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16/01/2008. Source:IVCJ (Israel Venture Capital & Private Equity Journal). Ori Israely and Shai Tsur, Giza Venture Capital
IVCJ asked Giza Venture Capital’s Ori Israely and Shai Tsur to tap experts from key internet sectors – advertising, portals and social networks, video, and gaming – for their views on how the online world is developing. Israely, managing director, and Tsur, associate, are focused on the Tel Aviv VC’s internet and media sector. They spoke with:
Scott Cohen – co-founder of LivePerson, a provider of online chat services, and of 24/7 Real Media, a supplier of digital marketing services;
Erez Pilosof – co-founder, deputy CEO, and CTO of Israeli Internet portal Walla!;
Amit Shafrir – CEO of Network2, a directory of Internet TV content;
Assaf Monsa - co-founder and CEO of Double Trump, a NY-based developer of casual games and software.
Online Advertising / Scott Cohen
Israely: Online advertising still makes up only a small fraction of total advertising expenditures. Do you see online advertising growing significantly in the next few years?
Absolutely. What we have been seeing in recent years is only the beginning of the move to online advertising. I fully expect significant growth for the foreseeable future. There are key drivers that have only now started coming into play that will spur industry growth, namely new delivery platforms and better technology to improve the advertising experience. Importantly, as targeting improves and video reaches more users via increased broadband penetration, Internet advertising will offer sight, sound and motion along with more engagement and measurement opportunities.
Israely: What are the major advertising technologies that you think will continue to transform the industry?
There are a number of technologies. I think targeted advertising is the most obvious one. What we've seen until now is mainly advertising that hasn't been targeted. Since it isn't relevant to Internet users, they've learned to tune out the ads. Google's Adsense technology, which is contextual based, is an improvement over completely nontargeted advertising, but still manages to miss the point much of the time. The big leap will come when advertisers can serve more ads based on a user's profile and behavior, and combined with information from registration and consumer databases. These ads will be really relevant to the user and increase returns that advertisers get from ads as well as the rates ad networks charge advertisers – all of which will serve to grow the online advertising "pie."
Also, as broadband continues to penetrate larger segments of the population, the range of available advertising types will increase. We'll start seeing a lot more video and interactive advertising, for instance. Widget-based advertising is another new development that has appeared in the last couple of years. Widgets can be used to expand a site or a brand's reach throughout the Internet (on blogs and social networking sites) as well as outside the browser. I'm certain that we will see increasing amounts of widget-based advertising, which will play a major role in obtaining broader reach.
Tsur: What effect will the recent buying frenzy by major players like Google and Microsoft have on the online advertising world?
Hopefully it will continue, and I will sell one or more of the companies I'm involved with at very nice returns and reward the founders and executives for their efforts. Seriously, though, I believe the recent M&A activity by the big online players in this area indicates that online advertising is becoming a mature industry. In a way, you can look at it as the "institutionalizing" of the traditional online advertising that we have seen so far. I expect we will continue to see a lot of buying activity as the Microsofts, Googles, and Yahoos continue to seek an edge on each other.
Israely: What types of advertising "real estate" are still ripe for an Adsense-type revolution?
I think the main relatively untapped areas as far as advertising is concerned are video and mobile. Both are in their infancy at the moment. Video is obviously a "killer app" for the Web, and this is only going to increase as Internet users continue to get better access to broadband and people start shifting their TV-watching habits online. At the moment, the ad networks have begun to experiment with different advertising types (pre-roll, post-roll, overlay, etc.) for video to see which ones are most effective. I'm confident that we will see continued movement in this area. At the moment we're seeing new video ad exchanges and networks starting to appear and develop.
Mobile advertising is another promising field of real estate, especially as people start accessing online services from their handhelds. Mobile devices are personalized and have a unique one-to-one identity, which makes them obvious candidates for better targeted advertising. This is going to be a tricky proposition, since users are a lot more sensitive to advertisers intruding on their "private" online space. So the targeted advertising will have to be as friendly, relevant, and unobtrusive as possible.
Portals and Social Networks / Erez Pilosof
Israely: Do you expect to see portals providing more user-generated content or will there be a backlash in favor of more professional material?
I don’t see it as an either-or situation. Users want to contribute their own material online, but they are also looking for slick and entertaining content. If you take video sharing sites as an example, there needs to be a mix of amateur UGC material as well as more professionally produced material. This lack of balance is the big problem with a lot of the video sites on the Web today. On the one hand you have YouTube offering a lot of user-generated videos, but not enough professional material (at least not legally). I think users will want easy access to both types. You’ll see this across the board with other content types like music as well.
Israely: What do you think about the hype surrounding Facebook? Is it justified and why? Can it become the major online platform for new online applications?
Like most cool things, Facebook is probably a little bit over-hyped. It isn’t necessarily a bad thing or a good thing. That’s the nature of the Web. Something good comes along, and everyone gets excited about it. Facebook is a great platform and great platforms have huge potential. The idea to open it up as a kind of an operating system for the Web was a genius idea and I think that it does have the potential to rework how we do things online and the way Internet start-ups think about getting their applications to market.
Israely: How big a threat are niche social networks to larger and more general sites such as MySpace and Facebook? Which verticals would be most interesting?
I don't think that niche social networks pose that much of a risk to the general ones. If anything, I think it’s the other way around. People don’t like a lot of hassle. I don’t want to have to manage six or seven social networks at once. It’s great that I can find a network for all my different identities and interests but it’s a real problem to have to go different sites for each different thing. I would prefer to maintain all my different online relationships (for business, as a sports fan, etc) in one place instead of having to go to a lot of different sites.
Online Video / Amit Shafrir
Tsur: How do you see the development of semi-professional video content? Who will control this content?
Semi-professional is probably the wrong term. "Prosumer" would be more accurate. These are people who know their stuff inside and out, and have chosen different paths than traditional filmmaking and television to express their creative vision. As with actual "professional" television and film, there's a scale to the content, some being terrible, and some being good.
Control is also the wrong term. Control is why mainstream television and film are slow to the game. It's a question of making sure the right parts of the value chain are incentivized properly to produce, distribute, and develop quality content. I believe that this market will drastically change in years to come. Many of the producers we see today will eventually go out of business, and few will succeed in creating a brand and successful shows.
These few will have more control of their own content, in terms of creation but less in terms of distribution. They will leverage their viewership to increase their profits and margins. They might be also in a position to directly cut deals with advertisers and sponsors, thus reducing their dependency on platforms such as blip.tv. The majority will consist of producers who are big enough to generate ad revenues and keep their businesses going, but not big enough to be attractive to sponsors directly. They will be dependent on existing platforms (current and future) to generate revenues. With time, such platforms will have a stronger position in the market, but will be limited as to the quality of content they are able to attract.
Tsur: Do you see any "YouTube killers" out there?
I don’t know what a "YouTube killer" is. Is it a platform with more viewers? Is it a platform with more videos? Is it a platform where more videos are played? I don’t think that killing YouTube is the goal. YouTube is a platform. It isn't the best viewing quality. It is overcrowded with poor production-quality material.
Finding the good stuff is the killer app. Finding the application that lets a viewer watch what matters to them is the killer. Delivering a product that provides a mixture of editorial vetting of content and participatory rating of personal likes and dislikes is the killer. There are currently various solutions out there that could over time assume leadership. A solutions such as VeohTV is a possibility, as it experiments with different paradigms. Perhaps someone will create a platform for niche sites, with targeted advertisement and revenue share to site owners.
I believe that as long as there is innovation there will be something better/faster/more interesting/ cooler/etc. than YouTube. Just like Google beat AltaVista, and just like there are attempts today to beat Google (e.g. Mahalo), I believe that something will come along to surpass YouTube.
Israely: When will we finally see a convergence of Internet and television? What form will this convergence take?
Convergence doesn't always happen. The telegraph didn't converge with the telephone. It died. Silent films didn't ride alongside talkies for too long. They died. The mainstream television system is already disaggregating and finding value in using the Internet as a carrier signal.
But there are content delivery values to the strong networks television has built to pass their content to an end-user's box. Imagine that quality of distribution for the prosumer material, a blending of methods such that the Internet's twoway is leveraged by traditional television, but television's delivery quality is leveraged by the new prosumer material. That kind of convergence would be brilliant.
There is also the convergent world of Internet and television from a technology delivery perspective (aka IPTV). I currently get my "regular" TV over a fiber network that runs over IP. In this case the Internet is simply a content delivery technology for video signals. The set top boxes that provide interactivity and user interaction with the programming are the convergence of the possible with what consumers will actually care about.
It is the right smart applications that will define convergence, not the technical feasibility. For example the ability to get a phone caller ID notification on my TV screen while watching regular TV – allowing lazy me to decide whether the call is important enough to move off the couch and pick up the phone – is a great example of Internet/TV convergence.
Tsur: There seems to be a feeling that Joost is the ultimate Internet TV experience. Do you think it will change the broadcasting world like Skype changed the VoIP world? What are the key challenges it faces?
Joost is exciting because it's an Internetenabled, peer-driven viewing platform. It is a disruptive new way to consider receiving video signals. It is also a closed environment that is simply a new license-distribution method for traditional television content. The actual end-point content isn't especially unique at this point. In this case, they could do more, by surfacing better content than we're used to seeing on TV, by surfacing more long-tail niche content, by building a way for people to get onto the Joost platform after passing some kind of quality standards. It's still the one to watch, but not as exciting as several of the open-faced players, at least from the content perspective.
I do not see Joost as any new breakthrough. At the end of the day, it is just like regular television, with blue screens as an added feature. I get over 500 channels on my regular TV now…and usually I can’t find anything to watch. Joost doesn’t change the viewing experience at all. It just delivers it to another device. Will Joost change the world of broadcasting? They are good partners for the vision of seamless connection between Internet and TV, and allow for the distribution of content. They have some major challenges in front of them – procuring premium content, creating a stable and efficient application, distributing that application to the masses – and if they succeed in all that it will still be just regular TV, delivered to a PC. Why bother?
Gaming / Assaf Monsa
Israely: How do you see the casual gaming world developing?
In the last few years, we’ve seen strong growth in the casual games industry. There are several drivers of this growth:
- Audience. This was the major driver in the first years of the industry. The audience for most published casual games was females, 30 and older, as well as older men. These are not the demographics of traditional gamers. The basic understanding that we are all gamers – whether or not we know it – became evident. Over time, people across all demographic groups have discovered the fun of casual games. In addition, people outside the traditional demographics for casual games – specifically younger males – started to find new titles targeted at them. So the growth in audience is due to both more exposure and more diversity in the games produced.
- Quality. Surprisingly, this is not a very significant driver in my opinion. The quality of a game, be it graphics, sound effects or story line, has never strongly influenced whether a person buys it. Game mechanics, on the other hand, have had a profound influence. The money that publishers invest in publishing a game has created a very competitive landscape among publishers. If you look at the business today, compared to where it was three or four years ago, it is much harder now for a developer to get his game on a major portal. So higher production costs and the proliferation of games create a high barrier for entry, which is a huge risk for publishers. All of this is taking place as the conversion rates are dropping, and therefore the reward is less.
- Availability. Casual titles are becoming available on more platforms: game consoles such as Xbox, handheld consoles such as Nintendo DS or PSP, and mobile phones. This means more people can access these games more frequently, and it exposes a younger audience to the same titles.
Israely: What kind of new business models can we expect to see in the gaming world?
The dominant model in the casual games industry is what you call "try before you buy." You can try any title you want free of charge, usually for one hour. Afterwards, you have to pay about $20 for the full version of the game. This model was extremely important during the industry’s infancy because it helped build a user base of people who discovered that they enjoyed playing these kinds of computer games. Today, however, conversion rates are nosediving. The percentage of users who buy the full version of an average game has fallen from about 2.5 percent in 2003 to about 0.8 percent today. This is potentially devastating to game publishers, as well as to game portals. The industry is still managing to survive because the audience keeps growing, but this situation will not sustain itself for long. Publishers are frantically seeking better business models that will allow them to better monetize their audience.
Double Trump has a micro-licensing model, where you can play any game you want for as long as you want, and pay only for the time played. In addition, you never pay more than $20 for a title. Once you’ve played the game for long enough to reach the list price, it becomes yours to keep. This has introduced a concept shift for the casual gaming industry. Gamers no longer pay for a title, but rather for value and fun. Their accessibility to titles is much better, since they can play all games, and therefore their willingness to spend money is greater. Micro licensing, which is currently available on PlayOnArcade.com and other sites, has shown both higher conversion rates and higher average revenue per user — more than 2.5 times the ARPU generated by the try & buy model.
Another interesting model is ad-supported game play, where advertisers fund the game play in return for people seeing their ads in natural intervals within the game (e.g. between levels). This model is going to develop further, although it is currently growing slowly because advertising budgets have still not shifted towards games, and ad inventory is not selling fast.
As models evolve, I believe we will see three consumer-paid models: an "all you can eat" subscription model for heavy gamers, microlicensing for the main bulk of gamers, and try & buy that will cater to occasional buyers. In addition, we will see the ad-supported model funding some gaming activity, as well as community-based models along the lines of what Pogo.com is offering.
Israely: Do you see Massive Multiplayer Online Roleplaying Games (MMORPGs), such as World of Warcraft, as a fad or will these games evolve into a solid industry?
This type of game is definitely not a fad. It is already a solid industry. World of Warcraft is an extremely strong title, easily shadowing the success of any of its predecessors, such as Everquest, Ultima Online or Asheron's Call. But it was built on the back of a long list of well-made titles that attracted huge audiences for years. While I do believe that business models will evolve in this area of the market – with maybe some inclination towards item-purchase models instead of or alongside fixed monthly subscription fees – the content side of the market is unquestionably strong and solid.
The major problem with MMORPGs is that they are expensive to produce, so publishers take a huge risk when creating a new one. Maintenance and support is also expensive. On the other hand, these are the "nice problems," the ones that you deal with when your title is already successful. There is also the question of audience. I don't think we will see a very strong MMORPG title that is aimed at older ladies. But, the community side of gaming and leisure is here and will stay.
This article first appeared in the Israel Venture Capital & Private Equity Journal (IVCJ). IVC Research Center publishes the Israel Venture Capital & Private Equity Journal, a quarterly review of trends and developments in the Israeli-related venture capital industry. IVCJ, distributed worldwide, is dedicated to provide wide-range coverage of Israel's venture capital industry. For more information please visit www.ivc-online.com
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