(The Big Disrupt) Zirtual: Why Zirtual Failed

Jason Calacanis: (in praise of Zirtual) “I think you’re sitting on a powder keg”

Maren Kate Donovan (founder and CEO of Zirtual) : “Thank you”

It was only a week ago that serial investor and This Week In Startups host Jason Calacanis (an investor in Zirtual) was singing Zirtual and its founder and CEO Maren Kate Donovan’s praises on his show but now it must be painful for Calacanis to watch that episode back as he gave a glowing appraisal to a company that stopped operations and was quickly acquired just days after the interview.

Calacanis, not exactly one to pull punches, was relatively Zen addressing the Zirtual implosion during his popular fan Q&A called “#askjason” (see the video below this article) choosing to look at the situation as something for him to learn from but it’s hard to imagine the man who put YouTube on blast while presenting at a YouTube conference not losing his shit on Zirtual’s founder and CEO via Go To Meeting.

Being a fan of the show, I found it painful to watch back myself as Calacanis went from one superlative to the next about the company, its CEO, and particularly it’s potential for growth as Calacanis tipped the company to reach “unicorn territory”.

While Zirtual’s implosion may have left Calacanis’s face red with anger and a little bit of embarrassment after investing in the company, the 400 employees of Zirtual were left pondering their futures after they were let go by the company via email. However, in truth, they’re jobs were in jeopardy the moment Zirtual made the wacky decision to take them on as full employees with benefits and add an incredible 30% to their costs. This has to be the strangest decision any company can make as there’s no company on the planet, never mind a 5 year startup planning to scale, that’s prepared to add 30% to their costs and risk their margin or, in Zirtual’s case, eliminate it.

Zirtual broke the cardinal rule that established companies and startups in their market live and die by: never make contractors employees. Very few companies who use contractors extensively can take all or even some of them on as full employees and Zirtual, unfortunately for them, weren’t an exception to the rule. Even Uber that’s currently worth $50 billion are scared to death of any court in the countries they operate in recognizing their drivers as employees as they simply can’t cover the costs as, according to a number of reports, they’re already losing a ton of money as it is.

While Zirtual may have got their numbers fatefully wrong, what they got right was building a service clients loved and their employees loved to provide which few companies can say about their business. Wil Schroter, CEO of Startup.co (the company that bought Zirtual) paid testimony to the commitment of the Zirtual staff as he revealed that some of the staff is working without pay to keep things going and commented on their passion for the business as he said ““They’re crazy passionate. ... They love what they built.””[1].

A company with this much good will from its employees towards it (despite letting them go via email) can never die without a fight and, hopefully, under the Startup.co, Zirtual thrives.

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[1] C. Ghose, 2015,  Failed S.F startup Zirtual’s  fired employees are working for free to revive services: they love what they built’,  http://www.bizjournals.com/sanfrancisco/blog/techflash/2015/08/zirtual-workers-shutdown-startups-co-maren-donovan.html

(The Big Disrupt) Interview: This Week In Startups Answers Fans Questions

Check out this great episode of This Week In Startups where founder and host Jason Calacanis talks about the Zirtual controversy, sage advice for entrepreneurs including raising money and dealing with investors.

(The Big Disrupt) Pay TV: Who'd Be A Pay TV Provider?

The last few years have not been good to be a pay TV provider with the whole industry losing subscribers and the goodwill of the one they have left because the industry’s notoriously bad customer service but the future looks even worse when you look closely.

The whole Pay TV industry is chasing two groups of TV consumers, cord cutters and cord nevers, who have chosen to either abandon or avoid entirely the cable bundle to sign up with over the top (OTT) services like Hulu and Netflix who offer a large library of content at cheaper prices than their Pay TV counterparts. This trend sends chills through Pay TV executive’s spines as cord cutters and cord nevers are their future customer base and find themselves having to compete with popular and well-established OTT services in the open marketplace to get them back.

This puts Pay TV providers in the unenviable position of having to negotiate a fine line where they have make sure their own OTT services don’t cannibalize their pay TV subscribers like other OTT services are.  However, this problem is nothing compared to the quagmire that Pay TV providers face: entering their industry’s number one growth market knowing that they’ll lose money or make significantly less than they make now. Pay TV providers, like any other company in any other industry, strive to make a return on dollars spent and thanks to low OTT APRU (Annual Revenue Per User), Pay TV providers over the next few years are going to find it really difficult to pull it off.

However, Pay TV providers will continue to make money from their large pay TV subscribers bases and Pay TV executives are well aware that they’ll see significantly lower subs and revenue in the OTT market and see it as a way to reach consumers they lost or never had. What Pay TV executives would be really be concerned about is the industry wide subscriber loss which saw Pay TV providers as a whole lose 550,000 subs in a quarter and the large retransmission fees they have to cough up to keep popular broadcast and cable networks in their cable bundles.

Pay TV providers hate paying these large transmission fees with every fiber of their being as it affects their ability to compete effectively and feel extorted to the point they’ve actively lobbied government officials to address the issue. It looks like their lobbying efforts paid off with FCC Chairman Tom Wheeler looking at removing exclusivity laws on the books that gives broadcast and cable networks an ungodly amount of leverage over Pay TV Providers, particularly at the local level. This will likely lead to an epic battle between the cable and broadcasting lobbies that will last months or most likely years as both sides are unlikely to back down even in defeat.

Retransmission fees makes up for a huge chunk of most broadcast and cable network’s revenue and would put a lot of downward pressure on their business for obvious reasons if they lose this battle as they won’t be able to command the same fees they do now by a long shot. Broadcasters may have ready themselves for the tough road ahead as pay TV providers have a winning argument and a FCC Chairman who would probably make the same argument if he was still head of NCTA (National Cable and Television Association).

However, looking at the numbers provided by SNL Kagan, it looks like Pay TV providers are targeting low hanging fruit as in 2015, premium and basic cable networks accounted for $37.9 billion of retransmission fees Pay TV providers had to cough up while broadcasters accounted for only $6.3 billion[1]. While retrans fees pay TV providers had to pay broadcasters saw more growth over the last decade than fees paid to cable networks, Pay TV providers are projected to pay just shy of $1o billion more in 2018 than they do now  to cable networks as opposed to the $2.3 billion they’ll pay Broadcasters in the same period[2].

The obvious answer to the problem would be for pay TV companies to keep the cable networks in check but that’s easier said than done when cable networks produce many of the commercial and critically acclaimed shows on television, period. This gives premium and basic cable channels such as HBO and AMC a lot of bargaining power as they produce commercially successful shows like The Walking Dead and Game of Thrones Pay TV providers can’t afford to lose out on.  Popular cable networks like HBO have buffered their already powerful bargaining position as they can explore other ways to distribute their in demand content to those who already subscribe to their cable channel (HBO Go) and those who don’t in partnership with other content distributors (HBO launching OTT service HBO Now in partnership with Apple).

However, in exploring new ways to distribute their content such as OTT and TV everywhere, cable networks are subject to same problem of low ARPU and thus lower revenues in general. However, network executives, much like their Pay TV counterparts, see these new distribution models as a way to reach cord cutters and cord nevers.

In sum, all this puts pay TV providers in an unenviable position which provokes the question who would be pay TV Provider indeed.

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[1] B. Fung, 2015, The FCC could soon give more power to cable companies. Here’s how, https://www.washingtonpost.com/news/the-switch/wp/2015/08/13/the-fcc-is-moving-to-end-tv-blackouts-once-and-for-all-heres-how/

[2][2] Ibid