Archive for December, 2006

Stung by the Long Tail: Google Shows Limits of the Economics of Abundance

December 21st, 2006

Chris Anderson, Editor of Wired Magazine and author of The Long Tail, gave a talk about a theme in his book called the “Economics of Abundance“. The long tail theory is that in the digital world, distribution costs are lowered so vastly that essentially any content and any product will find its audience, no matter how dispersed the audience members may be. The economy of abundance flows from that, and says that if the audience is out there, fewer reasons exist not to develop the product.

The idea has a lot of merit, but I think it can easily be overstated. It is true that scarcity is much less of an issue with digital products than with physical ones (think Amazon vs. just about any brick-and-mortar bookstore); there is no need to make tough decisions about shelf space when one can make everything available. Server storage, processor and bandwidth costs are low and dropping all the time, which should make it easier and easier to offer a wider variety of products. Shelf space is governed by the “economics of scarcity”, a zero-sum game. The economics of abundance let users/consumers choose, a seeming win-win for producers, sellers, and consumers.

On the flip side, abundance means more choices, which means more decisions about what to focus on. Scarcity is reduced from the producer/distributor/retailer side, but on the consumer end we still only have so many hours in the day to allocate. Abundant choices could even make our time resource more scarce after we spend time weeding through the abundance to find the material that interests us. Businesses run up against the risk of pushing themselves too far out on the long tail. Stop worrying about how your users will perceive the product and you may find that you have only a handful of customers. Stop worrying about how your users will find your product and you may not even have that many.

Google strikes me as a good example of this. There are few better-recognized brands on the Internet, but the company still struggles to make its products known to and understood by potential users. Earlier this year Google announced an effort to scale back its new product rollout and focus on “features, not products”, in Sergey Brin’s words.

Google seemed to have adopted the long tail theory in its engineering departments, implicitly at least, by allowing engineers to spend one day per week on products of their own imagining. The result follows Anderson’s long tail beautifully- Google has a huge number of products, but almost none other than search have significant traction in the market. Hitwise shows that Google is the clear leader in search, but time I checked Gmail had something like 5% of email market share. Google Video’s distant place in the video space led to its decision to acquire YouTube, Blogger watched its competition continually improve their products, yet limped along for two years or so without a significant overhaul until just recently, etc.

When I put all this together, I come to the conclusion that product success may follow its own long tail principle: the products that get the most attention have the greater likelihood of success. Products stuck out on a company’s development tail are more likely to lag.

So it seems as though Google has run on the long tail/abundance principle- throw out lots of stuff and see what sticks- but has found that it doesn’t have the resources or the wherewithal to follow up and make sure all its products get sufficient marketing and technical support in the market. And of course, if Google can’t do it, how much harder is it for “regular” companies trying to get by with “regular” amounts of cash?

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Cleantech’s Bumper Crop

December 12th, 2006

I have met a number of people in my career who I would consider extraordinarily bright inventors and visionaries. Many of these people had the even more-admirable quality of working toward social good by developing “clean” technologies, from alternative energy to waste-processing techniques. What always seemed to be lacking was the knowhow to build a company, and a product that others could and would buy.

I have seen a number of indicators that may be changing- “professional” managers seem to be taking notice of the sector and deciding to get involved, e.g. Martin Tobias, former CEO of tech company Loudeye, now at the helm of a nascent biodiesel company. More generally, one cleantech VC fund describes the step-up in managerial chops as a criterion leading to greater investor interest.

Of course, this reasoning is circular. What draws the Martin Tobias’s of the world, people experienced in building VC-backed businesses, to clean technology? Presumably it is the availability of VC investment dollars. More experienced company builders in the space make it easier for investors to get on board, which attracts more entrepreneurs, and it becomes a virtuous circle.

That’s the hope, at least, but what set the ball in motion? My guess is one part desire to do social good and four parts recognition that (a) society is approaching a crisis (how near or far away is anyone’s guess), and (b) that the people who can lead the rest of us toward the solution stand to make enormous fortunes.

I don’t mean for this to sound cynical. The technology ecosystem has been built on the ideas that new and better technology will benefit us all, and that investor and entrepreneurial risk-takers are sometimes handsomely rewarded for their efforts. The clean investing movement simply lets the technology ecosystem do what it does best, but for the ultimate benefit of real ecosystems everywhere.

Dissenters would argue- and I agree with this position in principle- that the *really* simple answer is just to consume less. Simple in theory and simple in practice are worlds apart, though. Humans seem to be an innately consumerist lot. Reduce/reuse/recycle is a terrific mantra, but not a complete solution.

Getting back to the point of the post, the influx of capital and entrepreneurial talent are fascinating to witness. I believe that the sector has only just germinated and has a huge amount of growth ahead before it comes into full flower. Look to this space to cover relevant trends and issues in the future as we see what kinds of flowers bloom.

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Japan Request a Harbinger of YouTube’s Overseas Troubles

December 5th, 2006

The AP reports that the Japan Society for Rights of Authors, Composers and Publishers has sent YouTube a request to implement a pre-post (and yes, official news sources also use the oxymoronic term “pre-post”) review process to ensure that no Japanese copyright-infringing material is posted to the video site.

This is interesting for a few reasons. First, the request comes within a month of YouTube’s removal of something like 30,000 Japanese clips at the request of the same organization. A quick search of the site comes up with roughly 40 copies of a Matrix-parody ping pong game from a Japanese TV show (very funny, by the way), suggesting that last month’s takedown may have bailed some of the standing water, but did nothing at all to stem the flow. This is not at all surprising, of course.

The really interesting point is how the Japanese request points toward a conflict between the DMCA’s notice-and-takedown rules and the IP protection rules used in other parts of the world. The DMCA was enacted by the US Congress as part of the US’s accession to two WIPO treaties, the WIPO Copyright Treaty (WCT) and WIPO Performances and Phonograms Treaty (WPPT). Notice and takedown, however, is not part of either treaty. US legislators developed that piece during the process of adding the treaties’ principles to US law.

Japan is one of 60 countries that have signed the WCT and 58 to sign the WPPT. However, as review of the list of signatories shows, just over a third of signing countries have ratified the treaties (never mind codifying the provisions into national law). Japan is conspicuously absent from the list, as is nearly all of Western Europe.

What does this mean for businesses relying on the DMCA’s notice-and-takedown safe harbors? It means that as contentious as that process is within the US (witness Universal Music Group’s lawsuits against Grouper and Bolt, and the latter companies’ vehement defense that they have complied with the DMCA throughout), it pales in comparison to what may happen when copyright-dependent US-based websites start to take off in other countries. Notice and takedown loses its power as an affirmative defense and is reduced to a mere symbol of good faith in trying to protect copyright. Where violations are rampant, as on YouTube, and local tribunals are likely to be sympathetic to home-country plaintiffs, it makes me start to wonder if the ~$200M holdback from the YouTube merger consideration will be enough to cover all claims everywhere.

Web 2.0 Exits – The Middle Tier

December 4th, 2006

I have been thinking about where things are headed with Web 2.0 recently. There is plenty of talk about how so many Web 2.0 companies aren’t real businesses, but are really features designed to be integrated into Google, Yahoo or some other larger property. I am sure this is true. Bubbleshare‘s traffic is perfectly decent and I really like the company’s simplicity and tools, but are they enough to distinguish it as a standalone in a crowded field? If the rumor mill is accurate about its sale, the answer seems to be, if not flat-out “no”, then at least “let’s take the cash over the risk”.

The really interesting point to me is that there has been a small group of really huge exits (YouTube, MySpace, Skype) and a lot of transactions for $30M or less (Flickr, del.icio.us, Jumpcut, etc.). Until this year, I am aware of very few exits in the $50M – $200M range. Startup Review (to I am a contributor) is one of the best resources for these mid-tier exits that I am aware of, though it is not comprehensive by any means.

What does this all mean? The major acquisitions say to me that the biggies felt like they had missed something important and couldn’t catch up without buying the brand that already had the traffic. The small exits tell me there are many companies that really are just featuresets. Especially given the short lifespan of many of these businesses, this is not a criticism: acquisition within a couple years for a few $MMs is a nice result and a great launch platform for the next business.
It is the middle group that is the most interesting. These companies are more than some bits of great code and less than a runaway consumer hit. What made Sony pay a solid chunk for Grouper, or Google do the same (reportedly) for Jotspot? Both of those companies happen to be second at-bats for founders with substantial Web 1.0 successes behind them (Spinner and Excite, respectively). It may be that the acquirors in those cases really wanted the expertise of the management teams. I am sure that is part of it. I also hope that transactions like these representing a maturation of Web 2.0 business models. Yes, AdSense revenue is still a viable and important component of online businesses, but the ones worth a significant price tag have more to offer than just that.