Wednesday, November 17, 2004
INTRODUCTION
Wake up and smell the coffee. This is not your father’s economy. And it’s not the boom that inflated our expectations and then exploded. But it’s also not the doom and gloom we’ve been mired in for nearly three years now! So, wake up. Pull yourself together. Get on with it. With what you ask? With the rest of your life. It’s a bright, fresh world full of opportunities. I know that runs counter to many of the opinions all around us, but it’s true, and I can show you why. It’s true for the investor, the entrepreneur, the CEO, the unemployed, and the human being seeking balance. This blog will be dedicated to insights and discussion about life, business, and investment in what I call The New Normal. Please join in!
Friday, May 13, 2005
Innovation & Start-ups, Part 1
From time to time, people express to me their concern about the state of innovation in the technology industry. Many people worry that the pace of innovation has slowed and that there won’t be many great start-ups. I don’t buy it.
In my experience, the rate of technology innovation remains fairly constant. What changes is the scale of the markets enabled by that innovation. We are still emerging from the post-Y2K nuclear winter of technology spending by enterprises, and the most compelling recent tech products have targeted consumers. Several of these came from established companies (e.g., iPod, Motorola RAZR), which contributes to the worries about the opportunity for start-ups
If you are unhappy that it’s no longer possible to make millions with nothing more than a Powerpoint pitch and a URL, then I can’t help you. What I can do, however, is point to a few of the business opportunities on my radar.
A few major themes that entrepreneurs can leverage:
o Time: No one has enough of time. Saving it and making the most of it are key drivers of consumer purchases today. Google and Blackberry save time. Portable music, DVD, and game players enable higher quality activities in limited time.
o Full Duplex Automation: Most services on the web are automated on the provider side, but require lots of effort by the end user. What I want is services that are automated at BOTH ends: full duplex automation. My two favorite examples are MyYahoo and TiVO. You program them once and they work for you forever.
o Universal authoring: It’s astonishing how many devices exist today that enable consumers to create content. The tools for managing that content are still pretty lame.
Here are a few of the innovations that I want to see . . .
o Digital safekeeping: Now that family photos, music, and video are digital, protecting them is a real priority. What is the right model for personal back up and how do your make it automatic?
o Full Duplex Search: Imagine a search engine that could watch the web for you. It could keep its eyes peeled for bargains, for specific news triggers, or whatever you want . . . and then send you an email—or execute a transaction—when it found what you want.
o BitTorrent client for the rest of us: Video on the internet is way too hard to use. What I want is a product that provides TiVO-plus functionality for digital downloads over the internet . . . full duplex automation that doesn’t require a computer science degree. Done right, the client could find, download (and even pay for) digital files of any type.
o Ability to buy anything on eBay with a credit card: This isn’t a start-up opportunity, but it’s something eBay should be doing.
If this is useful, I will pick this thread up again soon . . .
Friday, May 06, 2005
The New Normal - Career, Family & Personal Finance
The following is a speech I delivered at the Software 2005 conference in Santa Clara, CA on April 27, 2005
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I’m here today to talk about life . . . to talk about making the most of your life in a time I call the New Normal.
The New Normal is a time when there are four unshakable issues that each of has to deal with. First, technology is changing just about everything. Second, globalization is changing the nature of economic opportunity. Third, every individual is on his or her own. We have more power than ever before, but no safety nets. And fourth, none of us has enough time to deal with life.
Technology and globalization are the context of the New Normal. The Power of the Individual and Time are the keys to personal success.
Let’s start with the context: technology and globalization. Beginning in 2001, the technology industry entered a new era: the New Normal. Normal because we are back to an environment where growth rates are low. Where everything takes longer than we would like. Where more tech companies fail than succeed. Where getting rich is neither common nor easy. Normal in the sense that the 70s and 80s were normal. Just the opposite of the late 90s, when everything moved at Internet speed.
The 90s weren’t normal, but they altered our expectations. The 90s have made it much harder for us to re-adjust to Normal.
But this is the New Normal. New because the 90s transformed forever the role of technology in our lives. Technology is now pervasive in the economy and in our culture. PCs, cell phones, and the Internet are ubiquitous. Think back to 1990 … PC penetration of households was around 15%. Cell phone penetration was in the low single digits. And the Web was still a gleam in the eye of Tim Berners-Lee. Today, many of us value our cell phones, PCs and Internet connection on par with indoor plumbing.
At the end of the day, though, it’s the New Normal because it’s here to stay. I’m not here to tell you life will be boring. I don’t believe it will be. I believe that great things will happen in the world of technology. I’m not here to tell you that you’re going to be poor all your life. Some of you will eventually be as rich as Croesus
But I am here to tell you that the world has a new set of rules . . . and we are going to be stuck with them for many years. My goal today is to help you be more successful.
The technology industry is mature. Don’t hold your breath waiting for the next upcycle . . . because we’re in it. It won’t be exciting the way the 90s were, but there is no reason it can’t be rewarding for you.
How did we get here? The technology bull market of the 90s didn’t happen by accident. It happened because of two forces: Moore’s Law and the Berlin Wall. You know what Moore’s Law did, but you may not appreciate the importance of the Berlin Wall.
Before the Berlin Wall came down in 1989, American companies could only sell technology products in Western Europe, North America and parts of the Pacific Rim . . . roughly 25% of the world’s population. Every other market was inaccessible. Communist countries for political reasons. Third world countries because they had no money.
After the Wall came down, we saw a transformation in the global economy. Gone was the bilateral competition between the US and USSR. Gone were the old political barriers to trade. Gone was foreign aid.
In the early 90s, every country in the world was forced to implement a market economy. Faced with an imperative to attract foreign capital, emerging countries built airports and nice hotels in their capital cities. They installed phone systems. They bought computers. Lots of them.
When the Berlin Wall came down, the addressable market for US technology expanded more or less overnight to something like 80% or 90% of the world’s population. In combination with the economic upswing of the 90s - the longest economic expansion since the Second World War - this huge growth in addressable market propelled the technology industry to its greatest period of success.
Over a decade, there were three monster waves of technology adopted simultaneously by enterprises everywhere: Windows, client/server applications, and Y2K. The industry grew from about 6% of GDP to more than 9%, during a decade when the economy roughly doubled in size.
Now you understand why the bull market of the 90s was so enormous. Throughout the 90s, technology and globalization worked hand-in-hand to transform the world economy. If you watch Lou Dobbs on CNN, you might think that globalization is the worst thing that ever happened to the US economy. Dobbs would like to see the US government intervene to stop it.
Globalization is many things - some good, some bad - but it’s not a matter of choice. Globalization is a fact of life. It’s not going away. Our country’s only option is to figure how to use globalization to our advantage. The political problem with globalization is that a relatively small number of communities bear most of the burden. Their pain is visible to all. The benefits, on the other hand, are not so visible or politically compelling: low inflation and lots of inexpensive new products. They benefit everyone, but not so much that people are aware of it.
Even today, globalization and technology remain intertwined. Together they give rise to seven really important trends that affect us all. First, and most obvious, is the rise of Asia. The supply side of this one is so obvious, it probably qualifies for a “duh,” but the implications for all of us are real. Hardware manufacturing has been migrating to Asia for fifteen years. For some reason, the migration of technology manufacturing didn’t bother people much. Perhaps that’s because it happened while the economy was really strong. Those who lost jobs quickly found new ones. The migration that has everyone atwitter is in software development. The software migration coincided with a recession that made it hard for people to find new jobs, and for some reason, we felt that software development was an American business.
We shouldn’t be surprised that software jobs are moving to Asia. There is nothing new about the migration of mature - commoditized - job categories to low cost geographies. The key is to spend your career at companies that either benefit from this shift, or drive it.
Another thing worth remembering is that Asia has a demand side component, as well. We are in year five of the Chinese Century. Ten years from now, China’s local demand will radically alter the country’s economic policy. It will be harder for China to export deflation when Chinese consumers demand a larger share of production for their own use. The implications of this are very exciting
The second trend is industry consolidation. Maturity came so quickly to the technology industry that no one was prepared for it. Certain categories - electronic manufacturing services, PCs, and enterprise software - have too many vendors and too much capacity. There is opportunity in consolidation, but also risk. At a professional level, you need to steer clear of the downside of consolidation. Remember also that consolidation is not just an issue among larger companies. The venture industry still suffers from excessive capital, which suggests that some excellent opportunities will be undermined by “me too” competitors. This doesn’t mean you should avoid start-ups. What it means is that you should understand the risks. Far more companies will fail than succeed, so choose wisely.
The third trend is the unending demand for new and better forms of communication. We are nowhere near solving the puzzle in wireless, especially wireless data. The same is true in broadband. As with everything else in the New Normal, the gigantic opportunity in communications brings with it many challenges.
The fourth trend is collaboration. Collaboration has been a holy grail of the enterprise software business since the late 90s. The internet wasn’t ready then and customers weren’t ready either. Even today, the business processes that enable enterprises to collaborate with suppliers and customers are not standard across companies. Until they are, collaboration will depend on custom applications. This situation is likely to last five to ten years.
The fifth trend is the rise of mass customization. The 90s were about one-size-fits-all solutions. The next decade is about solutions that have lots of standard elements, but are tailored to the customer’s specific requirements. This trend has several consequences. Technology companies may actually have to deliver compelling technology to sustain their profit margins . . . and enterprise software vendors may be forced to rethink their product lines . . . and the way they sell.
The sixth trend is the rise of the consumer. Depending on who you ask, consumers account for somewhere between 25% and 40% of technology spending. The number today isn’t so important. Most of the innovation in technology is in consumer categories, so the number will go higher.
The seventh trend is time management. The biggest opportunities will be those that leverage people’s time. iPods allow busy people to take their music library with them. Cell phones and wireless data products enable location independence so that people can always communicate with family and business colleagues. Blackberry lets business travelers get more sleep by enabling them to catch up on email from the moment the plane lands until they get to their hotel. I’ll talk more about time in a moment. These are the big themes.
Technology and globalization are facts of life that ensure that no one will be able to stand still. Not countries. Not companies. Not individuals. Countries can no longer call the shots on their own economies. Companies cannot escape the threat from new competitors that lurk around every corner. And individuals have figure out how to deal with all of this without getting run over. As a result, the New Normal is an environment of great stress.
The great challenge for every individual is to balance family, career and personal finance with no safety nets. It is all too easy to feel isolated . . . to feel that each of us is alone in trying to maintain a balance. Alone in the sense of having no safety nets. Alone because we don’t appreciate that there are millions of other people facing the same challenges that we are. Each of us faces a never-ending stream of decisions . . . life has come to imitate a visit to Starbucks. At Starbucks, life can be as complicated as a half-café mega sweet double extra grande latte . . . or as simple as a cup of coffee
The problem is not lack of data. We’re drowning in data. The problem is not even a lack of tools. Technology has given us an amazing array of tools to help in our decision-making. The problem is lack of time. There doesn’t seem to be enough time in the day to get done all things we have to get done. Worse yet, there doesn’t seem to be enough time to change our personal business processes to get ahead of the curve.
But don’t despair. We may be buried with stuff to do and have too little time to get it done, but the New Normal is a time when individuals are empowered as never before.
I know what you’re thinking. Downsizing has been the national pastime for five years. Companies have been firing individuals left and right. How can I say that individuals are empowered as never before?
Here’s the reality. Everyone who is working today is doing more than one job. Every time the guy in the next cubicle gets laid off, everyone who is left has more work to do. For the past five years, it has meant longer hours for no more pay. It seems like a lousy deal, but it’s not.
Downsizing has been very painful for those who lost their jobs, but those who remain employed have been empowered big time. They have more skills. They are more indispensable . . . and as the economy improves they will have increasing leverage with their employers.
A generation ago, working in a corporation was like Charlie Chaplin on the production line. We spent the whole day doing the same thing over and over. Now practically everyone does a dozen things. Few enterprises realize it, but their business processes are more dependent on individuals than ever. We’re all being trained to be entrepreneurs. So if we don’t like the deal our employer offers us, eventually we will have the option of doing our own thing.
Technology and globalization are as much a part of the solution as they are of the problem. Thanks to the web, we have access to information as never before. We also have tools that enable us to expand our reach and leverage our time. Email, cell phones and the web have enabled us all to work - and play - in any location. eBay has made it possible for entrepreneurs to have a global footprint with no employees.
But if you want to leverage the power of the Individual, you have to manage your time effectively. Most of us are faced with a huge pile of things to do and decisions to make. More often than not, we start at the top of the pile and try to work our way through. Wrong answer. The pile never gets smaller. Here’s the key insight: Most of the stuff in our inbox is just not that important. The challenge is to figure out which two or three things really matter . . . and focus your energy on them.
At the highest level, the most important stuff is family, career and personal finance. The challenge is to maintain a balance among the three.
Success in the New Normal is ALL about time management. Time is the currency of this age. It is the key to personal happiness, professional success, and financial returns. If you get nothing else out of our time together, I hope you gain a greater appreciation for the strategic nature of time. Outlook and a PDA can tell you what’s on your schedule
But they don’t help you decide what belongs on your schedule. For that you need to be strategic.
Given the choice, many people optimize their lives around money. I don’t want to discourage you from trying to make more money, but I do want to persuade you that optimizing for time a better strategy. If you get time management right, everything else will follow, and you will make more money.
People generally do not place enough value on their time. It drives me crazy every time I hear about someone spending four or five hours on the web to save $25 or $50. Our culture places huge value on financial bargains. I’m all for bargains, but I denominate them in terms of time as well as price.
Being strategic about time takes time, but the trade-off is incredibly favorable. The rewards include more time, more money, and more happiness.
How do you do this? Focus on the three Ps: Prioritize, Plan, Participate.
Let’s start with the first P: priorities. What REALLY matters to you? We live in a world without safety nets. You cannot expect others to look out for you, so you have to know what you want. Whether consciously or not, you are always making trade-offs; doing one thing instead of another. Since you are going to be making the trade-offs anyway, you might as well do so with a plan.
First, be explicit about your long-term priorities. Think in terms of three primary categories: family, career, and personal finance. Look forward ten years or more. Over the long term, what do you have to accomplish in your career to feel you have been successful? How about with your family? Personal finance? Be realistic, but also be careful not to aim too low. The only way you will get the career or family you want is to go for it.
Second, be explicit about your priorities for the next five years. Now think in terms of how you would prioritize among the three. When you are faced with trade-offs among family, career and personal finance, which comes first? Long term, it’s important to meet your objectives in all three, but near term trade-offs are not only reasonable, they may be necessary. There are NO wrong answers here, but there are consequences.
As long as you are comfortable with the consequences of your choices, all is good. Don’t forget to make an explicit analysis of the value of your time. How much of your time is available for things you really care about? For years, people have asked how I find the time to play in a rock ‘n’ roll band, The Flying Other Brothers. The answer is that I make time for all the things that are important to me.
So let’s move on the second P: plan. Once you set your priorities, you need a plan to ensure that you get where you want to go. The New Normal is all about balancing family, career and personal finance to make the most of your life. Most of us focus on short-term issues. We live day-to-day, month-to-month, and year-to-year. We put out fires at work, scramble to pay bills at home, and promise ourselves we’ll deal with the future when it comes. Most of us tell ourselves that we are too busy to live any other way. If you are that busy, friends, the time has come to consider an alternative.
I am convinced that the person with the longest time horizon generally wins. Bill Gates. Warren Buffett. Bono. Steve Jobs - I’m thinking about the current Steve Jobs Era, the one that produced Pixar and the new Apple. Each had a time horizon far longer than his competitors. The longer time horizon helped them make superior trade-offs.
There are a million reasons not to plan today and only one reason to drop everything and start planning now. It will make you more successful, not just at work. It will make you more successful at home and in personal finance. The key is to consider work, family, and personal finance as a single system.
Planning at work starts with recognizing the difference between your job and your career. Your job generates a W-2. Your career defines who you are. It includes your job, plus all manner of professional activities, including continuing education. Career development activities are generally extra-curricular. Don’t let that stop you.
Career activities are an investment in you. Once in a blue moon, career activities will deliver a pop equivalent to a late-90s IPO, but more often they have no immediate payback. Again: Don’t let that stop you.
Career development activities broaden your skill base. They enhance your network. They make you more valuable. They make your professional life more interesting. When it comes to career planning, I find that the best strategy is to reverse engineer the careers of people who have been successful in your chosen field. Thanks to the internet, it is very straightforward to learn how the leading people in any field got there. No matter what the field, there is likely to be a path of least resistance. Doctors go to medical school. Professional athletes and musicians achieve prominence at a young age. Venture capitalists have engineering degrees, MBAs and career experience in successful technology companies with venture backing. While it’s possible to find your own way into a career, it is obviously much harder than the past of least resistance.
The next major requirement in career planning is patience. More careers are wrecked by impatience than anything else. Careers take many years to develop, yet zillions of people get stuck in a revolving door. Hopping from job to job without making career progress. If you don’t have the patience to let your career develop on something that approximates a normal schedule, you should consider the possibility that a different career might suit you better. There is nothing wrong with a sense of urgency . . . but impatience is destructive. While I think job-hopping is suboptimal, it works for lots of people. It’s a choice. As long as you are willing to live with the consequences, you are free to make any choice you like.
This brings me to the third and final P: participation. Get in the game. Too often, we go from day-to-day, just letting things happen. Wrong. Being passive in the New Normal is a very risky strategy. Setting priorities and making plans is essential, but only a start. In the New Normal you still need to play the game of life. Don’t let others make your choices for you. After all, you are the one who has to live with the consequences. Beware of peer pressure and family pressure. Just because everyone around you has a certain car or lives in a certain neighborhood doesn’t mean you have to follow suit. Make your own choices. Pick your own spots.
The three Ps - priorities, plans, and participation - can help you make the most of the New Normal. Let me offer a little more advice about how to succeed in the New Normal.
First, move on from the 90s. No matter what anyone tells you, the 90s are gone. If you got rich from them, more power to you. If you didn’t, I’m sorry. But the 90s aren’t coming back. Not in tech. At least not on a time frame that will work for any of us.
Second, work at a company you believe in. You can build transportable skills almost anywhere. Finding something to believe in is much harder.
Third, establish a balance between your professional and personal lives that you can sustain for five or ten years. In the New Normal, the guy with the longer time horizon will win most of the time.
Fourth, remember the three Ps: priorities, planning, and participation. They apply to every aspect of your life: family, career, and personal finance. Lastly, remember that life is a constant battle between fear and greed.
But there is good news . . . which I will share with you in the form of McNamee’s third law: Fear is transitory. Greed is permanent.
Thank you.
Wednesday, April 27, 2005
Did Goldman Sachs Acquire New York Stock Exchange?
The news last week that the New York Stock Exchange (NYSE) will acquire Archipelago Holdings seemed like a story from the days when J. P. Morgan ruled Wall Street. Archipelago is one of the new breed of electronic stock and derivatives exchanges that offer ultra low cost trading in the most liquid securities on the market. One can imagine that it would be a good idea for a venerable exchange such as the NYSE to acquire a leading edge player such as Archipelago. Beneath the surface, though, the deal has raises some questions:
o The investment banking firm of Goldman Sachs & Co. is the largest owner of Archipelago.
o Goldman also accounts for a huge percentage of the trading volume on Archipelago.
o Goldman’s Spear Leeds & Kellogg division is the largest special firm on the NYSE.
o Former Goldman executive John Thain is now CEO of the NYSE.
o Last but not least, Goldman acted as financial advisor to both the exchange and Archipelago.
In my opinion, Goldman Sachs is the best investment banking firm in the world. At the same time, they are the world’s most successful hedge fund. In addition, they just raised one of the world’s largest private equity funds. While it’s quite possible that the NYSE could not have acquired an electronic exchange without engendering the perception of conflict, it’s hard to imagine that it could possibly have found a situation more filled with conflicts than this.
Remarkably, most of the complaints I have read are from people who either thought the deal undervalued the NYSE or wanted a piece of the investment banking fee. On CNBC’s Squawk Box this morning, Mark Haines expressed concern about Goldman Sachs representing both the buyer and the seller.
Disclosure: A firm that I co-founded, Silver Lake Partners, recently invested in Nasdaq, which is a competitor to the NYSE. With Silver Lake’s help, Nasdaq recently acquired an Archipelago competitor owned by Instinet. I am no longer active with Silver Lake, but retain an Advisory Director status.
Monday, March 28, 2005
Video On The Internet, Part V - Grokster
Tomorrow the Supreme Court will hear arguments in the case of MGM vs. Grokster. To the surprise of many, Grokster prevailed in the 9th U.S. Circuit Court of Appeals, leaving the Supreme Court as the last stop for those trying to outlaw the current model of peer-to-peer file sharing.
Major media companies have made the case that MGM vs. Grokster is a matter of life and death. I agree. However, I think media companies are wrong about which verdict would kill them. I am convinced that winning the MGM vs. Grokster case would be the worst possible outcome for the media industry. It would perpetuate the illusion that the best technology strategy for media companies is to focus on digital rights management.
I oppose the piracy of copyrighted materials. But I also believe that the best way to limit or eliminate piracy is to understand why consumers are doing it and provide them with a legitimate alternative. Media companies have consistently failed to do this. They seem to fight every new idea that comes along. They fought television, VHS, and all manner of other innovations that ultimately proved to be in the interest of consumers, content creators, and media companies. It is no stretch to imagine that with today’s peer-to-peer file sharing, consumers are giving the media industry a message of hope: a new distribution model is emerging that could spur renewed growth for the industry. Just because the business model of internet distribution is different, doesn’t mean it has to be bad. Film, TV, and VHS each had its own business model, and they worked out really well.
Contrary to their public statements, media companies have not been willing participants in the development of new technology-based distribution systems for content. At every turn, the industry has tried to place restrictions on the usage of digital content. When that failed, media companies turned to the court system. As a result, the industry has so far missed the opportunity to exert a positive influence on the evolution of media-oriented technology.
I find it hard to believe that stamping out Grokster is going to be any better for creative artists or the media industry than the elimination of Napster was. Technology will continue to evolve and there will always be jurisdictions willing to host pirate systems. The only solution that I can see is one that addresses the underlying problems: consumers are looking for new ways to access and use media content; and the new ways threaten the existing industry business models.
Telling consumers that they are wrong has never been a winning business strategy. The sooner the media industry figures this out, the better off it will be. Losing the Grokster case would provide the best possible incentive for media companies to get involved in a process that will ultimate enrich them.
Sunday, March 27, 2005
Video On The Internet, Part IV - Brightcove
In the prior posts on this topic, I hypothesized that Hollywood’s reluctance to embrace the internet as a distribution channel might encourage consumers to develop alternative viewing habits. While bandwidth constraints currently limit the internet’s ability to compete head-to-head with cable and satellite, they are stimulating all manner of creativity from video content creators, consumers, and entrepreneurs.
One of our readers, Eric Savitz, pointed me to Brightcove (http://www.brightcove.com), a start-up that aims to provide a key enabling technology for video on the internet. Brightcove wants to create a marketplace for video content, providing creators and consumers with the tools and infrastructure they need to make video over the internet both accessible and commercially viable.
According to Brightcove’s founder, Jeremy Allaire, the company was formed around four core insights:
-- video over the internet represents a unique opportunity for rights holders in TV and video to offer their content globally without a carrier middleman; the opportunity requires an open marketplace/publishing model similar to that of eBay.
-- the opportunity goes beyond “just another distribution channel” to TVs in the living room; it’s an internet-centric model for video that needs to be device independent and to support both existing and new content types; to be successful, a service needs to be seamless across all platforms.
-- unlike traditional video distribution systems, the web enables consumers to share ideas and content they like, which drives both discovery and brand building . . . any service that facilitates such sharing will be leveraged by a network of blog publishers, commerce sites, vertical special interest sites, etc. eager to participate as affiliates in the economics of such as service; affiliates ensure both promotion and syndication.
-- everyone has the ability to be a content creator today, which democratizes video production; the current limits of the web favor new forms of video production, which may come from a new breed of creator, with a cost structure and production values that differ from those of Hollywood.
The Brightcove marketplace is still in development. Over the next couple of months, the company will focus on the needs of content creators. In a beta program set to begin next month, Brightcove will test tools that enable creators to publish their content and get paid for it. The strategy is to keep listing fees low - based on the amount of storage required -with Brightcove making its money from transaction fees. There will be an advertising-supported model for free content, as well. In a few months, Brightcove will shift its focus to the consumer side of the equation. The priorities of that beta will be on discovery of content, automation of access to content, ease of transactions, and minimal friction in an environment with multiple publishers. The company hasn’t told me when its service will open up to consumers, but I will keep you posted.
Brightcove is a very ambitious project, but it really resonates with me. I just hope that the company really believes in the power of the internet as a distribution platform for video. Allaire’s pitch gave me the impression that Brightcove will pursue television and movie programming pretty seriously. I hope not. The television and movie industries seem to be more interested in digital rights management than in promoting the internet as a new distribution platform, which makes them poor partners for a start-up such as Brightcove. If I were Jeremy Allaire, I would bet my company on the Long Tail. I would put every bit of my energy into developing a marketplace for content that currently lacks broad commercial distribution. I would trust that video over the internet will develop very differently than cable and satellite television, and that the opportunity will be huge. But that’s just me.
If I am right, the keys to success for Brightcove - or any other company that pursues a similar business plan - will be ease of use and breadth of offerings. The company has to find a way to minimize the technical limits of the internet, while supporting and encouraging all of the web’s positive attributes. There are analogs in the market today - Brightcove cites eBay as an example - but the video on the internet opportunity is bound to have its own wrinkles. I hope Brightcove will be open to them.
Brightcove’s founder, Jeremy Allaire, is a very smart man. He was a huge winner in the late 90s with Allaire Corp., the company that created the ColdFusion web development program and then sold out to Macromedia. I suspect Jeremy has this one figured out a lot better than I do.
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Disclosure: Brightcove has received venture capital from General Catalyst and Accel Partners. I am an investor in several Accel funds.
Sony's Playstation Portable (PSP), Part II
This past week, Sony’s Playstation Portable (PSP) went on sale in the United States. In New York and San Francisco, the launch happened at midnight, and hundreds of people lined up well in advance.
I bought a Sony PSP video game player on eBay back in December. The device was in Japanese, as were the games I ordered with it. No matter. Two of the games I acquired—Ridge Racers (car racing) and a golf game whose name remains a mystery to me—were operable with essentially one button. Both were compelling.
Until you play with one, it’s hard to appreciate the significance of the PSP. Having surrendered its position of leadership in portable music, Sony has delivered a product that enables it to apply Apple’s iPod strategy to video games. Thanks to a spectacular display and a package ideally suited to the typical briefcase, the PSP delivers great entertainment that will be appreciated as much by adults as kids. For business travelers, PSP is a nifty complement to the iPod and Blackberry. Where Blackberry gives travelers more sleep time by allowing them to do their email in the 40 minutes from aircraft touchdown to hotel, PSP offers serious entertainment for those travel moments when work, reading and the in-flight movie just aren’t enough.
In the New Normal, it’s all about time. None of us has enough of it, and optimizing the time we have is critical. The guys who sign your paychecks have given you the tools to fill your time with work. Treat yourself to a product that fills a little of your time with fun.
Wednesday, March 16, 2005
How To Cut Your Losses
A reader of this blog emailed me the other day to ask how I know when to sell a stock that hasn’t worked. Cutting your losses is a critical skill set in investing . . . and in life. The principles are not complicated, but it takes a certain frame of mind to implement them effectively.
When we think about the great investors - Warren Buffett or Peter Lynch, for example - the first thing that comes to mind is their exceptional ability to pick stocks. But in reality, investment greatness is as much about handling mistakes as it is about picking stocks. Every public market investor makes lots of mistakes. The great investors recognize their mistakes quickly and correct them. They accept that mistakes are part of the investment process, and that the real damage does not come from the mistake itself, but rather from the failure to deal with it and move on.
Whether because of pride, fear, or something else, too many people are reluctant to reverse decisions they took in the past, even when there is evidence that the decision was wrong. Have you read the story about the portfolio manager at Alliance Capital who kept buying Enron all the way down? Whether because of stubbornness or pride, he refused to acknowledge the growing mountain of evidence - both from his own colleagues and Wall Street - that Enron was a disaster in the making (http://www.securitiesfraudfyi.com/alliance_capital_management.html). Even in the case where investors don’t keep buying, they too often are reluctant to take small losses. They pray for a miracle, only to watch a small loss turn into a big one. Have you ever made an investment mistake, thought about changing your position, but not followed through? How much did it cost you?
Investors have a term that gives the appropriate context to decisions made and actions taken: sunk cost. If the cost is sunk, you don’t have to worry about it any longer. It doesn’t matter what price you paid for the stock. What matters is where it is going to go from here. Whether in stocks, your career, or even in personal relationships, circumstances change. When they do, the right strategy is to adapt. Each of us needs to adapt in a manner that is appropriate to our circumstances. Your risk tolerance, experience, and willingness to commit time to your investment activities all come into play here.
My partner John Powell once told me what he believes is the secret of the retail stock brokerage business: investors are most comfortable when their investments are just a bit under water. If a stock goes down a lot - or up even a little - most people worry that they should sell. But if a stock only goes down a little they believe they don’t have to worry at all. I call this the Price Target Paradox. People tend to set arbitrary price targets too close to current market prices, reflecting an overpowering fear of giving back small gains or taking big losses. The pursuit of quick wins causes investors to behave emotionally. Too often, they buy stocks that have already gone up a lot in the hope that they will go up a lot more. The risk/reward matrix for this kind of momentum strategy is really unfavorable, particularly for people who are investing on something less than a full time basis.
Great investors do not fixate on price targets. They recognize that circumstances change with time and that the decision of whether to buy or sell is not a matter of your unrealized gains or losses, but of the likely returns from this moment forward. If you automatically sell any stock that goes up 25%, you will always miss the opportunity for big gains. If you are going to react to small changes in stock price, do so on the downside. Use stop loss orders to prevent big losses.
If you are going to invest, give yourself permission to make some mistakes. Employ a consistent investment strategy over a long period of time to give yourself time to be successful. Use diversification to reduce the damage from mistakes. If you don’t think you can or want to do this, turn your money over to a professional.
Tuesday, March 15, 2005
Entropy - The Role of Digital Rights Management
Not so long ago, one of Elevation’s investors asked about our digital rights management (DRM) strategy. I explained that we believe the best DRM strategy is to provide consumers with the content they want, in the form they want, at a price they believe is reasonable. I suspect this strategy does not conform to prevailing views in the media industry.
Digital rights management is not the worst thing going on in the entertainment industry, but it may be a proxy for the technology problems facing the industry. You may recall the fable from medieval times about the kingdom that lost a war because its king was killed in battle; the king was killed because his horse lost a shoe; the horseshoe fell off because it was lacking a single nail. The lesson: for want of a nail, the war was lost. If it turns out that the media industry loses out in the technology wars, the preoccupation with DRM may turn out to be the nail.
I believe that the industry is hurting itself by focusing so much on digital rights management. Consumers have a large and growing number of entertainment options, and I have never met one yet who viewed DRM as a benefit. To the extent that DRM makes an entertainment option less convenient or more expensive, it will give consumers an incentive to look for more convenient, less expensive alternatives. There is no substitute for Casablanca or Sgt. Pepper’s, but there are substitutes for every entertainment delivery channel ever made. The music industry’s hyper-focus on DRM caused it to miss a big opportunity in the late-90s and gave rise to piracy on peer-to-peer file sharing networks. I oppose the unauthorized sharing of copyrighted materials, but I understand the psychology that led to music piracy. Consumers wanted digital music over the internet. They also wanted to be able to acquire one song at a time. They perceived that the industry was being unreasonable first in refusing to provide legitimate options, and then later in providing options that were both expensive and lame.
At issue was the value proposition of music. The industry perceived that it alone should be able to determine the packaging and pricing of its product. For reasons I cannot comprehend, it behaved as if consumers are not entitled to a voice on the subject. It was New Coke without the quick recognition of error. Seven or eight years have gone by, and yet peer-to-peer networks may not have been enough to teach industry executives the first rule of consumer marketing: give the customer what he or she wants. The Grateful Dead have live by this rule since 1965. The band gave its support to fans who wanted to tape shows and trade the tapes. Years later, when the band decided to sell live recordings from its vault, it discovered that the most successful vault releases were the shows that had been most heavily traded by fans. It turns out that even those fans who already owned the shows on free tapes wanted to own the band’s version. The Grateful Dead trusted their fans, sold the vault releases at reasonable prices, and were rewarded. People used to think that the Dead were a unique case, but Pearl Jam, Dave Matthews, Phish, and others have successfully followed a similar path.
Eighteen months ago, a senior executive in the music business suggested to me that he believed that the pricing of compact discs is too low. He pointed out that because the production and marketing costs for a CD exceed those for a hard cover book, CDs should command a retail price between $20 and $30, just as hard covers do. This reasoning is flawed. Hard cover books generally sell in much smaller unit volumes than CDs, which suggests that pricing CDs above $20 might result in precipitous declines in volume. The industry has already run this experiment, raising prices continuously in the ten years prior to 2003; when prices hit $13, industry revenues declined.
Until the past few years, the music industry had a relatively monolithic view of its product: 12 to 15 songs for $13. Take it or leave it. There were experiments with box sets - generally successful - and with higher sound quality such as SACD - generally not - but these were strictly at the margin. Long gone were the artistic beauty and ergonomic comfort of the LP album cover. The industry allowed itself to be held captive to a jewel case, the shape of which was dictated by a distribution channel with which labels and musicians were increasingly at odds. Meanwhile, the movie and television industries were running all manner of packaging experiments: standard format and widescreen, theatrical release and director’s cut, no frills and lots of extras, standard packaging and collector’s editions. On top of that, the video guys priced aggressively. Reasonably or not, consumers perceive that a $17 DVD is as good a value as a $13 CD. Based on unit volumes, one might reasonably conclude consumers think DVDs are a better value.
Now the music industry is experimenting with a couple inventive formats. One is dual disc, a format that has a regular CD on one side and DVD audio - with some video content - on the other. Priced only a couple bucks above a standard CD, dual discs have been selling very well. Some bands - including mine - have tried a different format, enhanced CDs that offer additional value via access to special websites. These initiatives seem like progress.
Media companies have made a lot of progress with respect to their value proposition on well established formats like CD and DVD, but are still struggling on new formats, especially those that incorporate the internet. The music industry still devotes more energy to litigation and spoofing than it does to experiments designed to boost demand for digital downloads. And Hollywood is moving very slowly to support web distribution of its content. Once again, the issue is digital rights management. Every time a new format comes along - whether it is Betamax, digital downloads, or whatever - the media industries generally say “no” until they are forced to cooperate. The explicit assumption is that copyrights are sacred. The implicit assumption is that consumers cannot be trusted. Instead of investing to accelerate new technology, media companies generally lobby to slow things down. The Digital Millennium Copyright Act is a perfect example. The industry also has been effective at extending copyright protection periods. A concept that was designed to protect creative people during their lifetime may eventually gain legal protection previously reserved for the Bill of Rights.
Having spent most of my career in and around Silicon Valley, I am comfortable with the destructive properties of creative processes. I do not fault the entertainment industry for trying to protect the assets it has worked so hard to create. My complaint is that the industry is so focused on protecting the status quo that it no longer has the bandwidth for systemic creativity. When something new and innovative happens in the content world, it takes everyone by surprise. What’s with that?
Digital rights management is a crutch. Media companies behave as though the limitations of DRM absolve them of the need to be supportive of or creative with respect to new distribution channels. This strikes me as spectacularly short sighted. In the era of the Long Tail - where new distribution systems enable ever-increasing consumer choice - the economic benefits of withholding content are less obvious than in the past. Entertainment is moving steadily from an event-based model - where the time and place of entertainment are strictly controlled by media companies - to an impulse purchase model where consumers are in control. Content owners who do not participate in the new model will surrender economic value to those who do. If they withhold their content long enough, some content owners may discover that consumer tastes have moved on.
Sunday, March 13, 2005
Entropy: Why Content And Distribution Should Be Separate
The recent promotion of Sir Howard Stringer to the top job at Sony calls attention to the never-ending search for synergy in major media companies between distribution and content. As appealing as it sounds to combine content and distribution, I think the optimal strategy is for them to be independent of each other.
The media industry has long been dominated by distribution companies, such as television networks, major movie studios, music labels, book publishers, etc. In the era when it was necessary to go to a theater or your living room to enjoy many forms of entertainment content, these major media companies used their control of physical distribution to dictate the time, place, and price of entertainment. Oligopolies of distribution also allowed the majors to gain control of content creation by providing capital to authors, producers, and bands in the form of advances against royalties. For decades the industry profited enormously by controlling the interface between creative people and the consumers of their content, creating a youth culture around new and hot content. While major media companies owned and controlled substantial amounts of content, the libraries were more valuable in theory than in practice. The key to success was control of distribution, which commanded at least 80% of the economic value in the industry.
The development of the compact disc and the home video player triggered structural changes in the entertainment business, altering the demographics of content consumption and the balance between distribution and content. In the era of music on LPs, where TV was a broadcast medium consumed in living rooms, and movies were available only in theaters, the core audience was young people. People under the age of 25 had a lot of free time relative to older adults and a passion for the latest content. Once entertainment became portable - due to the Walkman, CDs, VCRs, and then DVDs - a different model emerged. Portability - even if it just enabled a choice of movies from Blockbuster in the living room - increased the demand for content, spurring huge growth in the rental and purchase of content. It also triggered a demographic shift. Portable music and video increased the time available for adults to be entertained, unleashing huge demand from a well-heeled segment previously underserved by media companies. In some categories - music is the best example today - consumers 25 and over actually purchase more content than the 24-and-under demographic that remains the principal focus of the industry. What’s more, 25-and-overs don’t consume the same content as younger people. They favor the long tail of legacy content - the stuff media companies describe as “catalog” - which does not fit the traditional distribution model of major media companies. Even a superstore cannot carry enough different titles to capture the long tail effect. Only virtual outlets like Amazon and iTunes can do it.
Technology-enabled mobility and changing demographics combined to trigger huge purchase waves first in CDs and then in DVDs. Catalogs proved to be a goldmine. Piles of cash poured in, and major media companies quickly figured out they didn’t need to focus as much on developing new content as they had in the past. As so often happens with bluebirds, the industry learned the wrong lesson. Content is a great business, but it isn’t a silver bullet for the majors.
Technology enables new and ever-more-convenient playback and distribution systems, the vast majority of which are outside the control of major media companies. Unfortunately for the majors, they still have a huge amount of capital, culture, and profits tied up in older distributions systems. The same forces that are causing the value of all forms of content to rise are undercutting the core distribution operations of the majors. The math is not favorable. According to a study done by Time Warner a few years ago, major media companies still capture 70% of their profits through control of distribution. For most of the major media companies, it won’t matter how well they do in content if their distribution profits drop materially. And the new competition in distribution is serious.
In nearly every category, technology-enabled distribution either has emerged or is emerging to challenge traditional channels. Some - such as satellite television - found it advantageous to co-exist in an oligopoly with the incumbent distribution model (cable). In other categories - music is the obvious example - technology-based distribution systems may ultimately reach parity with traditional systems.
If you are a content owner, proliferating distribution offers lots of opportunity for incremental profits. The key is to behave like a consumer packaged goods company: give customers what they want, when they want it, at a price they are willing to pay. In most cases that means more, rather than fewer distribution channels. As a result, the best strategies for optimizing the value of content conflict with the best strategies for distribution. If they cannot deal with this, the major media companies will continue to produce suboptimal results.
The majors still have a distribution-centric view of the world. Fifty years of absolute control of distribution has made major media companies reluctant to put their content in channels they can’t control. Any much fan who ever tried to use the original PressPlay or Sony Connect has experienced first hand the downside of majors trying to control new channels of distribution. Even when the system works, distribution centricity can produce really perverse outcomes. When Disney bought Haim Saban’s children’s programming a few years ago, it did so to enhance the value of the Saturday morning cartoon slate on its ABC television network. Disney was successful. Unfortunately, the value of the morning slate on ABC was less than the value of the package of cable and broadcast distribution that Saban had at the time of the deal. (Saban had licensed each program to the highest bidder and his shows appeared on half a dozen different networks.)
I don’t subscribe to the notion that technology will destroy the major media companies. Despite heavy competition, the distribution networks of major media companies remain incredibly valuable. The challenge for the majors is to adapt quickly to a rapidly changing world. Technology will force media companies to change their business practices, but will create new opportunities. That requires a major cultural adjustment in distribution, as well as content. It will be interesting to see which media companies figure it out first.
In an upcoming post, I will address the role of digital rights management in the new world of media.
Randall Stross’ story about Sony in today’s New York Times inspired this post. (http://www.nytimes.com/pages/business/index.html)