Strategies for a discontinuous future.

Saturday, December 10, 2005

How Not to Think Strategically, pt 173841

First, a quick note about the emerging buzz surrounding MS's plans to pay consumers for ads.

This may sound cool, but there are three big problems which render it strategically meaningless.

1) It's fraught with moral hazard = click fraud^1000000.
2) It's a very nice market for adverse selection. That is, the guys that will pay you the most to click on their ads will be exactly the guys you never want to see ads from.
2) Google can imitate it overnight.

There's a much better way to improve on PPC, but I unfortunately can't tell you what it is, since one of my clients is working on it.

Relatd to this, Nick C thinks Google is in trouble:

"...Moreover, it's been able to run its AdWords and AdSense services as black boxes, hiding to a large extent the way it divvies up the money that comes in. Advertisers and publishers haven't complained much because their choices have been constrained. In the end, though, markets abhor both black boxes and oversized profits."

I think this argument is fatally flawed. Two points to note:

1) Calculating Google's gross revenue share is trivial; all the numbers you need are in it's annual report. It's by no means "hidden" (though it may certainly be for individual publishers).

if you make this calculation, you'll see that by no means does Google "keep all the money to itself". In fact, a huge reason for it's near-total disruption of advertising is the fact that it shares the lion's share of revenues, creating huge incentives for competitors...not to compete, but to cooperate.

2) Markets abhor oversized profits?! Let me emphatically point out that nothing could be further from the truth.

In the simplest analysis, you can think of many different kinds of monopoly effects, or what you can call competitive advantage: local, natural, time-based, etc. Secondarily, you can think of what strategists call Schumpeterian (radical innovation) or Ricardian (scarcity) rents as different kinds of drivers of supernormal returns.

Intuitively, you can think about MS in the 90s, oil companies today, GM in it's heyday, Wal-Mart, Starbucks, IBM, Coke, blah, blah.

If markets "abhorred oversize profits"...the beta of every financial instrument would be 1. Clearly, it's not; hence, there's an existence proof that what Nick is arguing is off.

In fact, the opposite is true, as recent work in behavioural finance shows: markets exhibit neat positive feedback with respect to oversized profits, as information contagion causes expectations cascades. Markets luv oversized profits.

So the premises are bad. Does the conclusion of Nick's argument hold? Will Google's margins erode as competition picks up?

More than likely, not very much. The converse will be (and already is) true: competitors are engaging in serious price competition, to offset the disporportionately lower utility advertisers derive from advertising on smaller networks with less efficient transaction mechanisms. It's their margins that are eroding; this is the trend that's likely to continue.

If you really wanna know why, read my research note on Google Print - I don't have time to get into the details now.

-- umair // 9:23 AM //

Friday, December 09, 2005

Yahoo + Delicious, pt 2: Why Did Yahoo Buy Flickr Delicious?

Why did Yahoo acquire Delicious? Let's do a bit of deconstruction.

Come back to strategy with me for a sec - let's think about Semel's four pillars (which are basically just the segments of the 2.0 value chain outlined long ago in my Media 2.0 and Peer Production ppts):

"...Semel describes a strategy built on four pillars: First, there is search, of course, to fend off Google, which has become the fastest-growing Internet company around. Next comes community, as he calls the vast growth of content contributed by everyday users and semiprofessionals like bloggers. Third, there is the professionally created content that Braun oversees - made both by Yahoo and other media providers. And last is personalization technology to help users sort through vast choices to find what interests them."

Yahoo, I think, is rolling up social plays so it can basically do what I've outlined as the dominant Media 2.0 strategy: vertically integrate across the 2.0 value chain, with a focus on the edges. This strategy dominates the economics of attention scarcity; I'm advising many of my clients to think hard about where they fit into this value chain.

Delicious, like Flickr, can be positioned along almost any segment, or even integrated across multiple segments - it's a micrplatform, smart aggregator, and reconstructor, rolled into one, adding ad inventory, allocating attention, exerting market power over traditional media players, by adding huge switching costs for consumers - so it's a very good strategic investment.

That is, it has something far more valuable to Yahoo than an incremental revenue stream, or "eyeballs": a formula for market power.

Now, that said, I urge you to read the MeFi thread, which very nicely illustrates the vital point which is going to make it difficult for Yahoo to capitalize on these acqs and create value from rolling them up. I won't talk about it for now very much (enough already).

Does this deal makes me feel like the www is a bit less vibrant, and a bit more more drab, today than it was yesterday? Yeah.

Certainly, I would have liked to see Delicious grow into something much more deeply disruptive; I also think possibly Josh had hit a bit of a wall in terms of driving mass-market adoption without greater resources.

But I do think Delicious had the potential to be deeply disruptive, by extending into new domains, and hyperefficiently allocating attention.

As much as we can talk about how Yahoo hasn't screwed Flickr up - and I agree, they haven't - that's really the wrong question. A much better question is: what has the opportunity cost been?

For me, the answer is that it's been great: IMHO, Flickr is no longer the buzzing hub of innovation and cool new thinking that it used to be.

It's exactly this loss that I think a lot of us are mourning, maybe prematurely, for Delicious. Is Delicious gonna be, like Flickr, just a tiny cog grinding away in a big machine, which is increasingly focused on short-term revenue growth at the expense of innovation and disruption?

Like what this commenter at Om's blog said:

"...I believe that what we define as web2.0 at its core threatens yahoo�s very existance. If they don�t crush or own the space they will lose billions in a couple of years down the road."

Deal math, if you're into that kind of thing: if Yahoo used recent comps to do this deal, they valued Delicious at ~ $10 millionish. I have no insider info, but my intuition is that Josh was able to command a significant premium (50-100%), because, more than anything else, cred and market power are scarce, Delicious has them - and Yahoo wants (read: needs) em.

The rumour is much more; $30 million plus, which sounds high to me.

-- umair // 11:51 PM //


Yahoo + Delicious, pt 1

Congrats to Josh, Fred, Brad (and Charlie).

I thought delicious was a killer idea practically from it's launch.

I was pretty surprised when USV invested; it was a bold move, because 2.0 was definitely not hot (possibly getting warm) in the eyes of most VCs at that point. I think this a nice datapoint to show that USV is (relative light-years) ahead of the competition - especially most Silicon Valley investors, who are having a very hard time grappling with investments in the media value chain, and which require deep insight into consumer behaviour.

-- umair // 11:42 PM //


All Your WEB 2.0 Are Suck!321#$$!

Nick C says:

"...At least, I thought, this brouhaha will mark the pinnacle of Web 2.0 farce: Aging MTV star anonymously rewrites Wikipedia podcast entry to give himself more prominence in the community-written history of the creation of the latest overhyped online medium. What could possibly top that?

I was wrong, of course. Just days later, a new peak was conquered, in Paris at the Les Blogs conference...

Utopias are great - until people start moving in."

Look. This is a straw man. Think about it this way - 500 years ago, you could have asked the same question of books:

"Will these...these...damned books create a utopia?! No! For the masses will spew filth and trash!! Let us forget about these useless books, brothers."

Clearly, the right question would have been to ask whether books made us better or worse off - not whether they create a perfect world.

It's the same here.

The rational question, of course, which Nick seems intent on not asking, is not whether 2.0 offers a perfect world - it's whether it offers a better world. That is, very simply, do the social benefits of 2.0 exceed the costs?

For guys cloistered in ivory towers, I suppose this doesn't matter.

But for those of us focusing on real economic value creation (as opposed to snark) it does. Snark is easy. Creating value is hard.

I am better off because my kid sis can Skype me whenever she wants.

I am better off because my friends and family (and clients) across the world can read my blog.

I am better off because Last.fm lets me find - and subsidize - music I couldn't find otherwise.

I am better off because Google, Wikipedia, delicious, and even Yahoo magnify the productivity of kids in 3rd world countries who ping me to tell me I am wrong.

Multiply that by millions of people, and you have a deep, revolutionary, fundamental economic shift. As copiously demonstrated by the huge - yet not irrational - erosion in the value of, for example, Media 1.0 industries, and the concomitant explosive shift in that value to players like Yahoo and Google.

Point: I find it hard to take Nick's "utopia" line of argument very seriously, because his question assumes an impossible outcome. Maybe you should too.

-- umair // 10:33 AM //


Iron Curtains

...of distribution are vaporizing. Case in point: get RocketBoom on your Tivo. The first sign of deep strategy decay, as discussed yesterday, for the TV and film industries.

-- umair // 1:41 AM //

Thursday, December 08, 2005

Edge Competencies and Getting qwned by the GooglePlex

Pete asks:

"...So Google plans to open up the long tail of user-generated content and (potentially) let users profit from it. Would that be an edge competency, Umair?"

It's exactly an example of leveraging edge competencies. What are the edge competencies in this case? Google's learned how to make media plastic and liquid, by utilizing cheap coordination (but other players, like Yahoo and eBay, are struggling to build exactly these sets of learning).

Once you build learning about how to utilize cheap coordination, you can use it most simply to arbitrage your own industry via hyperefficient sources of value creation (like AdSense) - or, more powerfully, as strategic leverage to frictionlessly enter new markets, domains, and industries.

Nice catch.

-- umair // 9:49 PM //


Do Not Underestimate the Power of First Mover Advantage

I know that talking about FMA is somewhat verboten, since it's very 1999.

Consider this quote about Yahoo Answers:

"...This may not be terribly creative, as some critics have noted, but that isn�t really the point. The point is to win market share, and the �first mover� doesn�t always have an advantage (Exhibit A: TiVo). As lawyer and tech blogger Rob Hyndman observed recently, getting displaced in such a way is even easier in a world where technology changes rapidly, is either cheap or even free, and users are constantly looking for the next greatest thing. Is that good or bad? That�s difficult to say. But it does seem to be the new reality."

Unfortunately, the numbers tell us that there is a very real early mover advantage in network markets.

I have demonstrated the exponential relationship between market share and time of entry/time to scale quite a few times (RSS readers, microplatforms, and I will do the same for reconstructors soon), and it should be fairly intuitive, because network scale creates, in effect, a nice entry barrier in terms of cost advantage.

First, let's define it: advantage that flows from entering and reaching some minimum level of scale early. This implies two things that people often fail to consider: first, reaching scale is important, second, like other advantages, FMA decays. It's not forever - what it does buy you is a period of supernormal returns.

TiVo isn't really a relevant example, because it's not really networked; rather, it's simply a component in a system of complements.

If you're playing in Web or Media 2.0 markets, do not underestimate the power of moving early. I think you should consider it carefully; it's a key point of leverage.

Intuitively, you can think about AdSense, MySpace, Wikipedia, Bloglines - the examples are almost endless.

-- umair // 9:34 PM //


Imitation is Not Strategy, or Why Yahoo is Living in the Uncanny Valley

One of Yahoo's vital points - perhaps it's definitive vital point - is that it doesn't innovate; it imitates. Even hyperimitates, if you like; soaking up like a sponge more and more corporate versions of cool ideas floating around the Net.

What it almost never does is improve on them in any meaningful way. Remember Yahoo Maps? Shoposphere? 360? MyWeb? These were all imitations (of Google Maps, Wists, MySpace, Delicious, etc).

I could go on, but you get the point: Yahoo's versions of these services were/are like wax dummies, lacking any life, missing the whole point of openness, anarchy, decentralization, etc being sources of very real value creation. It's like Yahoo's stuck in a strategic uncanny valley.

This should be intuitive, but let me be a beancounter for a sec:

"...The combined average revenue per page view and search increased by approximately 5 percent and 8 percent, respectively, in the three and nine months ended September 30, 2005 compared to the same periods in 2004."

That's from Yahoo's latest quarterly report.

Case in point, Yahoo Answers (or, secondarily, Messenger; despite the gushing, this too is simple imitation).

This is not innovation; it's an imitation, pretty obviously, of models like Ask Mefi, or perhaps Wondir - a play I've talked about a great deal.

It's not just that that's lame - it's that imitation (plus perhaps dressing something up in nicer garb) is not a sustainable strategy; The emperor still has no clothes, in markets dominated by first-mover advantage.

Why does Yahoo keep imitating? The implication is that it does because it can't innovate. Which begs the question: why so little innovative capacity? I'm not sure. Certainly, it's not for any lack of smart people, money, technology, or other resources.

Unfortunately for Yahoo, the market can feel what I'm saying - this lack of innovative capacity is clearly reflected in it's market cap vis a vis Goog.

To extend Mark P's killer analogy, if Google is like Wal-Mart, I suppose Yahoo is trying to be Target. Either one leaves me equally unexcited these days.

Of course, the standard rejoinder to my argument is that Yahoo is assembling resources and building competencies. I don't buy that. Yahoo seems to be chronically unable to derive any serious supply or demand side scale, scope, or specialization economies (as I've partially shown). This tells us all these resources are not translating into real economic value, let alone serving as sources of advantage.

I know this is a harsh post - so apologies in advance. My goal is not to offend anyone, most of all the folks at Yahoo that worked hard on these projects.

I just want to offer this critique of what I see as Yahoo's ongoing anti-strategy. YMMV.

-- umair // 10:26 AM //


Research Note - TV 2.0: How To Think Strategically About the Future of TV

TV is on the cusp of radical change. Like the newspaper market, the TV market is about to be fundamentally reshaped by technological disruptions and discontinuities in consumer preferences.

Together, these shifts threaten to fundamentally reshape industry economics - by vaporizing entry barriers, exploding substitutes, and eroding the market power of incumbents.

And because these shifts are discontinuous, strategy decay, will more than likely, as in other media markets, be violently, suddenly revealed - resulting in a rapid, exponential erosion in market cap and value creation potential.

Consider the following:

"...However, he is skeptical of a future without TV networks as a platform to introduce programs, build loyalty or direct viewers to affiliate programming like local newscasts. "Nobody's got a crystal ball here," he said. "But I'm not sure we're ready to throw out 30 years of television industry economics."

"We are searching for the new platform or the new channel that will drive the profits in the future, but there are so many unknowns . . . What we do know is that the entire model is up for grabs.'"

While industry players can feel the earth beginning to tremble beneath their feet, because the coming shifts are so total - in fact, they're inversions of mass media economics - it's hard to know where to begin strategically. What can players do in the face of such total disruption?

To begin with, it's imperative for TV players to take a lesson from newspapers. For newspaper publishers, strategy decay didn't bite for many years. But when industry economics shifted discontinuously - in the course of the last year - a wrenching, accelerating decline in market cap, and value creation potential, was the result.

Like newspapers, TV players are deep in strategy decay. Like newspapers, rather than building new resources and competencies for the eventual shift to service and network driven economics, TV players have invested heavily to protect slowly decaying strategies and business models - through regulation, by building iron curtains of distribution, and by choosing to invest marketing rather than in innovation.

But the genie is out of the bottle - as a slow, but accelerating, decline in market cap and value creation potential along all segments of the TV value chain demonstrates. The gears driving the structural shifts that will fundamentally and radically reshape industry economics are spinning up - and no amount of inertia from incumbents can resist them.

Players in the TV market should immediately begin making four moves to disrupt - rather than be disrupted.

1) Shift strategic intent from the core to the edge. That is, understand the dynamics of competition at the edge, why market power is shifting to the edges, and what strategies dominate the new economics of media.

2) Invest in new models, like Smart Aggregators and Reconstructors, which can hyperefficiently allocate attention, and exert market power from the consumption edge of the value chain

2) Invest in Microplatforms, around which communities of connected consumers can self-organize, exerting market power from the production edge of the value chain

4) Use these new resources and competencies - edge platforms and edge competencies - to drive new sources of sustainable, strategic, powerful value creation backing up hyperefficient new business models.

What are dominant strategies for TV players facing an imminent disruption in industry structure? How can players across the value chain compete effectively in a world of unbundled, plastic, liquid media, and fallen iron curtains of distribution?

The most dangerous mistake TV players can make is, like the newspaper publishers, to focus their intent on new revenue streams. A short term focus on monetizing content causes players to miss the forest for the trees: the real question industry players must answer is, instead, how to renew and revitalize deeply decayed strategies.

Why are TV players in strategy decay? TV, like other media markets, is marked by byzantine and complex revenue sharing agreements between value chain players - content creators, networks, and affiliates. These agreements are adaptive solutions to the problem of risk: that only a tiny universe of content, in a mass media world, can be offered to consumers.

That is, information about which content is likely to meet aggregate expectations and preferences is extremely costly. Because it's costly, the TV market is fraught with risk, which is shared among players along the value chain. Viewed through this lens, networks manage risk by bundling content, and affiliates manage risk by bundling networks.

This risk concentrates market power in the core of the TV value chain, where programming is commissioned and purchased, and distribution is locked in by iron curtains (like affiliate agreements and schedules). That is, the core of the value chain is where asymmetrical information on both sides is collected, and utilized by execs to transform resources - lights, camera, action - into outputs, or finished goods.

But VOD - the first step on the road to TV's shift to a network market - shifts this market power towards the edges of the value chain. That's because an on demand world doesn't just begin to blow apart iron distribution curtains, and vaporize entry barriers, atomizing the core, but, far more importantly, it begins to arbitrage this information asymmetry - by letting consumers reveal where, when, how, they prefer to consume media.

It's not that execs will be disintermediated; it's that newer, radically more efficient mechanisms for aggregating information about consumer preferences and expectations - and then using that info to make production in turn, hyperefficient; to produce and deliver content in ways that maximize utility - are slowly taking their place, making them irrelevant. The value at the core - execs, stars, marketing, meetings, and memos - is being replaced by decentralized communities and markets, where connected consumers self-organize around the media they love.

How can TV players build new sources of advantage? Not by focusing on new revenue models in the near term. Rather, by taking the steps above, building new kinds of resources and competencies at the edge, which lay the groundwork for new, dominant Media 2.0 strategies, by exerting market power over the atomizing core, which, in turn, support the creation of new, hyperefficient TV business models - models like AdSense which are already achieving huge efficiency gains by vaporizing risk.

TV players who invest in these models - and build edge platforms - will have the ability to quickly and costlessly experiment with new business models because they occupy the strategic high ground: increasingly, they will be able to dictate terms to players who aren't part of the emerging value chain. That's because investing in edge platforms, like reconstructors and smart aggregators, lets TV players leverage - and control - the most strategically scarce resource in the value chain: attention.

At the same time, these players can leverage edge platforms and connected consumers for hyperinnovation across activities - radically new kinds of marketing, distribution, and products and services.

In fact, players who are taking a non-strategic approach to new revenue models - those attempting to grow incremental revenues from the www and VOD as new distribution channels - will find themselves at the mercy of competitors who thought strategically, because as TV shifts to a network market, natural monopoly dynamics will dominate.

These moves above are dominant because they reflect the fact that the TV value chain is being fundamentally reshaped - new niches are emerging to reflect the new sources of media value creation: plasticity, liquidity, and aggregation. It is these niches, in combination, that allocate attention - the scarcest resource in the new media value chain - hyperefficiently.

You can read more about Bubblegen's Media 2.0 and edge competencies practice areas here (500kb ppt) and here (250kb ppt).

-- umair // 2:53 AM //


Is Wikipedia a Public Good?

I've been having a nice debate with a commenter about whether Wikipedia is a public good or not.

I don't think it is; I can very easily exclude you from consumption (ie, publishing your microchunk) by editing it out.

So I don't think public goods analyses (collective action, market failure, etc) really apply. I think about it as a two-sided market, rather than as a good at all, but that's a long, boring story.

Food for thought.

-- umair // 2:47 AM //


Scale, 2.0, and Intent

There's a discussion going on at the moment about 2.0 plays not technically scaling very well.

Let me add my 2c.

This is a much bigger issue than technology. One of the big problems for 2.0 is, yeah, scale - but not in technological terms; rather, in strategic terms.

Many of my clients, like many other 2.0 players in general, have come up with game-changing business models and strategies. But, IMHO, my main criticism is that 2.0 in general is not thinking big enough. Scale is important because the network is, for successful players, exponentially valuable; not just in textbooks, like it was in 1999, but in the real world, as I've demonstrated.

Radical innovations like the ones 2.0 is spawning are beyond disruptive - for many industries, 2.0 is already reshaping industry economics in fundamental ways; something that happens once only every few decades. Consider the media or consumer goods industries, for example.

So, yes, scale is important - but less so in terms of servers and architectures, than in terms of thinking how you can really leverage network scale economies to revolutionize your industry. This should be the intent of 2.0 players - to vaporize, atomize, and otherwise reduce incumbents to irrelevance.

-- umair // 12:46 AM //

Wednesday, December 07, 2005


A number of you have written to tell me about broken links and to request a full site feed. The links have hopefully been fixed.

I've been reluctant to provide a full feed, not because I make $$ off AdSense (I don't), but because I'm still wrestling with the best way to diffuse my work. But I will try it for a while and see if the effect is positive or negative.

-- umair // 11:40 PM //


Media 1.0 and Coordination Arbitrage

Let's add to the list of RIP drivers - those that are disrupting the industry economics and dominant strategies of yesterday - for Media 1.0 what I call a coordination asymmetry.

What's that? That in many industries, firms can organize production more efficiently than other forms; so it's (or used to be) more efficient to organize production in firms, than in, for example, markets or communities.

This results in things like a huge oversupply of actors - because only a few firms can coordinate production of media, the demand for actors is almost totally inelastic.

But I think this is about to change, and watching how entrepreneurs arbitrage coordination asymmetries - how they utilize new models to make coordinating outside firms just as efficient as inside firms - is going to be one of the most interesting economic events in years.

Not least because the media industry thinks it's immune to economic discontinuities: not a single studio exec, newspaper exec, editor, publishers, etc believes they can get arbed like this. Of course, they already are.

But when smart entrepreneurs begin arbitraging this coordination asymmetry - by, for example, utilizing the huge oversupply of actors, a few good ideas, cheap production technology, the www to manage everything, and begin distributing microchunked, plastic, liquid media directly or virally.

My kid sister is young enough to think that MySpace is corporate and lame. How do you think her generation is going to express and define itself?

-- umair // 8:32 PM //


qwning the GooglePlex, pt 3

The durability of Google's competitive advantage is based, in large part, on it's ability to free ride on the world's info.

Now that complementors and those further down the value chain are understanding that they're being atomized, that advantage is under increasingly serious threat - and so Google is forced to acquire inputs at increasingly costly factor prices.

This implies another, very simple, way to compete with Google - push up the costs of factor prices, and make it increasingly expensive for Google to continue indexing (read: free riding) off the world's information.

Alternatively, free ride off Google - even if it doesn't earn you returns; just so you can begin to dilute Google's market power.

Or, finally, at least use this weak spot as a source of reputation leverage against Google.

-- umair // 7:51 AM //

Tuesday, December 06, 2005

iTunes Variable Pricing & Replication Wars

Penenberg's latest article is a lot like my argument why variable pricing is good for the music industry; he extends the general argument by recommending a market where music prices are set. It's a great idea.

-- umair // 11:25 PM //


The Problems With Web 2.0?

The Stalwart has an interesting post:

"...It's been a bad few weeks for motley collection of sites and services collectively self-identifying as Web 2.0. While it's easy to idealize the power of crowds, the global mind, collective intelligence or what have you, there's also a dark side of groups: dangerous euphoria, unchecked mob mentality, collective gullibility, and lack of accountability."

I'm not sure how true that is, but let's assume it's completely true.

Even so, the question should be: are consumers, producers, culture, people better off with or without Web 2.0? That is, are we better off in a world of centralized, monolithic, corporate control of production, consumption, cultures, etc?

I think the answer is very clearly, no.

But YMMV - and certainly, it's a nice change from GYM...

-- umair // 11:10 PM //


Research Note: How to Think Strategically About the Future of On-Demand TV

Everyone's talking about the business model for on demand TV.

Honestly, guys, the b-model is missing the forest for the trees. Think strategically, instead, to figure out how the dynamics of plasticity for TV.

Everyone's asking the wrong question - will average viewership fall, or decline? Focusing on that question is what's killing traditional media industries - by letting them ignore the real problem: they're deep in strategy decay, because their industries are being structurall reshaped.

If they want to survive as more than marginal players trapped in the core of an atomizing value chain, they need to meet the disruption of cheap coordination head-on, with radical innovation - with edge competencies, edge platforms, and 2.0 network economies of scale.

Let's answer the viewership questions anyways, to get started.

For the most popular TV programmes, viewership is likely to rise. But these are one-offs, and economically not meaningful. On average, it's likely to fall, as consumers defect to programmes that better satisfy their utility. To make this clear, consider the counterfactual: the only way that average viewership rises is if we accept that TV execs are better at scheduling shows for consumers than consumers are at scheduling shows for themselves.

In other words, an average fall in viewership reflects efficiency gains, which, in turn, reflects the facts that the supply curve for each shows becomes much more elastic. The price of shows rises, and viewership declines.

But the real question the TV guys should be asking, and they're not, which tells us they're about to get qwned, is this: how does on demand TV change my industry economics?

The answer is the same as it is for other markets being disrupted by cheap coordination: it begins to vaporize entry barriers and switching costs, and shift market power to the edges of the value chain.

That's terrible news for TV guys. What it means is that since they're in the core, it's totally and utterly irrelevant how many more or less episodes they sell.

Increasingly, they will have terms dictated to them, because the value is shifting to the Smart Aggregators and Reconstructors that allocate those episodes efficiently to consumers.

At the same time, their universe of competitors just exploded: where ER has competed only with whatever else was on during it's daypart, an on demand ER competes with...every other programme. Not to mention the fact that barriers to entry just got vaporized, because anyone can offer programmes on demand - not just NBC and CBS.

TV execs should focus on strategy, not business models. They're deep in strategy decay - earning incremental revenues from new business models is not sustainable unless they're backed up by game-changing strategies.

-- umair // 9:04 PM //


qwning the Googleplex

One would think it would be Yahoo that would roll up communities to qwn Google, given Yahoo's historical focus on community. But that part of their strategy's decayed lately, while they go back to the future to try and become a media players.

Instead, as Staci points out, it's FIM, who are focusing on "social portals" (read: connected consumption).

Very interesting. Why didn't Yahoo build MySpace?

-- umair // 9:00 PM //


How Not to Build Edge Competencies

Partner with someone else who hasn't built any. This is a bad idea for both the NYT and MS; building competencies jointly is difficult, if not impossible, because both players have hugely different incentives, and crucially, already possess vastly different core competencies.

And building radical, discontinuously new kinds of competencies is doubly hard to begin with.

Guys, you should really rethink this move - it may sound nice in the short run, but it's a recipe for disaster in the medium and long runs.

-- umair // 11:27 AM //


Edge Competencies

Why do I talk about edge competencies? Am I trying to make simple things complicated?

No. It's a straightforwardconcept: deep sets of learning at the edges of value chains or value chain segments, which let innovators sustainably leverage cheap coordination strategically. That is, into new markets, new domains, or new industries - reshaping their economics and arbitraging older, less efficient players.

The canonical example, at this point, is Google attempting to move into print ads. It can do this because it has learned how to makes both ads and content plastic. Google's print ads initiative is moving slowly; soon, we'll find out just how deep Google's learning is.

Conversely, whether or not Google succeeds - it's current failure has as much to do with the media industry resisting Google's we-will-qwn-you approach as anything else - it's also clear that print advertising can be made hyperefficient.

So players in all media markets should be investing much more heavily in edge competencies, by making media liquid, plastic, microchunking it, building knowledge pools about it, letting it self-organize - rather than continuing to invest in decayed strategies and dead business models which deliver the same old inert media through fatter pipes.

-- umair // 11:10 AM //


Research Note: How Edge Platforms Disrupt Industries

Edge competencies are often expressed in the real world through edge platforms. Edge platforms have a numer of key features. The most familiar are that they're often massively distributed, and open-access.

These two features alone make edge platforms often hugely disruptive to the economics of traditional, pre-network industries. Why? Because, strategically, they are enormous sources of leverage: they can usually almost completely vaporize the fixed costs of production from most of the resources that are necessary and sufficient to compete in those industries.

Here's a killer example. Peter Molyneux's new game is an edge platform for machinima. This nice Post article talks about how film students are beginning to use it to throw together flicks at almost zero cost.

This is a form of coordination arbitrage: these students are arbitraging the fact that coordination, in Hollywood, is relatively overpriced. That is, studio execs, stars, agents, etc cost a great deal - but are returning less and less relative to new forms of competition at the edge, which exploit cheap coordination.

We can think of many, many other examples: Wikipedia, AdWords, Last.fm, to name just a few.

We can also think of many other markets whose consistent refusal to move from the core to the edge - whose deep strategy decay - is threatening them with not just competition, but irrelevance.

-- umair // 8:04 AM //


New Blood, New Ideas

I asked myself today why I would want to read a roundtable of John Battelle, Nick Carr, etc - more or less, the usual suspects - talking about Google.

I don't know about you, but I feel like the blogosphere is desperately in need of fresh thinking.

No, I'm not implying I want to contribute to the roundtable - just pointing I thought it was kind of boring.

I feel like the last thing the world needs is yet another debate about what Google will do, has done, might do, should do.

If you want to talk about Google, at least invert the question: talk about how to compete with it - that's fresh.

Better yet, just talk about something else altogether.

-- umair // 6:18 AM //


Interesting Startups

Protopage rocks: a textbook example of how to enter the reconstructor space. Nice one, guys.

Why, again, is it that all the cool stuff happens whenever I leave London?!

-- umair // 6:05 AM //


Media 1.0 vs Media 2.0

Gartenberg says:

"...The reall story of the Wikipedia is why would anyone presume anything written in there is accurate? Where's the accountablity? Well, there is none. Another reason why good content written by professionals with editorial oversight isn't going away anytime soon."

And, incredibly, misses the whole point. Has he looked at vaporizing media industry market caps lately? What does Gartenberg think the private equity funds sniffing around publishers are going to do with them? Hire more editors :) ?!

It's not that Wikipedia is better or worse. It's that it creates more value. How do we know this?

Because, in fact, content written by professionals with editorial oversight (as we know it) is already going away - those eroding market caps are translating into accelerating layoffs and restructuring in the real world. They mean that 1.0 competences and resources,and the business models they support - 1.0 value creation itself - is worth less and less.

Make no mistake about it, new models like Wikipedia are economically revolutionary - they're hyperefficient sources of value creation. They are very much substitutes for mass media.

The numbers simply don't lie; it's no coincidence that value is eroding from media 1.0 players, while the market cap of 2.0 players like Google and Yahoo continues to balloon: this is value shifting in the real world. Wikipedia doesn't have a market cap, but it does have an accelerating base of users - and like value, their attention is gained at the expense of the traditional media industry.

Smart mass media players will turn them media 2.0 into complements, by building edge platforms and edge competencies.

I mean, it's the end of 2005. Isn't it intuitive and obvious how the media industry could utilize Wikipedia, blogs, and podcasts (etc) to revolutionize their strategies and business models?

-- umair // 2:41 AM //


qwning the Googleplex, pt 1.5

Last week, I talked a bit about qwning the Googleplex. Here's a nice critique of one of Google's also-ran services: Froogle.

The basic point is that humans are, in many domains, hyperefficient - more efficient than algorithms.

Contrast Froogle with Fatwallet, for instance.

-- umair // 2:30 AM //




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