Bob Smith, Founder of AOLs Digital City, on Local
Bob Smith was the founder of AOL's Digital City, the first nationwide city guide service. Given that ILM is this week in Philadelphia and roughly 10 years have passed since the local Internet city sites started, I thought it would be interesting to get Smith's view on the past, present and future landscape. He will be participating on the panel “Cityguides and Standalone Local Products: Where Are They Now?”
Smith, who is now CEO of iBelong Networks, has more than 20 years of experience creating and managing interactive community-based businesses. He started his first directory publishing company in 1984 and became a member of the AOL management team in 1992. At AOL, his initial assignment was helping large media companies such as The New York Times, Tribune Client and Hachette Filipacchi Magazines create their first online publishing ventures. He went on to serve as general manager of all AOL's community programming operations.
After leaving AOL, Smith started one of the first business incubators for Internet businesses in the nation, Vector Development. He has spent the past few years working directly with Internet-based start-up companies as both a strategic advisor and investor. He helped found and guided companies in e-government (ezgov U.S. operations sold 2004), e-commerce (OneMade, where he served as chairman sold to AOL in 2003), identity monitoring/management (PromiseMark and Privista sold to ConsumerInfo and Equifax, respectively) and community-based mapping (The Map Network, where he was chairman). In addition to his Internet background, Smith also has extensive experience in directory, newsletter, magazine and wire syndication publishing, including more than six years as a senior executive of Congressional Quarterly.
Smith has an M.B.A. in marketing from George Washington University and a B.A. in political science from the University of Southern California, as well as six years of service as an officer in the U.S. Navy.
You were one of the founders of Digital City Inc. in 1995. Who else at AOL was involved in the launch of DCI?
The people I'm most indebted to are David Cole and Ted Leonsis. I'd been shopping the idea for DCI around AOL for over a year my first job at AOL was actually helping newspapers go online with AOL prior to David coming to the company. He gave me the support and guidance to launch the business. Ted, who I was working for at the time, gave his blessing and supported us within the AOL Brand group. I also have to mention the efforts of David Colburn and Miles Gilbourne, who led our negotiations to get funding and helped with strategy development. It never would have happened without them.
My initial team was a skunk works inside my own community organization at AOL who “moonlighted” to create the Digital City prototype in DC. Mark Dewey was our first “Mayor” or general manager. Our initial organization included a small national group doing business development led by Beth Singer and Tommy McGloin (who ran MapQuest and now has his own new start-up), a production group led by Will Schermerhorn and an editorial group. Most of our resources were in the field under our Mayors, including Trish Barber (who's with me now at iBelong) [and] Jim Riesenbach (who's at Autobytel now). Our technology group was headed by Jim Davidson, who'd worked with David Cole at Navisoft.
The other essential group was the Tribune Co., including Gene Quinn, Donn Davis and David Hiller. They were early investors and partners in DCI and were very helpful in setting our direction.
What are you doing now?
I'm running a new company, iBelong Networks Inc. We've developed a suite of tools to create unique community products for clients in media (national and local), politics/government, nonprofit and business. We help them develop online communities tailored to meet their business objectives. A specialty of ours is creating network-affiliate communities similar in structure if not content to DCI. Our offering includes technology, editorial and business development services, whatever our clients require in outsourcing.
To date, we've helped established nonprofits including Youth Service America and KaBOOM! move their operations to the Web. We've helped start-up companies get to market quickly at very low cost for technology, including Executive Pie (a professional women's social network) and Amplifier Network (a virtual see fund and micro-grant platform). We built a community around singer Sara Evan's ill-fated appearance on “Dancing with the Stars,” and we'll launch a site for a presidential hopeful beginning in 2007.
IBN is a lot of fun for me because I get to see a lot of different opportunities. It's challenging and fun coming up with new ideas in online community to address our clients' needs.
What was the view of the local market at that time (around '95) and what were the expectations around AOL's local business? Where did you think it would be in 10 years (2006)?
At the time, most people weren't thinking about it at all, which was, ironically, a big reason we got it done in the first place. Those that thought about it at all generally fell into two camps: A common view was that we were insane; that no one would be able to penetrate local media markets dominated by newspapers. They felt it would quickly fail and we'd fold it. Newspaper companies, not surprisingly, were in this camp. Steve Case was actually in this camp also, at first, but became a convert after he saw that we could actually launch sites without a heavy investment. Others felt that there was no need for a service focusing on local community and content exclusively, as each subject matter vertical would naturally have a local component. It's important to remember that we launched DCI before there was much advertising on AOL. In fact, the idea of advertising on the Internet was pretty novel. So the fact that we developed an online business based solely on advertising was pretty radical within AOL and it was not viewed favorably by many.
As time wore on, many expected that there would be big national commerce plays (most of which didn't exist at the time) in key categories such as auto, real estate and employment, among others, that would dominate. Clearly, they were closest to the mark, but we never considered ourselves mutually exclusive with those businesses and actually partnered with many of them. For instance, a lot of effort was made to get us to work with, or merge with, the New Century Network launched by the newspaper industry. There was a lot of support for that in AOL. I think there is a mistaken view out there, held by some, that local search obviates the need for dedicated local content and community. I don't believe that to be true. We always felt the value was more on the context of local and how you built the community from that, not the data per se.
As for where I saw it, I really felt that DCI had a chance to be a $300 million (give or take) company. That's what the modeling indicated, anyway discounting, of course, for the “please fund me” hockey stick premium. We used a simple revenue per market formula and assumed we'd be actively selling advertising on a local basis in the top 20+ “hub” markets in the U.S., plus leveraging those operations to support another 60-70 “spoke” markets. Nationwide efforts in advertising sales, directories and classifieds would round out the revenues. I still think that number was achievable, although we quickly found that once one got past the first 10 leading media markets it was tough making a living with a dedicated local staff.
Who were the potential major players on local at the beginning? What happened to them?
Newspapers were the biggest threat we saw at the time. They're still there, of course, but they are in stiff competition with Craigslist, eBay and other vertical commerce businesses. I'm not sure how successful they've been in bringing in local merchants and that's surprising. I also felt that without a national network behind them they and the inevitable cannibalization argument they faced with their parent organizations that they'd have trouble being successful. Also, the news model adopted by most newspaper services for local services was expensive and not highly valued by customers, in my opinion. I thought the efforts of guys like Tim Landon at the Trib around the lead classified verticals were the bigger threat to us.
Yellow Page companies were also seen as a big player or threat at the time. We actually partnered with Switchboard, R.H. Donnelly and later GTE Superpages early in our history, so we never considered them competition. They're around too, but local search as been a tough competitor for them. It seems many of them have adapted well to that challenge, though.
The two big direct competitors to DCI were, of course, Citysearch and Sidewalk from Microsoft. Citysearch was able to make it to an acquisition hats off to them and they continue as a viable brand even today. Their merger, under Barry Diller, with Ticketmaster was masterful. It's ironic that Trib and AOL/DCI were instrumental in bringing Ticketmaster online the group I worked with in 1993 actually built their first online ticket portal for the Chicago Tribune area on AOL. I argued for buying them, although obviously not well or strongly enough. At the time, though, AOL had many other priorities and DCI had no money or liquid stock, so there were good reasons why it didn't happen.
What was the revenue model in 1995/1996?
I always saw DCI as a classified and directory advertising business with community as the content. The initial business model looked to draw, roughly equally, from national advertising (across the network), Yellow Pages and classified advertising and local “display” advertising. The model I copied most closely was the broadcast TV model, where the network distributed programming through the local affiliates. National advertising was the primary revenue stream for the network, while the national content created local advertising inventory for the affiliates. We viewed the YP advertising as a national syndicated product; the same was true of “aggregated” classified listings. The primary content programs were “guides” built around the key sales categories in YP, classified and local dining and entertainment. That was the theory at least.
In practice, we actually pulled more revenues out of local markets through our Mayors' sales efforts to start. Our directory partnerships also were good early revenue generators. We got almost nothing from national ads at first, then we started selling bigger deals than AOL which didn't make us popular, believe me. Our L.A. office actually sold Autobytel before AOL landed them. They thought we were the better buy. It was a $2 million deal, or thereabout. As time went on, national advertising became a bigger share of the pie, but the AOL deal machine ultimately overshadowed, and subsumed, our efforts.
At Citysearch, we were selling Web sites for $19 a month with a deployed sales organization. We started to focus on restaurants and entertainment while DCI went the other direction and focused on higher spend advertisers like auto dealers. How successful was this?
It was actually very successful. I had started in directory sales and thought that it would be too expensive to launch that kind of effort with the scale we were required to achieve. You have to remember that AOL wanted us to have 50 cities with active content and communities within six months of launching if we were to get a “Channel” on the AOL menu. I couldn't afford a Citysearch-like effort.
What we did instead was sold scarcity. We limited the number of advertisers on the site. We sold exclusives by category and territory so if, for instance, someone clicked on our cars category, they would see only one car dealer per either city or community within a city, and possibly by make. We also sold a complete set of online services to them including creating their online presence, taking photos of their inventory a tactic we stole from Cobalt Group and the Recycler and managing a response service for them. As most dealers had no sites (no one did) and no way to maintain the sites, they viewed our combination of exclusivity, traffic (we were AOL after all) and services as great value indeed. We recorded contracts as high as $60K per year in our bigger cities for a major advertiser.
We did the same thing for Realtors and employers. In each of those categories we used partnerships and an aggregation strategy to aggregate listings, and then we'd sell value-added online services packages to early adopters. This method was short-lived, however. As the tools to get online proliferated and the venues for advertising increased, this was not a model that, alone, could sustain a local business. National advertising logically took the lead. It's surprising to me, though, that locally generated advertising still seems to be such a small percentage of the local ad picture. I think the problem remains a lack of compelling local products and the difficulties in making local ad sales scale.
In the YP categories our counter to Citysearch was to partner with existing YP companies. We launched R.H. Donnelly in early 1996 and grew that business to over $3 million per year nationwide after 18 months. The key for us was building the site and distribution into a premium that RHD advertisers got when they increased their print ad buy. It was a good starting model for us, but it too fell away as AOL gained more control and preferred selling national rights to content categories instead of grinding out YP sales.
Media partners seem to be inextricably linked with local to drive usage and sell against another established brand. We built a rather large media partnership practice at Citysearch with hundreds of radio, TV and print partners. You were one of the architects of a similar strategy at AOL. What was the strategy behind it? How many partners did you have?
It's ironic that Citysearch ultimately signed so many partners while AOL increasingly turned away from that over time. When we first started, Charles Conn (Citysearch CEO) and I actually had a lively debate on partnering with media companies, and he was not a big fan. I remember talking with him after Citysearch did their deal with The Washington Post and the two of us laughing about that.
Partnering was the key to our growth, just as it had been important to AOL's early branding, content and marketing efforts. We really did nothing more at DCI than copy the business development model we'd developed at the AOL brand. During our first two years we did well over 100 media partnerships. Our launch plan for a market required a Mayor to give a partner target list for each key content component of their site. Our marketing efforts were judged on how well we integrated partner online content with their offline marketing efforts. Supplementing the local partnering efforts were national efforts we did to flush out the local offerings. These included deals with Shadow Traffic, various movie listing providers oddly enough, we didn't partner with MovieFone (eventually bought by AOL) because they wouldn't give us good terms weather, dining guides, etc.
One of the things that I think is interesting was that in 1996 there were about 16 million people on the Internet. That means the sales process was twofold: one, convincing the business that they needed to be visible in 'the Internet' and then convincing them that we actually had a product that made sense for this need we just convinced them they had. What was your experience with this?
We were quite envious of Citysearch's proselytizing efforts. It was a great operation.
As I discussed above we really focused on large-scale, early adopter efforts in our major markets. We were somewhat hamstrung early on as we had to do everything in AOL's proprietary “RainMan” format. We left the larger scale efforts up to our YP and other partners and treated the move online as a giveaway. You're quite right about the nature of the sales process, but we felt it was better to leave the heavy lifting to companies like Cobalt Group, which was in the market very early on helping auto dealers get their presence online, and MLS providers who were slowly getting housing inventory up. As the market progressed, we just drafted off the efforts of the bigger vertical e-commerce players, looking to sell local ads around their content. We did the same with event guides, aggregating listings from multiple providers and putting all the data into a directory format.
We actually had a decided advantage against local papers and direct competitors AOL distribution. At the time over 50% of Internet traffic, and that 16 million-strong user community, was coming through AOL. The single smartest thing I did, with the help of Cole, Leonsis and David Colburn, was to get exclusive rights to a permanent button on the welcome screen of all AOL users, tied to their local Digital City offering. This did not make us very popular within AOL, but guaranteed that AOL users couldn't avoid us. No one at the time had such a traffic advantage. As hard to imagine as it seems now, many people (including most of the VCs we talked to) didn't consider it important. Tribune got it and it paid off nicely for them.
Content was a big expense. DCI, Citysearch and SideWalk all employed city-based editorial staffs since there really was not any content to aggregate. How big was the editorial staff at DCI?
We tried to keep editorial costs low, but we weren't always successful. The model I tried to use was based on my experience in print media. If we kept editorial costs under 15% of revenues we considered that a success. Generally, in-city we tried to keep the editorial headcount at three people or under on average, with up to five to seven people in big markets and two people in smaller markets. Additionally, we had a national editorial staff that was relatively small and largely tried to package content for the local markets. We had a network of a couple of hundred part-time community monitors to supplement our editorial efforts and to support smaller city content.
Our strategy on editorial was to keep editorial costs low by relying heavily on low- to no-cost content sources. Our content hierarchy was community- or user-generated content first, then partner content, including national programming (again mostly partner driven and commerce-related such as directories and classifieds), next was local stringer-generated content (reviews, etc.) and finally DCI original content, which focused on live “events” including man-in-the-street interviews. The strategy was generally right, but the execution varied, which at times gave our service a disjointed and uneven look. Hey, but it wasn't expensive!
Certainly at the other extreme was SideWalk. We could never understand why they spent so much money per market. In San Diego they actually set up their offices directly against a courtyard from ours. Our folks were convinced that they were spying on us and adapting their operations to copy ours. I think we were flattering ourselves, but there was probably some truth to the fact that SideWalk found it had to adjust its model and looked to Citysearch and maybe us to do it.
There is lots of speculation that editors can be replaced by consumer reviews. Do you think there is a balance here, or will there actually be a canonical local consumer review site?
Many people forget that community was all there was on the early Internet, i.e., pre-WWW. When I joined AOL in 1992 our content was a USA Today news feed and message boards. We're just going back to the future. I fundamentally believe that the Internet is, first and foremost, an appliance. It's a really great tool for storing, sharing and finding information. What's really changed in the last few years are the tools available to the average Joe to publish and participate. At the same time, search and RSS are making data a heck of a lot easier to find and distribute. Now everyone is their own media company with distribution.
It's natural that when the sources of information proliferate and the barriers to finding information are reduced, that the traditional role of editor as arbiter of relevance, taste and, dare we say it, truth will be reduced. At a minimum it will be significantly altered. Of course, the downside of the participatory Web is that talent and sense are still precious commodities. So, there are millions of bad publishers out there. The editor's role increasingly becomes culling the junk and crafting a coherent narrative from the pile of random postings. Technology can solve some of these problems, but not all. In other words, editors are needed even more today and they aren't going anywhere.
That is not to say that it's going to be business as usual. Consumer-generated content will become an integral (or principal) component of most sites. No longer will it do to stick the audience in some “Community” ghetto. However, participation must be nurtured and harnessed; it can't be channeled or cajoled. Most organizations that move online still don't get that to this day. I can see it in the traditional media sites I see and some of the clients I work with. It should also be remembered that a very small percentage of any viewing audience will actually post relevant content; even fewer post quality content and they aren't necessarily the people an audience wants to hear from. Are you looking for that restaurant review from the 24-year-old body-piercing aficionado? Maybe but that doesn't mean I want it.
That's why I believe that the Web will increasingly become a very personal experience. Content and social interactions will pass through a “me” filter that I manage. The user feedback and insights I look for will mirror the way I gather them in the real world: heavily relying on my most trusted friends. That why we at iBN believe that the micro-community, those affiliations most closely tied to me and who I am and where I live, will become the focus of people's online experience. It's already the norm if you consider the popularity of e-mail and instant messaging as opposed to other content interactions on the Web. The communities we create let small groups form around content, not beside it. Discovery, collaboration, sharing and continual reinforcement are the elements of community we highlight in our solutions.
Today, there are more than a billion people using the Internet. There are a lot of new companies making a run a local again. What are some of the more interesting ones you look at?
I've been most interested in the referral sites and hyperlocal plays than some of the other local plays. There is an e-mail-based referrals/hyperlocal site near me called Neighbors International that I thought was on the right track. Whether they can scale their model remains to be seen. I think companies like Backfence and offerings like My Hub are moving in the right general direction. However, I'm not a huge fan of the “fill my news hole” model. The idea of harvesting existing online activity to create new local products is right on, but a blog publishing model still relies on self-selected publishers driving the voice of the site. The problem is that the 1%-2% who will actively publish may not be the voices that drive the other 98% to make the site a habit. It's the age-old online problem and the MySpaces of the world are just beginning to see it. I think the closest efforts I've seen to where compelling local content needs to go are the group sites like Facebook. Facebook isn't interesting to me for the exhibitionist social network aspects but for the small group interactions at a school or click level. It was a big influence in the development of the iBN platform.
The city guide was fundamentally a directory product. That is even truer today. I think online Yellow Pages and local search sites are doing a relatively good job helping folks find information. I use them. The problem I have with them is they're soulless they are pure utility. Sadly, as the other local services try to compete for dollars they will angle more for the utility and they'll lose any sense of fun and involvement.
I still believe that local is the ultimate community, but it's very difficult to capture into a traditional “destination” brand. For instance, I live in Vienna, VA, but I don't define my community by The Washington Post, or even the Vienna Connection or Verizon Yellow Pages. I define it by my kids' sports teams, my church, my home owners association, the neighbors I watch football with, my local schools, PTA, etc. I connect with each of these groups through their existing Web sites or just through e-mail or phone. When I want referrals to what's new, good, reliable or whatever in my community, I'll generally ask friends, many of whom are in these groups. They are where trust and relevance is highest for me.
At iBN we help our clients reach into these existing real-world groups to create a richer, more connected, experience at this micro-group level through the use of our platform. We help brands affiliate with micro-groups or individuals instead of asking these groups to artificially affiliate with their brands. Our clients benefit by creating their own “long-tail” networks of connected local community organizations, harvesting that real-world activity to create new content products and advertising opportunities.
Looking back 10 years, was the strategy correct?
Generally, timing was a lot of the problem. One can argue that a vertical solution was better than a broad-based local service, or that the numbers never got huge for one brand, but I think misses the point of whether there is a place on the Internet for a truly local voice I think there is. I think we were right that a network is required, i.e., national/international reach vs. a market-by-market approach, but we were off with regards to the power of compelling vertical communities (eBay for one) to dominate so much of the local activity. EBay works because it is so easy, so focused and so relevant to users. I think we were also off on how long it would take to get local merchants online advertising. I still can't believe how slow it's gone, but then I still don't think there's a great option for them out there.