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Digital
Kapital
Setting a value on a site. Just as there is more than one kind of site, there is more than one way to take the measure of a site. In this issue, we'll look at the sites powered by avocation and hysteria, which can be the most enduring, or fleeting, types of sites. What is excitement worth? That's the question you have to answer when looking at the launch, acquisition or merger of a Web site that will build it's revenue on avocation, enthusiasm or histrionics. Napoleon said something to the effect of "victory is the best orator," and success is the best argument for a high valuation of a Web site. But in the Web business victory is fleeting, so we still need to assess the long-term prospects for a site. Will visitors continue to come back? What is the value of the site's name? The host or editor of the site? In an age when the source of value -- the host's avocation, enthusiasm or histrionics -- can walk out the door, how do you assess the price you should pay for a site? This particular issue has been very difficult to write about, since almost everyone in media is so incredibly disingenuous about the nature of value. No one, myself included, has a formula for success. And as I've worked over this question in my mind, for my own business ventures and those of clients, I keep coming back to the same question: What's the value of intangibles with unpredictable life spans? If you go to an accountant and ask her to answer this kind of question, after they say "What *is* it worth?" with a grin, they'll resort to the standard discounted cash flow analysis. Just plug in the growth factors and go, you know? Well, no, I don't, because popularity is a fleeting thing, or it can be permanent as all get-out. Take Mickey Mouse, a carefully managed phenomena that has generated billions in revenue over the past 60 years. Ren & Stimpy were designed with Mickey-scale success in mind, but who would fork over a billion dollars to buy them? No, something more is required. Something that doesn't depend on the color of chicken livers when divining value. Some interesting articles and books crossed my desk during the tedium of this research. Notably, the Harvard Business Review's article on "The Experience Economy." By B. Joseph Pine II and James H. Gilmore, two consultants with an upcoming book from the Harvard Business School Press, this piece presents a "progression of economic value" that has business evolving from "extract[ing] commodities" through "mak[ing] goods" and "deliver[ing] services" to the ultimate form of market, based on "stag[ing] experiences." Ooooaaahhh, so life *is* a trade show. Having been in the trade show business, I can tell you that the cost of staging experiences is far beyond the pale of most businesses. Suggesting that the trade show is a model for business in general is little like telling everyone who joins an HMO that they get free course in brain surgery -- on live patients! Of course, Pine II and Gilmore do make an important point, but amongst authors in search of a market there's this tendency to generalize that confounds the advice in any application. The Experience Economy style of business does not represent an end point in the history of commerce. I was really kind of relieved when I ran across "how hits happen" a new book by Coopers & Lybrand partner Winslow Farrell, since it promised to help me understand "forecasting predictability in a chaotic marketplace." Alas, this title, from the same press that brought us "The Friction-free Economy" is merely a paean to the author's discovery of chaos theory and his ensuing application of certain chaos principles in his consulting practice. Don't get me wrong, from a filled-with-compelling-facts perspective, "how hits happen" is actually pretty good. But there is no system to the analysis, which is precisely what seems to be promised by the cover copy, the introduction and virtually every page, which talks incessantly about "meta-games" conducted by competitors for public attention. "Rather than analyze problems in their true multifaceted dimension, managers construct myths about cause and effect," Farrell writes. Hey, true enough, but Farrell jumps into myth with both feet and swims languorously in its warm currents. Every new film and each new record to top the charts is a "shock wave" of one sort or another. He talks a lot about the models he and his C&L team have constructed, which simulate thousands upon thousands of consumers, but never describes the rules used to motivate these agents. And it is here that the self-deception enjoyed by the author virtually destroys the analysis. It is very easy to "create" an agent and tell it, for instance, "You like Kool and the Gang." The agent will trundle along simulating its enjoyment of disco music, but when Hootie and the Blowfish come along, the change in consumer behavior appears monumental. In fact, what you are witnessing is the impact of selectivity, the way the rules you have generated parse reality governs the outcome. A dead giveaway to Farrell's -- and all of our own delusions about history -- is the Now-ism that runs through every example cited. All the examples come from the lifetime of the author. He cites Elvis Presley as an atom bomb-like cultural phenomenon: "Suddenly rock and roll became the force around which youngsters dressed, thought, and formed friendships." But Elvis was not a wholesale phenomenon. Not *all* youth turned to him for definitions of "cool" nor was he the first pattern for social behavior among the young. Farrell could have turned back the calendar another 15 years to find Frank Sinatra doing the same thing Elvis did. |
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In analyzing the value of a Web site or a business or a work of art, we have to remember that we are always in the midst of progress. There's nothing new about change. I'm not saying that things aren't changing or that they aren't changing differently. But change is a constant and we're going to survive better if we stay calm about it. Look, Jean-Jacques Rousseau wrote that "our century and our nation will no doubt surpass all times and all peoples." No one is immune to the fatal conceit of viewing the whole of history from the high-water mark of today. If we remind ourselves of this more often, we might recognize our follies more often than we do today. Farrell sees every market event as a kind of self-organizing epiphenomenon which can be compared to other events. In fact, the market is a brew that ferments from the collective contents of all previous culture. Markets are the product of the past as well as the present. Hootie is related to Kool as Titanic is to The Poseidon Adventure, but Farrell sees popular culture as a non-linear, constantly revolutionizing, rather than evolving force. This touches a nerve for me, one I've been troubled by since Kevin Kelly described Loren Carpenter's experiment with a COMDEX audience that "controlled" a virtual computer screen using red and green wands at the beginning of "Out of Control." For those of you who haven't committed Kelly to memory, the gist of the event was that Carpenter gave the audience red and green wands which they could raise in order to have input to the image displayed on a screen overhead. The audience "generated" the image on the screen to play Pong and formed numbers and "flew" a flight simulator. Kelly ascribes self-organizing qualities to Carpenter's audience.
But, if you read the description carefully, what you actually see
is a finely managed process of leading the audience through the
exercises. Some of the interim examples of self-organization, like
making numbers appear, are misdirection, since the probabilities
that a number would emerge from a crowd showing either one color
wand or the other are relatively high. Each audience member would
be able to flip their wands a couple times while watching the screen
What you see is leadership. Carpenter defined the context and actions of the audience and instructed them. Audience members also participated in acts of leadership as people shouted out instructions. So, as the image of the plane veered to the left or right in response to cries of "left" or "right" what we witness is not the self-organization of a flight simulator, but the evolution of consensus. Farrell, in "how hits happen," uses the example of a standing ovation as an "emergent phenomenon, socially constructed by the actions of individuals." But what he doesn't take into consideration are the factors that lead up to the ovation (standing or not). Was it a good performance? Was the hall full or half-empty? Was the first person to stand an influential critic? Was the singer dressed well? Farrell reduces the question to "What makes a standing ovation?" while ignoring whether the conditions that contribute to a standing ovation are present. And that's the real challenge of valuing a Web site built on avocation, attitude or histrionics: identifying the qualities of enduring leadership. You do not want to buy a Web site that cannot sustain its leadership of an audience, that engages the audience in such a compelling way that individuals can't seem to help coming back to the site again and again. The conditions that make the site accessible to the influence of marketing and public relations expenditures must be present so that you can set the stage for success. So, the three things you have to do to set your value on the site are: 1.) Determine the ability of the existing staff/host to work with
others, likewise the fit between your current resources and the
target site's mission; Christopher Locke, former editor of MecklerWeb and now the vigilant RageBoy of www.rageboy.com, says of the type of Web site I'm speaking of, "...these pages sprang up overnight like a crop of magic mushrooms on a rich motherlode of corporate horseshit." If you think you are going to buy into one of these sites to make it a profitable business, then its owners and operators must be at least a little tolerant of corporate horseshit. Oh, I know, there are some of you reading this and saying to yourself, "Ratcliffe just doesn't get it. This is the Web. Things are different now." Well, I also know that those of us who have the money to pay for those of you thinking that want to know that there will be accountability and a shared commitment to getting the most value out of every dollar spent. You can't have this money unless you find a way to play along. The great entrepreneurs I know are the ones who have learned the lessons of good management, strong accountability, diligent reporting and the benefits of hiring executives to take over where grit and determination won't cut it alone. Along with the basic need for a willingness to work within the parameters of the principals of accounting, there's the desirability of finding investments that complement rather than conflict with current holdings. Take the example of Wired's acquisition of Suck, a site that gloried in sticking it to Wired. The marriage of the two made for a delightfully boring, but wittily written repartee that drained Suck of all its charm. In fact, Suck was a lousy acquisition for anyone, because the founders were so clearly freelancers-at-heart. See, folks, people who are interested in and willing to earn their keep at the periphery sometimes will stay firmly entrenched at the periphery, even after earning a big payday from a company that is more mainstream. You don't want to buy these people's loyalty, because it cannot be dislodged from their own interests. You *do* want to buy a site where the content and its creators are overtaking the mainstream -- here is where some of Winslow Farrell's "how hits happen" provides useful examples. Measuring the durability of a site's theme or content is hard. It isn't something that can be generalized in the way that I quantified the value of an audience in the last issue. You need to find a way to establish a dialog with the site's customers - both readers and, if they exist, advertisers. If you crack this nut, you will establish an ongoing source of feedback about the value of your investment. Methodologically speaking, you need to create a longitudinal survey of the site's audiences and, as much as possible, find ways to control for self-selection by extreme fanatics who will weight your findings to the wings of the response spectrum, as well as to avoid substantial changes in the survey population over time. This is most easily accomplished if the site already runs a psychographic and/or demographic program that lets you select respondents based on identifiable characteristics (this way, if someone drops out of your survey later you can replace them with someone with a similar profile). What you ask people and how you ask it depends upon the site. The
common elements you need to focus on, to make the site comparable
to others, are the frequency of visits, number of pages viewed per
visit, the cost of those pages (avocational content seems to defy
costing, but you have to find a way to calculate what it will cost
to deliver it over time), and the breadth of the audience's engagement.
If you For purposes of acquisition, do the survey for two months prior to closing on a value. Ask about what has appealed to the reader, the actions they've taken on the site and related sites (some of this you should know from the logs, but ask for qualitative responses), and what their expectations are about changes in the future -- sometimes, the consumer will present a stronger business model than the one the site owner is pursuing; besides, if the audience suggests ideas the current owner can't afford on their own, you increase the perceived value of the investment. Once you know who the audience is, turn to market research to determine whether there is a potential market for the service or content the site offers. What do people spend on the subject of the site? For instance, let's say you are talking about buying the World's Biggest Car Stereo Blast-Off site, a sort of consumer reports on car stereos. People spend a lot of money every year on car stereos, about $4.5 billion. Now, take the audience you polled and determine whether they represent the high, middle or low end of the market. Figure out how much the total audience of the site spends on car stereo each year, both on- and off-line -- what percentage of the market does the site currently represent? If less than 10 percent, why buy at any kind of premium? The site is merely a startup and you should value it like one. If the site has influence over more than 10 percent of the market, then you've entered a realm where it can be managed toward dominance, given that the site's staff and owner are willing to be managed. Sites with more than 20 percent of any market are already to expensive. Forget them. As I said in the last issue, you're looking for the sites that are poised to break out. What if the site doesn't have market influence, but political, emotional or histrionic influence? In this case, you'd better know why you are in the market for this kind of site. Say advertising is your bag... can the site support advertising without alienating its audience? Will it provide a coherent package that a media rep can sell? Is there a protectable source of content or will the people who gave the site its chops walk when they get their share of the buyout? If people are the main source of value, can you lock them in for the long term without destroying your profit? In other words, Web sites powered by avocation are lousy M&A candidates. You'll do better to stay in the realm of markets and marketing. The exception, I think, is in politics and emotional discourse, where a fad or a showboating host can build a huge audience very quickly. This, rather than be amenable to venture investing, is most powerful in the hands of an agent that can manage relationships for the site to maximize value. Here, I suggest that investors place their money with a Col. Tom Parker type who can identify, cultivate and manage talents. So far, no one has stepped into this role for the Net. Dealing with the aesthetic issues is harder still. Once Suck was sucked up into Wired, everyone knew it was neutered. A Snap!, however, in the hands of NBC, actually promises broader aesthetic value than it had at C/NET. This is an issue for professionals -- like myself, and others -- it requires instinct bred by experience, since, so far, no one has patented that formula for success. |
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The
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Sites on my mind: Far
Eastern Economic Review
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