Thursday, May 6, 2010

ChatRoulette - Fail Fast, Scale Fast


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There wasn't too many Internet start-ups in the years following the 2000 dot com bust. However, ten years later the story is very different and it has nothing to do with venture capitalists re-entering the market rather lightweight, scalable business models that have been made possible through cheaper hardware, free open source code, free marketing and distribution and powerful programming languages reducing the need for large development teams (Graham, 2008).


Competitiveness in the global online market relies on developers delivering products before their competitors and when they arrive they need to be cheap. Speed is of the essence as Van Grove (2010) puts it "the company with its name in lights is the company that most often will prevail". She was speaking about a recent start up ChatRoulette which is a service where users have video conversations with random users around the world. ChatRoulette is a great example of a business which experienced growth at a viral level a scaled appropriately.


Chatroulette Screen Shot

How a company receives revenue is directly related to how much the consumer pays for the product. Using the example of ChatRoulette the service is provided for free and revenue is generated through advertising. Costs a kept low because the bandwidth of the video is not ran through the server (CamChat, 2010). ChatRoulette's founder is quoted saying he turns a profit through such advertisement. Watson(2010) has suggested it is important for such companies to diversify possible revenue streams because the advertising market cannot alone be relied on.


Viral marketing is a cost effective method of promoting a new product and it doesn't happen by accident. Web pages such as YouTube or new.com make it easy for users to share their content with their friends using buttons such as email or share this article. Considering our example of ChatRoulette Andrey Ternovskiy (founder) used internet forums to publicize his new service (Bidder, 2010). Word of mouth caused his service to go viral and move from 500 users per day to 1.5 million. To cater for the sudden growth in demand Ternovskiy relied on outsourcing.


Businesses can access server storage and bandwidth as a service meaning they only pay for what they use (see one services pricing below). Chatroulette used a similar cloud service which enabled them to quickly scale with demand when the service went viral. Ternovskiy also outsources development. He is currently employing four programmers from around the world who are working on improving the service. Outsourcing provides companies such as Chatroulette cost effective flexibility and allows them to focus on their core activities (Bucki, 2010).


Linux Server Size (RAM / Disk)Hourly Cost *Monthly Cost
256 MB / 10 GB1.5¢$10.95
512 MB / 20 GB$21.90
1024 MB / 40 GB$43.80
2048 MB / 80 GB12¢$87.60
4096 MB / 160 GB24¢$175.20
8192 MB / 320 GB48¢$350.40
15872 MB / 620 GB96¢$700.80

(RackSpaceCloud, 2010)


By utilizing re-usable code, viral marketing, multiple revenue sources and outsourcing hardware services can experience fast growth and make quick returns on relatively (to traditional models) small investments (O'Reilly, 2005). Chatroulette took 17 year old Ternovskiy 2 days and 2 nights to create and is now worth an estimated 10 million euros (Bidder, 2010). He focused on the core functionality, released quickly and without the need for venture capitalist . This new business model is known as lightweight and scalable and is profitable (Zawodny, 2004).


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6 comments:

  1. Good one Jack!

    The part I love is taking 2 days to put the site together and reaping the rewards. Although I am sure that they did a lot of work getting the site to the point it is today!

    Makes me think that they would have had a solid strategy that relied heavily on Web 2.0 concepts discussed by O'Reilly such as a light weight and scalable model as you already mentioned!

    Great work!

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  2. Great blog Jack! I haven't heard about ChatRoulette before, but now I really want to try it. The opportunity to chat with random people around the world sounds really interesting.
    And how does ChatRoulettes advertisement work. Do they have banners on their site or do they also include advertisement in the video-communication part?

    Stefan
    www.borenich.at/wordpress

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  3. Thanks guys. The advertising is just a single tab, it isn't intrusive or even obvious but is apparently making money.

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  4. Hi Jack. I like your style of blogging.
    I knew chatroulette on hand, but mostly from the media because of the uncensored content you can find from anonymous users. I guess South Park kinda displayed what the media was saying in one of the newer episodes about Facebook. Have a look at the first 55 seconds of this clip: http://www.southparkstudios.com/clips/269236 :)
    Besides that, I think that it is very impressive to have created in chatroulette.com in so short a period of time.

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  5. Great article Jack! Chatroulette really is an exellent example, and you have done a good job at covering everything about the pattern. Do you know if Chatroulette has any problems with pedofiles, and if they are doing anything to prevent it?

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  6. They have had some big issues with exhibitionists and they claim to be working on the problem. Currently there isn't much more than a disclaimer telling people under the age of 16 to go away.

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