March 2007
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Month March 2007

Web 2.0 firms face unusual problem: too many customers

I wrote the following as a response to “Web 2.0 firms face unusual problem: too many customers a confusing article in the Mercury News (amusingly, since publication, the title changed to “Web 2.0’s global traffic dilemma”)

To the editor:

Try this for a headline: “San Jose Mercury-News faces unusual problem: too many readers.” You’re not likely to see it. The notion in your March 8 article, “Web 2.0 firms face unusual problem: too many customers,” is equally preposterous to anyone who understands the dynamics of media let alone social networks, where the addition of an member is even more valuable to the network. Not to mention the growing value of international audiences. The web, is becoming an increasingly international phenemena, as the US market matures and companies seek new audiences — that pesky other W is coming into focus.

My company, Fotolog is a very international web site — with 90% of our traffic outside of the US, we are the 29th largest site online. We are the third largest social network in the world, ahead of Facebook, behind Orkut and Myspace. Like Orkut our extraordinary growth started in Brazil but it then grew through all the other major South American countries to Europe. People in the US sometimes ask me whether Flog is really a social network. The experience on Fotolog is social, the media people discuss are photos — but if you consider that against each of the 200 million photos on the site there is on average 10 posts, you can see how social the site is. If you want to measure us as a photo site, today we’re larger than photo sites like Shutterfly and Ofoto with almost 10 times the page views of Flickr. But more important to me is our extraordinary level of engagement – nearly 20 percent of our members visit the site every day, spending approx 24 minutes a day with us — thats the social bit again. How did this happen? Is it the viral nature of the site, its stripped down wikipedia like simplicity of the site, or the fact that images, the media type that drive the conversations on Fotolog are undestandable to a global audience. The answer is not clear, but the service has become a global phenomena and the exchange of social capital across the network is clearly a key driver of our viral growth. Each active member brings non-linear value to the network, from wherever they come.

Beyond its misconception of individual member value, the article was also off in dismissing the international audience. A glance at the headlines – MySpace’s international expansion, Google’s deal this past week with Friendster, the number of European cross-border acquisitions – all underscore how web companies are looking beyond our borders to find new audiences — as U.S. Internet user growth matures and foreign advertising markets develop rapidly. 2% yoy growth is what comscore recently tracked US growth to be. Okrut may be big in Brazil, but even in young geographies like Brazil, market data again contradict the articles assertion that “there are still no mechanisms for making money (online) in Brazil.” According to Zenith/Optimedia, Brazil’s Internet advertising spend will exceed $124 million this year this represents a growing share of a total (local) advertising market of over $7 billion. No mechanisms?, a little bit of data usually helps ground broad brush statements.

Fotolog’s place as one of a small number of social networks able to continually build audience across multiple geographies gives us a head start in the race for these rising global advertising revenues. Our international reach has boosted us into the top 30 in Alexa’s global rankings and top 20 in many countries as our audience has spread from the U.S. to Latin America to Europe. As the web becomes an increasingly global phenema its important for the US to continue to look outward and lead in that development. Google clearly views Orkut, as it views many of its business lines, through a long term lens. But even if they didnt, the assertion in the article that Google wouldnt keep Okrut betrays a lack of understanding of the economics behind these businesses. The operating leverage that I see in my business — one where a small amount of capital and less than 25 people have built a top 30 web site is extraordinary. Orkut is likely made up of Orkut and a few other people. Newspapers for one — would die for that kind of operating leverage.

Lastly, the article manages to blur a critical area of national competitiveness — as the web becomes increasingly international its important for us to look beyond our borders for innovation as well as audience growth. Our friends in “old europe” are buying for less than $30, 20 mpbs broadband connections with telephony and video thrown in for free. The proliferation of thick broadband pipes is driving innovation in places the US would typically lead. In the past quarter two of the video offerings to gain the most attention — Joost and Babbelgum are both coming out of “old europe”. The rest of the world is becoming more than just another audience, its also another platform for innovation.

It’s a big world out there and Silicon Valley is at its best when its looking outward for opportunity and change, not inward.

Sincerely,

John Borthwick

CEO

Fotolog

(turns out they only accept letters of 150 words or so, so the press team cut this down to size)