Strategies for a discontinuous future.

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

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.

-- umair // 10:56 PM //


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.

-- umair // 7:58 PM //

Friday, October 07, 2005

Liquidity Events

Wondir gets snagged (hat tip to Rajan, nice catch).

-- umair // 8:31 PM //


How to Arbitrage Micromedia, pt 1

Google Reader.

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...)

-- umair // 7:55 PM //


Al Gore, Media 2.0 Analyst

Link. Surprisingly incisive.

-- umair // 2:53 PM //


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.

-- umair // 2:35 PM //

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.

-- umair // 5:28 PM //


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.

-- umair // 5:07 PM //



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 :)

-- umair // 4:52 PM //


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.

-- umair // 2:56 PM //

Wednesday, October 05, 2005

Bubblegen 2.0

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.

-- umair // 5:43 PM //

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 :(

-- umair // 8:45 PM //



Recent & upcoming sessions:

Supernova 2007 (video)




due diligence
a vc
tj's weblog
venture chronicles
the big picture
bill burnham
babak nivi
n-c thoughts
london gsb

chicago fed
dallas fed
ny fed
world bank
nouriel roubini


uhaque (dot) mba2003 (at) london (dot) edu


atom feed

technorati profile

blog archives