Zero is the Magic Number

Back in 2010 Facebook announced the creation of Facebook Zero a text based “light-weight” version of Facebook that carriers would offer subscribers for free. At first this may seem odd and pointless given Facebook’s focus on pictures; however, upon closer inspection it is clear that this was an important strategic creation to help Facebook permeate mobile phones as extensively as possible. It also would prove to be a great strategy for mobile carriers in developing markets trying to encourage internet usage and spread the use of mobile phones.

Now this was a smart move for Facebook when we consider the fact that the majority of the planet that own mobile devices do not own smart phones and/or live in countries where they cannot get or afford “data plans” such as the ones we enjoy in the Western world. By creating this product Facebook made themselves accessible to every possible individual who at a WAP (Wireless Application Protocol) mobile phone. In Africa this resulted in a 165% increase in users after the introduction of Facebook Zero. In a continent where almost 100% of internet access is via mobile phones Facebook has created a very strong position for itself.

For carriers having Facebook and its inherent viral nature available on every devices encourages active phone use which may start as just zero data text but could eventually lead to users accessing photos and spending more money on data. Also the ability to keep in touch with people in your network through Facebook could encourage more mobile phone adoption.

A close friend of mine who worked for Google in South Africa found one of their greatest difficulties to be getting people to use Google and for small business owners to create their own websites. The rationale that many people had was that they had a Facebook page why would they need anything else? Facebook has essentially made itself the portal to the internet to the developing world in the same way as the Western world views Google as our portal to the internet. Gaining adoption has proven difficult for Google and without a strategy like Facebook Zero they may be too late to gain significant traction.

Facebook’s strategy is now being adopted by others with Wikipedia looking to create a Wiki Zero for the developing world. As we see more and more companies cater to the larger and poorer developing markets it is interesting to think about how these companies can target gain traction and eventually monetize these user. Facebook is obviously using Facebook Zero as a long-term strategy to become synonymous with the internet in developing markets so that as these nations rise out of poverty the users will eventually be able to afford to pay for data thus allowing Facebook to start making money off of ads. Until then it seems clear that Zero is the magic number needed create a user base in poor developing countries.

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Tech valuations and what we (think) we know about finance

‘Revenue and profits are overrated’.

This was my first though when I read about Twitter’s $11B company valuation. While most public companies struggle with quarterly earnings announcements, the tech company seemed to be ‘undervalued’ according to the market [1]– quite surprising considering that it reported net losses of $ 133M last quarter. Yet, once the company goes public, it will be more valuable than Yahoo and AOL.

So, what makes this business model so different from other tech companies? At the time of their IPO’s, both Google and Facebook recorded revenues in the billions and posted net profits – a good indicator of a ‘proven’ business model: millions of users visited the sites every day and advertisers found them to be a good way to reach their target customers. Although they had high customer acquisition costs, experienced rapid growth and spent significant amounts of money in R&D, both companies were capable of monetizing their business models, while raising switching costs and acquiring potential competitors.

Twitter’s business model

Twitter –with more than 200 million monthly active users (MAU) – is one of the most popular social media platforms in the USA. It has proven its mobilization strategies and succeeded to become a prominent player in the tech scene. Yet, its monetization strategy is not clear and the outlook is not positive. If we divide the quarterly loss by the MAU, Twitter is losing roughly $0.60 per user per quarter.

Let’s assume that this incorporates high initial R&D expenditures and customer acquisitions costs. Assuming each user’s lifetime value is higher than the acquisition cost, the company would be creating value, either by charging the user or attracting more advertisers. Is Twitter capable of doing so? Not so clear.

Twitter’s monetization strategy and how it should be valued

Charging customer for what is now a free service would discourage usage, reduce MAU and allow the appearance of new, free competitors. In the end, it would destroy its mobilization strategy and undermine its company mission (‘to give everyone the power to create and share ideas and information instantly without barriers’ [2]).

Increasing advertising will also prove difficult. Advertisers prefer Facebook — with its wider user base and international presence—as its default social media platform. Twitter has to prove that it can help advertisers convert users into clicks (and sales), and that the additional ‘cost’ of advertising for users (in terms of experience and convenience) is bearable. Also, Twitter will have to prove it has a successful model for mobile advertising, a historical tough ad medium.

Is Twitter worth $11 billion? Maybe. However, the most important question is how investors value companies that have no proven monetization strategy (or even no revenue at all) in a context of low interest rates. Are we headed into a new dot-com bubble? Time will tell. In the meantime, with a valuation of $80M per each one of the 140 characters, Twitter is the proof that revenues and profit are overrated.




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This week eBay announced that it is acquiring Shutl, a London-based start-up that provides same-day delivery of goods available at local retailers [1]. Shutl already serves most of the UK and is planning to offer same day delivery in 20 major U.S. cities [2]. Shutl uses a different model from eBay’s instant delivery service, eBay Now, available in San Francisco, New York City, and Chicago [3]. eBay Now deliveries are handled by eBay employees, who pick up goods from local retailers and deliver them to eBay customers [4]. On the other hand, Shutl uses its technology to link up with local retailers and third party couriers to fulfill orders. This is a lower cost and more scalable model because it locates couriers already operating with extra capacity.

Finding a way to economically scale up same day delivery is a timely and strategic move for eBay. eBay’s competitors are investing heavily in what I call “NowCommerce” – online retailing of goods that can be delivered to customers within hours.

Some might not consider Walmart to be one of eBay’s closest competitors, but if you take a look at Walmart’s recent technology investments, Walmart is clearly investing for an increasingly competitive battle with eCommerce giants Amazon and eBay. For example, Walmart is opening another Silicon Valley office this fall [5]. In 2012, Walmart launched Walmart To Go, a same day delivery service delivering items available in Walmart stores to customers in San Jose, San Francisco, Northern Virginia, Philadelphia, Minneapolis, and Denver [6].  Walmart’s footprint of 4,100 stores within five miles of two-thirds of the U.S. population creates a huge NowCommerce opportunity for Walmart [7]. With the acquisition of Shutl, eBay can better compete with Walmart on same day delivery. Shutl already operates in 50 towns in the UK, indicating eBay will be able to expand NowCommerce well beyond cities like San Francisco in the U.S. [8].

Unlike Walmart’s store-based strategy for same day delivery and eBay’s partner-based strategy, Amazon is enhancing its same day delivery capability by investing in new and improved distribution centers around the country. Amazon currently offers same day delivery on items in local warehouses through Amazon Local Express Delivery, available in Baltimore, Boston, Chicago, Indianapolis, Las Vegas, New York City, Philadelphia, Phoenix, San Bernardino, Seattle and Washington, D.C. [9]. Amazon is building more warehouses close to its customers, including giant warehouses one to two hours from San Francisco and Los Angeles [10]. With more of Amazon’s world-class fulfillment centers located closer to customers’ homes, Amazon may be able to compete with Walmart and eBay’s same day delivery offerings.

So when will same day (or same hour) delivery of mass market goods be available in cities across the U.S.? This week’s acquisition will certainly heat up the race between Amazon, eBay, and Walmart to be your destination for items you want delivered as quickly as possible.












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The Story of TripAdvisor

In an unassuming building in Newton, Massachusetts, the team at TripAdvisor is working hard on perfecting the updates to the code to be released on Monday. “Speed wins,” the sign on CEO Steve Kaufer’s door reads. Even now, the $11 billion company still strives to retain a start-up’s sense of urgency and a culture of modesty that speaks much to its founding.

Establishing TripAdvisor

As recounted by Kaufer, the original business model for TripAdvisor was to be a white label search engine for web portals to the likes of Lycos and AOL. The company initially hired editors to comb through archives of professional travel articles on content provider websites, such as The New York Times, in an effort to sell this database on a per query basis. The value proposition was to provide high quality, curated content that would be, as Kaufer had hoped, costly to replicate.

Yet a year and a half later, TripAdvisor had only closed one licensing deal with Lycos. As it turned out, popular web portals and Kaufer’s team fundamentally disagreed on who should be the one to pay. Like many innovative start-ups with unproven standalone value, TripAdvisor was fighting the age-old problem of, “We seem to be doing OK without [your product]. Why do I have to pay you for it?” Then, unimaginably, 9/11 hit and the entire travel industry grinded to a halt.

In the midst of despair, Kaufer noticed that the demo site was picking up traffic. Desperate to monetize, the team experimented with a number of advertising methods and finally settled on a cost-per-click model similar to Google’s search ads. In a way, TripAdvisor benefited from its position at the nexus of an extremely valuable user base – those with high purchase intent for relatively high priced services – and the hospitality industry’s low marginal cost economics. Then, in a serendipitous move, TripAdvisor added a button that allowed users to provide their own reviews. To the founding team’s surprise, user-generated content expanded exponentially, quickly replacing the edited content on which TripAdvisor had sought to establish itself.

Scaling Traffic via SEO

With the rapid growth of user reviews, a number of complementary effects took over. Unsurprisingly, TripAdvisor relies heavily on Google to bring in traffic, and thanks to its remarkable SEO [search engine optimization] strategy, TripAdvisor manages to show up – front and center – on just about every travel-related search. This is no coincidence. The team at TripAdvisor has made a number of highly effective choices that have helped the destination site retain its top position in the industry.

First, TripAdvisor’s dedication to SEO has created a virtuous cycle in which its advantageous search rank helps the company to achieve higher share-of-mind for potential and repeat users. Then, as new users are welcomed into TripAdvisor’s vibrant community, they often feel obligated to give back to the community that has helped them plan such a wonderful trip in the first place. With more high quality and fresh content that appeals to the algorithms of major search engines, TripAdvisor will continue to cement its placement at the top of travel searches, thereby capturing more content-generating traffic.

In addition, TripAdvisor offers a number of tools for hotels to promote reviews directly on their websites, with each of those widgets and badges essentially serving as an inbound link to TripAdvisor, consequently boosting the page’s ranking on a search. In return, hotels, especially those reviewed favorably by TripAdvisor users, receive some of the most credible advertising money can buy. As the community expands and brand recognition for TripAdvisor overshadows that for individual hotels, hoteliers find that a TripAdvisor stamp of approval becomes almost a prerequisite for many travelers.

Ultimately, what’s particularly impressive is that despite characteristics of the fragmented online travel industry that are averse to winner-take-all dynamics, TripAdvisor has skewed many aspects of the industry to its favor. By snatching up competitor after competitor and absorbing their users, by creating a vibrant community as well as a truly differentiated product that’s difficult to imitate, TripAdvisor has closed the door behind itself to future competitors. In the end, TripAdvisor’s story is one of rapid pivots and of virtuous cycles, of luck and of thoughtful planning, an inspiration to entrepreneurs everywhere.


“Fact Sheet.” TripAdvisor. Last updated July 2013. <>.

“TripAdvisor. Recent milestones.” CrunchBase. Last edited October 24, 2013. <>.

“TripAdvisor’s Stephen Kaufer: Founder Stories.” TechCrunch interview. December 21, 2011. <>.

Alex Cocotas. “How $3 Billion TripAdvisor’s Business Works.” Business Insider. December 23, 2011. <>.

Andy Gelfond. “TripAdvisor Architecture.” High Scalability. June 27, 2011. <>.

Ava Seave. “How TripAdvisor Grows Scale and Network Effects: Expertise in Gathering UGC.” Forbes. June 20, 2013. <>.

Brian Fitzgerald. “How The Travel Industry Is Working Together To Help TripAdvisor’s SEO.” Orourke. May 15, 2012. <>.

Christopher Williams. “Interview: TripAdvisor founder Steve Kaufer.” The Telegraph. April 2, 2013. <>.

Jeffrey Bussgang. “The Secrets to TripAdvisor’s Impressive Scale.” HBR Blog Network. October 2, 2012. <>.

Jessica Livingston. “Founders at Work: Stories of Startups Early Days.” APress. September 19, 2008.

Rama Chanani & Jackie Kelly. “An Interview with Stephen Kaufer, Co-Founder & CEO of TripAdvisor.” Harbus. April 1, 2013. <>.

Robert Weisman. “TripAdvisor shows small firms the way to success.” The Boston Globe. January 17, 2005. <>.

Roderick Ioerger. “TripAdvisor Growing With Help of User Generated Content.” Marketing Pilgrim. May 24, 2007. <>.

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Scraping currently seems to be a very popular answer to achieving critical mass when launching a new business which relies heavily on two-sided networks. The problem, however, is that I don’t think it’s a strategy that is sustainable, nor do I believe it will even be a viable launch option much longer. Basically, I see three main problems that will ultimately make the opportunity disappear altogether:

You never get access to the best content. As all marketplaces on the internet are expanding rapidly, consumers are becoming overwhelmed with the breadth of selection offered to them, and I believe the competitive field is moving away from quantity towards quality. Because of scraping’s nature, the dominant player in any field has an incentive to prevent others from scraping its content, keeping the highest quality listings for itself to force traffic to its website.

Every one of your competitors has an incentive to use the same strategy. You can’t differentiate if it’s in each player’s best interest to scrape everyone else to create the largest possible inventory. Given how crawlers are now fairly easy to create, it is safe to assume that most of your competitors would start scraping shortly after learning of your existence, given the low barriers to start doing so and the lack of downside (unless they are the market leader, as mentioned in point 1).

You can’t outscrape Google. Finally, the strategy is inherently short-lived because you cannot hope to beat Google at what is basically their core business. Should your business ever become large enough that it is demonstrating a strong market demand for the service; Google could decide to enter the market and take a sizeable chunk out of your customer base, if it doesn’t crush you entirely.

What does this imply for start-ups trying to overcome the chicken and the egg problem who are trying to create value for the network they hope to grow? Well, it doesn’t mean that you should never try to scrape. It means you shouldn’t rely on scraping as your sole – or even your main – launch strategy. Any service should attempt to be differentiated and to add value, whereas scraping is, by its nature, about being undifferentiated and capturing value instead of creating value. Basically, I believe that when thinking about what a customer needs, it’s OK to consider aggregation as one part of the answer, but dangerous to consider it the whole answer; acting as a complement to another service or providing stand-alone value are most likely two examples of safer bets to create a lasting competitive advantage.

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