Finding Genius

by Kunal Mehta

  Bertelsmann Digital Media Investments’ website states:

  “BDMI partners with emerging digital media companies to share expertise, to make industry connections and to drive growth. We focus on three sectors:

  Online Video: From over-the-top television to viral videos to social media stars, video continues to be a disruptive force in the media industry

  Next Gen Media: Companies leveraging unique content, technology, social media and new business models to build loyal audiences

  Publishing Technology: Companies that help publishers create, distribute and monetize content.”

  RRE Ventures’ blog states:

  “We live in a post-portal world in which content travels freely through different messaging channels (email, text, Snapchat, Slack, a multitude of messaging services) and across major social media platforms (Facebook, Twitter, Google, YouTube). Successful distribution today depends on promotion, broad appeal, and your audience’s willingness to engage, react and share. Understanding these platforms and the forces that drive engagement and proliferation are critical if you want your content to achieve meaningful distribution. For media businesses that depend on advertising, this seems counterintuitive since better ad experiences have the potential to unlock major new revenue streams. Innovating around the advertiser’s experience has actually created a vast amount of value and we wish we saw more companies focused on this.”

  “We believe that in every media format, the important thing is to give the brand advertiser a means to engage the audience emotionally, just as the content does. At BuzzFeed, Jonah Peretti recognized this and drove the creation of the sponsored content model. This gave brands a fresh medium to tell a story through shareable content, while holding them accountable for engaging the audience. Today, there are more ways than ever for publishers to be true partners to a brand, helping hone their voice and find their targeted audiences. BuzzFeed’s test-and-learn approach lets brands explore new formats like quizzes, shorter-than-short form content, and no-sound-required video. These explorations have opened up entirely new revenue streams for BuzzFeed in the form of cross-platform branded content packages that are integrated with the company’s owned and operated site and apps. It’s one of the reasons the company has continued to grow at a terrific rate. Today, we welcome the ad innovations from SnapChat, with Lenses that overlay a brand lifestyle on our own and publisher driven Discover channels that include short, high-quality video ads. Now it feels like we are getting something new that works for brands, though a lot of what’s happening in those channels feels a lot like TV. We look forward to seeing new innovations in ad experiences that captivate audiences and advertisers alike.”

  Frontier Technology in Media and Entertainment

  Today’s most commonly hyped frontier technologies — XR, blockchain, and artificial intelligence — are extremely relevant to the media and entertainment industry and will likely capture billions of dollars of value in the next few years.

  XR (AR / VR / MR)

  Media companies have been some of the most fervent investors in XR — defined as the category of virtual reality (VR), augmented reality (AR), and mixed reality (MR) — as many view these platforms as the next frontier and platform for entertainment. At the moment, the sector is in “the trough of disillusionment” of The Gartner Hype Cycle. After Facebook acquired Oculus in 2014, investors poured capital into VR startups with unrealistic expectations around market timing and consumer adoption in the short term, and have generally been disappointed by traction to date. Media companies, realizing that movie attendance was declining and cord-cutting was increasing, began investing in VR, believing it could be the next mass media distribution channel.

  Media companies were some of the first to realize (intentionally or not) that VR may be better suited, at least initially, as Location Based Entertainment (LBE) installments for a vast majority of consumers who aren’t in a rush to purchase their own hardware. Dreamscape Immersive ($41 million raised from 21st Century Fox, Warner Bros. AMC, MGM, Nickelodeon, IMAX, and Steven Spielberg), The Void (undisclosed funding from Disney), SPACES ($9.5 million raised from investors including Comcast Ventures), and SandboxVR (over $70 million raised from Andreessen Horowitz and others) are creating physical locations for interactive, multiplayer VR experiences. These companies are installing locations at theme parks, movie theaters, and shopping malls — and in some cases are providing reduced or even free rent to encourage the installments, which they hope will bring increased foot traffic to their dying retail hubs. These installments are riding the consumer trend of seeking “experiences,” such as escape rooms and Instagram installments. The big challenge for LBE VR is to transcend the novelty, cultivate reasons for repeat visits, and solve the peak traffic issue — not being able to handle demand on a Saturday afternoon while having little to no demand on Tuesday morning.

  Since VR has yet to find its “killer app,” it’s still unclear whether virtual reality will be more than a new gaming platform (in a media context.) The most popular VR content to date have been interactive games such as Beat Saber, as opposed to 360 degree video or VR films. Film and television studios are betting that VR can provide a new distribution and monetization channel for filmed content, but it is not yet certain whether this content is a compelling consumer proposition. The most promising venture investments in VR are most likely in content tools, distribution technology, and networks (excluding hardware) — not in content companies. Founded in 2012 by Herman Narula, Rob Whitehead, and Peter Lipka, Improbable ($603 million raised, $2 billion valuation) is building the toolset to create “virtual worlds” for gaming and entertainment, similar to Unity Technologies.

  AR / MR media and entertainment applications in the immediate future are most likely gaming (again), advertising, and data. Founded in 2011 by John Hanke and Phil Keslin, Niantic ($470 million raised, $4 billion valuation) has had the most financially successful AR application to date with “Pokemon Go,” which has brought in over $2.5 billion in revenue and over 800 million downloads since launching 2016. The company’s next launch is a Harry Potter themed AR game due to be released in the second half of 2019. Advertising applications of AR / MR are likely to be pioneered by Google. On the data side, inside-out tracking for spatial positioning means companies like Facebook (through Oculus), Magic Leap, Google, and Apple will now have cameras inside your home, with the ability to recognize objects, products, and brands. Needless to say, this data is highly valuable (and sensitive.)

  Blockchain

  Blockchain technology has a few potential applications within the media and entertainment industry, including digital rights management / royalty payment and microtransaction options for paid content. Today, digital rights and royalty payments for music, TV shows, and films are primarily tracked, recorded, and paid out via individual databases (sometimes excel sheets) held by multiple independent organizations. This regularly results in disputes and unpaid royalties to the tune of millions of dollars annually. Smart blockchain contracts could ensure that everyone involved in the creation of a piece of content gets their share of revenue generated by it. Stem Disintermedia (founded in 2015) is building solutions for the music industry that would create decentralized databases on the blockchain, allowing third parties to transparently and immediately license content, while simultaneously providing reimbursement for all rights holders. Audius (founded in 2018, $5.5 million raised to date) is creating a decentralized platform for the distribution, attribution, and monetization of audio content.

  Blockchain technology is also being considered for creating new monetization models for content creators, such as microtransactions. Utilizing cryptocurrency / digital currencies, consumers could pay pennies or fractions of a penny to consume content such as articles, music, and video. The pendulum has shifted in digital publishing from free, ad-supported models, to paywalls and expensive upfront subscriptions. How many subscriptions are consumers willing to pay for? Spotify already pays music labels $0.006—$0.
0084 per stream, which is supported by subscribers’ monthly fees or advertising revenue. What if consumers paid this fee directly, without paying a subscription fee or being exposed to advertising? The proposition is certainly compelling for many consumers, who currently overpay for content relative to their consumption. Currently, paywalls on publishers’ websites demand high upfront payments, regardless of a user’s consumption. Mycro Media is looking to unbundle the exuberance of subscription publishers by empowering consumers to purchase access to only the articles that interest them for a nominal fee. Micropayments have the ability to align consumption with cost and ensure that content creators are fairly compensated.

  Artificial Intelligence (AI)

  Early use of artificial intelligence (more accurately, machine learning) was leveraged by companies like Netflix to power recommendations, content targeting, and personalization for consumers. Now, companies such as Brud (founded in 2014, over $25 million raised to date) are looking to use machine learning to scale content creation for the first time. Production of high-quality entertainment is expensive primarily because it is not scalable and takes an incredible amount of human effort to create. Brud is betting that it can create entertainment properties and stories using machine learning and algorithmic content creation.

  Machine learning (ML) and natural language processing (NLP) are also being utilized by companies like Papercup.ai to translate audio from video content into different languages in real time, while maintaining the intonation, emphasis, and emotion of the original speaker. This significantly expands the reach and audience of filmed content, whether YouTube videos or major motion pictures.

  The media and entertainment industry has changed more in the past 10 years than it had in the prior 50, thanks to the immense shifts in distribution and production technology and costs. The most successful new media technology companies over the past 20 years have demonstrated that the highest value is in creating compelling consumer propositions, proprietary distribution platforms, and infrastructure, communication and engagement tools. Today, we’re on the brink of even quicker innovation and disruption as new technologies like XR, AI, and blockchain demonstrate the potential for even better consumer experiences.

  LAURA CHAU

  CANAAN PARTNERS

  Facebook (with its acquisitions of WhatsApp and Instagram), Twitter, LinkedIn, and Snap dominate social interactions online and have expanded their reach to become global juggernauts within social networking. The thought of an entrepreneur launching a new social network amidst this competition often seems like an untenable idea. Building a genuine sense of community, fostering conversation, adding utility for diverse populations, and maintaining privacy and security are all challenges these companies continue to face. Laura Chau, a Principal with Canaan Partners, takes a contrarian view. Laura believes that there are opportunities for new social networks to emerge where these existing networks begin to hit their ‘breaking points’ and that as consumer behaviors evolve, so too do their interests in how they interact with one another or share pieces of themselves online. In this chapter, Laura shares her perspective on the challenges and opportunities of social networks.

  Canaan Partners is an early-stage fund with a storied 32-year history that has made it a mainstay player in the venture ecosystem across the US. On the consumer side, Canaan has invested in companies such as TheRealReal, Instacart, Turo, Ro, Ladder, and Match.com. Laura is a two-time graduate of Stanford University, with a B.S. and an MBA, and is supporting the next generation of consumer investing as a Principal with Canaan’s 11th fund. Before joining Canaan, Laura was one of the first of 20 employees at Kabam, the mobile gaming startup that was acquired in 2017 for $800 million. At Canaan Partners, Laura has led investments in Coterie and Jumpcut in addition to working closely with the firm’s investments in companies such as Cuyana, Kustomer, Cargomatic, and World View.

  As Laura thinks about online communities and interaction, she offers a discerning perspective on the foundational reasons why companies such as Facebook, Twitter, and Snap were specifically built, and how those companies have evolved in recent years. Unlike other investors who are outsiders to the industries that they cover, Laura offers personal perspectives in this chapter. She is an avid user of social platforms — be it the larger incumbents or new and novel approaches to social interaction — and balances her curiosity and enthusiasm as a user with the intellectual hurdles she must cross to prove that a social network is truly gaining the attention of users beyond herself.

  SOCIAL MEDIA: A GAME OF STATUS

  Laura Chau, Canaan Partners

  Introduction

  In 2019, the impact and reach of social media is undeniable. Facebook serves 2 billion unique users every month, Snapchat users post over 3 billion snaps every single day, and even the guy who artfully makes my Sunday morning lattes is an Instagram influencer. In tech and venture, social companies are the holy grail of Silicon Valley. They are the investments that VCs become famous for — like Chris Sacca and his early bet on Twitter, or Jim Goetz who turned $60 million into $3 billion with his bet on WhatsApp. The importance of social within this community is so pervasive that the founders of social companies are often the de facto template for budding entrepreneurs who could “build the next Facebook” or “become the next Evan Spiegel.”

  Yet there comes a point when these social networks hit their peak. In fact, most of the social media giants of today started 10-15 years ago — nearly an entire generation back. Today, as their growth begins to slow, they must acquire new companies to stay relevant, and for many, their original value proposition morphs — now in favor of revenue, margin, or user growth.

  What is perhaps most notable about many of these social media companies is that they are in fact, no longer social. Most social media companies initially rose to prominence through a small, controlled community: Facebook with Harvard students, WhatsApp through private group messages, Snapchat’s domination of 1:1 photo messages with your friends. This feeling of being pulled in by a friend or confidante allowed these platforms to grow virally: one friend inviting 10 of their pals; those 10 inviting another 10 and so on. However, now that we’ve hit maturity on these platforms, nearly all have taken a turn from intimate social network to social media with broadcasting as the core use case. In early 2019, Mark Zuckerberg proclaimed that Facebook had hit this peak — functioning as a “townsquare” — when now the goal is to get back to a “living room.” With this shift towards broadcasting and a massive growth in network size, most of these companies are, I argue, no longer social media platforms. They are status media platforms.

  The Building Blocks of Social

  Let’s first start by examining what actually makes something social. In the common lexicon, social is most commonly used to refer to social networks and social media. While the two share quite a bit of overlap, they are still distinct classifications. A social network is ultimately a communication platform, with 1:1 interactions at its core. Unsurprisingly, it also has strong network effects, such that the more people who are using it, the more valuable the content and the service itself becomes. Social media is typically a platform that broadcasts information from one to many. Facebook, for example began purely as a social network, requiring a double opt-in to be “friends” and a direct communication channel via your personal wall (and while this wall was public, your friends would have to purposefully seek out your wall to view it.) Facebook has also now become a social media platform, given the nature of the Newsfeed that broadcasts information about your friends, friends of friends, or trending news. Twitter on the other hand, was a social media site from the start — an open broadcast of your thoughts available for all to see. That’s perhaps why Twitter quickly became overrun with celebrities — it was a novel method to communicate with a fan base. Ashton Kutcher could tweet out something mildly provocative about what he ate for breakfast, creating a feeling of social closeness with his fans without having to communicate individually with each of them
via DMs or replies.

  Platforms will often blur the lines between social media and social network, even changing where they fall on the spectrum over time. Snapchat is a great example as something that began purely as a social network, but now straddles both. Again, with messaging at its core, users would send 1:1 snaps back and forth between friends. Even the interface discouraged sending snaps to mass audiences as you had to individually select everyone’s name. Eventually, Snapchat moved to allow you to snap large groups of friends and eventually post stories to anyone you were connected with (and even those you didn’t know) — perhaps the company’s most impactful feature contribution to modern media. Then, once Discover was added, providing short-form video and news content, Snapchat was fully a social media app in addition to still being a social network. Users had the option to choose which aspects of the service to use.

  Regardless of whether something is classified as social media or a social network, there are five characteristics that underlie anything that is inherently social. I refer to these as the “Social Pillars.”

  Community and Conversation: A platform must enable connection. It could be one-to-one or it could be one-to-many, but the ability to build some type of community and have a form of discourse is critical. Facebook and Twitter are clear examples of apps that capitalized on this pillar early. Others like Whisper or Meerkat had an early surge of success because of this community element, but failed to deliver on the remaining pillars.

  2. Utility: There must be some useful aspect to the tool to keep users engaged. This might be messaging to stay in touch with friends, a source of news, or a method to save photos of interior decorating ideas you’ve found on the Internet. Without true utility, social companies will be novel for a moment but will quickly fall to the wayside as soon as that novelty is exhausted (RIP Yo).