Friday, April 08, 2005
Technorati, Bloglines, and The Economics of Feeds
Update: Got a lot of mail about this post. Like I pointed out, these are my notes - not the gospel truth. Original post follows.
Zawodny has a nice post about Intelliseek muscling into the blog intel market that Technorati opened up.
Although I've learned a great deal from it, it's been less than cool for me to watch Technorati's first-mover advantage eroding over the last few months, culminating in the Bloglines acquisition. I thought Technorati was incredibly cool from the day it launched, and I thought it had a very strong advantage.
Examining why, I think, reveals some pretty important strategic lessons about Web 2.0 (at least for me). It's a fascinating story, because it's about two players, (Technorati and Bloglines) with the same capabilities, but very different strategies - which led to very different outcomes. Here are my notes about it (based on some pretty strong assumptions - needless to say, YMMV).
There are three questions that hit me these days when I look at the blog ecosystem. First, why has Technorati stuck with a decayed standard - 'watchlists' - vs feeds? Second, why didn't it extend it's advantage to first-to-scale by locking in a user base? Third, why does Blogger continue to turn into Windows 98? Leaving number 3 aside, here are some thoughts on the first two.
Technorati, and I think most blog aggregators, have misunderstood the strategic landscape created by the economics of feeds. Just like most content aggregators are misunderstanding the economics of micromedia syndication. If I recall correctly, Technorati charged for feeds (beyond a certain minimal number). This was the first error, because the value equation is backwards.
Feeds realize network FX (because they're networked to each other - there are strong complementarities in feeds). Network FX grow exponentially. Think about it this way: on average, users realize greater gains the more feeds they can read. On average, I will get exponentially more value out of a service that offers 100 feeds than I will out of a service that offers 10 feeds.
Now, charging for feeds kills these FX. By limiting free feeds to a small number, users never realized the kind of increasing marginal utility that a large network creates. Put another way, I never used Technorati's Watchlists much because the complementarities offered by 8 feeds were tiny, and so the possible utility I could derive was bounded (Technorati limited to 8 Watchlists if I recall correctly).
So the value is not in owning the feed. That's by definition, because RSS is an open standard, and because, as I've pointed out, feeds realize network FX due to strong complementarities. So monetizing feeds is a dominated strategy.
In fact, the dominant strategy (and value) is in exactly the opposite - in owning the user, by building scale economies (offering the most feeds), creating network FX/increasing marginal utility, and offering this to the user at the lowest relative transaction costs. This locks users in to your solution.
When users read feeds mostly on your real estate, all sorts of wonderful things become possible. Profile-based ads - ads served on your info consumption preferences, as I've recently discussed - are one. But the point is much bigger than this.
The feedreader, I suspect, is becoming the browser 2.0. This is hugely important, but little discussed. Because someone else has control of your browsing,the value equation gets flipped on it's head. Now, the point of this is not that they can do evil with it. If they do evil with it, you'll switch, because evil is costly.
The point is that feed aggregators can do many cool things to create value for all players. That's because they can aggregate (your and others') private information and preferences, and use this to push info that has value to you back into your infostream. For instance, they could extend links to do cooler things, automatically add relevant tags, or offer context scraped and matched from other places, just to name a few possibilities beyond profile-based ads.
In fact, the universe of models opened up by aggregator control of browsing is absolutely massive. The value creation potential is huge. This is why funding of feedreader plays is accelerating (and why Bloglines got acquired). But, like Technorati, if you limit feeds, (or never even offer them properly, like many other would-be competitors) the user has little incentive to choose you, because his marginal utility never increases.
Now, that's the value prop. The second half of the picture is the competitive strategy. The second mistake was that Technorati (and many other blog aggregators) never developed a compelling feedreader, a la Bloglines. Simply aggregating info doesn't create protectable value unless either the info is rival (ie, others can't access it once you have; ie, not based on open standard like RSS), or you throw up imitation barriers - like adding a reader to control real estate. Otherwise, since market entry is costless, hypercommoditization is the natural result (viz the new crop of blog aggregators).
Bloglines, I think, figured this out quickly, went first-to-scale, created a superior content prop, and, critically locked users into it's real estate by creating an easy, hassle-free feedreader. So it not only outcompeted everyone else by understanding the source of value creation - network FX in feeds, and owning the consumer, rather than the feed - but also by understanding how to protect it - by offering a 'free' feedreader (whose price to the user, of course, is switching costs).
The really crucial bit to note is that all of this flows from the same capability Technorati developed first - aggregating and indexing blogs. The difference in outcomes is due to the difference in how this capability was expressed in strategies, products, features, and pricing. Two players, same capability, different strategies - different outcomes.
So what can Technorati (and the rest of the blog aggregators) do now? Clearly, favelets and tags cannot a scalable business make. Blog search on it's own has a bit of a difficult b-model. One option is to get into the ring and compete as feed aggregator - just because Blogline has been acquired, the market is by no means locked up by a dominant design. In fact, no one's even really perfected profile-based ads yet.
I am also a huge fan of micromedia and peer production these days, and I think it would be really cool for Technorati to look at those areas. There are lots of interesting and relevant ways to extend a micromedia search capability into peer production - across media (horizontal), up and down the value chain (vertical), across time vs space, etc.
Note, none of this is to say that Technorati's not a nice acquisition candidate, it's out of the gam, etc. Far from it. It's capability is still clearly valuable - the point is that that value is eroding as the markets shifts and gets closer to a dominant design for micromedia consumption.
OK. I'll end it there - this post was not meant to turn into War and Peace (really). I wanted very much to talk to the Technorati guys about this last fallish, but I just had so much to do, I never got around to it. Anyways, I wish them luck...they have huge opportunities in front of them, and I think they will grab them.
Technorati used to offer 3 free watchlists and then extended the limit to 15. Now you can create an unlimited number of watchlists per account.
Also take a look at plazoo.com. They are new in the market and have a nice feature called myplazoo, which is quite similar to watchlists, but allows you to fill in more than one query at a time. just try, its free.
See my newcomer's perspective on
Great post!! Much to think about and some strong points...tie this up with the AFP/licensing issues and it gets more interesting...
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// kpowerinfinity // 7:39 AM
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