I love to cook. When I graduated from college, my mother bought me a KitchenAid mixer in pistachio green that still resides in my kitchen (and is regularly used for cookies, bread and other treats). I’ve been a Food Network devotee for years. And, I proudly consider myself to be an early adopter in the robust food blog world.

However, even I have been blown away from the recent proliferation of food-related online businesses offering to do everything from sourcing ingredients (Foodzie , Gilt Taste) to suggesting recipes (Foodily, Gojee) to organizing your shopping lists (Tasty Planner) to preparing meals for you (cookitfor.us, Gooble).

Don’t get me wrong; I love searching many of these sites and finding new recipes. In fact, despite my collection of cookbooks ranging from my grandmother’s hand-written recipes to Ferran Adria’s recent book, “The Family Meal,” I rarely open them to use a recipe. I prefer the online process, with more beautiful photos and detailed instructions than any static cookbook (at least that I’ve found) has managed to provide.

However, as a business student, I’m perplexed by the business models of many of these startups. There are natural opportunities to partner with major food companies for sponsored content and other advertising. Allrecipes (a grandfather in the field, having been founded in 1997) has done a good job with sponsored content, weaving company sponsored recipes (e.g., Hunts Lemon Tomato Chicken Pasta) with user-generated recipes for a robust search and suggestion platform. However, Allrecipes, purchased by Reader’s Digest Association in 2006 for $66M was recently put up for sale. My hunch is that the owner, whose print business has struggled in recent years, has likely had trouble monetizing the site beyond limited advertising and sponsorship.

What about other monetization opportunities? There could be a natural affiliate sales commission in selling ingredients for recipes, but I have two problems with this. First, many ingredients are perishable and don’t easily lend themselves to online purchasing and shipping. Secondly, many of the non-perishable ingredients are spices where you pay for a jar that may last for several years.

One area where I think there could be an opportunity is in moving these recipes from online to offline. There are many food bloggers who, having generated a strong following online, are creating an offline persona. Most notably, “Pioneer Woman,” Ree Drummond, turned her Oklahoma-based home cooking blog into a multiline business: her cookbook was at number one on Amazon’s Cooking, Food & Wine category before it debuted, her life story is being made into a movie starring Reese Witherspoon, and she now stars in a Food Network show. Tastebook has tried to systemize the blog to cookbook movement by selling make-your-own cookbooks based on compiling recipes from numerous food blogs and sites. However, as far as I can tell, their business hasn’t done extremely well, with traffic peaking at ~2M monthly visits to fewer than 250K this year.

Tech Cocktail recently suggested that 2011 might be the “year of the recipe.” But even if I wanted home-cooked meals three times a day every day of the year, this would still be only 1,095 meals. Allrecipes.com alone has recipes numbering into the millions. While I’m really interested in this market, unless I go viral as a food blogger, I don’t know exactly what the larger business opportunity means for me. However, it is an area that interests and continues to intrigue me as sites seem to be cloned repeatedly. How many recipes for Chicken Cacciatore do I really need?

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by Cynthia Samanian and Barry Malinowski

ShoeDazzle is a pioneer of sorts in the retail e-commerce space and has achieved impressive results in just a couple years, making it an incredibly interesting company for us to profile. The company boasts over 3 million registered users, 1.5 million “likes” on Facebook, and is shipping more than 150k pairs of shoes each month, which implies annual revenue north of $70 million (up from $25 million in 2010). In addition, the company has raised $60 million of venture capital, the most recent round at a valuation of $280 million.

In this post, we’ll explore ShoeDazzle’s use of the subscription model, assess its growth trajectory through new product lines, and reflect on the company’s influence on the retail e-commerce industry.

About ShoeDazzle
ShoeDazzle was launched in March 2009 and is based in Los Angeles. Co-founders include Brian Lee and celebrity spokesperson Kim Kardashian. Incidentally, Brian Lee co-founded his prior company LegalZoom with another celebrity, Robert Shapiro. ShoeDazzle is one of many recent companies with a laser focus on the female “shopaholic” consumer. More specifically, the typical ShoeDazzle customer might live in one of America’s small towns and be disappointed with the lack of styles offered by the local brick and mortar retailers.

Enter ShoeDazzle. Their idea is to bring the real world boutique experience to the masses via an online environment. When a prospective customer lands on the ShoeDazzle homepage, she is asked to fill out a quick “style quiz” to capture her taste in fashion. After a 24-hour wait that gives the illusion that a real celebrity stylist is hard at work, the customer is invited to view her personalized online showroom, which includes five different pairs of shoes, all ShoeDazzle manufactured and branded. Each shoe costs $39.95, which includes shipping both ways. If nothing appeals to the consumer, she can request alternate selections or “skip” the current month and wait until her showroom is refreshed the following month. The monthly “subscription” kicks in only after the customer’s first purchase. It’s worth noting that only around 5% of ShoeDazzle’s registered users buy in a given month – and a significant portion of registered users have yet to make their first purchase.

A New Twist on an Old Model
Subscription models date back nearly a century to book-of-the-month clubs, and since then have appeared in many forms – e.g. CD-of-the-month clubs, magazine subscriptions, replenishment of staples. While subscription models aren’t inherently bad for consumers, more often than not they’re designed to benefit the company in the form of upfront payment, recurring revenue, predictability of demand, reduced competition, etc.

Women’s shoes seem a reasonable fit for a subscription model given the product seasonality and the stat that that the average woman buys nine pairs of shoes per year. ShoeDazzle has adapted traditional subscription models to make the model more consumer-friendly by eliminating the obligation to buy each month. But there’s a catch… If the customer does not buy or opt out by the fifth day of each month, her credit card is charged $39.95, which can be applied toward future purchases within the next 12 months. This detail benefits the company in several ways. For one, the penalty for not responding results in email open rates that are higher than those for the e-commerce industry. In today’s world of email overload, just getting consumers to read your emails and visit your site is half the battle. The upfront charges that result from failure to buy or opt out benefit the company’s cash flow. Our experience with other opt-out models suggests that these charges could amount to millions of dollars. Finally, the subset of credits that ultimately go unclaimed go straight to the company’s bottom line. This is all well and good for ShoeDazzle so long as consumers continue to put up with it.

The Future Beyond Shoes
Recently, ShoeDazzle has extended their product line to include jewelry and handbags, maintaining the single $39.95 price point. From a consumer perspective, this appears to be a natural set of complements, given that accessories can be styled with shoes. On ShoeDazzle’s end, the hope is that product category expansion leads to a larger share of consumer spend. But the monthly subscription model may be conditioning consumers to buy only one product per month, thereby rendering the accessories substitutes for the shoes. If that’s the case, and we assume margins for handbags and jewelry are equal to shoes, overall company margins will decrease as production scale decreases on each individual product. The company may be best served by adding a higher price tier, especially in light of rising manufacturing costs in China across the board.

Industry Influencer
The emergence of ShoeDazzle copycats such as Just Fabulous and Sole Society is to be expected, but the rise of subscription models in other product categories is more interesting. There’s Birchbox for cosmetic samples, Stitch Fix for women’s clothing, StyleMint for t-shirts, and the list goes on – supposedly the BeachMint founders have  identified over 100 subscription businesses. There are quite a few differences in the models (e.g. private label vs. third-party products, obligation vs. no obligation, monthly vs. quarterly), but we believe it’s only a matter of time before consumers reach subscription overload.

Will the proliferation of subscription models like ShoeDazzle, each with its own rules and obligations, squeeze the fun out of online shopping? Or will this model provide an opportunity for companies to better serve the needs of consumers through personalization and value, in an otherwise crowded marketplace?

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How HTML5 will end platform wars.

“We support two platforms at Apple. Two. The first is HTML5 […] and the second is the AppStore”

–Steve Jobs, WWDC 2010

War of the platforms 1.0

A lot has been written about the “platform wars” between Apple and Microsoft. The quick summary is as follows:

Apple has established the dominant position in mass market personal computing in the 1980s. It has been able to establish this position by integrating its hardware and operating system into a single package – the Macintosh. Popular applications such as VisiCalc, the first spreadsheet software have been created for that platform thus forcing consumers seeking to use those applications to chose the Mac platform over its competitors.

Microsoft chose a different strategy. By licensing its Windows operating system to many hardware manufacturers Microsoft managed to establish a wide hardware footprint, which translated into a larger install base, which in turn made independent software vendors prioritize development of Windows applications over Mac ones. Furthermore, this strategy commoditized the hardware market thus enabling Microsoft to extract tremendous profits from the ecosystem that it nurtured.

In the mid 1990s Apple tried to adopt the Microsoft strategy by licensing its operating system to other hardware manufacturers – the so-called clones. However by that point Microsoft market domination was too large and Apple’s market share continued to slide.

Upon his return to Apple, Steve Jobs quickly killed the clone program and started to gradually rebuild the company by focusing on trendy esthetically appealing computers as well as the Mac OS X, the new operating system. Jobs also took care to make sure that Microsoft will continue developing its Office Suite for Mac.

War of the platforms 2.0

With the introduction of its iPhone, which came with the new operating system iOS, Apple kicked off the post-PC era. Google quickly followed with the Android operating system starting the current platform war for dominance in mobile devices.

Seemingly taking the page out of the Microsoft playbook Google opted to license Android to hardware manufacturers. Google succeeded in getting most major phone and tablet manufacturers to use Android. Today the Android market share exceeds that of iOS. The two companies are competing for developers and independent software vendors. While first-mover advantage allowed Apple to establish a sizable ecosystem, Google is gaining. Majority of popular mobile applications today are available on both iOS and Android.

Adobe Flash

Adobe carved out a niche for its Flash technology. Primarily used for creating rich web-based applications especially those with video, Flash is basically a platform within a platform. An application written in flash will work on Mac, Windows, Solaris and other systems as long as the user has downloaded the Flash player. So by choosing the Flash technology developers don’t have to choose development for Windows versus Mac versus another platform thus diminishing the importance of the operating system as far as flash-based applications are concerned. Adobe in turn is able to sell expensive developer tools, which developers are forced to buy in order to be able to reach the Flash install base.

Apple refused to support Flash on its iOS devices. Adobe accused Apple of stifling cross-platform development, while Apple motivated its lack of support for Flash by purely technological choices (See Steve Jobs’ Thoughts On Flash).

HTML 5 and its long-term impact

HTML 5 is going to allow creation of web-based applications by enabling the browser to run more complex processes such as video rendering, complex data operations and others, in effect making the browser the operating system. Just like with Flash, an application developed for HTML 5 will work on any device that has a browser with HTML 5 support. Unlike Flash however HTML 5 will not be controlled by any one company. It will be a completely open standard meaning that anybody will be able to create an HTML 5 browser and anybody will be able to create an HTML 5 application.

If we assume that majority of software applications will in the future become web-based and if we further assume that HTML 5 will become the dominant platform, that means that the majority of software created in the future will be completely operating-system agnostic. This has two important implications:

1. Because developers won’t be choosing between competing platforms, no company will be able to muscle its way to dominance by aggressively signing on developers.

 2.Because most applications will run on most devices, consumers will not be locked into any specific platform.

This will fundamentally shift competitive dynamics between technology platforms. Instead of competing to establish platform dominance and then protecting that dominance the way Microsoft did in late nineties, competition will increasingly be based on hardware. The role of the hardware operating systems will be to optimize the fundamental hardware characteristics such as battery life and usability. This means that hardware will play a more important role in the competition of technology platforms and will cease to be a commodity.

Steve Jobs’ quote in the beginning of this post as well as the fact that Apple is one of the major contributors to the HTML 5 format, suggests that Apple believes in the above turn of events and prefers competition on hardware to that of competition on third-party software ecosystems.

Google’s recent acquisition of Motorola Mobility suggests that Google too believes that that’s where we are headed. Google understands that it needs to create hardware that’s tightly integrated with software and that will be able to stand on its own in competition with Apple and other hardware manufacturers.

Microsoft is late to the race (again). The company recently introduced its touch operating system – Windows Phone. In its marketing materials Microsoft is touting compatibility with popular Microsoft applications such as Office and Xbox Live. Microsoft is also reaching into its developer community to ensure broader software availability as well as partnering with major hardware manufacturers to produce devices that run on Windows Phone. Microsoft is also investing heavily in Silverlight, a proprietary platform that competes with Flash.

What this all means for consumers?

I think that the consumers will benefit from the new competitive dynamics. By not having to worry about whether a particular device will be able to run our favorite applications we will be a lot more free in choosing which devices to buy. I also believe that smaller device manufacturers will proliferate. Who knows, maybe there’s another Apple in the making.

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Social Commerce is a very hot topic in the tech world at the moment and continues the trend towards the “socialization of the consumer internet”. Every website you see now has some form of social widget that lets you tell your friends which product you “like” and companies increasingly flock to Facebook to directly sell their products via their brand pages (this is also referred to as F-Commerce). While I agree with a previous blog post by Samantha Harrison where she claims “it will be a longtime before we see any real traction on this front”, I do believe that social commerce on the back of your social  / interest graph is the future of shopping online. However we are as of yet only at the very early stages of how this space will look like in a few years.

The core question the industry is grappling with is how to make online shopping sites more intelligent such that they only present you with products that you actually like and are thus more likely to buy. Many existing approaches are trying to leverage your social graph, meaning they establish a link to Facebook to figure out what your friends bought. The Levi’s online store was the first outlet to implement a feature to socialize purchases as can be seen on the screenshot of their campaign below:

Link: http://blog.marcopacifico.com/wp-content/uploads/2010/09/levis-facebook-declare-your-likes-e1289402126156.jpg

While Levi’s is a very powerful example of how a company can leverage social features to personalize your shopping experience, a startup called Hunch (www.hunch.com) goes one step beyond the social graph and actually claims to be able to figure out your “taste graph”. They do it by pulling in data from Facebook but also by asking you a set of targeted questions (which seem random at first) and by using a complex algorithm they claim to be able figure out your product tastes. For example they ask you whether you are a PC or a Mac person and infer a variety of characteristics about your taste profile, (see the Infographic for some cool data on this http://blog.hunch.com/?p=45344)

Using a set of 20+ such questions, Hunch then assigns you a “taste profile” and then recommends you products you might like which actually works surprisingly well. Over time the system actually improves by your activity on the site. They also go one step beyond this which for me truly shows the power of the personalized web – they developed an API that they implemented at 50+ online shops in the US which you can log in using your Hunch account and as a result get a tailored set of product recommendations from that store that fit your individual tastes. They also use that data for birthday gift recommendations for your friends, family, etc. The possibilities in this space are endless. Several other players in this space are the recently funded Pinterest and Svpply which are both online pinboards which are as of yet however not fully dedicated to the e-commerce space.

Hunch and other similar services are a very powerful example of how technology will enable us to tailor our shopping experience according to our individual tastes as well as the tastes of our social connections which will be far superior what current online shops are able to offer. I see a future where you have one highly personalized shopping aggregator which pulls your purchase history, social identity, taste graph, etc together and recommends you products on the basis of these characteristics. Amazon is already at the forefront of this innovation with their product recommendation engine, but so far no central player has emerged that aggregates products across various e-commerce retailers. Will Hunch, Pinterest or Svpply win the race or will it indeed be Facebook via their social shopping storefronts? My bet is with Hunch at the moment due to their advanced algorithm and easy-to-use exportable taste-graph API although their user growth has been pretty slow and Pinterest is emerging rapidly being a well-funded, well connected rival. Exciting times – looking forward to hearing your views.

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Zynga is the talk of the town with the many -ville games they have released, the millions upon millions of cash they are generating, and the looming IPO (Tech Bubble 2.0?). Most people know Zynga as a social gaming company, and we’ve been introduced to its business as such as well in the Online Economy classroom. In reality though, Zynga is a data analytics company masking under the guise of innocent farm animals and cutesy characters.

Of course, underlying it all is a fun game that provides entertainment for users. But the key element of executing a virtual goods based business model and why social games have been so successful is the data the game provides to the developer. They’ve got everything on you – age, how long you’ve been a player, ip address (where you’re located), and the entire history of the evolution of your character within a game. Every item you buy and most actions you take within the game are stored as data and analyzed to the point where the developer can pinpoint you out of all the millions of active players as someone who is likely to buy an item of XYZ color at ABC price presented to you in DEF way. Pretty scary huh?

What this means is that the game developer can customize your user experience in a certain way or price certain items differently, purely based on past behavior. Social games can morph at a moment’s notice to get you to come back to play and pay (if you’re willing to – I should caveat that I have yet to cave and directly purchase virtual currency). This, alongside the reality that this business model allows for ultimate pricing discrimination (you pay as much as you’re willing to) and instant evaluation of virality mechanics (ex. annoying wall posts), makes for a great business, and Zynga has shown us how successful you can be with this winning formula.

At my summer experience in my modest sized video game company HQ’d in Iceland (I definitely recommend a trip there in the summer), this was one of the challenges we faced in transitioning to a virtual goods based business model with our upcoming game DUST 514 (www.dust514.com), which will be the company’s first foray into a VG based game. We needed to identify the data we wanted to track, build in the data hooks in order to be able to retrieve the data, then be able to output stats that were manipulate-able to be able to analyze it and build a story around what it explains about player behavior and preferences.

But this is an iterative process, as it certainly must have been and is at Zynga. My company and many others have just begun, and are realizing how even little data can inform you so much about the good and bad of your game design. But with every new game, there are different metrics you must watch and act upon. With every new issue, the symptoms that show up in the metrics can be different, and it is up to the product managers and stats folks to determine what is the true underlying cause of a problem (ex. decrease in active users), to be able to accurately determine the corrective course of action.

The power of data and understanding your players or users better than the person understands themselves is the ultimate power an internet business enables. Google, Amazon.com, and Sermo are no different in harnessing the data that comes out of the activity on their sites and using it to drive decisions and improvements every day to make their business even more effective. Add social game companies to that list, and it would be incredible to see how other industries are transformed by the ability to collect and analyze data like never before.

A couple of sites that may be of interest on the topic:

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