Rational Exuberance Pays Off in Broadband Distribution

During the internet bubble, Alan Greenspan famously fretted that "irrational exuberance" was clouding the market's better judgment. Notwithstanding his ultimate foresight, at the time I remember thinking, would he prefer "rational exuberance", or would even this type of optimism be too giddy for his taste?

Rational exuberance is a good frame-of-mind for the growing group of both entrepreneurs and larger companies developing applications purely for broadband-connected consumers.

First of all - hooray for these initiatives! They mirror the creativity that accompanied the start of the internet itself and are critical to continuing to fuel the economic growth that the internet has created. After a few gloomy years, the spirit of innovation is again alive and well...

History's Lessons

However, I think one critical difference between the approach of the original group of successful internet entrepreneurs and the current group of broadband application enthusiasts relates to their distribution strategies.

The original group choose not to pursue big distribution partners initially or maybe ever, instead relying on organic growth or clever, low-cost marketing tactics. This original group would simply build their web sites or applications and put them up on the net. If they were compelling, they would be quickly discovered and passed on by their newly enamored users. It's hard to remember back that far, but that is how today's most prominent sites: Yahoo, Google, Ebay, Amazon and others got started. If you're thinking "yeah, that worked then, but it won't work now..", the reality is there are many web sites and applications that have followed the exact same logic and steadily built their audiences, just in the last few years.

At some point in the late '90s, this strategy gave way to a "we must get big as fast as we can" mantra. Well-financed dot coms came to believe that big-time distribution deals were the key to their success from day one. They gave millions of dollars to big distributors like AOL and others, often for lousy deal terms such as payments up front, meager performance efforts, and chunks of free equity.

Getting Back to the 'Net's Roots

I detect some vestiges of this "big-time-distribution-from-day-one-is-the-key-to-my-business-plan-succeeding" attitude among broadband developers whom I've met with in the last six months. Often they believe that landing big MSOs broadband as distribution partners is a key early success factor. I think this is a highly risky strategy that will yield questionable results.

My advice is to remember how the original group thought about distribution, and stay close to the same path. So how does a rationally exuberant broadband application developer proceed successfully, using the lessons of the successful early internet entrepreneurs?

Here are 5 guidelines for broadband applications developers to keep in mind:

1. Launch your application - your target users can get it directly
   The greatest thing about the internet remains its "frictionless nature" - there's no gatekeeper standing between developers and their target audience. Get yourself a URL and you're in business: more than 25 million broadband homes, plus millions of business and campus users out there who can instantly get access to what you've created especially for them.
2. Optimize your product and refine your business model
   Version 1 of internet applications tended to be pretty shoddy compared to what they ultimately grew into. The key is to get user feedback and focus resources on refining the product. This feedback includes allowing your community of users to comment on how you propose to monetize your efforts. This is valuable info for how to structure the big-time distribution deals when the time is right.
3. Creatively build your initial audience
   Seek out low cost ways of getting the word out. Maybe it's search terms that are underutilized and therefore inexpensive. Or maybe promotional deals with smaller, but hungry partners who value what your application brings to their audience and will accept reasonable financial terms. Or maybe community-of-interest tools like blogs, social-networking or online forums that reach your target user. Remember the famous "I want my MTV" community outcry of the 1980s. Be creative!
4. Generate evidence to back your story
   Hard data always trumps Powerpoint presentations, no matter how elegant they are. Real-world usage information guides your continued product development efforts, and is invaluable in proving the value of your application, so it's clear you're not the only one who has drunk the Kool-Aid.
5. Finance the plan adequately and keep the cash burn rate low This is tougher to do than ever for both startups and internally financed initiatives. The first four steps will all make your case stronger and give you much needed breathing room if results stray from forecasts. Financial strength is critical in any negotiation, but particularly when you're dealing with a multi-billion dollar entity.

When these steps are executed properly, they set the stage for timely and advantageous distribution deals with MSOs and other broadband service providers. If a developer's pitch for MSO distribution relies on nothing but its own speculation (enthusiastic as it may be) for how the MSO would benefit from distributing the application, a deal is unlikely to get too far. In fact, you actually run the risk of hurting yourself, because you may have used up scarce political capital in the form of personal and professional relationships to even get the meeting in the first place. Getting the next meeting when you have more to show may not be as easy.

When MSOs are presented with real-world experiences and data derived from following the above steps, they should be able to clearly understand the benefits they'll derive from a deal. As always, well understood self-interest is a strong motivator in helping make a deal happen. Remember, someone in the MSO organization has to become a personal champion for why the deal makes sense. The better they're armed with your evidence, the more likely they'll be willing to go to bat for you and get the deal approved.

I think this is a rationally exuberant approach that Mr. Greenspan would like!