Offline to Online: The Internet Inside

I recently tweeted about the acquisition of HauteLook by Nordstrom.  I think this is one example of many we will see in the coming years of large scale, “offline” incumbents buying their way into the future.

I believe every business today is going to be rewritten for the web, or “Internet optimized” as I call it.  This is not about putting up a website or selling online.  This is much more fundamental.  The Internet affects literally every part of a business system and makes it much more cost efficient than their legacy comparable.  Let’s take a few examples:

  • Marketing – Paid, organic, display, affiliate and other channels are far more precise and cost effective to pin point your audiences than any blunt mass-market tool of the past.  You are connected to all your customers, it’s just a matter of finding them (and vice versa).
  • Product – In an Internet optimized business, the product is instrumented to see real metrics on how people are logging into your application, which functions people are accessing, what breaks and doesn’t, etc.  Each of those tell you in real time what features to focus on or not, develop or discard, etc.  Customers participate in the product development process.
  • Development – Multi-tenancy, single instancing, and SaaS makes development easier and faster than the complex install matrix of the past. Cloud services like AWS, Rackspace, Engine Yard and others are fully variable infrastructure available to build upon.  AGILE and other development methodologies create output on regular basis.

Any “new” company is doing things efficiently across virtually all departments from the ground up (and includes areas not mentioned like sales, hiring, finance, and more).  At scale, they will have a fundamentally better cost model than any legacy player possibly could.  The legacy company still has those very expensive relationship based sales reps, or the high touch TV-driven ad model, or the “divine from above”/ “decide by committees” product model.  These are all points of friction that makes them hard to change, slow to adopt new business models, and not innovative.  It also leaves them at a fundamental economic disadvantage.

If you think about it, this concept is true for almost all businesses.  We see retail in the Nordstrom/Hautelook example.  The same is true in traditional advertising versus ad networks; console based gaming versus virtual goods businesses; large media publishers versus blog aggregators/publishing platforms; stock fit retail brands versus custom manufacturers; etc.  The Web is as deflationary across the internals of a business as anything else!  This wholesale rewiring is happening now, creating a unique moment in time and a littany of new companies looking to lead the pack.

The most likely way for offline players to evolve is to buy these Internet optimized businesses, incent those organizations to grow as rapidly as they can, retain the talent for as long as it possibly can, in the hopes they can eventually re-make their overall business by being led by example.  Those that do nothing will not survive, and there will be many;  those that think aggressively have a shot, and I think we’ll see much more of these partnerships with traditional brands and Internet optimized companies going forward.

[Update 4/08 - Random House leads round of financing at Flat World Knowledge]

[Update: 4/25 - The Travel Channel announces $7.5MM investment in Oyster.com]

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, Twitter, and the Convergence of Messaging

Lots of chatter about Twitter being offered $500MM by Facebook.  Some think Twitter is crazy not to take it, while many others correctly point out that $500MM is not $500MM if it’s in stock.  While Facebook may hold out the Microsoft $15 billion valuation (an artificial auction given how strategically important the advertising deal was to Microsoft, not to mention that they received preferred stock), my discussions with a number of people tell me Facebook common stock has been trading hands at somewhere between $3 and $4 billion in value.  If you’re Twitter, that’s the difference between owning 3% of Facebook and 12.5%.  That’s a huge difference in ownership when it comes to upside! 

Facebook is an unbelievable social hub, where casual communications amongst friends are mainstay.  Facebook has also been incredibly successful with mobile usage.  There are over 15 million active users of Facebook Mobile, growing over 300% from last year!  By comparison, Twitter “only” has 6 million active users of the product.  If Facebook is the dominant player in casual communications and has an incredibly strong product in the Mobile space, why would it make a “buy” decision versus a “build” one? 

I think Facebook is looking to take advantage of this downturn in the economy to become the largest social network and communications hub out there.  It turned down some huge offers to stay independent.  There’s no turning back now.  Twitter is the poster child “Web 2.0” company – incredible usage, no revenues.  If Facebook could get Twitter for a reasonable price (ie, selling them on a $15 billion valuation), they could clearly capitalize on Twitter’s market momentum.  Pick up a viral service that has got a high degree of overlap with your own users, and use the integrated service to draw everyone else from Facebook onto the service.   Even if they don’t buy Twitter, Facebook must be working on some sort of SMS-based Twitter-like feature.  They might even add a Loopt style service alongside the same platform.   Extrapolating from the chart below, text messaging is a very important communications medium for Facebook’s core audience, and clearly offering a full feature set would rank high in ensuring Facebook’s dialogue with their core audiences. 

 

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Looking at the chart above also provides some hint as to where Facebook might be headed next.  In my mind, the next most obvious place for them to go is email.   While younger kids view email as the “formal” way of communicating with adults, its usage is uniform across age demographics (see below).  And we all know how incredibly sticky email addresses are.  Yahoo! has over 260 million users of its email service, and AOL has long maintained audiences with its legacy email accounts.  Gmail by Google, while growing, is a surprising distant follower.  I’d bet many of the younger users of Facebook would easily use an “@facebook” account, or any separate brand Facebook might come up with, especially if it was appropriately integrated into their social messaging platform.  Facebook might even do something really interesting by providing POP access to its social messages to drive adoption.  Putting aside the details of how Facebook sorts/presents email from chat or social messages, it would seem like a great way to start building an organic presence in email for a huge audience you control.

Other possibilities could be expanding Facebook’s chat platform.  While they have their own internal chat function, why not approach Meebo or eBuddy to acquire their tens of millions of interoperable IM users.  Like Twitter, they likely share attributes of “high usage, light revenues”.  In addition, Facebook could launch a VoIP based voice service that it embeds into their chat platform and their smart phone mobile applications. 

Imagine the converged communications possibilities.  Facebook would have the SMS market cornered via Twitter or its own offering, it could have not only the internal usage of their Chat application but also corner interoperable IM services via acquisition, it could have users starting their sticky email “lives” with the launch of @Facebook/ @nameyourbrand so users can communicate with all those “adults” outside the Facebook ecosystem, it could have applications messaging enabled by the open Facebook platform, and it could have voice (VoIP) services embedded via the web and the downloadable mobile app.  While pure speculation on my part, one can see how the innocent Twitter play could be one small step towards Facebook aggressively trying to converge our messaging platforms.