Prepared for Purdue Entrepreneurship
Certificate Program
Team Analysis & Discussion
Spring
2007 © Hank Feeser
Grouper Case Study: Dual go to market strategy pays off
written
by Jay Parkhill,
posted on December 25th, 2006
From:
http://www.startup-review.com/blog/grouper-case-study-dual-go-to-market-strategy-pays-off.php
Note from Nisan Gabbay: This week’s
case study was authored by Jay Parkhill, who will be a regular contributor to
Startup Review. Jay is an attorney who serves as “outsourced general counsel”
to growth-oriented businesses. You can read more about him on his website and blog.
Grouper Networks is the developer of a consumer video
sharing site, www.grouper.com, and a provider of white label video hosting
solutions to other consumer facing websites. Grouper has created a variety of
easy to use tools to support online video creation and distribution. Grouper
was acquired by Sony in August 2006 for $65M in cash, at which time it claimed
approximately 8M unique monthly visitors.
Interviews conducted: Dave Samuel,
co-founder and President; JD Heilprin, entrepreneur, technology and media
consultant, founder of RioPort.
Key
success factors
Changed product direction from
offering a download-based peer-to-peer sharing network to a web-based platform
Grouper launched its first product,
a P2P network designed to facilitate sharing of media among small groups, in
October 2004. The founders, Dave Samuel and Josh Felser, believed strongly that
media sharing would be an important phenomenon, but that it should be done
without the massive copyright violations of other P2P networks. As such, the
product was designed to permit only 30 people to be part of any network.
In April 2005, the company realized
that online video was becoming increasingly important and that the closed
“darknet” P2P model would likely not generate sufficient business for the
company. Grouper retooled its product and re-launched in December 2005 as a
destination site for online video. As a result, Grouper’s user traffic
increased from 100,000 to ~8M (as reported by the company).
The tremendous increase in user
adoption is best explained by removal of the barriers to viral adoption
inherent in the initial product. Version 1.0 was limited to 30 users per
network and required a download. It was therefore difficult for users to share
either the content or the platform itself. Version 2.0, by contrast, allowed
users to share video simply with just about anyone.
Provided simple tools to enable
sharing
Almost from the launch of version
2.0, Grouper sought to emphasize ease of use. They took clues from Flickr and
other companies by making Grouper’s APIs simple, prominent and easy to
integrate into other web sites. Grouper was also one of the first, if not the very
first, to offer one-click posting of videos to MySpace, Friendster and blog
pages. Most sites, including YouTube, generated HTML code for users to drop
into their page in order to stream a video. Grouper instead streamlined this
process by automatically inserting the HTML code on behalf of users. While
seemingly a small difference from what YouTube was doing at the time, it
actually enabled a large audience of less tech savvy MySpace users to post
videos to their profile pages.
Pursued twin goals to be a consumer
destination site and a technology provider to other sites
At the same time that it grew the
consumer-facing website, www.grouper.com, Grouper also developed co-branded
video hosting sites for other online communities, most notably Friendster. These
co-branded sites helped to drive more video traffic and positioned Grouper as a
player in the video ad network market.
This base of technology for creating
distributed video hosting solutions was an important factor in Sony’s interest
in acquiring the company. The other interesting piece of technology Grouper
developed was its P2P application, which does not use the BitTorrent technology
common to many other P2P clients.
It is noteworthy that Grouper was
able to effectively pursue the consumer-destination and the back-end approaches
simultaneously. Most start-ups struggle to achieve one set of goals with the
limited resources they possess. It helped that Grouper was reasonably
well-funded with a $4M round of financing in March 2005.
Focus on copyright-legal material
Providing online content without
violating copyright was an important component of Grouper’s business from the
outset and continues to be a differentiator between Grouper and many of its
competitors. It seems likely that this strategy increased the company’s appeal
to Sony. At the same time, I find this point to be a bit of a double-edged
sword. Without trying to suggest that copyright infringement should be
condoned, it is nevertheless clear that a major factor in YouTube’s runaway
success has been the availability of content with little apparent regard for
ownership rights. It seems unlikely that another video business will be
acquired for anything close to YouTube’s valuation, but the line of thinking
leads to some fascinating questions. Would Grouper have taken off more quickly
if it had been less scrupulous about content? Conversely, would higher traffic
tempered by greater litigation risk have affected Sony’s purchase valuation?
Launch
strategy and marketing
As described above, Grouper’s
success came in the second iteration of its product. Dave explained that the
2.0 launch and marketing strategies were focused entirely on viral distribution
efforts. The company did not have a formal marketing program, although it did
engage in a sustained PR effort in order to get word out about the site.
Grouper coupled its emphasis on viral distribution with search engine
optimization tactics that also yielded good results. Grouper developed video
indexing and search optimization tools that gave a big boost to traffic in the
time before every major internet portal, especially Yahoo!, had its own video
area.
A major challenge Grouper faced was
the difficulty in re-tooling completely and changing from a behind-the-scenes
P2P application to a public-facing web business. While I noted above that
Grouper’s ability to maintain the P2P component probably helped its exit
valuation significantly, it is equally important to note that had Grouper
re-tooled sooner they may have captured a greater share of the online video
market.
Grouper decided to refocus on video
in April 2005, but did not launch version 2.0 until December of that year.
YouTube launched in June 2005, meaning that it had a six month headstart before
Grouper launched its competing product. In our interview, Dave explained to me
that it was both practically and emotionally difficult for the company to let
go of the previous strategy and restart in a new direction.
The Xfire case study provides a useful contrast here. Xfire
also changed direction, requiring about six months to introduce its IM gaming
product. The key differentiator, in my opinion, is that Xfire entered a market
that competitors had not yet figured out how to effectively serve. Grouper did
not have that luxury due to the rapid rise of YouTube and other online video
sites.
Exit
analysis
Prior to the sale to Sony, Grouper
discussed further rounds of venture investment, and received a term sheet that
was rumored to value the company at approximately half of what Sony paid. I
asked Dave what caused the decision to sell, and he told me that when management
reviewed the increasingly crowded video space and the amount of VC money
looking to enter it, they decided that the best way to “win”, i.e. increase
traffic to the site, was to partner closely with a company that could provide
cash as well as a unique set of complementary assets, especially video content.
The Board likely reached the conclusion that given the competitive nature of
the market, it probably made the most sense to take a solid return rather than
to keep swinging for a homerun and risk striking out.
No one factor made the deal
compelling to Sony, but the aggregation of several elements added up to a
successful exit. Specifically, (i) the site’s traffic was in the top 15 among
video sites, ahead of at least 200 others but well behind YouTube and several
other sites; (ii) the P2P platform is likely useful to Sony, but I find it
difficult to believe that Sony could not have bought or developed another
distribution platform for less than $65M; (iii) copyright compliance is an
important differentiator for Grouper, though again not difficult to replicate;
and (iv) the Grouper management team had established its credentials in the
online media space. Sony did not acquire Grouper for any one of these
attributes more than the others, but all together they added up to a business
Sony felt it could use as a launch platform for its online video/media efforts.
Food
for thought
It is rare to find a company in the
Web 2.0 landscape that has successfully created a destination site and an OEM
service. Grouper executed well on both of these product lines, and having both
businesses played a key role in their acquisition by Sony. We asked Dave to
comment on the benefits of pursuing this dual model: “at Spinner we had this
program called “faceplate” … it was our OEM program for Internet Radio. We
built Snap (cnet’s) radio. We built Comcast radio. We built Yahoo radio. When
AOL came knocking, they purchased us. At Grouper, the OEM partnerships
(Friendster, Buy.com, Pure Digital) were all very important for the company.
They demonstrated our willingness and ability to integrate and partner with 3rd
parties. Which is what happens when you are acquired. I definitely recommend
that any entrepreneur examine how they can partner with companies. And many
times, these partnerships will help find the acquirers.” Thus, OEM partnerships
help to validate the likelihood that a start-up can be successfully integrated
into an acquirer.
Reference
articles and further reading
Sony Reels in Grouper, Light Reading, August 23, 2006.
Timeline of company and discussion of balance between P2P and website-based
video sharing.
Wow – Grouper Sells for $65 Million, TechCrunch, August 22,
2006. Discussion of Sony acquisition and basis for purchase price.
Ruthless enough for a startup? Geeking with Greg, November
14, 2006. Blog post questioning whether anti-social behavior is required for a
Web 2.0 success. Amusing, if unresolvable question in regard to Grouper’s
stance on copyright.
2 Comments »
- Good review. Thanks! Didn’t the Grouper founders have
success with another start-up? I believe you reference it, but do not go
into details. Isn’t founder pedigree a huge element of a) getting seed
capital, and b) getting a Sony to pay attention?
Comment
by Scott — December 26, 2006 @ 11:37
am
Hi Scott,
You are
absolutely correct. Spinner was the company previously founded by Grouper’s
co-founders, Dave Samuel and Josh Felser. Spinner was acquired by AOL for $286M
in AOL stock in May 1999. Having a previous success and experienced management
team was critical to raising seed capital and getting Sony’s attention.
Management had worked with Sony during the Spinner era too.
Perhaps
Jay might have more to offer as commentary.
Comment
by Nisan Gabbay — December 26, 2006 @ 9:44
pm