26 February 2008

Here We Go Again: Dotcom Bust 2.0

by Freddy Tran Nager, Founder of Atomic Tango LLC + Guy Who’s Been There, Experienced That…

Video site Stage6 got the deep-six and called it quits. This comes on the heels of the fire sale at Revver, which ultimately sold for $5 million — less than half of the original investment that was pumped into it. But these weren’t the first signs of an industry decimation…

Last year, Sony converted its floundering video site Grouper into a talent agency.

Meanwhile, YouTube continues to grow as a staple of our existence, with consumers automatically flocking to it for clips about the election, Academy Awards, Super Bowl commercials, you name it. Since no truly effective video search engine has yet appeared, it’s the first place people look for video clips. For the time being.

YouTube will reign — until it follows AOL’s dinosaur footsteps.

AOL was a pioneer that won over millions of consumers with its mail and chat features, and then saw those consumers jump ship when competitors offered the same thing for free. In two to three years, videos will become as commonplace online as photos, and unless YouTube transforms into something more than a giant video dump, more and more consumers will get their vid fix from niche sites dedicated to their interests, whether those be politics, cats, motorcycles, music, girls, sports, or local news.

The collapse of Stage6 stands out for me because its videos were of extremely high quality — just a pleasure to view. And yet, the site couldn’t generate the traffic or the revenue to keep going, proving once again that great technology alone does not guarantee success anywhere.

In Silicon Valley, I was repeatedly fed the line, “our technology is better.” I countered by citing many companies with superior technology, from Subaru to OKI to the classic Betamax, all of whom lag (or lagged) far far far behind the market leaders. Now I can also point to Stage6 as a prime example of an Internet company with great technology that died from anonymity. How many consumers even heard of Stage6? Like many naïve tech companies, they believed word-of-mouth alone would save the day. As I mentioned in my post on Google, word-of-mouth successes are anecdotal at best. Ironically, most Silicon Valley execs are obsessed with spreadsheets, yet conveniently ignore the stats on how many start-ups actually succeed on word-of-mouth alone.

The problem isn’t limited to Stage6.

The tech world is filled with companies run by lawyers, engineers, and finance jockeys, which is a fantastic combo if you’re seeking investors, absolutely impotent if you’re seeking a large dedicated fanbase in a competitive market. Many of the so-called marketing execs I met in Silicon Valley had zero experience in advertising or any other form of marketing — they had simply taken a couple of marketing courses as part of an MBA program. As someone who teaches marketing through an MBA program, I can tell you that taking a couple of courses does not make you a marketer, no more than taking a couple of courses in biology would make me a physician.

These disastrous execs relied on mimicking “best practices,” which runs absolutely counter to the primary role of a CMO, which is differentiation. In the case of videos, one site after another copied YouTube, down to the layout. One creatively-challenged entrepreneur I met wanted to use the name “YouFilm,” and kept prattling on about how clever that was. Hello, if you simply copy YouTube, why should consumers bother looking you up when they can just go to YouTube?

In the real world, wannabes can succeed by virtue of geographical convenience. Most coffee chains these days copy Starbucks’ cozy ambiance, so for caffeine junkies passing by, that’s good enough — who needs to drive around town to find the real thing? But on the Web, there is no issue of geographical convenience; it takes seconds to surf away from a wannabe to the real thing.

So the thinning of the herd in video land has begun, and it will keep going until a handful of survivors remain. YouTube, as mentioned, will survive for the time being. And perhaps one or two other companies who manage to create a truly differentiated identity and value offering to consumers will last. The rest will go the way of their ’90s predecessors: Icebox, The Den, and the start-up where I learned my lessons the hard way, IZ.

When Web 2.0 dawned a few years back, all these entrepreneurs claimed that they had learned their lessons from Web 1.0. In Web 2.0, they would focus on revenue and not waste money on Super Bowl ads. Well, after observing the action up close and personal, I soon began using the term “Web 2.Overrated.” There has been more focus on revenue, but the earnings for most Web 2.0 companies still pale compared to the intake of a Hollywood movie or a big city newspaper.

What’s scarier is that so many Web 2.0 sites rely on advertising for revenue, when they themselves don’t believe in advertising! It must be fun trying to convince someone to advertise on your website when your top executives think advertising is a waste of money! And now that sponsors are cutting back on advertising in the face of yet another Bush recession, more advertising-driven start-ups will be writing blogs about their imminent demise.

Earth to entrepreneurs: smart advertising works.

Yes, expensive nonsensical TV commercials do not work, and neither do the annoying banners that you’re trying to sell on your websites. If you want to survive, it’s time to learn the difference between smart advertising and wasteful advertising — or hire someone who knows the difference. Only one tech company in Silicon Valley seems to understand the value of creating a unique identity then advertising the hell out of it. It’s called Apple. Perhaps you’ve heard of it?

Web 2.0 has been great for consumers, who enjoy getting free stuff, and it’s been great for some VC’s and entrepreneurs who managed to sell their start-ups quickly to a bigger company (the 21st century version of the IPO). Otherwise, there’s not much difference in business terms from Web 1.0: there’s still a get-rich-quick mentality and sloppy marketing all around. And now the buyers are becoming pickier — Stage6 tried to find one, but failed. And just like in Web 1.0, the smaller sites are dying first. So grab your popcorn and pull up a chair — some of the mighty are about to fall.

Update 4/7/8: The L.A. Times reported today that venture capital is drying up for many startups. The reasons include the credit crunch, the volatile stock market (negating IPO’s as an exit strategy), and my favorite: “Some of the current generation suffer from the same problems that beset those in the last Internet boom — many are creating near-identical businesses or have only vague ideas of how to generate revenue.” Technology is great, oh fellow entrepreneurs, but tech with strategy is even better.

Update 4/1/9: When Stage6 went down, its landing page directed people to Veoh. Now, according to TechCrunch, Veoh is in some trouble of its own.

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Freddy is the Founder & Creative Strategist of Atomic Tango. He also teaches graduate-level marketing communication courses at the University of Southern California (go Trojans!), shoots pool somewhat adequately, and herds cats. Freddy received his BA from Harvard and his MBA from USC.

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Bold Lentil
16 years ago

But surely there is some strategy in being the biggest online video dump? Or maybe the video clips plus a videoRank algorithm linked to a gmail account plus your IP address plus your last 20 queries could be useful for something that other video dumps couldn’t pull off? I’m sure video storage will proliferate but I’m not sure that means YouTube will be the next AOL. But I’ll get some pop corn regardless..

16 years ago

AOL still exists and still provides internet service to a lot of people, but it’s just a shell of its former self. For the vast majority of Web users, AOL is irrelevant. Could that be YouTube’s fate in 2010 or 2011? When every site on the Web features video, will Google regret having paid $1.6 billion for a large but generic video site?

Icebox, The Den, and IZ were all Web 1.0 video sites that went belly up. There’s a good reason you never heard of them.

16 years ago

Whatever happened to AOL? Is it still around? And what was the Icebox? The Den? And IZ?