Recipe for a billion-dollar website
Posted on 15 Jul 2008 at 16:49
Davey Winder finds out why the Googles and Facebooks succeed where so many fail.
Many of us harbour secret dreams of transforming a no-budget website run from the garage or spare bedroom into a multi-billion-pound business empire. Dreaming, of course, is one thing and doing is quite another. But have you ever wondered exactly what's involved in "doing a Facebook" in the real world? What are the key ingredients for building a hugely successful web business, the factors that separate the online giants from the wannabe websites?
Don't think for a minute that all the good online business ideas have already been exploited: there's plenty of room in the market for fresh concepts. Yes, it's hard to imagine challenging Google, but ten years ago nobody thought anyone could overcome the likes of AltaVista, WebCrawler and Yahoo. We've been talking to the people who have been there and done that, industry experts and analysts, web developers and business gurus, to find out exactly what the recipe for a billion-dollar website is.
There's a fairly well-worn theory that it's easier to build a business online than off - but is that actually true? Michael Wilson is the CEO of virtual world There.com and he's in no doubt that it is. "First and foremost the cost to build in cyberspace is, at least initially, far cheaper than in the real world," he explained. "It's also far easier to iterate in cyberspace than in the real world as you're not dealing with real products, made of real materials, but with arrangements of bits."
While that might be true for companies such as Betfair, which shook up the gambling market by allowing punters to bet with one another rather than a bookmaker, other web giants such as Amazon still need huge stock and vast warehouses to run their businesses. What they had in common, however, was a core idea that was ripe for online execution. "Both Amazon and Betfair work well because they took a concept that people already understood offline and made it much easier, quicker and more useful online," said Nick Mann, MD of web design agency Interdirect, whose clients include Lastminute.com.
But with a huge number of ideas competing to attract the attention of that global audience, the challenge becomes one of reaching critical mass and then keeping it. "Internet users are today very accustomed to looking for the 'next big thing'," Mann insists, so the real trick is user retention. "I would not say exploiting opportunities is easier online than offline - it just presents different problems!"
Not first, just better
The next big thing doesn't have to be a new big thing. Neither Google nor Facebook were pioneers. Yet, Google searched better than the rest, and Facebook adopted a friends-only approach to profile viewing that helped the site grow more quickly than open-house competitors. Which is good news, because it means you don't have to invent the wheel to make it in the web-billionaire stakes, as long as you know how to overturn the established giants.
Usability guru Jakob Nielsen, principal at Nielsen Norman Group, whose clients include Google and the BBC, is in no doubt regarding the secret. "The answer is easy - by being better," he told us. Of course, it's not that easy to be better than big companies that have clearly shown they resonate with customers. "There's always something that the market leaders do poorly, and with careful research, you can find the chink in their armour," Nielsen insisted, citing the example of everyone's favourite search engine. "There are many searches where Google gives horrible results, and its two-line summaries of web pages are very difficult to read."
Taking on the established players is something that Jeff Kelisky, CEO of the now Microsoft-owned Multimap, knows all about. "Needless to say, it can be very difficult," he said. "Once a brand becomes closely associated with a valuable consumer proposition, they can sew up the common entry points to a successful website and make it very difficult for other sites to gain traction." Indeed, brands can become so associated with a type of activity (Amazon for book buying, for example) that they're bookmarked or typed directly in as a URL. "Once that happens, the user is no longer offering the web the opportunity to compete for that consumer proposition," Kelisky explained, adding "finding new entry points is critical, which may involve developing partnerships to embedding links in existing, popular web properties."
Multimap certainly wasn't the first UK company to put maps on the web, so it had to find new ways to attract surfers. "We invested in consumer advertising early on to become associated with mapping in the UK in the minds of the online community," Kelisky added. It also established business models to create a virtuous cycle of growth and drove traffic from the community of websites beyond Multimap.com by allowing them to include links to its maps.
The ability to differentiate your new website from that of your competitors is paramount, more so if there's a chance it might be perceived as a copycat service. Mann argues that it's not only essential to have unique and improved feature sets "but it is also vital that prospective users of your service are aware of them and motivated to use them - it is essential that they tell their friends about them". This enables newer underdog services to establish a bedrock of fundamental support upon which they can start to develop a wider userbase. "The upside of being second or later is that you can use your competitors' systems and work out their weaknesses, so you might improve them in yours," Mann said.
Wilson prefers to sum all this up in two words: customer service. "Throughout history, the winners have been the businesses that understand who their customers are, communicate with them, and make their wants and needs an integral part of their business," he claimed. Take Facebook: it gave the customer back their right to privacy and started with a closed college community that was perceived as safe and exclusive to its members. "I believe that only when those members ventured out into the professional world did Facebook take the opportunity to open up to others, which I also believe was what the members wanted at the time."
Beating the growing pains
Opening up to the world at large isn't always the golden opportunity it may seem, especially when you consider that rapid growth means rapid spending. Being exposed to a global audience from day one and experiencing phenomenal growth can present "both an opportunity and a threat", according to Rob Steggles, marketing director at NTT Europe Online. "An opportunity in terms of revenue, and a threat in that unprepared websites can fall over under the pressure of high traffic levels, potentially leading to damaged brand reputation and lost revenue."
So how did Flickr, YouTube and Facebook manage the stratospheric growth that the internet can deliver? Nielsen advises that the best approach is to have a profitable service that makes money for every user: "Then it's no problem to get the funds to expand as usage grows, because your income will be growing just as fast. The problem is in services that live in the eternal hope that income will come, even though they don't make money from their current users."
That said, some websites have done very nicely indeed out of that "eternal hope" - not least YouTube, which Google bought for $1.65 billion back in 2006, even though it has still to show a profit. As Mann sagely suggests: "There's only one answer to funding it all: sell your soul to investors." If you can't afford to fund the explosive growth of your website, you'd better find someone with deeper pockets. "Sadly they are almost always a necessary evil if you are to transform a great idea with a solid but fledgling user subscription to an international phenomenon such as the current Web 2.0 site of the day." On the upside, investors can help take your idea to the next level, if only to protect their own investment. After all, as Mann reminded us: "It's worth considering the value of 100% of nothing."
In order to capitalise on this growth, and at the same time avoid damaging your business, you need to have a platform that can scale when required, accommodating that rapid expansion and guaranteeing your business continuity if the business does take off. "At the end of the day, though," warned Steggles, "no-one wants to be paying up front for anything that isn't needed right away, whether it be servers or office space. In a cash-poor economy, in order to succeed companies should be looking to invest in on-demand services that can be used as and when required."
Planning for lift-off
It's all well and good having a business plan for every conceivable eventuality - but that's nothing more than wasted energy if what you're trying to sell isn't up to scratch. A Google spokesperson rather candidly told us that "many people forget that for Google's first several years it had no business plan. The goal was simply to provide the best search results people could get. Full stop". It was only after people started to understand the value of the search engine that Google began looking for ways to bring targeted, relevant advertisements to people alongside search results. "We learned a lot from that experience, and we still believe that if you focus on the user, everything else will follow," they continued. "Thinking of ways to make money is secondary to us. By focusing on needs rather than the bottom line, we encourage our engineers and product managers to innovate at a rapid pace."
Many a good idea has withered on the vine when it comes to execution, however. Take software as a service, for example, with online office suites being great until you throw a couple of high-res images into a document and they start to crawl. So how do you get past the good idea stage and beyond into billion-dollar territory? Chris Gledhill, managing director of development company PDMS, thinks it's all about recognising that what you're embarking on is an engineering project that has to be designed to scale from the start. "It's amazing how many times a site that was built only as proof of concept actually ends up in use," Gledhill explained. "The boss is pushing for a deliverable, investors are getting anxious and suddenly you find yourself with something that is under-engineered and you flounder." Certainly execution is important, as Pascal Rachenour reminded us when he said that the idea is "only the first step of a long process, and if time is not spent on the execution strategy the idea will be killed quickly". Or worse still "picked up by another entity with better execution skills".
So perhaps the real answer is, once again, to surround yourself with the right people. Mann thinks so, insisting you have developers who understand that scalability is king. "It is something that Google has really got right with its huge arrays of relatively inexpensive servers: good scalability, great redundancy," he said. "It's easy to think exclusively about features and to never consider scalability. It is very dangerous to assume that you will have time to add scalability when your service become popular." You won't and your service will fail.
Harder than ever?
It might seem that it's harder now to create a billion-dollar website than it was during the dotcom-boom years, but is that really the case? After all, sites such as Facebook, launched as recently as 2004, have emerged to prove that it's still possible to grow an online business from nothing to a $10-billion brand in just a few years. Tom Ilube, currently CEO of internet-privacy specialists Garlik but formerly chief information officer at Egg.com, believes that it's no harder to succeed today than it was five years ago, but he admits it might take slightly longer. "A tech entrepreneur should think in terms of five years rather than 18 months, but that's no bad thing," he said. "There are so many new technologies emerging that the opportunity to build huge companies still exists."
Nielsen admits that venture capital may be harder to come by as a result of the ongoing credit crunch but he insists that this is actually a healthy situation, as "the most stupid ideas that are all chasing the same advertising budgets will be harder to fund. People who have a good idea that can actually make money can still get funding". It's not even that hard to outdo a long-established rival, according to Nielsen, as there are many ready-made solutions available for constructing a website: "Anything from cheap hosting providers to pre-programmed shopping-cart software that just need to be tweaked for your product instead of being written from scratch." And by following established usability guidelines, new businesses can avoid the mistakes made by others. "Learning from the past; what a concept," he joked. "That'll allow new sites to move straight to a design that works for users."
Ilube agrees, insisting that it's surprising how quickly innovation dries up in so-called industry leaders when pressures of quarterly reporting and protecting a core franchise come into play. "If you look at the recent big innovators such as Facebook, Skype and YouTube, they have happened outside of the established first generation web companies." So perhaps the only question that remains to be answered is: what are you waiting for?
Author: Davey Winder
Payments may get better soon too
Just starting a project that enables safe payments in shops and on websites. Once we have this in place, accepting payment no longer needs to be such a fight with PCI compliance or the need for a virus free computer (yes, I meant that).
By nuclear_glow on 17 Jan 2012
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