Although AllPeers didn’t produce the kind of outcome that we had hoped for and expected, it’s been a tremendous learning experience. Hopefully others will be able to benefit from what I consider to be the main lessons.
Luck and ambition
Naturally the success of any startup is dependent to some degree on luck, and the luck factor rises in proportion to your ambitions. If your plan is to sell T-shirts online then execution is probably the main consideration. If you make really cool designs, have an easy-to-use website and do good marketing then you’ll probably make money, though you’re unlikely to be buying a private island in the South Pacific any time soon. If, on the other hand, you plan to dethrone Facebook by adding state-of-the-art social features to the fabric of the web, transforming the internet experience of billions of people, you’re going to have to execute to perfection and still get really really lucky if your company is to succeed. Of course, if you make it you’ll be assured a very comfortable early retirement.
Neither of these approaches is inherently wrong but you should be aware of what you’re getting yourself into. If you can’t stand the thought of failure, make sure you’re not tackling a problem that is too big and ambitious. In the case of AllPeers, we knew that there was going to be a lot of luck involved (as there is with any product that relies on network effects and viral adoption), and we were pretty well prepared for the challenges we would face. It is comforting to see failure in this way because we certainly wouldn’t have sacrificed our lofty ambitions to increase our chance of moderate success.
Raise as much as you can
I’m not the first one to say this, but let me express my wholehearted agreement: raise as much as you can, as soon as you can, and not a penny less. In early 2006, before we had released even a private alpha of AllPeers, we suddenly became a minor web star thanks to a couple of white-hot buzzwords (”Firefox” and “BitTorrent”) and a very positive writeup on TechCrunch. (And in fact we owe a great deal to Mike Arrington, who grasped our vision immediately and did a great job of articulating why it was exciting. It’s easy and intellectually lazy to be pessimistic before the fact and snarky afterwards, while it takes courage to go out on a limb and predict success.) We believed our own hype a bit too much, unfortunately, and didn’t take advantage of the opportunity to raise a lot of cash at a high valuation. Instead we brought in a very modest amount under the assumption that we’d be in a great position in a few short months to close a much bigger round.
As a result, we were under constant pressure to get user numbers up so we could raise more money. This isn’t the way to run a company, particularly one with an ambitious technological vision. We ended up making a string of tactical moves rather than taking a step back and looking at the big picture. As a consequence, we ran out of money before we could get the product to where it needed to be. Don’t make this mistake.
This shouldn’t be construed as a criticism of Mangrove Capital Partners, who led our series A investment round. They are a fantastic group of individuals whom I wouldn’t hesitate to recommend to any entrepreneur seeking funding, and a classic example of a VC who really does offer much more than money to a budding startup (something they all claim to do). But only a company’s founder has a single-minded focus on the company’s success, and this includes acquiring a war chest to deal with unforeseen contingencies.
Consumer Reports provides a fascinating counterexample to the conventional wisdom that people won’t pay for content on the web, as reported by CNet (in some sort of vague collaboration with the New York Times). The author goes to great lengths to enumerate the unique factors that are enabling them to succeed with this model while other high profile purveyors of online paid content like the New York Times, the Economist and the Wall Street Journal have either eliminated their paywalls or are considering doing so. And indeed, I wouldn’t expect this article to change most people’s minds about the viability of charging for content on the web because it’s so easy to paint Consumer Reports as the exception that confirms the rule rather than a harbinger of things to come.
Yet there are many reasons to doubt that all future media will be financed by advertising. I’ve touched on this topic many times, notably in a March 2005 post in which I cited the ease of blocking online ads, among other things, as something that might motivate publishers to fall back on the more transparent mechanism of direct payments. The factor that led Consumer Reports to take this route, namely independence from corporate interests, is another that we might hope would be taken to heart by more publications. I mentioned one more the other day: it’s unclear that there is enough ad money out there to finance the entirety of content production as it moves online.
In the aforementioned piece from March 2005 I cited the arrival of mobile reading devices as one of the main triggers that I expected to force a shift in business models from advertising to paid content. This is starting to come true, most prominently with the Amazon Kindle, which famously embraces this approach even for traditionally free content like blogs. I’m not sold on the idea of a dedicated reading device, but I’m undeniably reading less and less printed pages now that the iPhone provides me with a usable portable device for consuming content online.
The main reason why publications like the New York Times broke down their paywall is that there is too much free content for readers to turn to rather than reaching for their wallets. The problem certainly isn’t that people are unwilling to pay for content: Consumer Reports proves that, as does the paradoxical success of the ring tone market, which has flourished in the absence of a free alternative. That’s why I hypothesized a tipping point in my musings on this topic two and a half years ago.
Here’s how this might pan out. More and more people will start to wonder, like me, why they pay to subscribe to the Economist when they can read the whole current issue online on their iPhone or other mobile reading device. As a result, publishers will see their overall revenues start to fall and will react by raising their advertising fees. Advertisers will take the hit for a while, but eventually they’ll start to fall back on other marketing techniques and use the savings to lower prices. Big web successes like Amazon, Google and Facebook don’t advertise, after all. Every newpaper and magazine out there will then find itself in the same position as Consumer Reports today, with no choice but to find a way to make paid content work. And the more publications that jump on this bandwagon, the less reason there will be for others to hold back.
Mark Zuckerberg’s mea culpa yesterday triggered a veritable tsunami of commentary on Facebook’s decision to atone for its sins by making its new Beacon advertising system less intrusive. The apology came too late to avert a medium-sized PR disaster, though I dare say there’s still plenty of life in them yet. And since the mere fact of piggybacking on a titular snowclone employed by the likes of Jobs and Zuckerberg makes me feel a teeny bit more important, I’ll chime in with a couple of thoughts of my own.
Now everyone knows that Facebook wants to be Google. Heck, everyone wants to be Google, but they’re the most plausible (or least implausible) contender right now. And that implies not just a great website and a lot of users but also an innovative, lucrative and scalable source of revenues. I can almost see their management team sitting down and brainstorming about the goose that would quack and waddle them forward in their quest for inevitable world domination amidst a pounding hailstorm of golden eggs. And what did they come up with? Advertising. Now where have I heard that before?
There are more than a few problems with this beyond the ham-handed way they handled Beacon’s rollout. As Tim O’Reilly points out, there isn’t enough ad money out there to finance the wholesale shift of media online. Facebook doesn’t share anything obvious with eBooks beyond the last five letters of its name, but I think the basic principle stills stands. Google has managed to go on minting ever greater sums to a large degree because its search engine drives such tremendous volumes of traffic. And that traffic is by nature intentional, as Alex Iskold rightly notes. I click on their ads because they might help me find that specific something I’m looking for.
Alex might be a bit harsh in condemning the whole notion of contextual advertising based on a flawed but ambitious product that is still only a few days old. But at the end of the day the whole idea that Facebook will justify its vaunted $15 billion valuation by pioneering the new new thing in targeted ads strikes me as unrealistic and facile. If I were them I would instead extend their application platform (which is truly innovative) to support paid services, taking a cut of partners’ revenues. I’m sure there are plenty of web developers out there who would love to take on eBay, Monster, iTunes and Match.com by leveraging Facebook’s gold mine of social features. Many would fail, of course, but who cares when the mother ship would book a percentage of whatever winning ideas an infinite number of monkeys scrappy startups can come up with?
On another note, did anyone else notice that Zuckerberg’s epistle of self-flagellation doesn’t mention the word advertising even once? Perhaps this is just another example of corporate spinmeistering at work, but I think there’s more to it than that. Ever since Jason Kottke’s seminal piece comparing Facebook to 1990’s AOL, freedom-loving folks (you know, the kind who wear sandals to business meetings and think they can hear the difference between FLAC and MP3) have lamented the rise of another online walled garden. How better for Facebook to counter this than to find a way to integrate their core functionality into the fabric of the web? The clever way that Beacon lurks in the background as you surf on other sites is an intriguing suggestion of the course they might take to make this happen.
More support for another recurring theme of this blog. Despite being one of the most popular vlogs, Rocketboom isn’t making enough money from advertising to “sustain its future growth” (which might or might not be a euphemism for financing its current operations). If Rocketboom is facing this issue, imagine what life must be like for the zillions of less popular vlogs, not to mention all the sites that could exist, but don’t because of financial considerations. Getting people to pay for stuff on the web is still difficult, but once someone cracks that nut we’re going to see an explosion in high-quality content.
Tim O’Reilly commented the other day on an interesting blog post, the gist of which is that it’s hard-to-impossible to make real money from an advertising-funded website.
As I’ve surely ranted many times in the past, the logical conclusion is that media on the web won’t be exclusively (or even primarily, in my opinion) funded by advertising. Most of the traditional media that has a good model for direct payments (films, music, print) is at least partially (and in many cases mostly or entirely) financed by that means. The only real exception is television, for the simple reason that advertising was the only technically feasible model until relatively recently.
The counterargument is the oft-heard assertion that “people won’t pay for content on the web.” Of course, this claim is true in exactly the way that, once upon a time, most people wouldn’t set foot on an airplane or eat sushi or buy a Czech-made car. But once the quality of the experience or product — and the peer pressure to try it out — rose to a certain level, suddenly everyone piled on, and now it seems like you can’t leave the house without seeing people noshing on maguro nigiri in their Skoda Superb while on the way to the airport. Buying content online is still pretty inconvenient and people aren’t used to doing it. But the medium is very young, and the status quo says very little about the way things will end up once the dust has settled.
Nick Carr muses about how technology stimulates economic inequality, with copious quotes from Fed Chairman Ben Bernanke. Using the example of the YouTube founders, he ponders why productivity increases appear to have benefited the rich and super-rich far more than the middle class, whose wealth is apparently growing even more slowly than that the poorest workers.
Bernanke’s analysis looks plausible as far as it goes:
A possible link between technological change and the substantial increases in the wages of the best-paid workers is that some advances, such as those that have swept the communications industry, may have contributed to the rise of so-called “superstars” - a small number of the most-gifted individuals in each field who are now better able to apply their talents in what has increasingly become a global marketplace.
It’s dangerous to base economic conclusions on anecdotal evidence, but this certainly jibes with my experience. People with highly specialized and sought-after skills are better able to monetize these skills, a result of straightforward supply and demand. In the past, a superstar programmer living in, say, Denver would only be able to earn the highest salary that a company in that city is willing to pay. Nowadays, secondary costs (e.g. communication overhead) associated with employing remote workers have fallen to the point that the same programmer can probably earn much, much more working for a company somewhere else in the world who values his or her unique skills more highly. In practical terms, demand for this individual has soared. Globalization has also made it easier for skilled workers to relocate, creating further efficiencies. The Economist recently ran a survey on executive pay (beware of pay wall) that reached a similar conclusion: top executives earn much more nowadays because they have more opportunities to sell their abilities to the company that can best exploit them.
None of this applies to those at the middle of the pay scale. Sure, technology may have made them more productive, but it’s probably done the same for less skilled workers as well. Garbage collectors and construction workers make heavy use of new technology and are more efficient as a result. White collar workers benefit as well, but not in a way that would make them salable on the “global marketplace” that Bernanke refers to.
One point that Nick doesn’t mention with respect to the very richest individuals is the importance of critical mass in making money from technology. The reason that the YouTube guys made so much money is that their business is so dependent on network effects. This leads to a winner-takes-all situation where the first player to reach the requisite tipping point garners the vast majority of rewards for the whole sector. Whether YouTube achieved this through superior skill, luck or timing is largely irrelevant. The fact is that people want to put their videos where the most people will see them and likewise seek videos where they are most likely to find them, a strongly virtuous circle. The same thing happened with Skype, eBay, ICQ and countless others, and as a result their founders all ended up filthy rich.
In the blogging community it isn’t difficult to find people who despise the current copyright regime and think it should be changed. But you’d have to look long and hard for someone who believes that copyright should be banned outright. Karl Fogel, a leading open source proponent and copyright activist, is not one of these people. He does feel, however, that this is a useful starting point for figuring out the right way to approach this issue. Rather than assuming that some copyright is necessary and trying to decide exactly how much is optimal, he suggests that we imagine a world without copyright and take it from there.
He contends at the beginning of the podcast that, not only does he not know personally what the right level of copyright is, but that it isn’t possible to know this based on current evidence, a view that I find eminently reasonable. I also agree wholeheartedly with the way he concludes our discussion:
I think that there is some built-in exclusivity there but I also think… whatever change is going to happen is going to happen essentially through a market process. It’s not going to be that Congress suddenly wakes up and drastically reconsiders copyright law. Instead, some number of artists, just as some number of software developers did a couple of decades ago, will by choice release their stuff under these liberal copyrights, And they will create this little fertile safe space for sharing that will grow, and basically we’ll have two parallel streams: there’s the old stream and the free stream. And people will just start choosing stuff based on what they like, not based on ideological concerns about how it was produced. And we’ll just see what happens.
At the end of the day, we need to create an environment where individuals can test their own approaches to copyright and let the market decide what works best. I don’t necessarily see as strong a connection as Karl between liberal copyright terms and free content, however, and I hope that this makes our discussion more dynamic and thought-provoking.
Oh, and having listened to the final product, I seem to be doing the majority of the talking. I’ve always wanted these podcasts to resemble debates rather than interviews, but I’m not sure that I’ve found the right balance yet. So I resolve in 2007 to make an effort in any future podcasts to shut up and listen, as much as possible.
Download the podcast (high quality, 50 Mb) (low quality, 12 Mb)
Hifi streaming (128 Kb/s):
Lofi streaming (32 Kb/s)
Richard Maven from e-consultancy.com caught up with Matt and me earlier this week and we talked about the current version of AllPeers as well as our future business model. If you want to know more about what we’re cooking, the whole interview is here.
Back in June, Wired editor Chris Anderson offered copies of his Long Tail book to the first 100 bloggers who wrote to him promising to review the book on their blogs.
I duly wrote in and received my copy. This was around the time of our public beta launch, and predictably it took me ages to finish the book. Since then I’ve been plagued by a guilty conscience for having failed to hold up my end of the bargain. So in an effort to assuage my remorse, here is perhaps the least topical tech business book review of all time.
I was blown away when I read Chris’s original Wired article, not because the idea of power law distributions was new to me, but because he encapsulated a revolutionary (for once the word is not an overstatement) shift in the media industry in a perfect two-word sound bite. Many people had intuitively grasped that something big was going on, but it was not until the article helped focus their minds that that they were able to put their fingers on what, exactly, it was.
Considering the success of the Long Tail article, one might justifiably question the need for a full-length book on the topic. As it transpires, the latter expands on the article’s theme along two axes, and its main weakness is that it tries to be two things at once. Is it a general overview of power law dynamics in the market, ranging from 19th century department stores to KitchenAid blenders? Or is it a treatise on the shift of power in the media industry from conglomerates to small content producers?
The latter is a topic that greatly interests me, and the book does a very good job of illustrating the changes currently underway in the entertainment sector. I’ve long argued that all three of the traditional strengths of large media companies — finance, marketing and distribution — are trending towards irrelevancy as digital content moves online. Chris singles out exactly these areas and devotes large sections (even chapters) to each one. He makes a bit too much of the idea that hits are an artificial concept invented by Big Media rather than, as I believe, intrinsically linked to human nature. He would do better to keep the emphasis more consistently on the rise of niche content, rather than the decline of mainstream fare. But overall his portrayal of how the media business is changing is one of the best I’ve encountered.
Applying the long tail concept to areas outside of entertainment strikes me as less interesting and more of a stretch. Worse, by trying to do too much the Long Tail ends up significantly too long (like so many other business-themed books). One of the defining tenets of “new media” is that content can be the length it wants to be, not the length that best lends itself to sales through traditional channels. The Long Tail is a worthwhile purchase and a good read in its traditional book format, but if it had applied its own conclusions to itself, it would have been an even better one at, let’s say, 100-odd pages.
Later this month, I will be speaking twice at the Monaco Media Forum. This is an invitation-only media event, put together by Publicis Events Worldwide, with a large number of executives from the media world, with a small twist of entrepreneurs, VCs and the like.
I will first participate to a workshop entitled Learning From MySpace with
Karl Jacobs, CEO Wallop;
Dan Whiley, Sr Vice-President MTV International;
Chris Michel, CEO Affinity Labs;
Cedric Maloux, CEO AllPeers.
This is actually one of my favorite subject, let’s call it Social Network 3.0 - where 1.0 were online communities in the late 90’s and 2.0 the MySpace and MeToo services.
My second panel is about innovation.
“New Waves 2″: Sharply focused presentations from the leading edge of digital innovation.
Tariq Krim, CEO NetVibes;
Cedric Maloux, CEO AllPeers;
Chase Norlin CEO Pixsy.
Introductions by Spencer Reiss, Wired Magazine
I will certainly talk about Digital Rights Managements and new business models for the Media Industry.
We have about 2 weeks to go before the event, so I’d love your suggestions for more examples about what lessons we have learnt from MySpace (and I’m not talking about bad design!) and how you see the Social Network space evolve. Thanks.
Today we have another edition of Pressure Point, our occasional podcast. As I’ve mentioned in the past, I’m a big fan of Techdirt, a popular technology news blog. With all the cluelessness out there, it’s refreshing to have a news source with such a level-headed and just plain intelligent view of so many hot-button issues. Because of my personal predilection for digital media, I follow their commentary on advertising, DRM and related topics particularly closely. It was therefore a pleasure to get the chance to discuss these areas with Mike Masnick, one of Techdirt’s founders.
Despite the fact that I agree with pretty much everything on Techdirt, I was hoping that we would find some bone of contention that would give the podcast more the character of a debate than a straight-up interview. (Let’s face it, I talk far too much to be a good interviewer.) This turned out to be the case, and after some insightful commentary by Mike on the evolution of advertising, we segued into a discussion about the merits and drawbacks of direct payments for content. As it turns out, we disagreed passionately and the result is a heated and (I hope) thought-provoking debate.
I was a bit flummoxed at the time by Mike’s contention that the principle of supply and demand implies that digital content, for which supply is infinite, must logically have a price of zero. As I wrote to him in a mail afterwards, I think the answer might be that the correct supply to measure is not that of a given piece of content (which is obviously infinite), but of a given type of content. Seen is this light, the supply is actually severely limited, and the pricing mechanism would act as expected, stabilizing to provide the correct level of motivation for people to create new content.
Download the podcast (high quality, 57 Mb) (low quality, 14 Mb)
Hifi streaming (128 Kb/s):
Lofi streaming (32 Kb/s)
One of the nicest things about being involved in the technology industry is that, unlike the teeming unwashed masses, we’re far too mature to be caught up in childish soap opera-style dramas. Or not.
I was chatting with a friend of mine yesterday about what it takes to build a successful business (though I suppose my opinion will carry more weight after I’ve actually done so). I told him that the single most important step is to choose the right partner. This is even more important than having the right product and business ideas; those will change anyway as your project matures. In the case of Rocketboom, it’s clear that something about the partnership was working. But egos come into play when things are going well. Nothing fails like success, or something like that. I’m guessing both parties may grow to regret that they didn’t do more to make a fruitful partnership work.
What struck me most of all was that Amanda Congdon, a rare example of a genuine new media star, was so anxious to go to Hollywood and become a “proper” actress after Rocketboom, ehm, took off. I don’t have any direct experience with Hollywood, but by all accounts there’s tremendous competition to break into the entertainment biz, with a huge failure rate and a tiny percentage of stars. I dare say most aspiring actresses would give up waiting tables in a heartbeat for a chance to create and control their own successful brand on the web. Giving up that opportunity to go swim with the sharks just doesn’t feel right.
That said, I simply can’t understand how Rocketboom failed to capitalize financially on its popularity, at least to the extent that its budding celebrity could afford to pay her rent. If the business types had held their end up, perhaps the appeal of new media stardom would have been easier to appreciate.
Every so often when I want to take the joy out of my day, I look at my mobile phone bill. I am struck by how ridiculously high the charges are in Europe. On average in Europe video calls cost € 0.5 per minute, voice calls cost € 0.25 per minute and SMS (texts) cost € 0.14, and these costs assume you are not roaming at which point an SMS can costs as much as € 0.85. Getting the sense that consumers are being taken for ride?
In my opinion, the mobile communications market offers tremendous opportunities for young companies to innovate. This sector has structural reasons why massive disruptive innovation is only a question of time. To name but three out of a long list: 1) inertia 2) fat margins and 3) massive user base.
Of course, when most talk about innovation in the mobile space, we generally hear about things like gaming, social networking, and video sharing. These are naturally areas where innovation will also flourish and I strongly believe that their time is coming, but why forget communications?
I encourage entrepreneurs to set their sites on the mobile communications space by offering products and services which greatly reduce costs while broadening the mobile communications user experience. I think for those who dare, you will not be disappointed.
It has occurred to me how much we get ripped off by hotels in Europe when trying to get on-line. In Europe, 24 hour Internet access in hotels ranges from € 15 to € 20 per day and of course in the UK, Euros quite naturally become Pounds. In Asia and in the United States, Internet access is in a large number of hotels free, simply part of the services provided to travelers. Figure that one out!
I am naturally not averse to paying for a convenient service and recognize that an upfront investment must bear its fruits. It is the level of the fee that gets to me.
Why does it have to be this way? Probably for the same reason it took a small company like Skype to get telecommunications costs to drop so significantly in such a short period of time. European businesses have a history and seem most comfortable when overcharging customers. Think of the costs of cable TV, SMS, mobile roaming charges, music and Internet access to name but a few.
In most cases these businesses will only change when pushed to do so. My guess is that we should see significant change in the next few years as companies such as Trustive, FON and The Cloud reach the critical mass to make a difference (I am an investor in none of these).
In the mean time, join me in cursing the hotel manager each time you connect.
My friend Mike Hogan wrote to me to tell me about his company ZiXXo, an online couponing system that has just launched:
ZiXXo is the only company today offering self-service coupon creation, coupon management, an API for coupon syndication, and many more innovations. Please see our overview screencast and our advertiser screencast (if nothing else they will help with the pronunciation of ZiXXo). For more information, please see ZiXXo’s media center.
I’m a proponent of opt-in advertising, where ads are designed to be informative or entertaining enough that consumers explicitly ask to see them. This contrasts with coercive marketing like TV spots or web popups that try to force people to endure annoying product plugs against their will. Seen in this light, the ZiXXo model is very appealing. Mike can go on for hours about the huge community of coupon clippers who invest incredible energy and ingenuity to gather coupons. Definitely the best kind of opt-in, and done right, this could have a revolutionary effect on online advertising. Local businesses who are trying to find the right approach for marketing on the web would do well to take a look.
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