Steve and Keith in happier times, before Keith began spamming Steve's email account with his incessant and unsubstantiated whining
RealNames and Microsoft formally commenced their relationship in June 1999, when they signed their first agreement for the distribution of the RealNames Keyword service through the MSN search service. The first deal originally did not even include distribution of Keywords through the IE browser, it was primarily a deal for enhancement of search with "high quality" Keyword data. For those of you with a lot of time on your hands, you can read the original contract online in RealNames' 1999 aborted SEC filing (use the browser's "find" function to search for "Exhibit 10.8"). For those of you who don't want to read the entire document, consider this quote from RealNames' own SEC filing:
". . . our contract with Microsoft does not require Microsoft to implement our service in Internet Explorer 5.0 or its other applications and services. Rather, Microsoft can implement the RealNames Service at its sole discretion."
RealNames Corporation, S-1 Registration Statement filed 10/18/99, page 9.
So, at the same time that RealNames was touting the Microsoft relationship as exponentially expanding the "reach" of the RealNames service -- or, the number of internet users who could use Keywords -- it was disclosing to investors that its agreement with Microsoft was hardly worth the paper it was printed on. For obvious reasons, this did not resonate very well with the (even at that time still clueless) investing public. RealNames' investment bankers said as much, and told the company that if it had any hope of going public, it needed to nail down the Microsoft contract for a fixed commitment.
Thus, in October 1999, Keith, Ted West and several others, traveled to Redmond to do just that. In a series of painful meetings that took place that fall and winter, the broad outlines of an agreement were reached. Other than the financial terms (which will be addressed separately), the principal issues in the negotiations were as follows:
Guaranteed Placement of Keyword Results. This was the crux of RealNames' need to renegotiate the original agreement. Without assurance that a Keyword would show up or function properly every time it was used, RealNames could not possibly hope to provide a true Internet infrastructure service. As a result, RealNames sought two things: Keyword placement above the number one result in MSN Search, and a DNS-like Keyword "redirect" every time a registered Keyword was typed into the address line of the Internet Explorer browser.
RealNames data relevance and integrity. Microsoft had always been content with the old contract because if RealNames' data quality slipped, it had no obligation to serve up keywords to its users. However, now Microsoft was being asked to sign a deal with placement guarantees over a fixed multi-year term. Microsoft accordingly demanded rigid protections in the agreement to avoid embarrassing incidents and complaints from its user base.
To address Microsoft's concerns regarding data integrity, Ted West devised what is now known in RealNames lore as simply "the matrix". The matrix was a 2 x 3 table which separated all possible Keyword registrations into six separate buckets, or Boxes. The first four Boxes described keywords that, with escalating degrees of certainty, could be said to have an overriding user expectation on the Internet. This could be either because they were unique brand names such as "Kodak" or "Chevrolet", or because they were branded, fanciful generic terms. For example, the keyword "Amazon", although it could be said relate to the river or the rainforest of the same name, had a fairly consistent expectation on the internet -- that being amazon.com's bookselling website. Stated differently, no Internet user would be surprised or disappointed in using the Keyword "Amazon" if it redirected the browser to www.amazon.com. The same would be true for the Keyword "Yahoo", provided that it pointed to www.yahoo.com.
The fifth Box in the matrix involved "multiple local" Keywords -- that is, Keywords which described businesses or other things that, while unique on a localized basis, were not unique on a broader scale. Examples of these "Box 5" Keywords would include "Suzy's Dry Cleaners", "Pauly's Pizza", and "St. Mary's Academy". Finally, Box 6 of the matrix was a catchall category that swept up all other terms not included in Boxes 1-5, including generic terms such as "Cars", "Computers", "Books" and "Jobs".
The compromise between the RealNames and Microsoft positions was struck as follows: so long as RealNames agreed to manually adjudicate each new Keyword registration in strict accordance with the standards set forth in the matrix (a detailed version of which was attached to the Microsoft contract as an integral exhibit), Microsoft would agree to provide the preferred placement in MSN Search, as well as the redirect from the browser, for the full two year term of the agreement. However, Microsoft would only guarantee placement and the redirect for Keywords satisfying the "relevance" criteria of Boxes 1-4 of the matrix (i.e., the "chevrolet", "kodak", and "amazon" type Keywords). It would provide no placement or redirect for generic Box 6 keywords, and it would only agree to some form of demoted placement in search (and no browser redirect) for "multiple local" Box 5 keywords.
Implicit in this compromise, and as expressly provided for in the contract, RealNames was required to manually review each and every keyword registration that came through its website or direct sales force before it was uploaded into the RealNames system and made live in the IE browser and MSN search engine. It is difficult to believe that Keith did not understand this significant contractual obligation and its consequences to RealNames' business model (not the least of which were the significant costs of having real-live trained editors reviewing each and every registration, and the impossibility of successfully scaling this type of business). This myopia has several explanations.
First, and perhaps most important, let us not forget that RealNames had an IPO registration cooling its heels on the desk of an SEC bureaucrat in Washington D.C. At the time, Keith was obsessed with getting the company public. Because of this, I believe that Keith placed much greater emphasis on simply getting the Microsoft deal signed and the IPO process restarted than he did on the actual business terms of the agreement.
Second, at the time, manual adjudication of every Keyword registration was perfectly acceptable to RealNames. Not only was adjudication consistent with the company's business model, but in fact was a source of PR buzz for the company. It was a convenient way to bash the competing DNS system, which allocated names on a first-come, first-served basis. Consider these quotes about RealNames:
"Unlike domain names that are registered on a first-come first-served basis, [RealNames] exercises management and adjudication processes to ensure that a RealName is assigned to the 'appropriate' Web page" (source)
"Because sites will not hesitate to hijack queries, RealNames had to create a human editorial process (we call it adjudication) to decide whether someone can actually can get a keyword. This is expensive and believe me, we would rather trust our customers to pick the keywords that they are really entitled to (instead of categorical terms that are popular queries). However, they don't! Query frequencies are heavily skewed to a few million of generic terms, and everyone would like to be listed when such queries occur." (source)
"RealNames Mission. Our mission is to help every entity establish or greatly strengthen its brand, visibility and authentic identity on the web. . . . Our service aims to provide users with a positive Internet navigation experience. We will accomplish this by examining every subscription manually, authenticating every site, making sure that brand names navigate to their "official site" and ensure no misdirection of users." (original source copied verbatim from webcache)
"One important difference between the domain name system and RealNames is that rather than assigning keywords on a first-come, first-serve basis, RealNames uses editorial judgement [SIC] to decide whether or not a keyword is appropriate for a site.... RealNames checks each URL submitted to make sure it's appropriate. 'If someone enters "Bambi" they'd better be going to Disney and not some porn site,' says [Susan] Rotella, [RealNames' senior vice president of customer operations]." (source)
"Rather than assigning Internet Keywords on a simple first-come, first-served basis, we require that the assignment of each Internet Keyword undergo an approval process intended to ensure a positive navigation experience for Internet users. In order to ensure a successful user experience, an Internet Keyword for which users have clear expectations, such as "Coca Cola" or "Ford Explorer," will be assigned only to the owner of the expected Internet destination." (source)
Third, apart from the PR benefit of only sending users to "appropriate" web destinations, doing so was perfectly consistent with the types of customers that RealNames was then targeting -- large brand names with big advertising budgets. In mid-1999, RealNames hired its first direct sales executive and began to build out a team of salespeople to target these accounts. RealNames' financial model at the time -- the same one given to its investment bankers to support a stratospheric IPO valuation, and the same one used to justify paying Microsoft a combined $125 million in cash and stock(††) -- was based on a large number of so-called "Brontosaurus" deals with significant household name customers like Disney, where RealNames would sell these customers a package of hundreds of Keywords for prices which Keith believed would be in the millions of dollars. (I'm not sure anyone other than Keith really believed these outrageous prices could be obtained, but any contrary opinions were routinely denounced by Keith as "FUD", or ridiculed as small-minded "tactical thinking" as opposed to his grand "strategic vision"). If, as Keith repeatedly professed to his staff, Keywords could be sold for a price equal to "a percentage of a customer's annual advertising budget" (as shown in this ridiculous email) then clearly RealNames could afford the relatively insignificant expense associated with manual Keyword review. Moreover, given the types of customers being targeted, the Keywords to be sold under RealNames 1999-2000 business model were perfectly consistent with the adjudication/matrix rules set forth in the proposed Microsoft contract. While RealNames did manage to dupe some large brand customers (e.g., Panasonic and Aventis) into paying exorbitant amounts to register their own marks as Keywords, the model never worked.
Nevertheless, it was in the context of this euphoric Internet bubble that RealNames signed the agreement with Microsoft requiring it to adjudicate all keywords -- RealNames was desperate to nail down the Microsoft agreement and go public; it embraced a business model which presumed that customers would pay exorbitant fees for online rights to their own trade and service marks (despite advertising a $100 price on the RealNames website); and it mistakenly believed it could scale a "high touch" business where each and every single keyword registration (and remember that RealNames was predicting untold millions of registrations) had to be reviewed by a trained editor. Unfortunately for RealNames, when its "brontosaurus" business model inevitably failed and it was forced to change its business strategy to a distributed registry system that -- hold your breath now -- looked exactly like DNS, manual adjudication no longer made any sense. Thus, when Keith approvingly quotes statements on his lame website that "The Internet isn't just for 'famous names' like Coca Cola," and "Microsoft only wants things like this that they can control," it is nothing more than revisionist history. Keith signed a contract, then later on decided he didn't like what it said. There's a saying for this. It's called "buyer's remorse". I, however, prefer the statement of Rod Tidwell (Cuba Gooding) when Jerry Maguire (Tom Cruise) wasn't getting his way as a big shot sports agent anymore: Boo-Fuckin'-Hoo.
Part II: A "dangerous strategy" is devised
Back to the Introduction
(††)By the way, the financial terms of the Microsoft deal, while not central to our story, make for a humorous sidebar.
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