Peder Saether Symposium (March 9-10, 2000)
Dean Gary Matkin Presentation
Dean Gary Matkin, University Extension and Summer Sessions, UC Irvine
My presentation today is going to present a rather stark contrast with most of the other papers. First of all, it’s not well organized; secondly, it is not based upon any kind of theory, grounded or otherwise, except maybe the theory that there is no theory to govern our work; thirdly, it’s based almost entirely on the subjective opinion of one person, namely me, completely unsupported or corroborated by any other source; and it has absolutely no data associated with it, except perhaps the most descriptive. I have deliberately and strategically designed my presentation to meet all those points because I want to model my presentation after the world I’m trying to describe, and give you the experience of working in it. I assure you, it’s not an elaborate excuse for lack of preparation.
I began my scholarly career in looking at university technology transfer issues, and worked under Professor Trow, who is in the audience. And this experience, I think, helped me as I began taking on responsibility for the development of the University Extension’s On-line Program. For the last two years, I think I’ve spent at least part of every day working on some kind of a relationship between the University and external organizations, and increasingly those have included dot-com companies.
Actually, the dot-com world is a completely different world, I think, than what I was used to looking at when I was looking at technology transfers, and I’d like to try to give you a little bit of experience of that world. I’m going to tell you some stories about what we’ve done, some war stories, and extrapolate into the imperium to give you a notion of some of the lessons I think I’ve learned about what we’re doing here.
First of all, as you may know, Extension got started in this business by the Sloan Foundation, who came to use and said, ‘We’d like you to propose the development of some on-line courses for us.’ And we said, ‘Okay, we’d like $50,000 to produce a course.’ And they said, ‘Sorry, we’re not going to give you $50,000, we’re going to give you a half a million dollars, and we want you to produce at least eight courses.’ And when they liked what they saw, they came back and said, ‘We’d like you to put more proposals in.’ So we said, ‘We’d like to produce 50 more courses with $1 million.’ And they said, ‘No, we’re going to give you $2 million and we want you to produce 100 courses.’ I learned from this experience, number one, that universities are relatively timid, and secondly, that they do not have an understanding, really, of what scale means in this field.
Once we had completed the Sloan Foundation project, we were looking for other partners. We went out and formed a relationship with a brand new startup company called Hungry Minds. Hungry Minds was started by Stuart Scorman, who had just sold Reel.com, a company sort of like Amazon.com for movies, to Hollywood Videos for $100 million. To give you an idea of this world, he told me that when he sold it, for $100 million, he was losing $100,000 a day. Here’s the person I met and what he’s about. I’d like to show you this video as a text about what the dot-com world is all about.
[VIDEO: http://media2.bmrc.berkeley.edu.8080/ramgen/video/projects/ucbext/reel.com.rm]
"Reel.com became the most popular video store on the Internet. Most of their income was derived basically from mailing videos by mail, or DVD’s by mail to customers, who bought them from our site. Reel.com was well known for its movie-matchmaking database, where it had all kinds of cool ways to help you find movies that you liked, so that it became known as an information website, not just a video store that sold products and services.
"Many people ask me about the now-famous Titanic promotional campaign that Reel.com had. And I’m happy to talk about it. Before I talk about it, I do want to say that the idea for the campaign and the execution was all done by Julie Wainwright, who is the CEO that I replaced myself with a couple months before she started this campaign, so that it was her idea and I certainly supported it and thought it was brilliant. But I want to just make the point it wasn’t my idea. The Titanic campaign is interesting, the three cities that we focused our marketing on were the key cities to win over, and they were New York, San Francisco, and Los Angeles. The reason those three are crucial is that most of the people who write in magazines or newspapers in the entertainment business live or work in one of those three cities. So a lot of that was a public relations thing, where it got us a lot more mileage than just the ads or whatever. It cost us about $18 to sell each movie, and we sold each movie for $9.95. So it was a big loss, but it was a great attention-getter that got us a lot of new customers. Everybody at Reel.com would agree on everything I just said. The parts there might be a slight disagreement, it’s nothing massive, is that it’s a very dangerous game to be in the retailing world and start to build your business around price. And the reason that’s so dangerous is because it’s so easy for someone else to lower their price, and pretty soon everybody has lower prices. I think the advertising might have run around $3 or $4 million, and then I think we sold about 200,000 tapes, that would save us around $9 per tape, and that’s another couple million dollars of losses. So maybe $5 million was the cost in promotion. It certainly helped to propel the company into being a major national brand, and so that cost may be small relative to the reward of what we got.
"Some people would say for a small startup like us to commit to spending $5 million is very expensive and so on. But it brings up one of the points about the Internet world that’s really interesting, and that is that what seems like a high-risk strategy is often the opposite, it’s often the lower risk strategy. Without selling that, the company never would have gotten anywhere. And what the Internet world keeps telling us over and over again is that the risk-takers are rewarded, the ones who have the courage to really go for it. And the people that hold back, that are deliberate, they are the ones that lose. The biggest piece of advice that I might give future entrepreneurs who want to be CEO’s or entrepreneurs in the Internet world is that risk-taking is everything. You need to be comfortable with risk, we make a lot of mistakes.
"There are some people that think the Titanic was just kind of a one-shot promotion, to be able to make the company look valuable to sell, and it was just kind of a one-shot gamble and wasn’t really a long-term business sustaining move. And it’s an interesting thought, I could see why people would say that. The company was sold to Hollywood Video for $100 million, actually, during the Titanic promotion. Interestingly enough, the deal that we made with Hollywood Video to sell Reel.com actually happened before the Titanic promotion took place. So that the fact that we sold the company and that the Titanic promotion happened around that time were literally irrelevant events from each other, there was no connection at all.
"One of my philosophies about how to build a really good business, and also how to build a really good brand, is to make the products and services that you sell, and the information about these products and services, as much fun as possible. We certainly did that at Reel.com, and we would always send out microwave popcorn whenever we would send anybody movies, and we always had the spirit of ‘enjoy, have fun.’"
I think this is a fairly rich text, and describes the dot-com world a bit, and I want to contrast it with the world of the university. We’re looking at a set of organizations, the dot-com companies that are, as you heard Stuart say, based on risk. The biggest risk you can make in this world is to be too careful. And when you’re talking about universities, of course, we’re talking about very risk-averse institutions.
Now, logically, there should be some sort of relationship between those, a very high risk-taking organization and a very low risk-taking organization. So the question is how these two organizations can get together. Let me tell you what happened. I went over and met Stuart at a power breakfast in a Sheraton Palace Palm Court. We talked about various philosophies, and then Stuart said, ‘Well, what’s it going to take for us to make an association with you? We really need this association.’ And learning from the experience we had before, I said, ‘Well, it would take about $2 million.’ And by the end of the breakfast, we had pretty much agreed on the principles and the fee, and that’s what we’ve done. So far, we’ve received about a half a million dollars from Hungry Minds; we’ve produced about eight to ten courses for them. Our deal with them is that we produce these courses, and then when we sell them, they get what’s called a ‘back-end’ deal. We received the money from them on September 1; to date we’ve produced about eight courses. We already have 169 enrollments in those courses, producing over $200,000; Hungry Mind’s share of that is $35,000. So within six months of this first money coming to us, we produced some results for them. I think you understand that in the university world, this is light speed.
So a couple of conclusions I would draw from this experience. First of all, there’s the notion of acceptance of risk. The risk-reward factor really has to be put in there. And if we’re going to ask somebody else to risk their money, then we have to give them a reward. And that reward, in this case, is a back-end income stream. We have to move fast to gain credibility. The fact that we had 100 courses online when we made this deal was a crucial element. There’s so much vapor-ware out there, there are so many people saying what they’re going to do, that when any organization can actually demonstrate that they’ve done something, they immediately get credibility, and I think that was crucial in this deal. You have to move fast to gain credibility, you have to be a ‘first mover,’ as they say, and the idea is to gain market share as quickly as you can, even if it’s at a big cost. You heard Stuart say, ‘customer service is everything in this field.’ And that is certainly true, and it's sometimes an issue that is lost on universities. Give stuff away in order to attract customers. In a market like the one we’re facing here, where the customers do not understand what the product is all about, you have to give them some sort of an experience. And giving something away for free to get them attracted to your program is very important.
One of the things that we also learned from our experience with Hungry Minds is that there’s no such thing as a business model in this field. They started out with a business model that said they were going to produce content. When they figured out it was too expensive to do it, they shifted their business model. That can be very disconcerting to a university partner, but that’s the way the world works. And so, again, it’s this clash of cultures, I would say, that really has to be overcome.
I’d just like to say one thing about what I see happening, in America at least, in this field. There’s a growing awareness among universities that large amounts of capitalization are going to be necessary in order to do this job correctly. So far, our world has been characterized by a bunch of what I call ‘hobbyists,’ small little pots of money, several faculty members, even on a large campus like this, getting very excited about doing something like this, but doing something and then having that something go absolutely nowhere because it’s not at the proper scale, not a proper commercializable platform, or whatever. As universities realize that they’re going to have to put massive amounts of capitalization into this--sometimes we call the ante $15 million, sometimes it’s $20 or $25 million--they see also that they’re going to have to accept some risk. So you see just a few universities doing this.
NYU, University of Maryland, University College, and even Tulane are putting money into for-profit companies in order to attract the capital they need in order to get in on this business. Another reason for going with your own corporation is that you can avoid the rather restrictive policies of most universities, and be able to hire, for instance, salesmen, who can do the selling that you need. You need massive capitalization because it takes a lot of money to produce a high quality product. And once you have that invested, then you have to attract a lot of people to it, which means you have to have money for marketing. So there’s a cost spiral that goes on, which requires even greater capitalization.
There is an alternative to this, however, and that is the out-source model. And that’s the one that we at the University of California have been using. UCLA, for instance, has out-sourced almost all of its on-line activity to OnlineLearning.net in an exclusive contract. At Berkeley, we are now in the process of forming strategic alliances with outfits like Hungry Minds, who can fund the up-front development of courses and the marketing.
So I think we’re beginning to see the shaking out of two general strategies designed to provide the services at a logical scale. The first is the for-profit, university-owned organization; the second is what I’m calling the out-source model. As I said, when we look at either of these models, particularly the out-source model, we see large adjustments that have to be made, the people in the dot-com world adjusting to university requirements, and the people in the university adjusting to those vagaries of the marketplace that the dot-com people are so much aware of.
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