Metcalfe's column: Understand Net epidemiology to 'monetise' the Web

Joseph Vardi's chuckle is catching, and that's not all.

We're poolside at PC Forum (www.edventure.com) in Scottsdale, Arizona, discussing how to get returns on our Internet investments. Vardi is intellectualising with me about 'viral marketing', of which he is surely the world champion.

It's also called 'word of mouth marketing', 'word of mouse marketing', or 'buzz marketing'. People talk about low-friction marketing, network effects, increasing returns, and, yes, Metcalfe's Law. I call the study of these phenomena Internet Epidemiology.

Vardi and friends founded Mirabilis in Israel in 1996. They launched an instant messaging service called ICQ -- "I seek you". When online, you can check if any of your buddies are also online, and, if so, you can instantly send them messages -- PC to PC -- bypassing e-mail servers.

By 1998, ICQ had infected almost 13 million PCs on the Internet -- amazing! The only problem was that there were no profits. Of course, earning profits would have been hard because ICQ didn't have any revenues either.

But Vardi chuckles and says: "Revenue is destructive." His plan was not to sell subscriptions or advertising, but to gather members. He wanted millions of them to sell to a large revenue-generating media property seeking new members.

And in June 1998, Vardi sold Mirabilis, still with zero revenues, to America Online (www.aol.com), for $US287 million in cash. A lot of people thought Vardi had taken AOL.

The Internet's current hot business model involves attracting eyeballs to Web sites and then selling page views to advertisers. I continue to think that, in time, advertising and Wall Street alone won't be able to finance Internet growth. But still, it's an important e-commerce trick to get people to visit your Web site.

First, you have to 'eyeballise' your Web site -- get people to visit. In publishing, we call this "circulation development". It's very expensive, especially if you're on the Web and don't understand Internet Epidemiology.

Then, after eyeballising your site, you sell ads.

The next two steps will become increasingly important as advertising fades. You have to 'memberise' your site's visitors, and then 'monetise' their visits.

Well, Vardi certainly eyeballised ICQ (www.icq.com). Then he got people to download his software and come back repeatedly -- he memberised them. Most importantly, he got them to bring their buddies. He left the monetising to AOL.

Since the sale, ICQ has continued to grow rapidly. The number of ICQ members, who needn't be AOL members, is approaching 30 million.

AOL is monetising this epidemic by using it to attract AOL subscriptions. After that, AOL will sell ads against its membership. Soon, the company will be developing ICQ as its own portal, to rival Yahoo and Hotmail, which by now probably wish they, instead of AOL, had bought ICQ.

One key feature of ICQ makes it highly contagious. Not only is the ICQ service useful and fun, so you're doing your buddies a favour by telling them about it, but the ICQ service is more valuable to members if their buddies are also members. This is contagion at its best.

I caught ICQ recently while upgrading my Netscape Navigator (www.netscape.com), which is now also an AOL product and part of a compound Netscape-ICQ-AOL epidemic. I was offered ICQ as the Netscape AOL Instant Messenger (AIM). Within minutes I was -- with AIM's help -- getting a buddy to download, too. And neither of us is an AOL member, yet.

It's reassuring that Vardi admits one mistake. He and his friends took the ICQ sale proceeds in cash. If they'd taken their $287 million in stock, they would have avoided taxes on their gain, watched their AOL stock multiply in value, and been, shall we say, monetised in full.

Pass it on.

Internet pundit Bob Metcalfe invented Ethernet in 1973 and founded 3Com in 1979. Send e-mail to metcalfe@idg.net or visit www.idg.net/metcalfe

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