RSA Homes is a Miserable Failure.

There is an interesting story today about a home builder, RSA Homes, that got a bad writeup in the online watchdog site "Rip Off Report".  Turns out that when people searched Google for RSA Homes, the complaint filed with the "Rip Off Report" was showing right under the company’s own site.  Unhappy with this exposure, the firm took the unwise step of suing Google and the "Rip Off Report" in what is probably a baseless suit.

The irony is that by suing, they were covered by the media, and blogs much more widely read than this one.  This in turn is creating more and more news around the topic, thereby increasing the PageRank of this story, keeping their brand name in hot water for a long time to come.  Sort of an unintended "suicide" Google Bomb, if I may make a very crass analogy.  (Check out a Google search for "RSA Homes"  as it appears right now.)

For every web action, there is sometimes an unequal and quite opposite effect.  Perhaps RSA Homes should just change their name to Nigritude Ultramarine, or Miserable Failure.

BigOven Widget

One of the new things on the web these days are "Widgets", little panels or gadgets that expose some data from the site to other users.  One of their purposes is to let users easily share data to them.  For instance, My BigOven widget gives you access to the recipes I’ve taken the time to rate, the recipes I’ve posted, my all-time favorite recipes (at least those that are on BigOven), and my "Try Soon" queue.  In other words, you can have a look at what I’m going to be eating soon…

You Go, Jerry. Life is short. Be Noble.

Delta Airlines CEO Gerald (Jerry) Grinstein of Delta announced on Tuesday that when Delta emerges from its wrenching bankruptcy period, he will forgo all additional compensation or payouts beyond his normal salary (approximately $330,000/year, a pittance for a Fortune 500 CEO).

"Instead, Delta’s plan calls for the distribution of an estimated $995 million to about 39,000 nonunionized employees and 1,000 managers within 12 to 14 months of the company’s exit from bankruptcy proceedings." — Wall Street Journal

Typically, bankruptcy plans provide a  considerable compensation for the CEO and senior leadership, ostensibly to keep them motivated to see it through during difficult times.  This plunder is, in part, what attracts many leadership "superstars" (at least on paper) to the turnaround world, but it seems wrong to me — particularly unfair to the firm’s employees and investors who’ve suffered even more.  Regardless, because it’s common practice, my guess is the press and most investors probably would have shrugged their shoulders if he and the board carved a multi-million dollar package and doled it out in the spring when they emerge from bankruptcy.

But that wasn’t something Jerry wanted.  Delta, like all other major US carriers, had wrung some hard-fought concessions from pilot, flight attendant and mechanic unions.  They also fought off hostile acquisitions from US Air, and wrestled with major increases in fuel cost, not to mention the security fallout from 9/11.  I guess Jerry just didn’t find it right for him to benefit beyond the emotional payoff of a job well done.  I wholeheartedly applaud him, and agree.

There’s a personal angle to this story beyond just Jerry as a role model for nobility in business.  I had the great pleasure of having Jerry Grinstein on my board of directors at VacationSpot.com.  He came to us as representative of Madrona Venture Group, the first venture firm to invest in VacationSpot.com, and served a little more than a year.  I was constantly impressed by his wisdom and integrity, which is especially evident because of the context in which he served (the go-go-Internet year of 1999).   I remember him as the kind of guy that listens 99% of the time, speaks less than 1% of the time, and you’ll always learn something important and new with that 1%; it’s always pithy and well-considered.   In one offline exchange, I remember Jerry being openly critical of various revenue swap schemes going on at various Internet firms like AOL more than a year before they were broadly considered sketchy.

If there were annual awards for nobility in business (and why aren’t there?) I’d nominate Gerald Grinstein for this year’s award. 

Microsoft Gets It, at least XBox Live

How often have you read "Microsoft Gets It" in the technology press?  Well, they’re writing that about Xbox Live.  Microsoft is currently out-innovating and outselling Sony and Nintendo (and hell, even Apple) in this field of connected entertainment.

While I didn’t ever directly work on Xbox live, I feel like a founding father of sorts.  I have the great honor of founding Microsoft’s internet gaming effort in early 1996, and I planted many of the seeds for what would become Xbox Live.  The Internet Gaming team that I formed and led created Microsoft’s first matchmaking meeting space on the Internet, and introduced all of Microsoft’s v1.0 concepts around online matchmaking, score-management, online chat, tournament play, avatars and more, all more than a decade ago.  This gave Microsoft a terrific head-start in both operational knowledge and design knowledge, which I think has been pretty helpful in delivering its next-generation Xbox Live.

The story’s a long one, but I’ll try to make it brief.

I joined the games group in late 1995 from the CD-ROM division at Microsoft.  I’m not too much of a gamer, but I was very interested making a career transition from marketing to being more central to technology planning and development.  That is, in Microsoft-speak, moving from a lead product planning role to a group program management role.  The opportunity arose in Games, and I thought there were some interesting technical challenges there, and that I could both learn, and try to contribute there.  I also thought that games might be a great mixture of Hollywood and Silicon Valley.  That part was all true.  But it didn’t make me a gamer.  To this day, I’ve never owned a game console, and I hope to keep it that way, much as I enjoy playing them.

When I joined the games group, it was a very opportunistic set of products (MS Golf, Flight Simulator, and a pretty mediocre game for Windows 95 that was being worked on called "Hover", as well as an online Chess game being written for the non-TCP/IP, proprietary MSN 1.0 platform.)  Then there were the joint venture activities with Dreamworks SKG/Dreamworks Interactive.  Quite frankly, it all struck me as a pretty haphazard bunch of unrelated projects. 

The FlightSim group was generating strong and consistent revenue growth, and the games GM at the time had a strong plan to bring the third-party developers behind FlightSim and Golf in-house.  Good call.  As 1996 continued, I was struck by how the Internet could be used to create a matchmaking ground, and perhaps could be used to bring some unity and coherence to the titles.

When Bill Gates’ "Internet Tidal Wave" (.PDF) memo came out in May of 1996, it was a defining moment in the company, and each of us in our groups thought long and hard about what the Internet meant for our businesses.

At the time, I was a lead program manager for the Action & Strategy products at Microsoft (Fury3, Age of Empires, Close Combat and a few other titles).  I wrote a paper summarizing where I thought Microsoft should go in online gaming, and it quickly got Bill’s attention, as well as Rick Rashid, Patty Stonesifer, Nathan Mhyrvold and others in the company. 

I felt strongly that an online gaming platform was needed that provided matchmaking services, a place for people to meet to start games, avatars (later called "GamerTags"), share scores, and socialize.  I wrote that it was inevitable that whoever built such a place could monetize the platform through advertising, subscription revenues and add-on sales (both of entire games — download to purchase — as well as game add-ons).  Low-latency gaming was also something we looked at, but eventually decided against building (or acquiring) a large network.

This period of my life also included the single worst business meeting of my life.

Now, through my seven years at Microsoft, I was fortunate enough to participate in dozen or so meetings with Bill Gates.  And despite the reputation that Bill and Steve Ballmer both have in being difficult and abrasive in meetings sometimes, I can report that every single one of them was a very positive experience. 

However, my absolute low-point ever at Microsoft was when Nathan Mhyrvold, then leading advanced research activities for the company, stopped by to hear a presentation about our online games strategy.  Nathan has a well-earned reputation for sparks of sheer brilliance, but sometimes obtuse comments and just plain wrong-headedness.  For instance, there is a famous email exchange in which Mhyrvold tries to tank one effort inside Microsoft because, economically, it was based on taking a "vig" on each transaction, and that "no one can sustain a margin with that kind of business".  Far better, he argued, was investing heavily to create original content, like Disney.  The two products he was comparing?  Well, the one he wanted to kill became Expedia (built on transactions, later to go on to create over $8 billion in market cap and establish clear leadership in the online travel world), and the one he was championing was Slate (a noteworthy, perhaps even notable effort still but struggling to deliver a solid ROI). 

One former senior Microsoft executive summarized Mhyrvold this way: "Meeting with Nathan is just like smoking pot.  When you’re in it, you feel really smart, but at the end, you sometimes don’t really know what was said."

Back to my meeting with Nathan in the spring of ’96.  I had been on the job of building the online games business for Microsoft for only a couple weeks, and admittedly, I was still struggling for the right metaphor for the business model that would emerge.  I stumbled through a few points, drawing an analogy between what we were trying to build and increasingly narrowcast television channels — one for casual games, one for action games, etc.  The strategy was to build a platform where people can meet each other to play games, upload high scores, exchange voice chat, buy game add-ons, etc.   Mhyrvold peppered me with a few questions, several of which I didn’t even understand.  He later wrote a blistering memo (published to the whole company) about how group managers need to be better prepared, and drew on several incidents from that infamous meeting.   

I feel less bad about my performance, and was buoyed by Bill Gates’ comments to me at the end of a product review just six months later on the Internet gaming effort that Microsoft’s purchase of Electric Gravity was extremely inexpensive compared to what we got out of it.  Bill said it was a great purchase, perhaps one of Microsoft’s best in terms of Return on Investment, and I agree.  (I’m not at liberty to disclose what we paid for our purchase, but it pales in comparison to nearly all other Microsoft buyouts.)

Today, thanks to the great creative team that build it, the MSN Gaming Zone is the Internet’s largest place to play games, and a strategic asset for Microsoft that will allow it to extend into the living room.  I saw Charlotte Guyman (the former VP that I reported into for a few years at MSFT) at a coffee shop recently, and she told my wife, who she had met for the first time, that I was the guy who "saved Microsoft’s games group".  That’s a huge complement, but also I fear a huge exaggeration.  I definitely think I put some significant english on the ball at a critical time, but I wasn’t the prime player.  I do think I helped Microsoft think much more strategically about games, publishing, and developer relations, however, as well as lay out a solid version 1.0 effort in what would soon become the largest online game site in the world.  I did this primarily by pointing out some pretty obvious conclusions about how platforms play to Microsoft’s strengths, and Microsoft needed to either create a comprehensive platform for gaming, or exit the business.  Luckily for all of us, they chose the former.

The Arena* project that I led with a team of people from ’95-97 established many of the key platform and matchmaking concepts that have now been implemented and improved in XBox Live.  And I’m extremely gratified by the sense that in this area at least, the press is starting to recognize that Microsoft Gets It.  I’d argue that in online gaming, Microsoft gets it better than any other entity in the world.  Better than Sony, Apple, Linux, and all the other albatrosses Microsoft has had to tackle from a standing start.   XBox Live is laying a foundation for many more important services to come.

So, in addition to trying to set the record straight, I guess the purpose of my post is — don’t let people’s reputation or negative feedback sway you.  Sometimes, they’re just plain wrong and don’t have the full context.  Make it happen.

*"Arena" was the codename we coined  in 1995 for this project (it’s a place people go to play and watch games).  Arena launched as the "Internet Gaming Zone" in 1996.  The Zone was the first Web-based multiplayer matchmaking space, and now has millions of players from around the world.

Chris Caposella on your TV again, this time on his own terms.

The last time you saw my good friend Chris Caposella, it was the infamous Windows 98 beta demonstration with Bill Gates, below.   He had two minutes of literally worldwide fame, with the video appearing on CNN, ABCNews, CBS, NBC, BBC and many more networks. 

Say what you will about Microsoft; I’m obviously a pretty biased observer.

Chris himself is one of the brightest, funniest, most capable, yet sincerely modest guys I’ve ever had the pleasure of knowing.  He and I worked together for a couple years in the relational database group (Access, FoxPro) at Microsoft, and it was a real pleasure.  Smart guy; many laughs.  I think we even started at Microsoft in the exact same month and year (July of ’91).  I left Microsoft in 1997; he didn’t, and he’s now running the Office group at Microsoft as Corporate VP.  Here he is again with some great insights on business, with his usual modest aplomb, in a recent hour-long interview on the University of Washington’s TV channel. 

Google releases Pay-Per-Action!

Google just released Pay Per Action, a major addition to their previous "Pay per click" model. 

PPA could have some significant, and positive applications for us at BigOven.com, Escapia.com and AdventureCentral.com, much more so than pay-per-click (PPC).  Though I’ve not yet tried it, in theory, this finally lets us bid much closer to our marginal profit for various actions, rather than just a lesser sum for a substantially lower-qualified audience. 

Queue, stage-right: precision.  Finally.  More on this later.

An Insider’s View of Sidewalk.com’s Rise and Sale

My friend Dave Chase has posted a great recap of Sidewalk.com’s rise and fall.  If you are interested in the Internet, Microsoft, or entrepreneurship in general, it’s well worth a read. 

On reflection, it’s fascinating to me how a company that is ostensibly very analytical in its decisionmaking (Microsoft) often ultimately makes major decisions based on product champions and forces of personality. (Or, regrettably sometimes, lack thereof.)

The Coming Demise of Vertical Online Classified Directories

A very popular (and heretofore viable) business model for the web from 1995 through today has been the "Classified Advertising" style model.  Here are the basic steps:

  • Pick a vertical where the search experience isn’t good, complete, or rich enough.  Ideally, it’s a niche where the things the Web does well add considerable value over offline substitutes.  (For instance, photos, ratings, sharing, audio, video, community, broad geographic reach, 24×7 access, dynamic pricing, interactivity — if these attributes add significant value to the experience, so much the better.)   Second, ideally, it’s a niche where the advertisers/sellers are willing to pay to get exposure.  Third, ideally, it’s a niche that has a very poor search experience due to fragmentation.
  • Create a data-driven website that welcomes all listers in your directory
  • Let them search by various criteria
  • Implement a pay-per-month or pay-per-year subscription model, perhaps a freemium model, to build out a directory.
  • Work feverishly on search engine presence.  It’s probably your bread and butter.
  • Build a brand to drive consumers to your slice of the market.  Be remarkable enough that current customers remember you as a better search experience and spread the word to others.

This is a perfectly fine business model if you started in the years 1995-2006.  In fact, I started such a business, VacationSpot.com, that did very well using this exact approach.

Started in my second bedroom in 1997 with just $250,000 in initial capital, we focused on building the world’s most complete vertical directory of vacation rentals — villas, condos, cabins, etc.  Our primary source of revenue was in selling monthly and annual listings to property owners and managers.  Our secondary source of revenue was booking services, through proprietary reservation systems we were building for clients.

We acquired five companies, raised $13 million and sold the company to Expedia just three years later for about $90 million in Expedia stock.  Now, VacationSpot.com had about $11 million in the bank at the time it was sold, and it was roughly breakeven on the classified advertising part of the business, while the transaction side of the business was still very much in "investment mode".  Expedia went on to more-than quintuple its stock price over the ensuing five years, providing a solid positive return to all investors, and an astonishing 2000%+ ROI for the earliest investors over a 7 year period, thanks largely to Expedia’s meteoric market-cap growth from around $900 million in 2000 to over $8 billion in adjusted market cap by 2007.   

Times have changed… somewhat.  If you’re in 2007, and you’ve got a relatively static classified-ad-driven business that is dependent upon search engine presence and annual listing fees, consider ringing the cash register now.  Because the game that you’ve optimized your business for is about to change.

The good news is that it’s not too late to sell.  Venture investors are still forking over great sums for classified-ad-style businesses, ones that I consider to be far easier to create (and far more sensitive to the whims of search engine giants) than supplier-technology plays like Escapia and Adventure Central (Fair disclosure — I’m Chairman of the former, Director of the latter.)

At VacationSpot.com, we were working on both types of projects — the consumer-facing classified-style directory and the back-end software.  Time and time again, we saw outside investors relating to what consumers see, and what was generating our current revenue — the listings site — and downplaying or ignoring the far harder, but far-more-strategically-important (IMO) back-end reservation platform that was underway.  In 1997, most of our property managers used dialup at best to reach the Internet, and we were handicapped greatly by this lack of broadband penetration.  And quite frankly, our technology solution just wasn’t as robust, complete, or high-quality as we needed to fully satisfy in that area — it required dual entry of reservations, since it served as an adjunct to their reservation desk.  It was an "Extranet", and often fell out of synch with the true state of the world.

In 2007, there are still many classified players out there building presently-strong businesses with this model:  HomeAway.com, YachtWorld.com, and RentClicks are just a few of them.  They have nice cashflow, (apparently) nice repeat listing business, and growing search engine presence.  What’s not to like?

In fact, HomeAway.com was the single largest venture deal done in 2006.  HomeAway is VacationSpot.com 2.0 — it’s a rollup of several classified advertising directories in the vacation rental space, offering marketing/listing/search-engine-presence services largely for the rent-by-owner market.  HomeAway’s most recent financing was on an eye-popping valuation north of $300 million.  Sure, the classified advertising has historically generated nice cashflow, and you can talk yourself into that business recurring well into the future.  But consider what happens whent the search engines change the game.   And they will. 

Another tact here — compare the $18 billion spent by consumers renting vacation homes every year with the estimated 5-10% of that which is spent advertising vacation homes.  Which is likely to grow faster — advertising spend on the Internet, or vacation rental bookings on the Internet?  I believe the first dollars to move to the Internet were the ad dollars, and transaction dollars are now following.

Most scarily for the classified ad players, the search engine players are working feverishly to structure their underlying data, and structure the search.  In other words, they are prepping today to pick off the classified categories, vertical-by-vertical.

Consider this:  Google, Yahoo, MSN and others are reaching the end of their first-generation approach, and the next generation will include support for increasingly structured searches.  In v1.0, search engines intelligently analyze the world’s HTML pages, the pages that link to them, the relative quality of linking, etc. to come up with terrific URL’s for you to look at when you type in various text in the search box. 

But I think what people really want when they go to Google and type in, say, "Maui condo for rent" is actually a list of Maui condos to look at, with narrow-down tools that ask the major-filter questions like "When do you want to go?", "How much do you want to spend?", and "A/C?  Pool?  Beachside?"  etc., together with photos and relevant listings in-situ.  The search engines are structuring data and structuring search in search’s next generation.  You can see it today on Google when you type in "San Francisco real estate", or "Seattle rental home". 

Where does that leave the classified advertising players, whose business models are predicated upon the fact that they provide a better search experience because they are domain-specific?

In the travel category, the reason I’m involved with companies like Seattle’s Escapia Inc. and Adventure Central Inc. is that I firmly believe that the future bodes well for those infrastructure providers that can accurately answer the questions:

  • "What is available that meets my criteria for the following date range?"
  • "How much is it?"

The classifed-advertising players are ultimately on Google, Google Base, Craigslist, Yahoo, and MSN’s railroad tracks.

I’ll leave you with this exercise:

  • Take any city pair, let’s say "Boston Seattle", and type it into Google
  • Notice what you get on the page that Google returns.
  • In your mind, fast-forward the videotape 3 years.
  • What do you get?  Where does the data come from that shows up on your "optimal result page" for searches like "spring break Maui condo"?  Who owns the most valuable asset in that future world — is it the classified advertising players, or the suppliers who can truly answer the question from an original-source standpoint?

Further reading:  "Google’s Structured Data Play"