Strategies for a discontinuous future.

Consulting & advisory, research notes, in the press, about bubblegen,
next wednesdays.

Wednesday, March 23, 2005

Dealflow - Topix

I would comment, but Jeff C's summed up most of what I would say very nicely.

-- umair // 2:37 PM //


Genome Economy

The MeFi post on the cryptic non-Mendelian DNA repair mechanism that's shocking biologists (and me) is great reading. Highly recommended.

-- umair // 2:30 PM //


Genome Economy

Human neuron production from (bone-marrow) stem cells, in chick embryos - a big step forward.

-- umair // 2:00 PM //


Marketing 2.0

"...Consumers are showing increasing resistance to mass marketing and long for a more individual, personal approach to shopping, entertainment and travel, according to a survey of British lifestyles."

Link. Wow, what a surprise. When the industry uses terms like 'resistance' to stand for consumer preferences, it's no surprise marketing and branding 1.0 are dying.

-- umair // 1:57 PM //


Games Industry vs Simulation Economy

BW on Eidos/Elevation and the innovation squeeze on developers. I think this piece gets it all wrong - sure, development costs are high and rising. But the industry's problems are structural, not technological - limited revenue streams, short product life-cycles, artifical obsolescence and distribution scarcity, all of which ultimately result in marketing (and to a lesser degree, development) cost spirals.

I think the growth of dev costs relative to expected revenues, which is probably a more insightful way of looking at the issue, is a function of these fundamental structural issues, which are already forcing innovators to radically innovate and find more efficient, less risky, and less long-term capital-intensive business models (viz SecondLife, MMORPGs, Habbo Hotel).

Here's a related Beeb piece, talking about how the UK develops great games, but because it hasn't been a b-model innovator, gains are flowing overseas and the dev side of the industry in the UK is shrinking fast.

-- umair // 1:49 PM //



Intel puts some cash into eInk.

-- umair // 1:20 PM //


Atkins Economy - Unintended Consequences

The G has a very insightful piece about how McDonald's going healthy is probably really bad news for the health-food value chain, since it will standardize, streamline, and exert near-monopsony power, leading ultimately to less variety, innovation, price/quantity competition eroding labor standards, etc - basically, the Wal-Mart effect. Killer piece, highly recommended, esp for techies:

"...Hermann Thoenissen describes his perfect apple with the tenderness he might use to describe an ideal lover. "It has to be crisp," says the area director of apple orchards for AgriNorthwest. "It should be bi-coloured. Red striped with a yellow background or yellow with a bit of pink. It has to be juicy. I want it sweet, and just under three inches."

The cameo apple comes close to his notion of perfection. He thinks it's no surprise that McDonald's would pluck cameos from its many rivals as an ideal fruit. "It keeps its crispness for a long time if it's kept in the right atmosphere, and it doesn't turn brown easily."

Meanwhile, elsewhere in the food biz:

"...The Coca-Cola Co. said Monday it will launch a no-calorie version of its trademark soft drink called Coca-Cola Zero in the United States in June.

The drink will be sweetened partly with a blend of aspartame and acesulfame potassium."

I can hardly wait.

-- umair // 1:14 PM //


Mass Media vs Micromedia

Barry has a great post on the dynamic pricing/price discrimination strategies the film and music industries employ. If you're not up on this, it's recommended - micromedia will turn the value equations employed here on their heads.

-- umair // 1:12 PM //


Mobile Malware

Nice Slate piece about the relative insecurity of mobile platforms, and the coming wave of mobile malware. Obliquely makes the point that mobile malware is gonna be more economically harmful to consumers (and so economically beneficial to virus writers, so markets for it will open up) than on the PC, since mobiles are inherently jacked into billing/payment systems.

-- umair // 1:09 PM //



PVRBlog has a nice post with much linkage to reaction about Comcast/Tivo.

-- umair // 1:08 PM //



With all the buzz about the PSP launch, it's worth reading this piece at GI, which points out that Nintendo's strategy is to penetrate and dominate entirely new market segments. While the PSP is certainly cool, it's questionable what the marginal benefit will be to Sony - how much more will the same target really spend on games?

A PSP plus five games is $500 - a fairly big chunk of discretionary income, even for apparently loaded 18-34 year old dudes like you and me. Now, if the PSP was in competition with the DS/GBA, I'd be worried if I was Nintendo, and happy if I was Sony, because I'd be penetrating and possibly dominating the market which has been subsidizing Nintendo's creativity for the last ten years. But I don't think the PSP is competing in the same market: it's much more expensive, and the games are targeted at older players. So I don't see Nintendo's total domination of the handheld gaming space - powered by younger players - begin challenged. In fact, I think Sony runs the risk of cannibalizing the PS2 franchise.

Now, don't get me wrong - I think the PSP is the coolest thing since Optimus Prime. It's a great product. But is it backed up by the new economics the games industry needs to accelerate growth? As I've pointed out before, what the games industry really needs is a fundamentally new economics built on diversified revenue streams and more efficient risk-sharing mechanisms, like the film industry. I think Nintendo has a better long-term shot at achieving this, despite the revenue bump Sony will gain from the PSP.

-- umair // 12:58 PM //


VC 2.0

Paul Graham writes a Unified Theory of VC Suckage, covering all the usual bases - arrogance, paranoia, greed, etc. I think there's a subtle point here: my own take is that VC's becoming more and more a hit-driven industry, just like Hollywood or music. With all the dynamics that entails.

-- umair // 12:55 PM //

Tuesday, March 22, 2005

From Mass Media to Micromedia - Market Dynamics

The transition from mass media to micromedia (nanomedia, picomedia, whatever) is going to follow 3 key dynamics. First, from the bottom up, verticalization, which has been much discussed lately. Downloadpunk is a nice example of verticalization (with some fun music for you to check out).

Second from the top down, horizontalization. Ugly word, big potential - imagine cross-media search, or a Downloadpunk where you can find not just music, but video, books, clothes, Manic Panic, and dog collars.

Let's discuss horizontalization for a second, because it's often overlooked in favor of sexier verticalization. The first glimmerings of this are in the ongoing horizontal disintegration of the big media conglomerates.

I think the important thing to note with the big guns is not the separation of content from distribution - that's a strategy that hasn't really worked for almost 2 generations - but rather, the separation of different kinds of content from each other (movie studios, record labels, theme parks). This is a strategy that has yielded fat profits for about 15-20 years, but won't work for big media anymore.

I think the main reason - and this holds for both vertical and horizontal disintegration of big media plays - is that as search and distribution costs have fallen, the old economies of scale (manufacturing, marketing) and scope (distribution, retailing) which created such enduring competitive advantages have vaporized. So horizontally integrated media plays must be much more narrowly and sharply targeted to reap synergy benefits in a micromedia environment - think of my Download punk example above.

OK, back to micromedia dynamics. The third one is peer production, which I think I've discussed extensively. Suffice it to say that PP will create a supply side explosion of content which is massively heterogeneous. Combine these three, and you begin to understand just how fragmented (and fertile) the Media 2.0 landscape will be.

-- umair // 5:05 PM //


Apple vs Apple

See, one of the reasons that I'm not historically cool with Apple is that creatively, Apple roolz, but strategically, Apple makes some big mistakes. Viz iTunes, the closed model, and the monopsony strategy. Here's another nice example - charging 10% to accessory mfgrs for 'Made for iPod' branding.

Not to beat a very dead horse, but one of the basic lessons of digital strategy is to exert platform power by creating thriving markets for complements. This creates economies of scale at worst, or entire ecosystems at best. Charging for branding is a silly idea.

I know, I know, Macfanatics, it's driven by Apple's 'relentless focus on giving consumers Apple quality'. But I think the marginal cost of this strategy - killing a large segment of the exponentially accelerating accessories ecosystem, which could drive Apple's platform dominance in the exploding personal media and digital media markets - is much, much, much, much greater than the marginal benefit - the retention of a relatively small number of quality-obsessed macfanatics.

In fact, I'd challenge you guys to give me an example of a 'Seal of Approval' program whose long-term benefits have outweighed it's long-term costs. The examples that tell us regulating complements is a strategic error are countless: Nintendo (vs Sony) is probably my favorite. (Via Fred)

-- umair // 5:00 PM //


M&A of the Week

My take on Flickr/Yahoo, AskJeeves/IAC - what Fred says. In short, IAC is doing a nice bit of arbitrage and picking up AskJ at a song - esp considering it's 6% and growing share of the search market, which has massively high barriers to entry. But it's also a semi-mature category.

Much more fun, for those of focused on innovation, is how Yahoo's acquisition of Flickr's tags and semi-open model (which is what drove usage, which is what drove the acq) will evolve. Will Yahoo be able to really exploit the massive innovative capacity in Flickr's tech model? I have my doubts, but it'll be interesting to watch.

-- umair // 4:55 PM //


Music 2.0

EPM Music is one of the first digital only distributors. Essentially, they license tracks from indie electronic labels to etailers like iTunes.

All of which kind of drives me nuts - it begs two questions:

1) Why is an intermediary like this necessary in the digital world - what value do they add? EPM says the value is in encoding and adding metadata (!)

2) Why are we seeing real-world industry structures replicate themselves in a radically different economic environment?

My intuition - digital distributors like this will fast go the way of the dinosaur. But I need to analyse the dynamics properly at some point - I think there is something I am missing here.

-- umair // 3:41 PM //


VC 2.0

"...Simon Fuller, the creator of Pop Idol, has teamed up with other music industry figures and investment/ advisory company Ingenious Media to launch a new venture capital fund offering 20 independent bands �1m each to help launch their careers."

Link. Interesting, if a little strange.

-- umair // 3:12 PM //



For all those involved in constructing the Media 2.0 value chain, I think this history of recording technology is an instructive read.

-- umair // 12:35 PM //



The Beeb on 3g's painfully slow adoption in the UK.

-- umair // 11:51 AM //



A very nice piece in the NYT about biomimetic materials inspired by the toughness and resilience of seashells. I think I am gonna be buying my kids exoskeletons for Xmas (uhh...when I have kids).

-- umair // 11:46 AM //


Simulation Economy

I've argued that for the games industry, the licensing strategy is dominated, because the price of licenses will get bid up (via price competition or via M&A). I did some strategy work for an anonymous publisher a year or so back, where I argued thatthe dominant strategy is to position games as platforms, not just as brands. Platform effects dominate brand effects, because they create greater switching costs at a lower price, and in fact, create brand economies for smart publishers.

What does a game as platform mean? Well, for one thing, platforms let users build things on them. MS has realized the power of the platform notion, and here's a nice piece for context about Xbox 2's integrated microtransactions system, with which users will pay other users for vgoods. This is the infrastructure for games as platforms - unfortuantely, few publishers have the right competences to achieve a meaningful advantage.

-- umair // 11:38 AM //



Ourmedia launches - free personal media hosting and publishing. Archive.org never ceases to impress me.

Personal media/micromedia is gonna be a very big deal - distributed economies of scale, peer production, value chain disintegration, you know the score by now.

What's interesting is that the whole notion is, I guess, so radically different from mass media that the incumbents just can't get it. This is a classic case of a competence trap: what works in a disrupted value chain is exactly what didn't work in the old one.

Case in point: Five has just made TV downloads available - at a steep price. Their test case is Fifth Gear (a car review show), where they hope people will pay to see car reviews:

"...Managing director Ben Drury said: "Broadcasters have seen the revenues attainable from music downloads and are eager to do the same with their own content.

...Fifth Gear executive producer Richard Pearson added: "Ever since Fifth Gear launched in 2002, viewers have regularly asked whether it's possible to purchase content. It's great that we can expand the Fifth Gear brand in this way."

It's interesting that, like the dot commers in 1998, the media heads in 2005 see the Net as a 'channel' (distribution, marketing, whatever).

The point is that the Net is much more powerful than a channel: because of the new economies it offers, it can totally disintegrate old business models.

So here's a free micromedia b-model for Five, which I think would be much cooler than making bits of Fifth Gear available at 2 quid a pop. Car reviews are valuable - that much is correct. Why not let users upload their own car reviews, discuss, aggregate, rate, index, cross-reference, videolink, and publish it all, using advertising and sponsorship from the car industry to pay for it? I'm pretty sure the market size of a universe of sponsored car microreviews is much greater than the market size of Fifth Gear downloads. And as a bonus, you'll start building the kind of competences you'll need if you want to survive in the micromedia ecosystem.

-- umair // 10:57 AM //

Monday, March 21, 2005

Coordination Economies

I got a fairly insightful email asking why I called tags coordination machines, instead of search machines. The following is a dense and geeky explanation why - best skipped if you're not heavily with tags, I think.

Let's start by basically examining coordination. We can coordinate two things - preferences, and actions. The former is what we might call weak coordination - not a formal economic term, my own coinage, to refer to the fact that value creation potential is lower than the latter. I think it's intuitive that coordinating people's actions will result, on average, in greater value creation.

Now let's get back to tags. Tags are implicit preference coordination machines. They let people aggregate and disaggregate preferences multidimensionally. This is why they're powerful: if they didn't coordinate preferences, but only aggregated peoples' categorizations, we'd see explosions of useless tags.

That's not what the evidence suggests. Instead, people tag things they prefer, and ignore things they think don't prefer. In this way, preferences get implicitly aggregated, and then coordinated. That is, if 400 people tag bubblegen with technology, you might also reasonably suspect a significant proportion of them think it was cool enough to tag, which goes on to coordinate your preferences about bubblegen.

Another example of a simple preference coordination machine is a hyperlink, but they're much weaker than tags, because they can only coordinate 1 thing with another (ie, a 1 to 1 relationship). Even so, we've seen (blogdex, etc) how powerful link aggregation is in terms of preference coordination. Tag aggregation will be a lot, lot more powerful.

-- umair // 5:15 PM //


Connectivity Wars

FCC to roll back naked DSL regs. What a surprise - the telco's decades-long reliance on the appeal to authority is a textbook case of strategy decay.

-- umair // 2:52 PM //

Sunday, March 20, 2005

5 Years Later: A Short History of the Bubble (and the Next One)

I wrote this piece for Om's 5 year bubble anniversary compendium (it's a bit late :) . It's waay too long, so I divided it up into two parts. It's also kind of messy - will edit as time permits. Enjoy!

The Past

Five years on, it's easy to see in retrospect what went wrong during the bubble. The Net turned out not to be such a great 'channel' - which is what hordes of fresh-faced MBAs toting business plans hoping to sell pet food, lava lamps, and expensive yet shabby looking clothes were taught.

Instead, the Net turned out to be great at, well, what you might think something called 'the Internet' would great at: connecting people. All of the most succesful business models on the Net are, essentially, vast switchboards.

Sometimes, they connect consumers with other consumers, creating huge gains to consumption - this is Amazon's model. Imagine Amazon without reviews and user info - I don't think it would have been very succesful, no matter how vast an inventory it offered. We only have to look at numerous distribution-focused competitors that crashed and burned to see the power of Amazon's demand-side economies of scale.

Sometimes, they connect intermediaries with consumers - this is eBay's model. Sometimes, they connect producers with consumers - this is the revolution that Google and Overture jointly, quietly unleashed on a baffled, dumbstruck advertising industry. Sometimes, they just join people, and worry about strategy later: this is Blogger, Bloglines, Flickr, del.icio.us, and Metafilter. Sometimes, they try and do it all: consumers, producers, intermediaries, and fun - this is LinkedIn, MySpace, and, to an extent, Yahoo.

I went to b-school because I wanted an answer to a very simple question: if the Net was revolutionizing my life, my family's lives, and my friends' lives, why did the massive value that was created go up in flames?

The intuitive answer - and I think the right one - is that the Net was never a great place to sell dorm furniture, pet food, or lava lamps. Most people who need those realize a greater surplus by shopping at local retailers. But the Net does a very special set of activities much better than the real-world can. Now, you probably know what I'm gonna say, so you might want to skip to the last third, where I discuss the future, not the past.

The Net is a much better place to buy and sell things that are costly to find in the real world. Not just 'information goods', or things made out of bits. Any goods for which search costs are high. This was the basis of a fundamentally new economics: what my old prof Gary Hamel called the transition from distribution economies to search economies. Those firms that could create search economies were the winners, because search economies are essentially massive gains to consumption, which create huge advantages over real-world firms dependent on real-world resources which create real-world consumption costs.

All of the models that I've outlined above are variations on this theme. Amazon doesn't succeed because it sells books more cheaply, but because it makes it easier to find books you'll derive greater utility from. Google/Overture's advertising revolution didn't succeed because it grabbed audiences by the throat better, but because it offered people ads they began to derive utility from - ads that were matched with things they were already looking for. eBay didn't succeed because it made it cheaper to get secondhand stuff - in fact, you can easily observe the winner's curse in action on eBay - but because it made a market in things people wanted to pay something for, but whose search costs were prohibitive.

Now, in 2005, the true power of search economies is about to rip most of the media industry apart. Publishing is on it's knees; the music and film industries are stumbling. This is what Chris Anderson has now famously called the Long Tail. I won't explain the idea again - but note it's fundamentally an expression of search economies. At the limit, search economics becomes Long Tail economics: markets for everything, everywhere. Because you can finally cheaply find the stuff that more closely matches what you really want, it's now becoming reasonably economically viable for others to make, market, and sell it.

This is like mass personalization - but given to consumers under a much different production regime and industry structure than predicted during the bubble. It's not monolithic firms that are going to personalize their goods for micromarkets, as the digerati thought. In fact, it's the inverse: microproducers with the ability to produce and sell goods crafted with passion to macromarkets.

The LT is, as many people suspect, going to define the next economics of the Net and traditional media. In fact, if you follow my argument so far, you understand the dynamic mechanisms behind it: as more efficient search mechanisms have been built, and as the size of the network has increased, the Tail has been lengthening. Because they don't have to pay high search and transaction costs to find and acquire them, consumers can now purchase goods from which they'll derive the greatest utility. Those gains to consumption are exactly equal to the fall in search costs.

Want vintage shoes? Now you can check out more than you can handle. But only because Google can slash your search costs, while making it economical to do so with ads that don't make you want to cut your eyes out. This really is an economic revolution: think about the size of search costs slashed in just one vintage shoes search, multiply that the universe of searches, and you get an idea how massive search economies really are.

Search economies are going to follow the same dynamics innovation usually does. The dominant design's been established, and now the race for incremental efficiency will begin. The dominant design will begin to mutate into offspring which resemble it, but are more efficient at surviving in the environments they inhabit. So search economies themselves will verticalize: travel search will begin to look very different than video search will begin to look very different than blog search will begin to look very different than people search.

The important thing to note is that this is going to be incremental change. Models will change a little bit, but not much - because the dominant design is hyperefficient in the current environment. Search economies are king. Something very important did happen during the bubble - the revolutionary transition from distribution economies to search economies. A huge amount of value was created - it only disappeared during the time the market's been sorting the winners out from the losers.

So I've spent a long time explaining what I think happened during and after the bubble. The more interesting question, I suspect, is: what now?

The Future

My answer is that an equally big, if not bigger, economic revolution is lurking just around the next corner. We can already see the first glimmerings of it in things like tags, CC Mixter, MMORPGs, SecondLife, blog communities, and even fabs.

This is what I call (inelegantly) the transition from search to coordination economies. My hypothesis is simple: when you can find anything you want costlessly (ie when hypercompetition erodes search economincs based b-models' margins), what becomes valuable? My answer is pretty simple too: doing something with all the cool stuff you've found.

But doing stuff, right now, is pretty hard. Sure, we blog, and podcast, etc. But these are solitary, atomized pursuits. It's hard to create a great deal of value on your own, unless you're Jenna Jameson or Stephen Hawking. There's only so much we can each do on our own. Collaborating to produce, market, distribute has massive economic implications - just like it did in the days of Adam Smith's pin factory.

My point is that there's a huge imbalance: one the supply side, we now have a huge set of new resources unlocked by better search mechanisms with which to create new business models. But on the demand side, there's still few way to do things with these resources: to combine, remix, retouch, refinish, reproduce, mutate, select them into newer, cooler, faster, smarter, sleeker, innovations.

Think about it this way. Imagine you're a musician. MP3 + Google creates the opportunity for the world to costlessly find your immense musical talent. That's the 2005 way of seeing you. But, I suspect, during the next bubble, we'll see you this way: as a musical resource with value creation ability going massively untapped because there's little way for you to coordinate your value activities with those of others.

Smart entrepreneurs are arbitraging the imbalance by creating coordination economies: things that make it cheaper for people not to find things, but to get together and produce things. Think of O'Reilly's Make. Think of selling things you've made in SecondLife. Think of Zopa. Think of the Gaming Open Market. Arbitraging the value creation potential of search resources by coordination economies is the heart of open-source/open-access/peer production models.

My favorite example is probably threadless, because it's so far removed from tech in general, and software in particular. It's a bunch of hipsters who realized that coming together as a community was cool, but that in collaboration, they could unlock relatively massive amounts of value. All they needed was a coordination mechanism. So they set up a simple website where anyone can submit T-shirt designs, the community rates them, and the winning designs get produced.

Now, this doesn't sound like a world-changing idea. But I think it might be. That's because threadless absolutely eviscerates the traditional economics of of all the industries involved in making, marketing, and selling T-shirts simultaneously.

Right now, most of your T-shirts are designed by a professional designer in the 1st world, approved by a committee of suits, made somewhere in Asia, packaged and distributed by BigCorp, and sold and marketed by BigBox. Threadless, and peer-production models in general, vaporize this traditional value chain. T-shirts threadless style are designed by amateur designers, approved by the community, made somewhere in Asia, and distributed, packaged, and marketed by, well, nobody. Maybe Fedex. The point is that half the value chain disappears.

But what's really important are the economic effects of coordination economies and peer-production models. I'm still wrestling with these, but here are my initial takes.

First, they hugely expand the market size. I might not buy a T-shirt from the mall, or even from tshirts.com - but I have from threadless. Second, coordination economies make it viable for pro-ams to make things only firms could make before. This is what I call distributed economies of scale, and it's about coalitions of pro-ams having a much lower opportunity cost of production than firms do, as well as access to factors of production. Yochai Benkler thinks it's about lumpy goods, which is probably also important.

Third, and this is the important one, by stripping out the half of the value chain we really don't value - the half that gives us cheesy designs, bad advertising, oscillating prices, and three whole colors to choose from - threadless aligns rent capture with value creation an order of magnitude better than before. This is bad news for Wal-Mart, Ralph Lauren, and your local mall, to be sure, but it's great news for T-shirt lovers, 3rd world suppliers, passionate designers, local economies, you and me - and, of course, potental innovators. And an entire generation of kids my kid sister's age - 11 - are gonna grow up spending their pocket money at places like threadless, Zingtone, and SecondLife.

At the limit, the transition from search to coordination economies changes the consumption landscape from a Long Tail to...something else. I haven't named it. Maybe we should call it All Tail (although that's a terrible name). Whatever we call it, it's my candidate for the next economic revolution: prosumers making stuff more efficiently and innovatively than firms. It's gonna be pretty cool, not least because whoever gives them ways to make it is going to get as rich as sin.

But (and this is what's really cool to me) the huge disruptions I suspect coordination economies - Web 3.0 - promise are evidence of Asimov's old dictum: we overestimate the impact of emerging technologies in the short term, and underestimate them in the long term. In other words, the bubble was a case study in irrational exuberance. But the innovation crash of 2001-2004, I think, will be remembered as (massively) irrational pessimism.

-- umair // 2:04 PM //


LinkedIn vs HR

I got a nice comment from LinkedIn's Marketing Mgr confirming that they're going to try and connect job seekers at higher levels up the decision making chain - which I think is very much the right strategy, because it targets the gaping void at the heart of the HR industry that Monster etc failed to capitalize on (as previously discussed).

-- umair // 1:53 PM //


Micromedia - Market Drivers

The NYT has a nice piece detailing the falling barriers to production for media - in this case, the rise of home studios. I talked about this recently with a recording industry buddy, who told me that pro studios here in London are seeing exponentially declining booking rates - viz Abbey Road Studios' Film Festival.

Digital audio is the case study on which Micromedia 2.0 will be built - if you don't understand just how radical a shift it is from paying $1000/hr to being able to record at 80% of the same quality by spending 5k on a laptop + software + soundcard, understand and take note.

-- umair // 1:47 PM //



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