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Think Big. Move Fast.

One of the great stories of Silicon Valley is how Josh Hannah and Jack Herrick bought eHow’s assets at a distressed price after the company went out of business, turned it around with a very low cost model and sold it to Demand Media two years later for a big profit. As Wikipedia notes:

eHow.com was founded in March 1999. The company raised close to $30 million.., hired 200 professional writers, and … employed a 25-person engineering team. By 2001, eHow had created thousands of articles. The professional writing, combined with a TV and radio advertising campaign, briefly made eHow one of the Internet’s top 10 news and information sites. Despite the popularity, eHow was not profitable and was forced to declare bankrupcy when funding ran out.

In 2001, IdeaExchange.com bought eHow out of bankruptcy with the hope of charging eHow’s readers to access how-to instructions. eHow remained unprofitable and in early 2004, IdeaExchange sold eHow to Jack Herrick and Josh Hannah.

Says Josh:

“When I told people what I was doing, they thought I was crazy. Conventional wisdom said content was dead, and there was no way to make money on it. We had a different view. In my experience, the foundation of a great business depends on having a different idea from conventional wisdom and pursuing it in spite of a skeptical market.” says Josh.

Josh and his partner restructured eHow by outsourcing content creation to the community and employing then-new advertising and search engine optimization techniques. In six weeks, they had earned enough from advertising to pay off the cost of the purchase. They increased revenue and traffic 30-fold before selling the company to Demand Media in 2006 for a 400X return.

The NY Times has an interesting article in this Sunday’s magazine which notes that much the same may be happening with Linen’s and Things:

In this instance, control of the Linens ’n Things brand, meaning its trademarks and the like, and its Web site, were acquired for a reported $1 million by a joint venture between Gordon Brothers Brands and Hilco Consumer Capital, divisions of firms with long histories in the bankruptcy business. This entity helped run the Linens ’n Things liquidation, spending four or five months immersed in its unwinding operations in the process. “We learned a lot about the brand and the consumer,” Carlyle Coutinho, vice president of Hilco Consumer Capital, says. “We knew we’d have a very strong e-mail list and a very strong customer base that was very loyal.”Time will tell how loyal shoppers turn out to be to what the Gordon Brothers-Hilco crew concocted: a Web-only version of Linens ’n Things. But a database of five million e-mail addresses isn’t a bad thing for a “new” business to have at its disposal, and certainly not something an online retailer starting from scratch would be likely to have. Nor would a start-up have a nationally recognized name the day it opened…

The proposition of this distinctly Great Recession model is snapping up a valuable asset on the cheap and using the low-labor tools of Web commerce — outsourcing, electronic ordering, etc. — to simulate a version of the original business.The new version of lnt.com that celebrated its “grand reopening” a few months ago may not strike the typical shopper as anything radical. The interesting stuff is in what’s behind the site, or maybe even what isn’t. For instance, the actual operation of lnt.com has been jobbed out to a third party: a San Diego firm called TorreyCommerce that bills itself as “a leading provider of outsourced e-commerce to the home-furnishings industry.”…

Linens ’n Things itself now has few direct employees, or even a full-time chief executive. And while the comeback announcement included a mention of plans to “reinvigorate” the brand, the marketing efforts so far revolve around Internet search ads and promotions sent to the e-mail list.

As companies both big and small go out of business during this great recession, I wonder which of them may yet be reborn by smart, thrifty, scrappy entrepreneurs who know how to keep costs low and, more importantly, variable. Anyone leveraging someone else’s invested capital out of a bankruptcy like this – please email me!

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Last month Piper Jaffray published a research report titled “Pay to Play: Paid Internet Services”, which included their analysis of the paid social networking, virtual goods, online dating, domain registration and paid online content (primarily video and music) industries. Included was the following market size estimates for virtual goods in the US and for the rest of the world (encompassing games, virtual gifts on social networks, and potential virtual goods on portals such as Yahoo.)

virt goods rev estimates

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Worlds in Motion has coverage of comments from senior figures from Zynga, Playdom and Gameforege speaking at GDC Europe about the free to play game market:

Gameforge co founder Kerstig noted:

Gameforge was formed in 2003 by Kersting and his partner Alexander Roesner as a developer of free-to-play browser and client-based MMOGs and has since released 15 MMOG titles in over 50 different languages. Their games have attracted over 85 million players worldwide and have nearly one million users playing at any one time…

“The challenge for publishers is to make it as easy as possible to get their games to gamers” says Kersting. Online distribution is a much better choice for both developers and users for numerous reasons – the cost of distribution “is close to zero”, access to media is easier and “the customer wants to get what he is looking for as easy and fast as possible”, according to Kersting….

He says gamers buy virtual items “for faster game progres, to enhance their gaming experience” and due to “vanity” — “so that they can say ‘I have the biggest house, garden etc.”

De Loayza from Zynga gives some tips on social game design:

The exec explained that the San Francisco-headquartered Zynga now has 15-20 million active daily users, which compares favorably to existing websites like EA’s Pogo.com, which gets a similar amount of visitors — but every month, not every day….

The Zynga exec noted that simplicity is the key to success for many social games. In fact, he said: “Make it less game, more social,” and it’s important to “focus on traffic as much or more as gameplay.” He cited a successful title like Kickmania, where the gameplay is a simple as ‘kicking’ a friend on a network, with leaderboards and other things layered on top. He also noted that often, the more straightforward mechanic is the better.

There are some particularly good viral-related game mechanics, says De Loayza, with gift giving being a particularly good way to alert other users and get them to join your game. He cited PopCap’s Bejeweled Blitz as a notably interesting example of competition as a viral mechanic, where users can team up to compete and win prizes.

In addition, crew mechanics on more standard ‘spreadsheet games’ like Mafia Wars, where adding friends to the game gets you to level up, can be a major growth factor. As for notifications, which are the way social network games communicate with your users, “use them as much as possible,” says De Loayza. He did acknowledge in the Q&A that what could be considered as ‘spamming’ does happen in the space, even as Zynga tries to keep their notifications useful.

How about the biggest mistakes you can make in the social network game space? De Loayza cited licenses, commenting: “I am not convinced that licenses necessarily work in this space… people just don’t seem to be that interested in it,” as well as linking to a destination site outside the social network, which “breaks the viral loop.”

Meretzhy from Playdom also had some tips on building virality and monetization:

He explained that the key issue of virality, or how to get your game to reach the widest possible audience, can be achieved using several popular mechanics. Game requests, active “wall-posts” and passive notifications are the favored methods where players are prodded to beat each other’s scores, join each other’s mobs or exchange gifts.

However, Meretzky pointed out that it’s not as easy as simply applying these mechanics: “Virality is made more complex by nearly everything falling outside of the terms of service,” making it necessary for a user to be in constant contact with the social networks.

Recently other methods have emerged to further the viral nature of social games.Farmville, Zynga’s hugely popular new Facebook game, uses a combined gifted invite method in its “lost cow” mechanic. When a cow wanders on to your virtual farm you aren’t allowed to keep it yourself, but can send it to a friend to get them started. This type of invite has a much higher acceptance rate than the standard message invite.

Another new mechanic brought in by Big Fish Games in their social game Restaurant Empire is the “be my employee” system, where you can task your friends with jobs in your restaurant. This system has two ways of hooking players: either your friends want to return the favor by employing you, or they want to seek revenge if you have given them a demeaning task. How do they get this revenge? By employing you in their restaurant to perform the same (or even a worse) job…

Meretzky was quick to point out though that, “monetization follows engagement.” In order for the player to start spending money in the game they must be very engaged and invested in it.

Meretzky detailed some of the way to get players to re-engage with a game, including login rewards, collecting stores of money that will not increase over a set amount, harvesting, and notifications of friends beating your high score.

He said of the high score mechanism that when you see a friend has passed you on a leader board, “the natural inclination is to jump right in and pass them right back”, clearly a very strong re-engagement technique.

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Dan Cook follows up his great post on how freemium beats advertising as a business model for flash games with a second great post on how you can get your players to pay you. After discussing the historical reasons …

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In the last few years, behavioral targeting has gone from being an interesting experiment to core to the success of many ad networks. Many networks are using data collected from one site to improve the targeting of advertising on other …

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Insightful tweet from Charles Hudson:

Good products create value. Good biz models capture value. Good companies have both

If a company has a good product but does not have a good business model it is usually because  it has …

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I’m speaking on the VC panel at Engage Expo next month, Sept 23-24 in San Jose. I’m on at 1pm on Wed Sept 23.

The agenda is shaping up well – I’m looking forward to the social media and virtual

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Gamasutra has a nice writeup of the game design behind Corpse Craft, a causal RTS (real time strategy) game on Whirled:

In a traditional RTS, resource gathering is largely automated (players send designated resource gathering units out to harvest

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Freetoplay.biz has raw notes taken from the session on Designing, Balancing and Managing a Virtual Economy. Some good quotes include:

On inflation:

Gaia

  • did not manage economy when they started
  • want ppl to earn quickly for initial wow experience

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Interesting research noted at Inside Facebook on how different generations use social networks. Most interesting chart to me shows that Gen Y (15-29) and Gen Z (13-14) use Myspace more than Facebook.

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