They are offloading development, hosting and bandwidth costs to the app developers and not having to pay a single penny! Brilliant actually. They reap all of the rewards without any of the associated costs.

Obviously, they are also feeding the hype. Without any proven success cases investment funds are being created and launched targeting Facebook app developers. Nothing like a few hundred grand to get people to sit up and take notice.

Nevertheless, Silicon Valley venture capitalists are creating funds devoted entirely to investing in Facebook tools. Internet entrepreneurs are shifting their businesses to focus on the social networking site. Some of the most popular applications are being sold, sometimes for hundreds of thousands of dollars — but only when buyers’ and sellers’ ideas about the potential of Facebook are similar.

Is this sustainable, I don’t know, but I don’t really think so. I definitely think a number of app developers can survive and thrive, but they will need to find new an innovative ways to monetize their app distribution/adoption/utilization. I don’t think advertising will generate enough revenue to build a sustainable business around.

And finally, this is simply scary! Bubble 2.0 anyone? Reminds me of the good ole days when companies would take mutual investments in one another and each would count that as revenue, or when they would purchase the SuperBowl adds…

Several companies have created networks to funnel advertisements to canvas pages, and Facebook itself has indicated it will soon introduce its own ad system for developers. So far, most of the ads on canvas pages promote other applications whose creators are seeking exposure.

That last sentence is of course not sustainable. I look forward to seeing the sustainable models that emerge and hopefully there will be more than a few!

Filed Under: Facebook, Revenue Model Tagged With: app, application, bubble 2.0, Facebook, hype

Validation, but room to improve for our Startup Job Board

September 26, 2007 By nathan kaiser Leave a Comment

A number of people have asked me about our strategy for focusing solely on the tech startup job space… I strongly feel that by focusing on this niche, we can offer the best value to startups and job seekers.

After speaking to hundreds of entrepreneurs about their hiring needs, I am continually struck by the unique type of individual that works well at a startup. These are the people that ultimately determine the fate of each startup. People who are dynamic, open to risk, willing to put their opinions on the table and want to create something from scratch are a rare breed. By only feature opportunities with Startups I think we will continue to be able to reach this group successfully.

As the below testaments show, I think we are on the right track.

nPost is a great alternative to traditional job sites and recruiters. It costs less and, because of the focus on technology startups, candidates from nPost are keenly interested in the dynamic opportunities of a startup environment. nPost helps us keep our candidate pipeline full with entrepreneurial-minded people.
Swivel

The nPost job board has generated a number of strong, relevant candidates for Appature. A recent post for a PM position brought forth numerous quality responses for proactive project managers. nPost is definitely the first place I’ll go to for my future recruiting efforts.
Appature

nPost.com was a major success in helping us find LAMP developers. We received four qualified applicants in the first day, and the resumes have continued to roll in. That’s money well spent!
Cool Toors

I believe that targeted job boards are the future, as it comes down to finding the specific types of candidates that each market needs to be successful. The importance of the large and unfocused job boards will continue to diminish. I feel strongly enough about it that I am betting nPost on it!

If you are a startup and are looking to hire, please feel free to learn more about the nPost startup job board.

Importantly, we have featured both Swivel and Appature in nPost interviews, however there is no requirement for companies to post jobs if they are featured in an nPost interview nor do we in any way give preferential treatment to companies that do post jobs. For example, we do not charge companies to be featured on nPost nor do we weight our decision to conduct an interview whether a company has posted jobs.

Filed Under: Entrepreneurship, Jobs, Revenue Model, Startups Tagged With: hiring, recruitment, startup jobs, targeted job boards, tech companies

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