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Some Web 2.0 startups have unusual problem: too many customers

Constance Loizos
San Jose Mercury News (MCT)

SAN JOSE, Calif. - More and more Web 2.0 start-ups are running into a surprising problem: too many customers.

Make that too many customers in the wrong countries.

Although the Internet is a global medium, U.S. firms, which drive the vast majority of online advertising spending, shun users in many foreign countries.

"Outside of multinational advertising companies like Coca-Cola and Microsoft that have a worldwide presence, the value of an international audience is significantly less attractive for most U.S. advertisers, whose products and services are targeted to American audiences," said Jeff Lanctot, vice president of media at digital advertising agency Avenue A.

"If you need to make money off your traffic, then some of the overseas stuff can be terrible," added Scott Rafer, a serial entrepreneur who was chief executive of the blog-tracking start-up MyBlogLog until it was sold to Yahoo in January for $10 million.

San Francisco social-networking service Friendster highlights what's happening. While Friendster's user numbers are rising - 15 percent alone in the last three months - 22 percent of its users are from the Philippines, another 22 percent live in Malaysia, 20 percent are in Singapore and 12 percent live in Indonesia, according to Alexa, which provides information on Web traffic.

Those markets, while growing, remain undeveloped and are less attractive to advertisers, a snag that could cause problems for Friendster, which famously spurned a $30 million acquisition offer from Google in 2003 and has had a succession of CEOs since then.

Why the seemingly capricious traffic patterns? Sometimes it's in response to a specific need, such as people living in conservative cultures who use Web tools from another country to put together dating sites. Rafer also says word of mouth plays a role, crediting MyBlogLog's one-time popularity in France to a renowned French blogger whom he calls a "friend of a friend."

Mostly, however, there's a "healthy amount of serendipity" involved, as Oakland, Calif., digital media analyst Greg Sterling put it.

Whatever the reason, most of these companies, particularly those centered around user-generated content, don't like to talk about the issue. After all, who wants to suggest that some users are less valuable than others - even though it's true?

Google didn't respond to questions about its social-networking site, Orkut, but it's conceivable that the site would no longer exist if not for its deep-pocketed parent. Launched in 2004 from Google's Mountain View, Calif., headquarters, Orkut now receives 71 percent of its users from Brazil, according to Alexa, and "there are still no mechanisms for making money (online) in Brazil," said Rafer.

Meanwhile, Fotolog, which operates an online community for downloading and sharing photographs from its home in New York, is in the same bind. It has virtually no U.S. users. Instead, 60 percent of its visitors live in either Chile or Argentina.

Fotolog also did not respond to a press request, but one venture capitalist who has met with the company suggests its traffic stopped his firm from helping provide the 5-year-old company a sixth round of venture funding.

"It might be exciting to say, `We have 150 percent year-over-year growth domestically, and 300 percent year-over-year growth internationally,'" said Lanctot. "That positions a company well. But that's a long-term outlook, and as you know, it's often about the short-term for these start-ups."

Even London-based venture capitalist Barry Maloney acknowledges that his firm, Benchmark Capital, with offices in Menlo Park, Calif., Europe and Israel, would be "very cautious" about funding a company that is mostly popular in places where there remains little in the way of online advertising dollars. "We're not interested in lots of users, wherever they may be. We look at whether you can build a real business around the people using your site," he said.

Not all companies with big overseas audiences are suffering. Take Bebo, on whose board Maloney sits. The San Francisco social-networking company is doing best in the United Kingdom, where 35 percent of its registered users live. That gives it a shot at an online advertising market that the U.K. Office of Communications estimates hit nearly $5 billion last year.

And other sites are using the traffic as a learning experience. New York-based WinkSite, a service that helps people turn their blogs into mobile Web sites, says 60 percent of its traffic derives from outside the United States, including Serbia and Montenegro. Rafer, chair of the company's board, says that "we lose money on it" but adds that "we're definitely learning from the folks overseas who are using the service and who are generally using mobile (services) more aggressively. So the $500 or $600 a month that we're spending to support those people, that's OK; we think it will come back to us at someday."

Garrett Camp, co-founder of StumbleUpon, a 5-year-old start-up that invites its 2 million registered users to find and rate Web sites that match their interests, also sees advantages to traffic from around the world. The San Francisco start-up gets half its traffic outside the United States.

"Our users are still rating interesting pages and photos all the time," said Camp. "No matter where they are, they're still contributing valuable information to the system."

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