Monday, March 28, 2011

Making Money on the Internet

The recent $315-million acquisition of The Huffington Post and the $75-million or so spent on AOL’s hyper-local platform aren’t the only big bets that the media company is making According to a cover story in the latest issue of The Hollywood Reporter, the one-time web portal is also putting some big money down in Tinseltown, where CEO Tim Armstrong has been signing content deals with celebrities such as former supermodel Heidi Klum, singer Queen Latifah and the musical group The Jonas Brothers. In some ways, it appears AOL’s new “content farm” ambitions are designed in part to produce content that can be wrapped around big Hollywood brands. But can this strategy produce enough financial bang to make a difference to a fading giant like AOL?

In the case of Klum and Latifah, the deals with AOL involve websites and content produced by the stars’ production companies, but AOL is going to be helping generate content — including web-based video shows — and promoting the sites through its network as well. According to The Hollywood Reporter, these types of deals involve AOL putting up between $1 million and $10 million per project (some of which comes from advertisers that the company lines up). According to Hollywood sources quoted by the magazine, those kinds of dollars look pretty good compared to what cable networks can offer.

Armstrong suggests that some of the content for these sites will be generated by other parts of AOL, including its Demand Media-style “content farm,” whose approach was described in a leaked memo recently entitled “The AOL Way.” The AOL chief executive told the magazine that “the system that we’ve been building — which the press has taken to calling a content farm — is simply a platform,” and gave an example where Klum might decide to produce a video about making jewelry, and the AOL platform could then generate information and other content about how jewelry is made. Armstrong made it clear that he thinks content is the future of the Internet:

The first phase of the Internet was about access, and I believe AOL was the biggest player in that phase. Then the next phase has really been about the platform, so you’ve seen Apple, Google and Facebook there. But the phase after this is going to be more of the Hollywood phase, where it’s about content, creativity and really putting a human face on the Internet.

In addition to using its content farm to generate material to wrap around these celebrity sites, AOL also used its own internal research to decide which celebrities to approach. According to The Hollywood Reporter piece, the company only took its “Planet Heidi” idea to the supermodel after its algorithmically-generated “quality score” showed that Klum was influential on topics like parenting, fashion and style — all of which appeal to the female demographic that Armstrong wants to focus AOL’s content on — and after Johnson & Johnson and Procter & Gamble had signed on.

The big question, of course, is whether this Hollywood strategy is going to produce enough revenue to make a difference for AOL, a company that is still in fairly precarious financial shape: in the final quarter of last year, for example, revenue sank by 26 percent and advertising revenue fell by almost 30 percent.

As I’ve written before, AOL is like a train running down a track that is disintegrating rapidly underneath it. That track is the dial-up access business, which still produces gigantic amounts of revenue — close to 40 percent of the company’s total — but is declining at a rapid rate. What Armstrong is trying to do is to build new businesses that have the ability to generate similar kinds of revenue, which amounts to laying new tracks quickly enough that the train doesn’t go hurtling into an abyss. The launch of Patch was one such attempt, and the acquisition of The Huffington Post was another.

The purchase of Arianna Huffington’s content-aggregation business is part of the same strategy that has taken AOL into the celebrity circus of Hollywood. One of the things the web giant has lacked on the content side is identifiable personalities, and that is clearly something the Huffington Post founder brings to the table. Huffington’s site started as a collection of blogs written by famous people from various walks of life who were drawn together by their friendships with Huffington herself, and celebrities continue to make use of the site as a personal blogging platform when they have a cause they want to push.

Huffington, who is now in charge of all AOL’s editorial content, is also in charge of the Hollywood operation. All she has to do now is turn all those celebrity websites into cold hard cash for her new boss before AOL runs out of track.

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Post and thumbnail courtesy of Flickr user Zert Sonstige

With the rapid pace of events on the web and the information revolution sparked by the Internet, it’s very easy for the technology industry to think it’s unique: constantly breaking new ground and doing things that nobody has ever done before.

But there are other sorts of business that have already undergone some of the same radical shifts, and have just as great a stake in the future.

Take healthcare, for instance.

We often think of it as a huge, lumbering beast, but in truth, medicine has undergone a series of revolutions in the past 200 years that are at least equal to those we see in technology and information.

The first stirrings of modern chemistry and biology were only just beginning in the 19th century, but by 1967, Christiaan Barnard started transplanting hearts. Similarly, it was only in the 1950s Watson and Crick discovered DNA. Less than 50 years later, the first draft of the human genome was produced. If that’s not rapid, world-shattering change, then what is?

Pharma has also faced other challenges the web industry is only now starting to realize. Products are slow to make, and drugs can take years to design, test and manufacture. Accordingly, R&D spending in pharmaceuticals is very high overall; according to the European Union (PDF), five of the world’s top 10 companies by R&D spend are in drugs or biotechnology (among traditional technology companies, only Microsoft, Nokia and Samsung feature in the list). And it’s a far greater proportion of total turnover (Pfizer spends around one seventh of revenues on research, Apple spends around one dollar on R&D for every 13 it brings in).

And where the planet’s electronics giants spend billions attempting to end piracy and patent infringement, pharmaceutical companies are rapidly adjusting to the fact that they only get 12 years before patent protection ends and other companies can introduce generic drugs. Imagine a situation where Windows 98 was already old enough to be forcibly open-sourced, and you get the idea of how disruptive that might be.

So, what does the pharmaceutical industry have to teach us?

First, be careful. Your property and ideas won’t be yours for long.

Second, while new discoveries are important, revolutions can be reliably predicted, most of the time. From the outside, Barnard’s transplants were a radical shift in surgery. From inside the profession, it was the next obvious step after previous organ transplants.

Third, the way money is being spent will inevitably change. It’s already happening: an issue addressed by the latest VC bulletin from Go4Venture, a London-based advisory group for European entrepreneurs and investors (you can sign up here). Their latest dispatch outlines the state of deal-making in Europe (more of them, but less valuable, as reflected in figures we wrote about last month), and they also point out Europe’s technology financing system is undergoing a significant shift:

[there is a] major structural change in European venture capital financing where corporates will play a more prominent role going forward. Corporates are facing a lasting ex-growth market environment (courtesy of debt-laden Western economies) and realise that internal R&D is rather expensive and just cannot cover the whole front of innovation.

For corporates, investing in start-ups has the added advantage of encouraging a more entrepreneurial culture inside and creating a stream of acquisition opportunities.

Pharma has been there before, in an early move precipitated by proprietary drugs coming off patent, and we are now seeing the pharma model spreading to other IP-driven sectors.

Spending more of the R&D budget on other companies doesn’t just mean acquisition, of course — although the startup world is very familiar with the process and it’s clearly the most common option. Just yesterday, Google spent $60 million making the slightly odd move to buy British price comparison website BeatThatQuote. It could also mean more early investment in small companies, like the $100,000 Microsoft is putting into Moscow-based anti-piracy startup Pirate Pay.

But what it does mean is, ultimately, the growth in the number of deals we’re seeing is going to get faster, and there will be more opportunities for innovative startups and smart entrepreneurs. Twinned with the aggressive, high valuation investing strategy of a company like Russia’s Digital Sky Technologies, it seems more likely than not we’ll see things explode, in Europe and elsewhere, over the next year or two.

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