Monthly Archives

August 2008

The power of small changes

By | Blogging, Content | 8 Comments

As reported on ReadWriteWeb yesterday Google plans to replace the words ‘Subcribe to this blog’ with ‘Follow this blog’ in the sidebar of every blog on Blogger.com around the web.

I’m constantly hearing stories of how small changes like this have a massive impact on key site metrics – e.g. conversion, and this could be the same. The word ‘subscribe’ always conjours up thoughts of payment for me and I like follow much better. I have just changed the heading in my right sidebar accordingly – although the buttons still say subscribe :(.

The Google announcement of the ‘follow’ terminology is accompanied by details of social features they are adding to Blogger and Google reader which sound like they will operate a bit like MyBlogLog and maybe even Friendfeed. Interesting stuff, although it sounds like it will be restricted to Google properties – which is a shame.

UK band makes money because of piracy

By | free, Music | 12 Comments

I seem to writing a lot about music and ‘free as a business model’ at the moment, and a great post on Techdirt this morning has me at it again. This is such a great description of why bands can benefit from having their music freely available that I’m going to reproduce the whole thing:

At some point, it won’t make sense to post these sorts of examples any more because it will just be common sense that bands can and do benefit from so-called “piracy,” but every time we post one of these stories, we get people complaining that this couldn’t possibly work for others. When a band is big, then it will never work for small artists. When they’re small, it’ll never work for big artists. Once we even had a commenter complain that it might work for big artists or small artists — but it was the all important artists in the middle that it would never work for.

So, here we go again, with yet another example of a band that isn’t worried about piracy. It’s an award-winning acoustic folk duo out of the UK, called Show of Hands, where one of the members admits that one of the most popular ways that people find out about the band is when others share the band’s music, and this often drives them to come out to shows and buy CDs as well. The band points out that “piracy” is a bad description of what happens:

You may call this process ‘piracy’ if you wish – for me it is an act of generosity and it both increases our audience size and record sales. And as I always say on the night – if you’re going to do it anyway you may as well feel good about it! I believe the official term is ‘viral marketing’, and we depend utterly upon it.

Yet, if he listened to the RIAA or the IFPI, apparently, all this viral marketing that the band depends on would be “no different than common theft.”

If the bands don’t need to be making money from digital sales then it is unclear that anybody else needs to be. Which leads to the conclusion that the price of music online needs to be low enough that consumers decide that it simply isn’t worth the hassle of going to download pirate sites. That could be via subscription
services or via ad supported services.

This is more evidence that labels need to reduce their royalty demands. As I’ve said before labels’ expectations are shaped by the economics of a by-gone age, and clinging on to them is a perilous endeavour.

‘Free’ as a business model and how it might apply to newspapers

By | Business models, Content | 21 Comments

Techdirt has an interesting post this morning on Getting People to Pay for Investigative Reporting Directly. The idea, as reported more fully in the New York Times is that people club together to commission a piece on investigative reporting and pay in advance. Spot.us in San Francisco is offering just this service raising money to write a piece on whether California can meet it’s ethanol demand and to fact check political ads. Once the piece has been written it is up to the commissioning group to decide what to do with it – most likely give it to the newspapers to publish for free to promote their issue, or maybe sell it to one newspaper as an exclusive.

Assuming issues of bias can be worked around then this will be a good example of how business models are evolving to deal with the economics of free in the newspaper world.

Historically the news industry has sold us a bundle which comprised investigative reporting, basic facts (election results, weather etc.), re-hashed PR, ads, and a physical format. The internet has unravelled the bundle and is forcing the individual components to be priced correctly – hence the separation of payment for investigative journalism from content.

In a separate post Techdirt gives offers this framework for the unbundling that is being driven by the internet and economics of free across many industries:

  1. Redefine the market based on the benefits
  2. Break the benefits down into scarce and infinite components.
  3. Set the infinite components free, syndicate them, make them easy to get — all to increase the value of the scarce components
  4. Charge for the scarce components that are tied to infinite components

In the case of news, the scarce components are the investigative journalism and the physical format. The rest – including the content itself – is infinite (in the sense of zero marginal cost to reproduce) and will therefore tend to free over time.

What I like about the spot.us experiment is that it shows the trend towards free doesn’t have to undermine the good things about newspapers, it just means the value chains will need to be recast. Or it will if it is successful. I hope it is.

Incidentally the other interesting thing about spot.us are that it is a market based mass collaboration project. I think we will see more of these.

Is an era of open-ness in mobile upon us?

By | Facebook, Innovation, Mobile | 11 Comments

In a good sign for the mobile eco-system T-Mobile is planning to open an app platform for all their phones. This is good news because mobile apps have historically been a graveyard for entrepreneurs and investors and like the Apple App Store the T-Mobile open app platform takes out one of the big breaks on innovation – the operators.

Hopefully we will see similar initiatives from other operators and then I’m sure someone will find a way to integrate the different app stores to create an effective single market.

I picked up the link to the T-Mobile story from a post by Umair last week entitled What Apple Knows that Facebook Doesn’t. There is a lot of good stuff behind this link but I particularly liked this:

Apple took something terminally closed – the mobile value chain -and pried it radically open. Facebook – still thinking in yesterday’s terms – took something radically open – the www – and is trying to make it a little bit more closed.

For all Apple’s history of closedness it is just possible they will end up unleashing a wave of competition in the mobile industry which is based on how open people can be. IMHO that would make the mobile world look a lot more like the PC world and unlock a lot of value.

By contrast, Facebook looks less likely to have a strong long term value play – looked at through this lens at least.

An analysis of why labels need to reduce their royalty demands

By | Music | 3 Comments

Yesterday I wrote about the threat to Pandora’s business model from high royalty demands, so I was interested this morning to come across this analysis on Silicon Alley Insider (thanks to Jason Ball for the pointer):

There’s a lot of interest in ad-sponsored streaming music services like iMeem, and  MySpace’s upcoming music venture. One big question: How can they possibly surive?  Answer: They can’t, unless the labels change their pricing demands.

The basic economics: A song lasts 3.5 minutes. The majors have been asking for a penny each time one gets played. Let’s say the site shows a new ad every time the song changes. To break even the site needs to sell one ad per song at the rate of 1 penny a song, which gives you an effective CPM (”eCPM”) of $10.

A $10 eCPM isn’t feasible. Sites don’t earn that kind of rate with 100% sell-through.  And even if it were feasible, it leaves no room for the rest of the business. They have other costs. They need to earn a profit, and it has to yield a return on investment comparable to web businesses that don’t pay music royalties; otherwise investors will move their money out of music-related products into royalty-free products like search engines.

A $1 effective CPM is closer to the mark. Which means that Myspace, Google, Facebook, etc need a 10X price reduction — down to a tenth of a penny per play — to make this business work.

The labels see this as unreasonable: They’re already lowering prices from what they earn at the iTunes store — why should they keep going to accommodate third-party businesses at their own expense?

This maths only covers part of the story, but it shows clearly the dilemma facing the industry. The other type of deal on the table for startups is to pay sizeable up front royalties, maybe including an equity stake, and then operate on a rev share. These deals face the same issues as straight royalty deals because the heart of the problem is the difference between labels’ expectations for revenues and what startups can realistically hope to get from ads.

For me it is obvious that if labels don’t adjust their expectations then these services won’t fly and people will continue to use filesharing networks – leaving the labels worse off. Moreover this will undermine the role of labels in general and individual artists and bands will continue to innovate around them.

Open source economics textbook

By | free | 12 Comments

In another bite-sized piece of evidence of the trend towards ‘free’ Preston McAfee has written an open source economics text book – reported on Techdirt and in the LA Times.

The PDF is available for free and there is an ‘open source’ Word version where he will capture user suggestions.

In the digital world the marginal cost of producing an extra copy is zero – which is what underpins my belief in the trend towards free and the need for new business models. McAfee explains it like this in his textbook:

Economics studies the allocation of scarce resources among people – examining what goods and services wind up in the hands of which people. Why scarce resources? Absent scarcity, there is no significant allocation issue.

Pandora business model undermined by high royalty demands

By | Music | 8 Comments

Back in April I wrote that the royalty demands of the music majors risked undermining the viability of online music services. It seems that might be coming to pass – as reported on Techdirt, under the pressure of high royalty demands from the RIAA Pandora is thinking of shutting down.

If this comes to pass it will be a crying shame – Pandora is a great and popular service with about 1 million listeners daily, and is one of the 10 most popular applications for the iPhone and is attracting 40,000 new customers a day.

It is also stupid – the issue is a straight fight over how the proceeds of music are split between the retailer, label and artist. Nothing new there, and I would guess that Pandora are at least to some extent grandstanding by making the debate public, but the bigger issue is that in the digital world the pie is smaller than it used to be. Labels and artists therefore need to a) reset their expectations, and b) find other ways to make money.

There have been lots of initiatives by individual artists that evidence this trend – e.g. Madonna’s $120m deal with Live Nation, Prince’s deal last year to give away his new album with the Mail on Sunday here in the UK, and then recently AC/DC’s exclusive distribution deal with Walmart for their new album.

It is time the industry behemoths caught up with what their leading artists are doing.

To finish on a positive note, there are some encouraging signs around. Aecdotally I hear good things about Last.fm and We7 and their deals with labels.

Founder transitions

By | Entrepreneurs, Venture Capital | 15 Comments

Fred Wilson has a great post today on The Human Piece of the Venture Equation. It is a long post covering topics including the age of founders and the rise of new incubator models (like Y-Combinator), but for me the best piece is towards the end, where he talks about founder succession.

This is a difficult topic fraught with emotion and ego. I’m going to reproduce a lot of what Fred wrote because of the fair and objective ways in which he lays out the issues. Fred has been in venture for 22 years and he says he still finds this stuff really hard. At eight years I have been working in this industry for less than half the time Fred has, but I certainly echo that, and I see very experienced VCs struggling to get it right all the time. These are wise words.

Firstly, the role of CEO changes as the company grows:

the failure rate of first time CEOs is incredibly high”. You just don’t know what you  don’t know. And it leads to making rookie mistakes. Early on in a company, those mistakes don’t cost much. And some mistakes can even be turned into wins.

But as a company grows, the rookie mistakes become harder to manage around. The value that everyone has invested in the business, most importantly the work of the team, starts to weigh on everyone’s minds. The CEO’s job goes from managing the product, writing a little code, doing customer support, and raising money to managing people and teams, processes and priorities. It’s not a job that most people enjoy doing
and it’s a job where experience really does matter.

Some founders will make the transition, this next excerpt is for those founders who either don’t want to or find it hard:

I’ve learned that nothing can replace the entrepreneur’s passion and vision for the product and the company. If you rip that out of the company too early, you’ll lose your investment. I think it’s best to wait until the initial product has succeeded in obtaining a critical mass of users and a business model has been developed that works and
make sense for the business and is scaling. Then, if its warranted, you can sit down and have the conversation about bringing in experienced management.

Some entrepreneurs react very negatively to that discussion. They have their own ego and self worth tied up in the company and cannot imagine the company operating successfully without them in the driver’s seat. They also don’t know what else they’d do if they didn’t run the company. It’s a really hard transition and can cause great pain for everyone, including the company.

I always try to focus people on what is in the best interests of the company, not specific individuals. That, of course, is easy for me to say because nobody is talking about me leaving the company. I don’t work there. But even so, it’s the right point of view for everyone to take. Sometimes the founders get it right away and are happy to part ways and do something new. Sometimes the founders understand it intellectually but have a hard time emotionally. In that scenario, I think time and patience can yield the right outcome most of the time. But sometimes, it’s never going to happen without a fight. And of course, sometimes the founders shouldn’t leave at all.

The point in the last paragraph about acting in the best interests of the company is important.  Prior to investment I always talk with entrepreneurs about the importance of acting as shareholders rather than managers if the topic of transition comes up.  If we are not on the same page in regarding this as important it sends up a red flag.

However, whilst it is easy to be wise in theory at the time of initial investment you usually don’t know if the founder will be the long term CEO, so you just have to see how it goes.  Fred puts it this way:

it’s important to observe them [founders] in the CEO role. Do they communicate well? Do they excel at having difficult face to face conversations with their team and their investors? Do they hire well? Do they move quickly to get rid of problem employees? Do they think about the people side of the business most of the time? Do they have a sense of urgency? Do they command the respect and loyalty of the entire team?

Those are the kinds of things I look for in “long term” CEOs. Of course they need to be able to set the long term strategy and vision and hold the company on that line. And they need to be able to raise capital and manage a Board and investor group.

I reproduce all this partly as an aide memoir to myself, but also in the hope it might help a few entrepreneurs out there to help understand how VCs think about this issue. I am painfully aware that some (maybe many) entrepreneurs are turned off VC because of fears that poorly thought through management changes will be imposed and their companies will suffer.

Update – from Henry Yates‘ comment – this link goes to some similar advice from the point of view on the entrepreneur.

Advice for UK startups targeting the US

By | Entrepreneurs | 8 Comments

Nigel Eccles CEO of prediction game site Hubdub has a guest post on Techrunch UK this morning with ten pieces of sound advice for startups looking to target the US from the UK. In a nutshell USAify yourself – including taking the for me painful step of using US English. Nigel is speaking from a position of some knowledge since his company consists of four people in Edinburgh and generates 75% of its traffic from the US.