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March 28, 2005

Goodnight, Gracie

This story recounts the first time I put Barry Diller on my radar as the Ted Turner of the interactive media world, so I thought it would make an interesting intro. Read the first few paragraphs of this article before continuing: Barry Diller Has No Vision For The Future Of The Internet. I was in the meeting where Barry Diller shut down the entire internet division of Vivendi Universal with the phrase “Goodnight Gracie.” It was June 11th of 2002 and Jean-Marie Messier, (who took to calling himself J2M, so I will too since it is easier to write) then-CEO of then-media (and water and sewage) conglomerate Vivendi Universal (VU) had his quarterly Entertainment Committee meeting in the VU conference room of what had previously been the Seagram’s building in New York. The Entertainment Committee was comprised of the heads of all the various entertainment divisions, who were sitting around the self-congratulatorily large conference table discussing their various businesses. These were big names, all of which you have heard. I remember mentally calculating the total net worth of all of the entertainment executives in the room and it was well into the billions of dollars.

Part of this meeting was dedicated to defending the value of VUnet, the internet division of VU at the time under which J2M had rolled up all of the internet properties including Uproar, Flipside, eMusic and willful copyright infringer MP3.com, the latter acquired by VU for $372mm and also the vehicle I rode into the VU fold. I was then president of Moviso, the then-money losing ringtone company. I reported to the CEO of VUnetUSA, and he reported to the CEO of VUnet in Paris, Agnes Audier. So it was Agnes in the hot seat defending her hodgepodge of internet properties, which in 2001 had generated $168mm in revenue but had posted an EBITDA loss of $192mm.

My boss at the time had asked me to attend the meeting to talk about my ringtone company as a bright spot in the otherwise gloomy story of VUnet. This was 2002 and the ringtone craze hadn’t yet hit its hockey stick growth curve in the U.S. so I was painting a broad vision of ringtones being an important revenue source to the music group in a few years and "mobile media" being a huge opportunity for all media incumbents. (Which went over not very well, though in fairness to them just looking past the Internet for incumbent media companies at the time was a bit of a stretch.)

Agnes started talking about all of the deals the various internet properties were working on and how integral they were to the various other entertainment properties. Frankly, even if the deals had been interesting, the fundamental problem with the vast majority of the VU internet companies was that they had no sustainable business model because they generally relied on the internet as a distribution channel for existing media. Barry Diller interrupted her in the middle of her presentation at one point and asked the various entertainment heads if all of the internet companies were indeed important to their businesses. All of them said no, effectively throwing Agnes under the bus, and then Barry added the final comment, “Well then, Say Good Night, Gracie,” as he neatly closed his copy of the presentation folder Agnes had handed out. Agnes, being French, didn’t seem to understand this reference to the famous George Burns signoff, so I am not sure it dawned on her that it meant the end for her entire division. I should note that Barry’s comment didn’t come off as malicious at the time. It was very matter-of-fact, like he was simply stating the obvious notion that there is no value in beating a dead horse. The fact that he did it with some style was just cool.

And VU had acquired a good number of internet dead horses. Dead because they weren’t based on the only business model that works on the internet.

A week later, my boss pulled his chute and was gone. A month later, J2M was famously ousted and later shamed by his countrymen. Then the whole VUnet division was dismantled over the course of several months in 2003. Moviso was sold for $25mm, which represented a profit for VU but was a firesale price due to the other economic woes at VU at the time and a fraction of what it would fetch now had the French management at VU had any vision for the future of media at all. While VU undertook a respectably bold endeavor, I am not sure many other water utilities will attempt to become media conglomerates anytime soon.

Which leads me to My Respect for IAC/InterActiveCorp
I remember reading with interest this passage from the Wired article about Barry Diller:

"What is content?" he asks, turning literal-minded. "Content is that which resides between two sides or four sides. But in Internet terms, when you talk about content, what you're really talking about are goods and services - the selling of goods or the dissemination of services. That's what interactivity is. I think Match.com is a really creative interactive service, but I would never call it content, because for me, content is narrative. Look - you can think of the Internet as just a distribution platform, and in that regard it will at some point be the major distribution platform in the world. But it is not of any particular current interest for video, because it does not yet have the bandwidth necessary."

I think Barry Diller saw that VUnet’s internet companies had no viable business model for that version of the internet, and I think Barry Diller understands the redefinition of the word “content.” The reason IAC’s internet properties (with few exceptions) are winning is because Barry Diller and his team understand this simple fact: The only sustainable business model that 1.0 of the internet understands is “Broker.” This is an important point. Anytime you use the internet to disintermediate an intermediary which has been creating value by connecting buyer and seller, you win. Look at IAC’s businesses and you’ll see a common thread. Expedia.com: Disintermediating your travel agent. LendingTree.com: Disintermediating your loan broker. RealEstate.com: Disintermediating your real estate agent. Even Match.com is disintermediating your yenta grandmother who wants to introduce you to a nice girl.

Think about how many people watch and buy from the Home Shopping Network. To have the vision for a business where people shop and buy from a TV show requires a massive redefinition of the word “content.” Simply put, the stuff being sold is the content, and the purchase is the entertainment. Talk about a multiple on value invested.

IAC is becoming an LMNO
IAC is now buying Ask Jeeves. Earlier this year, Ask Jeeves bought Bloglines.

And IAC owns ZeroDegrees.

Take another look at the User-Generated Content Value Chain.
Remember that a Media Networking Operator (MNO) enables users to communicate (or Network) through the content (Media) they create.
With Bloglines, they have a place on the Channel link of the value chain. Ask Jeeves gives them a place on the Search and Directory link. A combination of the Bloglines infrastructure and ZeroDegrees puts them on the Platform link. Tie them all together and IAC is an MNO.

Now look at their businesses.

A good percentage of what IAC transacts is location-specific information. Expedia and Hotels.com deal with places you go. TicketMaster is about venues. On Match.com, you search for other singles by location. CitySearch is basically a listing of yellow-pages information, most of which is on a map. RealEstate.com lists houses for sale, which are inherently location-based.

I’ll bet you the next step for IAC is to pull together the three links on the Value Chain and feed it the content from their internet properties. Then wrap it all up with ZeroDegrees and presto, you have reinvented IAC as a new kind of media company: One that allows users to create and attach to content that is meaningful to them and distribute it through a series of overlapping personal networks to other users. An MNO.

IAC’s Business Model for the Internet 2.0
Practically speaking, this is how it would work: On my channel I list the W hotel in San Diego with all of its details that I found on Expedia. I add my comments and the pictures I took of the rooftop Beach Bar to the blog section of my channel. You Ask Jeeves, “What is the coolest hotel bar in San Diego?” One of your results is my channel, which you trust more because it looks like insider information from a local resident. (I live a block away from the W.) When you click through to my channel, you find that not only have I provided useful information about the W Hotel, but IAC has conveniently integrated their Expedia webservices API into my channel so you can book the hotel right from my blog post by clicking on the photo I took. Then everyone who subscribes to my channel RSS style receives my recommendation on the W Hotel and values it more because it is from a trusted source. Everyone becomes a storefront and IAC makes it all possible by syndicating their content (about the stuff they make money selling) to whomever wants to link to it, allowing people to attach their own content to it (like my picture of the Beach Bar) which adds value, and even giving people the ability to add metadata that makes the content easier to find on a local basis to a market of one. This last bit would be the ultimate – based on my profile (perhaps repurposed technology from Match.com) I find the W Hotel on your channel because of something we have in common personally, thus rendering a higher relevance of your recommendation of the W Hotel because we are similar in nature even though we are perfect strangers. This same use case works for houses, hotels, restaurants, concert tickets and even available singles. I think Barry Diller understands this: The new business model for 2.0 of the internet is “Connect.” Connect people through the media they create and you win. This is the same reason Google bought Blogger and Yahoo bought Flickr.

I would be shocked to find that IAC is not working on this overarching strategy. This is my vision for the media company of the future. If you think a picture I take of a hotel bar is not media, think again. The media titans of the future will redefine the business models around media from “something that is created once then mass produced then distributed” to “something that is found, borrowed, added to, redistributed and found again.”

Apparently missing from IAC’s list of assets is a mobile platform. The next step for IAC will be to make all of this possible on your mobile phone, or as I prefer to call it, your Personal Media Device, (PMD) which my bias leads me to believe will be the consumer platform of choice in a few short years. Local information from a mobile device that is the ultimate localized search tool makes sense. Personal information from the most personal consumer electronic device in history makes sense. Syndicated distribution via overlapping personal networks administered from the PIMs of everyone’s mobile phones makes sense.

When IAC does that, (effectively adding the L to their MNO) they will be transformed into one of the largest LMNOs, and they are in a very good position to get their faster than any other company. The big question is when? Do they wait until the myriad roadblocks and issues around developing for the mobile space are addressed so that it is more like the internet from a development standpoint? And when is THAT going to happen? Would a broad deployment of a Microsoft handset OS provide a sufficiently homogeneous environment? Will the carriers allow the homogenization of their very valuable deck space or will they continue to add their own value but with better portability of 3rd-party application code across multiple carriers? In either case, when is that going to happen?? Whenever I prognosticate about this industry, I find it valuable to add two years to whatever seems most likely, so does that put IAC in the mobile space in two years or three? (Or four or five, as may be more realistic?) And if so, does someone else who has a more developed mobile strategy beat them to it? It will be interesting to see how IAC evolves, but in the meantime I am buying more stock.

Posted by Shawn Conahan at March 28, 2005 02:48 PM

Comments

Posted by: Eli Chapman at April 3, 2005 06:49 AM