Why Chatroulette may be 'nexted' by investors

Viral phenom faces challenges on the road to revenue

Chatroulette has buzz. But does it have a business?

Connecting webcam users around the world at random has turned the Web site into an overnight media darling. But what has attracted all the attention isn't so much the core functionality (here's an explanatory video or two) as its reputation as a virtual peep show.

Or more like "The Gong Show": most Chatroulette interactions last milliseconds because users can be "nexted" -- slang for passing over someone with whom you don't want to chat.

Hundreds of articles, TV news segments and blog posts recounting creative acts of perversion witnessed on the site has helped accelerate a viral sensation in little over four months to 30 million unique visitors worldwide in February, according to its 17-year-old creator, Andrey Ternovskiy.

"It's taken on a life of its own," said Todd Dagres, founder and general partner of Spark Capital, which specializes in technology and media companies. "It's a big hit among tweens and teens."

And wherever there are eyeballs amassing in high concentrations, there are investors looking to capitalize. Ternovskiy is reportedly in the U.S. this month exploring his opportunities; back in his native Russia, Facebook investor Yuri Milner of Digital Sky Technologies has already come knocking.

But there are obstacles in the way. All that sleaze could repel advertisers. Copycats are already here. And "The Daily Show with Jon Stewart" dismissed Chatroulette as a fad in a recent spoof. "It's the kind of thing everyone you know is going to do once," Stewart joked. "Like sex in a turnpike Dunkin' Donuts bathroom."

"I don't see a workable business model as long as Chatroulette remains in the sex business," said Michael Wolff, founder of Newser.com and a media columnist for Vanity Fair.

But as problematic as Chatroulette is, there is just too much upside to ignore. Just think: If venture capitalists couldn't stomach controversial digital opportunities designed by guys with little experience, the world would not have Napster, YouTube, MySpace and Facebook.

Would you give a Russian teenager millions?

The Chatroulette mythology is helped along by the enigma that is its central figure, Ternovskiy. He's a former hacker and current high school truant who has turned what he describes as a lark -- Chatroulette was intended to entertain his friends, he says -- into ambitions for storming Silicon Valley.

But whoever manages to sink their hooks into Ternovskiy may have both chronological and cultural divides to bridge. Plus, technological savvy is not the same thing as business acumen; Ternovskiy has already admitted that he isn't even getting paid yet via Google AdWords because he's too young to collect.

But Ternovskiy's trip to the U.S. signals the youngster is making the right moves: getting educated while showing a willingness to step out of his comfort zone. "You have to convince the guy to come to the states and build a team around him, which would be hard to do in Russia," said Dagres.

Judging from some of the comments he made, Ternovskiy may be born to play the part of the upstart entrepreneur. His first interviews show he's either preternaturally savvy or someone is coaching him brilliantly. He's already coyly toying with potential investors, telling NYT, "Well, for now, they are more interested in me than I am in them."

"Remember, Facebook was from an 18-year-old kid in Boston," said Keith Richman, founder and CEO of Break.com. "VCs don't tend to shy away from that kind of opportunity."

Ternovskiy also fits the mold preset by the technology press, which needs to crown at least one wunderkind per year to radiate from magazine covers the kind of youthful brio that prompts inspiration and envy. Once that pedestal has been erected, year two will be spent bringing Ternovskiy down to size. Enjoy the ride, kid.

The Ick Factor

Though Chatroulette claims to restrict usage to those older than 16 and provides a "report" button to flag offensive material, its indiscretions have been exhaustively documented. No wonder Chatroulette has emerged as the Internet's scourge du jour, attracting the kind of parental warnings from politicians that chat rooms once enjoyed.

But the very indecency that has undoubtedly fueled the growth of Chatroulette is also its biggest obstacle on the road to its likeliest source of revenue: advertising.

"They have one huge chasm to cross,'" said Dagres. "Do brands really want to associate themselves with whatever comes on screen?"

A new study by Web Ecology Project suggests all the media attention highlighting Chatroulette's sexual content may be a distortion of the truth. Only 5-8% of the sessions it monitored featured hanky panky. Nevertheless, perception probably counts more than reality.

That image problem doesn't end at U.S. borders either. Chatroulette may not just represent the decline of Western civilization, but Eastern, too: China is the second most active country on the site, according to WEP's research.

Few believe Chatroulette in its current form could sustain a business model other than advertising. Subscriptions, freemium or virtual currency are unlikely alternatives. Those models have helped sustain another former Internet hype magnet that saw its seedy side overtake an initial wave of marketer interest: virtual worlds.

Becoming ad-friendly is an obstacle not unlike what stymied user-generated content, which may have turned YouTube into a giant but isn't how it makes money. Google eventually drove revenues to YouTube by attaching advertisers to premium content; UGC is actually something of a loss leader because of its huge bandwidth costs.

Maybe with the right timing Chatroulette could have it both ways: The site wouldn't be the first to let chaos reign early on to swell its ranks, only to clean up later.

"The trick would be to build a critical mass and then get rid of the sex and find out what you're left with," said Wolff.

But communications consultant Julie Supan disagrees, citing her experience on the team that launched YouTube, where early on strategy was set to establish the site's identity as porn-free. "You have to make that decision from the very beginning," she said. "You have to decide who you are."

It's conceivable that the growing awareness of Chatroulette could be the very thing that cures its sleaze infestation: the more average Joes learn of it, the more sanitized it gets. Or Chatroulette could get much more strenuous about raising its standards. But cleaning up for advertisers could end up clearing out the user base who want the site untamed.

Chatroulette is already seeing signs of creeping commercialization. French Connection UK has offered a 250-pound voucher to men who can furnish a transcript proving they secured a date with someone they met on Chatroulette. Bands have used the platform to broadcast concerts. Celebrities from Ashton Kutcher to music producer Diplo have used Twitter to promote their appearances on Chatroulette. Don't be surprised if Chatroulette begins minting celebrities in its own right; perhaps you've heard of its rising stars Shirtless Bird Face Donkey Man or PianoChatImprov?

Mistaking the tree for a forest

The emergence of Chatroulette may portend not so much success for itself as it could the broader and equally nascent world of video chat. Matthew Szymczyk, CEO of Internet marketing firm Zugara, connected the dots in Advertising Age between other less buzzed-about growth trends including livestreaming, webcam sales and webcam-video uploads as evidence of a new category taking shape.

"I suspect that the right model is at some amount of remove from the Chatroulette model," said Wolff. "Although it takes something like the Chatroulette model to clarify the other model."

All Chatroulette essentially does is randomize interactions between webcam-using strangers on a one-on-one basis. But defining video chat as either random or one-to-one may not be the optimal application of the technology. Perhaps flipping the notion of random on its head and bringing together individuals with like-minded interests in the context of social networking could be even more compelling.

"If I were running Match.com, this would be an interesting way of getting the service aimed at a younger audience," said Richman. "It could be huge for a dating service."

Or maybe video chat could be more like its text predecessor, which was often known as a one-to-many application than a one-to-one exercise. Adopting this dynamic in a video environment could even turn video chat into a performance space (and possibly yet another front for online piracy).

No matter how Chatroulette's core offering is redefined, the site is ideally situated to expand where it makes sense. But it's also possible a nimbler company could come along and steal that thunder right from under it.

If Chatroulette has any one Achilles heel, it is that its functionality can't be patented, notes Dagres. "There's no barrier to entry here, it's not hard to do," he said. "There could be 20 copycats tomorrow."

The copycats are already here -- some of them even preceded Chatroulette, including Shuffle People, RandomDorm, Redditchat, Tinychat, Popjam, Zupyo and Spinthecam. Some bring their own innovations to the space; still others, like Manycam, exist to supplement the Chatroulette experience with funny graphics that can be employed on video.

But even as Chatroulette's clones pile on with potentially better services, there's something to be said for being the only player on the field with momentum. Take YouTube, for instance, which didn't necessarily have the best technology. But the fact that it built a following was enough to distance itself from the pack.

"Chatroulette can have a big enough audience to become a default standard," said Dagres. "It's not a true standard, it's just what people click on. And then if they're lucky, they become a verb."

Andrew Wallenstein can be reached at @awallenstein.
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