Strategies for a discontinuous future.

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

Saturday, April 02, 2005

Innovation Killaz

Big changes at Darpa - decreased IT funding to universities, a focus on near-term results (deliverables), and more classified projects.

Hopefully you know about the huge impact Darpa's had on seeding the most culturally and economically revolutionary technologies of the last 50 years or so.

So, let me get this straight: we're cutting investment in the source of our accelerating productivity? Wow, this really is the stupidest thing possible, in all the universes of possible stupid things, to do.

The drooling mindless idiot yokels who've got their hand on the rudder of our country are piloting us straight into the 3rd world. Words cannot express my contempt for a government which finds innumerable ways to, quite literally, screw Americans (and the very ideals that are America).

-- umair // 5:09 PM //


Neurome Economy

Nice Beeb piece about the BrainGate - I've discussed cheap neural interfaces here, I think this has absolutely revolutionary potential far beyond therapeutics...highly recommended.

-- umair // 5:04 PM //


Apple vs Apple

So Sony wants to do iTunes for movies. Argh - what can I do but say I told you so. Look, I want Apple to be a serious player in the Media 2.0 ecosystem. I luv my iPod. But every week, something happens that confirms my believing the opposite.

A few months back I argued that Apple should open iTunes op, and use the rents it captures to subsidize platform extension, leveraging speed to build economies of scale (or scope), and exerting massive innovation and strategic pressure over it's competitors. Building a movies iTunes would have been a great move.

Just sending a few signals would have been a deterrent.

Anyways, this is another example of a theme for this year: Apple's my favorite example of strategic errors, just like Yahoo was last year. Like I said before, creatively, Apple r00lz, but strategically, Apple's rapidly...welll...Appling itself (Mac 1984 style).

Macfanatics, please, think before you comment...last Apple thread, I challenged you guys to give me an example of a seal-of-approval program that worked and I got Good Housekeeping in response (!). Clearly, we're talking about digital goods, with platform FX - the economics are completely different, etc, etc. So please, do respond - just don't do it (purely) out of emotion.

-- umair // 4:47 PM //


Fun of the Day

I've been looking for a present for my GF (as you might have read), and I've been thinking about perfume. Today I spent the morning at Les Senteurs, which is a boutique in Belgravia specializing in the real thing (vs mass-market synthetic perfumes). They were incredibly helpful and have a killer selection - highly recommended if you're in London.

-- umair // 4:36 PM //


Utility and Disutility

Nice article about the disutility of too much choice from the NYT. I don't agree with this persepctive, but a nice read nonetheless.

-- umair // 4:34 PM //


Free Culture Problems/Contextual Ad Deathwatch

So by now you've heard about the WordPress spam affair.

This is a case study in one of this year's medium-sized questions: what are the dynamics of ad-funded models for free culture?

I've argued that they depend fundamentally on exclusion (invite-only betas, etc). [email protected]'s approach was the opposite - to use spam to fund the production of a public good.

Assuming that the Internet Archive doesn't start giving us all money for free (which might actually happen, knowing them), these are the two ends of the ad-funded free culture b-model spectrum. This is not an oxymoron - even public goods have to be financed. Traditionally, they're financed through taxes. We can think about advertising as a tax as well - a tax on users, a cost they have to bear in order to consume free goods.

The natural conclusion is that the nastiness of advertising rises in openness. That is, the more open the model is, the nastier the advertising gets. At one end of the spectrum, closed invite-only services monetize a small amount of users very profitably, by being able to offer a great deal of information about those users (which translates into tighter, and thus more valuable, targeting). As hit rates for ads improve, the number and nastiness of ads declines.

But at the other end of the spectrum, totally open models have to monetize a vast amount of users with nasty ads, because, by definition, info about users is more diffused and thus less valuable to advertisers, who will only pay for nastier, more costly ads. As hit rates for ads are relatively lower, the number and nastiness of ads on this side of the spectrum is much more intense.

This is all very straightforward. And I think you've got to see beyond it to really read the tea leaves here. Unfortunately, the www is getting fairly emotional about the WordPress issue, which obscures what's actually happening: the ad-funded model for free culture is going to coalesce in ways that are going to surprise us all a great deal.

That's because the dialectic outlined above leaves an absolutely massive gap for clever entrepreneurs to plug with classic disruptive innovation: funding free culture models with marketing that's less nasty and more effective (just like Google did for the www).

Except, of course, this time, the incumbent getting disrupted is Google and contextual advertising- because contextual ads create big incentives for www spam, which is why WordPress is taking heat. So, if anyone, Google (etc) should be taking the heat - Kottke and the Reg going hysterical on WordPress is first-order thinking, which is surprising from such smart guys, because it ignores what's really going on (and what's really at stake) here.

Don't miss the forest for the trees - if this story is important, it's because the next year is going to see ads that disrupt the contextual model - something I've talked before, as have Battelle and Fred W - what this does is illustrate just how ripe the market is.

-- umair // 4:10 PM //

Friday, April 01, 2005

The Really Big Picture

Let's build the world's largest free trade area, Beijing to New Delhi

Hmmm..this just might happen sooner than I thought when it would. Of course, this would be the 9.0 shaker for World Trade, when
it finally does happen.

-- Mahashunyam // 11:04 PM //


Peerflix - Network FX 2.0

Was recently thinking that if you trade DVD's on Peerflix, you are actually using an implicit price mechanism. Which conveys a huge amount of information about your expectations and preferences (ie, your taste in movies, how it's evolved, etc).

Which is an incredibly powerful way to build network FX - in fact, what this model is transforming dot com 1.0's network externality to direct gains to trade.

That's pretty amazing for at least a couple of reasons. First, because it will create absolutely massive switching costs (as you learn about your buddies'/community's trading tastes; as the market grows and liquidity increases). Second, because there are a vast number of ways to (really) monetize this market. For example, because so much information about consumption preferences is pooled and exchanged, access to the Peerflix market is gonna be worth an absolute fortune to marketers. Or you could use dynamic pricing to nonlinearly share in the gains from trade (versus the current $1 flat fee).

The other candidate, of course, that is creating the same kind of platform for 2.0 network FX is Zopa. Imagine lending/borrowing in the context of the paragraph above.

I think this is gonna be explosive stuff, and I am gonna do quite a bit of reading this wknd to trawl the econ lit for insight about network FX 2.0.

-- umair // 8:36 PM //


del.icio.us Vs del.irio.us

Having a conversation, you can read my comments if interested.

-- umair // 8:33 PM //


VC vs VC

Wasn't gonna blog today, too busy, but this article caught my eye, and I have to dispute it a lil bit. It's by the guys at Signal Lake, who've done a study, and have evidence that venture investments are not correlated innovation - by grabbing venture-backed IPOs, and ranking them on 'innovation'.

Problem is, their methodology has some serious flaws.

1) "...We also eliminated eBay Inc. and other companies that relied on e-commerce business models rather than new technologies. While innovations in e-commerce have created businesses worth billions of dollars, and improved the lives of millions of consumers and retailers alike, finding a new way for them to interact with one another is quite different from coming up with a fundamentally new technology...

In fact, e-commerce business models are almost always grounded in only the slightest bits of incremental innovation."

I think there's a flaw here. There is a 'fundamentally new technology' underlying e-commerce: the www (ve the Net). Without the www, e-commerce isn't possible - or at least, it's market size becomes negligible. So I think here, with one stroke, most of the economic impact of the www has been erased from their sample.

2) "...By far the largest number of IPOs over the course of our 10-year period received a low rating of 4, which was essentially the bottom."

Flaw #2 has to do with the fact that not all venture exits are IPOs. Trade sales etc were excluded from this study. Which is curious, considering the fact that incumbents like Cisco, Yahoo, and Google have chosen to grow via R&D-by-acquisition strategies, instead of organically. So I think the sample is, again, biased.

3) "...In fact, it would be difficult to argue that VCs are ignorant of engineering and other technical areas. A review of the backgrounds of 180 general partners at 20 leading VCs shows that 64 percent of general partners have undergraduate engineering degrees [see table, "A Matter of Degrees"]. But 64 percent also have MBAs, while only 29 percent have master's degrees in engineering or science. So by a wide margin, it seems that the business training of the average general partner exceeds his or her understanding of technology, and that for the people who have both, the technical background supports a business outlook, not the other way around."

Bolding's mine. Flaw #3 has to do with misunderstanding degrees and specialization. I don't think that a two year MBA versus a 4 year undergrad makes your business training exceed your technical understanding. I'd argue the reverse is true - your business training is much less than your technical understanding!

Another point to consider is that the definitions here are narrow. Not all engineering degrees correlate well with venture investing. My degree is in neuro, which makes a lot of sense for the things I'm interested in. But let's imagine I had a CS degree - this methodology wouldn't count it, though for a VC these days, a CS degree is clearly a relevant asset.

Look, I don't wanna belabor the point - I could go on picking holes in the methodology, but the bigger picture is what's really important. I appreciate the sentiment behind the article - venture investing is becoming an increasingly risk-averse market.

I think risk-aversion is an effect, not a cause - and the flaws in the methodology obscure this relationship. Like I've argued before, that venture dynamics are beginning to mirror those of other creative industries, like film, music, and publishing: they're becoming hit-driven dynamics. This causes risk aversion, marketing (or relationship) wars, etc, etc.

-- umair // 7:47 PM //

Thursday, March 31, 2005

Dot Com 2.0

Cannibal Flesh Donor Program.

-- umair // 12:28 PM //


del.icio.us Vs del.irio.us

I've been watching this battle for the last week or so. If you don't know, del.irio.us is the perfect example of hypercommoditization - it's a total (open-source) clone of del.icio.us. A shameless clone - it rips off del.icio.us down to the font sizes, and adds a few bits of it's own.

Now, this is interesting for several reasons. First, because it's patently clear that most dot com 2.0s are conceptualizing strategy in the same way as dot com 1.0s: offer a platform for network fx, give it away, build the largest network fastest, and monetize by selling the platform or the user base to corporate or high-value segments.

The problem with this, of course, is that there are no entry or imitation barriers until it's too late - until your network is already the biggest. This is happening all over again - dot com 2.0s are failing to build entry or imitation barriers, and are getting hyperimitated - in every space, we see one innovator, and a huuuge wave of imitation (networking, tag servers...etc).

Another example today is EVDB - which is a corporate version of Upcoming/evnt/etc. Why don't dot com 2.0 players build imitation barriers? I think, to a large extent, because strategy is not really on the agenda - technology is.

Second, because it raises what to me is probably the most interesting question of 2005 - what will the free culture business model be? Now, for larger communities, the answers are straightforward - sell support or ancillary services, advertising, etc. But for individuals, the answers are much less clear? Why do people share? Why does peer-production work? The incentives, from a purely economics perspective, don't seem to exist.

For example, OhMyNews added a tip jar to compensate citizen journos 3 years later - and not through any massive outcry from the community, either. So maybe del.iciou.us vs del.irio.us can help us understand the dynamics of open-source vs closed - del.icio.us is closed and has just received a funding round, but del.irio.us is open-source and self-funded.

-- umair // 12:01 PM //

Wednesday, March 30, 2005

Replication Wars - The Evolution of Sharing

I'm not talking much about the Grokster case for two reasons. First, I think it's pretty unlikely that Grokster loses. Second, more important, I believe that the Net lets consumers arbitrage costly property rights away via gray markets, so the case is kind of irrelevant.

Here's an example that fascinates me, because it's so far removed from tech and malleable digital goods.

I wanted to get something nice for my GF because she's been putting up with a lot lately. So I went online to see what news I could dig up about my favorite perfumers. I ended up at Basenotes.

Basenotes is a community of fragrance junkies. Fragrance junkies who are hacking perfume. The Net is letting these guys do two things that we normally associate with standardized digital media, like MP3.

First, they're remixing perfume. They're mixing, matching, and layering the stuff, and sharing notes about what works, and what doesn't. For example, they're trading a list of how to layer perfumes that a boutique perfumerie in NYC produced (and charged a hell of a lot for)...and they're tweaking it and then sharing what smells good, and what smells bad.

Second, they're arbitraging costly property rights away in an internal gray market. Here's how it works. Perfumes are, to an extent, an experience good. They smell different on your skin - and if you don't test heavily, you could end up with something that doesn't smell the way you thought it would. Testers don't give you enough to really test this, and bottles give you much more than you need to test this. Put another way, buying perfume is relatively risky because of the property rights the industry bundles with it's goods - small testers and big bottles.

So, of course, the natural solution is to arbitrage the property right of big bottles away: to create insurance against big bottles by swapping perfume. The community at Basenotes posts lists of perfumes they wanna swap for - when they find matches, they decant, send the agreed-on quantity in the mail, and so spread the risk of buying perfume among the larger community, lowering the expected cost of buying perfume for everyone in the community.

Sound familiar?! It should - this is file-sharing 2.0 - moving from digital to analog. The economics behind it are almost exactly the same as I outline in the New Economics of Music. It's the first example I've seen of almost the entire model being replicated for real-world goods. I think it's beyond cool.

It begs the question - how long will it be before Basenotes begins peer production of perfumes? If I think about it, all over the 3rd world perfumes are unbundled - retailers get the essences from the factories. The essences can then be rebundled any way you like - you can get a 'replica' of most mass-market perfumes incredibly cheaply this way - because property rights have been completely unbundled from inputs.

This is not the same as 'copycat' perfumes in the 1st world - which are reverse engineered. This is the real thing - the essences come from the same factories that make mass-market synthetic perfumes - just with the property right arbitraged away. How long will it be before communities of fragrance junkies realize they can leverage unbundling to begin to disintegrate the mass-market perfume value chain by rebundling, ranking, and pricing their own creations?

That's why I'm not worried about Grokster. If anything, I see sharing and peer-production growing exponentially in economic significance despite efforts to squelch them. The point is that Basenotes proves that the gains to sharing are so great that communities are willing to pay real-world transaction costs - packing and posting perfumes - to realize them. That's a very big deal, because it tells us sharing is not about technology (Grokster) - it's about economics. And markets usually find ways to give people what they want - even if (especially when) it's prohibited.

-- umair // 5:22 PM //


More Publishing 2.0

A nice post about the end of publishing as we know it. I think the example it uses - newspapers - is a little off.

Newspapers are, as the post points out, cash cows. But they're cash cows that can hide massive strategy decay. That's because they're natural monopolies - the average cost falls for the paper with the largest circulation. This leads to increasing returns to scale. That's why there's only really one major paper in most local markets. That's also why Warren Buffett got rich by investing heavily in local papers.

But total circulation has been falling for decades. I believe it peaked in the 80s and is now down to about 1/3 of the peak number. The issue is that newspapers can stay profitable in the face of falling readership - until total revenues dip below total fixed costs (of plant, distribution, admin, etc). Once this happens, not only will newspapers be unprofitable - it's unlikely they'll ever be profitable again.

So newspapers are a bad way to judge whether the publishing industry's in trouble - by the time they're unprofitable, the industry will be six feet under.

If you wanna read my general thoughts on Publishing 2.0, they're here.

-- umair // 4:27 PM //


How Yahoo Got Google's Mojo

Om had a nice piece recently about how Yahoo got it's mojo back - how it's created a fair bit of momentum and buzz with new products and revamps to old ones.

I think another way to look at it might be that Google's lost a great deal of mojo, and Yahoo's stepped into the huge strategic gaps that Google's exposed nicely.

Case in point: I haven't blogged for the last few days because every time I try, Blogger's down. This is kind of absurd. Google acquired Blogger a long, long time ago (in Net time)...and has yet to do turn it from asset into complement. Put another way, Google's done a nice job of extending AdSense into blogs - but this is incremental innovation.

As it's competitors continue to push the rate of innovation, as new standards get established, and as new platform complementarities emerge, Google loses market space exponentially. What's the point of having a huge share in a mature market? Not much...price competition from MSN and Yahoo is gonna erode AdSense/AdWords margins, and new segments - my money's on micromedia - are gonna be the high growth/high margin segments.

Google's lost the innovative edge in more space than it's sustained it - Froogle, Orkut, Google News, etc, are all essentially third-tier competitors in winner-take-all markets. The really important point to note is that in each market, Google established an early-mover-advantage...but never sustained it to first-to-scale, by building strong imitation barriers via differentiation (in target market - Orkut vs LinkedIn/Ryze/MySpace) or radical innovation (G News vs Topix/Technorati/Bloglines, each of whom massively leveraged RSS to solve distributor fragmentation).

The most obvious way Google could have sustained early entry to first-to-scale was via platform economics and hypercomplementarity - make the returns to using to the total vastly greater than the returns to using just one product. Because it's failed to deter not just imitation but competitor innovation, switching costs in it's core markets are declining fast. My switching costs in Blogger are not nearly as high as they were a year ago, because competitors offer me hugely more benefits than Blogger. At the same time, competitors have locked huge user bases into high-growth segments with sharply differentiated products offering discontinuous value creation (think LinkedIn/BlogLines) - Google's ceded these markets.

All of which begs the questions - why does Google lack a follow-through? The rumblings I've heard are that the same chaos that creates cool things fast is also hard to rein in when the times comes to standardize, modularize, differentiate, market, and integrate those cool things - those activities don't need genius strategists or engineers, they need grunts.

Now, I'm pretty sure Goog's answer to this would be: a) we're not worried; and b) we are going to surprise you all by launching the beta test of Cybertron in 4Q 05. That may be the case...but the opportunity cost of whatever Google's got in the pipeline has been pretty high.

In fact, almost exactly a year ago, Yahoo was my favorite target. They made nice strategic errors for me to comment on almost weekly (and I had a lot of fun pointing them out). The worm's turned - kudos to Yahoo for not only being able to read the tea leaves, but also being able to match vision with execution.

-- umair // 3:57 PM //


The Really Big Picture

Can Asians Think? Understanding the Divide Between East and West

A fascinating interview of Kishore Mahbubani, who in my opinion is probably one of the most insightful public intellectuals of our time.

-- Mahashunyam // 2:10 AM //

Tuesday, March 29, 2005


Trading Places

Peter Drucker's take on the emerging Macroecon picture. (via Marginal Revolution)

-- Mahashunyam // 3:34 AM //

Sunday, March 27, 2005

Power and Morals

An interesting look at the role of morals in foreign policy.

-- Mahashunyam // 7:54 AM //


Gang World (Sub.)

Foreign Policy looks into the world of transnational gangs : pretty cool.

-- Mahashunyam // 7:43 AM //


Take Your Porn on the Road

Note to Sony : hire an MBA flunky for your strategy monkey to teach them that the days of earning platform rents by re-deploying content on new "proprietery" media formats are long gone. Your consumers are *not* going to pay for a third copy of the same content they already own on VHS and CD/DVD.

Big kudos to Sajeeth Cherian, a fellow Canuck for saving some loonies for all of us. PSPVideo9 is his second hit after Videora.

BTW, here's another cool hack to get all your e-books on the PSP. (Via slashdot)

-- Mahashunyam // 6:10 AM //


Tata Literacy Project

A cool example of how technology can be used to create societal transformation. This also illustrates one of the key points that most of the Digital Divide crowd misses : Digital Divide will not be bridged by throwing more money and ugly Dell boxes at the developing world. Localized solutions that tackle key problems with local input, creativity and buy-in will be far more effective than "foreign" solutions.

The flipside is that given the right environment to unleash the creativity of people, such solutions will cost a fraction of what is on offer today. Technology must be deployed within the right set of social drivers to be most effective. This is the big challenge for all social entrepreneurs out there.

The Dallas Fed paper I posted earlier talks about the lack of attention to entrepreneurs in economics and how entrepreneurship is fostered within environments with different property right regimes, such as capitalism and socialism. I personally think that an even more egregious omission in social sciences is the missing study of social cordination mechanisms that foster entrepreneurship for public goods. There is almost an unquestionable assumption that public goods do not belong to the realm of innovation or entrepreneurship, leading to corrupt, ossified bureaucracies in government as the monopoly providers.

However, I believe that this is where some of the most impactful innovation is now being enabled with technology these days. Given the democratising/empowering/low-cost nature of many of these technologies such as Open Source, I think it is reasonable to expect that their greatest impact will be on provisioning public goods, rather than the for-profit economic value chain. A dollar invested in a technology such as that developed by the Tata project is as prodcutive as 10 dollars in a conventional rural school with a teacher, without even including the costs of administrative overheads or the usual government wastage and corruption. We need to understand this type of innnovation at a much deeper level to address the Digital Divide as well as the bigger issues of poverty and hunger.

Question for inquiring minds : does open source/web 2.0 etc offer enough incentives for societies to use them as the platform infastructure for public goods? Yes, not having to pay monopoly rents to The Man, and having access to the source code is a great start. Is that all there is to it?

-- Mahashunyam // 4:43 AM //


Art of the Day
Sky Ear


-- Mahashunyam // 4:22 AM //


The Long Tail versus the Bottom of the Pyramid

An interesting back-and-forth on these two concepts.

-- Mahashunyam // 3:49 AM //


Celebrating Canuck Innovation

I had no idea that Flickr was based right here in Vancouver. Kudos, folks : you guys are at the leading edge of tagonomics. Here's wishing them a fun ride with Yahoo.

-- Mahashunyam // 3:39 AM //


Interesting paper on the role of entrepreneurship from Dallas Fed. (via Bubbleblog)

-- Mahashunyam // 3:37 AM //


The Scarcity Rationale for Regulating Traditional Broadcasting: An Idea Whose Time Has Passed

An interesting new paper from the FCC. (via Long Tail)

-- Mahashunyam // 3:30 AM //



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