1-1

© 2005 UMFK.

Geocast Network Systems Inc.

internet business models

text and cases

Steven Young COS498

1-2

© 2005 UMFK.

Geocast Network Systems Inc.

Examination of a Personalized Broadband Network, and Rich Media

Delivery System

1-3

© 2005 UMFK.

Geocast Network Systems Inc. Overview

• Introduction

• Company History

• Goals and Strategies

• GBF

• Conclusion and 20-20 Hindsight

1-4

© 2005 UMFK.

Geocast Network Systems Inc. Introduction

• Founded in 1999 by Joseph Horowitz, Geocast product architecture resulted in an end-to-end solution for datacasting of a receiver which enabled PCs to receive and manage data transmission from terrestrial broadcasters, satellites, or cable TV including full-motion video, CD quality audio, and software downloading.

• This product was designed to address the two fundamental limitations of the Internet:– Difficulty with delivery of high-quality audio-video, and– The sorting of huge amounts of info to find desired resources.

• Designed to provide “intelligent caching” based on user preferences, utilizing content tagging in which user-preferred content is tagged.

• Truly unique technology in a receiver which incorporated a true file server with a large database

1-5

© 2005 UMFK.

Geocast Network Systems Inc. History & Facts

• Founded in 1999 by Joe Horowitz (Chairman and CEO). Mr. Horowitz, who has a MBA from Wharton University, had 20 years experience in early-stage venture capitalism, and technology and consumer ventures.

• Funded in January 1999 by 3 leading Venture Capitalist firms – Mayfield fund, Kleiner Perkins Caufield & Byers, and Institutional Venture Partners.

• A very strong management team was established including several former high-level executives and technical experts in business, communications, and technology.

• Received an additional $74M in financing in February 2000 from the Venture Capitalist funders and broadcast media and consumer electronics.

1-6

© 2005 UMFK.

Geocast Network Systems Inc. Goals and Strategies

• Early strategic questions included:– How the product should be distributed (retail,

bundled with other services (ISP, satellite, cable)?

– Pricing?– How to quickly gain market share and

profitability?

1-7

© 2005 UMFK.

Geocast Network Systems Inc. Goals and Strategies

Original Plan• Sell receivers for $300/each and offer the service

for free.• Take advantage of hot capital markets to subsidize

equipment costs.• Share ad revenue with content providers• A projection of 70% of income to come from

advertising, and • 30% of income from commerce providers fees.

1-8

© 2005 UMFK.

Geocast Network Systems Inc.Events causing a re-examination of Strategies

• Three factors in year 2000 led to Geocast re-evaluating its strategy in mid-year as follows:– The NASDAQ market crash of April 2000 (which

tightened the belts of venture capitalists for the rest of the year),

– FCC regulations regarding radio frequency modulation relating to broadcast TV interference (which cast uncertainty of interception of terrestrial-based signals without a roof-mounted antennae), and

– The rapid improvement and price reduction of hard drives, which led to a reduction in manufacturing costs.

1-9

© 2005 UMFK.

Geocast Network Systems Inc. Revised Goals and Strategies

Revised Plan• Possible partnership with a satellite company which would provide spectrum (bandwidth) and share

in sales and service. Echostar (Dish) more likely than DirecTV as:– Dish had more bandwidth available, and – were about to replace some dish hardware (when Geocast hardware could be installed a little extra cost).– DirecTV already offered Internet service and would effectively be offering competing products.Note: at that time DirccTV had 8.7 million customers, and Echostar had 4 million customers.

• A dual launch of satellite and terrestrial service would be employed to:– achieve scale more quickly,– Get more ad support,– Beat competition (such as iBlast) to the punch.

• What about cable?– Employing Geocast help alleviate network conjestion and free network bandwidth through caching, however,– Promotion of a superior solution would force cable companies to admit the limitations of their cable modems.– This constituted a major challenge as cable operators had a monopolistic view and attitude regarding potential

partnerships.

1-10

© 2005 UMFK.

Geocast Network Systems Inc. Revised Goals and Strategies

Revised Plan (continued)• Reposition Geocast as a personal server (potential for e-commerce) with the

ability to interconnect multiple PCs and other devices including TVs, cable boxes, eBook readers, and audio equipment via a LAN.

• Must compete with other start-up products including from Sony, and Compac.– TiVo announced investments from AOL, while Replay TV received investments

from Tome Warner.• Geocast had the option of marketing to online retailers in order to speed Web

connections and reduce resultant abandoned shopping carts.– This posed a technical problem as the bulk of online catalogs could max-out the

capacity of the Geocast servers.• In addition to receiver sales, monthly fees for the service ($10/month) and/or

bundle of hardware and service ($20/month) were considered (2 year payback).

– There was some concern about the potential effects of rentals on receiver sales.• A balance was sought where benefits of premiums for exclusive partnerships

could be reaped while avoiding a “walled garden” atmosphere.

1-11

© 2005 UMFK.

Geocast Network Systems Inc. Revised Goals and Strategies

• Cost of receiver production in 1999: $500– Initial planned selling price: $300

– Advertising/marketing support: $200

1-12

© 2005 UMFK.

Geocast Network Systems Inc. Key Stakeholders

Customers – Households with access to broadband

Regulatory– FCC

1-13

© 2005 UMFK.

Geocast Network Systems Inc. Key Stakeholders

Management – CEO, 17 VPs, 1 Chief Scientist!!Person Position at Geocast Prior Experience

Joseph Horowitz Chairman and CEO 20 years venture capitalism

Charles Jablonski Senior VP – Network Engineering / Operations Former VP NBC

Tom Paquin Senior VP - Engineering 7th Netscape employee, Netscape fellow

Mark Simmer Senior VP – Marketing / Programming Former VP w/Lycos, editor and chief Point Communications

John Abel VP – Broadcast Development Former VP National Association of Broadcasters

Jerry Agresti VP – Broadcast Engineering Broadcast engineer

Jessica Algazi VP – Content Partnerships VP Business Affairs – Discovery Communications

Edward Casaccia VP – Content Operations and Planning Sony Newsroom Marketing Manager

Reese Faucette VP - Technology CTO and CFO – The Kernel Group

Hillary Goodall VP - Programming former VP, Content Programming

Michael Gustafson VP – Network Operations Director of Engineering, CellNet Data Systems

1-14

© 2005 UMFK.

Geocast Network Systems Inc. Key Stakeholders

Management (continued)

Person Position at Geocast Prior Experience

Allison Hopkins VP – Human Resources CEO – Core Elements (consulting)

Jim Jackson VP – Hardware Engineering Computer architecture

Brian Klosterman VP – Channel Distribution and Services President, Starsight Telecast

Naresh Makhiani VP – Program Management VP, Product Engineering, Cyberstar

Charles Marker VP - Engineering Software Development, SGI

Jim Omura Chief Scientist UCLA Professor of E Engineering

Jim Plant VP – Marketing Communications Dirctor of Marketing and Corporate Communications for Replay TV

Anita Wallgren VP – Business Affairs Legal advisor, FCC

1-15

© 2005 UMFK.

Geocast Network Systems Inc. Key Stakeholders

Investors• Television Broadcasters

– Hearst-Argile Television, Inc– Belo Corporations– Allbritton Communications

• Consumer Electronics Firms– Thomson Multimedia– Royal Phillips Electronics

• Media Firms– Liberty Media Corporation– Electronic Arts

• Venture Capital Firms– Mayfield Fund– Kleiner Perkins Caufield & Byers– Institutional Venture Partners

1-16

© 2005 UMFK.

Geocast Network Systems Inc. GBF

Geocast Network Systems Inc. followed a “get big fast” strategy with significant commitment of $ and brainpower.

• Potential Payoff– Rapid market infiltration

• Risks– The scope of the business offering was very narrow,

though the company explored various different ways of using and promoting the product.

– Very top-heavy management– Rapidly changing technology environment

1-17

© 2005 UMFK.

Geocast Network Systems Inc. GBF Metrics

• Network Effects were very low • Scale economies are moderate. Per unit costs will

not be reduced significantly. Advertising dollars may rise disproportionately, giving some scale economy effects.

• Customer retention rates for this service may be moderate to low if there is the perception of a one-stop, one-box solution.

• Quick establishment in this developing market was key, however, perhaps premature as broadband connectivity was low at the time.

1-18

© 2005 UMFK.

Geocast Network Systems Inc. GBF

• This top-down organization reacted quickly to market and environmental changes in 2000. Strategic options were well thought, however, strategies seemed to be too spread out, and competition was seemingly underestimated.

1-19

© 2005 UMFK.

Geocast Network Systems Inc. What Happened?

• On March 1, 2001, Geocast cancelled all operations and terminated over 190 employees.

• Matt Jacobson of iBlast said that “they [Geocast] just had a lousy business model.”

• While Horowitz of Geocast stated “the market was simply not conducive to our efforts.”

• Most analysts felt that failure was due either to the cost of individual receivers, or because the product was offered before its time (before most consumers had broadband access).

1-20

© 2005 UMFK.

Geocast Network Systems Inc. LESSONS

• “Top down” :– “Bounded rationality.” A significant change of

strategies seemed to be inadequately focused. – Opportunities may have been lost during the

period of strategy re-examination.

1-21

© 2005 UMFK.

Geocast Network Systems Inc. Conclusion and 20-20 hindsight

• Good product• Good people• Good backing• Bad timing (pre-dates ready access to applicable

technology)• Low product diversity = poor stability• Heavy competition• Strategy was spread-out• With 20-20 hindsight, more focus should have been placed

on actively pursuing partnerships with Satellite provider's).