Monthly Archives

July 2011

Twitter Weekly Updates for 2011-07-10

By | Weekly Twitter digest | No Comments

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Twitter Weekly Updates for 2011-07-10

By | Weekly Twitter digest | No Comments

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Musings on Zynga’s dominance of Facebook games

By | Facebook, Games | One Comment

Nicholas Lovell wrote a great post earlier this week provocatively titled I think Facebook is over.  Nicholas writes about games and what he means is that Facebook is over as a platform to build sizeable new games businesses because competing with Zynga at scale is all but impossible, due to their size.  Amazingly Zynga 283m monthly active users is more than their next nine competitors combined (see AppData).

As Nicholas describes, Zynga’s scale translates into an unassailable competitive advantate for three reasons:

  • Their ability to cross promote their own games is an order of magnitude better than their competitors
  • They have the resources to ruthlessly copy any new games that start succeeding (e.g. Empires and Alies was a response to Army Attack and CityVille a response to Social City)
  • Their advertising budgets are much larger

In summary Zynga has scale and has locked up distribution, and competing with them in their own backyard is now analogous to trying to compete with EA in boxed console games.

(Note the caveat in the first paragraph: compete at scale, it remains very possible to build smaller profitable games businesses on Facebook.)

It is interesting to think about what this means for other games platforms, most notably mobile and the open web.  In both these areas the scale advantages and network effects that Zynga has benefited from are absent due to the presence of app stores and fragmented distribution.  Rovio, Bigpoint and MoshiMonsters are the hot games success stories here in Europe at the moment and all three have built success by working with multiple distribution partners.

All of which makes me wonder whether smarter games developers will increasingly be opting for platforms other than Facebook.  If they do, and the quality of games on Facebook starts to decline as a result then the title to Nicholas’s blog post might come to be regarded as prescient rather than provocative.  At least in a small way 🙂

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Neil Young, founder of ngmoco talks VC value add

By | Venture Capital | 2 Comments

ngmoco was a hugely successful mobile games business that exited last year for $400m and in the entertaining video below Neil Young the founder and CEO talks about some of what he learned.  In addition to a couple of the old chestnuts that are worth remembering (commitment is everything, try to raise money when you don’t need it) he gives an example of value add from one of his investors, Mike Maples.  This description is from Vator.tv:

On stage, at a recent Vator splash event, Neil Young, the founder of ngmoco, recounted a pivotal moment where Mike Maples, one of his angel investors and board observers, made a key insight about their business model: (right around minute 20:30) – having an experienced entrepreneur and angel investor at the table at that moment added a tremendous amount of value.

I highlight this example because this sort of value add from VCs is hard to describe in the abstract and why most people talk about introductions when describing how their VC has helped.  I believe that good-great VCs add a lot more value via this sort of insight and advice than they do through their rolodexes.

UPDATE – the video was autoplaying on page load and after 30mins of trying I gave up trying to work out how to stop it and decided to simply post this link instead.  Sorry to anyone who suffered an ad blast.

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Circa 1/6 US phone subs have a true smartphone

By | Apple, Google, Mobile | 2 Comments

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Comscore mobile data published on Techcrunch this morning ostensibly shows that one third of US phone subs have a smartphone (73m out of 234m), but when you look at the operating system I would argue that one sixth is a better estimate.  I say that because Android and iOS give their users a qualitatively different experience to the other OS’s, largely down to the quality of their browsers and the vibrancy of their app ecosystems.  There are arguments that some of the other systems are improving and Blackberry and others are now using the webkit browser, but as a first order approximation at least it is better to think of the smartphone universe as being limited to Android and iOS and therefore about half of the 73m are available as addressable market for smartphone dependent services and apps.

Every cloud has a silver lining though, and the good news here is that if true smartphones have only penetrated one sixth of the market there is still an awful lot of growth left to come.  I expect that penetration to increase rapidly with persistent rumours of $100-150 Android devices coming in the near future.

The other interesting thing to note from this data is that Android is now clearly in front of all the others and the gap to second placed iOS is increasing.

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Raise enough money to get you 6-9 months past the next milestone

By | 50 Questions, Venice Project | 4 Comments

Fred Wilson wrote a post on Sunday with the following advice for entrepreneurs raising money:

raise 12-18 months of cash each time you raise money. Less than a year is too little. You’ll be raising money again before you know it. Longer than 18 months means you may well be sitting on cash that you raised when your company was worth a lot less.

My advice is usually a little more conservative than that.  For me the best way to figure out how much money to raise is to work back from your next funding round, with the objective of making sure there is a decent appreciation in value.  The first step in this approach is to estimate the time and money it will take to get to the next value appreciation milestone (and remember startup valuations move in step functions) and then add another 6-9 months burn on top of that.  That way you can begin the fundraising process with the good news in the bag and have six to nine months to raise the money.

I was a little hesitant in writing this post, for fear of falling into the stereotype of the over-conservative European VC.  I think the point is important though, and in Europe at least raising twelve months money is a dangerous if you then miss a beat on execution.  My differences with Fred maybe reflect the different depths of the US and European VC markets and the fact that it still takes longer to raise money over here (unfortunately).  Additionally, Fred starts his post with the caveat that his advice is for companies that are ‘growing really fast’, whereas my advice is more general and applies equally to startups that have yet to hit their rapid growth phase.

For an alternative perspective on how much money to raise check out Nicholas Lovell’s 50 Questions: How much money should I raise?

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A couple more reasons why the price of content is headed towards $0

By | free, Startup general interest | 7 Comments

Back in 2008 Chris Andersen published his seminal book Free: The Future of a Radical Price: The Economics of Abundance and Why Zero Pricing is Changing the Face of Business.  The title is a mouthful, but the book is a monster and as I wrote when Chris published the preview of ‘Free’ I think Chris’s arguments are spot on.  I have written numerous posts on the topic since and as time has passed and events have unfolded my conviction has increased rather than decreased, and I say that in spite of the iPad, which I think at best will provide a temporary fillip to publishers but doesn’t alter the fundamentals of the argument.

I am writing all this now because my friend and 50 Questions co-author Nicholas Lovell wrote a good post on this topic last week which had a couple of new points/examples in this argument that are worth bringing out.

First Nicholas offers a recap on the central argument of ‘Free’:

As we transition from atoms (CDS, DVDs, books) to bits (MP3s, streamed movies, ebooks), the cost of making one more copy falls to zero. The original costs of content creation remain broadly the same, but distribution costs trend towards zero.

That means that charging a premium – and possibly any price at all – for that content becomes harder.

In other words the marginal cost of digital product is $0 and as basic economic tells us, in a competitive market price falls to marginal cost.

Content producers still need to get paid though, and this is where Nicholas’s two examples come in.  Firstly a great example of brand advertisers paying:

Barclaycard invested a six figure sum, perhaps as much as €250,000, into the creation of Waterslide Extreme, which took the premise of their television advertisements and turned it into an iPhone game. Over 10 million downloads later, the brand is happy and millions of consumers have had a high-quality, free experience.

If Barclaycard and other brands are now subsidising high quality games so they can be free for the consumer then to get people to pay for games becomes really hard.  I used the word ‘now’ in the previous sentence because most of the brand subsidised games I’ve seen to date have not been high quality.  Note that this model is little different to the ad funded television that we’ve been used to for years.

Nicholas’s second example draws on the new business model innovation of virtual goods.  The model itself is no longer news, but the scale of its success is now making headlines.

companies are taking advantage of close-to-free distribution to develop new business models. Zynga has a secondary market valuation of $7 billion based on a business model of allowing users to play their games entirely for free, but with the opportunity to spend money on virtual goods or faster progress in the game. ngMoco andPlayfish, both of which sold for around $400  million last year, allow users to play their games for free on the iPhone and Facebook respectively. These companies are developing new business models predicated on giving basic access to their content for free.

Nicholas’s conclusion therefore is that

on a ten year view, I don’t believe it will be possible to charge for basic access to content at all. We will all expect to have access to all the music, all the books, all the television and all the games that we could ever want. Sure, someone could invest in content and tell me that I can’t have it unless I pay. But there will be so many alternatives, both legal and illegal, that the model of paying access will be close to impossible to sustain.

I would be a little more circumspect as I believe that in some niche areas paid for content business models will remain workable, but I am fully on board with the broad thrust of this conclusion.  In the majority of areas the free alternatives to non-free content will be good enough capture a large market share, and as their share rises they make more money and the paid for folk will suffer, thereby re-enforcing the trend.

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Twitter Weekly Updates for 2011-07-03

By | Weekly Twitter digest | No Comments
  • Twitter Weekly Updates for 2011-06-26 http://goo.gl/fb/Fsigy #
  • The Black Swan remembered: Have VCs become yield hogs? http://goo.gl/fb/B3Hgy #
  • Myspace about to sell for as little as $30m! I note that all the early movers in social networking have struggled http://bit.ly/mnLcJf #
  • Amazon to launch ad network using data gathered on Amazon.com http://goo.gl/fb/PgT3s #
  • Just installed @waze on my #iPhone – it's a free navigation app with fun gaming & social elements! http://bit.ly/WazeHomePage #
  • 50 Questions: What is the first document I should put in front of a VC? http://goo.gl/fb/sQHkk #
  • Global M&A volumes are ticking down sharply. Is this the moment when the tech economy starts to converge with the broader macro economy? #
  • DFJ Esprit is five years old today http://goo.gl/fb/W6WIp #
  • France bans TV + radio stations from directing audience to Twitter and Facebook http://bit.ly/jLJBua would they do this is if FB was French? #
  • Twitter is too small to be subject to anti-trust inquiries http://goo.gl/fb/kb7xk #
  • @gamerlaw there isn't any point unless the market is big though – better to keep out of it until the market has emerged than risk killing it in reply to gamerlaw #
  • A lot happens on the web in 60s – an infographic http://goo.gl/fb/Vwst5 #
  • Foursquare has ramped up the gamification. I've been on twice this week after a fallow period and got soooo many new badges #

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Twitter is too small to be subject to anti-trust inquiries

By | Twitter | No Comments

You may have seen the news today that the US anti-trust regulator is making Twitter inquiries.  I really hope the world’s favourite short messaging service is exonerated because to me this is crazy.  I’m a believer in appropriate regulation and I think anti-trust laws have an important part to play in controlling company behaviour, but their purpose is to prevent abuse of dominant market positions and I don’t think a company should be classed as dominant until it is much bigger in revenue terms than Twitter’s estimated $150m this year, and is making significant profits.

Seeking to regulate behaviour before that point will undermine the search for a scalable and profitable business model which isn’t good for the company itself, ecosystem partners or innovation in general.

I’m not defending Twitter’s behaviour in the spat with Ubermedia or how they have treated their other ecosystem partners, that is not the point here.  The important thing is that many people love Twitter (now running at 200m Tweets per day) and that the company be given the best chance possible to find a way to scale revenues and generate profits so it can keep the service alive and growing.

This may seem a little harsh on developers in the Twitter ecosystem, but as mentioned above, ultimately they need Twitter to be successful, and in addition, one would hope that they took the time to understood the risks of building on top of a commercially unstable platform before they became a Twitter partner.

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