What Do Women Want? Just Ask (NYTimes, 10/29/06)

October 29, 2006
What Do Women Want? Just Ask
By MICKEY MEECE
FOR most of the 27 years it has been in business in Canada, Shane Homes has staked its claim as one of the country’s leading regional homebuilders the old-fashioned way: it devised and executed cookie-cutter designs for new houses just as fast as the orders came in. As the economy of its home base, Calgary, Alberta, soared on the back of oil and gas riches, it could have continued minting money by sticking with that tried-and-true approach. But two years ago, smack in the middle of a housing boom and heightened competition, Shane Homes dumped its old ways and adopted a new blueprint.
The overhaul began at a real estate conference in 2003, when Shane Wenzel, the builder’s namesake and its head of sales and marketing, heard a speech about the tremendous buying power of women. That moment, Mr. Wenzel recalled, was an “epiphany.” He set up small “listening groups” of women to tap into the needs of people who actually lived in his company’s homes. What Mr. Wenzel heard wasn’t pretty. “The ladies never held back once,” he said. “They were brutally honest.”
The kitchens in the company’s homes, the women said, were all wrong. The pantries were tiny, and the sinks needed to overlook a window so kids in the backyard could be monitored. And the mudrooms! They shared space with laundry rooms, meaning that dirty floors might sit right beneath clean laundry. (“It’s called a mud/laundry room?” one incredulous woman asked.) After that, Shane Homes subjected designs to similar grillings — before they were built — and adapted them accordingly.
“Shane Homes had the revolutionary idea of asking women what they wanted in a home,” said Joanne Thomas Yaccato, a Toronto consultant and author who advised the company on female consumers. “The revolutionary part is that they not only listened, they actually built the darn thing.”
Shane Homes is hardly alone. More companies, in the United States and elsewhere, have realized that they overlook women at their own financial peril. The companies are realigning their marketing and design practices, learning to court an increasingly female-centric consumer base that boasts more financial muscle and purchasing independence than ever before.
“We are perhaps on the first step to a matriarchal society; women will earn more money than men if current trends continue by 2028,” said Michael J. Silverstein of the Boston Consulting Group. “The trend has been escalating in the last 10 years as there has been a gradual, slow erosion of the power balance in the family, a psychic rebalancing.”
Women, Mr. Silverstein added, are “controlling purchases and driving a shift in our economy.”
Retailers like Home Depot, Lowe’s, Sears, Best Buy and others recognize that women are running their households like purchasing managers. Some are “identifying stores that have more female shoppers and offering additional services,” including sales support, customized signs and special product displays, said Dana L. Telsey, who runs her own independent research firm. Travel companies, automakers, and other companies, meanwhile, have had to cater to the tastes of women who have careers outside the home and are pursuing hobbies and other pricey interests. The phenomenon is readily apparent on the Internet, where Web sites built around the needs and interests of such groups as female homeowners and car buyers have gained steady traction.
Much of that shift has to do with education and pay. At American colleges and universities, women represent 57 percent of undergraduate classes and 58 percent of graduate classes, according to the American Council on Education. (They also hold a slight majority in the overall population.) And education, in turn, has helped to bolster salaries and income. In 2005, government data show, women who were full-time wage and salary workers had median weekly earnings of $585, or 81 percent of the $722 median for their male counterparts, up from about 63 percent in 1979.
“Women are making 70 percent of travel decisions, for the family, for their own getaways or for people at work,” said Niki Leondakis, the chief operating officer of Kimpton Hotels and Restaurants in San Francisco. “It’s surprising that more people are not including women in their marketing.”
But some big retailers say they are, in fact, well aware of where purchasing power resides.
Best Buy, for example, “used to be a boy store, built by boys, for boys, but four to five years ago, there was a dramatic flip,” said Julie Gilbert, a vice president with the company. That change, she said, occurred with the rise of must-have products like digital cameras, MP3 players, cellphones and other mobile devices, and products like flat-screen televisions that have became fashionable accessories for the home.
“Women are outspending men in our industry $55 billion to $41 billion,” Ms. Gilbert said. “Not only that, they are actually influencing 90 percent of the purchases. It is a new day in consumer electronics.”
THE same may be true in financial services. MassMutual, which recently introduced “Pearls of Wisdom,” a video-based financial seminar, and added a women’s page to its Web site, has taken the approach a step further. In August, it started a “Selling to Women” educational series to help its agents understand women’s expectations and needs. “When it comes to financial advisers, women will share the most intimate details of their lives,” said Susan W. Sweetser, second vice president of the women’s markets department at MassMutual. “Women don’t just buy based on information; they buy based on emotions, coupled with the facts.”
Health care was the first industry to recognize and adapt to female buyers because it was clear that women were the gatekeepers for most families’ health needs, according to Marti Barletta, president of the TrendSight Group, a research firm in Winnetka, Ill. Financial services was next, followed by home improvement and consumer electronics, she said, as marketers followed the money trail.
While women have always influenced decisions about big-ticket household purchases, their direct spending has expanded substantially in recent years.
Women accounted for 33 percent of the purchases at big-box retailers in 2005, up from 28 percent in 2003, according to the NPD Group, a consumer research firm. “That’s a huge shift,” said Mark J. Delaney, an NPD analyst, “not to be taken lightly.” To be sure, some companies have been examining the needs and interests of female consumers for years. The advertising agency Leo Burnett USA and its LeoShe division created its Girlfriend Groups research services in the 1990s to help clients understand how customers approach brands.
In its current form, Girlfriend Groups finds a volunteer who invites some friends to her house. Once there, they meet researchers who ask them questions about brands and products. “We needed to go deep,” said Denise Fedewa, executive vice president of Leo Burnett USA in Chicago. “We wanted to really peel back their guard and tell us what was going on.”
Ms. Fedewa said the research produced unusually honest and forthcoming results. In a more formal focus group held in a controlled setting, women might say, for example, that they kept only healthy foods in the cupboard for after-school snacks. But in Girlfriend Groups’ research, conducted at a woman’s house, friends would never let a woman get away with fibbing about what’s in the cupboard, Ms. Fedewa said.
Market researchers are now embracing women as much more than domestic divas. They recognize them as buyers with their own careers and fattened pocketbooks, who are finding plenty to do and plenty to buy outside the home. Over the last several years, a cottage industry of consultants and authors, all offering advice and analysis, has sprung up around the pervasiveness of women in the marketplace. A few years ago, Ms. Barletta said, she counted just three competitors; now she estimates that 15 to 20 consultants work in her field.
ON a recent Friday evening, Danisha Krause and three friends checked into the Hotel Palomar in Washington for a “Glam Girls” promotion held by Kimpton. The women are part of a larger group of mostly single women, aged 32 to 40, many of whom graduated from Virginia Tech and meet once a month for group suppers. They have traveled to places like Las Vegas and New York, but on this night the group of four decided to stay closer to home.
For about $300 each, they booked a suite with two adjoining bedrooms and converted it into a party pad. When they arrived, the hotel gave them gift bags containing OPI nail polish that they swapped among themselves, based on their color preferences. They dined in the hotel’s restaurant and then returned to their suite for a private Texas Hold ’Em lesson from a poker expert, while the hotel sent up a steady flow of cocktails and snacks.
“We really had a good time,” Ms. Krause said. “We played a round of blackjack, and craps, too.”
The Glam Girls package is part of the company’s Women in Touch program, the brainchild of Ms. Leondakis. The program, now two years old, offers special promotions and amenities to female guests. “I’m on the road so much,” Ms. Leondakis said. “I generally found that hotels didn’t cater to the specific needs of women travelers.”
She says that some hotels overlook female guests by not emphasizing their personal security — or by offering an abundance of poorly designed rooms. For example, what 5-foot-4 woman has not had to jump up to see herself in hotel mirrors that do not provide full-length views? And why, in so many bathrooms, can makeup supplies fall so easily into the toilet?
Kimpton says 48 percent of its guests are women — compared with a lodging industry norm of 42 percent — and it addresses their needs with rooms that offer more lighting and closet space, better mirrors, bathroom shelves, hand-held steamers and items like razors and toothpaste. There are also in-room wellness programs featuring yoga, Pilates and meditation. And don’t forget in-room safes. “We like to travel with jewelry and we don’t want to wait in line at the front desk,” Ms. Leondakis said.
Other companies are tapping into this same rich vein. Melody Biringer, founded Crave Party in Seattle in 2000 with the idea of events that weave together shopping, bonding and professional networking. Each party has a theme; the women pay a small fee and gather in one location where there is food, shopping and services like manicures and massages. The company’s motto is “Everything you crave, under one roof.”
Ms. Biringer said she started Crave Party because her life as a married entrepreneur prevented her from seeing her best friend more than twice a year.
“I decided that was not acceptable,” Ms. Biringer said. “Life gets in the way. I craved her, and hence the name. I decided I needed to start a business to get women together.”
Crave is now licensed in 13 cities; Ms. Biringer sponsors six parties a year in Seattle. Early on, she said, the parties were aimed at younger women, but after their first visit, the women would return with their mothers. So the groups now attract women 30 to 50 years old.
On a recent afternoon, Ms. Biringer offered a “Girls at Play” party at the Fisher Pavilion-Seattle Center. For $25 each, about 200 participants dined on Mexican salads, shopped and enjoyed activities like yoga, Pilates and dance boot-camp classes; makeup tips; and an active-wear show. They left with a gift bag of goodies.
Ms. Biringer also arranges travel shopping trips for small groups of women to places like Los Angeles and New York. “Some of us end up in Prada, some of us in Century 21, but we always have a blast and, yes, ring up the purchases,” said Barbara Travers, who also attended a Crave Party in Seattle in August. “I’m usually the one dragging us into four-star restaurants and wine shops; they’re usually dragging me into Henri Bendel and Saks.”
Group events like these are tailored to women’s interests, Ms. Biringer said. “We need to get away from it all and be with our trusted friends,” she said. “Despite what people think, we don’t really pamper ourselves that much. When we do, we’re really happy, and men appreciate that.”
Men might also appreciate that more women are handy around the house. Just ask Heidi Baker and Eden Jarrin, the Janes of BeJane.com, the online community they formed in 2003 with another entrepreneur, Phil Breman, and have aimed at women who are do-it-yourselfers. Ms. Baker, who is called the “chief Jane officer,” and Ms. Jarrin, the chief executive, taught themselves how to do home improvement projects, and they share the knowledge on their Web site.
Both women also bought their own homes before they married their husbands. That makes them representatives of another trend: single women are the fastest-growing segment of home buyers, according to the National Association of Realtors, purchasing 21 percent of homes, compared with just 9 percent for single men.
According to Be Jane more women are undertaking home improvement projects on their own. “We’ve seen a huge shift in everything: jobs, wages, home-buying,” Ms. Baker said. Do-it-yourself home improvement, she said, “is one of the last realms.”
Even so, Ms. Baker says stereotypes persist in the marketplace. In a blog posting in September with the heading, “Sorry Sweetie, You Need to Hire Someone,” Ms. Baker related the following encounter at a home improvement store:
“I walked into the lighting section and asked a guy to where I could find the dimmers. Once he takes me there, he turns and makes some comment about how I need to make sure to check with the electrician who’s going to install it. My response was that I would be putting it in myself. As if I hadn’t even said a thing, he tells me, ‘Oh honey, you really do need to hire someone to do this for you so you don’t burn the house down.’ ”
The two “Janes” shrug off such experiences. “We are building a lifestyle so women can learn how to feel confident in the home,” Ms. Jarrin said.
Data suggests that women are feeling quite confident. According to the NPD Group, women bought 47 percent of all painting supplies sold in the United States in June, up from 42 percent in 2003. And they buy about half of all new bathtubs, up from 35 percent.
WHAT BeJane.com is to home improvement, AskPatty.com hopes to be for women and cars. While there are just two Janes, a whole panel of expert automotive women are behind AskPatty, which gives women a blog and a Web site to post questions about all aspects of automobile transactions and maintenance.
The site, which has no advertising, is rolling out an AskPatty Certified Dealership Program. Dealers that complete it are deemed to be female friendly and are searchable by ZIP code. The company has given its seal of approval to 25 dealerships and says that hundreds more have inquired about joining the list.
Just who is Patty?
“Patty is a mom, daughter, wife, niece, grandmother and auntie,” the site explains in part. “Patty is young, old, married, single, an experienced driver, a new driver, a racecar driver, a hot rod driver, a classic car driver, a minivan driver, a truck driver, a luxury car driver, an S.U.V. driver, a disabled driver, a carpool driver.”
Jody DeVere, president of AskPatty, which was formed last summer, notes that women buy more than 50 percent of the new cars and trucks sold in the United States. In 2005, based on data from National Automobile Dealers Association, that amounted to about $200 billion spent on about eight million new vehicles. Although women also bought about half of new cars and trucks a decade ago, Ms. DeVere said, their approach to those decisions has changed.
“The main difference is that women are beginning to understand their purchasing power,” she said. “They are now beginning to demand better treatment and have gotten their voice.” While there are some other valuable auto-buying sites for women, like Edmunds.com/women, Ms. DeVere said, AskPatty is different in that “it is from women by women, but more than that, AskPatty is heartfelt. It’s not just words and information.”
After spending hours on the Internet researching a new car over several months, Beverly McMullen of Upland, Calif., hit upon the AskPatty site. She has a physical disability and needed specific auto modifications.
She visited the site before and after her family bought a 2006 Saturn Vue. Ms. DeVere responded personally to her questions, passing along useful information. Ms. McMullen said she was hesitant about asking for help, but was glad that she did.
“It seemed like I had a task force supporting me,” she said in an e-mail exchange. “AskPatty really jump-started what had seemed like a dead end for me.”
The Internet is also a resource for women taking charge of their own finances. It was only a few decades ago that women — who now buy a big share of products like tires, power tools, lawn mowers, computers, consumer electronics and, of course, homes — could not get a bank loan without a male co-signer, regardless of whether they had their own income.
These days, some women are literally opening their checkbooks to the world on blogs like MyOpenWallet and BostonGal’sOpenWallet, which is run by a woman who identifies herself online only as Jane Dough, to protect her privacy (www.bostongalsopenwallet.blogspot.com). The blog tracks her personal assets monthly (valued at $412,435.59 in October) and calls itself “the ongoing chronicle of a single 30-something Bostonian who is seeking enlightenment and control of her net worth.”
In a telephone interview, she explained that she started blogging a year ago, after she bought a house and paid off her student loans and credit cards. “I started to feel adrift,” she said. “What do I do next? How do I keep motivated?” The blog was her answer.
In her first post, she said: “Speaking publicly about your personal finances has always been a no-no in my family. The result of this is that I often felt unprepared and uneducated about financial matters. I am now in my mid-30’s, single, with a fairly well established professional career. Because I live alone, I make all the financial decisions in my life — good or bad.
“If your parents and peers can’t or won’t show you the way, hopefully sites like this on the Web will.”
For its part, Best Buy is more than willing to show them the way. Online, Best Buy has added “click to call,” so that a shopper can ask a representative to call her back at a time she requests to help with buying decisions. In the stores, it has made the aisles cleaner and wider and added shopping bags as an alternative to carts.
BACK in Calgary, Shane Homes plans to start a new listening group in November, and to keep it going until next summer. Mr. Wenzel, who is 34, says Ms. Yaccato’s advice and book — “The 80 Percent Minority: Reaching the Real World of Women Consumers,” which stipulates that women control 80 percent of every consumer dollar spent — inspired him to create the listening groups.
Shane Homes, whose revenue doubled in six years, to more than 180 million Canadian dollars in fiscal 2005-06, also went beyond listening. It asked women in the groups to design two homes, both named after Ms. Yaccato. Those and other suggestions were incorporated into the design of a house called the Yaccato 2, which went on to win a design award in Alberta.
Shane Homes sold nine Yaccato 2’s in 2005 and has sold five so far this year. Many of the its features have also been incorporated into the designs of the company’s other model homes.
Mr. Wenzel says that Shane Homes now takes about five times longer to design a home than it did just a few years ago.
“It’s critiqued once, twice, three times,” he said. “It’s a longer process, but we end up with better designs.”

A Dot-Com Survivor’s Long Road (NYTimes, 10/30/06)

October 30, 2006
A Dot-Com Survivor’s Long Road
By MIGUEL HELFT
SAN FRANCISCO, Oct. 29 — When Jim Clark started Shutterfly, the online photo printing service, in December 1999, a 2-megapixel digital camera could set you back $800, investor enthusiasm for e-commerce was soaring and the words “Internet” and “bust” were rarely used in the same sentence.
For his part, Mr. Clark had something of a Midas reputation when it came to technology investing, having started Silicon Graphics, Netscape and Healtheon.
But what was expected to be a sprint at the peak of the dot-com boom turned into a marathon — one in which Shutterfly, at times, appeared to be faltering. Late last month, the company finally crossed a finish line of sorts when it became one of just a few e-commerce companies to go public since the dot-com bust.
While the offering may have enriched Mr. Clark and other early Shutterfly backers, it has been a money-loser so far for most who bought into it. And it has not brightened the decidedly downbeat mood of venture investors, whose fortunes depend on a healthy market for public offerings.
Shutterfly’s shares had a brief run-up after their market debut on Sept. 29, but since then they have dropped to $13.35, or 11 percent below the offering price of $15.
“It’s been an extremely difficult I.P.O. market this entire year,” said Mark G. Heesen, president of the National Venture Capital Association, noting that only 37 venture-backed companies had gone public through the end of the third quarter. “Then you see something like Shutterfly, which a lot of people were excited about, but has not performed as well as we were expecting.”
Mr. Heesen cautioned that “one I.P.O. does not make a trend,” and he noted that eHealth and other companies that have gone public recently had done well. But he said there were no indications of a pickup in the overall market for initial offerings.
Citing restrictions imposed by securities regulators, Shutterfly declined to comment or make Mr. Clark, who is chairman, available for an interview. The company is scheduled to report earnings on Nov. 7.
While seven years is not an unusual amount of time for a venture-backed firm to go from start to public offering, the pace was often much quicker back in 1999. Coming in at the tail end of the boom, Shutterfly had no choice but to take its time — and weather some difficult periods.
“It’s been a long process,” said George Zachary, one of the original investors in Shutterfly. Attracting customers “was slower and consumed more money than we would have liked,” he added.
Mr. Zachary, formerly a partner at Mohr Davidow Ventures, the second-largest investor in Shutterfly after Mr. Clark, is now a partner at Charles River Ventures and no longer sits on Shutterfly’s board.
Shutterfly has been profitable for three years, but it is facing a digital photography market that is much different from when it started. Mr. Clark promised at the start that Shutterfly would usher in a revolution in digital imaging, and seven years later, there is no question that digital technology has revolutionized the world of photography. But Shutterfly appears to be more a product of the revolution than its standard-bearer.
Shutterfly’s two main competitors in online photo printing, Ofoto and Snapfish, have been acquired by Kodak and Hewlett-Packard, respectively. (The Ofoto service was renamed Kodak EasyShare Gallery.) These deep-pocketed patrons have challenged Shutterfly on price, hurting its profit margins.
Meanwhile, a large new crop of Internet companies is capitalizing on the explosion of digital images taken not just with cameras but also with cellphones. Most of these companies, which include Photobucket, ImageShack, Slide and Flickr, which was acquired by Yahoo last year, emphasize online sharing over printing.
Tapping a younger generation of consumers for whom photography has become a form of online self-expression, often as part of blogs or social networking sites like MySpace, they have, in some cases, dwarfed Shutterfly’s audience.
“The competitive landscape is very crowded,” said Sam Snyder, a research analyst at Renaissance Capital, an independent research firm that runs a mutual fund focusing on initial offerings. Shutterfly “has huge competitors breathing down its neck, undercutting it on price,” he said.
Early last year, the standard price of a 4-by-6 print was around 29 cents. Today, they cost 19 cents at Shutterfly, 15 cents at Kodak and 12 cents at Snapfish, though volume discounts are available.
Shutterfly was founded by Dan Baum and Eva Manolis, who had been engineering managers at Silicon Graphics. After receiving financing from Mr. Clark and Mr. Zachary, another Silicon Graphics alumnus, the fledgling company moved into a modest office suite above a Jenny Craig Weight Loss Center in Menlo Park, Calif.
The humble surroundings apparently did not impress representatives from major photo-printing equipment firms like Fuji and Konica, whom the company was courting. “They didn’t know whether to take us seriously or not,” said Mr. Baum, who is now an executive at Adobe.
Still, Shutterfly managed to obtain the hardware it needed, and by the time it was ready to open its virtual doors it had moved to new headquarters in Redwood City, Calif., where it is still based.
Coincidentally, the company was started the same day as Ofoto, which counted James Barksdale, the former chief executive of Netscape and therefore a business partner of Mr. Clark, among its investors.
“Ofoto and Shutterfly were like two identical petri dishes,” said James Joaquin, the former chief executive of Ofoto. He said that the shorthand for the rivalry between the two companies was “Clark vs. Bark.”
There were many similarities between the two — not just the features on their Web sites but also their enthusiastic embrace of the Internet boom’s get-big-fast mantra. That meant giving stuff away. Ofoto promised 100 free prints to its first million customers, a promotion valued at tens of millions of dollars. For its part, Shutterfly was giving away 85 percent of its prints by mid-2000.
The collapse of the Nasdaq, and the demise of e-commerce pioneers like eToys, Kozmo, Webvan and others, changed all that. “When we got into the postbubble, things really tightened,” Mr. Baum said. “It was tough. Fortunately, we had a real business.”
Still, by early 2001, the company was forced to cut a quarter of its work force, and kept having to go back to investors, including Mr. Clark, for more money. The extra rounds of financing continued even after the company turned its first annual profit in 2003.
By the time it was ready to go public, Shutterfly had received nearly $90 million in financing, and Mr. Clark owned 40.3 percent of the company, according to regulatory filings. Mr. Clark’s share has dropped to 30.4 percent since the public offering. His stake is valued at about $96 million.
Mr. Clark has moved to South Florida, where he has started a real estate development company with Tom Jermoluk, another Shutterfly investor and the former chief executive of the failed broadband company Excite@Home. Forbes recently estimated Mr. Clark’s wealth at $1.1 billion.
Shutterfly, which is now led by Jeffrey T. Housenbold, its fourth chief executive, has said it plans to use some of the proceeds from its $87 million offering to expand its printing and production operations. As 4-by-6 prints have increasingly become a low-margin commodity, the company has focused on selling more lucrative products, like customized calendars, greeting cards, photo books, mugs and mouse pads. The company now calls itself an “Internet-based social expression and personal publishing service.”
“Shutterfly’s specialty is a very robust catalog of photo gifts and merchandise,” said Alan Bullock, an analyst at InfoTrends, a market research firm.
Recent partnerships that Shutterfly announced with Scholastic Media and HIT Entertainment emphasize the merchandise business, Mr. Bullock said. The deals allow customers to place their own pictures — or more likely those of their toddlers — in books alongside well-known characters like Thomas the Tank Engine or Clifford the Big Red Dog. The books start at $35.
Shutterfly said it has sold about 370 million prints since its inception and has stored a billion photos in its online archives. Its sales grew to $83.9 million in 2005, up from $54.5 million the year before, while net income reached $28.9 million. Without a tax benefit of $24.1 million, profit for 2005 would have been $4.8 million. Shutterfly, whose sales peak in the fourth quarter, reported losses of $3.7 million in the first six months of this year.
Shutterfly’s growth rate shows that customers like its products. The bigger challenge for the company may be whether it can stay profitable by staking out a position as the premium brand in a cutthroat market.
“It’s a tough story to sell,” Mr. Synder said.

Fantasy Sports? Child’s Play. Here, Politics Is the Game(NYTimes, 10/23/06)

October 23, 2006
Fantasy Sports? Child’s Play. Here, Politics Is the Game.
By CINDY CHANG
When Ellen Montgomery’s co-workers relive the latest Chicago Bears victory or commiserate over the hometown team’s defeat, she has nothing to add to the conversation.
Ms. Montgomery, 27, a grass-roots organizer, says she has “zero” interest in sports and is even less equipped to engage in the statistics-laden talk of fantasy sports leagues that dominates at many water coolers in sports-crazy cities like Chicago. The hours sports fans spend tracking their favorite players are for Ms. Montgomery devoted to scouring the legislative agendas of members of Congress.
Now, she and fellow policy buffs have an outlet for their competitive urges. Fantasy Congress, a Web site created by four students at Claremont McKenna College in Southern California, made its debut three weeks ago. Through word of mouth and blog entries, it has attracted nearly 600 participants from states including Texas and Florida, from as far away as Denmark and, of course, from the Beltway.
For those who have no idea how many yards Peyton Manning threw for on Sunday but can cite every legislative amendment proposed by Senator Richard Durbin, Democrat of Illinois, the game could be an alternative to the prevailing fantasy sports culture.
Congress is in recess, and many Fantasy Congress leagues are still recruiting players or are waiting until after the Nov. 7 elections to get started. It remains to be seen how the game will play out over a long legislative session. But policy enthusiasts like Ms. Montgomery say they are thrilled that there is finally something for them.
“Especially this time of year, all you hear is people talking about fantasy football leagues,” Ms. Montgomery said. “I couldn’t care less if I tried, either about real football or fantasy football. But hey, I actually pay attention to what goes on in Congress.”
Just as in fantasy football or baseball, each player picks a team — in this case, 4 senators and 12 House members of varying seniority levels — and competes with other players in a league typically managed by a friend or a co-worker. Members determine whether to play for money or the thrill of victory. But that is where the similarities end.
On the Fantasy Congress Web site, www.fantasycongress.us, leagues have names like “We the Peeps” and “Foley4Prez,” in addition to the usual school and workplace affiliations.
Players accumulate points as the legislators they have chosen go about their business on Capitol Hill. A House member or senator earns five points for introducing a bill or an amendment, and more points for negotiating successfully each step in the legislative process.
Players can change their team members once a week, so if a scandal-plagued lawmaker resigns there is an opportunity to pick someone new. As of now, legislators can be on multiple teams within a league, but the site’s creators plan to introduce an exclusivity rule that would limit a legislator to playing for only one team.
A list updated daily on the Web site shows the cumulative point rankings of each legislator. Representative Don Young, Republican of Alaska and chairman of the Transportation and Infrastructure Committee, is first in the House with 1,905 points. Senator John W. Warner, Republican of Virginia and chairman of the Armed Services Committee, leads the Senate with 1,991 points.
“There’s so much more that impacts how a member of Congress can push their agenda forward than just one simple metric,” said Jeremy Cogan, press secretary for Representative Grace F. Napolitano, Democrat of California, offering an explanation for why his boss was tied for last in the House rankings with Representative Ike Skelton, Democrat of Missouri.
The Web site’s creators say they plan to add other ways to earn points, like floor speeches and news media references, but for now, the bill-based system is the sole measure of legislative productivity, making for a range of team-picking strategies.
Ms. Montgomery selected her team based on a combination of hard calculation — politicians running for re-election are less likely to be active on the legislative front, she reasoned — and sentimentality. Representative Rodney Frelinghuysen, a Republican from the New Jersey district where she grew up, has netted her zero points so far.
She is in first place in her league, while a friend who could not bring himself to pick any Republicans — even though the majority party has an edge in this scoring system — is in last place.
“It’s about majority and seniority,” said John J. Pitney Jr., a professor of government at Claremont McKenna. “You look at who’s been very active, whose issues are coming up. Sometimes it’s appropriations, sometimes defense or international relations.” Professor Pitney was an adviser to the creators of Fantasy Congress and plans to start a team.
Andrew Lee, the senior who came up with the idea for the game and then enlisted the help of three technically skilled classmates, has a wonky side, to be sure. Mr. Lee has been a devotee of water-rights policy since childhood and at 21 has had three Washington internships. On his four-day fall break, he flew home to Colorado to work on two Democratic campaigns.
Mr. Lee is also a Denver Broncos fan and has dabbled in fantasy baseball. In his dorm room, a poster of Jake Plummer, the Broncos’ quarterback, hangs across from legislators-in-action photographs from Congressional Quarterly.
One day during his freshman year, Mr. Lee was watching CNN while his roommate exulted over the results of a fantasy football team. He thought, Why not devise a similar game that would pit government aficionados against one another?
He hopes that Fantasy Congress, in addition to being fun, will teach people about their representatives and the legislative process. Professor Pitney says he will make students in his class on Congress play next semester.
If the ins and outs of Congressional business are unlikely to have the hold on the imagination that E.R.A.’s and R.B.I. do, turning those maneuverings into a game may win a few converts to the geek side.
“Everyone knows about football, but more people need to know about Congress,” Mr. Lee said. “If as many people knew about Congress as knew about football, baseball and basketball, we’d all be more educated.”

A Virtual World but Real Money(NYTimes, 10/19/06)

October 19, 2006
A Virtual World but Real Money
By RICHARD SIKLOS
Correction Appended
It has a population of a million. The “people” there make friends, build homes and run businesses. They also play sports, watch movies and do a lot of other familiar things. They even have their own currency, convertible into American dollars.
But residents also fly around, walk underwater and make themselves look beautiful, or like furry animals, dragons, or practically anything — or anyone — they wish.
This parallel universe, an online service called Second Life that allows computer users to create a new and improved digital version of themselves, began in 1999 as a kind of online video game.
But now, the budding fake world is not only attracting a lot more people, it is taking on a real world twist: big business interests are intruding on digital utopia. The Second Life online service is fast becoming a three-dimensional test bed for corporate marketers, including Sony BMG Music Entertainment, Sun Microsystems, Nissan, Adidas/Reebok, Toyota and Starwood Hotels.
The sudden rush of real companies into so-called virtual worlds mirrors the evolution of the Internet itself, which moved beyond an educational and research network in the 1990’s to become a commercial proposition — but not without complaints from some quarters that the medium’s purity would be lost.
Already, the Internet is the fastest-growing advertising medium, as traditional forms of marketing like television commercials and print advertising slow. For businesses, these early forays into virtual worlds could be the next frontier in the blurring of advertising and entertainment.
Unlike other popular online video games like World of Warcraft that are competitive fantasy games, these sites meld elements of the most popular forms of new media: chat rooms, video games, online stores, user-generated content sites like YouTube.com and social networking sites like MySpace.com.
Philip Rosedale, the chief executive of Linden Labs, the San Francisco company that operates Second Life, said that until a few months ago only one or two real world companies had dipped their toes in the synthetic water. Now, more than 30 companies are working on projects there, and dozens more are considering them. “It’s taken off in a way that is kind of surreal,” Mr. Rosedale said, with no trace of irony.
Beginning a promotional venture in a virtual world is still a relatively inexpensive proposition compared with the millions spent on other media. In Second Life, a company like Nissan or its advertising agency could buy an “island” for a one-time fee of $1,250 and a monthly rate of $195 a month. For its new campaign built around its Sentra car, the company then needed to hire some computer programmers to create a gigantic driving course and design digital cars that people “in world” could actually drive, as well as some billboards and other promotional spots throughout the virtual world that would encourage people to visit Nissan Island.
Virtual world proponents — including a roster of Linden Labs investors that includes Jeffrey P. Bezos, the founder of Amazon.com; Mitchell D. Kapor, the software pioneer; and Pierre Omidyar, the eBay founder — say that the entire Internet is moving toward being a three-dimensional experience that will become more realistic as computing technology advances.
Entering Second Life, people’s digital alter-egos — known as avatars — are able to move around and do everything they do in the physical world, but without such bothers as the laws of physics. “When you are at Amazon.com you are actually there with 10,000 concurrent other people, but you cannot see them or talk to them,” Mr. Rosedale said. “At Second Life, everything you experience is inherently experienced with others.”
Second Life is the largest and best known of several virtual worlds created to attract a crowd. The cable TV network MTV, for example, just began Virtual Laguna Beach, where fans of its show, “Laguna Beach: The Real O.C.,” can fashion themselves after the show’s characters and hang out in their faux settings.
Unlike Second Life, which emphasizes a hands-off approach and has little say over who sets up shop inside its simulated world, MTV’s approach is to bring in advertisers as partners.
In Second Life, retailers like Reebok, Nike, Amazon and American Apparel have all set up shops to sell digital as well as real world versions of their products. Last week, Sun Microsystems unveiled a new pavilion promoting its products, and I.B.M. alumni held a virtual world reunion.
This week, the performer Ben Folds is to promote a new album with two virtual appearances. At one, he will play the opening party for Aloft, an elaborate digital prototype for a new chain of hotels planned by Starwood Hotels and Resorts. The same day, Mr. Folds will also “appear” at a new facility his music label’s parent company, Sony BMG, is opening at a complex called Media Island.
Meanwhile, Nissan is introducing its Nissan promotion, featuring a gigantic vending machine dispensing cars people can “drive” around.
And some of this is likely to be covered for the outside world by such business news outlets as CNet and Reuters, which now have reporters embedded full-time in the virtual realm.
All this attention has some Second Lifers concerned that their digital paradise will never be the same, like a Wal-Mart coming to town or a Starbucks opening in the neighborhood. “The phase it is in now is just using it as a hype and marketing thing,” said Catherine A. Fitzpatrick, 50, a member of Second Life who in the real world is a Russian translator in Manhattan.
In her second life, Ms. Fitzpatrick’s digital alter-ego is a figure well-known to other participants called Prokofy Neva, who runs a business renting “real estate” to other players. “The next phase,” she said, “will be they try to compete with other domestic products — the people who made sneakers in the world are now in danger of being crushed by Adidas.”
Mr. Rosedale says such concerns are overstated, because there are no advantages from economies of scale for big corporations in Second Life, and people can avoid places like Nissan Island as easily as they can avoid going to Nissan’s Web site. There is no limit to what can be built in Second Life, just as there is no limit to how many Web sites populate the Internet.
Linden Labs makes most of its money leasing “land” to tenants, Mr. Rosedale said, at an average of roughly $20 per month per “acre” or $195 a month for a private “island.” The land mass of Second Life is growing about 8 percent a month, a spokeswoman said, and now totals “60,000 acres,” the equivalent of about 95 square miles in the physical world. Linden Labs, a private company, does not disclose its revenue.
Despite the surge of outside business activity in Second Life, Linden Labs said corporate interests still owned less than 5 percent of the virtual world’s real estate.
As many as 10,000 people are in the virtual world at a time, and they are engaged in a gamut of ventures: everything from holding charity fund-raisers to selling virtual helicopters to operating sex clubs. Linden also makes money on exchanging United States dollars for what it calls Linden dollars for around 400 Linden dollars for $1 (people can load up on them with a credit card). A typical article of clothing — say a shirt — would cost around 200 Linden dollars, or 50 cents. As evidence of the growth of its “economy,” Second Life’s Web site tracks how much money changes hands each day. It recently reached as much as $500,000 a day and is growing as much as 15 percent a month.
On Tuesday, a Congressional committee said it was investigating whether virtual assets and incomes should be taxed.
But many inhabitants simply hang out for free. For advertisers worried about the effectiveness of the 30-second TV spot and the clutter of real world billboards and Internet pop-up ads, Second Life is appealing because it is a place where people literally immerse themselves in their products.
Steve F. Kerho, director of interactive marketing and media for Nissan USA, said the Second Life campaign was part of a growing interest in online video games. “We’re just trying to follow our consumer, that’s where they’re spending their time,” Mr. Kerho said. “But there has to be something in it for them — it’s got to be fun; it’s got to be playful.”
Projects like the Aloft hotel, an offshoot of Starwood’s W Hotels brand, are designed to promote the venture but also to give its designers feedback from prospective guests before the first real hotel opens in 2008.
The new Sony BMG building has rooms devoted to popular musicians like Justin Timberlake and DMX, allowing fans to mingle, listen to tunes or watch videos. Sony BMG is also toying with renting residences in the complex, as well as selling music downloads that people can listen to throughout the simulated world.
Sibley Verbeck, chief executive of the Electric Sheep Company, a consultancy that designed the Aloft and Sony BMG projects, said the flurry of corporate interest stemmed from the 10 to 20 percent growth in the number of people who had gone into virtual worlds each month for the last three years. Though exact numbers are difficult to come by, the figure should top a few million by next year, he said.
The spread of these worlds, however, is limited by access to high-speed Internet connections and, in Second Life’s case, software that is challenging to master and only runs on certain models of computers.
“If it doesn’t crash and burn then it will become real,” he said. “So now’s the time to start experimenting and learning ahead of your competition.”
As part of that process, businesses are learning that different rules apply when they venture into an arena where audiences are in control. “Users are the content — that’s the thing that everybody has a hard time getting over,” said Michael Wilson, the chief executive of Makena Technologies, which operates the virtual world There.com and helped build Virtual Laguna Beach.
For example, Sun Microsystems kicked off the opening of its Second Life venue with a press conference online hosted by executives and Mr. Rosedale of Linden Labs. But by the time the event was in full swing, several members of the audience had either walked or flown onto the stage, where they were running roughshod over the proceedings.
Even Mr. Rosedale got in on the act: he conjured a pair of sunglasses that he superimposed on a video image of a Sun representative talking on a screen behind the stage. (In virtual world lingo, such high jinks are known as “griefing.”)
Some corporate events have been met with protests by placard-waving avatars. And there is even a group called the Second Life Liberation Army that has staged faux “attacks” on Reebok and American Apparel stores. (The S.L.L.A. says it is fighting for voting rights for avatars — as well as stock in Linden Labs.)
Companies in this new environment have to get used to the idea that they may never know exactly who they are dealing with. Most of those in Second Life have chosen their names from a whimsical menu of supplied surnames, resulting in monikers like Snoopybrown Zamboni and Bitmason Pimpernel; males posing as female avatars and vice versa are not uncommon.
Another issue companies have to contend with is that their brands may already be in these virtual worlds, but illegally. Henry Jenkins, a professor at the Massachusetts Institute of Technology Media Lab, said one Second Life habitué created a virtual reproduction of the Ikea catalog to help people decorate their digital pads.
Mr. Verbeck of Electric Sheep said copyright infringement was rampant. His company runs an online boutique where Second Life residents sell each other pixelized creations of everything from body parts to home furnishings to roller skates — many of them unauthorized knockoffs.
So far, the boutique has not had many requests to stop selling fake products. But “we did have a request from the Salvador Dali Museum — which was great,” Mr. Verbeck said. “Second Life is so surreal that it was perfect.”
Correction: Oct. 21, 2006
An article in Business Day on Thursday about commercial marketing in online virtual worlds misstated the position of Pierre Omidyar, an investor in Linden Labs, a company that has started such a venture. He is the founder of eBay, not a co-founder.

The Starbucks Aesthetic (NYTimes, 10/22/06)

October 22, 2006
The Starbucks Aesthetic
By SUSAN DOMINUS
WHEN Bette Gottfried, a 48-year-old regular at a Starbucks in Ardsley, N.Y., saw that her favorite coffeehouse was promoting a film, she wasn’t immediately interested. “At first I was leery,” said Ms. Gottfried, dressed in workout clothes, wearing her hair in a ponytail and sitting near the window with her daily decaf mocha (“low-fat milk, no foam, no whipped”). “I thought, ‘Who are they to get involved in the movies?’ ”
Ultimately, however, she decided to take her 9-year-old daughter to see the film, “Akeelah and the Bee,” precisely because of the involvement of Starbucks. “I trusted seeing the movie, because it was promoted here,” she said. After all, she liked the company’s coffee; she had already bought and liked several CD’s it produced and sold, compilations of music by Carole King, Tony Bennett and Frank Sinatra. Why wouldn’t she like a Starbucks movie? She did, and now she’s considering picking up its latest cultural sales item: “For One More Day,” a book by Mitch Albom.
But Ms. Gottfried’s question is a valid one. Starbucks is clearly very good at selling coffee, but why should it become involved in the movies — and books and CD’s, for that matter? And why would consumers trust its taste in books and films any more than they’d trust, say, Simon & Schuster’s taste in Ethiopia Gemadro Estate decaf?
Yet the chain is increasingly positioning itself as a purveyor of premium-blend culture. “We’re very excited, because despite how much we’ve grown, these are the early stages for development,” said Howard Schultz, the chairman of Starbucks. “At our core, we’re a coffee company, but the opportunity we have to extend the brand is beyond coffee; it’s entertainment.”
In an early misstep, Starbucks started offering Joe, a literary magazine that appeared in 1999 and lasted all of six months before Mr. Schultz decided, on the basis of slow sales, that the product “didn’t add any value.” But since then Starbucks has successfully promoted a slew of hits, from the Ray Charles CD “Genius Loves Company,” a joint venture with Concord Records that won several Grammy Awards and sold 800,000 copies at Starbucks alone, to a recent CD of Meryl Streep reading “The Velveteen Rabbit.” In some cases, as with the Ray Charles album, Starbucks partners with an existing label; but even when it merely stocks another label’s titles, said Ronn Werre, president of EMI Music Marketing, it is typically responsible for at least 10 percent of overall sales; when it recently started selling the Frank Sinatra classic “In the Wee Small Hours,” sales of that CD went up twentyfold. This month, Starbucks landed a coveted and very prominent retail section on the iTunes home page, one of only two brands to enjoy that privilege.
Mr. Albom’s book, published by Hyperion, marks the next piece of the expanding Starbucks cultural portfolio. The chain’s creative team has already been looking for additional original films to present and is thinking about producing movies down the road. And Mr. Schultz said it was “not out of the question that we would self-publish” new authors. Some of the chain’s projects have been relatively intimate and artsy — for example, two several-day-long salons, one at the Sundance Film Festival, one in New York, where the doors were open to free spoken-word performances, musical collaborations and one-act plays. But the company clearly wants to have a national impact as well.
On Thursday, in hopes of sparking communitywide dialogue about “For One More Day,” 25 Starbucks stores around the country will feature discussion groups. (To ease the flow of conversation, free coffee will be provided.)
Sounding a bit caffeinated himself, Mr. Schultz explained, “With the assets Starbucks has in terms of number of stores, and the trust we have with the brand, and the profile of our customers, we’re in a unique position to partner with creators of unique content to create an entertainment platform and an audience that’s unparalleled.”
The heart of that audience is a group the company refers to as its “core customers” — educated, with an average age of 42 and an average income of $90,000. About 15 years ago, Mr. Schultz said, Starbucks began “to observe the fracturing of the retail music industry and the consumer experience becoming something that our core customers were no longer enjoying.” So they started selling CD’s of the music they’d already been playing in the stores.
It still works. “If I hear a CD they’re playing, I generally like it,” Bette Gottfried, back in the Ardsley store, said. “It’s who I am — baby boomer, upper middle class, a little hippyish, rockish. ...”
As Mr. Schultz sees it, customers get a new cultural experience and Starbucks gets a “halo” — the associations people have with beloved music, with “quality, good will, trust, intelligence.”
To cultivate that halo, he built an entertainment division, with an office in Seattle and another in Los Angeles. In Los Angeles, Nikkole Denson, 36, who ran the entertainment and film departments of Magic Johnson’s entertainment company, is the chain’s director of business management, in charge of fielding and negotiating film and book selections. (Starbucks works closely with the William Morris Agency as well.) She says “Akeelah and the Bee,” a movie about a young black girl from South Los Angeles with a talent for spelling, is a perfect example of her company’s cultural profile.
“Starbucks is all about community and inspiration, and everything in that movie seemed aligned with that — it has that human connection,” Ms. Denson said. “It doesn’t have to be a family film, but it does have to be socially relevant.” As for the books she’s selecting — they won’t all be by name brands like Mr. Albom — she says she wants books that provide “almost an education without being preachy.” Yes, they should be inspiring, but also, she hopes, challenging: “not racy or dark, but thought-provoking.”
A major player in the company’s music business is Timothy Jones, manager of compilations and music programming. Mr. Jones, 58, ran a small independent record shop in Seattle until 1987, when his business folded and he started managing the Starbucks across the street. Customers there asked if they could buy the mixes of Ella Fitzgerald and Miles Davis he was playing, and that’s how it all got started. What he looks for now, he says, is “a believable sound that isn’t too harsh.”
Mr. Jones championed Madeleine Peyroux when she was a critically acclaimed singer who had never quite hit it big; since her album “Careless Love” started selling at Starbucks, its sales have CD tripled.
“We do our best with a new artist when there’s sort of an NPR buzz going on around him, the stars-in-the-making,” Mr. Jones said. “Then we take a Decemberists or a Madeleine Peyroux and put it out there in the spotlight of the coffeehouse, and people standing in line say, ‘I’ve heard about this person.’ ”
Balancing out the newer artists are the classics Starbucks sells packaged in coffee hues of sepia: Tony Bennett, Etta James, Marvin Gaye. “It’s like European-style roasted coffee,” Mr. Jones said. “It’s reaching back, it’s timeless.”
THE more cultural products with which Starbucks affiliates itself, the more clearly a Starbucks aesthetic comes into view: the image the chain is trying to cultivate and the way it thinks it’s reflecting its consumer.
There’s the faintest whiff of discriminating good taste around everything Starbucks sells, a range of products designed, on some level, to flatter the buyer’s self-regard. Starbucks stores don’t carry “Sgt. Pepper’s Lonely Hearts Club Band,” the Beatles album everyone’s mother could name; they carry “Revolver,” a critical darling without the same overplayed name recognition.
Might DVD sales be the next frontier? And if so, which DVD’s? Ms. Denson wouldn’t say, but it’s an entertaining exercise for a reporter to try to guess: For the holiday season, perhaps a movie like “White Christmas” — it’s retro-chic, it’s got the classy crooner Bing Crosby going for it, yet it’s not quite as overplayed as, say, “Miracle on 34th Street.” Throw in some never-before-seen outtakes, package it in a beautiful silver and black box. ...
“You’re pretty close there,” Ms. Denson said. “Very, very close.” So close, in fact, that later that day she sent over a press release: Starting next month, in conjunction with Turner Classics, the “White Christmas” DVD will be available exclusively at Starbucks, packaged for the first time with a Decca recording of the film’s soundtrack and an informative 12-page booklet that includes a list of other must-see Christmas movies. Inspirational but not hokey, familiar but not ubiquitous, gently educational — it’s tailor- made for the NPR-listening type Mr. Jones imagines as the typical Starbucks consumer.
Mr. Schultz said the company was eager to offer customers products that are “out of the mainstream.” Starbucks itself used to be out of the mainstream, back when it started in Seattle. But that was before it took over the world (well, almost). Championing the little guy — Ms. Peyroux, some new bossa nova artist — can be a relatively easy way to offset the sense of alienation that overreplicated chains inspire.
“It adds to the emotional connection with the customer,” said Mr. Schultz, and keeps the Starbucks experience from feeling, as he put it, “antiseptic.”
Of course, the moment Starbucks chooses to promote an artist — prominent space on the company’s Web page, access to its 5,400 stores throughout the country, possible discussion groups and so on — that artist almost by definition becomes mainstream.
But that may not matter to consumers. “You know, it’s not that different from feeling cool because you’ve got an Apple computer,” said the novelist Jonathan Lethem. Mr. Lethem was one of the well-regarded, not-quite-mainstream artists who were featured at the New York Starbucks salon, which he experienced as a supportive environment for creative work. As for the Starbucks sensibility itself, he said, “It’s the faint affect of a counterculture shackled to the most ordinary, slightly upscale product” — just more of what he describes as the “faux-alternative” aesthetic that’s been around for decades.
These days the so-called long tail model of cultural consumption — the 1.5 million songs on iTunes, the 55,000 films on Netflix — is getting a lot of attention among business theorists, and teenage boys are getting a lot of attention from the entertainment complex. But Starbucks relies on a previous model: a narrow range of blockbuster hits geared toward an older, educated audience.
The book publishing industry could benefit from such a tastemaking force, said Laurence Kirshbaum, founder of the LJK Literary Management agency. “One of the big problems in the book industry is that outside e of Oprah, there’s no really widely accepted authority to recommend books,” Mr. Kirshbaum said.
At the same time, he expressed concern on behalf of the traditional bookstore. “The concern is that, in a business that’s essentially flat, can Starbucks provide additional buyers? Or is it going to be pilfering buyers from existing accounts?”
Thomas Hay, a 48-year-old contractor from Hartsdale, N.Y., said Starbucks helped him by editing down his cultural choices. Looking over the selections the company makes, he said, he has the impression that “some people of caring hearts and minds have looked at this and felt it was worthwhile and beneficial and would create a good vibe in the world.”
Karen Golden, 43, and Kirk Sipe, 53, also customers at that Ardsley Starbucks, said that they were unlikely to buy a CD there — at $15, they could get it cheaper from Amazon — but that the company’s choices solidified their respect for the brand. “They could go with what’s ultramarketable, but good for them for promoting people who don’t get airplay,” said Ms. Golden, a psychotherapist from nearby Dobbs Ferry. Asked to describe the kind of music and movies they expected to find there, they rattled off language that could have come straight from a Starbucks marketing plan: “quality,” “what will endure,” “people who have something to say.”
When Starbucks executives describe the goal of the company’s cultural extensions, they invariably lean on the word discovery. “Customers say one of the reasons they come is because they can discover new things — a new coffee from Rwanda, a new food item. So extending that sense of discovery into entertainment is very natural for us. That’s all part of the Starbucks experience,” said Anne Saunders , senior vice president of global brand strategy and communications.
Even the keyboardist Herbie Hancock, whose recent album “Possibilities” has been a strong seller at Starbucks, buys the idea. “Going to Starbucks,” he said, “you feel kind of hip. I feel kind of hip when I go to Starbucks; that’s how I know!” He said people of every age had told him they weren’t familiar with his work until it appeared there, then he called back to say he’d never gotten better promotion in his life.
Mr. Schultz said one the most valuable assets in the Starbucks culture project was the chain’s wireless Web-access network. “What’s coming is an opportunity to leverage WiFi as a channel,” he said, “and that channel is going to have the ability to expose our customers digitally to unique content.” He added: “It’s not a stretch to think of Starbucks in a new way as a network. A new channel with 12,500 points of distribution,” with every point representing a Starbucks store around the world.
And that channel, no doubt, will be geared toward the European-coffee-drinking, CD-liner-notes-reading, singer-songwriter-loving Starbucks customers, who now not only relax at the same coffee shops but also go home and listen to the same jazz release while possibly reading the same reliably entertaining, even inspirational, book. At the Starbucks in Ardsley, prominently displayed on the wall is a poster of an elephant lumbering comfortably along in the burnt-sienna rays of the sun. Below the image is printed, in typewriterlike letters, a message from Starbucks that the company has made, through its good taste, increasingly tempting: “Move with the herd.”

Skills Gap Hurts Technology Boom in India (NYTimes, 10/19/06)

October 17, 2006
Skills Gap Hurts Technology Boom in India
By SOMINI SENGUPTA
TIRUCHENGODE, India — As its technology companies soar to the outsourcing skies, India is bumping up against an improbable challenge. In a country once regarded as a bottomless well of low-cost, ready-to-work, English-speaking engineers, a shortage looms.
India still produces plenty of engineers, nearly 400,000 a year at last count. But their competence has become the issue.
A study commissioned by a trade group, the National Association of Software and Service Companies, or Nasscom, found only one in four engineering graduates to be employable. The rest were deficient in the required technical skills, fluency in English or ability to work in a team or deliver basic oral presentations.
The skills gap reflects the narrow availability of high-quality college education in India and the galloping pace of the country’s service-driven economy, which is growing faster than nearly all but China’s. The software and service companies provide technology services to foreign companies, many of them based in the United States. Software exports alone expanded by 33 percent in the last year.
The university systems of few countries would be able to keep up with such demand, and India is certainly having trouble. The best and most selective universities generate too few graduates, and new private colleges are producing graduates of uneven quality.
Many fear that the labor pinch may signal bottlenecks in other parts of the economy. It is already being felt in the information technology sector.
With the number of technology jobs expected to nearly double to 1.7 million in the next four years, companies are scrambling to find fresh engineering talent and to upgrade the schools that produce it.
Some companies are training faculty members themselves, offering courses tailored to industry needs and improving college labs and libraries. They are rushing to get first choice of would-be engineers long before they have completed their course work. And they are fanning out to small, remote colleges that almost no one had heard of before. The country’s most successful technology concerns can no longer afford to hire only from the most prestigious Indian universities. Nor can they expect recent graduates to be ready to hit the shop floor. Most companies require in-house training of anywhere from two to six months.
Demand is beginning to be felt on the bottom line. Entry-level salaries in the software industry have risen by an average of 10 to 15 percent in recent years. And Nasscom, which helps companies wanting to outsource find workers, forecasts a shortage of 500,000 professional employees in the technology sector by 2010.
The labor crunch is starting to pop up across the service economy. ICICI, the country’s largest financial services company, announced plans to hire up to 40,000 workers in the next three years.
The Retailers Association of India said in July that its fast-expanding industry would need nearly 115,000 workers in the next six months. Reuters reported in October that Google was having trouble finding Indian workers proficient in the languages and design technologies used in the latest generation of Web sites.
This year, India’s largest software company, Tata Consultancy Services, plans to add 30,000 people to its current work force of 72,000. So it was that on a recent afternoon a four-man team from the company roamed the halls of a college founded by a local textile magnate in this small south Indian outpost.
The team came to Tiruchengode with the goals of selecting its next generation of software programmers and assessing how, in the short term, the company could help the college churn out more of what it needed. “These are the guys who are going to write my Windows 2010,” as one of the recruiters put it.
“We can’t afford to let talent go” was the verdict of A. K. Pattabiraman, a member of the team.
They grilled professors and administrators: How many faculty members have doctorates? Why did so many students have incompletes by the time they entered their fourth and final year? What software programs do they use for the class in mechatronics — a combination of mechanics, information technology and electronics?
They tested the students’ ability to reason and speak, tossing out debate topics, like democracy versus dictatorship, and science quiz questions, like what happens to an iron rod put in a beaker of nitric acid.
They sampled the offerings at the college library and the English language lab.
The exercise was part of an elaborate process by the company to assess whether this campus, the K. S. Rangasamy College of Technical Education, can be added to the pool of colleges from which to recruit.
In the past, Tata Consultancy Services needed only to turn to the top engineering schools in the country: the nine campuses of the Indian Institutes of Technology and a few others gaining admission can be more difficult than getting into the Ivy League. Today the list includes 209 institutions, many of them, like this one, brand-new private colleges that have emerged to meet the need. Mr. Rangasamy, the college’s founder, is himself the product of the Indian economic expansion. His factories produce tablecloths and bedsheets for Kmart and Marriott.
Mr. Rangasamy himself has no more than a fourth-grade education and speaks not a word of English. But the cluster of colleges he has built educate nearly 12,000 students. Of those, nearly 3,600 study software engineering, and most of them, college officials say, are the first in their families to attend college.
The imprimatur of Tata Consultancy would clearly be a prize for the college, and the campus was festooned with flowers and banners welcoming the company team. To be certified as part of the company’s pool would mean that its students would have a chance of getting a job even before graduation, and other perks for the college — faculty training, course materials, research opportunities for teachers and students.
The number of technical schools in India, including engineering colleges, has more than tripled in the last 10 years, according to the All India Council of Technical Education. Most are privately run.
A new kind of institution has emerged to offer intensive English language training and instruction in technical skills required for the workplace for those between college and career. They are called finishing schools, and Nasscom is rolling out its own by early next year.
In the end, the Rangasamy college did not fit the company’s bill. The team found deficiencies in the way basic subjects were taught and deemed the students to be average.
Higher education is still available only to a tiny slice of India’s young. No more than 10 percent of Indians ages 18 to 25 are enrolled in college, according to official figures. Nearly 40 percent of Indians over the age of 15 are illiterate.
The industry is lobbying hard to allow private investment in Indian higher education. Right now the government allows only nonprofit ventures, and often they are of varying quality or are the brainchildren of politically connected entrepreneurs.
The Commerce Ministry has recently floated the idea of private foreign investment in higher education. Indians account for among the largest groups of foreign students in the United States, and India increasingly sends students to other countries, like Australia and Canada.
Nandan M. Nilekani, the chief executive of Infosys, one of India’s biggest providers of technology and back-office services to Western companies, calls the situation a crossroads for his country.
With more than half of its population under 25, he said, India could educate its young and open job opportunities for them, or be left with a large, potentially restive pool of unskilled, unemployable youth. “It is a golden opportunity,” he said, “which can be frittered away if we don’t do the right thing.”
India’s young engineers are earning salaries unimaginable in their parents’ day.
They have been preparing intensely as well. Many have been writing code since they were teenagers, or slogging through stiffly competitive exams to get into reputable engineering schools.
Naini Gomes, 22, landed a job with Infosys at the end of her third year in college. That was not unusual on her campus, an engineering college with a strong reputation in Bangalore. “Everybody was sitting with at least two jobs,” Ms. Gomes said.
The sense of opportunity, in fact, can inject an unnerving self-confidence in Indians of Ms. Gomes’s generation.
“The way the I.T. sector is booming, this is the place to be,” said Chinmay Nanavati, a fresh 22-year-old recruit. “At this point I’m happy with the way things are going. They’re going my way.”

A Loopy Deal That Actually Makes Sense (NYTimes, 10/15/06)

October 15, 2006
Media Frenzy
A Loopy Deal That Actually Makes Sense
By RICHARD SIKLOS
IS Google’s $1.65 billion acquisition of the video Web site YouTube another milestone in the annals of the Internet? Or is it evidence of a second silly season? The answer to both questions: Yep, you’d better believe it.
The terms of this all-stock deal are a marvel, given YouTube’s age (18 months), revenue (negligible) and profitability (nil). As we were in the dot-com bubble a few years ago, we are back in a moment of “metrics” that can make the acquisition appear quite reasonable — a bargain even — when measured by nonfinancial considerations like “uniques” and “trailing 12-month page views.”
There is also the nagging question of whether YouTube can keep its party going and cut workable deals with the copyright holders whose material populates much of the video that people post on the site. Or how long it will be before one or two of them tries to shut down the place — or to extract a huge toll from its new moneybags owners. But never mind.
Another question raised by Google’s move is whether the Internet land grab is different this time. The answer, again, is yes. The last go-round, of course, was a broad stock market mania for Internet and technology stocks and initial public offerings. This time, the leading companies being snapped up are clearly onto something as a business, but are not even yet contemplating going public.
Above all, one glaring difference amplifies the reverberations that “GoogTube” is sending through the tech and media worlds: this time around, big conventional media are largely on the sidelines of the deal flow, at least where the biggest prizes are concerned.
This is a marked shift in the dance of so-called old and new media. For one thing, YouTube was not some clever techie thing invented by people in lab coats. It is the biggest online outlet in a realm that every media giant knows well: video. Yet the biggest traditional media companies — even those with newfound religion over their Web strategies — couldn’t wrap their heads around it.
If Yahoo ends up buying Facebook for about $1 billion — the two sides are reportedly talking — the deal would be the third of at least that amount this year in which a Web company bought a coveted Internet media property. The other was eBay’s purchase of the Internet phone service Skype for $2.6 billion up front and the potential for a further $1.5 billion down the road.
YouTube, Skype and Facebook — a social networking site built around college students — have existed for a grand total of around seven years. In each case, media companies that have been around in one form or another for decades sniffed around these businesses and decided that they could not make the non-numbers of these newbie titans work. Dinosaur imagery does come to mind.
There are obvious reasons for this, given the carnage of the last boom and previous online efforts of media’s giants. We needn’t recite the saga of AOL- Time Warner yet again, but it is worth recalling that lesser degrees of digital pain were felt across the media spectrum: from the wayward Go network at Walt Disney and the Snap.com and NBCi fizzles at NBC to the great Seagram- Vivendi-Universal debacle.
Even the News Corporation’s chief, Rupert Murdoch, whose purchase of MySpace for around $580 million appears to be the hallmark old-new media deal of the modern era, has a long way to go before he balances out the ledger from past digital letdowns, chief among them the meltdown of Gemstar-TV Guide International.
The full implications of big media’s pragmatic approach toward large Internet endeavors are, at best, murky. Media chieftains may be kicking themselves a few years from now because they didn’t step up to pay whatever it took to own the emergent first mover in online video. Or they may be reminiscing about YouTube they way they do about much-praised but now faded game-changers like Napster and Friendster.
Given Google’s $130 billion market capitalization, one could argue that paying $1.65 billion in stock is an easy nut to swallow, even if it doesn’t pan out.
Jeffrey L. Bewkes, the president of Time Warner, told me in an interview that YouTube made perfect sense for Google — even at $1.65 billion — because the deal had to be viewed in the context of Google’s ambitions to extend and evolve its search advertising platform, rather than as a media play.
Thus, no sane chief executive of a traditional media conglomerate would have been able to sell the YouTube deal at that price to his or her shareholders or board.
That includes the risk-friendly Mr. Murdoch, whose attempts to get in the middle of the YouTube-Google talks were ignored. But a person close to Mr. Murdoch who spoke on background because he was not authorized to speak publicly on the matter says the News Corporation would not have stepped up with the kind of price Google was offering, even though it has the financial wherewithal.
Now, even if traditional media companies are passing up the biggest prizes of the day, they aren’t exactly sitting on their hands. NBC Universal has bought iVillage, Mr. Murdoch has bought several smaller Web businesses beyond MySpace, AOL has quietly beefed up its service with a series of add-on acquisitions and Viacom has made a series of smaller deals.
Viacom’s supposed lack of aggressiveness in moving online — in particular, losing MySpace to Mr. Murdoch — was cited as a main reason that its respected chief executive, Tom Freston, recently lost his job. His successor, Philippe P. Dauman, has decried making acquisitions that can’t be justified financially.
Mr. Dauman has said that the company is looking for the next-generation Web hits before they break from the pack. “We need to create a process to identify these opportunities early,” he said at a conference last month.
In other words, buy up all the garages in Silicon Valley.
SO for now, it looks as if the big, loopy Internet deal will remain the province of the big Internet players for as long as their stock prices allow it. It is hard to say whether Google is being foolhardy or prescient.
It is worth remembering that the company’s founders rebuffed reported overtures from Microsoft before they went public — and look what they’re worth and doing today.
On the other hand, the survival skills of the media moguls may be hardier than some people give them credit for. After all, the dinosaurs ruled for more than 150 million years — and some even became birds that still flap around today.

Wallflower at the Web Party(NYTimes, 10/15/06)

October 15, 2006
Wallflower at the Web Party
By GARY RIVLIN
JONATHAN ABRAMS was in a spot. He could take the safe bet and accept the $30 million that Google was offering him for Friendster, the social networking Web start-up he began only a year earlier, in 2002. Saying yes to Google would provide a quick and stunning payout for relatively little work and instantly place the Friendster Web site in front of hundreds of millions of users across the globe.
But at the same time, some of the biggest names in Silicon Valley were lobbying Mr. Abrams, a computer programmer, to reject Google’s offer. America Online had offered the two founders of Yahoo a few million dollars each in the mid-90’s for their Web site — and both became billionaires because they said no. Sell us a stake in your company for $13 million, the advisers told Mr. Abrams, and we will help build Friendster into an online powerhouse worth hundreds of millions — if not billions — of dollars.
“It really didn’t take much persuading,” said Russell L. Siegelman, a partner at the venture capital firm Kleiner Perkins Caufield & Byers, which has poured around $10 million into Friendster since November 2003. “Jonathan clearly wanted to go for it.”
Go for it, he did. Mr. Abrams spurned Google’s advances and charted his own course. In retrospect, he should have taken the $30 million. If Google had paid him in stock, Mr. Abrams would easily be worth $1 billion today, according to one person close to Google. And with Google’s ample resources, Friendster might have solidified its position as the pioneering front-runner in social networking. Instead, Mr. Abrams has the distinction of founding a company that is shorthand for potential unmet.
Roughly once a week, David L. Sze, a venture capitalist at Greylock Partners, hears from entrepreneurs who say they have the next MySpace, the copycat social networking site that has trounced Friendster. “The counter to that is, ‘Tell me why you aren’t going to be the next Friendster,’ ” Mr. Sze said. “It’s become the iconic case of failure.”
Reality must smack even harder just after the blockbuster deal in which Google agreed to pay $1.65 billion for YouTube, the video-sharing Web site that has yet to celebrate its first anniversary or its first profits. Friendster essentially created the social networking sector three years ago by offering users a site where they could browse profiles posted by friends and the friends of friends in search of dates and playmates. But so badly did Friendster fumble its early lead that, as of last month, it ranked 14th among all social networking sites tracked by comScore Media Metrix, trailing even myYearbook.com, a site started last year by a 16-year-old high school student.
It is not too late for Mr. Abrams and his investors to see a handsome payout from Friendster, a well-known brand in a nascent business sector. But why and how Friendster missed the mark is a salutary Silicon Valley tale so instructive that Mikolaj Jan Piskorski, an assistant professor at the Harvard Business School, uses the company’s inglorious fall as a case study in his strategy classes.
Friendster’s fate is “a real puzzle,” Professor Piskorski said. “This was a company that had the talent and had the connections.” he said. “They had this great idea that people really took to.”
There is no single reason that explains Friendster’s failures, Professor Piskorski added, which is what makes it academic fodder. “It’s a power story,” he said. “It’s a status story. It’s an ego story.” But largely, he said, Friendster is a “very Silicon Valley story that tells us a lot about how the Valley operates.”
EVERY good Silicon Valley start-up story needs an engaging tale about its founding. The YouTube boys — Chad Hurley, Steve Chen and Jawed Karim — supposedly conjured up the idea of a video-sharing product almost by accident, after a late-night dinner party. (That, at least, is the way two of the three founders tell it.) Earlier, Larry Page and Sergey Brin decided to start Google after Yahoo declined to buy their search technology — for a paltry $1.6 million. Mr. Abrams drew his inspiration to create Friendster from a broken heart brought on by a failed relationship and the eternal lures of the mating dance.
“Basically, Jonathan wanted to meet girls,” said Mark J. Pincus, a Silicon Valley entrepreneur who provided Mr. Abrams with some of the seed money to finance his project at the end of 2002. “He told me himself, he started Friendster as a way to surf through his friends’ address books for good-looking girls.”
The second half of the 1990’s had seen any number of failed social networking sites, including forgotten enterprises like Six Degrees and SocialNet. “We all basically hit the market several years before the market was ready for social networking,” said Reid G. Hoffman, the founding chief executive of SocialNet and an early investor in Friendster.
Mr. Abrams, though, had perfect timing. Friendster made its Web debut in March 2003, and though it was then a speck of a start-up that spent no money on marketing, it signed up three million registered users by the fall. Publications including Time, Esquire, Vanity Fair, Entertainment Weekly, US Weekly and Spin were writing about Friendster before anyone had heard of MySpace. So popular was Friendster in those early days that Mr. Abrams appeared on “Jimmy Kimmel Live” — and then boasted that the Yahoo founders had never been guests on a late-night television talk show.
“Jonathan is very much an acquired taste,” said Larissa Le, a former Friendster employee and longtime friend of Mr. Abrams. “He’s your typical engineer from the Valley who can come off as very arrogant.” For a time Mr. Abrams, then in his early 30’s, cut a high profile in the Valley, showing up regularly at parties with a strikingly attractive woman on each arm and his head in the stars.
His fellow entrepreneurs might have shaken their heads over the size of Mr. Abrams’s ballooning ego, but they also could not deny that he had invented something significant at an opportune moment, when the area was still struggling to shake off its post-bubble doldrums.
The list of venture capitalists enticing him to say no to Google and to go it alone included John Doerr, the legendary venture capitalist at Kleiner Perkins whose list of greatest hits includes Google, Netscape and Amazon.com, and Bob Kagle, the Benchmark Capital partner who first spotted eBay.
Andrew L. Anker, a former venture capitalist who is now a top executive at Six Apart, a popular blogging company that considered buying Friendster last year, said he recalled Mr. Abrams’s quandary. “Jonathan had the Google offer,” he said, “but he also had these very-well-regarded V.C.’s saying, ‘Let’s make this thing huge.’ ”
It did not take much to convince him. Mr. Abrams, a former engineer at Netscape, is a byproduct of the Valley, an environment finely calibrated to create monster-sized companies. “There aren’t thousands of V.C.’s running around Silicon Valley to fund a company just to flip it for a quick payout,” Mr. Anker said. “The Valley is all about making things huge.”
Mr. Doerr and Mr. Kagle took seats on Friendster’s board, as did another investor, Timothy A. Koogle, who had been the chief executive of Yahoo through the second half of the 1990’s. Other investors included Peter A. Thiel, a co-founder of PayPal, which eBay bought for $1.5 billion in 2002, and K. Ram Shriram, one of the first investors in Google and perhaps the most-sought-after angel investor in Silicon Valley. In turn, this gold-plated group helped to recruit to Friendster an equally impressive cadre of top executives and computer programmers.
Back in late 2003, Mr. Abrams spoke of the all-star cast that had joined him at Friendster the way a Yankee fan might boast about the Murderer’s Row that George Steinbrenner assembles each year in pursuit of another World Series ring. Now, however, Mr. Abrams casts that same board — then composed primarily of men in their 50’s who were far older than the site’s target demographic — and the recruits they drafted as the main cause of Friendster’s great stumble.
Through a colleague from a previous tech start-up, Melissa Gilbert, Mr. Abrams declined to comment for this article, saying he was too busy working on a new start-up to talk about the past. Ms. Gilbert, though, who described herself as the first investor in Friendster, echoed the comments of others close to Mr. Abrams, who has loudly proclaimed that he will never again accept a dime in venture capital. Mr. Abrams believed that he had developed a sound business plan for building Friendster into an Internet powerhouse — and that the plan foundered when his well-known investors shoved him aside and proceeded to mess everything up, Ms. Gilbert wrote in an e-mail message.
“Friendster ended up with three levels of V.P.’s, C.E.O.’s and board members who, although they had great résumés, they were not connected to the social networking concept and didn’t really use Friendster,” she wrote.
Mr. Doerr, at Kleiner Perkins, disputed this. He said that he visited the Friendster site at least once a day. “It’s certainly not fair to say we were out of touch when we were willing to commit millions of dollars to this market,” he said. “We understood the opportunity. The company didn’t seize that opportunity.”
But Mr. Siegelman, one of Mr. Doerr’s partners at Kleiner Perkins, said Mr. Abrams had a point. The original board had little feel for the product, said Mr. Siegelman, who attended most meetings and eventually replaced Mr. Doerr. But Mr. Siegelman also described Mr. Abrams as a founder in way over his head, which is why, in April 2004, only a few months after investing in the company, the board replaced him as chief executive.
“All of a sudden Jonathan had all these high-powered investors to please,” Mr. Siegelman said. “He had all this money in the bank, so there was all this pressure to hire people and get things done. Open up new territories: China, Japan, Germany. Add all these new features. Meantime, he took his eye off the ball.”
But the board also lost sight of the task at hand, according to Kent Lindstrom, an early investor in Friendster and one of its first employees. As Friendster became more popular, its overwhelmed Web site became slower. Things would become so bad that a Friendster Web page took as long as 40 seconds to download. Yet, from where Mr. Lindstrom sat, technical difficulties proved too pedestrian for a board of this pedigree. The performance problems would come up, but the board devoted most of its time to talking about potential competitors and new features, such as the possibility of adding Internet phone services, or so-called voice over Internet protocol, or VoIP, to the site.
THE stars would never sit back and say, ‘We really have to make this thing work,’ ” recalled Mr. Lindstrom, who is now president of Friendster. “They were talking about the next thing. Voice over Internet. Making Friendster work in different languages. Potential big advertising deals. Yet we didn’t solve the first basic problem: our site didn’t work.”
In retrospect, Mr. Lindstrom said, the company needed to devote all of its resources to fixing its technological problems. But such are the appetites of companies fixated on growing into multibillion-dollar behemoths. They seek to run even before they can walk.
“Friendster was so focused on becoming the next Google,” Professor Piskorski said, “that they weren’t focused on fixing the more mundane problems standing in the way of them becoming the next Google.”
The board replaced Mr. Abrams with one of its own, Mr. Koogle, the former chief executive of Yahoo. But Mr. Koogle served only three months, a temporary caretaker who showed up at the office only sporadically, former Friendster employees said. The board next chose a television industry executive, Scott M. Sassa, to replace Mr. Koogle. That selection might have made sense if the company had been in position to start cutting big advertising deals. But it was not, given that its Web site was not up to speed. Mr. Sassa left after less than a year, which was nearly twice the tenure of his successor, Taek Kwan, who left at the end of 2005, six months after he started.
“After a while all the changes really wear on you,” said Jeff Winner, who served under three chief executives in just 12 months as the head of the company’s troubled engineering team. “Every C.E.O. represented a change of direction, and when a company changes direction, the engineers really get jerked around.”
Mr. Winner left at the end of 2004, he said, “because like a lot of people I no longer believed Friendster was on a course for massive success.”
People inside the company recognized that they needed to add new features to the site if it was to compete with the new crop of copycat sites trying to cash in on Friendster’s early success.
“There really wasn’t much to do once you set up your network and found your old friends,” said Ms. Le, one of several people who could describe themselves as a former product manager at Friendster. Other social networking sites, including MySpace, were adding features like blogs and tools that people could use to jazz up their profiles. But adding new features to Friendster would only slow down the site further.
“People had great ideas all the time,” Mr. Lindstrom said, “but it always boiled down to, ‘O.K., but first let’s get the basic thing working.’ ”
ONE of the good ideas, Mr. Doerr said, was to encourage users to organize around favorite bands — the very idea that proved so crucial to MySpace’s success.
“We completely failed to execute,” Mr. Doerr said. “Everything boiled down to our inability to improve performance.”
People inside Friendster were closely monitoring MySpace, which was founded by a pair of Los Angeles music aficionados in the fall of 2003, inspired by Friendster’s early success. MySpace would have been hard to ignore, given its phenomenal traffic growth starting in early 2004.
“I was giving people regular updates on MySpace,” said Jim Scheinman, who served as Friendster’s head of business development from October 2003 until leaving in May 2005 to work at a social networking rival, Bebo.com. “But a lot of people refused to take them seriously.”
Many people working at Friendster sneered at MySpace. The holy grail at Friendster — and the cause of most of its technical problems — was its closed system: users at Friendster could view only the profiles of those on a relatively short chain of acquaintances. By contrast, MySpace was open, and therefore much simpler from a technological standpoint; anybody could look at anyone else’s profile.
The two companies also mirrored their founders: where Friendster reflected the ordered vision of its engineer-founder — early on, the company famously removed the profiles of people who put up joke pictures, like photographs of their dogs in place of themselves — MySpace was more L.A.-laid back. At MySpace, they rode the wave instead of fighting it, and encouraged users to do pretty much as they pleased.
Besides, those behind Friendster were so convinced that they were destined to be the next big thing that they instead fixated on the actions of their presumed peers — at least that is Mr. Siegelman’s recollection. “I remember going to these board meetings and feeling disgusted,” he said. “Half of every board meeting was taken up by a discussion of what Google’s going to do, or Yahoo.”
Today, MySpace has more than 50 times the number of monthly domestic visitors as Friendster, according to comScore Media Metrix. The social networking offerings of Yahoo and Google are also tiny when their American audiences are compared with that of the market leader: MySpace’s audience is 10 times as big as Yahoo 360, and 200 times that of Orkut, Google’s answer to Friendster.
Last fall, Friendster hired an investment banker to shop the company around. In part, the board was inspired by the $580 million that Rupert Murdoch’s News Corporation agreed in July 2005 to pay for Intermix Media and its primary asset, MySpace. In the end, though, the investors failed to find a suitor willing to pay even $20 million for the company.
Friendster was nearly out of cash by the end of last year. It had halved its payroll, to 25 employees, and advertising was hard to come by on a site that, three years after its debut, still did not work right. The venture capitalists considered shutting down the company. But a sense of obligation (“It was my feeling that the investors and the board had done something of a disservice to Friendster,” Mr. Siegelman said) and economics (Friendster still had a well-known brand and millions of registered users, even if most had not visited the site in some time) prompted Kleiner Perkins, Benchmark and some of the private investors to sink an additional $3 million into the company at the start of 2006.
THE venture capitalists reconstructed the board — “I took all the 50-year-old white guys off,” said Mr. Siegelman, who is white and 44 — and put Mr. Lindstrom, who had been with the company since mid-2003, in charge. The company hired yet another chief of engineering, who laid down the law: at least 80 percent of his people would work on performance and stability issues until the Web site worked as well as it should.
“In the past, we had often chosen the more exotic solution over the more simple solution,” Mr. Lindstrom said. Trailblazing a new field like social networking was enough of a challenge. “But we were also trying to innovate on the tech side as well,” he said. The company finally licked its performance problems this last summer, Mr. Lindstrom said.
The team now running Friendster valiantly soldiers on, hoping that it can position the company as a site for an older demographic group — people 25 to 40 — who do not have the time or inclination to spend hours each day on MySpace.
Now the challenge, Mr. Lindstrom said, is “to focus on a market for more than two months.” A second challenge is figuring out ways to cash in on its popularity overseas. Three quarters of Friendster’s users live outside the United States, mainly in the Philippines, Malaysia and other, smaller southeast Asian countries.
“In the past we’ve seen that as a problem,” Mr. Lindstrom said, “but now we see this as a huge opportunity.”
The investors apparently are satisfied with this new, less ambitious version of Friendster. In the summer, they sank another $10 million into the company.
“Friendster missed the chance to become a multibillion-dollar company,” said Mr. Thiel, the PayPal co-founder who has continued to invest in Friendster. “But I still see a lot of opportunity here.”
Mr. Doerr added: “There are plenty of second acts in American business.”