Internet firms throwing big money at TV ad campaigns are making an elementary goof.
Topics: Entertainment News
The “250 Hours Free” America Online disk slipped out of the magazine I was reading and onto the floor. Ho hum; another high-tech coaster. But as I moved to toss it away, something caught my eye: A little sticker that shouted, in big type, “AS SEEN ON TV.”
What a wonderful selling point for AOL! Other online service providers might offer low rates, personal service or superior bandwidth. But AOL has a trump card: Its promotional offers can be seen on TV. They aren’t just vapors in cyberspace; they have the hard, palpable reality that only network broadcast confers.
Of course, AOL is now the most successful online company around, with a claimed 19 million subscribers. Perhaps “AS SEEN ON TV” appeals to focus groups and boosts response rates by 0.1 percent. What does AOL care if Silicon Valley sophisticates sneer?
The surprise this season is that “AS SEEN ON TV” is no longer just the proud slogan of mass-market-
Readers with memories longer than six months or so will recall that one promise of the Internet in its callow youth was to connect people directly with the information, products and services they sought, cutting out middlemen — like TV networks — via a process dubbed “disintermediation.” The commercial Internet’s collective embrace of TV advertising now has many pundits singing dirges for disintermediation, arguing “plus ga change, plus c’est la mjme chose.”
“See?” they crow. “The Internet is no different from any other business. To succeed, you need eyeballs and market share, and TV is still the best way to grab them.”
Just how wrongheaded this argument is will be measurable in the aftermath of this holiday season, as gaggles of Internet start-ups that gambled much of their venture-capital inheritance on TV time go belly up. The dot-com TV frenzy isn’t a sign of things to come; it’s a mere transitory spasm of folly — albeit a spectacular one. To understand how this vast failure of imagination came to pass, we need to look at the nature of today’s overheated venture capital market — and the pathologically impatient mind-set it has promoted among the Internet start-up companies it spawns.
The flow of venture capital into Internet companies is torrential today; one industry survey pegs it at $5 billion in the third quarter of 1999 alone. With that much money chasing a fixed quantity of novel ideas, managerial talent and human ingenuity, an inevitable decline in the quality of companies and business models sets in, and duplication runs rampant. Thus the pileups of overlapping niche businesses, like the half-dozen new pet-related e-commerce companies out there, or the multiple golf portals and toy emporiums, or the many competing “Webtop” Web-based personal-organizer firms.
This is, as speakers at an Industry Standard conference last summer dubbed it, an “era of permissive capital.” The offspring of permissive financial parents tend to lack self-control; they want instant gratification. (Their VC parents often want it, too, in the form of fast returns.) The life plan all these companies have adopted is an accelerated version of the one the Silicon Valley venture capital world pioneered for technology companies: Fund a start-up, bring a product to market fast (18 months in the old days, six months or so today), see if it sells, and then cash in if it’s a success and bail out if it’s a flop.
That model made sense for chip innovators, game developers and storage-device manufacturers. The trouble is, it is now being applied to Internet ventures that are, at heart, media companies or retail firms that happen to be doing business online. And building a following for an online store or a Web portal or a content site isn’t a single roll of the dice; it’s a game that needs to play out over many seasons.
A site’s traffic rarely soars overnight. Most successful Web sites find that their number of visitors and volume of pages viewed grow over time, as Internet users spread the word, links multiply across the Web, URLs circulate on mailing lists, and so forth. Overnight sensations do happen, of course — like the Hamster Dance, or Mahir the Turkish accordion player. But sustainable long-term online businesses take time to grow; their life trajectories are snowballs, not skyrockets.
Today’s start-ups, though, lack the patience to wait for their businesses to grow organically. Some are spooked by the idea of an Internet “land grab,” in which he who spends the most first supposedly walks off with the spoils. Some are prodded by impatient backers looking for the shortest distance between first round of investment and IPO cash-out. Many, I think, are simply following the genetic program of the Silicon Valley start-up, which dictates fast results or death.
The CEO and the board of, say, Ecommerce4U.com look at the disappointing traffic figures for the site they’ve just launched. They look at the money they have in the bank. They think, “How can we get large numbers of people to our site, fast?” Their eyes drift to the TV set in the conference-room corner. “AS SEEN ON TV” — bingo!
Too bad for Ecommerce4U.com that the exact same sequence of events is simultaneously taking place in the offices of dozens of its competitors. And too bad for all of them that TV ads are neither the most cost-effective nor the most efficient tool for attracting Web users.
Venture capital pooh-bah John Doerr, of the pioneering VC firm Kleiner Perkins Caufield & Byers, is widely quoted describing Silicon Valley as “the single greatest legal creation of wealth in the history of the planet.” But what’s happening this winter is more like the single greatest legal transfer of wealth from venture capitalists’ pockets to media corporations’ coffers in the history of the planet. In this transaction, the Internet firms are mere middlemen, passing the cash along.
For now, the TV networks, radio stations and Internet-ad-
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