15
Business Models: Kid-Friendly Internet Businesses

Brian Pass

Until yesterday, I was president, chief executive officer, and cofounder of Passport New Media, which created a product called “Your Own World” (YOW for short), stand-alone software designed to enable children to experience third-party Internet content in a protected, offline environment. For parents, we offered peace of mind that their kids, when using our software, would never be exposed to the dangers of the Internet. For kids, we dramatically improved the performance of the Internet by eliminating bandwidth constraints and putting all of the content on the personal computer (PC).

We founded the company in January 1999. We were a year in development, building this software from scratch. We launched the product last spring but, when we went to raise our third round of capital and market the product nationwide, we were hit by the financing problems that face many companies these days. Bankruptcy papers were filed just yesterday. Nonetheless, we are proud of the product, which drew a lot of praise from parents, especially, and from critics who covered the space.

I am also a father of two girls aged 5 and 7, and many of my comments are informed by the fact that I am a concerned parent.

15.1 BUILDING AN INTERNET BUSINESS

What are the primary challenges of building a business based on the idea of attracting kids to safe and appropriate Internet content? Building any Internet-based business is difficult, but especially in the kids’ space. The kids’ companies suffer from all the same problems that the adult-



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Technical, Business, and Legal Dimensions of Protecting Children from Pornography on the Internet: Proceedings of a Workshop 15 Business Models: Kid-Friendly Internet Businesses Brian Pass Until yesterday, I was president, chief executive officer, and cofounder of Passport New Media, which created a product called “Your Own World” (YOW for short), stand-alone software designed to enable children to experience third-party Internet content in a protected, offline environment. For parents, we offered peace of mind that their kids, when using our software, would never be exposed to the dangers of the Internet. For kids, we dramatically improved the performance of the Internet by eliminating bandwidth constraints and putting all of the content on the personal computer (PC). We founded the company in January 1999. We were a year in development, building this software from scratch. We launched the product last spring but, when we went to raise our third round of capital and market the product nationwide, we were hit by the financing problems that face many companies these days. Bankruptcy papers were filed just yesterday. Nonetheless, we are proud of the product, which drew a lot of praise from parents, especially, and from critics who covered the space. I am also a father of two girls aged 5 and 7, and many of my comments are informed by the fact that I am a concerned parent. 15.1 BUILDING AN INTERNET BUSINESS What are the primary challenges of building a business based on the idea of attracting kids to safe and appropriate Internet content? Building any Internet-based business is difficult, but especially in the kids’ space. The kids’ companies suffer from all the same problems that the adult-

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Technical, Business, and Legal Dimensions of Protecting Children from Pornography on the Internet: Proceedings of a Workshop content companies do, but the problems are exacerbated. The problems are not necessarily different in nature, except for the safety area. The first and biggest challenge is the Internet itself, which is not necessarily an effective medium for young children aged 2 to 12, especially for those under 10. The bandwidth constraints pose one of the most significant problems. Even at broadband speeds, children find content coming over the Internet frustrating. Adults do, too. If you try to watch a video or animation, especially over a dial-up connection but even over broadband connections, the experience is not pleasant. It is tolerable for adults but becomes intolerable for kids. This is a business challenge because of the competition. You are competing with TV, video games that perform extremely well, and PC software that works well. When you click on a PC game, something happens right away; the same cannot be said for content coming over the Internet. A snowballing series of other business challenges arise out of these bandwidth constraints. There are creative limitations on what you can do in a space. If you want to do something that works well over the Internet, chances are you will make creative sacrifices that make your content fare worse than your competition. This applies to entertainment-based content and educational content. Our product was somewhere in the middle, in the edu-tainment space. The creative trade-offs pose real challenges. Many companies have tried to develop original educational content and deliver it exclusively over the Internet. For example, MaMaMedia in New York tried to create bandwidth-intensive educational (but fun) content for kids. They were challenged from a business perspective because they spent a lot of money marketing this product. There was a major mass-advertising campaign of which my kids were well aware; they asked me if we could buy Fruit Roll-ups so that they could get the secret code for a game on a MaMaMedia site—notwithstanding the fact that they are not allowed on the Internet and have never seen MaMaMedia. This was a successful campaign and it drove millions of unique visitors to the site. But from a business perspective, those kids did not visit the site often or stay very long, and the performance results were probably among the worst in the industry of the companies that I am aware. At Passport, we tried to address this very issue by bringing the content off the Internet and making it perform well. As a consequence, we did not have the same problems. On average, our kids visited 10 times a month and stayed 25 minutes each time they sat down, about 10 times the industry rate (kids visiting less than twice a month and staying maybe 25 minutes during the entire month). We had other problems, but bandwidth clearly is holding kids back from embracing the Internet in important ways. The other major limitations of the Internet include the safety and pri-

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Technical, Business, and Legal Dimensions of Protecting Children from Pornography on the Internet: Proceedings of a Workshop vacy concerns. I will address them from a business perspective. The first issue is the cost of complying with regulations. The Children’s On-Line Privacy Protection Act governs this space. There have been many discussions since the law was enacted about the costs, in dollars, that these regulations impose on content providers. These are just some of the costs of doing business in this space. The more important cost is the primal fear factor. I do not wish to question parents’ judgment, because I share a lot of those concerns. But parents’ fear of the Internet makes it a less than great medium for the simple reason they do not allow their younger kids online in great numbers. (I am not referring to teenagers, who embrace the Internet in much higher numbers.) When you combine this fact with the unpleasant, bandwidth-constrained online experience for kids—if they are allowed online—it explains why fewer than one in three kids who have Internet access at home are actually online. (This number does not include kids who access the Internet from schools.) Another major challenge to a business seeking to provide content to kids in a safe way is financing. This is obviously the biggest issue facing Internet companies of any type today, but even when we got started in early 1999, during the glory days of the Internet, the kids’ segment was difficult for the venture capital community. I cannot tell you how many times I was in a venture capital meeting and was told, “It is very difficult to monetize kids.” As repugnant as that sounds, it gets to the heart of the problem. There is no bigger challenge than getting a business funded and off the ground. Even in the late 1990s, the industries serving children were not doing especially well. This includes television production, historically a difficult business, and the CD-ROM business, which is very hit driven and a difficult retail model. The Learning Company, then under Mattel, was struggling in those days, and I read just recently that, since the company was sold, it has reached the break-even point. 15.2 COMPARING BUSINESS MODELS After the stock market crash of last year, I did not hear about the issue of monetizing children anymore in meetings, because I was not getting any meetings. I could not have presented a worse business model to the venture capital community last year—I think the same still holds for today—because the model embraces content for kids and has an advertising-supported revenue stream. One might argue that the business case has not yet been made for providing content to kids in a safe way. But many people have tried. The business models today can be categorized by two variables. The first vari-

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Technical, Business, and Legal Dimensions of Protecting Children from Pornography on the Internet: Proceedings of a Workshop able is the market that you are targeting, such as kids in the home, the consumer market, or kids in schools. These are different markets and are dividing lines among business models. The second variable is the revenue model, whether ad-supported or fee-based subscription or licensing. I am excluding e-commerce. If you constructed a matrix using those variables, you would have consumer ad-supported companies, consumer subscription-fee companies, school-based ad-supported companies, and school-based subscription-fee companies. We were in the first of those four categories, with a consumer product for the home supported by advertising. Other examples of this type are MaMaMedia, Zeeks, FreeZone, and probably a host of others. The problems here with the business case are similar to those facing sites for adults: the high cost of creating content, slow acceptance by advertisers, and limitations of the Internet medium with respect to advertising. Not only does it make for a poor entertainment content experience, but it also makes for a poor advertising experience. The traditional form of advertising on the Web is a banner ad, which you click and it takes you to another site. For a kid, especially over a dial-up modem, that form of advertising is a nonstarter. The kid gets lost when transferred to another site. Even the content provider loses out, because now the kid is no longer at the original site. It is a losing proposition all the way around. We tried to address this problem with offline capability. Instead of kids clicking on a banner ad and going to another site, they got a rich media pay-off right away. They could play a game instantly. They could watch the full, 21/2-minute Rocky and Bullwinkle movie trailer behind a banner ad that played in real time with no bandwidth constraints. Not surprisingly, we got a very high response to that ad. But with a small user base, you cannot make a lot of money doing this. This was our big challenge; we could not build a base big enough to get large advertisers on board, even though they were excited about the product. We did not have enough kids for them to reach. We did not build the base quickly enough before we ran out of cash. Timing is everything, and that had a lot to do with it. There are many examples of the consumer-subscription model in the kids’ space, such as JuniorNet, probably the closest technically to what we were doing, and Disney Blast. These companies have tried to offer subscription-based services to kids in the home, such that the subscription takes the form of a monthly or yearly fee. The problem is that the subscription model never has worked for any Internet company, as far as I know. Many people have tried to charge for content, but people at home feel that Internet content should be free of charge. This has been the fun-

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Technical, Business, and Legal Dimensions of Protecting Children from Pornography on the Internet: Proceedings of a Workshop damental problem of the Internet for all companies, not just those catering to kids. An example of a school business model that adopted an advertising approach would be Zap Me, which offered to wire schools and build infrastructure in exchange for being able to advertise or market to children in those schools. This brings up difficult issues in terms of the commercialization of schools. Zap Me found that it was unworkable and the company no longer deals with schools or kids; it is now offering network services under a different name, rStar Networks. The fourth model in the matrix is school-based services that use a subscription or licensing model. This is the predominant model. Classroom Connect, Light Span, and others have developed online, fee-based services for schools. We have heard a lot about the obstacles and difficulties of working in schools; I will highlight just a few. One difficulty is the great variability in how networks and computers are structured. Every school is a little bit different in ways that affect how you bring content into that school. Statistics show a very high penetration of Internet access in schools, but I doubt that any one school is like any other in the way that kids use and experience the Internet. Some have computers in the classrooms, others have them only in the library, and still others have a separate computer lab. This makes it very difficult to create curriculum-based content. In addition, there is an underlying assumption that learning from the PC or the Internet is a good thing, especially in schools. This remains to be shown. I believe that, on the whole, my kids are better off. They are learning to use software and have had positive experiences on computers. But at least some studies suggest that this is not necessarily a good thing, so this becomes a barrier to successfully putting content into those schools. Ultimately, the successful model (if there is one) will do the following things: It will work well within the bandwidth limitations of the Internet. It will focus on what the Internet does well, which is deliver content and exchange text. It will meet the demands of parents. It will be safe, secure, and private. And, above all, it will meet the demands of kids, the toughest ones to please in this market. It will entertain, it will educate, and it will be well done so that they will accept it. No one has tried yet to shrink-wrap a content-based Web product— the publisher’s model. CD-ROM developers are trying to incorporate the Internet into their off-the-shelf products. We could have shrink-wrapped our product and put it on a shelf. But at the time, we looked at the companies doing this and saw the difficulties that they were having. The Learning Company and others in the educational space had difficult distribution models and had to provide incentives for purchases by offering very substantial rebates. The publishing model was not attractive to us at the

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Technical, Business, and Legal Dimensions of Protecting Children from Pornography on the Internet: Proceedings of a Workshop time. Maybe Netscape tried this model when they first introduced the Navigator.1 There are also other issues. One is whether a company in this space can be grown organically while avoiding some of the venture capital funding issues. It probably can. Somewhere, there is probably someone creative enough to make their own educational or entertainment content, post it on the Web, and build a business that can pay for itself over time. I was not smart enough to go about it this way, but I think someone may succeed. Sadly, some of the best sites for kids on the Web are probably the commercial ones pushing products. Nabisco, LifeSavers, and Kellogg’s are examples of dynamic, well-done sites that exist purely to promote products. They have great activities. The most popular game that circulated around our office was a Tetris-like game with Fruit Loops; it was a lot of fun. Unfortunately, this is where the money is. They have a different purpose in bringing that content to kids, and they can afford to create beautiful stuff. Businesses targeting 12- to 18-year-olds would face a lot of the same challenges. The Web applications are different—more chat, more instant messaging—and the content is different. I have not seen as much educational content going to teens. The content is more like the Back Street Boys, surfing, and skateboarding. The companies operating in this space have had very mixed results. A notable company in San Francisco, Kibu, recently closed before it ever launched. Bandwidth is less of an issue for teens, who are more tolerant than younger kids and understand the medium better. They are looking to the Internet for different things. There are also more homework issues. Teens who go home and do their homework want to do research and access those positive aspects of the Internet. Any technology change has both good and bad aspects.2 1   Marilyn Mason suggested that this model is going in the direction of a journal for a different level of reader. 2   Irv Shapiro said his company targets the ages between very young children and teens, primarily kids aged 6 to 12. He uses a subscription model paid for by the schools. His motivation is simple: He had good fortune in a previous career, planned to donate about 100 computers to schools, walked around to see how they were planning to use them, and was appalled. This led to the creation of Edventions. The goal was to integrate computers into schools just as calculators had been integrated into the math curriculum, based on the idea that children will use calculators to do arithmetic when they become adults. In the early years, elementary school math teachers were against any use of calculators. Now, calculators are integrated into the curriculum. A division of Texas Instruments is devoted to selling calculators to schools. Similarly, children will use computers as teens in high school and as adults, so the societal motivation is to find the proper way to provide a safe, secure environment for these children to learn about computers. Shapiro’s solution is to try to leverage the talents of teachers to do this. Sandra Calvert said Dan Geer sent around a

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Technical, Business, and Legal Dimensions of Protecting Children from Pornography on the Internet: Proceedings of a Workshop There has been a lot more business activity in the teen space, and a few companies have gone public. Sites like Bolt, Alloy, and Snowball are really going after this market and these advertising dollars, because teens have more disposable income. They can make decisions. Then the questions become whether they are staying away from pornography and whether marketing to them is good or bad. I spoke about a year ago at a conference at which there was a heated discussion about the commercialization of the Web and kids. Someone asked why there is nothing like a Public Broadcasting System (PBS) for kids on the Internet. The discussion went on for about 5 or 10 minutes, and it was heated. No one pointed out that PBS is the PBS of the Web—it is out there online. Maybe not enough people know about it, but this may be a good model going forward (it is one that I was toying with late in the game). We could create nonprofit organizations that license commercial technology and work in that space, and corporations that want to do good work can sponsor good educational content. We can have something like PBS; it is not out of the realm of possibility. In the course of licensing content from major media companies and in dealing with their kids’ divisions in separate Internet operating groups, I did not think those separate Internet groups did very well.3 My sense is that Nickelodeon, for example, went through two or three massive restructurings of its Internet group over the last 2 years. Another example is Warner Brothers, whose online site just folded itself back into the company. Fox is withdrawing from having separate Internet divisions, including Fox for Kids, and wrapping them back up in the network. Television is a great driver. But it is interesting that sites like Nickelodeon or Fox for Kids do no better than the industry averages in terms of repeat visitation and total minutes of use. The media company is making money from the TV show and not necessarily from the Web. They are not that different from Life Savers, which is promoting products online and doing it well.     memo about the use of calculators, especially among minority children, who do not understand the fundamentals of math but can use a calculator. This approach needs to be tempered with more basic knowledge. Calculators alone are not a magic bullet for doing math. 3   Winnie Wechsler suggested that Web sites linked to television networks or other preexisting media seem to do well. Whatever her kids watch on television, they also use on the Internet. In other words, the business model that works involves a Web site that augments viewership on television, which, in turn, draws traffic to the Web. To address the problem of drawing traffic, what is more powerful than a 24-hour ad on television?

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Technical, Business, and Legal Dimensions of Protecting Children from Pornography on the Internet: Proceedings of a Workshop 15.3 THE ROLE OF PARENTS The question of how to deal with inappropriate material goes back to the role of responsible parents. This burden falls on parents, teachers, and librarians by default because the technologies are not strong enough, and the regulatory responses generally run into First Amendment issues about free speech and have a tough time in the courts. By default, responsible adults have to stand up and take the lead in combating inappropriate material. The central role of responsible adults is the reason why, as businessmen, we made a product that would appeal to parents as the primary decision makers. We demonstrated with the product adoption rates that there is a lot of demand for solutions from parents. Parents are concerned; they want their kids to have a positive Internet experience, and they are searching for solutions. I do not let my kids go on the Internet without my presence. Of course, they are young (5 and 7), so we will see how vigilant I am in 2 or 3 years. I have a cable modem, and my kids are examples of how band-width constraints are a problem. Even when my kids go with me online and we look at something together, they get frustrated and go back to their rooms to play with Barbie dolls. The Internet is slow. There is concern about whether we want 2- and 3-year-olds on the Internet. By being offline, we could make a completely simplified interface that could be used by 2-year-olds, who did use our service without knowledge of how to use the Internet. I will not say whether this is right or wrong, but the children’s educational software industry targets kids starting at that age and even younger. A year or two ago, The Learning Company introduced software that teaches toddlers how to bang on keyboards. My kids were using the computer with multimedia software at 18 months. They are not gifted children. But they happened to be the types of kids who would just as soon be playing outside and would do a little of both. But this is a concern, and it goes back to the assumption that the Internet is a good medium for educating kids. That assumption should be challenged.4 4   Sandra Calvert said the issue should be researched. The discussion points to the lack of a database on whether and how little kids should use the Internet. She has seen 4-year-olds who have been online for 2 years, and they are not “hunched over.” They are curious; they want to know where the “Back” button is. They are knowledgeable about the Internet. She does not think it is damaging them, but she would pay attention to the sites they visited and whether their parents were with them at the time.