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A couple of posts on Techcrunch, one on Filmloop entering the Deadpool, and another on a rumor that Slide took $20m in funding have sparked some lively debate in comments about the business models for widgets. I don’t pretend to have the answer to this, although I did note in my earlier post on 2007 Consumer Internet predictions that this would be the year that social networks would find a business model.

I led Lightspeed’s investment in Rockyou early last year (Sequoia was our co-investor). Rockyou is a competitor to both Slide and Filmloop – they help people to customize their online representations (on social network pages, blogs etc) by embedding widgets, including photo slideshows, glittertext, image text and other widgets. As has been noted in the comments to the Techcrunch posts, the technology involved here is not terribly complicated (although the challenges of scale are meaningful). We invested for a couple of reasons: (i) Rockyou had achieved very real adoption from users and (ii) we really liked the two founders, Lance Tokuda and Jia Shen. Lance and Jia have a great sense for their users needs. Here in the valley we can get a little insular, but Lance and Jia have developed a fantastic sense of what their user, the Myspace/Bebo/Friendster user, is looking for.

We have been very happy with our investment in Rockyou. It has only continued to grow since we invested – it now serves well over 100 million widget views every DAY, and it has diversified well beyond a dependence on Myspace (a majority of its visits do not come from Myspace anymore). Having too much of a dependence for new users on a single source is a scary thing for any company. When Myspace launched its photo slideshow widget a few months ago, we waited with baited breath to see the impact on our growth. If Myspace blocked Rockyou (or Slide or any other widget company) it would have a meaningful impact on the business. However, Myspace has grown in large part by being open. It briefly blocked YouTube in December of 2005 (eventually attributed to a misunderstanding) but reversed that shortly afterwards, perhaps due to complaints from its users. Its hard to read the FIM/Myspace tealeaves, but they have had plenty of opportunity to block successful widget companies in the last year and have not chosen to do so so far, even while they have launched competing services internally.

That being said, like most startups just past their one year anniversary, Rockyou is not yet profitable. As I mentioned in my prior post, Youtube is really the only company that has suceeded in turning widgets into a destination website that can be monetized directly. Photobucket drives enough traffic from users uploading and editing photos to be able to generate significant revenue from advertising as well. Its fair to say that none of the other widget companies, Rockyou included, have achieved the same level of success in creating a destination browsing experience to the same degree.

Its not yet clear what the business model for such widgets will be. One possibility is sponsorship. Rockyou partnered with Sony to offer “Casino Royale” themes and with Nettwerk Records to offer “Matt Wertz” and Leigh Nash” themes that users could apply to their slideshows. All three have been successful, with large numbers of users choosing these themes resulting in 10s -100s of millions of widget views. This could well be a path to monetization. Another is freemium models. Although the base products will always be free, users may be willing to pay for certain premium customizations. Rockyou allows users to customize a “pin” to replace the rockyou watermark on their slideshows for a small fee. Its early days, and we don’t yet have a clear picture of exactly what the monetization model will be, but these are both highly promising options. Venture investing, and starting companies, always carries elements of risk after all!

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Several recent articles (NYT, Richard MacManus, etc) on next generation search and the questionable wisdom of backing businesses with a mission to displace some or all of Google’s current market domain caused us to do some of our own reflection.

Not only is Google tremendously good at what they do, in less than 10 years they’ve established a consumer brand with iconography to rival the likes of Nike’s famed athletic swoosh or Coca Cola’s signature “wave” heralding the onset of good times. Google’s navigational search delivers tremendous value when consumers know what they are looking for. Its unlikely we’ll witness the demise of this offering anytime soon.

However, there are many instances where a minimalist approach to search results simply can’t deliver what the user wants because the user doesnt know what he or she wants.

For example, I had a friend who recently contracted SSHL, a termporary hearing loss condition. I needed information. My search on Google yielded a hodgepodge of linear page results, most of which had nothing to do with the medical condition. My search on Kosmix (Lightspeed portfolio company), a category-based search engine, provided well organized, relevant results and suggested specific symptoms, treatments, medications, best hospitals, and other relevant directional tips to guide me through my discovery process. Similarly, when I was looking for post-holiday sales on Espresso Machines, I found Google’s answer to be virtually unintelligable versus the clean array of choices yielded by TheFind.

While Google has a dominant brand and will continue to be a “start-point” for many navigational searches, there are a variety situations where the answer to a user’s query doesn’t reside on the top page of links from a Google search results deck.

There in lies the opportunity. While there are challenges for start-ups in developing the right distribution channels and content syndication partnerships to scale up traffic and consumer mindshare, if the quality of vertical search experience can consistently create “aha” moments for the consumer it will yeild market opportunity.

As previous articles have noted, its not a matter of out-Googling, Google. More likely, it will be about identifying segments of search where consumers need more than a traditional page of linear result links to easily answer their information request. Over time, it doesn’t make that sense one size will fit all. Google may evolve and adapt to this segmented notion, but they will be required to learn the same lessons and develop similar alternative approaches to those of many start-ups that have already begun the process of search disaggregation.

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I got a really interesting email in response to the 2007 Consumer Internet Predicitions post from Iggy Fanlo (CEO of AdBrite, ex President of Shopping.com and a guy who knows a thing or two about CPC advertising!):

You talk about cos like Zappos filling the SEM void, but the math still doesn’t work… if search revenues (online advertising generally) is rising at 70-80% and e-commerce (total, not just the established entities) is rising at less than 30%, AND folks still aren’t using search for branding, then what is going on?

(a) Either we are moving to a far greater lifetime value model for customer acquisition (which really is branding in disguise) OR

(b) There is an rapidly approaching upper limit on search revenue growth that approximates e-commerce growth (Google and others’ slice of pie cannot get much greater) OR

(c)There are lots of greater fools (small cos trying to get off the ground, large cos not watching their SEM spend with any discipline) and will still end up drying up in the end.

Thoughts?

I’m going to hand-wave a little in my attempt at an answer here, but would love to hear comments from those more knowledgeable than I am about Google.

Google grew its revenues at 70% Year on Year according to their 2006 Q3 financials.

Lets say 30 percentage points of that came from the growth of US ecommerce as per Iggy (Comscore says 26%, I’ve seen others a little higher).

Search Engine Watch and Neilsen say that Google has increased its market share from the mid 40s to around 50% of all searches in the last year or so, which is about a 10% increase for Google, so that gets us to 40 percentage points of growth.

Google’s international growth is outpacing US growth as per their Q3 earnings slides: 92% vs 56%. I wheeled out my creaky excel and crunched the numbers, and this international growth premium over the US contributes about 14 percentage points of growth, getting us to around 54 percentage points.

Lead gen isn’t included in the ecommerce growth numbers, but is also clearly a driver of search engine marketing. According to the IAB, lead gen was up over 70% in H1 2006 over H1 2005. Its still a lot smaller than ecommerce, so perhaps that adds another 5 points of growth to get us to 59 points.

That still leaves around 10 points of growth that is likely due to increased pricing. I scanned some analyst reports which seemed to agree about pricing but couldn’t find size estimates

So Iggy is right. But its not as dire as it looks at first glance, or perhaps not as imminent. I agree with his point (a), that margins are getting skinnier and in some cases Search Marketers ARE applying a Lifetime Value analysis and taking a loss on customer acquisition for the first transaction. (I would disagree that this is branding in disguise though as it is still trackable). I don’t think his (c) is a major factor – people are being pretty rigorous in their ROI analysis in this area in my experience. But (b) is ultimately right – it has to be eventually. I don’t think we’re quite there yet though.

Comments and discussion much appreciated.

I’m going to post on Monday about Lead Gen in more detail as it generated a lot of comment discussion in the earlier post, and I think the SEM trends very relevant to that topic also.

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First – Happy New Year! The Lightspeed Team is very excited about the prospects for 2007. We’re just getting rolling with our blog here and hopeful it can be a positive resource to let you know how and why we …

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The WSJ (subscription) has a good article this morning on a new set of networking sites for investors. Techcrunch separetly has a review of stockpickr.

We’ve seen a few of these stockpicking sites over the last little while. I …

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Happy New Year everyone.

It seems to be the season for consumer internet predictions, so here are mine:

1. Ecommerce 2.0 arrives. Google‘s search revenues continue to grow at 70-80% growth rates. Yet the public ecommerce companies

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I recently got back from a fascinating conference in Sydney which brought back about a hundred of us expat Australians to talk about the Australian diaspora and how we could continue to help Australia from overseas. Peter Costello, the Australian …

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Allan Leinwand did an interesting guest column on GigaOm yesterday about VC’s providing some founder liquidity at early rounds. This picks up on a Venturebeat story from Friday about a related topic, “FF” class stock that is deliberately designed to …

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Lightspeed Venture Partners launched its blog this month.

What’s that?

Too many VC’s blogging already? Another example of VCs acting like sheep?

From our perspective the answers are clearly, no and no.

Ok. How about maybe and maybe?

The truth …

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I joined Lightspeed on February 28, 2006. Since then a few people have asked me how I got a job in Venture. As with most of my career, it was mostly serendipity. However, as a number of others have recently …

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