Rational Exuberance | Digital Media and Online Advertising | Brian Goffman

Why Twitter is a Disruptive Innovation

It's hard to escape the Twitter publicity storm.  Celebrities are now coming in droves to what was a geek-driven network. One question worth asking is...why now?  What's different? Aren't email, IM, chat, Skype, blogging, social networking (now with email) and other the other forms of rapid fire communication enough?

In short, no. I had a chance to look again at the Innovators Dilemma by Clayton Christensen.  He describes a Disruptive Innovation as a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves ‘up market', eventually displacing established competitors.

An innovation that is disruptive allows a whole new population of consumers access to a product or service that was historically only accessible to consumers with a lot of money or a lot of skill. Characteristics of disruptive businesses, at least in their initial stages, can include: lower gross margins, smaller target markets, and simpler products and services that may not appear as attractive as existing solutions when compared against traditional performance metrics.

Why didn't blogging companies (like SixApart) develop Twitter?  Because they were busy serving ever growing needs of bloggers who right long form entries.

How about IM vendors? Chat? Facebook? Facebook was building its app platform at the same time Twitter was building a seemingly bare bones system for sharing a stream of short messages. Now Facebook has to respond to Twitter's incredible success with developers.

Because companies tend to innovate faster than their customers' lives change, most organizations eventually end up producing products or services that are too good, too expensive, and too inconvenient for many customers. By only pursuing “sustaining innovations” that perpetuate what has historically helped them succeed, companies unwittingly open the door to “disruptive innovations”.

It may be that incumbents...themselves in many cases only a few years old...will respond with innovation of their own and catch up to Twitter's momentum.  I'm not betting on it.

Warren Buffett and the Three I's

I heard a great quote from Warren Buffett today via Theodore Forstmann of Forstmann Little & Company:

"Buffett once told me there are three 'I's in every cycle. The 'innovator,' that's the first 'I.' After the innovator comes the 'imitator.' And after the imitator in the cycle comes the idiot."

If you're building a new product or investing in one, which "I" are you?

Financial.com

In 2002, in the darkest days of the .com nuclear winter, after many companies collapsed loads of software engineers were left hanging out at Starbucks.  Big company executives who imagined immense riches as part of the next Netscape packed their bags and left the Bay Area.  Some made it back to the East Coast and become mortgage brokers.

Around the same time, the glory days of financial engineering started heading to new highs.

How times have changed.  In 2008, the start-up world is humming again, fueled by venture capital funds raised on liquidity events of 2006.  Meanwhile, the financial system that created massive bonuses for traders, bankers and hedge fund managers, seems on the brink of collapse.

Why the dichotomy here?  Conventional wisdom is that venture capital investing lags the real economy by 6 months or so.  This is because VCs typically don't directly feel how bad things are until results start showing in their portfolios.  At that point, they have to increase reserves for follow-on investments and plan to sit longer on boards of companies that can't sell or go public. 

If you're planning to raise money, do it now.

The current financial crisis is much bigger than the .com fallout.  It affects every corner of the economy.  Banks rely on the trust of consumers to keep their money safe.  Banks also rely on the trust of other financial institutions to maintain liquidity.  There were lots of charlatans who thrived in the .com boom, but it's becoming clear that the scale of the mortgage-backed house of cards is larger than anything Enron invented.

How low will we go nobody knows.

Some Good Things about a Recession

Back in January I had the chance to get together with a group of my business school friends on the East Coast.  The mood among the bankers and hedge fund managers was apocalyptic  The financial system, according to almost all of them, was coming to a crashing halt. From the looks of the stock prices of Fannie Mae and Lehman Brothers, and the demise of Bear Stearns, they were at least directionally correct.

Those of us in the technology business were pretty shocked at how bad the bankers thought things were. We didn't even know anyone who had been laid off! And what about that new iPhone? This time, in contrast to 2001, it's Wall Street that's on the downside of a bubble.  And this one is beyond anything seen in the lifetime of the Internet. 

For tech, it may be only beginning. Wall Street banks buy a lot of software and hardware (see that Cisco warning this week?). Investment bankers do a lot of traveling (Expedia?). Mortgage lenders do a lot of advertising (IAC?) Hedge fund managers...well, they're still making money.

But there's no question that the melt down on Wall Street, combined with the skyward rise of oil and commodity prices, will cycle through online media and technology. Some projects will do really well - enterprise software that saves money, for example. But the stupid discretionary projects may be axed.

Is there anything good about this? Back in 2001, several people told me that "a downturn is a great time to start a business." This may make sense once you've lived through it and look back, but it's painful at the time. So for those of you starting or running a startup during this downturn, I thought I'd share some good things about a recession.

 

I remember reading the Wired article in 2006 on The New Boom that argued that "it's different this time!" since we're in a boom (sustainable growth), not a bubble (crazy stupidity).

I don't think anyone in Silicon Valley praying in 2002 for "Please, God, just one more bubble," meant for one in commodities and housing. But that's what we got.  So boom, bust, or bubble, stay focused on the opportunity.

Widgets and SEO

For me, one of the most intriguing areas of online marketing is search engine optimization or SEO.  Though there are a number of reputable software and consulting firms like SEOMoz, I haven't found a world-class software-based solution to managing and monitoring SEO in conjunction with a broader online marketing strategy.

With the advent of universal search there's also a lot of buzz around digital asset optimization, described in this TopRank blog post.  As far as I know, outside of Mixpo very few companies are actively incorporating universal search into marketing.

One of the best SEO-focused companies  I know is BuddyTV.  BuddyTV has taken an approach to SEO that fully aligns with search engine goals: great content, a deep link structure, multiple media types, and engaging services for user self-expression.  One of my favorite features of BuddyTV is the personality quiz that compares me to TV characters.  I can put the results on my blog, MySpace page, etc. 

If you're interested, here's my result from the quiz about The Office:

Which Character From The Office Are You?

More on The Office. Created by BuddyTV

Note to NBC: why don't you have a separate site for The Office? How about fixing the broken links on the John Krasinski page on NBC.com? Are you behind Jim Halpert's page on MySpace?

Not coincidentally, this widget links to BuddyTV.

Mark Goffman makes the WSJ for "Figures of Speech"

I'm really excited about Mark Goffman's upcoming documentary on ventriloquists, "Figures of Speech." I admit lots of bias on this but Mark's a super talented guy (West Wing, Law & Order SVU) and he's picked a great topic. Early footage from the film is very, very funny.

Since this is a limited budget movie, it will be interesting to see what we can do to generate interest in the movie from the web and how that translates into demand for distribution.

If you're interested in more click below or I've attached the link to the page on WSJ article on Terry Fator and background on the movie.

read more | digg story

The Beaconization of the Web

A lot of ink and pixels have been spent on Facebook's Beacon feature.  Most of the concern has been about Facebook's clumsy implementation of privacy controls and backlash among users that don't want to share what they're doing on the web with others.  I've heard the story about how Facebook was ruining holiday gift giving probably 10 times in the past 2 weeks.

I'm going to come out and say that I'm a big fan of Beacon and what it represents.  With the right privacy controls and affilates, I think Beacon represents a paradigm shift in the way people share information about themselves online.  A recent article by Sandy Pentland at MIT describes the concept of using "reality mining" to monitor actions on a cell phone to develop a representation of a person and their web of connections online.  With all due credit to Erving Goffman and his assessment of behavior in a specific context, our online identity is a new framing of representation of the self. 

The key concept for me from this and other research is that aggregating actions on a cell phone, on the web, or in the real world can speak volumes about who you are.  Just knowing that I spend a night on Mercer Island and a day in downtown Seattle speaks volumes.

I believe that Beacon will work through the kinks and privacy issues to enable users to share what they want from the web on their profiles.  Services like Six Apart (the platform that runs this blog) have introduced features to enable comments to post through Beacon on Facebook.   The difference at Six Apart is that their solution is completely opt-in.  Though details are murky, Pluck recently announced features to allow users to share activity on Pluck-enabled services with Facebook and OpenSocial.

There are lots of potential ways that Beacon-like services can extend, connecting actions on any service to any other service, and potentially any device, as long as users are in control.  In a Beaconized world, applications will create lots of value for users if they can require very little if any work to extend identity on the web.

In the content business, what's your competitive advantage?

Most of the time time when I hear an entrepreneur talk to a venture capitalist about starting a "content business," it seems like the same topic comes up.  In a content business, what's your competitive advantage?

This question highlights an area of competition that most technologists do not feel comfortable about.  VCs feel great about distribution businesses.  They like services that distribute ads, blogs, videos, music, or anything that can be turned into bits.  Hosting and sharing and mobilizing are great too, especially if there's some form of lock-in for customers.  Fortunes have been made turning proud media creators into "content."

You can host create blogs at Six Apart.  You can share videos at YouTube.  You can stream music at Last.fm. The brilliance of the Facebook newsfeed is that just by showing up, installing apps, adding friends, and sharing photos you create "content." For them. There are no touchy actors or expensive special effects.

The public markets recognize a similar value gap.  Businesses that search, share or recommend media are valued much more highly than those that create the media itself.  Google has dramatically higher margins, and market cap, than, say, TheStreet.com, home of Jim Cramer, and Disney, creator of (among many others) Lion King, Hannah Montana and High School Musical.

But can you build a great business creating the media that other companies are attempting to commoditize?  If so, what are the elements of a great content business?

It's worth looking at what's been funded lately.  The recent slew of new HowTo sites like 5min provide a model of discoverable video amenable to advertising.  Comedy sites like FunnyOrDie and Comedy.com aspire to entertain and create community.  60Frames and OnNetworks help finance independent, high-definition videos for distribution on other services. The assumption in building these companies - still an open question - is that low-cost production can create great quality underneath, or at least alongside, the current high-cost model.

In Seattle, companies like BuddyTV are creating original stories about new television shows that both drive traffic and help build a social network.  Zillow is increasingly building a community of buyers and sellers around its core real estate data. These communities would not come together if the content wasn't there.  Almost all of these services rely on the same inexpensive overseas labor that has driven down the cost of software development.  Bits are bits.

I think Comcast understood the relative value of content compared to distribution when they made a failed attempt to buy Disney.  FIOS can't take value away from Cinderella.

I was recently part of a roundtable discussion with online marketers about how to drive traffic through SEO.  One business marketer commented that traffic to their site was increasingly coming through their blog.  Traffic has increased dramatically since they added a full-time person to create "content":  not just blog entries but also videos, photos, and news entries.

What's becoming clear to me is that everyone who has an online presence is, in some form, in the media business.  If you want to get traffic, you have to be interesting.  You may not be making movies or publishing music, but if what you're putting on your site is boring or amateur, people won't pay attention.  So invest in content:  it's much more valuable than you think.

More Seattle Companies

Marcelo Calbucci from Sampa updated his list of Seattle startups for November.  The list comes in at 210 members.  Thought I'm not sure what criteria is used to filter minimum criteria, it's clear that aggregate traffic (and hopefully revenue) is growing, along with the depth and range of services.   

I'm looking for a way to keep the list up to date, ideally automatically, and make it available for editing by companies who want to update their profiles.  User feedback would also be great.  One candidate to add this kind of service could be AboutUs or the TechCrunch company index.  A database service like DabbleDB or Blist could also work.

Kudos to Marcelo for pulling this list together.  Hoovers.com, now owned by Thompson, is a good source for this kind of data on public companies, but all companies should be in control of their own profiles.  There's definitely a business opportunity here.

The Analog Digital Coffeeshop Music Advertising Supply Chain

I admit I'm addicted to Starbucks coffee.  And Tully's, Pete's, and The Coffee Bean & Tea Leaf (when in LA).  My coffee drinking is a more-than-daily habit, and it's hard - very hard - to kick.  So it's been interesting to observe the coffee shop turning into a test lab of sorts for digital media.

This month, I was surprised to see Starbucks handing out cards for free iTunes music.  Many Starbucks are now getting flat screens on the wall showing "Now Playing" and "Available on iTunes."  Is this designed to sell more coffee?  Or is it designed to sell more music?  Both? 

Tully's Coffee, meanwhile, has deployed Ripple, which looks a lot to me like the PointCast screensaver on the wall with news, weather, stock quotes, and animated ads (doesn't someone own the patent for that?).  Several other in-store advertising networks are targeting the coffeehouse market.

Back in the 90s, several companies paid Starbucks to run Wi-Fi networks in the stores.  In general, those investments didn't pan out well.  Mobile broadband rolled out to the same customers who would otherwise be heading to Starbucks to log in.  T-Mobile runs at least some of those networks since purchasing Mobilestar, the company that set them up.  Paid Wi-Fi revenue pales in comparison to mobile broadband.

Now Apple is eyeing the same coffee drinkers as potential iTunes buyers.  With the iPhone and new iPod touch, I can download music without my PC in a pretty slick interface.  I can also use iTunes in the store to get the last 10 songs played and buy them if I'm interested, with free Wi-Fi.  But outside of people with the appropriate devices and software, it's pretty hard to make the digital supply chain work in an analog store since you have to enable the digital transaction.

The biggest challenge is the iTunes card.  The cards look nice, but using them is a mess.  I've seen several stores with cards spread around the cash register, with some from the prior day.  The codes are long and hard to enter.  One of the barristas I talked to commented that it's a hassle to keep the cards on hand, and most people don't understand them, but "it makes money."  Does she think Starbucks is getting paid by Apple for this, or Apple is making money on Starbucks?  I'd love to know.

I'm in favor of trying every possible experiment to access limited consumer attention.  When I'm in Starbucks waiting for my Americano, I can give Apple some of my attention, or Ripple, or anyone else who wants to put a flashy, animated flat screen on the wall.  If you give me a card for free music, I'll download it.  But I'm not going to Starbucks to buy music.  I'm pretty convinced most people don't want to do anything in a coffee shop other than drink coffee, read, write, surf the web, or have a discussion.  It will be very interesting to see if these distribution points for music and for advertisers move the needle.

I'd love to hear otherwise, but I still think the biggest leverage point for digital products is digital distribution.  And the best place for coffee is a coffee shop.  Lots of people are buying virtual coffee on Facebook, but I'm still going to Starbucks (and their competitors) for the real thing.  And buying music everywhere else.

Innovating in a "Mature" Market

Many investors and entrepreneurs have commented on the importance of targeting the right market opportunity for your company.  Most investors view market opportunity and economics as having a greater impact on success than team or building a great product.  To quote Warren Buffett:  "When a management team with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact."  In a startup context, Marc Andreesen’s post about what matters most is a great reference on this topic.

In my experience, most experienced tech entrepreneurs, and many inexperienced ones, know intuitively how to identify a large market.  In consumer services, this is often based on personal experience.  “If I would use it, so would lots of people!” YouTube, Facebook, and other very large services fall into this category.  In enterprise software, seeing a large number of companies building similar services in-house might identify a general need. 

But what makes a great market?  I’d propose using the following framework to think about venture backed markets and the related likelihood of having a big outcome for you and your company.  Credit goes to Ross Cockrell at Escalate Capital for helping me think this through.

   

The first area to consider in evaluating your market opportunity is the potential size of your market.  The really, really simple formula here is P * Q:  price times quantity.  If your market is too small – and you may not know this starting out – by definition, there will be no big winners.  The size of market is a time-bound definition, since in startups, being early is the same as being wrong. Even if the market gets there eventually, if you don’t time it right, you will run out of money before the market catches up.  If you are selling ads, you either need a lot of inventory, or high eCPMs, or (preferably) both.

Examples of small markets with many venture-backed companies and no winners abound.  WAP software application developers and B2B marketplaces in 2000 are examples.  Online jewelry turned out to be a large market, but Blue Nile and others had to hunker down in 2001 to survive until the market arrived.

The second, and, in my view just as important, area to evaluate in considering your market opportunity is to look at how recognized the opportunity is among venture capitalists.  This is another way of predicting the intensity of competition.  In a “consensus” market, even if large, there will be winners, but lots of losers as well.  You can do extremely well in these markets, but you will be looking over your shoulder every day to see what's coming.  Think YouTube and its host of video sharing competitors in 2005.

What excites me the most are large markets that are viewed as uninteresting by a majority of venture capitalists.  There are a number of categories viewed by technology entrepreneurs and VCs are “mature,” but where innovation can really change the landscape.  This is where you often stand alone and have the highest probability of building an independent company.

To give a few examples of non-consensus leaders, think about Google in 1999, when search was considered a mature market and relegated to a feature of established portals.  Zillow, another innovator, recognized the broad consumer desire to know the value of their house.  They also understood the size of the real estate marketing industry and took on HouseValues with a self-service, consumer-friendly application.

Picnik, an online photo editor, is a rapidly growth service operating in what many people viewed as a well-established market.  Did the world need another photo editor in a world of Photoshop, Picassa, and a host of other offerings?  Apparently yes, when brilliantly executed in a web service.

In thinking about the attractiveness of your market, ask yourself some basic questions:

• Are you fulfilling an already recognized need (i.e., large market) in a dramatically lower cost, more convenient, and / or radically innovative way? 
  
• Are you taking a differentiated approach to delivering to your customers vs. competing on features and functions?
  
• Do venture capitalists view your market as mature?

If you can answer yes to those questions, and are targeting a large market, the odds of success are greatly improved.