Wednesday, April 30, 2008
There is too much suckage.
Tech impresario Tim O'Reilly says it in one way.
Brilliant tech market strategist Umair Haque says it another way.
Startup igniter Paul Graham says it yet another way.
But the point is that the web world is really delivering crap right now. Paul and Umair blame VCs. Umair blames the rest of us as well. Tim doesn't blame anyone directly, but by telling us what we should be doing, and what not to do, which is what everyone else is doing, he really is blaming all of us as well.
The point is this. For the last several years we have been focused on free doohickeys to poke and prod and tweet and tag. And some of that is good. But damn! How about actually trying to do something really useful like making things that people actually *want* to pay for and actually charging them? Or if its free, at least figuring out how to do some stuff that has the potential to really make a difference.
Are we all so devoid of creativity and insight that the best we can come up with is some new mashup on some old mashup all mashed up?
When I initially named this blog at the beginning of 2007, I called it "Why does everything suck?" not because the genre of products people were making sucked, but because my view was, and still is, that product design is generally so poor that a product like the iPhone can come along and blow away incumbents who have billions of dollars in marketshare to lose. The iPhone phenomenon is only possible because there was way way too much suckage in phone software.
But now the problem has spread to not just the micro/design issue, but to the macro/markets issue. We are building lots of useless me too stuff. It doesn't matter how well you design something if it is useless anyway. There is only so much Minwax you can apply to a turd.
And so, I join my fellow complainers in saying enough with the suckage. Lets do some stuff that actually matters again. Please!
Tuesday, April 29, 2008
Google has faked us all out. The gobs of money that Google is making has tricked us into a belief that Internet advertising really works. But search advertising is a hugely profitable special case. Essentially, search advertising only works on a search engine. But most web sites aren’t search engines and so they have no easy access to the users intent. That’s how search advertising works. Because you are actively looking for something, you are totally engaged in looking at the results, whether they are paid for (sponsored) or not.
If you are not a search engine and you are dependent on ads, good luck with that
For every site that isn’t a search engine, the advertising metaphor is banner/display advertising – either a text or a graphical ad on the page. We have different strategies for gleaning what type of ad to show, from AdSense, to keywords, to sponsorships. But the problem here is that it doesn’t much matter what ad we show because no one is looking.
Display ads don’t work on the Internet. Or at least they don’t work nearly well enough to replace the advertising platforms the Internet is killing. In other words, if one hundred thousand people are exposed to an ad on the Internet, that will be *far* less effective than one hundred thousand people being exposed to an ad in a newspaper. This is why, as advertising shifts to from print to the web, content producing companies are hurting.
The problem is a combination of psychology and physiology. Traditional media captures more attention and mindshare than Internet display advertising for a given amount of media consumption. In an hour of newspaper reading, your mind absorbs more of the advertising messages than it does in an hour of web browsing.
Why does physical print work so much better for advertising?
Part of the reason print works so well is that when we are in active mode, attempting to achieve some goal, our mind shuts out peripheral visual information. For example, when you are rushing down the street are you more or less likely to notice details in the periphery?
On the Internet, we are always rushing somewhere. Our intent is focused on our intended action. When we are reading a newspaper, we are not rushing down the street. We are calmly perusing the page. Perhaps we are on the train commuting to work. Or perhaps we are sitting at our desk having some coffee. But whatever we are doing, we allow ourselves to be immersed in the world of the newspaper, ads and all.
Some of the additional specifics behind the Internet advertising attention problem are as follows.
- Our eyes are faster than clicking – Therefore we will tolerate a higher ad to media ratio because we can easily scan the ads and the page. This relates to the slowness of redrawing screens, vs. the comfort, and speed of scanning a page. But even if updating a page after a link click was instant, the cognitive step of clicking takes us out of the passive mode of absorbing.
- Page turning is easier and faster than clicking through – And page turning is analog. We can scan forward a few pages and keep a finger on that old page in case we need to go back. Physical pages give us more comfort and control. This all facilitates scanning and comfortable ad perusal.
- Physical pages are bigger than screens – And even if screens were just as big, it is not acceptable to give half or all of a page that you thought was going to have content to an advertisement. It is fine in print because in print, the page is *their* world. But your computer screen is your world. In the print environment, you open up a double page spread and there is a mix of advertising and content. Your eyes and your attention can comfortably flow between them. And because you are in newspaper or magazine reading mode, and because some significant percentage of the publication real estate may be advertising, you are very likely to read at least some of it.
- We look at more of a magazine than we do a web site – We don’t have thousands of magazines or newspapers physically in front of us. Probably just one or two. A given web page feels a bit disembodied from the overall publication. A print publication tends to feel like something that should be consumed an issue at a time.
- Print ads can be truly beautiful – Web ads really can’t – or perhaps just generally aren’t. How many ads on the web are able to make you stop because they are so gorgeous?
- Print ads are persistent – An ad doesn’t go away when you read the next article. If you see an ad you will remember you saw it in yesterday’s Times which is in the den so you can go back to it easily. You can also tear the ad out of the paper.
Web display ads capture *none* of my attention!
So all of us have the same amount of time available, presumably a maximum of 24 hours in a day. But as we shift more of our time to the Internet, we’re giving up less of our attention to advertising messages. In fact, for many and perhaps most of us, we are giving away essentially *none* of our attention any more.
I personally haven’t clicked on and ad in months. And aside from the dancing women in that mortgage ad, I couldn’t even describe one ad I have seen on the Internet. Even then I couldn’t tell you what company those mortgage ads are for. Conversely when I read print ads and watch TV, messages definitely get through. I am at times intrigued by advertising calls to action. This *never* happens on the Internet. And while this is not at all scientific, I am quite sure I am not alone.
Many forms of content production can’t survive
So if we are moving from mediums that can capture our attention for advertising, to ones that fundamentally, outside of search, cannot, how can traditional media survive in the Internet era? Unless we can come up with some other way to capture consumer attention for marketing messages, the media business is in trouble.
Display advertising may just be less effective in our new Internet future. And if that is so, then content will be worth less and will be less fundable. Certain types of content will not be fundable at all anymore. A magazine that could reach a hundred thousand monthly readers in a well defined niche could generate a reasonable revenue stream. It could support a small staff. But a website that reaches a hundred thousand monthly readers is a hobby that might generate a few hundred dollars a month. In essence, the same content production from ten years ago, say 20 articles in a month, is worth far, far less today.
The bottom line: The Internet sucks for non-search advertising. If you are an entrepreneur and this is your plan for monetization, think again.
Monday, April 28, 2008
It does appear that most of us have, at least for a time, checked our ethics at the door. But despite the tongue-in-cheek name of this blog, I am an optimist. I do believe it is possible that the justifications for the theft we are engaged in is nothing more than temporary cognitive dissonance, and that we will indeed come to our senses.
I believe this because the consequences of deciding as a society that teaching our young children that stealing is OK is ultimately too dire. We will ultimately come to understand it is impossible to create a viable or credible ethical framework that separates stealing a song from stealing a loaf of bread. In fact, stealing the bread may be more justifiable if you are hungry and yet intuitively most of us know, no matter how hungry you are, that stealing the bread is still wrong.
On the other hand, we steal entertainment content with guiltless reckless abandon, and you certainly can’t eat a Foo Fighters song. There are statistics that suggest that plagiarism in college is up substantially, and I would not be at all shocked to find that there is a correlation between the mindset of stealing a song vs. stealing a paper.
The permissive and even supportive attitude of thought leaders in our industry on this subject is poisoning the minds of our children and we need to stop it. Ethics matter, and there is no way to explain to a child that theft is OK when you are “mad at the man”, and “big corporations are evil.” Our brains don’t work that way.
The psychology of our youth has already been irreparably damaged, but I do think we can turn things around, at least for the next generation. And we must. There are those that will suggest that because we can steal, that we will. They believe that we are no more ethical or honest than our circumstances will allow. I do not subscribe to this theory of human nature. I think we are all villagers, and we will for the most part adhere to the mores of the village. If it was considered wrong to steal music or movies or software, and there was actual shame associated with it, people wouldn’t do it.
And so my prescription: Think about how your parents might react if you told them you’d just stolen 1000 songs from Wal-Mart every time you play your ill gotten MP3 collection. If you are a parent, and you see your kid has a 1000 song MP3 collection *you* should be reacting like they stole it from Wal-Mart.
All it will take is just a little bit of shame.
Friday, April 25, 2008
Risk is a relative term. For example, if a poor person risks $100 on a lottery tickets, is that more or less risk than a wealthy person buying $1,000 worth of lottery tickets? Presumably the $100 is worth more to the poor person than $1000 is to the rich person. So part of risk is about how much the loss would impact your overall holdings.
The second part of risk is whether a given investment stands alone or is part of a broader risk reducing strategy. All smart investors (and all VCs) engage a portfolio strategy. They know that most of their investments will fail or only perform moderately, but they rely on the idea that one really good investment pays for a whole lot of bad or mediocre ones. Entrepreneurs do not, generally, have the opportunity of engaging a risk reducing portfolio strategy. And so if their venture fails, as most do, they do not have the opportunity to have placed a bunch of other bets, one of which can make up for any losses.
There are those that will argue that if the entrepreneur only risks $100,000 by not being paid for a year, and the investor invests one million dollars, then the investor is risking more. But if the investor is working with a $100 million dollar fund and has spread his risk across many companies, the single one million dollar investment is not nearly as risky as, for most entrepreneurs, not being paid for a year. This is both because the entrepreneur does not have a risk spreading strategy, and also because the entrepreneur is playing, with this one investment, with a much greater percentage of his or her net worth. Of course if the entrepreneur really *doesn't* take a substantial risk by investing his own time and money before outside money comes in this doesn't hold.
In discussions that I have had about this issue, some have suggested that the entrepreneur learns much from taking such risks and so the education of being an entrepreneur mitigates the financial risks. And there may be some truth to this. But my effort here is to analyze *financial* risk, because once you start throwing in those sorts of things, it becomes impossible to measure or discuss the mathematics.
For example, if an investor serves on your board, meets another board member, and ends up doing some business with that person at a later time and making a lot of money, has that mitigated the loss associated with investing in your deal? Did the investor learn something *from you* about a space that they were unfamiliar with that ends up being valuable to them at a later time? I don’t think we can examine risk based on these soft criteria because there are so many imprecise vectors that could come into play. Risk must be analyzed based purely on relative financial downside and upside.
And so, VC funds are at far less risk than the entrepreneur’s they invest in. In truth this doesn’t really matter much except to entrepreneurial psychology. You are not going to get a better deal because you tell a VC hey you should take less because I am taking all the risk! You will just sound silly. But understanding how the game is played and what is really going on is, I think important to being able to navigate the fund raising waters with a clear head.
Thursday, April 24, 2008
I am writing about this because I got into a discussion about this service on a local New York tech mailing list and I thought the discussion was interesting.
There were opposing points of view, but not a few people thought the idea behind 99 designs was wrong. People with that view held that it was inappropriate and actually *unethical* to ask people to work, on spec, without getting paid, and that this would be the “downfall of the design profession.”
I am sure that there are more than a few designers who feel this way. Personally, I don’t find anything unethical about this at all since people of free will may decide to participate or not. But my immediate reaction was to wonder how many illegal MP3s the people who are complaining that this is immoral have on their computers.
I was immediately attacked for making a statement that was in the mind of one person, a non sequitur. What do MP3s have to do with outsourced, on spec design?
The answer: Hypocrisy.
How can you claim that it is unethical to give an opportunity to people of free will to compete for business, if at their own discretion they so choose, while filling your computer with someone else’s work without their permission at all.
In one case, the creator of the work has decided that it is totally fine that you may view their work for free in the hope that you will chose them. In the other case, the creator of the work explicitly expects to get paid, but instead you steal it.
I cannot say that the specific people making these particular comments have ever pirated even one MP3. But since the majority of people steal music, statistically it is likely most of the people who would argue that 99 designs is unethical, see nothing unethical about actually *stealing* someone else’s work.
What is amazing is that we as people are so often fundamentally unable to see such simple logical fallacies. What is wrong for you is right for me. Doing “X” is wrong because it hurts me, but if I do the same thing, or worse to you, that’s OK.
Its not like I don’t understand how this happens, but is sure is frustrating to watch.
Wednesday, April 23, 2008
I am unimpressed.
Well that’s not quite true. I am sure the technology is impressive. I just don’t buy the grand strategic vision. Mesh is a system that allows users to synchronize between multiple PCs and eventually cell phones. It is a very natural extension of the work Microsoft CTO Ray Ozzie did with Groove before he joined Microsoft. Mesh is essentially a synchronized file system, where files on one computer can be automatically synchronized to a user’s other computers or to the cloud. The idea is that you create a "mesh" of devices, and you can make sure that any documents you have are on all of your devices. Mesh also allows for remote access to your computer so that you can actually run applications on your computer from another computer in the Mesh.
This is certainly the most robust synchronization system that has ever been implemented. But in my mind, the key question is, in the future how important will local file storage really be? And how often do average users really want to remotely run software from one machine on another?
The entire software industry is moving towards a world where all software runs in browsers from servers in the cloud. Microsoft’s strategy with Mesh is to maintain desktop software’s relevance. They would like the world to continue running local software and to keep files locally.
The reason for this is simple. Microsoft makes most of its money from Windows and Office. If people started using online alternatives to Office in large numbers, Microsoft would be crippled. Mesh is Microsoft’s effort to stop the software-as-a-service tsunami that could severely damage them.
I don’t think it will work.
I believe the future is one in which eventually all or most of our data will be stored in the cloud. Desktops and cell phones will, for most tasks, be terminals to the cloud, and so the concept of synchronization will be meaningless for most users. To be sure, there are solid use cases for synchronization but I don’t think sync is the best model for most people in most scenarios. And yes, Mesh does allow you to store data in the cloud as another data point in the mesh. But adding the desktop sync layer is, for most people, just not necessary, and I suspect will be generally perceived by mainstream users as an irrelevant added layer of complexity.
Personally, I am wary of installing some additional thing on my computer to make all of this work. Microsoft technology is rarely flawless and I don't want to be dependent on it if I don't have to. And as it is, I am essentially always online, and though I work with a Mac and a PC I never really feel like I am missing anything by not having them synched. For the most part, everything I need is already in the cloud, which allows me to access my data from any browser at any time.
And so, to me, Mesh is just the wrong answer. I am not saying it’s a bad thing. I just think it suggests a desire to change the momentum of the move to the cloud that can’t be stopped. The future is not the desktop. Microsoft should be busy doing the admittedly very hard job of making a version of Microsoft Office work from the browser. I would much prefer, instead of putting more software on my desktop, that Microsoft be working on getting most of my software *off* the desktop and into the cloud.
Tuesday, April 22, 2008
So today is different. It is the first weekday since January 2nd 2008 that I don't have anything to say. I don't have any old piece laying around, and I am not going to force it. Perhaps I am feeling complacent since my traffic has been enormous this month -- a 2x growth over last month, which was already really good. Or perhaps its the election today. Or perhaps its just because sometimes you need to shut up.
In any case there it is. Today is my first blog holiday.
Monday, April 21, 2008
In the old days, when traditional media was strong and growing, being in the media business was a good thing. It was enough. Media properties had their own sales forces, and while there were ad networks (they were called rep firms) they really weren’t seen as strategic. Certainly, big media companies did not set up divisions to sell for small new startups. Most importantly, big media companies made lots of money on their own properties, and though it was a tough business, a decent, relatively small magazine could find sufficient advertising to support itself.
But today, while anyone can start a web media property, the likelihood that it will be profitable selling advertising is very very small. Everyone intuitively understands this, which is why everyone wants to be higher in the food chain.
Ad networks are the answer of the day. They are indeed analogous to a modern day pyramid scheme. Not that I am saying they are doing anything illegal, which true pyramid schemes are. But the key characteristic of a pyramid is that if you are the first guy in at the top of the food chain, you win. Being an ad network is like being at the top of the pyramid. No one else makes money but you and perhaps a few of your associates. Everyone else is just really a salesman for your network; most generating a monthly pittance.
The epitome of this is Google’s AdSense and AdWords platform. Google sells ads for an enormous number of websites, most of which make very little money. But for Google it’s all in the volume. They don’t need for *anybody* else to make money. The media companies are deciding that if you want to make money, being the guy selling the ads seems like a better bet than being the guy trying to generate the page views to support the ads.
Of course now with everyone starting an ad network, the increased competition will certainly reduce and perhaps eliminate the profitability of the ad networks. Because the real problem is no matter how you slice it, there are just not enough advertisers to support all the stuff that we are putting on the web right now.
In short, too much supply and not enough demand is just not a good thing – no matter where you are in the food chain. Oh yeah, that doesn’t count for Google.
Friday, April 18, 2008
Hank Williams on the Economics of 'Free' from Brian Lehrer on Vimeo.
I have done a fair bit of television as compared to the average person. That's not to say I have done a lot, but enough that I have done a bit of media training and such. That said, I have not done it in quite some time, and so, while not being particularly nervous, before my appearance I was concerned. Will I look nervous -- or just goofy? Will I be able to get my points out? Will I forget something important? (This happens a lot.)
Before I went to the studio, I had mapped out what I wanted to say. What are the key messages. This is standard media training. Its why listening to politicians can be so frustrating. When they are not smooth, every answer is a message point, regardless of whether it does answer the question. Of course I never want to do that, but trying hard to stay on message without going too far is a good thing.
So I am sitting in the green room and Marty, the producer, comes out to chat with me. We talk about some of the issues, and his concern is that the conversation stay at a level where regular folks can understand it. Examples are critical.
Uh oh. Regular folks. I hadnt considered them. Game change!
So there I am sitting in the green room like the quarterback has called an audible and I didn't read the playbook. What are my examples!
I reformulated my plan. I thought of some examples. I would try to stick to some concrete concepts. I was as ready as I was going to be.
Then I did the interview.
The problem with interviews is that there is this other person in the room getting in the way of what you want to say. You actually have to talk to them! Brian was actually great, but for me, responding to questions in a manner that is both responsive and on message is *hard*. I need more practice. Perhaps I had too much of an agenda to fit into one TV segment. But coming out of the studio I did feel a bit like I didn't say everything I wanted to say.
That said, it still felt pretty good. When the interview was done, I felt comfortable. But I was still not sure how I did. How you feel in your own skin is very different from how you may look to others watching you.
So since the show is live, I had recorded it and was able to watch it when I went home. My first concern was not anything about content. I was really worried I would just look like a goof. TV and photographs can either be kind, or not so kind. Thankfully, in that regard, things were, by my standards OK. And while I didnt say everything I wanted to say, it didnt seem like I wasted too much time. So all-in-all I was satisfied. Of course practice makes perfect and I hope to do more. But having not been on TV in seven or so years, not too bad.
Thursday, April 17, 2008
This is stunning.
Most advertising on YouTube is not monetizeable so this CPM is for the really good stuff! So with all of Google's market power, this is the best that could be done.
This suggests two things:
- There is absolutely no market value at all to user generated video. Zero. None. Nada. Actually there is a market value, but its negative.
- The only company in the world that might have had a chance to make money with YouTube can't, and so the 1.5 Billion dollar price Google paid for YouTube was an enormous overpayment. If anyone else had gotten their hands on it they would have shut it down by now.
It also raises the question, will Google just continue to run YouTube as a community charity? How long can this continue? Growth *will* flatten at Google at some point. That point may be now but none of us is quite sure. But in any case it will come at some point. And when that day comes, the chickens really may come home to roost.
Google will have to decide if they can withstand the market ire generated by shutting down or curtailing YouTube in some way, or if they can withstand subsidizing most of the world's video consumption indefinitely. I'm really not a short term thinker. But I just can't see a way to make user generated video worth anything to anybody in the near term. This usually wouldn't be a problem but in the case of video, waiting for the long term is really expensive.
Then again, perhaps Google's proprietary network and ISP transit agreements give them a low enough cost basis to uniquely position them to subsidize the world's video consumption without getting killed. I'd sure love to get some of that Google charity directly though!
Wednesday, April 16, 2008
But when I woke up this morning to write my piece, after re-reading Paul's essay I could not disagree. I think what I really want to do is explain the phenomenon.
The core issue with VCs is, they are us.
We are all, by and large, scared, conservative creatures who are not willing to step outside of our comfort zones. Even those of us that are not scared are lazy or conservative in other ways. I have written software since I was 13, and yet during the era of the VCR, I never took the time to learn how to make any of my VCRs stop blinking 12:00. Sometimes exploring new things can be a pain.
It is true that entrepreneurs are less likely to be conservative since entrepreneurship is inherently risky. But VCs are, by and large, not entrepreneurs, and so the fear of failure can be paralyzing.
For most people in our culture, the fear, and sometimes the actuality, of failure, are absolutely unbearable. In most of our culture, failure is punished mercilessly. Indeed if you fail as a VC firm you risk not being able to raise a new fund. If you fail at being a VC personally, you will almost certainly loose your cushy VC job.
Amusingly, most VCs are failing anyway.
It seems to me there is no good answer to this. It is in large part about human nature. VC behavior reflects a prevailing attitude in society. Risk is inherently risky.
What is interesting to me though is a much bigger picture issue. I do believe that one of the most critical elements in life is attaining the ability to be unafraid to fail. Fear of failure will prevent you from doing some of the most enjoyable and/or fulfilling things in life.
And so I agree with Paul’s thesis. VCs should be bolder. I just don’t think that message should be limited to VCs. Most of us drive through life with all the windows closed. That’s great in the winter. But there is nothing like a morning ride through the scent of spring. I suggest we should all try a bit more of life with the windows down.
Tuesday, April 15, 2008
As a bit if history, I come to this discussion because after my old company, Clickradio, I had not been hands on cutting code for a few years. I was deciding on my toolset, and I was convinced that Flash was a platform that I could actually use to make apps that ran on the web, but felt like real applications instead of web pages. This was in around 2003.
I came to Flash though, at the end of the ActionScript 1.0 life cycle. Adobe (Macromedia at the time) was brining out ActionScript 2.0. We referred to the languages as AS1 and AS2. So I was in a position to observe and participate in the transition from AS1, which is prototype based, to AS2, which is class based.
If you are not familiar with the concepts of prototype based languages you can read this.
Now I don't want to get into a philosophical argument about which is "better". Because it is entirely possible for one person to reasonably like something, and another person to not like it. But to me one point is perfectly clear. The community was *radically* more productive once AS2 was introduced and people began using it. I was an active member of the Flash community at the time and it was as if the heavens opened up and people were able to do things that before hand were conceptually much more difficult. Code reuse exploded. The entire community felt empowered.
The problem with AS1 is that it encourages spaghetti code. It is indeed possible in any language to write good or bad code, but a language either pushes you in the right direction or the wrong direction. As I have argued many times before on this blog, abstractions are important. It may be possible to do anything with anything, but the way a tool is designed does matter. It is not a zero sum game. And so the argument that you *can* do something with a given tool is fairly meaningless. In fact given the vagaries of being human, the only way of measuring productivity of something like a language is to give it to people and see what happens. And indeed when we did this with AS1 and AS2, the verdict was clear. Class based AS2 was *far* more productive that prototype based AS1.
Monday, April 14, 2008
Many moons ago, during the timeframe of the AIR launch, Google Gears was also launching, and it was being compared to AIR since its mission is also to provide a platform for web developers to move their applications to the desktop.
In the AIR vs. Gears battle, AIR is on the verge of a TKO.
There are *lots* of applications coming out that were written with AIR and almost nothing written with Gears. Even Google’s own applications have, for the most part, not been ported.
The reason for this domination is very simple. Flash/Flex is designed with the idea that you write your entire application to run on the client. Then you communicate small bits of data over the Internet. None of your behavioral/user interface code resides on the server. This model is the opposite of the way most web applications are built, where most of the code driving the user interface sits on the server. But the Flash/Flex client side model is exactly what you need for writing desktop applications. This means there are millions of Flash/Flex developers with the requisite skills, tools, and experience in the required development model for AIR applications.
And so it appears Gears is being killed by AIR. Or perhaps, based on its lineage, Gears was just stillborn, DOA.
Friday, April 11, 2008
I use a Mac and a PC. This week I am hating my PC. What it is doing is not new. And I am sure there is a fix available from some buried instructions or some hacker that has figured out how to disable it. But I *hate* the fact that when a new security update comes in over the wire that it decides on its own, when no one is looking, that it needs to reboot. Yeah yeah, its for my own "protection."
It feels almost fascist.
It’s like you have no control. We at Microsoft control your universe. Your will is my command.
You can think you are taking whatever precautions you want to protect my work, but at the end of the day you have no way of knowing that rebooting my PC is safe. You may very well be doing *far* more harm than good by rebooting my machine without my permission.
The fact that there is no obvious, surface level interface control for controlling this “feature” is unconscionable. At the very least when they do it the first time they ought to tell you how to control it.
Have a great weekend.
Thursday, April 10, 2008
As background, artificial abundance is the creation of too much free product in a marketplace, where indirect financial support props up the offering. Examples include Google subsidizing money losing free web operations with their very profitable search revenue, and over zealous VCs, funding companies offering free services in categories that seemingly have little hope of generating revenue.
Artificial abundance is significant not because there are too many companies or products, but because of the psychology all of this deceptively free stuff is creating. Consumers are being inappropriately trained to believe that everything can be had for free and nothing should be paid for.
When I mentioned the concept of artificial abundance to Brian, he quickly shot back, “is that just another word for bubble 2.0.”
I was taken aback because I had never thought of that formulation. But boy was he right.
The best reflection of the problem caused by artificial abundance is the fact that there are *very* few profitable exits right now. There are essentially no IPOs, which could be blamed on Sarbanes-Oxley. But there is not that much M&A activity right now either. I presume the reason for this is a perception by acquirers that not enough revenue is being generated. Otherwise why would companies not want to buy other companies if the transaction opportunities are anything close to accretive?
My belief is there are very few such deal opportunities because except in the extraordinary cases, it is hard to make much money off of free. And so I suspect there is shrinking interest in buying money-losing operations in the hope that the acquisition will turn the un-profitable company profitable.
And so I agree with Brian. Artificial abundance is just Bubble 2.0. There are too many Internet businesses offering free products that have no hope of making money. They are going to go away. Am I happy about this? Not in the sense that a lot of entrepreneurs will lose and, of course that sucks. But I do think it is important to reset what the public expects from the Internet. Everything can’t be a free ride because the money has to come from somewhere. And advertising revenue is just not big enough to support all the cool useful things the Internet can bring us.
Wednesday, April 9, 2008
In speaking with the shows producer he informed me that the lead in to the show would be this Chris Anderson video, where Chris theorizes that everything digital will be free, and extols the virtue of that potential future. The video got me thinking about how I would respond, and I thought I should write it down.
What if all digital products really *had* to be free?
Based on what Chris is saying, does this mean that Microsoft, Oracle, Electronic Arts, etc. are all going out of business? Or does it mean they will all have to adopt an advertising based model and give away all their products, perhaps only charging for the manual labor of technical support? These are all digital businesses, and based on Chris’s thesis, all their products will have to become free.
I don’t think Chris is right about this, but lets just explore it as a thought experiment. What if he *is* right? Would that be a good thing for the world?
Perhaps it depends on where you live. It would be the most massive shift of wealth ever from the first world to the third world on a scale that would make Ghandi seem like Scrooge. Because what it suggests is that countries like China and other less developed countries, where their populations can’t afford to buy digital products and services, won’t have to because they will all be free. Meanwhile, the products they create, all physical, will be sellable at a reasonable margin – because they require labor on a per unit basis.
As the first world economies become increasingly knowledge based and digital, by Chris’s theory, labor in these economies will become less and less valuable. Some of you will argue that Google does fine based purely on advertising. But just because one company can commoditize everyone else’s work and make pennies on things that used to generate dollars, is that sustainable across the whole economy? Or would we really be reducing the overall amount of money flowing into the digital market and therefore to the overall labor force?
I think it is clear that the “media-ization” of digital economy has the effect of reducing the amount of actual hard dollars that flow into the economy. If less money is spent on digital and more money is spent on hard physical goods that are generally produced elsewhere, taken to an extreme that would have a horrific effect on our economy.
Ok, but does everything *have to* be free?
So it may not be good for us, but is Chris right? Chris’s argument is based on the misinterpreted economic theory that everything tends toward its marginal cost. But does this really hold up in the digital economy? The fact that there was very little marginal cost to Microsoft Office did not mean that it was tending toward free for the last twenty years, so I don’t buy this at all. The marginal cost of Office has been pretty close to zero for a long time.
The supposed economic theory behind what Chris is saying is that the marginal cost of goods really drives the price because, in theory, competition forces people to lower their prices until they absolutely can’t afford to do so any more. But this is really an economic theory that does not apply to non-commoditized markets.
For example the fact that you can play Breakout or Pong for free does not cause Microsoft to need to sell Halo cheap. Halo’s marginal cost isn’t any higher than the marginal cost of Pong. The reason it is expensive is because it has unique entertainment value to people.
Similarly, in the music business, the argument has been made that the reason that music sales are hurting is because the marginal cost of their product is zero. But this is also not true. There is no competition driving the value of a given Foo Fighters recording down. Every recording has a unique value to a given audience. What is driving the value of music down is the fact that people are stealing it with no compunction on a massive scale. The “theft effect” is not part of any economic theory I have every studied and certainly has no relationship to marginal costs.
So where is this all going?
I don’t think it would be at all good for people in America that every digital product becomes free because the digital/information world is increasingly the only type of labor we are going to be willing or able to do. If you don’t want to dig ditches making your daily bread, a free economy is not a good thing.
But thankfully, I believe the thesis is flawed. I do believe we are in an era of artificial digital abundance in large part driven by over zealous VCs and companies like Google that are supporting money losing services with their massively profitable search engine. But this cannot continue indefinitely. Google cannot do the best job of making every category of everything. Scarcity of important useful products will indeed return. These products will be designed by companies that do not want to lose money and don’t have a search engine to subsidize money-losing efforts. Therefore they will have to be supported by direct (i.e. non-advertising) revenue streams. And I do believe that they will.
We are indeed in a crazy time. But after a bit of equilibrium returns to the markets and people begin to get used to the idea that everything digital can’t be free, everything we have learned about economics, and I don’t mean Chris Anderson’s voodoo economics, will take hold and everything will be OK.
Tuesday, April 8, 2008
These applications are wonderful to create, in that when they click, they are incredibly viral. Users encourage others to sign up so that they can communicate with them. Or in the case of Hotmail, each email was an advertisement for the service.
Unfortunately, the bad news about all of these services is that they don’t really make money. Skype makes a bit using its SkypeOut gateway to the regular phone system, but even there, it does not make nearly as much as the attention it gets or the number of users it has would suggest.
The problem is that advertising seems to be ineffective in communications apps. You can’t put advertising in the way of the act of communicating. For example having to watch an add before you could send an email or a tweet would be a non-starter. But if you make the advertising unobtrusive, the ads become truly invisible and ineffective.
So with communications apps, you can get big fast, but so far no one has figured out how to monetize. This is the conundrum that Twitter finds itself in, but as I see it the problem is even worse for Twitter than for other communications platforms, because they don’t even control the user interface for much or perhaps most of the access to their service. Twitter offers a free API that allows application developers to make Twitter front ends. If there are ways to monetize these users it will most likely be through front ends, and so since anyone can make a front end it will be even harder to monetize and control than it has been for more closed platforms like Skype and AIM.
The good news about developing successful communications applications is that they are almost always acquired. The reason is that if you can convince someone to use your tools every day, you are really making them part of your family. For example, I use Google everything. The reason is that I started using Gmail, and so it was really easy to give them more information and to sign up for more revenue generating services. But this only works for companies that have a bunch of other lines of business like Google, Microsoft, and Yahoo.
And so, looking at Twitter, I suspect they will never make a penny, but they will be purchased by one of the big guys for a whole lot of money. This is great for the founders and investors, but it is a shame that that seems to be the only way to make money from such cool stuff.
Monday, April 7, 2008
To be clear, I do believe there are lots of services for which the appropriate business model is free. Facebook is a great example of this and there are lots of others. The problem is that there is not enough “attention” to make most advertising-based businesses successful. The quest for gold has turned everything into a “media” business. People have suggested, for example, that Microsoft Works should be made free and turned into an advertising based platform. Now, maybe that’s smart for Microsoft given that they are probably generating very little money from Works. But let’s be clear. Works is not a good advertising property. The amount of attention Microsoft would be able to siphon towards advertising is essentially nil because ads are generally invisible when used inside productivity tools.
There Isn’t Enough Money In Text And Banner Ads
The market has extrapolated from Google’s success that most anything can be supported from advertising. Google succeeds for two reasons. First, they understand your intent when you do a search. Or with AdSense, at a *much* lower level of success, they attempt to glean your context. This is great for Google, which operates at an internet-wide scale, but is not very effective for most of the websites that Google places ads on.
So while Google can be hugely successful because of scale, this does not translate for most businesses. Advertising without intent and without narrow context, is a *very* inefficient way to generate revenue. If you could only, at best, generate a few cents a month from your average user, you have to have *a lot* of users. And so most companies will not generate sufficient audience to justify any venture capital. But in the gold rush, many VCs are investing in things that they have no good reason to believe will ever scale to the level that they can IPO or even sell to Google et al. at a decent multiple. To be sure, the best VCs aren’t doing this, but there are plenty of VCs out there that are not Sequoia or Union Square.
Freemium and the Psychology of “free”
It has been suggested that the freemium model is an effective non-advertising based strategy for leveraging free. And to be sure, the idea of free with an up sell of an additional paid service is great for some products. But far fewer things succeed with freemium than I think really should, because unfortunately a psychology has been created on the Internet that nothing should be paid for. This is a broad social issue that has most perniciously affected us in the music space where we have a generation of kids that have absolutely no compunction about stealing every last bit of their music. They believe *everything* on the Internet should be free. Artificial abundance supports this psychology.
It was interesting in reading the disagreements with my last piece to note that the only examples people could cite to demostrate the success of the freemium model were 37 Signals and SmugMug. I am sure there are more counter examples than these, but it is interesting that in the more than a hundred responses I read, these were the only two examples cited. While it is far from scientific, for me this reinforces my notion that freemium is not as successful as I wish it were. I would strongly suspect that the amount of freemium revenue is dwarfed by the amount of advertising revenue by at least an order of magnitude. My thesis is that the culprit is this new “free psychology.”
Part of what drives the desire to get big quickly, even without revenue, is the idea that, even if you cannot sufficiently monetize a property, that the acquirer will be able to. A great example of a business that could only be sustained by an acquirer is YouTube. The problem of course is that there are very few other companies that could have acquired YouTube, because their massive bandwidth costs probably still exceeds their revenue. Today there are way too many me too video companies that have *no* shot at a reasonable exit because Google has already made its acquisition.
So unfortunately we have perhaps dozens of companies that aspire to be in the video business – many of them VC funded. Few will survive even though quite a few bring something interesting to the table. There is no ecosystem or psychology for paying for anything in the video space. Mogulus, a live video broadcasting company, indicated that they are going to try to charge people for their service using a freemium model. I hope they succeed because I think they have a very cool product. But I fear that the current market psychology is such that not enough people will be willing to pay to support them -- at least in the consumer space.
VCs Overfunding Markets is Not New, But the Psychology Is
Some have correctly argued that VCs have always overfunded successful niches after the primary opportunity has been exhausted. And this is true. The difference is that when dozens of *free* products are released in a given niche, not only is the supply and demand curve effected, as it always has been, but the psychology of the market is effected. Psychologically, an abundant hyper-competitive market is very different than an abundant and totally free market. Even an abundant and totally free market is fine if it is economically supportable. But in most cases, it is not. Too much free has the effect of changing our value system. In short, I believe what we really have is a psychology problem on the Internet.
One More Culprit: Google
In my last piece I probably aimed my blame gun too narrowly in focusing on VCs in that there are other entities that are also responsible for this artificial abundance. Google, most directly comes to mind in that they make essentially no money on their non-search services like email, documents, etc. They can use their enormous search cash cow to support other businesses that make no economic sense except at Google.
If Google's behavior was likened to trade with a foreign country, the US government would consider it dumping – the practice of selling goods below cost to gain market share. It is also effectively what Microsoft was accused of in the anti-trust case where they bundled lots of free add-ons inside their core monopoly product, Windows. I say this not to suggest that the courts should step in, but merely to demonstrate that there is plenty of economic study to suggesting that free and below cost do effect markets and competition negatively. Many suggested, in response to my last piece, that this was not the case.
Can It Be Fixed?
The bottom line is free products, where the “free” is not supportable except by outside forces, is unhealthy. This is true whether the outside support comes from China, Google, Microsoft, or indeed venture capital. And while I don’t think the genie can fully be put back in the bottle, I do think that a little natural scarcity, driven by a shakeout, would provide a healthy impetus to the development of real customer payment models.
Friday, April 4, 2008
In today’s “free” world, in most online business categories, it is inherently impossible to start a small self-sustaining business and to grow it. This is because in the digital world, advertising, the only real revenue stream, cannot support a small digital business. If businesses were based on the idea that people paid for services then small companies could succeed at a small scale and grow. But it is very hard to charge when your competition is free.
The economic problem with advertising businesses is that advertising businesses do not work without really significant scale. In the past, a good product or service could address a niche and succeed without being a home run. Today, a home run is required because if you do not reach a massive scale, advertisers are uninterested. And even if advertisers could be attracted, CPMs are so low that the revenue would be inconsequential. Small Internet businesses don’t work.
So how did we get here? In a word, VC.
Venture capital has totally distorted the market. VCs are investing billions of dollars in companies with instructions to get big fast and to worry about advertising revenue later. As a result the competition is for users and not paying customers.
Unfortunately, to fix this, many more companies need to die.
With less “free” floating around, a more regular supply and demand dynamic can take hold, customers will have to pay for the things that are important to them and non-quantized growth dynamics can return. In the meantime, why should consumers pay for products and services that VCs and their pension fund investors are willing to give away for free?
The good news is at some point VCs will indeed realize how dumb all of this is and stop giving away everything of value on the Internet. This will all stop when the average VC can’t get any of his/her companies to scale because there is just too much VC sponsored free stuff out there. Then and only then will this crazy eyeballs business model redux finally be put to bed.
I cant wait.
Thursday, April 3, 2008
The current discussion threads are focused on whether Ron Garriques, who lead the division before he decamped to Dell, should be brought back as CEO. Ron is a smart guy. He knew enough to get out just before the giant FAIL signs appeared over Motorola. Unfortunately this is where the smarts ends. The SAI commenters, presumably many insiders, are rightly laughing at the suggestion that Garriques is the guy.
First of all, Garriques benefitted from the timing of the RAZR. He didn't think of it (it was being developed before he got the division head job), and he didn't like it (according to SAI commenters).
But most importantly, the RAZR was a bad idea.
Ok, I don't literally mean that. Lets say it this way. The RAZR was an *insignificant* idea. Make a thin phone. Lets do a good industrial design. Duh! Who cares!!!
Motorola's task was then and is now to make phones that are more *useful*. This is a software problem. Moto's software sucks. They will adopt Android, and this is good. But it will commoditize Motorola unless they integrate really well and ad value on top of Android.
The problem is that Motorola's organizational DNA is not about software, particularly consumer facing software. Garriques doesn't know diddly about that.
Other bone headed suggestions from over at SAI:
Todd Bradley: One of the many executives responsible for PALMS inability to *ever* ship a modern operating system.
Peter Skarzynski: An unemployed sales guy from Samsung. Yes, that's right, a sales guy can fix Motorola's problems.
Robbie Bach: Entertainment & Devices prez at Microsoft. Well we are at least a little warm here. The right kind of DNA. But its MICROSOFT!!!!
Miles Flint: Former head of Sony Erricson. According to SAI they make some of the coolest phones you've never heard of. Right. I am sure Apple is quaking in its boots.
The problem with all of these suggestions and I am sure with all the sorts of people that Motorola will consider, is that they are all suits. They are all guys that will do little more than hire McKinsey again to develop their strategy. They will never hire anyone that has real strategy or technical cojones. This is the reason these kinds of companies fail and continue to fail.
Ok, so who do *I* suggest?
Well first of all, I am unavailable.
That said, The suggestion I am about to make, I make fearfully. I am fearful because someone might just follow up, and I really like this guy and I would hate to see him leave his current job. But here its goes.
Kevin Lynch, CTO Adobe.
Now first of all, I have never personally met Kevin. But I think he is awesome. I have been observing him for years. He is the guy that was primarily responsible for Macromedia's and now Adobe's Internet strategy. He created the entire platform concept which Adobe is building Adobe 2.0 around. He's a killer.
Now would a guy like this ever be considered? No. Because the suit types generally don't even know enough to know what they don't know and what they do need. It is only by accidents of history or founder-hood when people like this end up running the show. But this is exactly what Motorola needs. Not someone to develop pretty new org charts. They need someone who can develop a real plan *themselves*. Someone who can understand all the issues and get down in the dirt. They do not need an armchair quarterback. They need a real quarterback. They need a player/coach. Without this type of person. The motorola phone division will be 1/10th its size in 5 years. If it even exists.
Kevin Lynch is a brilliant software guy. I would presume he is a great team leader since he has built a great team. Kevin, or a Kevin equivalent (there are very few) is exactly what Motorola needs and is exactly what they will never get.
Wednesday, April 2, 2008
The point of the piece is that formatting is critical to anything attempting to replace or even supplement a word processor. Several people commented that, in essence, Google is not trying to compete on the basis of formatting, and that collaboration is really their goal.
I would agree that this is the niche that they have carved out as of now. However, I do not believe that this is their ambition. I believe they want to do three things.
- They want to cripple Microsoft, who's largest revenue generator is Office, by undercutting their pricing with a product that is "good enough."
- They actually want to create another great revenue stream along side search in the corporate market
- Their mission is about organizing the worlds information. If you are going to organize the worlds information you better be able or organize and edit Microsoft office documents, and you better become an ideal repository for them. Google wants to be such a repository.
Right now Google Docs will allow you to edit Word documents but you do not see formatting properly, and if you edit you have a significant likelihood of destroying formatting information that was there when the document was initially created.
My view is that if any of these three things are your real goal, you cannot win without doing a good job... no, a *really* good job with what people use a word processor for. And despite the fact that Google Documents does a great job with collaboration, I do not believe that you can provide a good alternative to Word or even a good repository for Word documents if you cannot edit them properly or even see at least the most basic of formatting properly. In short, to do any of the three listed items, Google must be able to format at least as well as Word For Windows 1.0 or MacWrite circa 1984.
I do not believe that Google can get everyone to believe that font selection, and tabs, and line spacing and decent graphics embedding and formatting are things that just don't matter any more. Yes Word has more features than most people need. But that generalization does not extend down to this basic level of formatting. I do not believe that Google, powerful though it is, can make people think that these really basic things aren't important. Because most important documents in business need to be printed at some point. And formatting is important.
Now to be clear, my criticism is *not* that they don't have all the formatting features that are needed. I totally buy the idea of starting somewhere and making things better over time. My concern is that given that Google Documents is HTML based, YOU CAN'T GET THERE FROM HERE. And almost none of the code they currently have will be useful towards a proper solution.
This is a huge point. HTML for word processing is a cul-de-sac. A dead end. You cannot provide good formatting features using it. And this concern can only be mitigated if you believe that Google's plan is not world domination, or if you believe that some day soon printing is going to be an obsolete concept. And if you believe either of those things I've got a bridge in Brooklyn you might be interested in.
Tuesday, April 1, 2008
It seems like such a simple thing, tabs. And yet tabs are really a proxy for what makes a modern word processor something more substantial than old arcane products like WordStar from a bygone era.
The world changed when WYSIWIG (What You See Is What You Get) was invented and the word processor became capable of precisely positioning each character on the screen and on paper in exactly the same way.
Without precise type control, you cannot do any of the formatting we associate with modern word processing. This includes things as simple as tabs and precise line spacing, and as sophisticated but expected as basic page layout.
Unfortunately, Google Documents is based on HTML. HTML does not allow for control over fonts and does not provide for pixel precise positioning of text. What Google is currently presenting as a word processor is in fact little more than a very poor notepad, albeit with decent collaborative functionality.
In short, HTML based text editing is lame.
The only way around this is by creating a new text editing platform based on Flash. I do not know whether Google is constitutionally capable of basing one of their cornerstone applications on Flash. But they really need to get over it. Because, as I see it, this part of their life depends on it.
By eschewing the concept of a flash based word processor, Google is leaving itself vulnerable to Adobe. Adobe has acquired, and I would imagine is now heavily investing in the first web based word processor with true pixel level type control, called BuzzWord. Adobe has better distribution than any other company on the Internet, and Adobe has the best web client technology, and adobe owns PDF. As I see it, Adobe is well poised to beat Google at being *the* web document company, just as they are *the* print document company.
This might not be so important if it weren’t so important. The stakes cant possibly be higher. The format that documents are stored on the Internet is really one of the major end games. If Google does not have a good document editor, they will not be the platform that people use to edit and store documents. For this reason, as I see it, there is nothing more important for Google outside of search than providing users a good document editing and storage platform. They aren’t even in the game right now, and as I see it, they aren’t even on the right playing field.