Business Ideas from MBA 734

The business model that I found most intriguing was Droid College.  The concept presented was to develop a central repository for educational materials that students and professionals looking to refresh their skill sets can rapidly access various documents at no cost.  Having been forced to use Blackboard as an undergraduate and graduate student and now through my employer, I believe that a market for such a service exists.  The Blackboard system is at best slow, unreliable, and poorly developed.  Additionally, Blackboard can only be accessed through a computer meaning that a busy professional often goes days between log-ins and typically relies on at least one other technology to get through their courses.  Even the simple act of downloading a file from Blackboard usually requires two or three attempts before meeting with success.  The system requires a great deal of patience from the user and a great deal of planning as well because trusting the system to be up and running properly when you need to upload a file right before the deadline is a fool’s game.  From past experience, the network usually crashes during exams or a few days before the end of the semester when there are major due dates. 

Perhaps I’m just thrilled that someone else is interested in entering the market space.  Or perhaps it’s because the Droid College presentation covered interconnectivity and being able to use my phone to keep track of deliverables and access course material on the go.  Blackboard has gotten way too comfortable in its market without another major competitor and their mediocre service has declined since I first used it nearly a decade ago.  Innovation is desperately needed in this space and I believe that there is room is a forward thinking service that is promoting ways of accessing its network from multiple technologies.  While I’m not certain how Blackboard’s fee structure works for universities and major employers, the low level of service they have provided their customers over the years would likely result in some attrition when a new, capable entrant came online.  Best wishes to Droid College, I hope the idea becomes a reality because such a service years overdue.

Prediction Markets

Prediction markets are an effective tool for gathering and analyzing the thoughts of a group of people on an issue.  The larger the population making predictions or casting votes, the more accurate the market can become.  Prediction markets are gaining acceptance as businesses identify new uses to experiment with them.  However, prediction markets are not very effective with limited response as a few outliers could skew a prediction significantly.  So how can a company create an incentive for users to participate in their prediction market without paying users for their input?

A simple approach is to create a status feature.  At a basic level, people value how others perceive them.  They are motivated to be named an expert or recognized as knowledgeable.  When users participate in multiple prediction markets, a company can track the individual’s response against the actual outcome overtime.  If the user has a strong history of accurately predicting political outcomes, the company could name them a political expert.  Or if a user regularly picks the outcome of professional hockey games, they could be named an NHL guru.  The company could then weight that user’s future opinions more heavily as they have an established track record of being accurate.  This motivates the user to continue to participate and provide quality responses.

LinkedIn

LinkedIn must define how it wants to grow and what customers it intends serve.  Today, the company has over 100 million users and serves three distinct sides of the network, individual professionals, corporations, and advertisers.  A multi-sided network can exist when the needs and actions of one side are not a detriment to another.  Individual users generally accept well placed ads are as a cost of doing business.  However, a few overwhelming ads or pop-ups significantly reduce the amount of times a user will visit a site.  LinkedIn is treading down a path that is likely to pit one side of its network, the professionals, against another, corporations.  While some professionals pay a subscription for premium access to LinkedIn’s services, most are casual users who use the service to keep in contact with others they think may help them find a new job.  They may make an introduction or two and may click the occasional ad but LinkedIn generally does not see much revenue from individual professionals.  On another side, LinkedIn offers businesses of all sizes tools to help recruit and retain talent.  Corporate accounts are more profitable for LinkedIn and the company has a sales force to service them.  LinkedIn collects a fee for job placements and enables recruiters to reach passive job seekers through its premium InMail service.  The last side of the network is advertising.  LinkedIn has established approval processes for ads and widgets placed on its in order to protect and maintain LinkedIn’s professional image. 

Moving forward, the biggest threat to LinkedIn is LinkedIn.  Professionals use LinkedIn because they want to keep their professional and personal lives separate and there is not another uniquely professional social network large enough to compete with LinkedIn.   Businesses, recruiters, and advertisers will all follow the crowd of individual professionals so LinkedIn must remain as attractive as possible to the individual professional user group.  As such, LinkedIn must focus its efforts on ways to increase the amount of time that the individual professional spends on LinkedIn.  The company should develop and offer value-added features such as webinars or industry training courses to increase the amount of time professionals spend on LinkedIn.  LinkedIn could then mine through user activity to identify trends and potentially professionals contemplating looking for a new job or career change.  This information could then be sold to businesses anxious to speak with talent before they begin the job search.  This service and others like it that increase the usefulness of LinkedIn to professionals and increase the amount of time they spend on the site should be a top priority for management in the years to come.

Wikipedia

Wikipedia was founded in 2001 to provide a web based encyclopedia created, edited, and controlled by the masses.  The company has a very informal structure relying on a small number of employees to maintain the site and generate revenue while essentially outsourcing the content creation, editing, and control to volunteer contributors, known as Wikipedians.  Incredibly, the model has worked. Erroneous and/ or malicious updates are regularly deleted by other users who seek to provide the unbiased truth.  Wikipedia has set up a set of guidelines known as the Five Pillars of Wikipedia that govern the site’s content management process.  The Pillars are Wikipedia is an encyclopedia, has a neutral point of view, is free content, has a code of conduct, and does not have firm rules.  However, enforcement of these pillars has been largely left up to contributors as well mostly because of the 5^th pillar Wikipedia does not have rules.  As such, content management has been the subject of many debates and has led to three distinct classes of Wikipedians in terms of how to deal with erroneous entries.

Deletionists

Deletionists are Wikipedians who believe that Wikipedia should be used to report accurate and unbiased information on as many topics that it can but no more.  Deletionists prefer not to add content to Wikipedia until such time that there is a significant amount of independent research to support the new topic.  While this mindset protects the Wikipedia brand from being tarnished by erroneous content, it also limits the site’s ability to stay current on emerging subject areas.

Inclusionists

Inclusionists are the opposite of Deletionists.  These are the Wikipedians who believe that Wikipedia should offer as much content as possible and that through the process of editing, the unbiased facts will emerge and be validated by other users over time.  To Inclusionists, the argument that a topic has not yet been researched or developed enough to yield unbiased facts is not a reason to exclude it from Wikipedia.  Instead, they argue that emerging topics must be on the site to keep users informed of the most current developments and keep the site current and relevant.  The Inclusionist mindset does allow the possibility of erroneous content related to new topics to damage the Wikipedia brand.  However, this risk already exists because Wikipedia does not restrict update privileges to subject matter experts. 

The Middle Ground

The final class is comprised of Wikipedians who fall somewhere in between the Deletionists and Inclusionists.  This group is known as the Association of Wikipedians Who Dislike Making Broad Judgments About the Worthiness of a General Category of Article, and Who Are in Favor of the Deletion of Some Particularly Bad Articles, but That Doesn't Mean They Are Deletionist.  They believe that some content does in fact not belong on Wikipedia but others such as emerging topics should be on the site and allowed to be developed

By 2006, the divisions between the groups had widened to the point that it was beginning to wear on the community.  More troubling was that there was mounting evidence that new topics with limited source data were beginning to damage the Wikipedia brand.  Casual users could find information about a plethora of topics but the general perception was that it could not be trusted.  As this perception grows, it could enable a competitor to gain a foothold in the market and damage the brand.  Wikipedia Founder Jim Wales and the rest of the Wikipedia management team need to define a path forward for the community.  While the Deletionist mentality may be appropriate for topics that are well established, it does not lend itself well to emerging topics.  If Wikipedia follows the Deletionist mantra, it risks becoming irrelevant as many users go to Wikipedia to read about a new topic for the first time.  Worse yet, if Wikipedia deletes all topics that are not supported by enough independent research it allows a niche for a competitor to gain market share.  However, Wikipedia could not allow erroneous content posted on emerging topics to damage its brand either.  Users may rely less on Wikipedia if they feel that it is not reporting unbiased, fact-based information. 

Status Quo

Continuing down the current path is a strategy often left out of the decision making process but it does need to be considered.  At Wikipedia, the status quo is not necessarily broken.  Instead it could be argued that the process of creating, editing, and maintaining unbiased, fact-based content is working exactly as designed.  Wikipedians dividing into groups over when and how to create new topics and manage content may be a natural reaction to Wikipedia’s structure and lack of formal standards.  However, the status quo is also creating some discomfort within the community as more new topics without substantial independent research emerge at a growing rate.  Leaving the status quo in place may only allow a minor issue to snowball into a large problem.  However, if Wales were to come forward and reaffirm the company’s commitment to this process it may temporarily calm the storm and allow cooler heads to prevail.  This option does not require any significant capital investment and presents few short term risks as it would not change the Five Pillars that currently govern the site and its community.

Develop Criteria for New Topics

Defining what makes a topic eligible for Wikipedia would reduce the much of the debate of inclusion or deletion.  However, developing criteria to evaluate whether or not a topic is worthy for Wikipedia currently goes against the 5^th Pillar which states that Wikipedia does not have firm rules.  While defining and implementing this policy would not require a significant investment, the consequences of such a policy would likely be far reaching as it would reshape the rules and norms of the Wikipedian community.

Disable the Delete Function

Management could disable the delete function or make the process of removing a topic more difficult by taking the stance that all topics are to be included unless it violates the Five Pillars of Wikipedia.  This follows the 1^st Pillar that Wikipedia is an encyclopedia and 2^nd Pillar that it maintains a neutral point of view.  However, Wikipedia must protect its reputation and defend accuracy.  If Wikipedia allows topics with erroneous content to remain on its site until it can be edited, if it can be edited, it runs the risk of damaging its brand.  Wikipedia already has issues with its credibility.  Many in the academic and commercial worlds already look down on Wikipedia because the site allows updates by non-experts.  If Wikipedia makes it more difficult to delete topics, it prolongs the life of a topic that may not be worthy of an entry.  In doing so, it increases the opportunity for users to read the disputed entry and form a negative opinion about Wikipedia because of erroneous information.

Hybrid Approach

All of the above mentioned solutions offer some benefit to Wikipedia but all have significant risks.  Wikipedia could combine these solutions into a hybrid approach that would reaffirm the company’s commitment to its founding philosophy and take a stronger stance on referenced work.  Wikipedia cannot allow new topics with marginal source data to damage its reputation as an unbiased, fact based content provider.  Wikipedia can develop an alternate site where it can incubate new topics until such time as they provide unbiased, fact based data supported by multiple independent sources.  While this solution would require more capital investment and a significant change to the current process, it does solve the debate over what to do with new topics without alienating Wikipedians or damaging the brand’s reputation.

Recommendation

The hybrid approach provides the solution that will be accepted by most Wikipedians and must be recommended despite requiring the greatest investment.  This approach may also inadvertently create a niche market for a competitor to produce content on emerging topics but the hybrid approach allows Wikipedia to be the most useful (accurate and unbiased) to the most users.  The risk of creating a niche market for a competitor to exist creating data on emerging topics is relatively small as it would take a significant amount of time for any new entrant to develop a critical mass of content to be viewed as a credible source and rival Wikipedia.  More so the fact that any potential new entrant would likely be a niche service limits any potential impact it may have.   

Getting in Front of Negative Media Attention

“United, United . . . You broke my Taylor guitar.”  I have had that line stuck in my head for almost a week now.  If you have no idea what I’m talking about, go to YouTube right now and search for United Breaks Guitars.

In a time when catchy videos go viral, any person with a computer and just a little time on their hands can become a company’s greatest promoter or greatest foe by simply posting a video about their experience.  Such was the case when Dave Carroll posted a song about his ordeal with United Airlines in July of 2009.  Carroll’s song, United Breaks Guitars, tells the story of how his guitar was damaged by United Airlines baggage handlers during a layover in Chicago.  As of this posting, the video has been viewed more than 10 million times.  But how much can a funny YouTube clip really cost a company?  In United’s case, Carroll’s song ignited a firestorm of negative attention and the company lost around $180 million in market cap.  While this is an extreme example, it been well documented that consumers share their experiences with others.  The only difference is now consumers have the tools to reach hundreds, thousands, even millions of others instead of just a handful of friends.

Perhaps even as little as 10 years ago, a company like United Airlines could have ignored incidents like Carroll’s because consumers did not have a platform large enough to reach the masses and share their experience.  Now there is an entire industry organized for the single purpose (if you exclude selling ad space) of providing a forum for users to post their thoughts.  Yelp has helped many small businesses prosper as a result of a few unsolicited, positive reviews.  However, it has created hard times for many others that did not provide the level of service that the reviewer had expected.  Consumers have demonstrated that they are more willing to trust other consumers, especially ones like themselves, than they are willing to believe any corporate ad.  So how can companies leverage this phenomenon?  There are technologies out there to enable the truth to be brought to light, maximize the positive attention and deflect the negative such as Reputation.com.  It enables users to create a profile that depicts how they want to be seen (only flattering of course) and then seeks to protect that carefully crafted image against malicious (or potentially accurate) postings.

But does this really solve the problem?  No, sites like Facebook, YouTube, Yelp, and Twitter only provide consumers a platform to share their experiences with a larger audience but before they existed, consumers shared their experiences with others albeit on a smaller scale.  So the problem is not at all technology based and so the solution should not be technology based.  There is no replacement for quality customer service.  Simply put the ability to deliver what consumers expect is what keeps a company in business.  If it fails to meet consumer expectations, consumers generally share those experiences and the company suffers.  Dave Carroll’s song would have never been created if United had atoned for damaging his guitar or better yet, did not break it in the first place.  The real way to get in front of negative press in today’s digital age is to treat consumers with respect and deliver what you promise.  Anything less than that . . . well you can read about it on Twitter or maybe watch a video on YouTube.

How does Hulu’s value proposition differ from traditional broadcast and cable television?

Hulu CEO Jason Kilar has been quoted as saying that the company’s objective is “helping users find and enjoy the world’s premium, professionally produced content when, where, and how they want it.”  This statement highlights Hulu’s competitive advantage over traditional cable and broadcast companies and other web based content providers like YouTube.  Cable and broadcast companies have literally networked their way into consumers’ living rooms in order to provide professionally produced content over their many channels but their strength is also their weakness.  Having invested so much capital in creating and maintaining their cable or fiber-optic networks, they are either unwilling or financially unable to develop new means of delivering that content.  Other web based competitors do not have access to “premium, professionally produced content” and instead offer thousands of short clips created and uploaded by other users.  While some are well made and many are enjoyable, very few appear professionally produced.  Hulu exists between these two spaces.  Major media companies News Corp and NBC Universal partnered to create Hulu in 2007 as a means of distributing their premium content to users not necessarily in front of a television set.  Hulu benefitted from this pedigree by immediately gaining access to the content of Fox, NBC, Warner Bros, and Lionsgate.  The newly formed company quickly set about creating a platform that would enable users to view content not only at Hulu.com but at hundreds (later thousands) of partner websites.  The company has since focused on distributing content to smart phones, allowing users to stream to their television, and entered into an agreement with Disney that provided Hulu access to Disney’s content in exchange for an equity stake.  Hulu has developed ways to position its premium content to users wherever the user is using whatever device the user has available.  It even allows the user to select the program(s) they wanted to view on demand.  This set the company apart from other cable or broadcasting companies that aired a set line up on various channels via connections to televisions.  While many cable companies have developed on demand features that enable users to select when they want to view specific programs, they still limit their distribution to television. 

What are the factors behind Google’s early success?

As with any start-up that ultimately succeeds, Google was founded to solve a problem that was causing the masses pain.  In 1999, internet search engines were designed to return pages that had the most instances of keywords.  The pages with the highest instances of the keywords were returned first.  Web developers used this design to their advantage by loading illogical combinations of words on their pages to create high counts of many words.  This resulted in low quality results being returned at the top of searches.  By the time Larry Page and Sergey Brin unveiled their PageMark algorithm to power search engines, users were ready for a new solution.  PageMark relied on the number of inbound links a site has rather than the number of keyword occurrences to rank results.  Brin and Page figured that other web developers had already valued a target site by linking their site to it and so returning targets with the most inbound links at the top.  In doing so, PageMark would also return the most valuable sites.  The technology quickly caught on and empowered the company to experiment with paid listing models for selling ad space.  The focus on innovative ways to grow ad revenue led Google to create AdSense, an advertising system that places ads where users find similar content.  AdSense enabled Google to grow beyond search and it quickly became a web-based juggernaut by adding Google Maps, Docs, Finance, and Gmail to name a few.  The more free platforms Google delivers to users, the more ways it can sell content based ad space with AdSense. 

The Struggles of a Start-Up: MusicJuice.net

The Struggles of a Start-Up: MusicJuice.net

            Founded in 2007, MusicJuice.net provides funding for independent musicians to record albums by allowing listeners to preview the artists’ work and decide whether or not to invest.  It is very similar to the venture capital model used by many start up companies to fund their early efforts.  The company’s founders, Rocky Liu and Peter Wong, had even gone so far as to identify four distinct revenue streams for their business model.  The company had set a minimum target of $50,000 for musicians to raise before they could use the funds invested by listeners and fans to record an album.  As a fee for bringing together investors and musicians, MusicJuice.net would earn 33.3% of any future profits of the musician’s album sales.  MusicJuice.net would also collect interest on the funds while not in use.  This could conceivably be a decent revenue stream as it would very likely take unknown musicians quite a while to generate the type of following necessary to raise $50,000.  The third stream was from a premium service that would allow users to interact with their favorite musicians through private chats on the site and receive a signed copy of the musician’s CD when it was produced.  Finally, like every other web-based company, MusicJuice.net would collect revenue from ads that site visitors clicked on by using Google Ads. 

The Good       

Liu and Wong were correct in identifying the music industry as an aging business model in need of a stark makeover.  The music industry’s core market has been selling albums in local record stores or other retailers.  However of the years leading up to 2007 when MusicJuice.net was founded, the music industry had seen digital media erode its core market at an increasing rate.  Record companies have long relied on album sales to offset the cost of identifying talent and producing albums.  When consumers purchase an album, they pay for the hits and the songs that are less known.  The less known songs help to subsidize the costs of production. However, by 2007 digital platforms had already been offering individual songs.  Now consumers were able to buy just the hits and record companies that had relied on lesser known songs to generate revenue were scrambling for new ideas.  Liu and Wong correctly identified an industry ripe for change as record companies were in a state of change.

The Bad

            While they were correct in identifying the music industry as ripe for change, Liu and Wong set out to identify revenue models for their service before determining if there was a market for their service and in doing so, missed the mark.  To be successful, a start-up must provide value for its costumer.  It must relieve some pain or stress for the costumer in such a way that the costumer recognizes the relief and is willing to pay for it.  Similar to Webvan.com, MusicJuice.net was created with the vision that its offerings would be highly desirable and that users would be attracted to the site in droves.  Unfortunately, very few individuals cared enough to participate in funding unknown musicians’ album productions.  The site failed to give users any incentive to invest their money in the future of unknown musicians.  True, 33.3% of album sales would be returned to investors but this was hardly motivation to invest hard earned money on the future of unknown musicians.  MusicJuice.net only made the decision to invest more difficult by setting a target of $50,000 that had to be reached before an album could be recorded.  Even though that was the estimated cost to produce an album, users realized that it would take a very long time for musicians to raise that much money and then sell enough copies to cover the costs before they could recognize a profit on their investment.  In fact, making a profit was very unlikely.  MusicJuice.net itself was also unknown to users.  In order for new users to become investors, they first had to trust MusicJuice.net to deliver the services they promised and then had to believe enough in an unknown musician’s future to fund his/ her album.  Overcoming one of these obstacles would be difficult but overcoming both on a shoestring budget would test the founders’ resolve.

The Ugly

            The struggles above were not the only ones faced by Liu and Wong.  To begin, the website itself was three months late in development and blew the budget by 40%.  Liu and Wong disagreed on why the effort was delayed, why it cost more than expected, and worst yet, the road ahead.  The road ahead was becoming much more difficult for MusicJuice.net because the delay in the development of the website allowed an unforeseen competitor to enter the market and drained the company of funds that it desperately needed to build brand awareness.  A Liu and Wong’s struggle to agree on a path ahead is not uncommon story for young start-ups but without quick resolution the business likely ceases to exist. 

What Now?

            Liu and Wong really have three options at this point.  First they can use the remaining $5,000 to invest in the website so as to attract and retain more users.  They have received feedback that the site is boring and does not hold visitors long enough to convert them to investors.  The second option is to redefine the market.  Most individuals are not interested in funding unknown musicians’ album expenses but record companies are very interested.  Liu and Wong could use the remaining $5,000 to tailor their offerings to create value for record companies.  Finally, Liu and Wong must consider shutting down.  They must consider all past efforts and costs as sunk and honestly evaluate MusicJuice.net’s ability to become a profitable enterprise at its current state. 

            MusicJuice.net does provide some value but its revenue model is misaligned.  The option to shut down cannot be recommended just yet.  Instead MusicJuice.net should redefine itself with its remaining capital in the mold of an Indy-rock Pandora.  Musicians have already happily uploaded their music to MusicJuice.net with the hope that someone will listen to it and enjoy it.  MusicJuice.net can then categorize the content and stream it to visitors inserting short advertisements every few songs.  If MusicJuice.net applied a feature where users could “like” or “dislike” a song, the company could keep track of popular songs and bands which could be useful data to major record companies trying to identify new talent while reducing their search costs.  Record companies spend a lot of time and effort trying to identify the next big star.  MusicJuice.net could provide a way for record companies replace their more capital intensive ways of identifying new talent by collecting data on popular songs and bands and packaging it record companies.

Conclusion

            When starting a business, either web-based or brick and mortar, great care must be taken to identify a source of pain or stress in people or business’s daily lives.  The pain or stress does not have to be physical, it could simply be “I do not like that my mail box does not lock because I think people will read my mail.”  Relieving the pain or stress is how a start-up can provide value and charge for its services.  MusicJuice.net created a fun idea but it did not solve a problem for anyone.  Nobody wakes up in a cold sweat in the middle of the night wondering if they forgot to help fund an unknown musician produce an album.  MusicJuice.net still has time to modify its website and offerings so that it can provide value to a different market.  However, with feuding partners and only $5,000 left, time is running out.

Netflix: The Video On Demand Decision

Founded in 1997, Netflix has succeeded by delivering movies to customers with greater value, convenience, and selection than brick and mortar competitors.  Netflix has effectively merged new and old technologies to create a customer experience that has crippled many traditional competitors.  The company has developed an advanced set of algorithms that predict what movies users will like based on past reviews and similar patterns of other users and married that with the distribution system of the USPS.   The combined model enables Netflix to service more users with fewer copies of movies.  However, by 2007, video on demand was becoming more of legitimate means of distributing content.  Netflix would have to determine whether to enter the new market and potentially risk cannibalizing its DVD by mail business or not enter and risk losing margins to cable providers or other video on demand providers.

            The decision to enter is the easy part, Netflix must enter the market.  In keeping with the company’s value proposition, Netflix delivers greater value, convenience, and selection.  In 2007, greater convenience will soon mean no longer having to wait even a day to watch a movie.  Netflix must enter the video on demand market to retain its position as a leader in providing convenient access to movies.  The real question is how to enter.  Netflix can partner with a cable company as they already have access to a viewer’s tv.  It can spin off a company to compete in the video on demand market to keep the businesses clearly separate and protect Netflix from piracy in the video on demand market.  Or Netflix could dive head first to the video on demand market and use its advanced selection tool as a key differentiator in the new market.

            While the answer is obvious now (Netflix entered the video on demand market on its own), in early 2007 the path ahead was not as clear.  However, the choice of competing on its own was the choice with the least risk.  Partnering with local cable providers would not have yielded any significant long term advantage to Netflix.  The company would have most likely offered its algorithms to cable providers to enable their subscribers to select movies.  This would have provided Netflix a revenue stream in the way of licensing fees but also open some of its proprietary data to partners.  Additionally, cable providers are local.  Netflix would have to have hundreds of partnerships to compete in the video on demand market this way.  It is too costly and too risky to form and manage that many partnerships so that option should not be pursued.   

Similarly, spinning off a separate business is also too costly and too risky.  Costs are in the form of talent in this instance because Netflix would have to part with some of its top management to ensure the spin-off’s success.  It would likely need to jumpstart the new entity with seed money as well.  Worse yet, if the newly formed business took off it would prove to be a competitor with Netflix.  The risk of Netflix customers leaving in mass for a new video on demand provider is real and likely.  Spinning off a new company to enter this market only hastens the parent company’s demise.

Netflix must compete in the new market on its own.  It must protect its key asset and competitive advantage, the algorithms that recommend movies further down the long tail of its inventory.  Risking that technology in any partnership will likely hinder the company’s ability to retain its market leading position. 

Netflix must adapt and enter the video on demand market and be prepared to enter whatever markets come next as well.

Why Can’t Yelp Make a Profit?

Why Can’t Yelp Make a Profit?

The Problem

In a word: Revenue!  But it’s not quite that simple.  Yelp cannot figure out how to charge for the content that its community of reviewers generate on a daily basis.  The company was founded in 2004 to answer the question of what to expect at local businesses before you shopped there.  Need a good doctor or want some great barbeque, go to Yelp and see what your neighbors recommend.  The company offers users the ability to post reviews on anything and everything and presents all the reviews for a specific business in just a few clicks.  The ever increasing number of reviews requires more and more capacity on a daily basis to keep up.  The company originally relied on venture capital to develop its platform and then sustain its growth from the San Francisco area across the country but with competitors like Google HotPot and Yahoo! Local, Yelp needs to carve out a profitable niche fast or risk being driven out of the marketplace.

At the root of the problem is Yelp’s business plan, or lack of one.  The company originally set out under the old internet startup mantra “build a following online and money will follow”.  Well, Yelp built a huge following but the money hasn’t followed.  The company did not have a clearly defined plan to charge to make the company profitable.  Fast forward through several years of failed revenue generating concepts and Yelp is still struggling to turn a profit with its current business model.  Yelp needs to change its model fast.

Stop Giving Away the Cow

As the old saying goes, why buy the cow when you can have the milk for free?  Yelp has provided a free means of advertising for many local businesses by publishing unsolicited and unedited user reviews.  Many businesses have seen the impact of Yelp reviews on sales firsthand but yet few expressed interest in Yelp’s sponsorship program which provided businesses the opportunity to post information and pictures on its Yelp page for a fee.  And why should they?  Yelp’s sponsorship program did not deliver enough additional value to a business owner to justify the fee.  A few good reviews are much more valuable to a business than a few nice pictures of its dining area.  If a business can continue to enjoy free positive reviews on Yelp, why pay?  Interest in the program may have been higher if Yelp had allowed businesses that received negative reviews the opportunity to edit or delete them but Yelp categorically denied that.  To make the model a cash cow instead of the free cow, Yelp needs to leverage the power of its reviewer community and use it make money by blocking content.  Yelp can continue to allow reviewers to post reviews on any business they want but only publish reviews on businesses who pay a subscription fee.  If a local business owner wants potential customers to read his/ her reviews on Yelp, they will have to pay a monthly service fee for Yelp to publish the content.  Businesses, especially local ones, recognize the influence that Yelp has in generating new customers and often times do not have the resources to take out an ad in the Yellow Pages or other media.  Yelp has offered business owners a viable alternative to the Yellow Pages and has proven its ability to influence sales.  Charging a fee for public distribution of its reviews like Zagat is not unreasonable, especially when many would likely notice a drop in new customers if Yelp blocked their review page. 

You Scratch My Back, I’ll Scratch Yours

The Yelp management team has expressed concern that charging for access to reviews would alienate some reviewers and so access is still free.  In January of 2009, Yelp boasted over 22 million unique visitors but less than 1% of those visitors posted a review¹.  While it is likely that many visitors had previously posted reviews or will post reviews in the future, there still exists a significant population of passive viewers who have not and will not post reviews.  These passive reviewers benefit from the information that Yelp provides through its network of reviewers but does not offer anything in return and in fact cost the company money by requiring greater servers and capacity to accommodate the traffic.   Yelp can implement a review to read model in which it would allow free access to its reviews if you have posted a review in the past 30 days and charge a subscription fee to just read its content.  Sites like Angie’s List already use a similar model but do not provide an option for free access.  Implementing this would not be difficult as Yelp reviewers already have profiles.  The company can track posts associated to profiles so that the reviewer would not have to do anything different.  This would encourage more passive users to become active members of the reviewing community and give Yelp more power with advertisers and local business owners in its cash cow model outlined above.  If Yelp’s passive users do not want to become reviewers, the company can charge a small fee for access to its content.  Yelp must not overprice its content for risk of reducing the number of unique visitors and more importantly its reviewers but even $1 a week for passive use would have a significant impact on revenue.  By pricing access to reviews very low and providing options to free content will mitigate Yelp management’s concern of alienating reviewers.

Time is Running Out!

Yelp needs to take action immediately because it does not offer a unique service.  Sites like Yahoo! Local, Google HotPot, and Angie’s list offer very similar services.  Yelp needs to capitalize on its reviewer community now before reviewers begin to migrate to different sites.  Reviewers identify with other Yelp reviewers, the website, and the company itself but competitors can create similar communities too.  Yelp must act soon or risk while it still has the community of reviewers to leverage.  The clock is ticking.

1.  Piskoroski, Mikolaj Jan.  “Yelp,” Harvard Business School, March 27, 2009.

Why Did Webvan Fail So Spectacularly?

Why did Webvan fail so spectacularly?

Webvan was established in 1997 to allow consumers to order groceries online and have them delivered to their home within a 30 minute window.  It attracted hundreds of millions of dollars in venture capital and hundreds of millions more in a 1999 IPO because investors believed that the company could use online grocery sales as a spring board into other business lines.  The high priced, well-decorated management team at Webvan wooed investors with promise of solving the “last mile” problem, how to bring goods directly into customers’ homes profitably.  Why this group of top-talent executives believed they could not only solve the near mythical problem that has long plagued retailers but also solve it on a scale large enough to service markets all over the county in two years is beyond me.  Webvan might have been successful if it had attempted to service one market efficiently and then expand into a new market using the knowledge gained by efficiently serving the first.  Instead, Webvan built a complex distribution center that management believed was capable of being replicated quickly in many new markets.  Besides investing hundreds of millions of dollars to support a market that did not yet exist, three fatal errors doomed the company’s model.

Allocating resources:

Webvan created its distribution center around a maze of conveyor belts, scanners, and picking stations.  Each new distribution center costs $35 million just to build.  Stocking the center and marketing the company’s service in a new market, and staffing added to that total.  A significant part of that cost was tied to the elaborate carrousels that Webvan kept its products in.  The carrousels rotated products around the employees so that they could remain stationary and fill orders faster.  However, this technology only helped fill about 35% of Webvan’s orders because it could not store produce of frozen goods, the remaining 65% of ordered still required employees to manually select products.  The investment in the carrousels and the technology to make them work failed to create as much of a cost savings as management had envisioned. 

The Market:

Another obstacle was delivery density.  Webvan needed 10-12% of total households to be repeat customers for its model to be profitable.  In 1999, that might have been a half to two-thirds of the tech-savvy households in the region.  If all of those households were clustered together in one or two neighborhoods, Webvan could have serviced them with a significantly less capital intensive model.  Perhaps a smaller, more centrally located (with respect to customers) distribution center with only a small fleet of vans.  Unfortunately for Webvan, in 1999 the tech-savvy households that they needed to count as repeat customers were scattered all over major urban/ suburban areas and required a massive operation to provide the level of service that Webvan claimed to be provide.

Too Smart for Their Own Good:

Webvan assembled a who’s who list of top talent executives.  They created data and models that supported their own beliefs and when analysts and investors voiced concerns about Webvan’s assumptions, management just shrugged it off.  The Founder, Louis Borders proclaimed “Its $10 billion or zero” and CEO George Shaheen believed that Webvan would be more than groceries and that the market was $1.5 trillion (total projected online purchases for 2003 by IDC) not $6.5 billion projected for online grocery sales by Jupiter Communications for the same year.  What is truly amazing is not so much the projectitis that this group contracted but that so many analysts and investors were sipping the Kool-Aid too.  It’s not uncommon for managers to get so far caught up in their own ideas that they fail recognize what’s actually occurring in the market but this was star-studded management team who had been there, done that, and knew to question every assumption relentlessly to be sure that it was reasonable.  Unfortunately, this management team believed that they were different.  They had the best minds and the best technology available.  They believed their solution was better than everyone else’s who had tried and failed to solve the “last mile” problem before them.  They casually shrugged off conflicting data and ignored analysts’ concerns to their own detriment.  In the end, I suppose that if you are going to fail, you might as well be the best at that too. 

Introduction

Thanks for visiting The Idea Post.  This blog will be used over the next few months to exchange ideas on how and why business models succeed or in some cases, fail.  If you agree or disagree with my postings, leave a comment and let me know your ideas.  Thanks and hope you'll visit again.  ~PC