Monday, October 31, 2005
Biggest error I've seen in a looong time (and that's saying something) - nice one.
As I've pointed out, the dominant Media 2.0 strategy is in fact the reverse - to open up your goods at various levels.
Saturday, October 29, 2005
The Wikablog - Main - Home Page
What took you so long?
Thursday, October 27, 2005
Workshops & Seminars
You want to understand how micromedia, peer production, and personal media are atomizing value chains and transforming the media industry.
You want to understand how edge competences and distributed, viral, & strong network economies can lead to a transformative, disruptive competitive advantage, and revolutionize your market.
I can help.
Details at research.bubblegeneration.com.
The Problems With Web 2.0, pt 3 - Success vs Success
OK. I think one of the biggest problems with 2.0 is that success is it's own worst enemy. In a sense, the fact that we have working business models now is a very bad thing. Now, I know this smacks of bubblism (hey, whaddaya expect?!). But hear me out.
Despite a lot of skepticism, it's not that we don't have business models - we do. The market has validated, in fact, at least several different kinds: advertising (Google), transactions (eBay, iTunes), subscriptions (WSJ, NYTSelect..just kidding), metered use (Skype).
I think the problem is the opposite: the success of these models is limiting everyone's collective vision, by letting them largely ignore to the potential of new ones.
What's different about Web 2.0 is that lightweight technologies and convergence on multiple levels create huge new opportunities for hugely cool new business models.
One family is models that redistribute revenues to peers, align value creation with capture, blah, blah. Basically, models make things cooler by making them fairer (aka, more efficient): returns for the people who create value by created shared meanings for goods, not just suits who plot strategies in boardrooms.
Try this on for size:
"...Each time a clip is downloaded by a 3 customer the performer gets paid 1p. With a potential audience of 3.2 million, the most popular clips from contributors could make thousands of pounds worth of cash."
Now - for all the growing buzz surrounding peer production business models at USV Sessions, all over the blogosphere, in boardrooms, on Sand Hill Rd, etc - that's the peer production business model. Redistributing revenues to peers. Rewarding people for the act of sharing information, creating meaning, and adding value.
Let me reemphasize this: that's the model. That's the economic innovation that will fuel the creation of more and higher-quality communities. I've been talking about this since 2003, because the radical misalignment of media value capture from value creation was the one thing that made the least sense economically, and was just asking for disruption.
In fact, we've been watching it happen since then - AdSense is a(n increasingly lame) example; OhMyNews is a much better one. So are the multitude of models that are springing up to reward people for sharing music, etc.
But here's the thing. This model is slipping under the radar. I think that's pretty interesting; that people are asking more and more often 'where's the peer production business model?' - but in fact are missing the forest for the trees.
Why is this? If you ask me, based on numerous conversations with geeks (entrepreneurs), suits (VCs), droids (uh, everyone else), it's largely because we have the reference points listed above, and it's hard to ignore them and really focus on something new.
Let me extrapolate dangerously for a sec. The point I want to make is that I see an eagerness from the geeks and suits to play with 2.0 technologies and see what cool new things they can make. But I don't see an eagerness to play with 2.0 models and see how they can really disrupt old and obsolete economics.
It's almost as if the success of the four or five models listed above have blinded geeks, suits, and droids alike to the potential for entirely, radically new models.
In a sense, this is rational, and not unexpected - success breeds imitation. But I think the reason why Web + Media 2.0 is cool is not just the technology, but the economics behind it. They're disruptive - but it's up to this community to be a little more aggressive in experimenting with them.
That's why I wanted to share the 3 blurb - I think it neatly illustrates the fact that right now, the Valley's playing with new technologies, but largely ignoring the potential of new models.
Nick Carr is (totally) wrong when he talks about the 'cult of the amateur'. In fact, as I've shown, the anomaly is the mass media industry of the 20 century, whose crutch has been artificial scarcity enforced by regulation, marketing economies, and no small amount of collusion (viz, payola, etc).
But if the 2.0 crowd really wants to help accelerate this implosion, it's got to focus as much or more on economic innovation - new business models - as it does on technological innovation.
Wednesday, October 26, 2005
Greatest Comment Ever
Viz, me getting qwned by Google:
"...I guess it goes to show how cheap and obvious so many of these ideas are. Maybe there's a market for another photo-sharing service!?"
I have no words for this level of awesomeness. She just insulted everyone doing anything cool, all at the same time.
Tuesday, October 25, 2005
I just got qwned by Google. Base is almost exactly what I have been working on for the last few weeks with a few buddies.
In fact, I just talked to a VC here who told me the idea sucked (oh, the irony).
Goddammnit, I hate it when this happens.
Memeorandum - Miniprofile & Edge Competences Case Study
Like many of you, I find myself using the new Memeorandum more and more. It's killer - an evolution of blogdex using simple threading algorithms whose time is long overdue.
Why do we all use it so much? Because it is one of the most efficient attention allocators on the market - it is one of the first true media reconstructors. It can rapidly allocate your attention to relevant mass and micromedia almost frictionlessly.
But the real insight I would like to drive is that Memeorandum is a near perfect case study in leveraging edge competences. Media 2.0 is edge competences; they are the building blocks for dominant 2.0 strategies. Two edge competences I talk about frequently to media heads are plasticity and liquidity.
Let me explain intuitively what they mean, using Memeorandum to help. Memeorandum leverages liquidity to allocate attention to plastic microchunks of media.
That is, because we can trade info about the media we're consuming - in this case, links and blog posts - Memeorandum can rank it. It's liquid and tradable, and Memeorandum exploits this to make a market out of it.
At the same time, because the media we're consuming is plastic - it can be unbundled from distribution into chunks into microchunks (http into blogs into posts, etc) - it can be rebundled, into, essentially, Memeorandum Page A1.
Together, plasticity and liquidity let Memeorandum offer you a hugely superior value proposition - a hugely greater return on attention than almost anywhere else on the www, if what you need is a high-level view of what's happening now.
Now, the question I'd like to ask is simple: why are so many incumbents failing to see this simple picture? OK, sure, since I've worked with a few, I have some answers. But it's the question that's important.
For example, the cost of building a reconstructor like Memeorandum is trivial if you are an incumbent. So why did the NYT choose to close off it's content with NYTSelect rather than internalize gains from allocating attention to the rest of the market by building a reconstructor? In which case is the return greater, even in a first-order situation (ie, with no consequences)?
I think pretty clearly, the return is far greater in the latter case, leveraging edge competences to build a reconstructor - the costs are trivial, and the potential benefits huge; you immediately begin to internalize your competitors' returns on attention. Clearly, NYTSelect can't match these economics.
Why do even erstwhile 2.0 incumbents like Yahoo choose to ignore attention allocation as the source of Media 2.0 value? I mean, it's not exactly a big deal for Yahoo to try and build a reconstructor like Memeorandum. Or is it?
I think it's difficult because, truth be told, Yahoo has not really understood how to play this game - they have no edge competences, and are not busy building any. They're more interested in, for some reason, building scope and scale economies (ie, expanding 'services' and building 'inventory'). But these economies fail in a 2.0 world, unless you can allocate attention efficiently to them.
Why didn't Technorati build a Memeorandum? After all, they were first out of the gate by a looong way. They intuitively understood the huge market gap for efficient attention allocation long before almost anyone else in the world. Or did they?
I think they chose to forgo building edge competences, which require a long term investment, in favor of shorter term gains (viz, the enterprise strategy, etc).
The point I'm trying to make is twofold.
First, there is still despite all the interest and excitement my and others' work on attention economics has raised, a huuuuge market gap for reconstructors to efficently allocate attention.
Second, to do so - really do so - requires that you leverage edge competences to provide a superior return on attenton. Not close your goods (NYT), derive 1.0 style scale/scope economies (Yahoo), or lose the focus of this intent (Technorati). I can cite other examples - choosing technology over attention economics (del.icio.us), etc, but I think that's enough for now :)
Carr vs Econ
Carr's Amorality piece seems to be getting more and more attention, viz Jarvis, TechDirt, and O'Reilly.
Guys, like I pointed out last week, Carr's argument is internally inconsistent. He contradicts himself in basic econ terms, and so his argument can't hold. It's a wash, so any debate is really superfluous.
Saturday, October 22, 2005
The Great Disruptive Web 2.0 Search
Richard Macmanus has kicked off a thread trying to find some really disruptive 2.0 plays based, in part, on my comments last week. This is a cool idea.
Let me jump into the conversation, which I've largely missed so far because I've been pretty busy this week.
We've got to begin by defining disruptive. I am going to set the bar really low and define a disruptive startup as one that meets two of the three following features (YMMV):
1) Is it not simply a product range extension for existing incumbents? If it is, it's more than likely that it's not going to be disruptive - it's going to be an incremental innoviation. I think SproutIt is pretty cool, but does it meet this criterion?
2) Can it scale to more than 25m users (in 2-3ish years)? Current Web 2.0 penetration is peanuts; 1m users/readers/subs is nothing in broader media terms. Example: I like the idea of urbnforage a lot, but does it meet this criterion?
3) Can it achieve revenues/user of at least $.50 (in 2-3ish years)? That doesn't sound like a lot, but it is. A startup will have to present a (really) disruptive business model - on the order of AdSense or eBay - to create this kind of value.
You get the idea. I think there is a very (very) short list of current plays that meet these criteria.
The more interesting question is why. Why is the list so short? 2.0 technologies make it pretty easy to disrupt markets like media.
My answer, as outlined previously, is that the Valley really doesn't have a great understanding of how media works, so it's having a hard time defining what Media 2.0 should look like.
Understanding media is about understanding consumer behavior and dynamics. Why are things cool? Why do some brands suck, and others not? Etc, etc. This gap is not surprising - the Valley is famous for its rejection of consumer culture.
So, to answer the question, why are there so few disruptive 2.0 plays, I don't see, pretty simply, that the geeks have this understanding - which is why most 2.0 plays are default-targeted, like a broken record, to the same somewhat smarmy 20somethings (uh, like me).
To make this concrete, think about how long it's taking disruptive, radical innovators like Technorati and del.icio.us to meet the criteria above.
Clearly, the technologies they've built easily have the potential to meet the above targets - but it's the search for strategy, marketing, branding; that is, understanding where and how the value they've created fits into the larger media landscape - that's held them back from realizing this potential.
Trust & Returns to Scale
Jarvis has a very nice post about trust, which is something that was discussed at USV quite a bit.
I tried to explain why trust was important in the economics of attention, but I don't think I did a great job.
Jarvis gets it intuitively, but I think it's important to break down the economics that make it so important (aka, what I call connected consumption), because it's easy to explain to that way.
I'm going to write more about this in coming days, but for now, let me state the argument as simply as possible.
1) Trust is important because you can't get people to share if they don't trust you.
2) If we are both members of the same network, sharing (expectation and preference info) is important not just because it's a hyperefficient way to leverage other people's tastes to efficiently allocate your attention (a direct network effect); but also because I am always better off if you share your information (an indirect network effect, eg, an advertising effect which lowers the price of network usage for me, for example).
3) That is, trust (connected consumption, etc) is what allows returns to scale nonlinearly with network size.
4) I know, I know, you think exponential returns (aka Reed's law) are (really) a lot of bs. I think the numbers (250kb ppt) present some pretty compelling evidence otherwise.
5) See 3.
Just finished up USV Sessions. It was great - thanks to Fred, Brad, and Charlie for having me over. I met a bunch of cool people and had many killer discussions.
Thoughts + feedback tomorrow, as well as comment responses, etc.
Monday, October 17, 2005
The Problems With Web 2.0, Pt 2: Geeks (New) vs Geeks (Old)
OK. While we're on the subject, another big problem with Web 2.0 is that it's industry economics are those of natural monopoly.
This is in itself not a bad thing; but it becomes one because as Web 2.0 becomes the consumer interface to Media 2.0. That's because mass media industries are often natural monopolies, sometimes legislated to become oligopolies (radio, newspapers, tv, etc). What happens in natural monopolies? Well, innovation diminishes rapidly, in both rate and kind.
Why is this a problem? Well, to an extent, it's already becoming one. All across the Valley, entrepreneurs are setting up shop...with the hope of getting acquired by Yahoo, Google, eBay, or FIM (in roughly that order).
I think these are kind of the wrong incentives for entrepreneurs. What made the Valley cool was it's refusal to think small, and do truly disruptive things. But getting a small change acquisition to essentially extend a Yahoo/Google/etc product line sets incentives for incremental, not disruptive, innovations and models.
Make no mistake - the incumbents have a far less powerful incentive to be truly disruptive than new plays do, if only because it will probably cost them a nice hit to, at least, their top lines. This is why most 2.0 acquisitions have not exactly resulted in post-deal fireworks.
At the same time, as it becomes more and more difficult to compete with the incumbents on any meaningful dimension, and assuming the IPO window stays largely closed, new plays become narrower and narrower in their strategic focus.
In fact, it's already happening: many of the latest plays which we all think are extremely cool are also thinking very small, relative to the bubble, the Valley in the 80s, etc. And because there's not a lot of senior guys (VCs, etc) in the Valley with media industry experience, these resources may never be fully capitalized upon.
What's the answer? I don't think there are any easy ones, at least in this case...
The Problems With Web 2.0, pt 1: Geeks vs Droids
Let's think for a sec about how Web 2.0 is vastly different in terms of marketing and branding than 1.0. Now, in 05, identity is about minimalism and being largely free of corporate hype, unlike during the bubble, when huge marketing budgets pushed big graphics and bigger marketing strategies.
Minimalism and lots of white space a la Google and Flickr (this, after all, was one of the primary rationales for the acq by Yahoo) are great at killing transaction costs and making interaction more efficient - they do create very real economic value.
But what Web 2.0 is not great at is, well, reaching out to non-geeks. Right now, hitting 1m users is a Big Deal. But if Web 2.0 really wants to transition to Media 2.0, this hurdle has to be crossed - because in media terms, 1m users is peanuts. Think of the reach of broadcast, cable, and radio networks.
Most Web 2.0 plays that you, me and the usual suspects gush about are pretty geeky. They're distinctly not services that the mass market feels comfortable using. Now, most of us, are, to some degree, culture snobs, so this is kind of secretly cool.
But make no mistake: it's a pretty big growth barrier. So how do we cross this barrier? Clearly, not through 1.0 style big marketing.
I think what smart players will do is look to drive growth through alliances which demonstrate viscerally to the mass market the very real power of a 2.0 value prop based on liquidity, plasticity, and networked users.
A textbook example lately is Technorati's Washington Post deal (which is not strictly marketing, but that's my point). It's killer. If you put other 2.0 services in this context (Memeorandum, del.icio.us, Jeteye, Indeed, etc, etc) for a sec, I think you'll see that there's huge room for 2.0 players to kick off similarly cool deals.
In fact, I'll go further, and venture that one of the reasons plays which are a lil bit older (SecondLife, LinkedIn, Friendster, etc) have plateaued is because of exactly this growth barrier.
Arthur C Clarke
Check out this Beeb show interviewing Arthur C Clarke.
He's one of my heroes. I grew up reading his books, had my mind blown several times, then he became kind of a family friend. Even at 90ish - he is beyond awesome, as incredibly sharp as you would expect, well, Arthur C Clarke to be.
Every time I think of him, I feel massively inspired - so I thought I would share this link with you guys, maybe you will too.
Next Big Things - Paranoia
Down with the flu this weekend, too brain-dead to do anything cool, so I ended up reading a copy of (believe it or not) "Left Behind" lying around my cousin's place. You know, the Rapture book.
Mind-bendingly bizarre (uhh..no offense if you believe in the whole Rapture sequence) - I think it's absolutely vital as a cultural Rosetta Stone for America on the cusp of the 21st century.
I don't think it takes a genius to hypothesize that the reason this fairly bizarre stuff catches in on the States is because of Pressure (capital P).
I've lived all over the world. Life in the States is incredibly stressful, relative to anywhere else.
That's because unless you've really made it, you're always just a few months away from the end of the line - especially in a society with zero social protection for the poor and less fortunate. Your entire life can be undone in the space of weeks, no matter how 'hard' you work.
There is nowhere else in the world like this - no, not even the 3rd world. I've lived there too, and at least there, social institution like extended families are there to catch people when they fall. People are not nearly as stressed out.
So is it really a big surprise that people choose paranoia over reason? I don't think so; under this kind of selection pressure, reason has very little adaptive value. So what if you can explain something? It won't help you - but being paranoid will; it can provide a kind of adaptive foresight that reason is hard pressed to match in terms of efficiency.
I think paranoia is emerging as a consumer macrotrend - a primary driver of consumption for the mass market. Right now, it's mostly manifested through the hypergrowth of the religious media segments; but something to look out for in other segments as well.
Nick Carr vs Peer Production
"...Wikipedia might be a pale shadow of the Britannica, but because it's created by amateurs rather than professionals, it's free. And free trumps quality all the time."
OK. This argument is fundamentally, and I think fatally, flawed in terms of its basic economics. Here's why:
Carr spends the first half of this piece telling us that peers can only produce low quality goods. Then he tells us that 'free trumps quality'.
These two statements are contradictory - they're flawed premises which conflate two central econ concepts, and so they render Carr's argument pretty much invalid, IMHO.
Let me put it really simply. You can either argue that peers produce relatively high value goods at cheap prices, in which case they are substitutes for traditional goods. Or you can argue that peers produce realtively low value goods at cheap prices, in which case thy're not.
But Carr wants to have it both ways. This is because he conflates value and quality. So his argument is a wash; it's trivial, because its two premises are contradictory. It doesn't hold up, and you really shouldn't take it too seriously.
Let me get a little more technical. What Carr means to say is that holding 'quality' proportional (ie, >unit elasticity), free (aka zero cost) trumps not free (aka > zero cost).
In other words, if quality/price, or what we should really call value, is held constant, we will always choose the cheaper good.
This is obvious; of course we will - it's one of the fundamental concepts of microeconomics, and it's what lets us build demand curves.
But by conflating 'quality' with value, note that Carr contradicts his first premise, which is that peer production can only produce low quality goods.
In fact, if we follow Carr's argument to its logical conclusion, we see that he has in fact misunderstood his own argument (how cool is that!).
If peer communities can only produce low quality goods, and this drop in quality quality is less than the proportional drop in price, people will never choose peer produced goods, and the demand curve will never shift inwards.
So the only way this argument holds is if Carr contradicts himself - if demand is inelastic for every good in the universe; that is, if peer produced goods are relatively high value (quality, in Carr's terms) goods.
And this, dear readers, is exactly the scenario that smart venture money is backing (Zazzle, Squidoo, etc), and is exactly why traditional consumer-facing industries (media, fmcg, etc) are getting kinda scared.
Friday, October 14, 2005
Next Big Things
Forget about Ning, the future is Kiva: coordination economies, microchunking into new domains (in this case, capital formation), and disrupting markets and regulatory structures in the process. Seriously, unspeakably, awesome.
Thursday, October 13, 2005
AOL + Google
Hate to say it, but another kind of yawn - all this really tells us that screen space is value at 1-3x revenues, and that Google wants to own as much of it as possible (like we don't already know)
The triple-play. Yawn.
Tagging vs The Social
Now that the big boys have quietly (lamely) co-opted tagging, and Ning has hypercomoditized it, (all with nary a microchunk of innovation in sight), let's ask - what's next?
Tagging is a big component of how Media 2.0 plays mediate new kinds of sociality. What's after tagging? Lots of people are looking (viz, tagyu), but I don't think there are any clearcut answers. Oh wait, actually I do, I just can't tell you :) !!
Video iPod and No Steve Don't Do It
Some points to note:
1) It opens up an entirely new revenue stream for content guys to monetize videos. Obivously. The trick is that this value chain doesn't exist; watching it emerge will be cool, there will be lots of opportunities for cool things to happen...
2) But not enough of them. Just like Nokia with the Ngage, Apple is (really) pioneering a new market here. It could define entirely, radically, new economics for it. Replicating the old ones is an error, just like it was for Nokia, because...
3) It has to keep exerting massive innovation pressure like this (all by itself), just to be able to deal with the somewhat insane music (etc) industry. Innovation pressure is extremely costly, mostly because it's so risky.
4) What could Apple do? Well, to me, here is how I would redefine industry economics: Atomize the value chains of the suppliers who are trying to exert market power over you (viz, the music/film industries). Open the platform up to everyone, not just big or even 'indie' media.
As discussed ad nauseum before.
Discussion with teens about how they use the Net as a huge substitute for mass media.
Wednesday, October 12, 2005
Bubblegen is You
Hi folks, everyone that donates/donated >$5 to my laptop fund gets an option to have me write a post on the topic of their choice.
If you'd like to exercise your option, ping me, or add a comment here, and I'll get to them as time permits in the next few days.
Also, a lot of people that have been contributing are guys that I suspect are not exactly loaded themselves. This is very nice adverse selection - please don't donate unless you can (seriously) afford it and you (seriously) enjoy bubblegen.
Video iPod arrives.
SEO Guys Attack (Starrring Bubblegen)
Here's a rather nasty trackback I just pulled down viz my Irrational Exuberance 2.0 post:
"...Wow that was an awesome read about Web 2.0 valuation's
Too bad its all conjecture and assumptions.
Notice the heavy use of things like "-ish" and "~", no citations to factual data, no reasonable explanation of why he assumes anything."
Etc. These guys actually picked on me for being poor (amazing).
Dear SEO guys, (obviously) all my numbers are simply in the public domain, all of my assumptions are clearly stated and justified, all of the valuation techniques I use are standard techniques I've used during my MBA and my (numerous) roles in finance, blah, blah, blah.
Academe vs Micromedia
What a surprise, crusty old academics don't like blogs. Most of them don't even like email!!
NYTSelect vs the Blogosphere
Not looking good for NYTSelect.
Flock - Miniprofile
Interesting discussion in which the Flock model is taken to task. Bart (aka Mr Flock) responds:
"...There is a very straightforward business model for a web browser that doesn't sell out the user experience: that simple search box in the upper right corner. Mozilla folks have talked publicly about their search monetization deals, a simple Technorati search will show you rumors about how much money is involved, and Opera just went free thanks to their new search deal with Google."
Let's not give the whole game away (!). I think Flock is certainly cool, and the business model is viable. My concern is really traction. What's the mass market value prop?
As my post below talks about, if Web 2.0 plays want to transition to Media 2.0, they have to increase their valuations by orders of magnitude. That means they have to dramatically increase either penetration or revenues.
Now certainly, Flock can't jack up revenues that much, so it's penetration we're after. Skype, at ~ 50m users, is a nice example - you can think of it as approaching (in fact, surpassing) blockbuster film attendance.
I can see why the geeks of the world love it; they derive serious network benefits from being connected to other geeks, and Flock makes these benefits many to many, or exponential. But I'm not so sure about people in India, China, or Montana :) .
But I think there's a bigger reason I'm a bit skeptical. What is Flock, really? It's an integrated 2.0 model, just like I recommend. It's horizontally integrating across the range of 2.0 services, and vertically integrating across the stages necessary to deliver them. Think GM, it's not a bad analogy. So why am I skeptical?
Now, the rationale for bundlers/centralizers, like Flock, is not just that they will realize scale/scope economies. It's also that these economies will be greater than any specialization economies individual competitors derive.
Now, let's go back to GM for a sec. What happened? Well, the rise of more efficient Japanese production techniques eventually (massively) outwieghed any scale/scope economies GM realized.
In my analogy, this is basically like saying that specializers - Technorati, YouTube, etc - innovate more and faster. This is the big problem I see for Flock. Sure, integration offers huge benefits. But specializers are often able to, well, specialize, and offer consumers a hugely more attractive value prop.If this is the case, Flock is going to find driving mass-market adoption difficult.
Another point that's been bugging me is this. Disruptive techs are usually worse on some dimensions/features/etc and radically better on others. I'm not sure I see this in Flock - especially not the worse part; it seems more incremental to me. If it's incremental, can it really offer a strong enough value prop to entice people to switch?
YouTube - Miniprofile, and Media 2.0 Market Evolution
OK, by now you've read Om and you know that YouTube's gotten funded at a $20m valuation.
This is interesting. I think people are thinking about this the wrong way around. Sure it's a bet, but that's what venture investors do. The question is: can YouTube realistically be valued at $200m within the next few years?
How should we think about this? Well let's begin by noting that this works out to revenues of ~ $20m, if we use a rough average of current Net EV multiples (Yahoo, eBay, etc).
Does this seem doable? Let me give you some context. Weblogsinc, ~ $1m; Facebook, ~ $2-3m, Skype ~ $60-$70m.
Let me put it another way. If YouTube achieves 1m users - webloginc style traction - that's $20/user in revenues necessary to achieve a nice return. That's a pretty ambitious number. But if it achieves Skype style traction, revenues/user necessary to achieve a nice return drop to less than $1.
Now, if video can be monetized with contextual/profile-based/etc ads, because it's a richer medium, given current text contextual ad rates, achieving this level of revenues/user - less than $1 - is a no-brainer.
So this valuation hinges on YouTube becoming one of the first big Media 2.0 plays, in the sense that it achieves a fairly wide penetration. Is it an expensive valuation? Maybe a little bit. But the thinking behind it is pretty solid, as I hope I've shown; the bigger point is that the bet is really kind of all or nothing.
What I do question about this is whether or not it's a bit early to have this kind of confidence in YouTube; someone will qwn this market, but will it be YouTube? It's traction is accelerating, but I don't think there's a clear signal yet.
Profiles - Squidoo (Social Search)
Entry into the social search space is accelerating. Squidoo reminds me a lot of Jeteye. The basic model appears to be very similar (Jeteye - 'Jetpaks'; Squidoo - 'Lenses'), so I think I'll refer you to my Jeteye profile.
What's most interesting about this space, actually, is that there's not more interest. Wondir was acquired (not a huge acquisition, but some validation, nonetheless) in pretty short order - IMHO, guys like Squidoo and Jeteye are not fully leveraging peer production (but Wondir is, because their model is fully decentralized).
That said, it's important to note that Godin's behind Squidoo, which means the concept is probably going to evolve seriously over the next few months.
Nice post piece on blogging as therapy. Interesting; I've talked a lot about why people produce micromedia, but this is something I haven't considered so much.
Backed Up and Thanks
Hi guys, thanks for all the comments, emails and donations to the laptop fund. I'm totally backed up tonight trying to schedule things for the next 2 weeks or so, so email/comment responses in the morning...hope this is cool.
If you'd like to donate a few bucks, you can do so via paypal to umairhaque (at) gmail. Thanks in advance if you do :)
Tuesday, October 11, 2005
Me vs The World and the Problems with Odlyzko's Law
So apparently a major financial institution has sent out a note about eBay and Skype using network econ to do some basic valuation. Funnily enough, these guys also show up on my referrer logs.
1) Look, I like the fact that my ideas have an impact. But *please*, at least credit me. I don't wanna sound whingey, but I can't even afford a new laptop. I'm just a young guy trying to make it. Don't rip me off; my ideas are my currency.
Next time, I'm going to start naming and shaming people.
2) They didn't get it right. Here's why:
Odlyzko's law uses a log term to dilute the value of possible network connections. There's a simple reason why this is not great economics. The value of nodes of a network is expected value. It's contingent; it's not today's value.
So clearly, I may not derive any value now from the Germans that were randomly calling me on Skype last summer; but I may in the future. That value has to be factored in; because it is, with some probability greater than zero, expected.
So how do we assign probabilities to these expected values? Odlyzko law essentially argues that they're assigned logarithmically. You could also argue that they're assigned linearly, whatever.
But the point to note is that in real-world valuation sitatuations, these probabilities are already assigned at something less than 1 in the usual venture/M&A discount rates that heavily discount the future value of resources like networks. So if you use Odlyzko's law, you're essentially discounting the value of a network twice.
I think it's far more accurate to assume the full value of a network based on it's ideal economics, just like we do with other resources in valuation, and then discount it at a rate that reflects the opportunity cost of capital.
These 'laws' are much better suited to analyze returns to scale - not to do valuation.
The Bubblegen Laptop Fund
Guys, disaster has struck. I dropped my laptop and it broke. I need a new one to get anything done, but I'm kind of broke.
So I'm launching a fund with a target of $1k. That's less than fifty cents from each of my regular readers, or $100 from 10 of you. If you can contribute (PayPal), I appreciate it.
Web 2.0 vs America
"...Start talking with people in Montana about Skype, for example, and their eyes glaze over, he said."
Link. Funny, start talking with people in say, India, China, Burma, Sri Lanka, Pakistan, Egypt, Poland, Israel, Spain, Italy, Lebanon, or Nepal about Skype, like I have, and they'll tell you how cool they think it is.
Of course, most of those guys are also not busy arguing whether the earth got created 4000 or 4 billion years ago.
All Your Irrational Exuberance Are Belong To Us, Pt 2
The Stalwart thinks that current media/web 2.0 valuations are approaching bubble-era irrationality, factoring in unrealistic growth expectations, viz eBay + Skype.
His is one post in a growing tide of buzz about Web 2.0 valuations approaching irrationality lately. Let me take a few minutes to try and debunk this line of thought. I think this is emphatically not the case - being skeptical is cool; but what's fun about media/web 2.0 is that we're creating and capturing very real value.
OK. Let's do a bit of basic valuation, beginning with media 1.0. The market values newspaper readers at ~ $850ish, and cable subcribers at about $2-3k. Price/sales (or EV/Rev, which is prolly a bit more accurate) multiples are on the order of ~ 1.5-4x. That gives us a bit of context.
Now, eBay's current value/user is ~ $600ish. Is this in itself irrational? Not really; the context above tells us so, and it also equates to an EV multiple of about 14, which is high, but not out-of-line for a growth play with strong margins (30%+) and strong growth prospects in the media (or almost any) sector.
OK. So eBay's valuation isn't irrational. Is the price it bought Skype at irrational? It bought Skype at a value of between $50-$100/user (depending on your assumptions; not so important).
So in a naive scenario, the question is: can Skype really add $50-100 of lifetime future cashflows per user (or PV, if ya like) to eBay?
This is the pessimists' (fairly unrealistic) view, which assumes no growth in the user base.
Now, let's chalk out another, more realistic scenario. Let's assume Skype's user base doubles in the next 5-7 years. In fact, this is an assumption we've already accepted as rational, which is implicit in eBay's EV multiple of 14. In this scenario, the question becomes: can Skype add $25-50 of future per user to eBay?
In scenario 1, the total value added by Skype is between 8-16% of eBay's current value/user; in scenario 2, the total value added is between 4-8%.
To think about this, let's look at Skype's current revenues/user. They work out to about between $1.5-3. Now, let's multiply this revenue/user by eBay's EV/revenue multiple of 14. The result is a value/user of between $20 and $42. Note (I can't stress this enough), this is real-world value at rational multiples.
Now, this number - Skype's current revenue/user at eBay's EV/revenue multiple, to grab an implied value/user for Skype - is already awfully close to the amount of value eBay has to realize from Skype in scenario two, where the user base doubles.
Basically, what I'm pointing out is that to make this acquisition work, even if we assume zero synergy benefit, Skype has to either double it's user base, or it has to double it's revenues/user. This is not exactly a huge growth target for a play on the trajectory of Skype.
For example, it can achieve this by, for example, a relatively sane growth rate of 10% over the next 5-7 years; in fact, this assumption is already embedded in eBay's current valuation, as I've already pointed out.
Now, if we go further, and assume some marginal synergy benefits between eBay and Skype - not entirely unrealistic - the conclusion we reach is that for this deal to work, Skype has to less than double it's revenues or user base.
Lemme make this clear: the doubling is an upper bound. That's the pessimists' worst-case scenario. Any better case scenario means, in fact, eBay can break even with Skype making less than 2x what it does now.
So, I think this makes it pretty clear even the pessimists' worst-case scenario is fairly rational, and nowhere (repeat: nowhere) do we need to resort to bubble-era valuation trixxx (viz, massive growth rates, etc).
Hopefully, this is a useful practical demonstration and object lesson in why Media + Web 2.0 is becoming interesting to so many people beyond the usual suspects: this time around, the value that's being created actually does exist outside of spreadsheets :)
Peerconomy/Micromedia Market Penetration
"...The extent of the personal publishing revolution has been revealed by a Guardian/ICM poll showing that a third of all young people online have launched their own blog or website."
And this is in technophobic Europe. Wow, these are stunning numbers, even if you discount them by 50%.
This adds an interesting wrinkle to the Web 2.0 investment thesis - that it's only Web 2.0 techs which can make media plastic, liquid...and interactive/personal/two-way. Not sure what to call this yet...something worth thinking about.
Citizen models. File under peer production goes meta; Wikipedia > Threadless > Zazzle > Ning > Galliano (!)
Seriously, this is a big datapoint. The fashion world and guys like Galliano are about as far away from the geeky world of Wikipedia and Ning as you can get.
Hi folks, I'm currently in the Bay Area before I head off to Union Square Ventures Sessions next week. If you'd like to grab a coffee, ping me.
Open-Source vs Open-Source
Doc asks: is there a shortage of big open-source thinkers?
I don't think so. I think the big problem is boundaries. For example, I think my work on peer production is pretty original and pretty cool. But hardcore geeks often take one look at my MBA, and tell me I'm (just) a beancounter. OTOH, hardcore beancounters often tell me the opposite; that my work isn't corporate enough for them, because it's not totally focused on $$$.
There's been lots of cool cross-disciplinary, cutting-edge work on open-source (viz, Tirole's papers). But how many geeks even know about it? And vice versa for the beancounters.
Monday, October 10, 2005
Yahoo vs Google vs Yawn
Q: Why did Yahoo just launch podcasting search?
A: Because Google Reader threatens to qwn Yahoo's entire nascent micromedia initiatives; try it's Flash-based podcasting support to see what I mean.
Both are nice examples of the complementarity between mass and micromedia - you can, I think, for the first time begin to see how Web 2.0 techs lay the groundwork for an antirely new media ecosystem which is relevant to the mass market (ie, beyond geeks).
Q: Why am I yawning?
A: Because what the AV micromedia market really needs is a reconstructor. That is, a service that lets you microchunk podcasts, vlogs, etc. I've discussed this to death in the Valley, but no one seems to be stepping up to the plate...
Why Web 2.0 Is (Really) Important - Special Beancounters Edition
Many of my classmates from b-school are puzzled at my interest in Web 2.0. They see it as a tiny, small-change market, relative to the markets and industries they've specialized in. $20-50 million acquisitions are not exactly earth-shattering events.
Now, that's true - for now. But (and I'm sure most of you know this, but let's recap), the reason Web 2.0 is important is in it's future value.
The fundamental hypothesis of most of the people backing Web 2.0 is that it's special because it's going to be the consumer interface to many 2.0 markets. Media is one example that I've analyzed to death. Another one in whch interest is accelerating is Applications (viz, Zimbra, Google Office, etc).
Why is this? Fundamentally, it's because Web 2.0 techs make info liquid and plastic. They let it be be frictionlessly unbundled and rebundled. That, in turn, enables convergence on multiple levels.
This is why the consumer value prop is so strong - Web 2.0 is not just the infrastructure for the digital home, but also for the digital lifestyle (viz, Media 2.0 + mobility), digital productivity (Apps 2.0), peer production (Consumer Goods 2.0, etc).
Now, note also that in each of these markets, the Web 2.0 layer is the layer that the consumer connects to - it's the most strategically important segment of the value chain.
So, yeah - right now, Web 2.0 is a small-change market. My market analysis tells us that the current market size is currently between 3-5% of the media industry - not huge by any stretch of imagination.
But the potential for Web 2.0 techs to grab a nice slice of each of the markets discussed above is very real - on the order of 15-20% (to begin with). Now, throw the value of market power into the mix, and all that adds up to a fair amount of $$$. I won't run the numbers here totally, but it's on the order of hundreds of billions.
Saturday, October 08, 2005
All Your Irrational Exuberance Are Belong To Us
A note on my latest ppt, I've just finally had the time to trawl through some of the discussion surrounding it.
It's distinctly not meant to be a justification for assumptions or projections of unbounded poly/exponential/combinatorial growth. I should have explained this more carefully when I released it.
In fact, it's the opposite; it's meant to be a tool you can use to evaluate whether your portfolio companies or businesses are generating 2.0 economies along all three dimensions (distributed, viral, network) with a fair degree of quantitative rigor.
That is to say, growth assumptions for most 2.0 plays will (should) already have these economies factored in and discounted, in the usual venture/M&A scenarios; you can then evaluate performance on all three dimensions, and have a fairly good idea of how returns are scaling (or not).
Unfortunately, I think a fair number of people got this backwards, and think my ppt essentially an argument for projecting unbounded growth - it's not, trawl the archives, and you'll see I've argued against this many (many) times.
More on this later.
Irrational Exuberance 2.0 (Or Not)
Got the following comment:
"...The problem with your analysis is that none of these valuations are "validated" until these buyouts (Skype, Weblogsince...) are shown to have been profitable. The fact that that a weakened AOL jumps into blog-content with a small-change investment doesn't mean anything yet, and we won't know what it means until a few years from now when we see what kind of ROI they got. Same with Skype.
This isn't the first time you've talked about validation this way, but it seems inappopriate."
Thanks for the comment. Whether intentional or not, this is the standard Media 1.0 take on Media 2.0 market entry. Partly, it's because many Media 1.0 businesses treat acquisitions as almost purely financial (viz, films). But in a 2.0 world, it's flawed for many reasons, not least of which it's first-order thinking. Some points to note.
1) Skype, weblogsinc (etc) are in fact profitable, from what I understand.
2) To drive the point home, let's think about Flickr. If Flickr's margin never increased beyond 1%, but the acq still helped Yahoo build a huge competence in communities (ie, boosted margins across businesses/products by increasing returns to scale for network economies), would the benefits outweigh the costs? I think, pretty clearly yes. Can you quantify this? Sure, I won't go into it here, but you could check out my latest ppt for some examples.
The point is that the commenter is treating these acqs as purely financial when pretty obviously they're strategic; it would be silly of AOL to acquire weblogsinc, run it as a standalone entity, and expect a nice 'ROI'. Clearly, they're expecting some kind of synergy gains.
3) Now, for the commenter, profitabilty is what validates new market spaces. I think that a spate of acquisitions factoring in large synergy gains are a nice signal that the market is factoring in profitability.
Finally, I distinctly noted that I didn't think the acq validated 2.0 content plays generally - only from the perspective of risk-seeking guys like Calacanis and Denton.
4) uhh, d00d, it's not like I posted a naked pic of Condi. That would be inappropriate.
Last thing - I was just reading your blog to get a little insight into where you're coming from; you talk about how Skype's got 'negative scale economies' (ie, scale diseconomies). Check the chart and you'll see this is distinctly not the case. This is the heart of where our we disagree with each other.
Friday, October 07, 2005
Wondir gets snagged (hat tip to Rajan, nice catch).
How to Arbitrage Micromedia, pt 1
Not so long ago, I spoke to one of of the usual suspects and one of my recommendations was to drive growth in micromedia consumption at all costs. I suggested a newsreader; they kind of rolled their eyes (which really surprised me).
Their logic was that marginal revenues from microads are tiny. I thought that was kind of missing the point. The point is that a reader, when combined other services, becomes the browser 2.0 - the consumer interface to micromedia.
Now, here's a textbook example of how to arb micromedia, thanks to Google. Give away a reader; pick up nice marginal ad revenues from microads, but much more importantly, begin to build a profile-based ads competence, and hugely increase switching costs by creating demand side scope economies.
This is a huge (huge) arbitrage; you are essentially creating and capturing all this value for the price of the relatively minor fixed and almost zero variable costs necessary to run a reader. The returns are phenomenal. Textbook execution (well, except for the fact that Google reader kinda sucks so far :)
Another segment bites the dust (not really, there's gonna be a lot more action to come, let's see if Flock can deliver on the hype...)
Al Gore, Media 2.0 Analyst
Link. Surprisingly incisive.
AOL + Weblogsinc and 2.0 Content Validation
OK. Let's do some basic deal math and examine whether this really validates 2.0 content from a financial perspective. Weblogsinc gets acquired at a revenue multiple of ~ 20ish. Now, let's factor in some synergy benefits. How much can AOL realize almost costlessly from sending new eyeballs to Weblogsinc sites?
For now, let's assume it can double eyeballs (and double revenues - we'll assume linearity as well). This means an effective revenue multiple of about 10. Now, relative to Media 1.0, which trades at ~ 1-4 times revenues, that's certainly a nice multiple.
But I think relative to recent Web 2.0 acquisitions, that's not huge. The most obvious example is Skype, at 35ish. It's not huge relative to the usual suspects, either (Google, Yahoo, eBay; 17, 9, 14ish).
So is this really validation of the 2.0 content space? Well, I think it depends on your financial perspective; your appetite for risk, and return.
Most investors are leery of content plays because it's hit-driven and dominated by idiosyncratic risk. I don't think this multiple really justifies the risk in most investors' eyes (it certainly wouldn't in mine - what this outcome tells us is that you need a strategic buyer who can extract huge synergy gains to make an exit viable, even for a relatively successful 2.0 content play like Weblogsinc). If you're putting money into Web + Media 2.0, I don't think is a huge validation.
On the other hand, if you're an entrepreneur who's bootstrapping things, like Calacanis or Denton (or even Rafat :), these are nice numbers which represent a very nice return - but their risk profile is notably more aggressive.
I also agree with Denton's thoughts - if current growth is anything to go by, maybe exponentially more value can be realized by waiting just a lil longer.
Either way, congrats to the team at Weblogsinc - they certainly deserve it.
Thursday, October 06, 2005
Me + Biz 2.0
Here's a cool article from Business 2.0 about peer production, in which I'm quoted pretty extensively.
How Not to Analyse Strategy, pt 383183
Got the following comment I've been wanting to respond to for a while now:
"...Oh for Chrissake! This breathless blather is really quite irritating. I go to eBay like *many* other users, and then search for stuff. I get *many* results and I pick one or *gasp!* "many". It's many to many! This is very much like AdSense. You should stop smoking so much. Calm down.
The only reason Google makes more is because they often stand in-between users and eBay. They act as a bottleneck. That has nothing to do with combinatorial blah blah...It's just (approximate) monopoly pricing power. (Even though CPCs are set by auction, the Google monopoly has reduced choice for sellers...they have to go to Google...)
The reason eBay bought Skype is to have control over 53m and growing client software installations. If you have client software, you have a way to get to consumers that bypasses Google."
OK. I realize some of my stuff is pretty dense, so let me nicely explain what this commenter is misunderstanding.
1) I've shown that eBay is realizing no network scale economies.
2) So it would be a big deal for eBay to shift to realizing even quadratic (let alone exponential) returns - forget about combinatorial returns.
3) Even if eBay does nothing defections to Google, the reduction in transaction costs between buyers and sellers Skype offers can potentially break exactly this linear bound in returns to scale.
4) Note, the commenter is confused about what many to many means. To put it in his/her terms, it means that each user can be 'monetized' along different dimensions/activities/products/services/groups. Clearly, this isn't the case on eBay at the moment (but it is at Google, etc, etc).
5) The commenter's analysis is based on a comparison of relative monopoly power over customer acquisition between eBay and Google. This is basically saying 'Google qwns screen space relative to eBay'. I've tried to show it's about something a little cooler and deeper; how eBay can realize greater scale economies regardless of this (because Google will pretty much always qwn screen space relative to eBay, no?).
Anyways, two bigger points. First, this commenter is pretty someone I've hung out with (viz the smoking reference). Posting as 'anonymous' when we've met is a lot like (lamely) sniping from a distance, no?
Second, the root cause of this thread is that I don't put my analyses into terms that industry strategists find easy to understand (CPC, ARPU, etc, etc); I use a lot of academic terms because I think they're more powerful. But I will start doing so, because I don't like it when people don't get what I'm writing.
Folks, thanks for all your encouragement and suggestions in the last few days.
I have a pretty good idea where I'd like to take bubblegen in the near future. For some first steps, you can check out my new profiles page, where I will be sharing bits of my proprietary Web + Media 2.0 market map.
Thanks again, email responses are coming tonight, and stay tuned for bubblegen 2.0 :)
The Corporatization of Web 2.0 and the Countdown to Hypercivilization
Long title, I know lots of you hate it when I spout sociological theory - but bear with me, it'll be worth it.
OK. AOL + weblogsinc, Yahoo + upcoming, etc - you know the score by now. The land grab is revving up. So what's the bigger picture? Here's my take:
Media 2.0 is what Baudrillard called hypercivilization - a space where everything is hyperreal; hyperlinked, simulated, plastic, liquid, etc.
In concrete terms, I've been asking myself the following question: since most new things end up being syntheses, if mass media is the thesis, and micromedia is the antithesis, what does the Media 2.0 synthesis end up looking like?
Now, to understand this we have to get past the false dichotomy that leads to questions like: is a Media 2.0 world really better than a Media 1.0 world? Are blogs better than books and newspapers? Are vlogs better than newscasts and flicks?
Micromedia isn't a total substitute for mass media; neither is it a total complement. So where's the threshold?
I think NYTSelect has helped us understand that that threshold may be much higher than anyone suspected. From the rumblings I've heard, most people are defecting to blogs rather than subscribing to NYTSelect (which is no big surprise). Micromedia may not be an effective substitute for the WSJ or Economist's content; but it does seem to be for more mass 1.0 media.
Now, the downsides of micromedia are something I've discussed extensively - hyperpolarization is a biggie. Another is a drop in average quality (perhaps compensated for by a greater rise in average creativity).
For now, most players in the media space aren't really asking these questions - they're either busy building imitation barriers (like NYTSelect), or on acquisition binges (FIM).
One of media's biggest value drivers is to challenge people - to make them think. Think John Peel and the incessantly wierd stuff he used to play - until many of his choices ended up gaining not just market acceptance, but attaining iconic status. This is media innovation, and it's tough, because you're deliberately not giving people what they (think they) want.
Let me tie this into disruptive technologies for a sec. Disruption happens when something new is more efficient on a new dimension of value creation, but maybe worse on others. The point is the new thing (good, mode of production, service, etc) is orders of magnitude better on the new dimension, more than offsetting it's shortcomings on older dimensions.
I think this - the John Peel effect, what lately I've been calling novelty - is the missing link in the synthesis. I think this is micromedia's most powerful and possibly disruptive feature - it can cheaply drive novelty; it can create value along an entirely new dimension.
This should be intuitive, because for a very long time, we've lived in a world where studio execs tell us what media we should like - there is, effectively, almost zero novelty in a Media 1.0 world.
The problem is that between everyone's belated realization that Media 1.0 is dying a slow but sure death, and that Media 2.0 is hugely sexy and exciting...novelty is kind of being left by the wayside. Note, it's not even remotely the same thing as 'discovery' (one of the latest buzzwords in Media 1 and 2.0 boardrooms). Discovery is stuff you already know you want - it's the output of simple collaborative filtering most often.
To put this in concrete terms, what happens after Ask acquires Bloglines? Not much. What happens after Yahoo acquires Flickr? Not much. What happens after Fox acquires
Not much - incumbents use micromedia to derive marginal synergy benefits value along the same old dimensions (discovery, subscriber acquisition, etc). The point is that so far, none of these acquisitions are really creating new sources of value, based on entirely new kinds of sociality/mediation - and until they do, there's a long way to go until we hit hypercivilization.
Wednesday, October 05, 2005
Hi everyone. Thanks for your nice and encouraging emails + comments. I appreciate them a great deal.
Here's what I'm thinking of adding to bubblegen: a monthly research report (currently focused on web/media 2.0), including new ppts (1 or 2), 5-6 in depth analytical pieces, and detailed profiles/analyses of new startups/m&a events.
Don't worry, the blog won't go away - this is a complement, not a substitute.
If you're a regular reader who might buy this as a corporate rather than personal service, can you let me know if you'd be interested - and if not, why not? Don't worry, you won't be on the hook for anything - it would just help me a great deal to know if it's even a marginally viable project before jumping in.
Monday, October 03, 2005
Smarminess vs Sharing
Ian thinks I sound smarmy. He's probably a little right. So let me first apologize, and then explain.
I've been kind of frustrated. Until recently, I was a PhD student - and about as poor as you'd expect one to be. I never really thought too much of bubblegen - it was just a place to keep my notes and share stuff I thought was cool. Recently, I've shifted to looking for a full-time gig, and having been paying more attention to what happens with my thoughts and ideas.
Now, I think kind of the same thing that happened to Rafat is happening to me - for him, it was the WSJ grabbing his posts, and turning them into articles; for me it's my ideas gaining a lot of currency, but me not getting much in return.
For example, I can't (afford to) go to Web 2.0, which is something I'd very much like to do. That sucks - most of you guys will be there, but I won't.
So where's the incentive for me to share? I'm not really sure.
That's why I haven't been posting very much, and why my last few posts have been kind of smarmy (yeah, I admit it).
Basically, I'm rethinking the whole idea of bubblegen, FWIW. So, no posting for a while until I figure out a better way to balance what to share and what not to, and with whom - sorry :(