Monday, December 24, 2007

Profitable Christmas PNE strategies

Positive network effects are normally associated with platform strategies such as those for videogame consoles and PCs, as outlined by the book Information Rules. In the last few years, new PNE strategies have been attempted with social networking websites, but many of these sites are still using unproven (if not dubious) revenue models.

At tonight’s first round of Christmas gift exchange, I became better acquainted with two new business models that seem to combine network effects and direct revenue models in novel (and promising) ways.

The first example was the JibJab animated cartoon site, which is best known for a series of political satires such as “This Land” played on the Tonight Show during the 2004 presidential campaign. The company’s claim to fame is superimposing facial pictures on top of cartoons and then tilting them back and forth to the music.

Now the company has branched out into personalized video greeting cards (not its first attempt to monetize its brand and technology). My sister sent a JibJab Christmas card in which her family’s pictures were superimposed on a movie of Santa’s elves goofing off at work. It turns out my teenage niece got a card from a friend, sent her own card to her friends, and then her mom said “let’s send this to our friends.” Two interesting freemium wrinkles are that some cards are free, and you start out with an initial credit, so it’s easy to get started (as my niece did) before you realize this will end up costing real money (although a lot less money than 20th century technologies like sending Kodak photo cards).

So the more people who send cards to their friends, the more potential customers JibJab gets, and each one gets lured in with a freemium model. My only questions is that once everyone’s doing it (as with the Blue Mountain ECards) the novelty wear off?

The other new business model is Webkinz, which for $14 gives you a small stuffed animal combined with a paid social networking game site called KinzChat. As with my niece (same niece) and nephew’s Wii, the Webkinz was a hot product in short supply this Christmas shopping season. Participation in the fad has even helped retailers carrying the product.

So Webkinz has to build a website with games, login tools, age-appropriate content etc., and then they get to command a high gross margin ($5? $10 per toy). The KinzChat logon only lasts for a year, and then the parents must go buy another premium-priced stuffed animal or junior will be kicked off the website.

No clue as to how long this fad will last — Beenie Babies, Cabbage Patch Dolls, pet rocks, and other similar fads eventually faded away. But it seems safe to predict that Webkinz will spawn a whole raft of online re-interpretations of low-tech toys.

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