Friday, May 19, 2006
Research Note: Discovering the Wrong Future - Denuo Mini Case Study
Recently, Publicis set up a new practice to advise and invest in new media - Denuo. They don't invest financial capital - they advise in exchange for equity:
"...Denuo, a major new strategic initiative designed to anticipate and exploit the rapidly changing digital, interactive and mobile communication environment. Denuo is a stand-alone business -- but is not based on any pre-existing industry model. Denuo's model rests on three pillars, and will function simultaneously as a strategic consultant, an inventor of solutions and as an investor in partnerships."
Denuo has invested in (=is advising) a few plays so far: Lightningcast, ShadowTV, Brightcove.
Note how strikingly similar Denuo's investments are. They are all infrastructure plays. The investment thesis behind infrastructure plays is simple - and too simplistic.
It is often simply that demand is racing ahead of supply - and so it pays to invest along in those segments of the value chain which make production technically and marginally more efficient.
Of course, the key hidden assumption is that dominant design of the value chain (the sum of business models, the way value is created and captured) is still valid; still in sync with industry economics. That's a very important point, which we'll return to.
Now, these investments aren't just strikingly similar - they're strikingly like those of most venture funds, who are still looking at new media through a technological looking-glass. They are the kind of investments you would expect (and indeed, you get) from tech-centric, consumer-averse half-geek/half-beancounter VCs - not marketing droids like the Denuo guys.
Now, this is an investment thesis that has doomed most VCs to watch a disproportionate number of their highest-geek-quotient investments continue to go sideways - while puzzling over the accelerating success of of largely anti-technological plays like flickr, delicious, Skype, Habbo Hotel and MySpace (and, of course, then funding scores of half-baked imitators).
Denuo is an example of something both paradoxical and improbable: media players investing in exactly the wrong parts of the new media value chain. Guys who should get new media, but are, instead, more VC than VC.
To really make this point concrete, let's contrast Denuo's picks with the acquisitions of the most visionary new media player by far - Fox.
Scout Media - team-specific sports content & community
Newroo - (rumoured to be an) attention market
Ksolo - karaoke community
Whatifsports - team-based sports sim community
And, of course:
MySpace - music and fan social network
Fox's acquisition thesis is a bit more complicated - but predicated on a much deeper understanding of the new media value chain. Fox invests in domains which are hypersocial (discontinuous shifts in social connectivity) or hypercultural (discontinuous shifts in cultural specificity): sports, karaoke, music.
Further, Fox invests at the edge of the new value chain: at the interface with consumers. Further, Fox invests in the three roughly distinct models which live there - which are what we talk about at bubblegen a huge amount: markets, networks, and communities.
Why? Because Fox understands the deep economics of new media. Value capture in the new media value chain is a function of market power. And market power is a function of attention. And attention is allocated most efficiently by markets, networks and communities.
Consider MySpace. MySpace's success is driven by it's proprietary music and now video player - the deepest social widget in the new media world. It is what lets fans connect to bands they might love - it is what allocates their attention hyperefficiently (more efficiently than Top 40 charts, corporatized radio robo-DJs, or even next-gen corporobots, like Pitchfork Media).
It's unlikely that MySpace will ever use the kind of generic "infrastructure" that Denuo's investing in: because doing so would rob it of the very source of it's advantage. It would make MySpace just another generic interface to a pseudosocial antinetwork (hi LinkedIn).
Google's story is the same. It profits by allocating attention hyperefficiently - using a market to do capture value. Will Google, one day, shift to a generic search "infrastructure"? Or a generic market-making "infrastructure" to replace AdWords? Of course not - the contrast is even more stark in Google's case.
Denuo, then, is the anti-Fox. They are nearly flawlessly discovering the wrong future. It's the future where infrastructure lays the pipes for scores of generic markets, networks, and communities. Of course, this is the future that already happened, which consumers thought sucked, and so they stopped using the www - remember the bubble?
What's different about today is that visionaries like Fox (surprisingly enough) understand that what drives attention allocation is the hypersocial and hypercultural; and what drives the hypersocial and the hypercultural in, for example, music and sports, is marginally, but deeply, different.
There can be no common "infrastructure" between, for example, music and sports, because it is exactly the marginal differences - being able to individualize your MySpace page, being able to connect through the music player - which create value. They are what drive the shift to hypersociality and hyperculture.
It's fascinating that media guys - who should have the deep understanding of attention economics and consumer dynamics that informs the Fox acquisition thesis - are instead, thinking purely about tech. Like VCs, they subscribe to a technological view of the future. And, possibly worse, like traditional media guys, they think in terms of "inventory", "engagement", and "control".
But that's exactly why the crash happened - because yesteryear's MBAs, hit with the fever dreams of a new gold rush, thought about the www was simply a more efficient distribution channel for the same old concepts and ideas; so they focused on technology, largely leaving consumers - the most powerful force of the post-network economy - out of the equation.
Investment theses count. But their strategy has to be built on a deep, durable economic understanding - not a superficial, flimsy one. Unfortunately for Denuo (and most venture funds), the Cambrian Explosion in media isn't about making the same old broken model of media marginally more efficient by investing in infrastructure.
Instead, if recent history teaches us anything strategic, it's that the Cambrian Explosion in media is about radically redefining the economic essence of media; redefining media production and consumption for an attention and interaction economy; redefining how media shapes the social and the cultural to allocate attention, exploding value creation and value capture.
Note: Yes, I do understand Denuo is bound by a specific set of relationships with existing clients.
I enjoy your work, and appreciate your making thoughtful new media analysis very accessible.
I would like to know, however, why knock the writers at Pitchfork Media as "corporobots?"
I have no affiliation with them, but I think Pitchfork's got a nice mix of news, reviews, etc. and they do it in a really organic way. Where are the robots?
It's not really a knock, I'm just pointing out that Pitchfork is more and more predictable - but perhaps it's just me, so of course YMMV.
It's interesting that Murdoch kind of out-pitchforked Pitchfork, no?
I certainly agree with you regarding Murdoch and his success. There's just so much more to leverage with MySpace, and it doesn't even require too much steering. The power of self-interest/self-promotion is amazing.
tremendous post Umair - right or not, you have so thoroughly analysed this that your position is extremely hard to question - thanks
// marks ramblings // 4:23 AM
This is really amazing Umair... Manual Trackback
Reading your excellent post I couldn't help but be reminded about something I read on Jason Kottke site almost two years ago. It is attributed to Robert Morris from IBM, and I quote:
"Advances on the internet and the web are typically heralded as technology-driven...[but] most significant advances in software are actually advances in user experience, not in technology."
This is something Fox understands and Denuo doesn't.
Awesome post, Umair - I agree completely.
// Pete Cashmore // 2:26 PM
I heard Denuo's president Nick Pahade speak at Syndicate in nyc Wednesday. If I remember correctly, the title of his concluding slide, in reference to the "Web 2.0 startups" in the room was: Our Clients Will Love You (just clean yourselves up a bit)
I was amazed because what this means is that Publicis was unable to even process information about new media. They had to create an entirely new company (Denuo) to simply have meetings with new media businesses- meetings where businesses will be judged with an anti-edge mentality (since it's more important for Denuo to face consumer brand executives than it is to face consumers).
// eli chapman // 4:06 PM
I read in SilionBeat that AOL bought LightingCast. Interesting.
Great stuff, but I'm left wondering if your grand vision isn't clouded by survivor-bias. One headline grabber does not a future make.
That's a very good point.
Thanks for sharing that - very interesting.
Did you even read the note? I gave you plenty of examples - about 10, to be exact.
Survivorship bias, if anything, goes directly in the other direction.
Thx for the comments.
You can write!!!
Thanks for your comments on new technologies that are not on the corporate leash. You analyzed the Denuo vs. Fox investment strategy like a Samurai at Sushi bar. I am curious if you could recommend any other intelligent investors for the entrepreneur? I have an IPTV application that permits the viewer to choose their advertisement outside of the Set Top Box. Any suggestions?
I've appreciated your "New Media Economics" for some time now. It's refreshingly "macro" (big picture), and has impacted my own thinking a good deal. To that end, this post got me thinking about "infrastructure" and "attention" and the innovative business model enablers that have and will continue to generate more value for the content aggregators/distributors. My post is here.
Appreciate your thoughts about Denuo, and humbled by the attention. While your thesis and analogies are interesting, they do not accurately reflect what our little unit is doing; we have no aim to be like Fox (or anti-Fox) or replicate what VCs are doing - or anyone else for that matter. We "marketing droids" sit at an interesting intersection between consumers, "media" and one track of the economics in-between (ad messaging), and our Denuo practice comprises a number of activities (not just those mused about here) that just might help all players benefit going forward. We are not blind to attention economics or changing consumer dynamics or any of the other "deep, durable economic understanding" you point out - in fact, we are closer to it than you know. I would suggest you resist the easy temptation to lump what Denuo is doing into the same pile as VCs or other agency holding companies or big media firms - especially when you have no true knowledge about what our varied activities are focused on. We just might surprise you in the months to come. - Tim Hanlon (Denuo)
Thx for the link - I enjoyed reading your comments.
I'm sorry if I upset you - I certainly didn't mean to. I have a great deal of respect for you guys.
Look, you're certainly right - I don't have perfect information.
But your two responses to my argument - that what you're doing is top secret, and that you guys do a lot more than I talked about - are kind of irrelevant.
That's because I'm arguing that the info we *do* have points pretty consistently in a given direction; and this argument is only related to your investing.
So (don't kill me or anything), but I think you're not actually responding to the argument I'm making.
Truth be told, I do hope I'm totally, utterly, hopelessly contradicted, and that you guys will surprise.
I think the idea of Denuo is great - I just don't think the thesis that I can trace is that great.
Also - I'm not "lumping you in" or even arguing that you're "trying" to be similar to venture funds.
I'm arguing that you're viewing the world through a technological lens, and so the results are similar.
Thx for the comments guys.
Hardly upset, and thanks for the props. Actually agree with much of what you've said - especially the potential (of many players) to focus too much attention on tech-centric approaches (e.g., don't get me started about some VCs' view of the media world!). Just saying that we (and our activity in toto) may not be the best poster child for your "wrong approach" argument when all is said and done. That, to me, seems relevant. And time will certainly tell. Regards, Tim
Umair, I enjoy bubblegen tremendously and think you've got the vision right. Your note about the investment in infrastructure is right on - except for the fact that there is this unsettled movement about 'net-neutrality' going on. If net-neutratlity is entrenched then you are absolutely right. But suppose the infrastructure owners have it their way? Could it be that the Denuo approach is an attempt to hedge the bets. It not like they will lose, if net-neutrality is confirmed (they simply will not gain a great deal), but if the infrastructurist old school fences the 'commons' then they stand to gain a great deal in a world where control of the pipes determines what goes through and how fast it goes through.
As Umair said, your counter argument is just (to paraphrase) "We're not like the others." It IS irrelevent to his post. There's no examples or specifics to back it up.
I work in advertising and have a few thoughts on your post.
It is ridiculous to compare a company like Denuo with Fox: Fox is a media company that makes money off of selling its ad inventory; Denuo will make money from its investments by selling pickaxes to the goldrush of advertisers trying to deliver things like video to Fox's numerous properties.
Denuo knows the advertising industry and will make money from it.
Fox's "play" is to own an audience with the highest reach it can achieve, and that's why it has been buying everything it can get its hands on over the past year. To assume that it has some sort of vision is also a bit naive - they buy for size and growth, (throwing in things like niche communities so that they can sell the "long-tail" to advertisers as well). This is, in fact, a traditional media investment approach.
Further, to assume that MySpace will be a major player on the web even five years from now is also a mistake, as the primary consumers on MySpace are among the most fickle on the web. Give it time, and MySpace will implode, only to be replaced by some new, independent social networking site that allows people added functionality without things like the intrusive "advertising buddies" that MySpace currently seeks to force on its consumers.
And Fox won't own the MySpace replacement, but Denuo will partially own the technology that delivers the video ads to it.
Facebook? Ruckus? JetEye?
umair, would be interesting to hear your arguments to those points above? there are some valid assumptions in there. where is the evidence that newscorp isn�t just grasping for reach or that myspace is still playing a role in 5 years?
Let's look at what the numbers reveal. If Fox was simply after "reach", their entire M&A strategy would be very different - they would be acquiring players like YouTube and Facebook (etc).
That they aren't - and where they are focusing their acquisitions instead - reveals a great deal about their thinking.
FYI - everyone and their mother and their best friend has bee predicting Myspace's demise for almost the last 3 years - but it keeps growing. Clearly, there must be a reason beyond it being a fad - and in fact, I've explained why many times.
Your read of the investment direction and postulation of what really drives change and success is very interesting! What is your prediction for the new definition of the "economic essence of media" ... 2 years from now and 5 years from now? Pradeep A.
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