A blog on using the power of Disruptive Business Models to build successful businesses...and other stuff. by Joe Agliozzo

Thursday, December 16, 2004

Search Engine Strategies Chicago - 2004

We were invited to speak at SES Chicago on the subject of Creating Compelling Ads and Landing Pages. The panel and the show in general were very good, with plenty of interesting ideas for improving both online ads and search engine optimization performance. We emphasized the value of testing (of course) and our case studies seemed to generate quite a bit of interest from the audience.

Also interesting was the panel discussing use of trademarks in PPC advertising. There were strong feelings on both sides, with trademark holders obviously feeling "ripped off" and advocates of free and broad search capabilities feeling that there is a bit of "big brother" censorship looming over the industry. In my opinion, it is not the trademark purchase that is the issue, but rather the content of the ad that appears on the results page. If that ad is clearly NOT placed by the trademark holder (in the eyes of the viewer) then there should be no liability. This is the same as the doctrine of comparison advertising in any other media. On the other hand, if the ad misleads the viewer into clicking on the ad thinking it has been placed by the trademark holder, that should give rise to liability. Meanwhile, you can avoid the hard questions about what should "show up" on a page when a particular word is used as a search term by a user.

Another interesting question raised was "Should Google be able to make money from "selling" my trademarked term? Aside from the question of what indices of ownership a trademark conveys (meaning not only the product or service the word is attached to, but also how the word is used), there is also the question of whether the user of the word itself to generate revenue, rather than using the word to sell a competing product or service somehow creates liability. I confess that I can't remember my law school cases in this area (I seem to fuzzily recall something about the word "Olympic" and that the IOC, as owner of the trademark had been able to prevent all sorts of companies from using the term as part of their company name, but I am not sure if even that situation is analogous to Google's.).

Of course, the day after the panel, Google was found (at least for now) NOT to be liable for selling Geico's trademarks (although the ruling appears to be based on the lack of facts supporting confusion, rather than any broader finding that there is no liability for this type of conduct, which you would expect from a trial court). The real law will be made at the appellate level.

PPC advertising continues to evolve in all areas, including not only effectiveness of the ads, but also the legal claims and consequences surrounding the medium.

Sunday, November 14, 2004

Trademark Infringement in PPC Advertising

John Battelle has a new post on Google and the potential policy that Google will prevent anyone other than the registered trademark holder from purchasing a trademarked keyword.

Rather than prohibit the purchase of the keyword, Google should regulate the copy that appears in the AdWords ad that appears when the keyword is used. Here's why:

A trademark on a word doesn't mean you "own" the word in all instances and can prohibit everyone else from using the word in any way, shape or form. Think about "Coke". Certainly coke is a trademarked term for colas, but probably not for the substance used in making steel. So a steel producer will not be infringing on the "coke" trademark, if they buy the keyword, coke, right?. Now it is true that the resulting ad is not relevant for one or the other viewer group, so there is no problem here.

Now take the closer case of "American Blinds". Clearly a trademarked term, and if a competitor buys the keyword "American Blinds" they are trying to steal a customer from America Blinds - but "WHAT'S WRONG WITH THAT!" - it's the American way, isn't it?

What you can't do is pose AS American Blinds to steal their customer - but there is nothing wrong with putting your ad up there along with American Blinds' ad so that the consumer can compare your offering with theirs. It is probably also safe to assume that a consumer who searches on American Blinds may want to see not only American Blind's offerings, but also see other competing offerings - isn't the ability to easily compare products one of the great things the internet has brought to consumers?

So the issue is really whether by buying the keyword, you are creating confusion about who the resulting ad belongs to.

The solution is therefore in regulating the ad copy, and not the purchase of the keyword.

Tuesday, October 12, 2004

Guy Kawasaki - "Art of the Start" and Bootstrappable Business Models

I am starting to get into Guy's new book - The Art of the Start. Chapter 5 is called The Art of Bootstrapping (I like to skip around in most business books and use them more as reference guides).

There is a lot of great stuff in this chapter, but today I want to focus on Guy's thoughts on a bootstrappable business (meaning one that you can start and grow on your own steam). I think this is a really important topic because let's face it, 99.9% of all entrepreneurs and startups have to bootstrap. Also, as I have written before (as has Guy) most startups that are not bootstrapped, but instead receive venture or corporate funding don't succeed. Why? Because they don't have the laser focus you are forced to have when you count every penny. This includes not only how you spend your money, but even more importantly, how you spend your time. There is nothing like the concept of limited funds to focus everyone on speed to market!

On to Guy's characteristics for a bootstrappable business:

  • Low upfront capital
  • Short sales cycle (less than 1 month)
  • Short (under a month) payment terms
  • Recurring revenue
  • Word of mouth advertising

I would also add some additional characteristics of my own:

  • No inventory
  • Don’t need proportionally more people to handle more sales (scalability)
  • Can be marketed and sold effectively online (means don’t need partners distributors, etc. when you start out – no shelf space issue)
  • Free trial/Guaranty can be offered at little or no actual cost
  • High margins
  • Only solution available for target customers (means lower customer acquisition costs and also can get out there with limited functionality)
By the way, our new startup has all of these characteristics!

Guy's book has a lot more great stuff for startup entrepreneurs. The Art of the Start, combined with The Innovator's Solution by Clayton Christensen are really a "cookbook" for creating a great startup company.

Wednesday, October 06, 2004

Local Search - The Pie Gets Bigger

Couple of interesting announcements yesterday from Yahoo! and Bill Gross of Idealab (Idealab was the spawning ground for Overture as GoTo.net, Yahoo! purchased Overture).

Gross announced Snap and Insider Pages in conjunction with John Batelle's Web2.0 conference. More about Snap in a future post (in short, the transparency and ability to pay on the basis of sales generated, etc. is pretty revolutionary).

For now, Insider Pages and also the announcement that Yahoo! Local Search is out of beta means that the local search market is really starting to get a lot of resources and energy.

Yahoo! Local Search includes the ability to search by location and look for local businesses, complete with mapping (Google offers a similar product). Insider Pages is a little more creative. Supposedly, Insider Pages combines local search type listings (like Craig's List) with social networking (like Friendster) to allow people to make recommendations, etc. I am sure this is exciting for the social networking folks because it may create the most realistic business model for this segment.

We are excited about anything that expands the supply of inventory for advertising while at the same time creating a new pool of advertisers that will take advantage of this type of advertising. From previous posts, you know that we feel that the local advertiser will one day buy paid search advertising as readily as they buy Yellow Pages advertising right now.

These initatives are one more step in that direction. When these advertisers come online, the key to getting their business will be having an extremely easy way to create very effective ads - which is what we are all about.

Tuesday, October 05, 2004

New Battle Brewing in Search Engine Optimization?

Great post by Jim Hedger at Search Engine News Journal on the possibility of a new battle in the search engine optimization wars. Apparently, Jim feels that the PhD's at Google are fed up with what they see as the "gaming" of their search engine results by SEO firms. Jim speculates that Google may be rebuilding their ENTIRE 4.5 BILLION index of webpages, using a new spider to categorize (and characterize) the pages. If so, this will surely be more disruptive to many website operators than even the infamous "Florida" update that wreaked havoc on many web businesses. After Florida, many sites found that they had basically disappeared from Google search results and as a result they had zero traffic, customers and sales.

While we think SEO is an important overall part of running a successful ecommerce business, it is an "us against them" game (us being Search Engines and them being SEO firms). This adversarial relationship will often leave the SEO customer in the middle. The website owner finds herself with fluctuating numbers of visitors, customers and sales. Hard to run a business that way.

We came to the conclusion in operating our own online businesses that the only way to have a dependable revenue stream was to increasingly rely on paid search advertising, where we could control our exposure, budget and flow of customers. Our experience in managing our PPC campaigns and optimizing our ads to increase response and decrease average costs per click led us to our new product, which we will be launching shortly.

Paid search is an important part of any websites search engine marketing campaign, and as the battles over natural search listings continue, will become even more crucial.

Paid Search is Expanding

Bambi Francisco's article (sorry, the article is behind a subscription wall at CBS MarketWatch) this morning is about law firms using paid search advertising to troll for Vioxx clients. The really interesting tidbits in the article are that pay per click advertising accounts for 40% of online advertising expenditures and is growing at 63% per year. Admittedly, these are some of the rosier forecasts we have seen, but everyone agrees that paid search is soon going to account for the majority of online advertising spending. It makes sense because paid search is tied to performance, and pay for performance always wins. She also makes the point that as news search becomes a more prominent feature for search users, more keywords will become valuable (for the duration of the news cycle) and then drop again. So the keyword universe that many advertisers complain has become limited looks like it will be a little more flexible. Companies will also have to be able to rapidly take advantage of newly popular keywords by being able to quickly create and place effective campaigns containing effective ad copy with the major paid search providers (Google and Overture) - something we are addressing with our new product.
Stay tuned.

Friday, October 01, 2004

As Guy Kawasaki Says "Don't Worry, Be Crappy"

No posts from me since May because I have been working fairly non stop on my new company. We are in stealth mode, but getting ready to launch (soon!).

Guy Kawasaki is one of my favorite business writers and I was fortunate enough to partner with Garage Technology Ventures (when it was garage.com) when I raised venture capital for my first startup in 1999.

Guy has a new book out called "The Art of the Start". I am waiting for my copy right now, in the meantime, I have been thinking all summer about one of Guy's earlier books - Rules for Revolutionaries. One of my favorite rules is "Don't Worry, Be Crappy". What Guy means by that is that the best way to develop a product (and a company) is to get your product out the door, in the hands of real customers, as quickly as possible, even if it sucks (but not too much).

What you lose in "polish" and "presentation" along with some functionality is more than made up for in finding out (1) whether the customers are interested in buying what you are selling and (2) what you forgot about that customers actually need. No matter how much thinking the team does on product features, customers will always come up with different or additional stuff that they have to have and they will let you know about it.

Of course, you always have to reach out to your customer base and communicate that your product is under development and needs more work, you want to partner with the customer in making the best product possible, etc. Don't claim your product is perfect when you know it is not, be humble.

I have used "Don't Worry, be Crappy" twice now. When we launched Coreflix, we had a basic product and bam, customers were on it from day one. We did have to add features but the development process was much more focused with real customers giving us real feedback as opposed to focus groups, etc.

We are using it again now on our new company. We started out this summer with a really crappy beta that had only the bare minimum functions. This time we had to test not only whether beta customers were interested and would pay for the product, but also whether the algorithms the service is based on would work. The answer on both counts was an unqualified yes, but we also found we had to go back to the workshop and create a much more "automatic" product that was easier to use - around a 90 day process of very long days (and nights).

Once again though, "Don't Worry, Be Crappy" pointed us in the right direction.

I wish Guy's book had been around in 1999. We didn't use "Don't Worry, Be Crappy" at Netfreight.com and we spent over a million dollars developing our beta product before we got input from customers. Of course, we would need that money later, and when we didn't have it, we didn't have many choices.

"Don't Worry, Be Crappy" is probably one of my most valuable lessons learned.

Monday, May 10, 2004

Blog Moved

Moved my blog over to Blogger.com today, thus the posts all have the May 10, 2004 date.

Original Postings were Feb, March, April and May, roughly...

Coreflix sold to public company

Today we completed the sale of the Coreflix (tm) online DVD rental business to Americana Publishing, Inc.(OTC Bulletin Board: APBH). I have written about this business before, but in short it was a DVD rental service geared towards "action" and "extreme" sports titles. This was the first "disruptive" business I have launched and it proved to me the basic tenets of disruptive business model design, as described by Clayton Christensen in the Innovators Dilemma and the Innovator's Solution:

1. An initially smaller or niche market where there was a need, but not a lot of solutions. This was great because the customers were basically "nonconsumers" of DVD rentals in action sports (because no rental program existed). The best part was that we were able to launch early in the process with a very basic product and the customers were happy to have it and we had confirmation right away that we had a business.

2. We were patient for growth (and still are) but impatient for profits. We bootstrapped this company (VC's saw the market as too small, and they may yet be right, for their purposes such as hurdle rates of return, how much capital they need to invest, etc.), so we wanted to launch as cheaply as possible and then use cash flow to finance refinement of the business and expansion of the customer base. This is exactly what we did, and combined with 1. above, it worked beautifully.

3. We chose a rental model. I believe that rental models are inherently disruptive, because you are providing a solution that is inferior to the full benefits of ownership, yet fits the needs of many segments of customers. It also uses the principal of looking at the "job" the customer is trying to get done - which in this case was "view" DVDs without necessarily needing to pay the high price of owning them. Many/most action sports DVDs are also typically viewed only once, so the "job" the customer is trying to do is watch a DVD once, which is definitely better satisfied by renting than owning (especially given the stubbornly high prices at retail for purchasing these DVDs).

Emergent Business Strategy

An important part of a disruptive business model is the concept of an "emergent" strategy. In short, startups never start out with the right strategy, part of the entrepreneurial effort is figuring out the right strategy as you go - thus the right strategy "emerges".

As Clayton Christensen points out in "The Innovators Solution" (see link in previous post), a limited or "right" amount of funding can go a long way towards prompting the management team to focus on emergent strategy - they simply have no choice if they want the company to survive. In our Netfreight experience (see post below) we didn't focus on changing our strategy as quickly as we should have because we had the luxury of being patient because of our venture capital funding. When the funding dried up, we didn't have time to create a new strategy.

Contrast that with Coreflix, which was/is a bootstrapped company, so we were constantly focused on changing/emerging our strategy in response to customer feedback (and getting customers right away was in itself an emergent strategy!). We learned what worked and what didn't work much more rapidly and also connected with the customer much more rapidly, at far less cost.

Emergent strategy is key, and has also been pointed out using other terms, by Guy Kawasaki (who's garage.com - now garage technology ventures - also funded NetFreight.com). One of Guy's mottos was "Don't Worry Be Crappy" - which meant, "get your product to market and get some customer feedback." Then you could change your product and strategy based on the feedback. This weeks article by Robert X. Cringley also includes some interesting references to the emergent strategy concept. Instead of focusing on an individual company though, Bob points to VC investment models, and the generally known principle that only through taking chances on a lot of companies can VC's hope that one will be a big hit (Bob also points out that how much of a hit the winner needs to be has also developed into a problem for the VC business).

Referring to Christensen, the emergent strategy as applied to VC investing consists of hoping that one of your portfolio companies gets their own emergent strategy right! If VC's were to additionally impose some of the funding discipline espoused by Christensen on their portfolio companies (say through staged investment, etc.) rather than giving a thumbs up (you get $3M at once) or thumbs down (not well developed enough, not a big enough market, etc. - you get nothing). Maybe their batting averages would be higher overall, and maybe some of the investment "overhang" we read so much about would start to dissipate, and a whole new crop of startups would be created (which could be nothing but great in light of the current job growth/offshoring/outsourcing controversy).

This type of investing model is even more important today because most angel funding and corporate funding has basically disappeared. VCs no longer have the luxury of having these seed stage investors nurture companies to the first round institutional stage that the VCs are known for. However, given the incredibly cheap resources (including offshore development) available to today's entrepreneur, the bright side is that most startups can test their concept/business model/product relatively cheaply, in fact this can generally be done for $200,000 to $500,000 max. With the billions of dollars in VC funding available, it makes sense for VC's to devote $10M to $20M per year to these types of investments. Funding 50-100 companies a year with these small amounts would provide the VC investors with their next "institutional round" candidates, and would also spur innovation, employment and create the next generation of entrepreneurial risk takers. More on the details of managing a program like this in the next post.


My co-founder and I, Ben Padnos, along with another co-founder, started coreflix.com (www.coreflix.com) in late 2002 as an internet based DVD rental service for Action Sports (Surf, Skate, Snow, etc.). Learning from my last company, NetFreight, I had conceptualized this business to fit into the disruptive framework.

A little background on the Action Sports DVD industry.

1. There are no theatrical releases for the DVDs.
2. The DVDs are not available for rent at Blockbuster, Hollywood Video, Netflix, etc.
3. The DVDs retail for $24.95 to $34.95, are typically 40 minutes long and have to be purchased sight unseen.

So, we felt there was a good sized population of customers who would love to have a $17.95/month "all you can eat" (flat fee) rental service. (I believe that rental as a business is almost inherently disruptive because you are enabling a larger population of folks who either cannot afford to buy or don't use the product enough to buy it the opportunity to use it). Users would select DVDs through our website and we would use the USPS to mail them out in 2 way mailers.

Well we were right, we acquired hundreds of customers soon after launching and we get comments every day from our customers, telling us how much they love having an alternative to the old way of consuming these DVDs:

"Thanks Ben,

You guys are great to deal with. Coreflix has been a great way to find out which DVDs are cool and which ones suck, without spending a ton of $$$$.


The "Disruption" framework showed the way:

1. We targeted and enabled a population of consumers who previously didn't have the money or value this content enough to purchase it.
2. We gave them a simple, web based ordering process and used the USPS for fulfillment (customers were willing to accept the delayed gratification of receiving the product because they had no other alternative).
3. We helped them to more easily and effectively do something they were already trying to do - view a lot of action sports DVDS.

We also picked a niche that was not of interest to the major DVD outlets (asymetry).

Predictably, the "industry" (DVD producers) were mad at us and made all sorts of legal threats (all of which were basically hot air due to well established copyright doctrine). We believe, and tried to relate to them that a rental service was a way that the industry as a whole could gain more customers, by increasing the numbers of viewers of their product. There will always be more casual viewers who would rent but would not buy sight unseen (and so were not current customers), as compared to the "hard core" fan that purchases, and from which the industry currently makes its living. Fortunately (and critical to a disruptive business model) we didn't need their permission nor cooperation. Hopefully they will hopefully come around to our point of view, realize that this is good for the industry and help us promote the service.

Now we are trying to figure out how to grow the business beyond the die-hard action sports fan and get the more casual consumer. Stay tuned.


I founded NetFreight.com in 1998. It was the first business to business internet based marketplace to service the transportation marketplace (long haul trucking, both full truckload and less than truckload). Over the next two years, we raised and spent approximately $3.2M, built some cool technology but never really got traction in the marketplace (although we did have some cool test customers like Home Depot and Del Monte).

The reason we never got traction is that our service (and the internet enabling of logistics and transportation management in general) was really sustaining for the marketplace we were after -larger companies with big freight bills. We were trying to provide better/faster, and as a result butting heads with all the large, entrenched third party logistics companies (3PL's) out there. They had huge amounts of money, customers who depended on them, and salespeople with tight relationships with the customer. Hard to break through that.

What we should have done is focus on the small companies, the ones that couldn't afford sophisticated transportation management software (typically VAN and private network based), but would have accepted our product as being "good enough" to do a job they were already trying to do (manage freight and hold costs down). The problem is that this market was hard to quantify, and the sales model required to address it was uncertain, so second round investors were not impressed (especially given that in March/April of 2000 you needed to be pretty bulletproof to raise money).

In the end we shut down the company, at least finding a home for the IP and other assets with another company, where the technology could live on and we could take care of most of our vendors.

A valuable lesson learned - sustaining business models are tough to execute without heavy duty backing and a lot of patience. There is no doubt in my mind that our internet based solution was superior in almost all ways to the old, closed, proprietary software solutions out there, but changing the mindset of customers with a sustaining product is very, very difficult.

Disruptive Business Models - Weblog Launch

Today is launch day for my weblog describing my experiences creating and launching businesses based on Clayton Christensen's ideas in The Innovator's Dilemma and The Innovator's solution.