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For websites with social networking or community features “going viral” or acheiving a viral coefficient greater than 1.0 represents the holy grail of traffic acquisition. What’s behind this? Going viral means that new user acquisition costs have essentially been driven to ZERO. This is a significant departure from the current state-of-the-art.

The friction of the “real world” means traditional businesses need to invest in sales and marketing to acquire and retain customers. Whether selling to enterprises or consumers and whether the sales process is direct, “high touch” or indirect via telesales, direct mail, etc, the process of bringing in customers requires money proportional to the number of new users. Internet 1.0 businesses have fared slightly better through expanded online reach but still need to invest in keyword marketing, affiliate revenue sharing and other acquisition and distribution vehicles to acquire incremental customers.

Viral marketing has emerged as a mainstream Web 2.0 phenomena whereby existing users do the work and bear the time and expense of delivering additional new users. While not univerasally applicable (yet), we think the power of viral marketing as a zero or exceptionally low cost agent for acquiring customers will expand to be applied across lots of new categories. To date we’ve observed several early variants on the model:

1) Peer to Peer Communication and Messaging: Applications like Skype or Hotmail where inherent use of the application requires a user to forward the application to other users and have them register in order to particiapte. CPM (Yahoo!Mail) and contextual (gmail) advertising and pre-paid subscription (Skype) business models have all been used to monetize these viral ecosystems.

2) Online Self Expression and Social Networking: Sites like MySpace , Flickr, and YouTube and new distributed social self expression sites or widgets like RockYou (LSVP portfolio company), Widgetbox and others enable users to invite friends to view personalized digital content. These new viewers are required to become registrants on the social networking site or can make the decision to adopt a widget in order to broadcast their own content inducing a viral growth cycle as these new users then invite additional viewers into the system. Thus far, monetization has occured primarly through online advertising although early experiments with the sale of digital goods (HotorNot) foreshadow a more transaction-based monetization model.

3) Viral email marketing: This usually takes place by way of online offers which are proposed to an initial set of consumers. Embedded in the offer is an earnable incentive or reward for successfully forwarding the identical offer to additional consumers. Campaigns can yield large numbers of responses even for offers sent to a small initial set of customers.

4) Vertical community sites. Like more horizontal social networking sites, these portals enable like-minded consumers with a particular interest to invite new users to participate in a shared affinity group. The more people who are part of the community, the faster the rate of the communities viral growth due to exponential increases in the richness of content and number of invitations sent out to new members. Viral community sites enable sharing of interests across topics ranging from finding sales leads (Jigsaw) or finding a new career (LinkedIn) to finding the trendiest new clothing styles (Stylehive – LSVP portfolio company) or getting the latest tips on new movies (Flixster – LSVP portfolio company). Today much of the monetization occurs through impression based advertising although future monetization could emerge via subscriptions, lead generation, and transactional commerce services aimed at vendors interested in accessing highly targetted channels of distribution.

We think the principals of viral marketing and viral user acquisition will be applied well beyond current initial use cases as Web 2.0 continues to evolve. It should yield some exciting new investment opportunities which we’re looking forward to hearing about and getting involved in.

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Toby Coppel recently posted on the Y! corporate blog with his thoughts on interesting startups. He calls out some companies he finds interesting (one of which Y! has since acquired!), talks about how this wave of startups is different from the late 90s, and talks about how many of Y!’s acquisitions were about attracting visionary talent. It’s well worth reading

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Patrick wrote a post on “The New Must See TV” on Friday and I know that he wanted to include some information on The Venice Project but was unable to say much because of the NDA that we signed. However, it looks like Om was not under the same constraints as his excellent and informative NewTeeVee post goes into a lot of detail about the company. Both Om and Mike Arrington at Techcrunch comment that they see two key hurdles for TVP which I think are surmountable, but I believe that a third hurdle exists that will limit TVP’s eventual scale.

1. TVP lacks compelling content

I haven’t seen the NDA material so my thoughts here may be way off base, but I don’t think that a lack of compelling content today is likely to be a long term hurdle.

Much has been written about the long tail of video content, all of which is legitimate. However, its no accident that Youtube is now pursuing licensing agreements from the major TV networks, music labels and movie studios. Long tail notwithstanding, as even Chris Anderson says, “Hits aren’t dead”.
Furthermore, the major studios and networks seem to have turned a corner on their willingness to license their content. When startups like Guba, Wurld Media and Bit Torrent can get licensing deals done with major studios, its pretty clear that the policy rubicon has been crossed, and now the only haggling to be done is on price. As soon as TVP is willing to pay the prices asked, it can get content.

2. TVP requires a download

Requiring a download is certainly a hurdle, but not an insurmountable one, as the founders of TVP have demonstrated twice before, with both Skype and Kazaa. However, both Skype and Kazaa are clients that benefit from obvious network effects, as do many other successful consumer clients such as AIM, ICQ, Y! Messenger, Bittorrent, Limewire, Morpheus etc. Other successful downloads that do not benefit from the network effect have mostly been focused on security concerns, including the Firefox browser and the many anti Adware/Spyware products. One of TVP’s challenges will be how to balance making its network effects obvious with the likely desire of content owners to keep some level of control over their content. The social aspects that they’ve built into the product are certainly a good start. I haven’t peered behind the NDA curtain on this issue so don’t have any further PoV on the matter.

3. High quality video is too bandwidth intensive

The issue that I think may be underestimated is that of bandwidth. Om alludes to this issue in his post and seems to give the benefit of the doubt to TVP, although he points out that TVP would require 250MB/hour which is enough to violate many ISP’s terms of service. Video is an incredibly bandwidth intensive application, especially at higher quality levels. At high levels of penetration, even p2p solutions are not sufficient to support high quliaty video streaming because of asymmetries in the upload/download bandwidth for most consumer’s broadband connections. If TVP is successful to Skype like levels, then there simply isn’t enough upstream bandwidth from peers to fulfil the downstream bandwidth demand from users who are trying to watch high quality video. Most upstream bandwidth pipes are only 1/5 to 1/10 the size of downstream bandwith.

Now this only becomes a problem at real scale, but it may put a cap on how big TVP can become before video quality becomes degraded or expensive server farms need to go into place to supplement peer delivery. Jeremy Riemer makes a similar point at ArsTechnica.

None the less, althought there is likely no VC investment opportunity here, this will be an interesting company to watch!

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Download Squad reports on a rumor that Safari might be released for Windows, citing Mary Jo Foley who found the speculation on Mozilla’s Firefox 3 requirements wiki. (The speculation has since been removed form the Mozilla wiki.)

The …

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On Wednesday, Yahoo! and Akimbo announced a new partnership to bring the most popular selections of Yahoo! Video to the Akimbo video-on-demand service. This announcement comes on the heels of the launch of Apple TV, a set top box …

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There has been some vigorous comment discussion on the post of 2007 consumer internet predictions, mostly about the lead gen prediction. Firstly, its wonderful to get comments – thank you. When you first start blogging it feels like shouting out …

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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 …

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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 …

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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

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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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