New Investment: BioDigital

I am excited to announce one of our latest investments, BioDigital.  BioDigital is one of several investments we have made at the intersection of healthcare and technology.  I laid out our rationale at a high level here.

BioDigital is based in NYC and has built a powerful platform around 3D visualization and immersion of the human body.  Our short hand for BioDigital is “Google Earth for the human body”.  Their team sits at the intersection of 3D / CAD software, web technologies (HTML5/WebGL), human anatomy and physiology, bio mechanics and high scale back end infrastructure.  A rich, deep, powerful service made simply available via APIs.  If you want a wicked engineering challenge, apply here.

The team has been working on complex 3D human modeling for the last several years, but with the introduction of WebGL and HTML5, saw a profound opportunity to instantiate all of their models into a Web based platform called the Human.  In the brief period of time since launch, the company has surpassed over 1 million registrants.  Even more exciting to us was the breath of use cases for the product.   Frank Sculli, founder and CEO, details some of them here.

There will be a number of ways to access the Human.  Their web, mobile and tablet apps will appeal to the millions of consumers interested in learning what’s inside our body and how it works.  Consumer health sites will be able to easily use our widgets to offer much richer representations of health conditions that afflict us.  Search engines can embed physiology and conditions directly into rich snippets.  Content publishers can enrich the learning experiences for students across the globe.  Doctor offices and hospitals can use the Human as their front end UI, with patient records mapped to the Human’s ontology.  And more exciting are the ways we cannot think of via our APIs.

In addition, we also can’t predict the ways in which individual consumers will add to the platform  People will be able to append all sorts of information into the Human to improve it in a Wikipedia like model – MRIs, content, interactions, etc.  People will also be able to personalize the human to the things they care about and share them out to the people they love or groups they interact with.  It will be exciting to see how people engage with an experience that was never possible before.

We believe this will be a transformative project and we are at the very beginning.  We are delighted to partner with Frank Sculli, John Qualter, Aaron Oliker and the entire BioDigital team!  Frank’s announcement on the BioDigital blog is here.

A Little Human Touch?

For the past decade, business on the Web has focused on driving usage and user base independent of a clear financial model.  Charging for products or services with utility was anathema to the cause of driving user adoption.  Systems were designed to create as much “automation” as possible to allow for massive scalability with minimal cost.  And given the Web as a new medium, those strategies made a ton of sense.

With viral loops and massive usage, services like Facebook and Twitter were able to create fundamental platform businesses that took the connectivity of the Internet and created “connections”.  The goal to drive audiences brought content walled gardens down, and drove a whole new generation of folks to the Web.  Automated activities like user generated content and self service models became the hallmarks of success.  Get other people to create site connect or sign up for a service, and make money off of their effort.  No better business right?  Those mantras created a stark positive value proposition and led to a huge critical mass of online activity.

But the world of usage, automation and free has some collateral effects.  Given how easy it is to start a site or a service, we now also have a world of noise.  People are dealing with the problem of excess.  Spam email, offers, products, content, tweets, updates – you name it, almost every category has infinite shelf space competing for finite attention.

That is part of the reason why I see the pendulum shifting again towards simplification, organization, and curation.  Paid content walls are going up again, as businesses identify customers out of the masses willing to pay for content with cost and create unique ways of interacting with content.  It’s not that the same perspective or content isn’t available for free somewhere on the Web, it’s that people don’t have to time to sift through and find all of it.  The same is true for products and services.  We’ve seen a number of businesses growing rapidly whose primary value proposition is not showing customers 1000s of SKUs, but a few really good options.  And automation?  Perhaps not fully.  Virtual call centers, email communication, on demand conversations all seem to be getting layered back into the equation.  Of course this will all be done in a much more efficient and productive way than ever before, but it seems to me the human touch is fighting its way back into dogma of long tail and free.

Facebook Credits: A Paypal in Training?

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I’ve been reading curiously about the new beta Facebook Credits platform.  Most coverage tends to focus on the unique elements of allowing users to vote economically for better content.  Give a good content producer some credits, and perhaps that will incent them to produce more.  Think Digg with economic value.  I think the launch of Credits again reflects the brilliance of Facebook and I for one see a much bigger play at hand.

Facebook understands very well the amount of money flowing into virtual goods, both from their own virtual goods, as well as the money machine created by their gaming partners like Zynga, SGN, and the like (who buy large chunks of advertising to feed their virtual goods money machine).  Enabling users to generate credits that work across games and applications would be of huge value, and allows Facebook to generate different and ultimately more economics from the platform developers.  In addition, Facebook now represents over 1 in 4 US pageviews.  Their user base is over 200 million.  They have HUGE scale, which allows them to have the credibility to pull off a payment play.  Users would inherently trust the FB platform over fragmented app creators.  This creates the perfect recipe for a Paypal alternative, and has inherent distribution that a Google Checkout or Amazon may not.

So why not just come out with the grand plan?  Well, the launch of a payment platform is non-trivial.  There are hundreds of ways it can go wrong; PayPal has spent years and huge sums of money learning lessons on how to deal with fraud.  Amazon, Google Checkout and others are all working through their own issues.  It also deals with one of the most sensitive items for people (ie, their money).  On a social platform like Facebook, the last thing you want to do is to alienate users.  Facebook cannot turn on a major transactional system that would be the immediate target of phishing, fraud, and rip offs without understanding the issues thoroughly.  The initial Credits approach lets them dip a little toe into the water, quietly and under the radar, and rapidly gain feedback/experience without exposing themselves to major financial or reputational damage.  With that knowledge, they can slowly train their way into the Paypal market.

I have a lot of respect for what Facebook has built.  And per my prior post, I think they are going to spread their tentacles broadly.  Facebook controls the social graph, Facebook Connect controls identity, Facebook “Communications” will come, and Facebook Payments on the roadmap…. Stay tuned, and note the date and time of publication, but that’s my highly speculative, uncorroborated and unsolicted vision for their future.

[Update 11/26/09 - looks like things may be happening behind the scenes .  This seems much more like a transactional fee, but I'd bet once it works internal to Facebook, it'll show up externally as a third party service but with a more paypal competitive pricing model.]

[Update 1/12/2010:  News flow indicating this is likely.]

GaaS at Work: Halo3

Though I don’t have time to be a hardcore gamer, I do dabble with a few to keep myself current with the state of the art in games, tools, infrastructure, and services.  My experience last night validated an extensive post I did a few months back on the world of Games as a Service

I decided to fire up Halo3 (yes, I know old, and far behind other new FPS games) to log onto to the “Team Slayer” playlist.  In this mode, you are linked by rank and skill level to other random players on the Xbox Live network to form a team.  Your “red” team attacks another similarly formed “blue” team with the goal to be the first team to get to 50 kills.  You play on maps, which differ in environment, layout, buildings, weapons, etc. 

Curiously, I could not log onto Team Slayer mode because I did not have “the required maps” (Non-Mythic DLC for those that care).  Upon doing some digging, it turns out that Bungie/Microsoft was requiring players to purchase newer map packs that previously had been optional upgrades.  Historically, if you did not buy the new maps, the servers would match you to players that had your same map packs.  This of course would lead many players to play whatever maps were free, and only download newer map packs when they became free.  Hard core players who wanted to learn the best strategies before anyone else would pay for early access to the new packs, but they would have a much smaller universe of players to compete against in those worlds. 

Requiring subscribers to pay for the new maps to access the Team Slayer mode raises some really interesting questions.  The blogosphere and forums were full of strong opinions.  On the one side were the hardcore players who wanted everyone else to pay so their network would have more players.  They also defended the need for Bungie to keep getting paid for an entertainment offering to keep it alive.  On the other side were gamers who believe they had paid for the game, which included the Team Slayer function, and they should be allowed to play with whatever maps they chose to have and not be forced to upgrade.  They would also claim they already pay Microsoft a monthly subscription fee for the Xbox Live network, which is intended to link them to other players. 

I think this approach is a perfect example of a publisher extracting economics in a continuing GaaS driven model.  The new maps cost me about $10, roughly 20% of the original game cost.  As an aside, that seems magically to be about the same as the annual percentage charge for maintenance with licensed software, and the rule of thumb in what annual SaaS prices should be versus comparable license charges.  And one can likely bet there will be new maps in the future for which I will have to pay for.  I also pay $50/year or $5/month for the Xbox Live membership.   If I was not forced to upgrade, then Bungie/Microsoft would have little incentive to keep developing new maps, and eventually a large portion of the audience would move on to a different game.  From their perspective, it makes complete sense to communicate continuously with me through the game, enticing or forcing me to upgrade my game to continue to play the content.  It extends the life of the service to a wider audience and helps them build a strong recurring revenue base.  Both great examples of GaaS offerings and a marked departure from the old CD based model!

Disagree?  Or more importantly have a strong opinion on the debate?

GaaS – The Rising World of Games as a Service

In the enterprise world, since the advent of Salesforce.com in the late 90s, we have heard about this notion of software delivered from the cloud and offered as a shared, multi-tenant service to customers, with the web browser acting as the universal interface to access the application.  Over the past decade, SaaS based applications have become mainstream, and are rapidly being adopted by small and medium sized enterprises globally because of its alignment of service delivery and value.  Interestingly, the same concepts are now beginning to affect the gaming industry.

In the old world of gaming, there were large hardware manufacturers who built specialized consoles to run and execute CD and DVD based games.  Game developers would create games that were stored on DVDs, and distributed through a vast retail infrastructure.  The game would have a multi-year timeline, and the developers went off building a new version of the game, which would completely replace the old DVD (much like writing new versions of licensed software).  Over time, those consoles introduced networking connectivity, and services like Xbox Live were launched.   You still bought the DVD as a starting point, but game updates became available online and you could even download new games in entirety over the network.

Today, a new era is emerging.  It started with the incredible success of World of Warcraft, which showed that a game could be delivered over the web, onto a PC, and create a “services” style game that continually grew and upgraded.  There are over 11.5 million subscribers to WoW, nearly half of which pay $15/month to play the game in North America and Europe. While the premium subscription model has proven to be wildly successful in North America and Europe, over 5 million WoW players in China continue to play via prepaid game cards at a rate of $0.07/hour. As most Massive Multiplayer Online games (MMOGs) in China are still played within PC cafes, the primary revenue model continues to be through prepaid cards via a time-based pay to play model combined with in-game item sales through micro-transactions, the latter being another gaming trend that is fast gaining traction in western markets.

WoW’s success has led to a revolution in thinking game development and delivery.  There are many examples of PC based games launching that are a single instance, multi-tenant, shared game application with a monthly subscription price that customers are rapidly adopting.  Two recent examples include Lord of the Rings Online (developed by Turbine and published by Midway/Codemasters) and Warhammer Online (developed by Mythic and published by EA), two western MMOGs with that have attracted over 300k paying subscribers each paying $15/month to play those games. Additionally, after having great success in markets like South Korea and China, game publishers are now experimenting with new models that allow users to play games for free upfront, and buy virtual items and characters via micro-transactions and P2P trading within the games.  Want to get the Penguin Micropet in GoPets?  Pay $2.  Want a level 80 character in Everquest 2 without investing weeks of gameplay?  Pay $500.  Companies like Nexon (publisher of Maple Story, Kart Rider and Crazy Arcade) in Korea and have generated hundreds of millions of dollars in annual revenue with this free to play, micro-transactions based model.

In addition, game content distribution is going through a massive shift.  Platforms like Steam from Valve are changing how we think of buying and interacting with gaming content.  Steam is a digital distribution and digital rights management platform that delivers gaming content directly to gamers via a web connected client. Steam allows gamers to purchase games and receive game patches and updates in an entirely digital manner. Steam offers both first party games from parent company Valve as well as titles from third party publishers, and currently offers over 350 games to 20 million registered users in 21 different languages.

Underlying this is a significant shift that will put pressure on the largest publishers of games, and create some great opportunities for creative destruction in the gaming industry.  The highlights of this new “GaaS” based ecosystem will share many of the same attributes of the “SaaS” world we have seen thrive, and will have the following attributes:

  • Games will be sold and played over the Internet;
  • The game itself will be a shared instance, with foundational upgrades instantly being applied to all players;
  • Game titles will have “continuous” economics, as new levels, variations, and challenges can be dynamically inserted or purchased;
  • Free to play model will remove barriers to adoption and encourage initial and immediate game exploration;
  • Micro-transactions via web payments, mobile payments and prepaid cards will allow game publishers to monetize users instantly and directly;
  • Game publishers will have unprecedented ability to interact with their customers directly – measuring navigation and usage as one does the internet, creating unique 1:1 marketing experiences, and watch for dips or spikes in activity and modify the environment in response;
  • Game publishers will be able to collect real-time gameplay data to provide a better and more personalized gaming experience for gamers, leading to more accurate leveling, improved matchmaking and increased socialization within games.

At FirstMark Capital, we have invested in a number of companies that follow on these trends, and they are seeing tremendous success in the market.  Riot Games is a session based MMO based on the very popular DotA community, whose game is entering beta and is already getting exciting user feedback.  LiveGamer is an exchange for virtual goods, and has seen transaction volumes and activities rise as more and more publishers introduce virtual items into their economic stream.  We have a number of other initiatives under way, but I believe this notion of GaaS will be an exciting one for the next few years.

(Special thanks to Jason Yeh for his contributions to this post.)

NYC: The Media Capital in 2020?

Today, I attended the kick-off dinner to the NYC Economic Development Center’s efforts to shape and support NYC’s position as the media capital of the world for the next decade.  The event was held at Gracie Mansion, and included 40-50 of the media industry’s most notable names.  It was a great cross-section – from traditional media to the largest ad agencies to the newest digital media properties to deans of the leading NY universities to various NYC venture capitalists – all assembled to discuss the changes affecting the industry, and specifically how the city can create long term initiatives to ensure NYC remains the media capital in 2020. 

The city seems to take this project quite seriously.  It’s hired Oliver Wyman as lead consultants, it is setting up a website that will leverage the latest technologies to facilitate the dialogue, and has set up a rigorous program by which to have regular discourse and detailed action items.   

The session was kicked off by Mayor Bloomberg, who spent much of his time talking about the need for hope and the belief that the bad times would eventually yield a strong recovery.  He made a number of interesting points, including highlighting an article by Fareed Zakariya that talked about how Canada has had zero bank failures, managed consistent government budget surpluses, has home ownership at the same rate as America without the tax deductibility of mortgage interest payments, and has been growing as a country largely on the backs of sound fiscal policy, common sense and an open immigration policy.   He mentioned a number of interesting statistics about NYC, including that it had more fashion houses than Paris, and took the occasional shot at the folks in Albany.  He also pointed out NYC’s fiscal discipline in cutting expenses in the budget by $3 billion.  It felt like he was beginning his campaign.

After the Mayor spoke, members of the NYC EDC set the stage about the media industry in NYC.  Some relevant facts:

·         Media is the second largest industry in NYC, behind financial services;

·         Media employs over 300,000 people, representing 10% of the total, and over $30 billion in revenues;

·         The 305 large and very large media businesses accounted for only 50% of the media jobs in the city, the remaining 50% came from the 15,000 small and medium sized businesses in the city (driving the point home that supporting innovation and small businesses are high on the agenda).

We then transitioned to a plenary session discussing the positives and negatives of doing business in NYC, and the key issues we would need to deal with to ensure the “Media NYC 2020” vision.  The highlights included:

·         NYC is still “the place” young people want to be, for its energy, arts, culture, and unique mix of people, and that is an important characteristic to maintain and support;

·         The lines between media and technology are blurring, and there is a strong need to improve the quality of the engineering and development talent to face this growing trend, lest Silicon Valley keep all the technology spoils to itself;

o   Many examples of how media firms have simply put their technology development in different geographies because they could not find the needed talent in NYC;

o   A universal sentiment that NYC needed to establish a “Media Center” that brought together academia, industry, and the bleeding media technology issues in a similar manner that MIT has done for Boston/Cambridge or Stanford for the Valley;

o   Discussions about creating engineering scholarship programs to attract the best and smartest students from around the globe to the city;

o   Discussions about tax incentives and credits for startups to combat both the higher cost of living and the more lucrative salaries that financial services firms had paid techies.  One radical idea of creating tax free zones as some other foreign countries have done to foster community and innovation;

·         In the debate about whether the city should support “traditional media” or “new media”, an acknowledgement by several that “big media” could not lead the charge, as it is facing a fundamental shift in market forces and will be permanently in a cost optimization mode for its legacy products.  The key is not who should be protected, but that the industry of content creation, aggregation, distribution, and monetization be supported without regard to old or new so that NYC maintains its status as media capital.

It was an interesting night filled with plenty of good conversation.  What other suggestions would you have for the folks at the NYC EDC?  Please post them here, and I’ll be sure to pass them along!

AlwaysOn Panel: “Big Media’s Digital Strategies: Where do Private Companies Fit?”

I moderated a panel this past week at the AlwaysOn OnMedia conference in NYC.  It was an opportunity to get behind what the “big media” folks are thinking in this economy, and how they interact with startups.  The panelists were Jessica Schell, SVP, NBC Universal; Walker Jacobs, SVP at Turner Digital; Vivek Shah, Group President Digital, Time; Jim Spanfeller, President, Forbes.com; and Sanjaya Krishna, Principal & US Digital Services Leader, KPMG.  Below are the most interesting takeaways I got from the session.  For the full panel, click here.

·         On the overall economy, as expected most of the panelists indicated it was tough going out there, and they were focused on partnerships that drove revenue.   In fact, given the pressures in the broader market, they were “more open than ever” to partner.   Some of the panelists highlighted their willingness to do deals in areas like content as evidence of that openness.

·         One of the key challenges they saw in unlocking more digital dollars was translating brand advertising into value online.  One of the more interesting ideas was from Vivek Shah, who said that while growth in performance based advertising in a recession is to be expected (as demonstrated by the most recent Google and Yahoo quarterly results), it is akin to harvesting crops.  It’s easy to pull in more food near term by harvesting more (search) but if you don’t plant any seeds (brand advertising), you may find yourself without crops in the future.

·         All the panelists want to find ways to drive additional lift and yield – the “optimization” problem has still not been solved.  Each were working with various contextual, behavioral, and other techniques to try and improve CPMs and deliver a more compelling story for this medium versus other areas of spend to advertisers.  There were a few areas of strength highlighted, including in QSRs (quick service restaurants) and entertainment, to go along the usual weak spots of finance and autos.

·         In defense of traditional media, the panelists pointed out that people turned first to CNN when news of the airplane landing in the Hudson River broke, not the blogosphere.   The panel expressed a need for better curation tools.

·         There was lots of discussion around the dearth or plethora of data online, and the need to make better sense of it all.  Data standardization continues to be a recurring theme.

·         Time Warner and NBCU both highlighted their investment arms (Time Warner Investments and Peacock Equity Fund) as one way to get introduced and a way for them to learn about startups, but quickly pointed out that the best way was to get a direct operational relationship.  An investment did not guarantee a deal, and a deal did not guarantee an investment.

·         In terms of mistakes startups make when engaging with big media, the panel offered the following advice:  1) don’t present a deal that assumes you’d capture the lion share of the economics out of the gate; 2) set expectations appropriately – start small and prove success rather than promising the moon; 3) focus on how to drive revenues in this environment; 4) know what items they are willing to outsource and what items they would never (such as the sales relationship).

·         I concluded asking the panel what company they would start knowing the problems they currently faced in their environments.   The answers:  a next generation data exchange, improving the mobile experience, new back office systems designed for the digital era, improving operational efficiencies.

It was a fun panel to moderate.  The panel cited numerous examples of startups they have successfully partnered with to drive mutual value, but it was clear there was a long way to go.  Those of us part of the startup ecosystem should take heart!