CEO of Date.com talks about online dating

Meir Strahlberg, CEO of Date.com, talked about the online dating business in a speech at an industry conference. Why does this matter to internet investors? First, Yahoo! and IACI both own an online dating business. Second, dating sites are big spenders on online advertising. Third, dating sites will converge with social networking and content businesses.

Here's the majority of the speech:

Jupiter Research forecasts that the online dating industry will grow to $550 million in 2006 from $220 million in 2002.  Bear in mind that these are only projections and that these forecasts are from October 2003.  A new report will be out in a month.  I think these projections are low, but even if Jupiter is correct, winning a small piece of a half a billion dollars is still a good business.  And that’s only in the U.S.

Jupiter’s report also showed the percentage of U.S. Internet users who took certain actions on online dating sites.  21% browsed personal ads online, 13% posted personal ads, and 5% became paying members.

Why I Am So Optimistic About This Industry

Now I will outline why I am so optimistic about this industry and why I think the half a billion-dollar figure is conservative.

1:  More people are using online dating sites.

This industry is becoming more accepted and Online Dating is becoming more and more mainstream every day.

When I started out in the telephone dating industry, only geeks and losers that used these services. Today, you can meet your soul mate online and find someone to marry.  Or, if you are looking for a non-committed relationship, you can find a date for every night of the week.

The concept of online dating is becoming more and more socially acceptable and it will continue becoming more socially acceptable especially as dating companies advertise through television and radio.

Many of you assumed that when Yahoo entered into this business it would leave less room for the rest of us. I think it was the best thing to happen to this industry. It made people aware of online dating and gave the concept legitimacy.

More and more people are going to come to our sites, more people will join, and more people will pay.

2: Higher Cost of Membership

The second reason why I think the half a billion-dollar number is conservative is that I think that prices are too low and that average member values are going to increase.

If you’re single, or if you can remember to back when you were single, you know how important dating is and how much money you spend to get a date.

You spend money on clothes, you spend money on makeup, you spend money on perfume, and perhaps you think that driving a nice car will get you the girl you’ve always dreamed of. But it’s obvious that you’ve spent, and spent a lot. So I think that asking for more money than $20 per month, to find a date is not unreasonable.

Yahoo recently announced a higher price point for their Premium product. They’re charging $35 per month. The basic price is $20. I think that many companies are going to follow suit. And I think that the consumer will be willing to spend more.

3. Industry Improvements

The third reason for my optimism is that I think that we are getting better at addressing what the consumers need and what the consumer wants. This insight, along with constant improvements to our products will lead to higher conversion rates for the industry as a whole, certainly better than 5%.  Among the improvements consumers have seen are: better matches, better searches, better tools and greater ease of use.

Issues Facing The Industry

To an outsider, all of my reasons for optimism sound great, but for those of you involved in the day-to-day aspects of running a dating company know that there are many issues facing the industry.

The two main issues facing the industry are: the rising cost of media and increased competition.

1. The Rising Cost of Media

The rise in the cost of media is due to two main factors. The first is due to pixel technology and optimization software. Only a few years ago, publishers had no idea how their traffic converted and what their media was worth.

Today due to optimization software, pixel placements on join pages, and improved tracking tools, publishers understands exactly how a site converts, and exactly how much they can charge for their inventory.

This has led publishers to raise the cost of media as high as possible as they know exactly what that industry can afford.

The second reason that media has skyrocketed is based on the auction based model of buying media popularized by companies like Overture and Google. The company willing to spend the most money will be able to buy the most traffic. And it does not matter if the company buying the traffic is earning a profit. The cost of traffic rises for everyone.

This chart will give you an idea how much money Google is making per click from the Dating Industry.

As you can tell from the chart the CPC’s can run as high as $1.63 each. And there are some companies spending quite a lot of money for this traffic.

Those companies that are willing to lose the most money, or those companies with the highest conversion ratio and member value, are paying the most and buying the most traffic.

This brings me to the second greatest issue facing our industry, increased competition.

2. Increased Competition

I think that its crazy what has been happening in the industry. An accurate analogy of what has been happening is almost like a war.

Barry Diller and Match.com came along first. He brought a gun, in a figurative sense, and then proceeded to lock up as much media as possible, securing exclusive deal after deal.

Matchnet saw the opportunity to go public and with their own ambitions plans went out and bought bigger guns. They brought machine guns, and started buying profiles at over $5 each, even though it was unprofitable at these levels.

And everyone in the business rushed out to follow, and spend as much money as possible.

Then, True.com came along intending to become a player overnight and rolled up in a tank.

True started buying profiles at $18 each! While their price per profile dropped over the next few weeks they still continued to outspend every other company who had been fine-tuning their conversions for years.

And finally, eHarmony recently came along with an F-16. They just raised  $110 million.  It will be interesting to see how they start spending it.

This analogy may sound like a joke but it is not far from the reality of what is happening. The industry has gotten to the point where everyone is trying to outspend each other often regardless of profitability.

Current Industry Trends

I’m now going to discuss what I see as some of the trends that appear to be taking place in the industry.  Over 60 companies are tracked by Comscore as the top tier of the online dating industry.  There are hundreds of smaller companies that are not tracked.

1. Niche Markets

Creative entrepreneurs that don’t want to enter a head to head war need something to compete with. Two years ago the big buzz was all around Friendster. Friendster didn’t outspend everyone. They out smarted everyone. They created something unique. And while everyone rushed out to implement their own version of friendster’s Tell-a-friend functionality, no other dating site has made it work.

Last year people shifted their focus to another site. Run by an older doctor, and his scientific way of finding true, long lasting love. I’m referring to eHarmony who Jupiter reported is now earning the most money in the industry even though they do not have the most unique visitors. When Match and Yahoo saw this, they rushed out to implement their own personality tests. Everyone is trying to copy eHarmony, but no one can truly copy their exact formula.

It is often easier to dominate an overlooked niche than it is to compete with the major players who are focused on the mainstream. These niche markets often have higher conversions, higher member values, and present a growing and often untapped market.

This year, seniors become the hot niche. Match aggressively launched a PR campaign to attract seniors. Matchnet and Friendfinder have their own sites targeting this niche. 

The Christian niche is filled with companies among them Big Church, another Friendfinder property, Love and Seek owned by a company called Zencon, Christian Mingle by Mingle Match, and Soulmatch which targets all religions and is owned by Beliefnet.

The Gay market is dominated by Gay.com, but there are many other players in this space.  The African-American niche has its share of sites, among them Black Planet, Black Singles Connection, and Black People Meet.  And finally, how could a discussion on niche markets take place without mentioning the Jewish niche. Matchnet keeps its doors open thanks to Jdate, a site that has become a household name in the Jewish market.

Breaking into these niche markets presents its own problems. While there are few niche markets where there is no competition, it is usually easier to maintain a site in a niche market. You don’t need the database power or the massive hardware as these niche markets usually have smaller audiences.

2. International Expansion

A second industry trend is international expansion.  Those companies that have gained significant market share in the US are now looking overseas for growth. In addition to the prospect of growth, with the US dollar being so weak, the Euro, and especially the British pound look very attractive.  If customers in Europe generate even half as much money as American customers, it is worth the same amount of money.

MeetIC, one of the leading Online Dating players in Europe recently announced that it was going public. Immediately upon hearing this news, Match.com started announcing how Match was “The Leading Online Dating Company in Europe