Five Laws of Successful Digital Media Companies

Venture capital’s newfound love for content and distribution businesses: What’s changed and why.

It used to be that venture disliked investing in content and distribution businesses, especially those that had to reach millions of consumers. That was because content and distribution were incredibly expensive. One had to spend a lot of money on content and then spend two or three times that on distribution, before even knowing whether a hit was possible. That is no longer the case.

Today’s digital media startups are taking advantage of the five laws below:

1. Use low cost, high leverage distribution. Facebook, iPhone, Android, or all three. Reaching the consumer used to be prohibitively expensive. During the dot-com boom, a company would raise tens if not hundreds of millions of dollars to build a brand and reach consumers. Today’s startups leverage platforms that are already reaching millions of consumers.

Companies that don’t start on these platforms leverage them to let their users share and to interact while mobile. Others use these platforms as jumping-off points. Their biggest challenge is crossing the chasm to build their own sustainable brands.

For those that monetize their users, a host of digital advertising, data, and optimization companies provide the tools for highly efficient and measurable acquisition of even more consumers.

2. Deliver low cost content. VC’s used to dislike investing in content companies. Content, from games to news, was prohibitively expensive to produce, and determining whether one had a hit cost huge development and distribution dollars. Not so today.

Today’s user generated content (UGC) comes in many forms: files, links, payments, photos, posts, reviews, texts, tweets, videos, and virtual gifts, to name just a few. UGC content isn’t the only

3. Use game dynamics to promote adoption. On top of low cost distribution and low-cost content, today’s startups use a new form of marketing: gamification to reach and engage users. Virtually every startup is applying game mechanics to reach and engage users.

Startups are using digital incentives from badges to leaderboards to storage to encourage sharing and viral product adoption. Companies get their users to drive more adoption. Network-effects are easier because sharing is supported by the underlying platforms.

4. Substitute for existing time or money consumption. Leveraging low cost content and distribution, today’s startups are replacing more traditional forms of entertainment, information, and services. Zynga, and others are stealing disposable entertainment time from television. While the paperless office is still not reality, startups like doxo, Dropbox, Evernote, and others are transforming Consumer IT at home.

5. Monetize via advertising or direct payments. Paypal has existed now for over a decade, and Google Adsense for more than seven years. But what has really transformed user monetization is widespread consumer acceptance of payments for digital content, from music to video to virtual coins and goods. Today’s startups are also offering hybrid models that let the consumer choose how they want to pay: with their wallet, time, or identity. Startups now allow consumers to buy items for a fee, watch advertisements, or provide identity information to receive offers or enable more targeted advertising. All are viable forms of payment in today’s digital economy.

Conclusion. Startups are leveraging the five laws above to reach consumers faster and more efficiently than ever before. As a result, investing in content and distribution businesses and the tools companies associated with them has become one of the most appealing areas for venture investment, and will likely produce some of the most appealing returns.