Andrew Chen Archives

Virtual Goods Summit videos are up!
Charles Hudson was kind enough to post all the videos from the Virtual Goods Summit from earlier this year, you can see all the videos here.

The talk that Daniel James (of Three Rings fame) and myself gave is embedded below.

Here’s the outline of the content we covered:

Metrics for Virtual Goods

• Key metrics
  • What is Whirled?
  • What is Puzzle Pirates?
  • Puzzle Pirates Metrics
• What factors drive LTV?
  • User acquisition metrics
  • Factors that drive acquisition cost
  • Dashboard for user acquisition
• Customer retention metrics
  • Factors that drive revisit rate
  • Whirled retention cohort %s
• Virtual Economy overview
  • Dashboard for a virtual economy
  • Lots of graphs
• Billing payment breakdown
  • Billing fraud
• Questions and answers

Enjoy!

UPDATE: Mike Gowen put up some photos of the slides here. Mindmaps and more videos from Jussi here.

Buying ads make sense for direct monetizing products
When it comes to products that directly monetize their audience using subscription, ecommerce, virtual items, etc., it can make a lot of sense to rely on advertising as a distribution channel. The reason for although there are 100s of millions of internet users, only a small fraction (usually <1%) will be in-market for your services at any given time. As a result, you are looking to acquire these users, and only these users, and everyone else is considered wasted energy.

Note that the freemium model is a variation on this concept – where you acquire a large base of “casual users” that stick around, and you slowly convert some % of them to subscribers. You can think of it as vertically integrating your distribution, and instead of spending money to buy ads, instead you are spending money to support this large base of free users.

Run an ad-supported consumer internet app? You better understand ad-buying too
These days, it’s simple to think that advertising is about placing javascript code on a page, and seeing what numbers AdSense gives back to you. Instead of thinking about it that way, publishers would do their customers (their advertisers) a great service by understanding what it means for ad inventory to perform or not perform. They should really understand how advertisers analyze their cost-per-acquisition so that the publisher can better service them – that’s at the heart of indirect monetization. If you’re not selling directly yourself, you’re helping someone else sell.

CPA, the common currency of user acquisition
The first step is to understand your user acquisition funnel, from start to end. Although there are many ways to price things, be it CPM, CPC, or CPA, the key is that it all rolls back to how much it costs you to have a registered user. You need this cost-per-acquisition number to be lower than the lifetime value number, and what you have left is profit (before cost of infrastructure, etc).

So you want to build something that looks like this:

The above is an example of two traffic sources, Google and Advertising.com (the latter being an ad network), as well as clickthrough rates, signup %s, and the cost per acquisition.

A couple important notes on the above:

• the SOURCE of your traffic is the most important segmentation – make sure you track acquisition and LTV numbers, since you often get vastly different numbers depending on where you are buying ads
• you want to break down your funnel into as small of steps that make sense, from the clicks into the signup page into any intermediate profile forms and then the final registered numbers. Your funnel may be larger or smaller
• Google might charge you CPC and Ad.com might charge you CPM, but you have to normalize that back into how much it costs you to acquire a registered account. In a CPC model, you don’t care about the CTR much since you don’t pay for impressions that don’t result in clicks, whereas you do care about CPMs
• the only difference between a good CPA and a bad CPA is whether it’s above or below your customer LTV
• In addition to tracking source of traffic, you may also want to track important factors like what campaign it was in, what creative it corresponded to, the banner ad size, and other things that might affect CPA. The last thing you want is a variation that is very unprofitable, but is obscured by being grouped together
• You may also want to group all your marketing channels into the above, including email, partnerships, blog traffic, viral invites, etc. Obviously for stuff that’s free traffic, the CPA is infinity, but it’s good to know what kinds of funnel %s the other traffic throws off, for comparison’s sake

Got all that? Good :)

What factors influence ad performance?
The second thing worth considering is what factors actually influence GOOD numbers for CPAs versus what numbers are generally bad.

I made a quick, anecdotal table below to enumerate some of the factors:

A couple additional notes:

• As mentioned previously, the source of traffic is very important – you should dedicate a significant amount of time buying lots of different kinds of traffic to see what works
• Cost model is something you should be able to normalize into CPA and mostly ignore, except for cashflow and risk reasons
• User requirements can be a huge issue – if you are forcing users to download, that will kill your CPA. Similarly, asking a demographic that doesn’t have credit cards for their credit number can kill you. Make sure that you understand your audience and that your funnel is optimized for them
• Audience Theme revolves around the concept that strongly themed products are often quite vertical in nature, which causes a large % of users to reject the product. For example, a site for teens obsessed with vampires is much narrower than a web email site. The narrower the theme is, the harder it is to find appropriate ad inventory to buy
• Funnel design and A/B testing is key – definitely worth investing in
• Similarly, for those who can find a viral angle in their product, that can be a huge benefit as well. It has the capability to create order-of-magnitude decreases in the CPA, which can be the difference between profitability and bankruptcy! But this also has issues if your product is not widely appealing enough, since virality depends on a horizontal offering to work

If you have questions or comments, feel free to leave a message!

Man it’s tough to make money with affiliate sales :) There’s definitely been a bump since I posted my books list, but nothing fancy.

This is why I’m always amused when I get pitched blog widgets that are supposed to help me make money – none of it is ever substantial enough to be worthwhile purely for monetization. The value from writing this blog is all in super soft social capital.

Talk coming up next week
Steve Blank, a professor at Stanford and serial entrepreneur of 8 startup companies, is giving a revised version of his talk, The Secret History of Silicon Valley. The YouTube video of the talk is embedded above, and an additional 1/3 of new material will be added. There’s also a lot more material in Stanford’s Entrepreneurship Corner, which I’d encourage you to check out aswell.

Also, if you haven’t read Steve’s book, The Four Steps to the Epiphany, I’d encourage you to do so. There’s a lot of great stuff in there that is more or less the product development methodology that I follow.

Anyway, here are some additional details on the event – see you there!

DATE & TIME
Thursday, November 20, 2008

12 p.m. – Bring your lunch and enjoy a lecture with CHM friends and family. Beverages will be provided.

LOCATION
1401 N. Shoreline Boulevard
Mountain View, CA 94043
Directions

REGISTRATION
Register Now

ABSTRACT OF TALK
While Silicon Valley is responsible for the wealth of millions of people, not many are familiar with its long and complex history. Unbeknownst to even the most seasoned inhabitant or observer, Silicon Valley, Northern California’s peninsula, was shaped by many forces.

Join renowned serial entrepreneur, Steve Blank, as he provides an overview on the secret history of Silicon Valley and how the Valley got its start. Much like the startups that have made Silicon Valley famous, the Valley began in a strikingly similar formula.

Hear the story of how two major events – WWII and the Cold War – and one Stanford professor set the stage for the creation and explosive growth of entrepreneurship in Silicon Valley. In true startup form, the world was forever changed when the CIA and the National Security Agency acted as venture capitalists for this first wave of entrepreneurship. Learn about the key players and the series of events that contributed to this dramatic and important piece of the emergence of this world renowned technology mecca.

I recently went through and updated the list of essays on this blog – it’s now all up to date. As always, you can view them from my blog by clicking the Essays link at the top.

For the lazy folks, here’s the complete list, current as of today:

Viral marketing and user acquisition

For web entrepreneurs, growing your userbase is a key challenge, alongside product development and financing. These posts emphasize a quantitative approach to getting traction and growing users.

• What’s your viral loop? Understanding the engine of adoption
• Adwords is not enough for success on the consumer web
• Are your SEO efforts working, or failing?
• Bridging your traffic engine with your revenue engine
• Facebook viral marketing: When and why do apps “jump the shark?”
• Is your site really viral? Viral Branding versus Viral Action
• Social network marketing: Getting from zero to critical mass
• Viral marketing is not a marketing strategy
• 10 obvious strategies to ruthlessly acquire users
• Growing renewable audiences (a talk at O’Reilly Alphatech Ventures)

Engagement and product design

Using principles from game design and analysis of consumer behavior, these essays cover the process of creating experiences your customers will love.

• 10 signs you’re a product fanatic
• 25 reasons users STOP using your product: An analysis of customer lifecycle
• Are people like lab rats? Using reward schedules to drive engagement
• Do you ever say, “MySpace is sooo ugly?” This blog’s for you…
• Does Facebook reflect your true friendships? How about e-mail?
• Facebook Apps: Why they’re focused on fun instead of utility
• Is your website a leaky bucket? 4 scenarios for user retention
• Public and private spaces, and why YouTube comments are so awful
• Social gaming design – Bartle types versus Web 2.0 participation pyramid
• Social network death spiral: How Metcalfe’s Law can work against you
• Technology always changes, but people always stay the same
• The design of social spaces
• User retention: Why depending on notification-driven retention sucks
• Users, customers, or audience – what do you call the people that visit your site?
• Why your friends list gets polluted over time
• Your site will succeed or fail in the first 10 seconds

Online advertising and social network monetization

Social web product have unique characteristics as it applies to online advertising. These posts cover some of the issues around key topics such as CPM rates, behavioral data, ad revenue modeling, etc.

• 5 factors that determine your advertising CPM rates
• 5 things that make your social network monetize like crap
• 7 ideas for billion dollar startups in online advertising
• Data portability: Is the social network data you’re hoarding treasure or trash?
• Counting your big pile of Benjamins: 5 startup tips for maximizing ad revenue
• How NOT to calculate ad revenue
• Online advertising during a recession: 5 key trends for ad-based startups
• Vertical ad networks: What are they, and why did Cox just buy Adify for $300MM?
• What’s the value of a user on your site? Why it’s hard to calculate lifetime value for social network audiences
• Your ad-supported Web 2.0 site is actually a B2B enterprise in disguise
• Super Rewards and the leadgen side of Facebook virtual currency – can it last?
• Remnant ads and the advertisers who love them
• Ad targeting talk from Community Next: People Not Pages (updated x2)
• Revenue, ARPU, Funnels, and RPM: My talk from Startonomics on Revenue metrics

Metrics

Without metrics, web entrepreneurs are just flying blind. These essays cover some of the organization and development issues around instituting a metrics system – what to measure, in what order, and how to implement them.

• 5 steps towards building a metrics-driven business
• The first 6 steps to homegrowing basic startup analytics
• Are you misusing Alexa numbers? (Probably)
• Lessons from the casino industry on engagement metrics and lifetime value
• Obama and McCain: How political marketing has evolved from offline to online
• omg I’m just a startup, I can’t do those fancy analytics!
• Recency Frequency and Monetization (RFM): Optimizing your notifications strategy
• How to measure if users love your product using cohorts and revisit rates

Media and games

Traditional media, including TV, music, games, and movies are at a crossroads. Here are some thoughts on how the industry is changing and evolving.

• From analog dollars to digital pennies: The crisis in traditional media
• Game design tutorial at the GDC
• MySpace versus Facebook: Analysis of both traffic and ad revenue, using Google Trends
• What every Web 2.0 entrepreneur should know about virtual goods
• Social Gaming Summit: Recap and observations
• Early adopters vs the Mainstream: Google Insights points out websites only used by Silicon Valley nerds
• YouTube vs Webkinz: Case studies for new product adoption
• Prosper.com and peer-to-peer lending in the economic downturn

Entrepreneurship and startup life in San Francisco

Just a couple thoughts on things I’ve encountered while arriving in SF.

• 10 tips for meeting people at industry events
• 5 ways to break past the San Francisco echo-chamber
• Are Web 2.0 startups wasting their time with Web 2.0 early adopters?
• Couple quotes on Facebook in Wired, Fortune, and NYT
• How do you find a badass co-founder, Part 2
• How do you find a badass co-founder?
• How do start a professional blog: 10 tips for new bloggers
• Is blogging worth it? What’s the ROI?
• Moving to SF and joining the tech community – Lessons from my first year
• What’s an Entrepreneur-in-Residence?
• What is your W2SAT* score? (*Web 2.0 Startup Aptitude Test)

As always, here are some of the articles/URLs I’ve been tweeting lately.

If you want to grab these in real time, you can follow me on Twitter at @andrew_chen.

• ever heard of the ultimatum game from behavioral economics? Made me think of that when reading this article: http://bit.ly/GDQX
• zomg, shiba inu puppy cam! http://tinyurl.com/3nwgde
• miley cyrus on pace to become billionaire by age 18: http://www.msnbc.msn.com/id/23051344/
• true or false: economists > political scientists > sociologists? FWIW, gre scores for all of them: http://bit.ly/2tVhEU
• New malcolm gladwell article, Can underprivileged outsiders have an advantage? http://bit.ly/4395X0
• wow, how skimmers+videocams are used to steal credit card numbers and PINs from ATMs: http://tinyurl.com/tb8hj
• wow, extremely detailed graphs and data on virtual currency exchange rates: http://www.gameusd.com/news0730.htm
• wow, zynga is dominating social gaming on myspace: http://tinyurl.com/56wj6v
• Lol, it’s kinda relaxing! Scientific Attempt To Create Most Annoying Song Ever: http://tinyurl.com/55bl9d
• good to see big brands embracing good ol UGC: http://tinyurl.com/5czoeq
• fun data in the form of a youtube video: http://tinyurl.com/2rzrn9
• neat lil NYT article about my hometown: http://travel.nytimes.com/2008/10/31/travel/escapes/31american.html
• rt @venturehacks Why startup pitches fail. See http://tinyurl.com/6prpes

Usability notes from iPhone apps
I found these interesting notes on how people use the iPhone, mostly usability-oriented, focused on a couple key applications and areas. It’s useful info for anyone who is building on the iPhone platform, which has some very unique interactions that even expert users have a tough time mastering.

The presentation covers the following apps:

• browsing
• time/calendar/alarm
• maps
• youtube
• downloaded apps: air hockey, koi pond, labyrinth
• iphone store (including pricing, reviews, etc.)

Then there’s a nice wrap-up of best practices for iPhone app usability, which is always nice.

Here’s the full presentation – you’ll have to click through the link if you are reading this in an RSS reader:

Poll results are in!
I recently looked at the poll I put up about blog topics – very interesting.

It looks like people are absolutely more interested in analytics and metrics, particularly in user engagement, and much less interested in social gaming, social networks in general, etc. I assume that it’s because for the social stuff, there’s a lot of specific coverage on that in tech blogs like Techcrunch and the like.

I haven’t seen as much stuff out there digging into analytics around engagement/viral in social applications – most of the good analytics out there focuses on e-commerce, etc., so I imagine that the appetite is out there for a more focused analytics conversation.

No love for social gaming
Most interesting to me was that there’s very little interest in social-gaming – it was tied at the bottom with B2B and vertical social networks. I figured that given social gaming’s hotness in the investment (and social networking sector), that it would rank quite high. Good thing I ran this poll!

Anyway, here are all the results below:

	Answer Text	Votes	%
	Analytics and metrics	69	20%
	User retention/engagement	68	19%
	Viral marketing	55	16%
	Online advertising	39	11%
	Product management	39	11%
	Social network platforms	30	9%
	B2B and vertical social networks	23	7%
	Social gaming	23	7%
	Other…	5	1%
	TOTAL	351

Click below for the full screen view of Facebook with huge ads

If Facebook is seeking a revenue model, let’s hope it’s not ads
There’s been a couple posts lately about Facebook and its revenue model, particularly this article on Venturebeat, written by Eric Eldon: In bid for international money, Facebook takes gifts off dollar standard. (There was also an earlier article on Techcrunch: Facebook May Be Growing Too Fast.) In either case, it’s absolutely indisputable that Facebook eventually needs to have a business model to be successful long-term.

Now up to this point, the company has tried a number of very social-network specific advertising such as:

• Facebook Pages
• Social ads
• Sponsored groups
• … and other ad solutions listed here.

These are all great, innovative products. I think it’s natural that anyone at a hot new company would primarily focus on the outputs that it could uniquely produce. That’s at the heart of differentiation and defensibility in the market

On the other hand, we have to consider what advertisers want, and ultimately, all these social campaigns at Facebook just aren’t the mainstream. Instead, this social media advertising gets grouped into “experimental budget” by ad agencies, which really control the purse strings in the brand advertising world.

What is experimental ad budget?
Typically, an ad agency is spending the bulk of its clients’ dollars on media they know performs. It used to be all TV, but we’re also seeing a lot of spend in search, buying premium spots on brand publishers’ homepages, etc. We’re often talking about 90%+ spend in these mainstream categories, and then a much smaller amount in experimental advertising.

Jeremy Liew recently referenced a WSJ article on experimental advertising which states that this budget is getting slashed as the recession develops:

In recent years, marketers have set aside a portion of their ad budgets to experiment with digital technologies such as Web video, mobile phones, gaming and virtual worlds. But with broader economic turmoil reaching Madison Avenue, these “experimental” budgets are among the first to hit the cutting-room floor.

Chrysler LLC has already slashed its experimental ad buys. With each ad dollar facing additional scrutiny, especially in the hard-hit auto industry, these ad buys will now make up about 5% of the auto maker’s marketing budget, down from as much as 10% in previous years, says Deborah Meyer, Chrysler’s chief marketing officer.

In good times, the maker of Chrysler, Dodge and Jeep brands tapped technologies like gaming and mobile to build awareness of its vehicles. “We won’t experiment in a lot of things that are fun to have. All of our dollars have to go to hitting in-market shoppers with the appropriate media,” Ms. Meyer says.

Areas like mobile, virtual worlds and widgets are expected to be hit particularly hard, as it remains unclear what kind of impact ads in these media have. These campaigns often reach a small number of people, and standard measurement systems have yet to be developed. “When we get into the need to drive results, you can’t spend money on the experiments and hope to keep your job and get your sales goals,” says Peter Kim, senior partner at Dachis, which advises marketers such as Philips Electronics NV’s Philips Healthcare and Johnson & Johnson on marketing strategies.

Jeremy also has two other relevant articles on this topic, Which online media companies will survive the ad recession? and New forms of advertising are hard. Both are worth reading.

Well, what do advertisers want?
The point is, advertisers are used to buying something very specific – they want IAB standard ad unit sizes, they’d like to do homepage takeovers and roadblocks, etc. And of course these are units that Facebook does not emphasize in their ad revenue process, because they are often annoying and obtrusive. Again, let’s take a look at ths mockup with the Facebook homepage covered with ads for the next James Bond movie.

Annoying, right?

I hope as an avid Facebook user that it never goes this far, yet as an online ad guy, I fear that’s what it’ll take to truly unlock the revenue behind Facebook’s pages, at least a long as it takes to convert the rather risk-averse agency community into building social media into their main budgets.

Given the frequent comparisons between Google and Facebook, it’s also educational to see how long it’s taken for the Mountain View giant to conquer the hearts and minds of Madison Avenue. Quite frankly, they haven’t been successful yet. That’s why after years of very aggressive talk about commoditizing the agency business, and making the entire ad buying process more efficient, you’re seeing Google account reps buying candy and otherwise sucking up to agencies. The article states:

Advertisers are grappling with the idea of Google, which spent many of its early years avoiding — and infuriating — advertising agencies, now shifting to embrace them. […]

“We understand that maybe we haven’t been the best partner over the years,” said Erin Clift, the director of agency relations at Google.

Google could avoid ad agencies when it sold only search advertising, where it is dominant. But now that it has a wider set of products in more areas — including social media and virtual reality — it finds that it must work harder to drum up business, particularly because of the lingering hard feelings.

That’s right, 100B in market cap and they have to resort to bribing agency folks with candy! That is what is in store for Facebook’s efforts in trying to get brand advertising agencies to get excited about them.

Quick thought on an impending cultural revolution
I also want to point out that if this is what is in Facebook’s future, their culture is bound to look more like Yahoo than it is to look like Google. This is because ultimately, it means that technology will have very little to do with the success of monetization on Facebook, and instead it’ll primarily be centered around sales and marketing execution. These are the hallmarks of a media company that derives their primary revenue stream from brand ad agencies.

In fact, more complex technology and coining terms like “social graph” will only hurt, not help, in realizing the monetization potential around Facebook. What this means, unfortunately, is that there may be a subtle transition of power and emphasis from the super smart geeks who built Facebook and more into the hands of polished ad sales staff who can make money.

Every technology firm engaged in the ad network industry goes through this transition. It was true for the team at Revenue Science, and I’ve shared many conversations with Bay Area-based ad networks who figured out the key to their success was not algorithms, but happy hours with clients.

When will we know when Facebook starts prioritizing ad revenue?
OK, now all of this said, I think I’m making these predictions all too soon in Facebook’s trajectory. The fact is, Facebook is really not acting like they care much about ad revenues.

Here’s the checklist of potential actions that would tip off an intent in that direction:

1. Creating content categories or building out public spaces with focused content, which will give their ads more contextual relevance than just profiles (like a public blogging platform on top of Facebook)
2. Decreasing their international traffic, which is tough to monetize and costs just as much money, and/or de-emphasizing the amount of international traffic from their marketing
3. Allowing more standardized ad units, particularly high-end content like video, homepage takeovers, etc.
4. Taking strategic investment or otherwise strongly allying with a giant media company to take advantage of their brand advertising teams (Viacom?). This is to counter MySpace’s Newscorp resources
5. Emphasizing a specific audience for Facebook, at least to ad agencies and marketers, rather than trying to stay horizontal and representing their traffic as a giant gray neutral blob
6. Creating more opportunies for search, and/or integrating content or creating partnerships which try to increase the number of commercial searches on the site
7. Acquiring an ad network, not for the technology, but for the people – and appointing a brand advertising guy as Chief Revenue Officer
8. Stopping their clearly public Google envy :) and starting to think more like a publisher rather than a technology platform – perhaps this will be exhibited by less Google hires, or a very big splashy media hire, etc.

Anyway, those are some wild ass guesses! But if any of those happen you saw it here first.

Like this post? Get this blog by RSS or email here. Also, check out a ton of other essays on related topics here.

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Well, it turns out that Star Wars fanatics are easier to monetize, but are harder to find at scale!

More recession talk = More interest in direct monetization
There’s always discussion about the weaknesses of ad-based revenue models for consumer internet, and with recession chatter increasing every day, many companies are turning to freemium based models. Silicon Alley Insider recently wrote about this in an article called Revenue Crisis: Here Come The Pro Accounts. And of course, there is constantly discussion around the example of 37 Signals, who are notable critics of business models that give away product for free, described by the the Techcrunch article 37 Signals Drives Another Company To The Deadpool. Here’s another from Slate called A Radical Business Plan for Facebook: Charge people.

Direct monetization models versus indirect monetization
To restate the general argument in my own terms, there are basically two kinds of companies on the internet (and btw, I’ve discussed these two groupings of companies at my talk at Startonomics – you can check out the video here and the slides here):

• Direct monetization, aka Advertisers: Direct monetizers charge money for their products, via subscription, ecommerce, virtual items, etc. They typically have a small, focused group of customers.
• Indirect monetization, aka Publishers: Indirect monetizers don’t charge money to use their product and in fact, often give their product away. They chop their audiences into pieces (using content to differentitate between them) and sell the targeted audiences to companies who directly monetize them.

Now note that Direct monetizers and Indirect monetizers have very different problems:

• Direct monetization: The biggest issue is cost per acquisition and limited size of their customer base.
• Indirect monetization: The biggest issue is zero cost user acquisition and identifying user intent (via targeting)

And of course, the central issue is that direct monetization has the huge advantage that you can “make money as you go” and maintain a profitable trajectory at every point. This is great for the bootstrapped startup.

Compare this to the indirect monetization companies which often need to reach a very large critical mass, burning lots of capital along the way, until it gets large enough to sell their audience segments in large enough chunks to be interesting to advertisers.

From the venture capitalist’s point of view, the indirect monetization models are often able to produce larger exits, and thus the “go big” mantra holds here. The reason is that the indirect monetization methods are often appropriate for companies who have extremely horizontal audiences (like search, email, video, etc.) combined with viral growth.

From the VC’s perspective, the direct monetization models can often be less desirable because they may have a small customer base that can only be reached by expensive marketing techniques. As a result, there ends up being a smaller exit because the startup exhausts all their marketing channels to reach their customer base and may not be able to grow beyond that. This is why, although it may be highly profitable to build software for orthidontist offices, these companies often end up lifestyle businesses and not venture-returns businesses.

Which one are you?
I want to stop here and ask, which method best suits your company? I’ve found that there are several Web 2.0 companies floating out there that should probably charge for their product because they are niche products, but instead they are opting to go free and ad-supported. This may be a mistake. Similarly, there are products out there with wide audience appeal that may generate more revenues as indirect monetization models (for example, much of digital content).

Both strategies work: Compare MySpace versus World of Warcraft
Ultimately, this is an optimization of two variables simultaneously. One variable is the size of the audience, and the other is the revenue potential.

The tension is that:

• Size of audience is determined by breadth of appeal
• Revenue potential is driven on intent and passion of audience

Oftentimes, of course, these two variables are at odds. It’s the rare product that EVERYONE will pay for, and often you have to choose between monetizing a small group of fanatics at high rates, or monetizing a huge group of casual users at low rates.

The two corners of this model, of course, are MySpace and World of Warcraft.

• MySpace is an amazing indirect monetizer – they have a HUGE audience, but but make very little money off of each user. Even with 10s of millions of uniques, they make cents per user per month. But this all adds up to nearly $1B in revenue per year. Note that the first version of MySpace was relatively cheap to build (hey, it’s just a website!)
• World of Warcraft is an amazing direct monetizer – they have a much smaller audience (<15M subscribers) but make a ton of money off of each user. They charge a $15/month, and even with their much smaller audience they make nearly $1B in revenue per year. Note that the first version of WoW was quite expensive (into the 10s of millions!)

The point is that both strategies work – the question is, what can you learn from each of these to figure out which model works best for you?

Pretty interesting data:

SAI publishes a post called Ad Rates Dropped 11% In The Third Quarter.

I think this tells you that if you have a direct monetization method for the audience (and context) within social networks, music, and entertainment, this is a great opportunity to pick up users on the cheap. Companies that are selling subscriptions to DVDs, music, etc. will all benefit from this. Games supported by virtual goods and subscription should stand to benefit as well!