Excerpt: Viral Loop

by Adam L. Penenberg
(from an excerpt published in Wired UK)

Two Heinekens into a lazy Tuesday afternoon James Hong, a 27- year-old dotcom refugee from Mountain View, California, was listening to his roommate, Jim Young, an electrical-engineering graduate from Berkeley, describe a woman he had met at a party the previous weekend. Young, also 27, insisted she was a “perfect ten”; Hong didn’t believe him. His flatmate had a thing for “goth chicks” while Hong’s own tastes were more Abercrombie & Fitch. What the world needed, they agreed, was a metric to rate someone’s looks reliably.

Young’s “perfect ten” comment got Hong thinking. What if you could rate someone’s looks by opening it up to a vote — so that a person’s attractiveness could be based on whatever a large community of people judged it? All they needed were pictures and a scale from one to 10 for site visitors to click.

Hong scoured the web for candid shots while Young got cracking on the digital infrastructure. Because of the way they designed the site, users couldn’t find out poll results until they voted and the next page loaded. They purposely placed the aggregate score on the left side, over a smaller version of the picture, while the next picture was significantly larger and centred. The interface demanded engagement, and this made it sticky; if a site retains visitors’ interest, it has the potential to be popular and spread by powerful word-of-mouth endorsement.

On October 9, 2000, AmIHotOrNot went live. Hong emailed 42 friends: “Here’s a website that Jim and I made — be nice,” he wrote, and inserted a link to their own pictures. The visitors pinging the site quickly grew well beyond Hong’s 42 friends. It didn’t take an epidemiologist to recognise a viral spread. By the end of the first day, 37,000 visitors had found the site; by its eighth day the site had 1.8 million daily page views. Hong, who had slept only eight hours in those eight days, was shaking.

Hong soon estimated that AmIHotOrNot would cost $150,000 in bandwidth in its first year. The more successful they were, the greater the chance that they could go bankrupt. He had no idea how the site would make money and, frankly, he didn’t care. All he knew was that he had stumbled into an insanely viral scheme, but had to figure out how to keep it going before the levees gave way. Six weeks after launch, the site had attracted three million page views a day and more than 3,000 photos. Advertising made the most sense as a way to earn money, but a number of users had been posting nude photos, and pornographers were tricking users into passing on their emails so they could spam them. Hong knew if there were objectionable material posted they couldn’t attract advertisers, so he and Young came up with their new motto, “Fun, Clean and Real.” They issued basic rules: no celebrities, minors, models or porn, no group photos, advertisements or anything with contact information such as email addresses or phone numbers.

They created a community monitoring system whereby users could click a link under an inappropriate picture; based on an algorithm, they would delete anything that was tagged too often. They turned to their community to act as moderators; each applicant was required to pen an essay, and those chosen to moderate were told to reject inappropriate pictures, ads or anything containing contact details. With hundreds of users trolling the site, they could filter what was posted.

After this went into effect, it didn’t take long to land an advertising network. Although click-through rates were low — in the order of 0.2 per cent — the immense number of page views still made it a good proposition. Within two months, they had seven million page views a day and had collected 130,000 photos. Three months after launch, they broke into Nielsen’s top 25 advertising domains and had generated $100,000 in ad revenue. In 2001, the name was shortened to HotOrNot.

Just when things seemed to be humming along, the web ad market stumbled, a victim of the dotcom bust; advertising rates dropped. “Can we charge for anything?” Hong wondered. The answer was staring him right in the face. After they had launched the community monitoring system to stamp out pornography, they received emails from users complaining that they had been enjoying meeting others via the site. Since it made sense to stoke the community, Hong and Young set up “Meet Me”, which allowed users to commingle online. It was also a hedge against the porn operators, since a member couldn’t post an ad and wait for email to roll in, but first had to engage in the community.

In April 2001, they instituted a $6-per-month fee to join “Meet Me”, thinking it was cheap enough to qualify as an impulse buy. In its first month it generated $25,000 in revenue and by the year’s end brought in $600,000. Their success spurred them to work even harder; most nights neither got much sleep. The site grew so big so quickly, and continued to attract visitors at an exponential rate, that it had achieved a point of non-displacement. This meant that virtually no one in the market could then knock them off their pedestal.

Besides money and fame, the site offered other, fringe benefits. It vastly improved their dating lives, for one: Hong could now afford a Porsche and was dating women way out of his league. Initially his photo rated a 3.8, once plummeting to 2.6 after a particularly unfortunate haircut, while Young averaged 3.5. That changed after they inserted a link that said “Meet the guys that run HotOrNot” on the homepage and their scores rose. It figured, thought Hong; the more successful the site, the more money they made, the more famous they became, the hotter they got.

It took a while before Young and Hong were convinced that they had a viable business, even after venture capitalists expressed interest and Lycos offered them $2 million for it (they turned it down flat). There was nothing inherently viral about HotOrNot, it was simply compelling enough to induce people to spread the word. Like any fad, Hong believed it would lose steam and their gravy train would run out of track. Young could then return to grad school to complete his dissertation, “Design and Specification of Heterogeneous Systems”, and Hong would move on to other ventures, both of them richer and wiser. But in their first full year they pulled in $600,000 in almost pure profit, and doubled their revenue each and every year that followed. By 2004, the site generated more than $4 million annually, which the partners split in the form of dividends. In July 2006, the site tallied its 13-billionth vote and was the third most popular dating site on the internet. Two years later, they sold HotOrNot for $20 million.

As Hong and Young showed, simply by designing a product the right way it’s possible to build a billion-dollar business from scratch: no advertising or marketing budget, no sales force, venture capitalists prepared to kill for the chance to throw money at you.

Some of the most iconic web 2.0 companies — Hotmail, eBay, PayPal, MySpace, YouTube, Facebook, Digg, Twitter and Flickr, as well as hundreds of widget-makers navigating the social-media economy like Zynga — fit this description. The trick is that they created something people really wanted, so that their customers happily spread their product for them through their own networks of friends, family, colleagues and peers. That’s one of the beautiful things about web 2.0: you can nurture a business like never before and achieve almost stratospheric valuations in record time.

Copyright 2009 Adam L. Penenberg (penenberg.com)

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