Strategies for a discontinuous future.

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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.

-- umair // 10:42 PM //


Umbria Listen to This

A strong candidate for worst domain name ever: umbrialistens. If you don't know, Umbria's in the pseudo-business of blog-mining; reflecting their own buzz back at brands.

No wonder marketers can't get the new marketing right. They can't even speak honestly about themselves!

In case it's not crystal clear. Listening implies the people talking know you're, well, listening. What Umbria is doing is eavesdropping.

Now, I know this sounds like a minor difference to you geeks. But it's a very big one from a branding point of view, because it means they're unabashed about bending the truth when it comes to consumers - not a great idea for a company whose business is built on the backs of consumers, huh?

And it tells us a great deal about Umbria's worldview, strategy, philosophy: that listening to the conversation - without adding to it - is how they plan to capture value. In other words, they plan to capture a lot of value, without creating much.

That's not just ultra-lame.

It should go without saying that that's how would-be players of all stripes - from VCs to entrepreneurs to analysts - get killed.

-- umair // 9:02 PM //


Euro VCs underperform US VCs

Why doesn'tthis post from Paul Kedrosky surprise me at all? Risk aversion, rigid socio-economic structures, unwillingness to embrace globalization, xenophobia, blah blah blah...you know the score.

-- Mahashunyam // 3:21 AM //

Thursday, May 18, 2006


Guys, I seem to perennially, lethally backed up on email. No matter how hard I try, I don't even make a dent in the mountain.

So if you email me, and I don't respond, please don't take it personally. If it's really important to you, just ping me again to remind me (if that's OK).

-- umair // 7:14 PM //


Humour of the Day

The retarded irony factor knows absolutely no bounds - how not to advertise mini case study: so inauthentic, it's ironic.

Nothing like proving how evil you really are (MeFi).

In fact, check this out:

"...Josh mentioned he remembered that CEI�s founder, Fred Smith, was on Crossfire years ago talking about how �global warming was actually a good thing because of all the cool new crops we could grow.�

Here�s the transcript from Crossfire, 3/27/92:

Mr. SMITH: Look, the point- what we do know and don�t know, we know that carbon dioxide is increasing. We know carbon dioxide is a plant fertilizer which is a positive benefit to the peoples of the world. We know that there are these elaborate computer models that have never been right before, may be right this time, that suggest climate changes, possibly good, possibly bad. Most of the indications right now are it looks pretty good. Warmer winters, warmer nights, no effects during the day because of clouding, sounds to me like we�re moving to a more benign planet, more rain, richer, easier productivity to agriculture-

KINSLEY: Wait a minute.

Mr. SMITH: We�re basically to a world now that�s a lot closer to heaven than hell.

Ah, the big lie technique strikes again (and don't miss the combination of a very nice culturally specific trigger for fundamentalists who are the least likely to believe in global warming anyways = "heaven").

-- umair // 6:26 PM //


The Creativity Explosion

A quick note. I discovered this comment on my work.

"...Things like search cost and distribution cost and microchunking cost (sorry umair ) don�t add up to a hill of beans when it comes to true entertainment value."

In case it's not crystal clear. Though I use the tools of economics, my work is fundamentally about the rebirth of creativity.

What is the Snowball Effect, at the end of the day? Amplified returns to creativity.

What is microchunking, from a functional point of view? The ability for people to be more creative, without having to pay the costs of buying a block of mass media time.

I may talk about costs and benefits; but it's to demonstrate the futility of being a beancounter in a globalized, hypercompetitive, post-network economy.

What's incredibly interesting (to me, at least) is that Rupert Murdoch recently said as much.

-- umair // 6:20 PM //


Dead Tree Problem

"..."Think for a moment about the dead-tree problem," he said. "When you stand in your own personal library looking for something and you realize that A, you can't remember which book it was in, and B, there's no way you can go through manually looking at all the pages, then you think, 'God, I wish all this stuff was online.' "

From yet another article about Google Print. That's all well and good.

But there's an inverse problem - call it the Dead Brain Problem - which is what the next batch of radical innovators are already solving: that in a world of cheap, universally accessible info, you don't have the incentive to know much of anything. When you have a library, you get to know your books - you learn what's in them.

This is a key vital point for Google.

-- umair // 6:14 PM //


Two Steps Back

"...Yahoo's new ad system is designed to let marketers target prospective consumers not only by the search terms the people use, but also by their demographics, location and what they do on other areas of the Yahoo network, executives said."

Note: making better ads doesn't mean going back to yesterday. It means letting go of yesterday - disrupting it.

And, note, Yahoo's still talking the talk without walking the walk:

"...Lloyd Braun, head of the Yahoo Media Group, said the company is planning to offer licensed, original and user-generated content. "Community and personalization are going to be the key differentiators for us," he said."

I (really) won't hold my breath. If Yahoo's demonstrated anything in the last year or so, it's that the market is wiiiiide open for...uhhh...real community builders and peer production players.

Finally, note how similar Yahoo's pillars still are to my (now old) new media value chain (ppt).

-- umair // 6:02 PM //


The 10 Worst Corporations of 2005

You know the drill - every single one of these presents a huge vital point for strategic innovators to strike.

-- umair // 5:58 PM //



We haven't discussed consumer dynamics enough lately on bubblegen. Here's a great example (and an awesomely disturbing one) of the tectonic behavioural shift to the search for comfort via the spiritual in a fragmenting, mechanizing, hyperrationalized, increasingly risky world.

-- umair // 5:52 PM //

Monday, May 15, 2006

Politics of the Day

Greatest MeFi comment ever? You decide (even though you're not the Decider):

"...Dear America,

If you put up a wall on the northern border, could you please line it with lead? We're concerned your impending civil war may go nuclear.

Thanks in advance,



-- umair // 10:35 PM //


Stardoll - More 2.0 Than 2.0

I've been meaning to write about Stardoll for quite some time now.

Stardoll is more 2.0 than 2.0 - it's something that represents the essence of 2.0 economics, but is completely off the radar of the usual suspects because it's not in the usual 2.0 markets.

Mini case study: I made the mistake of talking to a very well-known venture guy about it last time I was in SF, and he so didn't get it. From the look on his face, my guess is because Stardoll isn't just about culture, it's about toys; it's not just about toys, it's about girls. And thats a pretty unfamiliar territory for almost anyone in the Valley - whether geeks or beancounters - to find themselves.

Anyways, here's the deal. Stardoll gets some serious <3 from fans. Why? Because it does something deceptively powerful: it begins to make dolls plastic - it lets kids unbundle and rebundle them in the ways they like. It's related - though different - to the Neopets model (which is one direction in which Stardoll could head).

Now, Stardoll's model isn't perfect. There's much they could do to improve it. They have only halfway built a real edge strategy But it's a very nice start to tapping a vastly overlooked - and vast - market. Toys are going to be absolutely revolutionized by 2.0 models - Lego Factory is another nice example.

Kudos to Index for making the investment - I think it will be a winner if Stardoll can understand the new drivers of scale.

-- umair // 8:27 PM //


Idea of the Day

Either the stupidest thing I have heard in a very long time, or the smartest (I can't decide). Thoughts?

-- umair // 6:41 PM //



Can someone recommend another Tagcloud-alike to extract a tag cloud for me? I would be eternally grateful...

-- umair // 6:39 PM //


Please Guy, Don't Hurt 'Em

Another top ten list from Guy Kawasaki makes my head want to explode (in a nice way).

-- umair // 6:35 PM //


Snowball Effect

A corollary to the Snowball Effect is that returns for content producers are, on average, going to rise - especially in the short run, when there's no Googleopolist to shave their margins.

Note, though, that this isn't value creation - it's value transfer. This margin amplification is essentially at the expense of the marketing costs publishers used to pour into (crap) content (no one wanted to see anyways).

Also note that another component of this effect is that it's hard for average returns to content to fall in the short run - because of the amazingly Byzantine business model which evolved to solve the (so-called) problem of risk (=execs more interested in expense accounts than consumers) in yesterday's media industry - the NYT does a nice of explaining:

"...Until recently, that model worked something like this: a studio sold the initial rights to broadcast a program to a network within its own company or that of a competitor, usually for far less money than it had cost to make the show. The studio then waited patiently for the time, probably four years later, when the network's exclusive right to broadcast those episodes would end, thus allowing the studio to sell the show in syndication and not only erase the deficit but hopefully turn a profit."

-- umair // 6:30 PM //


The Problems With Gutopia

You know, it's quotes like this (from Kevin Kelly's recent article for the NYT Mag):

"...Brewster Kahle, an archivist overseeing another scanning project, says that the universal library is now within reach. "This is our chance to one-up the Greeks!" he shouts. "It is really possible with the technology of today, not tomorrow. We can provide all the works of humankind to all the people of the world. It will be an achievement remembered for all time, like putting a man on the moon."

That amaze me. Of course, the difference between now and then is that doing gives a single company - Google - enormous market power.

And if history is any guide, not once has a firm with absolute power - Standard Oil, Microsoft, you know the score - been anything less than evil.

Google is, in a very real sense, profiting enormously from the utopian naivete of the Valley. And though Kevin's article is a great read - and I'm a huge fan of his new work - this flaw makes his conclusion - a utopian vision of ubiquitous, "free", information totally invalid.

Has Kevin used Google Scholar? If you haven't, try a simple query like this.

That screen is the polar opposite of ubiquitous, free information - it is a set of links which send you to walled gardens built by academic publishers who want to charge $20, $50, or $100 or more for a single article.

But it is the future the Googleverse leads to. It's the inevitable result of handing informational market power over to Google - just like physical distribution economies (and price hypersensitive consumers) inevitably lead to Wal-Mart. Either one is just as evil as far as consumers are concerned.

Kevin argues that we should scan books because there is a "moral imperative to scan" - a moral imperative to make information free, essentially.

Are you kidding? That's like saying there's a moral imperative to buy gas, or to buy the cheapest goods possible - because this so-called moral imperative has a single economic effect: to line Google's pockets, handing market power over to it.

Take books - what we're talking about here. The so-called moral imperative is only valid if there's a level playing field for scanning; if the scanning market can be made competitive.

Of course, it can't - it's a natural monopoly; who scans the most wins, because the average cost is always falling.

And this - profiting from the natural monopoly dynamics of information - is, make no mistake about it, exactly Google's game - not creating some kind of Gutopia.

I find all this amazing, given the intensity of anti-corporate feeling amongst the digerati. Here's another version of the same specious argument from Tim O'Reilly, for example, completely misinterpreting the economic implications of a Long Tail - just assuming consumers will be better off because demand is amplified.

The real question is: will natural monopoly dynamics give producers enough market power to impose hidden costs that outweigh the benefits consumers realize from saving search costs? How big will the deadweight loss of the Googleopoly (or whoever) be?

Look, this isn't a hard argument to grasp - why do brilliant guys like Kevin keep missing it?

-- umair // 6:02 PM //


Politics of the Day - When Reality is a Straw Man

"...I predict that his speechwriters will insult our intelligence and present unsustainable and bad argumentation supporting amnesty for border jumpers, including the strawman �We are a nation of immigrants!�"

From the incomparable LaShawn Barber.

The real question, of course, is whether Bush can simulate yet another war, this time with Mexico. My money is on yes.

Sometime in the distant future, when I'm old, gray, and only marginally cool anymore, historians will note the Fox Effect - an enormous, statistically proven bias in how divergent the beliefs of Fox News viewers are from reality - with something approaching awe.

So I think absolutely the American public can be fooled very nicely and easily - at least until my generation is old enough that the most evil form of media ever invented, TV, will finally be rotting in it's well-deserved grave.

-- umair // 3:54 PM //


The Real Chasm in 2.0 is VCs

I took this post down because I really didn't wanna offer yet another long explanation of what I think is wrong in the venture community, but several people have asked me to repost this, so...

Don't look now, but it looks like venture guys are finally beginning to get the massive gaping chasm at the heart of 2.0 (which we've discussed in excruciating detail).

But they are asking (and answering) the wrong question. The malaise in the venture community isn't down to entrepreneurs - it's squarely and fundamentally down to VCs.

Now, of course, there are exceptions to the argument I'm gonna make, and you know who some of them are.

Last time around, VCs were the guys that helped entrepreneurs discover how to tap mass markets. Today, the vast majority of them aren't doing that - there are very few VCs who are providing the kind of insight, fresh ideas, or leadership the community needs.

As I've pointed out, this is because many of them don't understand media or cultural industries, which is where the action will be for the next few years. They don't understand the new drivers of scale - as evidence by Feld and Josh talking about doing exactly the wrong thing: reaching scale in decaying, vanishing mass markets.

To make this intuitive, all you have to do is think about Myspace recently destroying YouTube in a matter of weeks - there couldn't be a more stark confirmation that, when it comes to edge strategy, most venture guys have (not to put too fine a point on it) no idea what they're doing.

To make this clear, let's go back to the old saw: what is 2.0?

If you think Web 2.0 is purely technological, you end up with Om's recent thesis, where you're basically trying to sell nicer use experiences to a moribund software industry.

That's kind of insane from the point of value creation - because it fundamentally misses the economics of 2.0

Those technologies - lamp, rest, blah, blah - are a commodity. If we want to talk about 2.0 from the point of view of value creation and capture, it becomes pretty clear pretty fast that 2.0 is the common set of design principles and attributes (as in mechanism design, not make it look nicer design) which unlock radical new ways for people to connect and coordinate: markets like Digg, networks like Last.fm, and communities like MySpace.

The technology matters, sure - but it's also cheap, ubiquitous, and very, very easy to work with. Instead, what counts is the fact that guys like this are embracing radical kinds of management and strategic innovation which make old economics obsolete. For example, they're rethinking the way a dying media industry thought goods had to flow through value chains.

Now, if you follow my argument, you end up at a very different place. You end up with the hypothesis that 2.0 is going to cause tectonic shifts across industries.

Consider HCL's recent radical management innovation, recently discussed in a very nice catch by M. It sure feels 2.0 to me. It's the emergence of what is a vast, untapped market for 2.0.

Consider Fanlib. It sure feels 2.0 to me. It's another example of an emerging market for 2.0

But you'll never hear these examples discussed by the usual suspects, whether VCs or otherwise. The point is that the Valley is caught in a core rigidity. It's spent so long thinking about tech, it can't think about anything else.

And the problem is that 2.0 is much, much more than tech - it is about a new economics. And these economics are changing the way business is done all over the world. It's the Valley's fault - the fault of the senior guys, the thinkers, the leaders, the VCs - if it can't (or won't) notice.

Of course, this begs the question - why won't/can't the venture guys get it?

I think VCs are the new chasm because they are so scarred by the bubble, they're scared of new concepts and new Big Ideas - they are paralyzed into trying to "monetize" yesterday's stale, tired, old ideas. Yes, many venture guys have always been vultures - but a good portion were also fairly visionary. That fire in the belly is gone - the passion to disrupt and change things has disappeared.

Ultimately, this death of ideas, novelty, and renewal is why we end with the VCs thinking 2.0 is about technology; why we end up with the guys who should have an economic vision failing to create one; why we end up with a whole community of very smart guys, who, afraid to step outside their narrow comfort zone, are missing the obvious and enormous tectonic shifts rumbling through the economic landscaope, where innovators outside are using the real 2.0 - markets, networks, communities - to disrupt new industries almost every week.

So I'm glad VCs are beginning to have conversations about the latest chasm, but, frankly, I think the real problem is, in fact, something a lil bit hilarious: they're talking furiously about where the chasm is - from inside the chasm.

-- umair // 3:12 PM //

Sunday, May 14, 2006

Troop Shortages in Iraq?

I know we are desperate for an exit strategy in Iraq, but isn't this taking it a bit too far? In 10 years, this 'war' will replace the Bay of Pigs invasion as the textbook example for groupthink.

-- kh // 4:55 PM //



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