Strategies for a discontinuous future.

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

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.

-- umair // 6:38 AM //

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)

-- umair // 7:38 PM //


Everyone loves

The triple-play. Yawn.

-- umair // 7:35 PM //


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 :) !!

-- umair // 7:31 PM //


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.

-- umair // 7:23 PM //


Marketing 2.0

Discussion with teens about how they use the Net as a huge substitute for mass media.

-- umair // 7:20 PM //

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.

-- umair // 9:39 PM //


Uh Oh

Video iPod arrives.

-- umair // 8:17 PM //


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.

-- umair // 7:57 PM //


Academe vs Micromedia

What a surprise, crusty old academics don't like blogs. Most of them don't even like email!!

-- umair // 6:37 PM //


NYTSelect vs the Blogosphere

Not looking good for NYTSelect.

-- umair // 6:33 PM //


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?

-- umair // 6:09 PM //


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.

-- umair // 5:49 PM //


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.

-- umair // 5:32 PM //



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.

-- umair // 5:30 PM //


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 :)

-- umair // 7:20 AM //

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.

-- umair // 5:42 PM //


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.

-- umair // 4:56 PM //


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.

-- umair // 7:44 AM //


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 :)

-- umair // 7:08 AM //


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.

-- umair // 6:45 AM //



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.

-- umair // 6:32 AM //



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.

-- umair // 2:29 AM //


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.

-- umair // 2:20 AM //

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...

-- umair // 11:16 PM //


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.

-- umair // 9:40 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