Monday, February 27, 2006
Industry Note - Are VCs the Real Chasm In 2.0?
I had a fun chat with Scott a few days ago, and he has a post outlining a bit of what we discussed, so check it out for some fresh thinking.
But the larger point behind that particular discussion is simple, and probably worth a larger, broader discussion.
Out discussion was about the fact that we're at an impasse today in the 2.0 space. The 2.0 crowd has the right tools (communities, networks, attention markets, etc), but not the right audiences. Big media still has the audiences, but not the tools.
Consider Digg. Digg, as it is, is useless to me, and to most of the rest of the universe. I don't care if there's a video on YouTube about an 87 year old dude having a sex change. Reading Digg is like listening to a coked-up Connie Chung talking to the same 1000 Ajax worshippers...every second of every day.
It's not that Digg inherently sucks. In fact, I think attention markets are going to be a revolutionary, radical innovation. But, as in many 2.0 models, the content is like the community. Digg's community of pimply teenagers can give me neither relevance nor depth.
Now, the WSJ's, WaPo's, NYT's, Economist's audiences could - but they haven't been given the tools to connect and create.
This begs the bigger, more crucial question: why not?
I think the answer's simple: VCs. VCs are great are crafting value propositions for enterprise software and semiconductors. They understand those industries very, very well.
But they distinctly don't understand media and culture, and so they can't craft value propositions (or build the right relationships, etc) for their portfolio companies - and that's when they invest in the right companies to begin with.
Largely, this is because the things that make VCs good at crafting value props for software and chips - alliances, the stack, efficiency, building out ops, helping slowly win big customers, investing a great deal in a small number of plays, etc - destroy more value than they create for plays at the intersection of media, www, and consumer markets.
Hence, the impasse. The senior guys in the community that should be understanding where 2.0 plays fit in the emerging value chain, and then actively seeding that concept with potential acquirers aren't, or won't - or maybe, just possibly, can't.
I think they need new blood, new ideas, new thinking, to build that understanding. What's stopping them? VC is clubby. Like any other club, they exist to sustain asymmetries (in information, resource, capital, etc).
Now, that's not inherently bad. Asymmetries, too, can be efficient.
But I think it's becoming increasingly clear that, today, VCs are deeply resistant to change. If you factor in the pre-crash, it's taking two cycles - 14 years - to change VC. That is an incredibly long time - especially for an industry that's supposed to be about innovation!
Three simple examples.
Ask yourself: is it really efficient for VC to have so little turnover compared to any other industry?
How is it possible that while every other industry in the world has undergone wrenching change, VC looks almost exactly the same as it did 20 years ago?
Is it any coincidence that while the VC overhang (uninvested cash) piles up, the very definition of the term innovation is shifting to a class of players who are clearly much hungrier - like Ideo, Cheskin, Doblin, etc - and are busy redefining innovation on their own terms, as a design-driven discipline?
Now, I'm not trying to offend my VC readers and pals here - in fact, many insightful venture guys have said as much in the last few months (Joe Schoendorf last year, memorably). But let me be more honest than I perhaps should be: from my POV, as a strategy consultant at the intersection of exactly those spaces VCs are grappling with, the current state of VC is a full-on stall.
The failure to understand, craft and articulate 2.0 value propositions is just the latest example of this VC decay. VC must change organizationally and strategically - or the downward spiral is going to continue.
And that's why we've reached an impasse: because, just possibly, the real chasm for 2.0 is exactly the set of guys that should be seeding, growing, nurturing, and building it.
The Rise of the Advisory Capitalists
An interesting discussion's been going on lately about the emerging group of folks who are more or less Advisory Capitalists, kicked off by Stowe Boyd.
Since I'm on this list of people, let me add my 2c.
It's funny - though my clients also include incumbents from industries like media, advertising, telecoms, CE, even FMCG, for the last few months, when people in SF ask me what I do (which is always the first thing people ask you in the US, but never anywhere else in the world), I say "I'm like a VC, only without the C".
Which, uhhh, generally leaves people more confused than before, but does point to the rise of this semi-new niche of people, which, I guess, until now, has lacked a label.
Yes, I can certainly see the argument that ACs might have a reason for existence in a flat world - cheap information, cheap coordination, you know the score.
But I think that the rise of AC is solving a different problem: the VC competence trap.
Isn't AC what VCs should be doing? If not, what's their economic function? Simply to select investments, and then to leave advisory work to others? Isn't the fact that the expertise required to guide new ventures isn't separable from the capital required for them to create value the whole rationale for the existence of venture capital?
I think the rise of ACs is a temporary thing, which points to a deep, ongoing malaise in VC more than a real structural shift in financing of innovation (as I've been pointing out lately); namely, the fact that VCs are nearly as resistant to
change as Microsoft.
Sunday, February 26, 2006
Saturday, February 25, 2006
This is so mind-bendingly cool in its simplicity and effectiveness. Use
close-captioning subtitles translating dialogue in real-time in the native language of a film to teach the written form of that language to the illiterate. Absolutely brilliant!! (Hat Tip: SepiaMutiny).
Friday, February 24, 2006
Thursday, February 23, 2006
Why Yahoo Didn't Build MySpace
Don't know if you saw Bradley Horowitz's pyramid last week, arguing that only a small percentage of consumers become peer producers.
Bradley is a terribly smart guy, but I was going to write a nice long post about why this is exactly, totally wrong; Greg beat me to it - I highly recommend you check out his post.
It's a very nice datapoint about why Yahoo, who's focused heavily on the social, doesn't really understand what "the social" is, or how it creates value - which is why they got, and continue to get, thoroughly pwned by MySpace.
Wednesday, February 22, 2006
Bubblegen Goes Podcasting (Again)
I grabbed a coffee with Brian O @ Lightbox5, and we ended up doing a quick podcast. We discussed my take on (among other things):
"...attention scarcity, plasticity, micromedia/microchunking, edge competencies, smart aggregators, reconstructors, Ning'd, Flock'd, etc. It's serious Web 2.0 business model geekery. Mentioned: MySpace, Edgeio, Google (duh), Yahoo!, flickr, etsy, delicious, Apple, Ning, Flock, threadless, and much more."
I tried to explain many of these ideas as intuitively as possible, so check it, enjoy, let me know if it was helpful, etc.
Industry Note - The Great Divide: Why is the Valley Afraid of MySpace?
I hear the same question from almost every Web 2.0 player and investor I talk to lately, so I'm not surprised to finally to see the meme surface: "I don't get MySpace; in fact, I'm scared of it - what's the %$@^ deal?"
This is the most relevant question (leaving aside VC non-questions like "what should we invest in?!" and media non-questions like "who should we acquire?!" etc) for the first half of 06 in the www 2.0 space.
Why? Because it illustrates something so important I'll say it twice:
Web 2.0 cannot live up to its (enormous) potential to create value that's structurally disruptive until and unless technologists understand consumer dynamics.
Web 2.0 can't live up to its game-changing potential until and unless the geeks step outside and think outside their own box of geekery.
This is a theme at Bubblegen these days.
I've pointed out in some detail why this has the potential to lead to what we sometimes rather unkindly call the "living dead" - ventures that don't die, but just kind of go sideways.
Of course, when I say geeks, I also mean to include VCs - these are senior members of the community, whose role is strategic guidance; but in this case, They're stumbling like everyone else.
I'm not kidding; check this interview with Esther Dyson about the attention economy. I don't mean to bust on Esther, but it left me questioning whether she really understands how to create and capture value from attention.
Or you could simply read VC blogs - they're great at giving advice about getting funded, and the arcana of VC, but they are distinctly not enaging in discussions about the dynamics of investing in and disrupting media, culture, etc (with the usual exceptions).
Why the VC disconnect? My answer: investing in enterprise software and semiconductors is distinctly not like investing in media and other culture industries. In fact, I would argue that VCs are in a competence trap - it's exactly those things that made them successful at investing in software and chips that make them very unsuccessful at investing in culture.
Coming back to geeks in general, I've recently used Ning and Flock as examples of this larger failure to understand or even engage with consumer dynamics.
But here's another lens into the situation.
Recently, I read an article that suggested Conde Nast was set to acquire MakeUpAlley (no insider info, I just read the article).
Check it out; click the link. If you're part of the Valley kru, I'm sure you'll be aghast.
It doesn't have Ajax, it doesn't have gradients, it doesn't have a clever name, it doesn't even have anything resembling a design (the horror).
But not so long ago, it was one of my absolute top acquisition recommendations to a Very Big Corporation.
Why? What it does have is a very, very, very deep understanding of what consumers in it's vertical value, how to connect them into a coherent community, how to manage and regulate this community, and how to translate those connections into deep and shallow value creation.
The MUA guys have a very, very, very deep understanding of the edge. Much more so than, despite all the (well-intended) conversation about the edge by the usual suspects, almost anyone in the geek world.
In short, they're doing for cosmetics lovers what MySpace has done for insecure, acne-ridden teens. But how many geeks or VCs can you imagine discussing a play like MUA? Clearly, not many - because it requires deep understanding of the very different world of real consumer culture.
I could cite you many more examples of non-geeks on the acquisition radar because they understand the edge, but the real question is this: why are these issues so difficult for the geeks to grapple with?
My answer: because for geeks, marketing, branding, advertising, etc are eeeeevil.
The challenge, of course, is for geeks to understand that it's exactly this value equation they should be disrupting, not ignoring: making marketing, branding, advertising not evil.
That they're evil doesn't mean you should ignore them - it means you should be destroying them and then redefining them: making them less about Madison Ave and BuzzAgent, and more about the deep 2.0 principles that in fact, are revolutionizing the deep economics of many industries - principles like peer production, gift economies, sharing, transparency, social capital, anticonsumption, and deep culture.
Let me be a bit more blunt than I'd like to be: geeks (you too, VCs), this is your Next Big Thing - stop blowing it already.
I'd give you some tips, but unfortunately I can't blog those...you can always ping me to chat.
Thursday, February 16, 2006
Wednesday, February 15, 2006
Politics of the Day - Abu Ghraib, pt 2
As if Darth Cheney shooting a friend in the face wasn't enough, here are more Abu Ghraib photos just leaked to the SMH (link to MeFi, pics link on from there).
God, these are disturbing - much worse than the last batch.
I've been waiting for these to be released; as I've pointed out before, the Post and the UN are both sitting on a CD of 600+ of these photos, which were showed to the Senate some time ago.
I think today I am not just ashamed to be am American - I feel literally sick after looking at these. I can't seem to find any words...
Just go look and see if you can get through all 15.
And a note on strategy to moron Dems: try using language the heartland understands to explain just why this is wrong. Say: "this is Satanic". No, I'm not kidding - not even a little bit.
Tuesday, February 14, 2006
Bubblegen Goes Podcasting
I sat down last week with Michael Bayler, as associate and pal, to chat about media econ + strategy; the podcast is here.
If you've ever wanted a quick intro, here it is - recommended for those of you into the media end of my work.
Edge Competencies - Plasticity Mini Case Study
"..."MySpace gives you more freedom to express yourself," said Zlatan Stankovic, 21, a sophomore at Hudson Valley Community College in Troy, N.Y. "You can leave different kinds of comments, pictures, movies, stuff like that."
Link; on why MySpace is more successful than it's competitors.
There's a very big point in this little quote.
Let me try and put it as simply as possible. It's that plasticity is an edge competence: one of the things firms can do to make the edge strategically productive. When your edge is more productive than your competitors', you have built one of the only sources of sustainable advantage in the post-network economy.
A nice advance in the neuroscience of memory should have smart brand strategists and managers across industries contemplating the (very real) virtues of idleness and the deep hidden costs of attention scarcity.
Saturday, February 11, 2006
Politics of the Day - Why I <3 LaShawn Barber
Guys, I try and not get political on Bubblegen. So please excuse the politics if you're not into that kind of thing. That said...
I admit it. I read LaShawn Barber's blog. It's a guilty pleasure, full of schadenfreude - like watching a train wreck that never ends.
I luv LaShawn because she is the ultrapundit - more pundit than pundit. She's the ultimate simulation - she demonstrates what the pundit really is; a simulation of argument, rhetoric, knowledge, denuded of all context, logic, data, and rationale.
Her arguments aren't just asinine, as pundit's arguments often are - they actually take to the limit, as far as one can possibly can take, the fundamental paradox that dominates American culture today: demonstrating a superior lack of understanding about, well, almost anything - jurisprudence, politics, economics, ethics, religion, you name it - gets you attention.
LaShawn usually demonstrates no understanding (of anything).
The banality of stupidity, it turns out, is a real winner.
Call it the Village Idiot Effect - As we converge to a global village, it takes a singular devotion to battling the vast amounts of knowledge that even Google can give you for free to keep being the village idiot; but those that succeed enjoy a larger share of global attention.
The market for idiots, it turns out, is also, like other markets in a globalizing economy, a winner-take-all market.
Now, I'm not harshing on LaShawn for no reason. Here's the latest addition to her unrivalled arsenal of mind-blowingly brain-crushing fatuousity:
"...Gratuitous comment: People are ragging on Ann Coulter for using the term �raghead.� I think it�s much ado about nothing. How is that, Sean?"
Let me get this straight - LaShawn Barber (as if the sheer Voltron-of-stupid power displayed on her blog wasn't enough already) also hints at being...a racist.
I am in awe - utterly in awe - of the sheer unvarnished perversion of this contradiction. LaShawn is a black (born-again?) fundamentalist Christian. One would think (wrongly) that this might make it rather unlikely for her to want to be a racist.
That, my friends, is perfection - it's the perfection of ultrapunditry; to be able to claim everything while understanding nothing - not even the rawest essence of the deepest core of your own history and morality.
It's a true coup de grace. I don't think either Cleese or Orwell could have designed this story to turn out any better.
Friday, February 10, 2006
Game Over: How To Kill Your Industry
Don't innovate; extract value instead of creating it, by building iron curtains around the valeu chain; focus on synergies (read: marketing economies of scale and scope). Then, when the returns from the above are played out, do what anti-innovators throughout history have done - vertically integrate (ie, acquire the creative).
The ongoing games industry tragicomedy gives us a latest textbook example.
Did you hear that? That's the sound of an entire industry imploding (while radical innovators steal tomorrow's customers from right under their nose).
I really hope the usual media suspects (yes, even you, Yahoo + Goog) are taking notes.
Branding 2.0: Myspace Invaders
Let's connect a few dots.
(COO) Peter Chernin:
"...We need to reorganize the sales force, add sales people and really begin to monetize what's really a pretty extraodinary amount of traffic asnd page views."
From a recent job posting:
"...Top-tier online advertisers such as Nike, Target, Interscope, Cingular, Universal Music, Dreamworks, Sony, Victoria�s Secret, and others looking to hit the 16-34 market are working with MySpace to come up with cool and creative ways to reach our audience."
Clearly, Fox is about try and "monetize" Myspace heavily.
All of which begs a few very interesting questions, since it's going to be the first time big media has really tried to capture a share of the value created by a community at the edge:
0) The philosphical question: is the strategy about milking the community's social capital (and killing it), or treating it with the care it needs?
1) Will they be traditional (lame) ads? Not recommended.
2) Will they try and seed the community with flacks? Extremely not recommended.
3) Will they leverage the community itself = the snowball effect? Recommended.
4) Will they choose the right companies to work with? It looks a little dubious from that list. Nike meets Myspace goths? That's exactly what everyone was afraid Fox would do with Myspace!!
999) Is advertising (traditional) really the revenue stream with the greatest returns from Myspace? Will Fox use this as a platform to redefine advertising for an ultraconnected era? Will Fox clue in to the commoditization of meaning?
I have my doubts.
The bigger point is that Fox is really the only 1.0 Media player who is focusing on building edge competencies. So, like building any other kind of competence, it won't be easy, and the only way to try in the absence of knowledge is to fail (a lot). I think the problems (to put it mildly) Fox is gonna face are fairly transparent, just from looking at these two datapoints.
Sit back and enjoy the show - you're about to see a very expensive attempt at building edge competencies unfold (or implode) in real time.
Edgeio and The Costs of the Edge
Will Edgeio be Craigslist 2.0? Maybe, maybe not. I haven't seen it yet, so I don't know for sure.
But I can point out one issue that I see with this school of plays - you have to already be invested in the edge to participate. That is, you have to have a blog, website, etc - somewhere to put your tagged classified.
Now, that may help with identity and trust. But it also kills the magnitude of network effects.
That is, the utility of these models is bounded by how the fixed cost of investing in the edge (setting up a blog, etc) is in the first place.
Do these costs outweigh the benefits? I'm not entirely sure - but I would bet Craigslist and eBay will still be relatively hyperefficient.
Also note the confusion about thinking clearly about this class of plays - this has nothing to do with walled gardens at all.
Final note: the idea of microchunking is at the core of my media ppt, if you want more pain.
Thursday, February 09, 2006
What Yahoo Should Do Next
What amazes me about Yahoo is that it's actually a company with great ideas. Better ideas than most of their competitors - whether Google or media. I mean Semel's four pillars are the segments of my new media value chain. Obviously, Yahoo gets it.
But somewhere between the rubber and the road, these ideas invariably get diluted, degraded, and robbed of all value creation potential. It's like the brains at Yahoo design Miuras - and somehow, what ends up being delivered to the market are K-Cars.
Case in point: Yahoo to trial revenue sharing to consumers for using search.
Now, you might think it's just price competition - but in fact, this is almost a great idea. You can almost imagine the context - some Y exec saying "we can still grab a 20% margin if we share a bit with consumers". True - but doomed to fail, for reasons of massive adverse selection which we won't go into here.
Instead, let me offer some humble advice to the Ys that <3 Bubblegen. Here's how this idea could be great. Remember Amazon's Mechanical Turk? Cross this with that.
Don't pay people to use search - pay people to help improve Yahoo search. Give anyone a tiny micropayment for a tiny contribution to Y search. Leverage the massively distributed specialization of the edge to improve/filter/rank results.
There are many ways to approach the problem - tags, rankings, ratings, etc - for which revenues are redistributed to peers. The exact mechanism isn't so important - the intent itself is.
Think about the huge marginal benefit you realize from this strategy versus the simple price competition of incentive for use - in this case, you realize leverage. Think about what kind of game-changing return you could realize for a piffling few million bucks invested in this kind of strategy.
The result would be the most radical strategic innovation - it would absolutely redefine the search value proposition if done right, and let you begin to reshape the deep economics of search on its own terms.
Think about it, run the numbers, email me if you wanna chat about it.
Leveraging the edge in a single domain, like many 2.0 startups are focused on, is - or more often, should be - a path to a bigger goal. That goal is building an edge competence, which, like a core competence, lets you leverage the edge consistently in new domains and markets.
The best example right now is Google's print ads initiative - it should be intuitive to see that since Google has made ads and content liquid and plastic, it can extend this competence to new domains, like print (TV, etc, etc...).
I strongly recommend you check it out to get a vivid demo of what I'm talking about - it will be a lot clearer (really).
Getting Ninged + Getting Flocked = The Two Chasms of 2.0 (...and Songbird)
Lately, I've been saying Ninged a lot.
It's shorthand for a chasm in usability. Though you've created new market space, the share of that market that's valuable in the real world is tiny; though many might want to use this set of services, only geeks can use them - you've built a better mousetrap, but only guys like this can figure out how to use it.
There's an obverse to being Ninged - being Flocked.
Flocked is shorthand for a chasm in needs. Though everyone can figure them out, they create little market space: only geeks want these services - you've built a better mousetrap, but it only catches very, very small subset of mice.
Getting Ninged and Flocked - things only geeks can figure out, versus things only geeks want - are the two big barriers to growth for 2.0 at the moment. They illustrate how out of touch 2.0 really is with consumer markets, which require deep understandings of consumer behaviour and how to make things if not cool, at least useful, usable, desirable, necessary, etc (think iPod).
Now, I bring all this up because I think Songbird may be Flocked.
Is it a cool idea? Sure. Is there really market space for it? I'm not so sure.
Without going into too much depth, the market offers a huge number of substitutes that are modular enough to do what Songbird does in combination. At the same time, I'm not sure that Songbird allows a meaningful or powerful leverage of the edge, which is what could reshape the value proposition in this space.
OTOH, I can also see the argument that media lovers want depth (without hassle). And the Songbird team is certainly the right set of guys for the task.
The bigger problem is that I think, in general, I doubt that Flock and it's vertical-browser-2.0 offspring are going to be as revolutionary as teh nu digerati kru would like.
I see the 2.0 browser space being dominated by virtual worlds (as it's already starting to be in Korea, China, Japan) and communities - more people, less software. This is the big issue for Songbird (despite the hype) - software focused on a better experience (whether through aggregation of competing services, etc) may be, in fact, part of the problem, rather than part of the solution.
Microchunking, Media 2.0 & Murdoch
Erick Schonfeld on Murdoch getting the potential of microchunked media. A very interesting catch (and not just because I am the microchunking guy). Highly recommended.
I find it absolutely amazing that Murdoch is still the guy that gets media the most.
Dell retreats from hard drive based MP3 players.
Lesson: the Red Queen dynamics of product-centric businesses are accelerating. These are going to be tougher and tougher markets to compete in, as global competition accelerates.
Unless, of course, you actually take the time to, oh, I don't know, invest in designing products that people actually care about.
Edge Competencies - Zillow
Zillow launches. It's been the subject of quite a bit of speculation, even by insiders, since the hype focused around a radical innovation for real estate via the www that no one could quite figure out.
Now, the cat's out of the bag - Zillow's big innovation:
"Zillow's algorithm crunches the home sales, tax assesor and other data it has and returns what it calls a Zestimate. We tried it on our home and it didn't seem far off. The site also shows the values of surrounding homes, which are displayed on an aerial map. Zillow can also show "comps,'' or the sale prices of homes that are comparable to the one your interested in."
Is this important? Yes. Why? Edge competencies - they're what you do to make the edge productive.
One of the edge competencies I talk about, but 2.0 players across spaces are glossing over these days (unwisely) is liquidity. Zillow, pretty clearly, is building a competence in making real estate much more liquid than it's been in a loooong time.
Will it work? Not sure. But the deep economics of the model are perfect - so I think it's a great bet for Benchmark and TCV to have made.
A perfect example of an experience - in this case, the Anti-Starbucks. When I was in Tokyo last month, we made a point of checking these cafes out, and the lines to get in were huuuuge.
They're actually cool - not evil like the article makes them sound - because they let geeks and geek girls build social capital. But unfortunately, they're also pretty strict about no pictures.
Why the Edge is Efficient
Unlike yesterday's media industry, you can arbitrage other people's mistakes - which means everybody has to play the game a little more seriously.
"...Ford had one of the more memorable commercials for their new Escape hybrid vehicle, starring Kermit The Frog. Competitor GM purchased the word 'Kermit' to promote their own hybrid car line, essentially getting all of the benefits of having a Super Bowl ad, with none of the hassles."
Tuesday, February 07, 2006
How Not to Manage the Edge, pt 665492
Blah, blah, blah - talk about not getting it.
Next Any Things
Guys, I have to admit something.
I am colossally bored with almost every discussion going on among the usual suspects in 06. So bored.
Maybe I am not saying interesting enough things myself.
I just feel like most of the discussions these days center around things that are so predictable they're almost deterministic.
What are Google, Yahoo, MS, telcos, bla, blah, blah gonna do next? Like we don't know.
What's the media industry gonna do (to fall deeper into strategy decay) next? Like we don't already know.
What are VCs gonna invest in? Like we don't know.
I don't mean to be bitchy. I am just hugely, enormously, mightily bored with all things 2.0 at the moment.
What I would really like to see (if I can actually be constructive for a moment):
1) 2.0 meets product/service design + innovation.
2) 2.0 meets creativity (do something cool for culture already, stop selling out...so cheaply, no less).
3) 2.0 disrupts VC (nuff said).
4) 2.0 > media (must...find...new verticals).
5) Media does something cool (imagine that).
6) Telco does something cool (imagine that).
7) GYA put turning into MegaCorp aside for a second, and do something cool.
8) The thinkers start thinking a lot bigger than, say, how Ajax slashes transaction costs, or how micromedia creates attention scarcity. That is the smallest bit of a very tiny picture.
9) ...you get the picture.
Economies of Scope
So is it just me or is the new Gmail + Chat bundling...well...very Yahoo?
Why is Google so hell-bent on chat anyways? I'm a little bit mystified. I don't think it is a real fit with their larger strategy.
Food for thought.
Fon gets a round from Index, Google, etc.
Let's do a bit of deal deconstruction.
What's Index's bet? It's essentially the same as Skype - that the current economics of bandwidth are inefficient, and sharing is a way to arbitrage this inefficiency.
To make this concrete, consider a world where bandwidth is perfectly allocated - everyone gets exactly as much as they need, no more, no less. In that case, P2P can't work. Economically, P2P is a way to make the inefficiency of the bandwidth business model productive - by allocating unused resources to those who can use them more productively.
And when done right, we've all seen how much new value you can create from allocating all these tiny pockets of inefficiency - huge amounts.
Now, I have my doubts about Fon's solution - if you follow the above argument, you see that, economically, Skype is the same model, just done over software. I think there are many reasons why a software-based solution is more powerful. For starters, it's not bound nearly so much by location - the network is much more robust. I'm not sure if the market will go for a hardware based solution, which is more brittle, constrained, and more location-sensitive. There are many more criticisms I can make - here's a nice summary.
But would I still make the bet if I was Index? Absolutely - for the simple reason that (as I keep pointing out) there's a dearth of good ideas at the moment. The opportunity cost of this capital is very low.
What's Google's angle? Simple - Google will make pretty much any bet it can right now to try and commoditize bandwidth (aka vaporize the market power of telcos).
This is one such bet - Fon, if succesful, pretty obviously shifts market power to consumers at the edge, decays the core, essentially by rebalancing the value equation - making bandwidth/dollar more efficient.
Social Finance, Round Two
Prosper gets a round from Benchmark and Omidyar Network.
Prosper is a social finance play, similar to Zopa. I think both are cool; I have been a big fan of Zopa since it launched.
What's perhaps most interesting about this is that Benchmark has funded both Prosper and Zopa. It's unusual to take two bets on the same space. So what's the deal?
I think there are a few points to note:
1) This space isn't crowded. Competitive intensity is (very) low. That's because unlike other 2.0 verticals, finance plays have to think a little more strategically, because people are playing with real money - not just reviews, ratings, and rankings. In other words, there are natural, knowledge-based entry barriers.
2) The potential returns are very significant - the last meaningful innovation that took place in this space was, well, PayPal. And that was a looong time ago. Put another way, this is a vertical that's ripe for disruption; if either Zopa or Prosper are successful, they can begin to reshape the consumer finance value chain (which is worth a great deal more, than say, the local listings value chain).
3) Going out on a bit of a limb, I'd venture that it's probably worth a great deal to Benchmark to learn about how to disrupt this space, because one of the big market gaps in India and China right now is consumer credit - if they can transfer that learning there, their returns will be pretty spectacular indeed.
Monday, February 06, 2006
Disney + Pixar and Jobs at the Edge
John Hagel has a killer analysis of Disney + Pixar, talking a great deal about the shift away from how Media 1.0 must shift away from product/marketing based scale economies to find new dominant strategies in a 2.0 world, as well as about Steve Jobs vs the edge.
I know a lot of you read Bubblegen for whatever (meager) insight I can give you. I highly (highly) recommend you check out John's piece. He was and continues to be one of my biggest influences - I think if you read this piece, you will see why; his ability to focus on and deconstruct the big picture is awesome (it's light years beyond mine - don't miss this piece).
Spam Wars - Micromotives and Macrobehaviour
Lots of talk this weekend about Yahoo + AOL deciding to charge for email.
I made the point years ago that economic solutions to spam would dominate technological solutions. I still think that's the case (for a mini case study, read Calacanis).
Now, I agree 100% that Yahoo and AOL are the two firms most likely to abuse this for their own benefit, in a perfect case of myopia.
But I also think that the shift to incentive-based models which solve spam implicitly has long been inevitable, and will continue. You can't fight economics; and though Danah makes the point that kids are shifting to IM and asynchronous comms, those only make the incentive problem worse - not better.
If anything, in the coming era edge dominance, economic models like - which rely on, to use Schelling's words, micromotives to implicitly let the right kinds of macrobehaviour emerge - are going to be more and more ubiquitous. I think radical innovators will start to see them as opportunities for disruption, rather than threats to openness; they're mechanisms that the edge needs to be able to self-organize and self-regulate.
Friday, February 03, 2006
Thinking Strategically About a Tiered Internet
I haven't talked much about the telco's latest tiered strategy. The reason is that I think it's unfortunately, deeply out of touch with economic reality. Now, to buy my argument, you will have to accept my assumption that bandwidth isn't relatively scarce (even though the US might suck relative to the rest of the universe). If you do accept that assumption, then while telcos may dream of restructuring their industries around artificial scarcity, the truth is that tiered service will help neither their margins nor their strategic position.
There are two reasons. First, consider simple market dynamics. Unless all telcos collude, the dominant strategy will always be price competition. Unless all agree to maintain the roughly the same tier pricing now matter what the outcomes for each, the competitor with the lowest returns will always choose to defect, and compete on price. This, in turn, alters the payoffs for the rest, and price wars will erupt.
Second, even if all telcos do collude, and begin to exert market power over the rest of the value chain, the dominant strategy for downstream players is to simply vertically integrate (by, for example, acquiring a telco). Doing so immediately breaks the statics of collusion, commoditizes bandwidth again, and forces the remaining telcos to shift to price competition.
Given these dynamcis, even if telcos do shift to tiered pricing, while they may see incremental gains from price discrimination, competition will simply continue to force the total margins of a differentiated bundle of services lower, as it has been doing. The reason is straightforward: there is no real or natural scarcity to underpin supernormal returns to price discrimination based strategies for telcos.
Strategically, the most likely outcome is simply for telcos to unbundle: to divest lower-margin, lower-growth businesses (like many fixed-line businesses), and focus on higher-margin, high-growth businesses (like mobile, etc). Who would acquire fixed-line businesses? Economically, those players that can subsidize them with complementary services - like Google.
Is this kind of acquisition possible? Looking at relative market caps and growth rates, it's (barely) within the realm of possibility for a Google to bid for a telco, and well within the realm of possibility for Google to acquire fixed-line assets (like it's slowly been doing).
Thursday, February 02, 2006
Capital vs Labour vs Capital
This is a great article challenging the idea that Craigslist is a good thing:
"...How, exactly, does a San Francisco outfit moving into, say, Burlington, Vt. and threatening to eviscerate the local alternative newspaper, help build community? If he's such an altruist, why does he have to keep expanding like a typical predatory chain? We all get the need for online ads and community sites now; why not let the folks in Burlington (or wherever) build their own? Why not (gasp) help them, instead of using his clout to hurt them?
This isn't such a radical idea. Check out the blog world, where the best political bloggers don't try to corner the market � they encourage others to start their own blogs.
Craig's answer: I only go where people want me."
Why is this so important? It's a massive market gap. It's like a neon sign pointing to what Craiglist is doing wrong.
Plenty of people have talked about how this guy's article is wrong - Craig keeps more money in the community, by freeing capital for higher value uses than classifieds.
Now, I'm not sure I agree with that (how much of that goes to Starbucks or Wal-Mart?) - but forget about that for now.
The point is that Craigslist, like it or not, does erode a community's social capital - and that's a very real kind of capital we have to factor in. And there ain't very much in the US to begin with. That is a huge market gap.
Publishing 2.0 - Death of the Blockbuster Edition
Scott K has a very cool post up, which has some very nice things to say about me.
He quotes this very interesting comment:
"...the majority of people WANT blockbusters. It may seem to media economists that everyone should have a highly sophisticated strategy for consuming media in reconstituted microchunks through smart aggregators, just as they do, but a significant portion of the populace may not want to invest a lot of their precious time figuring out this Media 2.0 environment and will instead stick to a few trusted sources."
Let's count the ways in which this is wrong:
1. Intuitively: do you really want blockbusters? Come on...
2. Existence proof: retursn to blockbusters are, in fact, eroding - just ask Hollywood, or check out the latest graphs up at Chris's Long Tail blog.
3) By definition. A blockbuster is something that has a little bit of everything for everyone. That's because people have vastly different preferences. When distribution is scarce, you have to bundle a little bit of what everyone wants into big blockbusters, which can be marketed over and over again. When distribution is abundant, everyone can have whatever they're willing to pay for.
That's theory, sure. But it's also exactly what we see emerging in the world around us. You can think of the Long Tail - or an exploding number of other examples (blogs, MySpace, search, Zara/H&M, Lego Factory, etc).
4) Now, the point is that of course very few people will invest a great deal of time in individualizing their choices in an exploding consumptionscape. That's exactly the opportunity for all things 2.0 - that's why and how they create very real economic value; or, conversely, why blockbusters create less and less value.
5) Don't misunderstand: this is not to say that professionally produced media will die. In fact, it's strongly complementary with micromedia. What it does mean is that the blockbuster as a strategy for producing and marketing media will die - and we'll see less marketing investment, and more production investment.
I would be willing to bet that Yahoo acquires Last.fm in the next six months or os, as the relative lack of success of Yahoo Music becomes more transparent; I also bet that Yahoo pays a significant premium, as they did with delicious (>50% recent comps).
Note: I have zero insider information, this is not grist for the rumour mill - just idle thinking.
Wednesday, February 01, 2006
Guys, I have got the flu...so, minimal blogging, comment responses to follow after I'm better.
Oh yah, the Goog stuff is waaay overblown today.