Monday, July 30, 2007

Buzz buzz

I have metaphorically taken advantage of bees and beehives in two previous posts, and I’ve desired an inspiration to talk about buzz. Buzz in a bonfire-esque, pseudo Tipping Point, semi-Metcalfe’s law, real-life sense. The buzz that builds when a company or a product gains popularity and capitalizes on the self-referencing psychographic and networked value of like (or wannabe) participants.

First, Metcalfe’s much debated law. It contends the value of a network (the Ethernet in his initial example) equals the square of the number of users of the system (n2). Take fax machines (with thanks to Wikipedia for this example): A single fax machine is useless, but the value of every fax machine increases with the total number of fax machines in the network, because the total number of people with whom each user may send and receive documents increases.

Email is a great example. SMS/cell phones too. And, social networking sites. In each case, the communications infrastructure/backbone provides the ubiquitous, network-effect-enabling catalyst for companies and products to create their own network effect.

Malcom Gladwell’s premise in The Tipping Point boasts a dash of buzz and a pinch of the network effect:

… the best way to understand the emergence of fashion trends, the ebb and flow of crime waves, or, for that matter, the transformation of unknown books into bestsellers, or the rise of teenage smoking, or the phenomena of word of mouth, or any number of the other mysterious changes that mark everyday life is to think of them as epidemics. Ideas and products and messages and behaviors spread just like viruses do.
A few months ago, prior to picking on bees, I engaged bonfires. Here’s a synopsis:
The bonfire effect: With each endorsement (sale, partnership, testimonial, news article), the bonfire grows. So too does the collection of perceptions, awareness, and connectivity of your participants. As more people participate in the bonfire, the brighter you shine and the more likely people are to see you (a bonfire that’s happening) and get involved.
Bees and bonfires and networks and tipping points … where are we going? One of my favorite thinkers and get-shit-doners, Mark Cuban, chimes in with a recent post about Metcalfe’s Law and Video. It’s all of the above, with a little Long Tail tossed in. His main points:
1. The more people that see content when it is originally "broadcast", regardless of the distribution medium, the more valuable the content.

2. The greater the number of people that watch content simultaneously, the greater the emotional attachment of the viewer.

3. The longer the period required for content to saturate viewer demand, the cheaper the cost of delivery.

4. The shorter the period required to saturate demand, the more expensive the cost.

5. The greater the number of content alternatives at any given point in time, the more expensive it is for any given piece of content to acquire an incremental viewer.
When I met Mark a few years ago (click here for my recap), he flirted with a few of these points in building his case for HDNet, and it’s rewarding to see his oration encapsulated in a string of thoughtful hypotheses. Thanks for the inspiration.

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Post-script (8/6/07): Freakonomics posted a superfreako user-generated Q&A with Mark Cuban. Check out his take about the stock market:
As far as information symmetries, I don’t know that there are any. Unfortunately, most people forget that whenever they buy or sell a stock, there is someone, usually a professional investment firm, on the other side of the trade. I’m pretty sure the other side isn’t there with the intent of losing money.

Sunday, July 29, 2007

Socrates v. Books

Discovered the below in Andreessen's blog ... as a consumer of several books each month, and an admirer of Socrates, I enjoyed a few Sunday night chortles. Here goes:

From Thomas West's Thinking Like Einstein:
Long ago, Socrates described some second thoughts he had about the new and questionable technology called a "book". He thought it had several weaknesses. A book could not adjust what it was saying, as a living person would, to what would be appropriate for certain listeners or specific times or places. In addition, a book could not be interactive, as in a conversation or dialogue between persons. And finally, according to Socrates, in a book the written words "seem to talk to you as if they were intelligent, but if you ask them anything about what they say, from a desire to be instructed, they go on telling you just the same thing forever."
[Socrates then went on to say, "It's been five weeks since the book was introduced, and I don't see that many people using it -- books are so over."]

10X

In the early '00s I spent some (too much) time transiting on I-280 between Menlo Park and San Francisco. On any given day, my 80-mile-an-hour rumbling VW Eurovan would be nudged to the middle lane by a sailing German sedan. Twas life in the fast lane for folks managing hundreds of millions in private equity; twas life, too, in the middle lane for folks like me who sought to pimp fast lane VCs.

One day I was less than politely pushed to the right (most likely by a Republican). The BMW/Mercedes’ license plate caught my eye: 10X, 10XMAKR or some analog. It was the days of 10X in the land of 10X; private equity returns generated via acquisitions and IPOs were plentiful. The cavalier license plate was, to quote the Cal Aggie Marching Band-uh!, bold, bitchin and bodacious in a bodacious, bitchin and bold time.

One of the catalysts of the late-90s/early-00s boom was Marc Andreessen, creator of the first Web browser (Mosaic). As Jobs and Wozniak and Gates and Allen had germinated a generation prior, Andreessen epitomized the coolness and potential of being a geek and striking it rich. He did it, and many followed. And, he generated far greater than a 10X ROI for his investors when Netscape went public in 1995.

I discovered Andreessen’s blog the other day. It’s good (check that: great), devoid of Valley pom-pom waving and jargon babbling. One of his posts, Bubbles on the brain, percolated. Therein Andreessen pricked a few bubble theories and then proffered a 10X theory about Internet businesses. Here’s an excerpt:

It is far cheaper to start an Internet business today than it was in the late 90's.

The market for Internet businesses today is much larger than it was in the late 90's.

And business models for Internet businesses today are much more solid than they were in the late 90's.

This is a logical consequence of time passing, technology getting more broadly adopted, and the Internet going mainstream as a consumer phenomenon.

People smarter than me have written about these factors at length elsewhere, so I won't dwell on them, unless there is specific interest.

But my back of the envelope calculation is that it is about 10x cheaper to start an Internet business today than it was in the late 90's -- due to commodity hardware, open source software, modern programming technologies, cheap bandwidth, the rise of third-party ad networks, and other infrastructure factors.

And the market size for a new Internet business today is about 10x bigger than it was in the late 90's -- there are about 10x more people online (really!), and they are far more used to doing things on the Internet today than they were in 1999.
Well said, and that’s a valid 10X ripe with opportunities for middle-land cruising entrepreneurs.

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Post-script (8/3/07): Quick "10x" addition from a different Andreessen post (The Truth About Venture Capitalists, Part 1):
"Out of ten swings at the bat, you [a VC] get maybe seven strikeouts, two base hits, and if you are lucky, one home run. The base hits and the home runs pay for all the strikeouts."

They don't get seven strikeouts because they're stupid; they get seven strikeouts because most startups fail, most startups have always failed, and most startups will always fail.

So logically their investment selection strategy has to be, and is, to require a credible potential of a 10x gain within 4 to 6 years on any individual investment -- so that the winners will pay for the losers and in the timeframe that their investors expect.

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Post-script (06 Feb 08): Great post from Andreessen earlier this week, Silicon Valley after a Microsoft/Yahoo merger: a contrarian view. A snippet:

The formula for success in startups is the same today as it's always been, and it will be the same post-Microsoft/Yahoo:

Build something of value -- something that people want, and something that will be profitable at the appropriate point -- and the world is yours.

Successful companies -- companies that have built something of value -- have many options. They can stay private and throw off dividends. They can go public. They can get acquired by big companies who suddenly decide, hey, that looks really valuable, let's buy that. They can sell minority stakes to big investors or strategic partners at very high valuations. All options that are typically not open to the startup that started with the goal of getting bought and didn't build something of independent value.

Or, reduced to a phrase: the best way to get bought is to not be for sale.

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Post-script (14 Feb 08): Terrific analog to Andreessen's post from Ask the Wizard ... a taste:

The old adage “great companies are bought, not sold” is sometimes taken to mean that if you’re out there hawking your wares to M&A teams, your product/service must be second rate, but I think the more salient takeaway from this adage is that great companies are pretty focused on what they need to do in order to grow the business, execute on the strategy, and hit the revenue/operations targets.

The bottom line is that you have to take something of a zen approach to what the “result” of your company will be. Your business will either be successful or it won’t. If it’s successful, then the outcome will take care of itself. How will it take care of itself? It’s impossible to predict.

Tuesday, July 24, 2007

Wagging the tail

I conversationally tendered The Long Tail yesterday in a meeting. Five blank stares, then two questions: What is it? And, How can a business capitalize on it? Good questions, and my answers were a bit shallow ... time to dig deeper and scratch a few fleas.

In theory, as LT author Chris Anderson summarizes, the Long Tail makes sense: Our culture and economy are increasingly shifting away from a focus on a relatively small number of mainstream products and markets at the head of the demand curve, and moving toward a huge number of niches in the tail. In practice, as Anderson opines, it’s sensible too: In an era without the constraints of physical shelf space and other bottlenecks of distribution (reflect on our recent Wal-Mart Rocks post), narrowly targeted goods and services can be as economically attractive as mainstream fare. But, if you are running a Long Tail company or considering launching a new tail-wagging venture, what can you pragmatically learn and apply to your business?

Make it. Get it out there. And, help me find it. These are the three forces of the Long Tail, catalyzed by six contemporary themes:

1. In virtually all markets, there are far more niche goods than hits. That ratio is growing exponentially larger as the tools of production become cheaper and more ubiquitous.
2. The cost of reaching those niches is now falling dramatically. Thanks to a combination of forces including digital distribution, powerful search technologies, and a critical mass of broadband penetration, online markets are resetting the economics of retail. Thus, in many markets, it is now possible to offer a massively expanded variety of products.
3. Simply offering more variety, however, does not shift demand by itself. Consumers must be given ways to find niches that suit their particular needs and interests. A range of tools and techniques – from recommendations to rankings – are effective at doing this. These “filters” can drive demand down the Tail.
4. Once there’s massively expanded variety and the filters to sort through it, the demand curve flattens. There are still hits and niches, but the hits are relatively less popular and the niches relatively more so.
5. All those niches add up. Although none sell in huge numbers, there are so many niche products that collectively they can comprise a market rivaling the hits.
6. Once all of this is in place, the natural shape of demand is revealed, undistorted by distribution bottlenecks, scarcity of information, and limited choice of shelf space. What’s more, that shape is far less hit-driven than we have been led to believe. Instead, it is as diverse as the population itself.

Anderson’s bottom line: A Long Tail is just culture unfiltered by economic scarcity.

Let’s return to the three forces for a few pragmatic examples:

  • Force 1: Democratize Production (Make it). Business: Long Tail toolmakers and producers. Examples: Digital videocameras, desktop music and video editing software, blogging tools.
  • Force 2: Democratize Distribution (Get it out there). Business: Long Tail aggregators. Examples: Amazon, eBay, iTunes, Netflix.
  • Force 3: Connect Supply and Demand (Help me find it). Business: Long Tail filters. Examples: Google, blogs, Rhapsody recommendations, best-seller lists.
Wrap: If there’s a disconnect (or inefficiency) between supply and demand – e.g., customer needs are inadequately being fulfilled – you can wag the tail by taking advantage of ubiquitous production and distribution tools to capitalize on market opportunities. More flea searching and tail wagging to come.

Friday, July 20, 2007

Model this

I like to chortle, and hanging around entrepreneurs is a tasty tonic for chortling. Two hearty chortle-inducing questions:

  • Who are your competitors? We have none. (If so, then you do not have a market.)
  • What is your business model? Well, it’s, um, well, um, well, we’re not sure … what’s a business model? (Or, the entrepreneur will severely complicate a relatively simple concept and/or litter his reply with contemporaneous jargon or bschool blah-blah.)
If you create a company that sells products or services, you have a business model, whether you know what it is or not. However, few entrepreneurs set out to create a business model. Entrepreneurs create companies through the translation of ideas into saleable products and services; the business model just happens, morphing with time, experience and maturity. They could care less about their biz model … they just know that what they’re doing and however they’re doing it works.

What is a business model? My take: It’s how you create and deliver value to customers to make money. A well-designed and superbly executed model maximizes the value and profit you extract from your market in a sustainable and defensible manner.

I recently discovered EarlyStageVC, an insightful blog authored by Peter Rip, a general partner with Crosslink Capital and former Bain guy. If you have an inkling for entrepreneurship or an interest in private equity, visit Rip’s blog … it’s worth the trip.

Rip authored a post last summer, Business Model, Schnizness Model. Here’s an excerpt and accompanying graphic:
So I sat down and drew this little graphic for myself to try and outline the key concepts that seem to appear in the “business models” of companies that I see in my practice … a couple of things are worth noting. First, at the center are the terms “lever” and “return on equity.” I think of all these bubbles as knobs or levers in the machine that is a business. Not all are equally important, but all are impactful choices that Management has made about the business, even if the choice is to ignore this facet. Second, the objective I want to maximize is return on equity, not growth, not revenue, and not necessarily even market share, though these may be part of what generates ROE.
(I liked to read the sports page in business school, and a professor would occasionally catch me. “Mr. Soderquist, what’s the answer to the question?” Dumbfounded, I would make eye contact and utter, “to increase shareholder wealth?” In retrospect, I could have answered, “maximize leverage to enhance return on equity.” Enough daydreaming; back to business models.)

Like most insightful blog posts, Rip’s includes a flurry of comments. Here’s one that resonates with me and echoes previous posts herein:
When a VC asks, "What is your business model?" he's really asking, "How are you going to make money?" That's what a business model is. Simplicity is important. It reveals how well an entrepreneur understands his business. If you understand it well you can explain it simply. Most often it can be simplified. If it can't then probably the entrepreneur doesn't yet understand how he/she is going to make money. That's where the VC works with the entrepreneur to figure it out. So the question is a litmus test in disguise. Most successful businesses can simplify their business model. Jim Collins calls this the "hedgehog principle". For example, the cable tv business model is "buy content wholesale, sell retail". It's that simple.
Cool commentary, and it inspired me to dust off Collins’ Good to Great and revisit hedgehogs. Collins asserts that for companies to go from good to great requires a deep understanding of three intersecting circles (what you are deeply passionate about, what you can be the best in the world at, and what drives your economic engine) translated into a simple, crystalline concept (the Hedgehog Concept). One of his unexpected findings: The good-to-great companies are more like hedgehogs – simple, dowdy creatures that know “one big thing” and stick to it.

Simple, dowdy creatures ... that's worth a chortle.

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Post-script (14 Feb 08): Worthy treatise about business models -- particularly for early-stage technology companies -- at Ask the Wizard. One graph:
I generally believe that for many technology companies, you need not necessarily have any idea how you will make money when you get started, and if you show good progress on the product and customer adoption, you need not make any commitments to a business model for some time. You do need to intimately understand where you sit in the proverbial value chain and what your position there means for your company, but you don't need to know precisely how you will extract value. In fact, I'll go farther and say that focusing on business model too early can hurt a company's prospects. When asked about Google's lack of a clear business model when he backed the company, John Doerr is said to have responded "With this kind of traffic, we'll figure it out". It's hard for some people to make sense of this when juxtaposed against their own experience pitching VC's, during which an obviously best-guess business model is grilled and questioned.

Wednesday, July 18, 2007

Wal-Mart rocks

I’ve been a music geek/freak/dork for about 25 years, dating to early 80s new wave (Depeche Mode and The B52s), punk (Sex Pistols and The Clash), ska (English Beat and The Specials), and rock (REM and U2) and maturing to a blend of several dozen genres. Listening to music is a daily, if not hourly, ante to my awake existence; I can’t imagine going for a run sans iPod. And, my affinity for music rivals my distaste for shopping at a big-box retailer.

Guess who’s the nation’s largest music retailer? You could have stumped me, and I was stunned by the answer: Wal-Mart. Yes, the king of retail accounts for about one-fifth of all music sales in America. Say it ain’t so!

But it is. And, get this: Some 138 million Americans shop at Wal-Mart each week. Yes, each week! As Chris Anderson suggests in The Long Tail, Wal-Mart is perhaps the single most unifying cultural force in the country.

If you unify culture – sounds like a super power! – what are the ramifications? You can control what people consume and what they’re exposed to. You can dictate what is sold and what isn’t. And, you can neuter choice through simplified selection. Chris Anderson turns the clock back to the 19th century:

Before the Industrial Revolution, most culture was local. The economy was agrarian, which distributed populations as broadly as the land, and distance divided people. Culture was fragmented, creating everything from regional accents to folk music. The lack of rapid transportation and communications limited cultural mixing and the propagation of new ideas and trends.
If culture in the 1800s was fragmented and local, did a “unifying force” exist? Anderson continues:
Influences varied from town to town because the vehicles for carrying common culture were so limited. Aside from traveling theatrical acts and a small number of books available to the literate, most culture spread no faster than people themselves. There was a reason the Church was the main mass cultural unifier in Western Europe; it had the best distribution infrastructure and, thanks to Gutenberg’s press, the most mass-produced media (the Bible).
Rewind to Wal-Mart and the music industry. One-hundred thirty-eight million Americans can choose from 4,500 unique CD titles. As a point of comparison, Amazon lists about 800,000. And, of the 30,000 of so new albums released each year, Wal-Mart carries just 750. Quick math: One-third of the population purchases 20% of all CDs from a retailer that offers around 2.5% of available music. Welcome to the Short Head.

Anderson encapsulates Wal-Mart and the retailer’s money-making disconnect:
Scarcity, bottlenecks, the distortion of distribution, and the tyranny of shelf space all wrapped up in one big store. Again, it’s ironic, this paradox of plenty: Walk into a Wal-Mart and you’re overwhelmed by the abundance and choice. Yet look closer and the utter thinness of this cornucopia is revealed. Wal-Mart’s shelves are a display case a mile wide and twenty-four inches deep. At first glance, that may look like everything, but in a world that’s actually a mile wide and a mile deep, a veneer of variety just isn’t enough.
And, I’d wager my three iPods and iTunes library that nary an English Beat CD can be found.

Tale of the Tail


In October 2004 Wired published an article, The Long Tail, authored by its editor, Chris Anderson. The article quickly became the most cited piece the magazine had ever run, and for good reason. Anderson struck a cord with his analysis of “long-tailed distributions,” the tail-end (and theretofore too often ignored chunk) of an industry’s sales. He proffered three primary observations:

  1. The tail of available variety is far longer than we realize;
  2. It’s now within reach economically; and,
  3. All those niches, when aggregated, can make up a significant market.
The Long Tail the article soon became The Long Tail the book. Reading it reminded me of The Tipping Point, not content-wise, but in its page-turning, a-ha-inducing, and thought-provoking smorgasbord of meaningful morsels. Anderson summarized the impact of his thinking:
What people intuitively grasped was that new efficiencies in distribution, manufacturing, and marketing were changing the definition of what was commercially viable across the board. The best way to describe these forces is that they are turning unprofitable customers, products, and markets into profitable ones.
Anderson’s tome focuses primarily on the media and entertainment industries, and each industry’s “hits” and “non-hits”. What’s truly amazing, he contends, is the sheer size of the Long Tail. Books are a great example:
The average Borders carries around 100,000 titles. Consider the implication: If the Amazon statistics are any guide, the market for books that are not even sold in the average bookstore is already a third the size of the existing market – and what’s more, it’s growing quickly. If these growth trends continue, the potential book market may actually be half as big as it appears to be, if only we can get over the economics of scarcity. Venture capitalist and former music industry consultant Kevin Laws puts it this way: “The biggest money is in the smallest sales.”
Whether they set out to do so or not, the most successful Internet businesses are monetizing the Long Tail:
Google makes most of its money not from huge corporate advertisers, but from small ones (the Long Tail of advertising). eBay is mostly Tail as well – niche products from collector cars to tricked-out golf clubs. By overcoming the limitations of geography and scale, companies like these have not only expanded existing markets, but more important, they’ve also discovered entirely new ones. Moreover, in each case those new markets that lie outside the reach of the physical retailer have proven to be far bigger than anyone expected – and they’re only getting bigger.
Retail as we know it is not dead, but the scarcity of its supply (and shelf space) increasingly constrains brick-and-mortar companies (in addition to the other virtues of buying and selling via the Internet). “These infinite-shelf-space businesses have learned a lesson in new math: A very, very big number (the products in the Tail) multiplied by a relatively small number (the sales of each) is still equal to a very, very big number,” Anderson explains. “And, again, that very, very big number is only getting bigger.”

More LT stuff to come … for now, check out Anderson’s blog (particularly the left sidebar … there’s lots of good stuff therein) to dig deeper.

Tuesday, July 17, 2007

All the News That’s Fit to Blog

I’ve anecdotally referenced The Long Tail, Chris Anderson’s provocative book, a few times over the past month, and I intend to share more in the coming weeks. (As I mentioned in my Summer Reading post, I love sharing books with friends … The Long Tail is being devoured by my friend Nora, and it took me a few weeks to Amazon a new copy.) Anderson identifies three forces that catalyze new opportunities in the emerging Long Tail marketplace: Democratize production, democratize distribution, and content supply and demand. More on these forces soon; for now, let’s hone in on blogs and their impact on big media (I’m biased since my undergrad degree was in journalism).

Bloggers are information entrepreneurs, exchanging a currency of ideas and opinions. As Anderson shares, Richard Posner, the eminent judge and legal scholar, thinks bloggers and their bogging is a once-in-a-lifetime game-changer. Opining in a New York Times book review, Posner observed that with virtually no costs, a blogger can target a segment of the reading public much narrower than a newspaper or a television news channel could possibly aim for. In effect, blogs pick off the mainstream media’s customers one by one by being niche where their old-media precursors are mass:

Bloggers can specialize in particular topics to an extent that few journalists employed by media companies can, since the more that journalists specialized, the more of them the company would have to hire in order to be able to cover all bases … What really sticks in the craw of conventional journalists is that although individual blogs have no warrant of accuracy, the blogosphere as a whole has a better error-correction machinery than the conventional media do. The rapidity with which vast masses of information are pooled and sifted leaves the conventional media in the dust. Not only are there millions of blogs, and thousands of bloggers who specialize, but, what is more, readers post comments that augment the blogs, and the information in those comments, as in the blogs themselves, zips around blogland at the speed of electronic transmission.

The blogosphere has more checks and balances than the conventional media; only they are different. The model is Friedrich Hayek’s classic analysis of how the economic market pools enormous quantities of information efficiently despite its decentralized character, its lack of a master coordinator or regulator, and the very limited knowledge possessed by each of its participants. In effect, the blogosphere is a collective enterprise – not 12 million separate enterprises, but one enterprise with 12 million reporters, feature writers and editorialists, yet with almost no costs. It’s as if the Associated Press or Reuters had millions of reporters, many of them experts, all working with no salary for free newspapers that carried no advertising.
Pretty heavy and logical stuff; if you’re in the newspaper business, run. Fast. Content consumers (their subscribers) crave niche information, and Google’s advertising model annihilates their staid, non-targeted display and classified alternative.

In Letters to a Young Contrarian, the fantastically eloquent Christopher Hitchens writes that he wakes up every morning and checks his vital signs by grabbing the front page of the New York Times:
‘All the News That’s Fit to Print,’ it says. It’s been saying that for decades, day in and day out. I imagine that most readers of the canonical sheet have long ceased to notice the bannered and flaunted symbol of its mental furniture. I myself check every day to make sure that it still irritates me. If I can still exclaim, under my breath, why do they insult me and what do they take me for and what the hell is it supposed to mean unless it’s as obviously complacent and conceited and censorious as it seems to be, then at least I know that I still have a pulse.

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Postscript (7/18/07): Just unearthed an Anderson post, Bear Stearns Takes a Second Look at the Long Tail, engaging the Long Tail effect in media. Interesting analysis generated for BS’s oh-shit mumbling media clients. The investment bank has three primary objections:
  1. How much demand is there for user-generated content (UGC)?
  2. Can UGC actually be monetized?
  3. Won’t “content always remain king”?
Anderson: “Bear Stearns believes (as do I; indeed a third of my book is focused on this) that in a world of infinite choice, content is only as valuable as your ability to find it. They call that "context and aggregation", and it's what both Google and your favorite blogger do when the filter the web according to a narrow lens, be it your expressed search term or their own sensibility.”

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Postscript (8/3/07): Richard Karlgaard authored a post in Forbes.com, The World's Worst Disease, dissecting the perils of zero sum thinking. Here's his take about blogs (love the entrepreneurial reference):
Meanwhile, the most energetic, original and positive writing has been migrating to the Web and to blogs. No surprise here. Anybody who creates a blog is: (a) an entrepreneur and thus probably NOT a zero-sum thinker; (b) a producer first and a consumer second. These two attributes alone guarantee that the blogger probably has a more accurate view of the world, and how it really works, than does the zero-sum thinker toiling away at his MSM position.
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Postscript (13 Feb 08): Unearthed a somewhat relevant, though a bit dated, post from Nick Denton, The long and illustrious history of bile. It's worth a read ... quick taste:

Each new medium -- from the yellow press at the turn of the century, to the movies, television, trash television, video games and talk radio -- has been the greatest threat to civilized discourse since, well, since the previous threat to civilized discourse.

So, it's something of a rite of passage that blogs in general -- and Gawker in particular -- are the subject of a critical cover story in this week's New York magazine, one of the last bastions of old-school journalism. The cover line: "Gawker.com and the culture of bile." ...

... And bilious bloggers are hardly the first disrespectful outsiders to bother the media incumbents. Every age has its own cultural panic, in which uncouth interlopers threaten all that is decent and good, and the media establishment, like a stuffy dowager, strikes them from polite society.

Monday, July 16, 2007

Trading up

About 10 years ago I attended an AMA (American Marketing Association) monthly luncheon. The guest speaker, who ran marketing for one of the major winemaking conglomerates, opened his talk with a question: What’s the difference between an $8 and a $40 bottle of wine? After numerous audience inputs about the quality, variety and age of the grapes, the marketer half-kiddingly proffered a smug answer: Thirty-two bucks. He was a smart ass, but his point was well taken. (8/5/07 PS: Take a quick peek at this post for a third-dimension/triangulation peek at choice.)

I’ve yet to meet a company that did not strive to maximize their margins through optimal pricing and positioning. Too often we focus on the rational criteria for consumer purchases – the technical and functional considerations people employ. Companies that successfully market luxury/high-end goods tap (check that: deeply penetrate) the emotional vein too. When they do so, they can leverage premium pricing strategies.

“Questing is the emotional space that has emerged the most strongly in the past several years,” explained Michael Silverstein and Neil Fiske in their terrific marketing tome, Trading Up. “It is all about those goods and services I can buy that will enrich my existence, deliver new experience, satisfy my curiosity, deliver physical and intellectual stimulation, provide adventure and excitement, and add novelty and exoticism to my life.”

If you’re interested or engaged in marketing consumer goods, grab a copy of Trading Up (with thanks to my friend Ben for his recommendation). Therein the authors evaluate a diverse collection of luxury brands – including Viking, Victoria’s Secret, Callaway, Kendall-Jackson, and BMW – while offering pragmatic, employable marketing tools.

Fiske and Silverstein contend new luxury goods cannot be created, by either entrepreneurs or established companies, with the methods traditionally used to develop products and bring them to market. They elaborate eight practices that “new luxury leaders” follow in their marketing:

  1. They never underestimate their customers.
  2. They shatter the price-volume demand curve.
  3. They create a ladder of genuine benefits.
  4. They escalate innovation, elevate quality, and deliver a flawless experience.
  5. They extend the price range and positioning of the brand.
  6. They customize their value chains to deliver on the benefit ladder.
  7. They use influence marketing and seed their success through brand apostles.
  8. They continually attack the category like an outsider.
Americans are increasingly trading up. As a generation, we – unlike past generations that spent less and saved more – have a propensity to spend, to experience, to live in the present and worry less about the future, and to back brands that, as the authors posit, provide a reasonably reliable, efficient, and consistent method for signaling others about who I am or who I would like to be. It’s self-revealing and frightening as a consumer, but salivating and opportunity-ridden for marketers.

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Post-script (8/5/07): Cool, quick and somewhat relevant post from Seth Godin about brands. He contends they're the product of [Prediction of what to expect] times [emotional power of that expectation].

Thursday, July 12, 2007

Sloth

I recently devoured Walter Isaacson’s terrific biography, Benjamin Franklin: An American Life. Poor Richard had an entertainingly eclectic, curious, witty and enterprising spirit. He was the inventor and proprietor of much, and an acclaimed author and business strategist. A tireless entrepreneur who enjoyed creating and sharing prose: My kind of guy.

Entrepreneurship is hard. If it wasn’t, most everyone would do it – the rewards and virtues of starting, running and harvesting a business are too great. I’ve yet to meet a successful entrepreneur who did not work hard. Perspiration, and lots of it, is an ante to entrepreneurship. In his tidy, 17-page pamphlet, The Way to Wealth, Franklin takes aim at sloths. Here’s an encapsulation:

But idleness taxes many of us much more, if we reckon all that is spent in absolute sloth, or doing of nothing, with that which is spent in idle employments or amusements, that amount to nothing. Sloth, by bringing on diseases, absolutely shortens life. Sloth, like rust, consumes faster than labor wears, while the used key is always bright, as Poor Richard says. But dost thou love life, then do not squander time, for that's the stuff life is made of, as Poor Richard says. How much more than is necessary do we spend in sleep! forgetting that the sleeping fox catches no poultry, and that there will be sleeping enough in the grave, as Poor Richard says.

If time be of all things the most precious, wasting time must be, as Poor Richard says, the greatest prodigality, since, as he elsewhere tells us, lost time is never found again, and what we call time-enough, always proves little enough: let us then be up and be doing, and doing to the purpose; so by diligence shall we do more with less perplexity. Sloth makes all things difficult, but industry all easy, as Poor Richard says; and he that riseth late, must trot all day, and shall scarce overtake his business at night. While laziness travels so slowly, that poverty soon overtakes him, as we read in Poor Richard, who adds, drive thy business, let not that drive thee; and early to bed, and early to rise, makes a man healthy, wealthy and wise.
Given our recent piece about scarcity – in a market and marketing sense – Franklin’s “lost time is never found again” is timely and appropriate. Take a few minutes to enjoy the read … it’s worthy.

Tuesday, July 10, 2007

Scarcity

I’ve been thinking about scarcity lately, specifically in the design of new business models. All companies fundamentally seek situations where demand > supply, particularly if their supply – be it products, services, knowledge, or a combination thereof – is scarce. As demand increases, supply decreases, and scarcity galvanizes, you can charge more for your product or service. Elementary stuff.

Real estate is a cardinal example. Developers seek to create urgency (fear?) through perceived scarcity of a specific property, investment opportunity, or pricing. Scarcity can scare potential buyers. We just returned from a weekend in Tahoe where we enjoyed a tour and complementary stay at a resort. “We can’t build and sell them (the properties and fractional interests) fast enough,” our salesperson offered. My wife and I sensed sincerity in his assertion that, combined with the desirable opportunity, fostered several emotions: An urgency to get in at an opportunistic price for a perceived scarce offering. We did not buy on the spot, but our emotive strings were strung.

Scarcity in real estate also reminds me of a few-seasons-ago Sopranos episode. Tony and his cronies were dining with a young investment advisor who had recently orchestrated a profitable deal. “So, kid, tell me, what else you got,” Tony asked. “Buy land,” the advisor suggested. “God isn’t making any more of it.”

Scarcity is also analogous to deprivation. Remember the Got Milk? ad campaign? Milk is a commodity; it’s anything but scarce. And, marketing a commodity is a tooth-yanking, migraine-inducing bore. Got Milk? got it. The campaign’s advertisements personified situations where people were deprived of milk: inhaling a peanut butter sandwich, prepping a bowl of cereal, opening the fridge in a thirst-quenching quest. Deprivation of a scarce commodity germinated demand.

Here’s another example. In 1980 two Minnesotans had an idea. What if we could liquefy soap and sell it in containers with pump-top dispensers? Like bottled water – think about how, 20 years ago, non-bubbly bottled water did not exist – the idea was too simple. So simple that the entrepreneurs worried about, post-creation, big consumer packaged goods companies (e.g., P&G) entering the market. What to do? They (Minnetonka Corporation) acquired an 18-month worldwide supply of pump-top dispensers and plunged in with their first product: Soft Soap. When the big boys sensed they were on to something and tried to enter the market, they were stunted; Minnetonka had cornered an essential (and scarce) resource, buying enough time to create the market and build necessary momentum.

Finally, a demand > scarce supply = fortune economic pearl from Emerson, circa 1855:

I trust a good deal to common fame, as we all must. If a man has good corn, or wood, or boards, or pigs, to sell, or can make better chairs or knives, crucibles or church organs, than anybody else, you will find a broad hard-beaten road to his house, though it be in the woods. And if a man knows the law, people find it out, though he live in a pine shanty, and resort to him. And if a man can pipe or sign, so as to wrap the prisoned soul in an elysium; or can paint landscape, and convey into oils and ochres all the enchantments of Spring or Autumn; or can liberate or intoxicate all people who hear him with delicious songs and verses; ‘tis certain that the secret cannot be kept: the first witness tells it to a second, and men go by fives and tens and fifties to his door. What a signal convenience is fame.

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Post-script (8/20/07): Interesting piece in today's Freakonomics blog about bottled water vis-a-vis soft drinks. Building on the above, think about a pair of entrepreneurs two decades ago with a prospect: We're going to fill plastic bottles with two parts hydrogen and one part oxygen, and we'll sell it for a buck a bottle at 7-11! Fat heads (VCs) unite: These guys are nuts.

Post-script II (8/31/07): One of my favorite marketing minds, Seth Godin, chimes in with a replay of a four-year-old take on Scarcity: The Scarcity Shortage. Synopsis:
So what's scarce now? Respect. Honesty. Good judgment. Long-term relationships that lead to trust. None of these things guarantee loyalty in the face of cut-rate competition, though. So to that list I'll add this: an insanely low-cost structure based on outsourcing everything except your company's insight into what your customers really want to buy. If the work is boring, let someone else do it, faster and cheaper than you ever could. If your products are boring, kill them before your competition does.

Saturday, July 7, 2007

Swarm II: The Waggle Dance

A few months ago we analogized the similarity of bee colonies and startup companies (click here to read the post). Beehives, I asserted, are cool. I’m fascinated by their organization, sense of purpose, productivity, and frenetic (but disciplined) characteristics. Bees, like kick-ass entrepreneurs, get shit done.

I am currently immersed in James Surowiecki’s The Wisdom of Crowds. It’s a better than expected, noggin-opening page turner. If you have not read it, get it. Surowiecki’s principal argument is that large groups of people are smarter than an elite few, no matter how brilliant – better at solving problems, fostering innovation, coming to wise decisions, and even predicting the future. The collective wisdom of many trumps the brilliance of a few.

Early on, Surowiecki employs a beehive analogy to support his premise, specifically the destructive and (seemingly) wasteful cycle of new industry creation and innovation. Here’s a verbatim peek:

Bees are remarkably efficient at finding food. According to Thomas Seeley, author of The Wisdom of the Hive, a typical bee colony can search six or more kilometers from the hive, and if there is a flower patch within two kilometers of the hive, the bees have a better-than-half chance of finding it. How do the bees do this? They don’t sit around and have a collective discussion about where foragers should go. Instead, the hive sends out a host of scout bees to search the surrounding area. When a scout bee has found a nectar source that seems strong, he comes back and does a waggle dance, the intensity of which is shaped, in some way, but the excellence of the nectar supply at the site. The waggle dance attracts other forager bees, which follow the first forager, while foragers who have found less-good sites attract fewer flowers and, in some cases, eventually abandon their sites entirely. The result is that bee foragers end up distributing themselves across different nectar sources in an almost perfect fashion, meaning that they get as much food as possible relative to the time and energy they put into searching. It is a collectively brilliant solution to the colony’s food problem.

What’s important, though, is the way the colony gets to that collectively intelligent solution. It does not get there by first rationally considering all the alternatives and then determining an ideal foraging pattern. It can’t do this, because it doesn’t have any idea what the possible alternatives – that is, where the different flower patches – are. So instead, it sends out scouts in many different directions and trusts that at least one of them will find the best patch, return, and do a good dance so that the hive will know where the food source is.
The message for entrepreneurs and innovators: Discovering the source of nectar (the right product for the apt market segment) is a collaborative, curious, speculative, diverse, and diffused process. It’s about acknowledging and solving unknown unknowns. It’s messy and tiring, but then again, so too is the nectar search for waggle-dancing bees.

Thursday, July 5, 2007

Yes, and ... (be an innvoator, not a but-head)

I'm a few weeks delinquent in my blog reviews. In knocking out a few blogcobwebs this afternoon, I discovered a post from The Great Tim Sanders, championing (on behalf of Joseph Pine, author of the superb The Experience Economy) the use of "yes, and ..." in stand-up comedy and organizational brainstorming. Wait, that's what we wrote about a few months ago, I emoted. (Of course, Pine's thinking is much more original than my Yes, and ... piece, which was the inaugural entry to my blog.) Great post from Tim ... here's a quick snippet:

Too many times, especially in project work, we take on the devil's advocate role and answer all creative ideas with a dismissive/anal retentive "yes, but...?" which kills innovation pretty quickly. In the comedy improv world, the yes, and routine is core to coming up with funny sketches. As Joe believes all the world is a stage (even business), he also believes that we must borrow from street theatre and improve to stage memorable experiences. Don't try to add meeting value by shooting things down when they haven't even left the hangar, leave operations issues for the final pro/con debate -- once the idea is given a chance to come to live. Joe demonstrates the value of saying "yes, and" in those situations to foster creative thinking.
Check out the YouTube video too ... Pine is even wearing a Yes, and ... button!

Why?

There are a lot of cool words. My favorite: Why. Better yet: Why? Why why? It’s a tasty, terse, power-packed, and utterly insatiable three-letter gem. And, it’s at the root of curiosity, creativity, innovation and great thinking.

Children are masters of the why domain. Their ingenuity, inquisitiveness and seemingly effortless creative leaps are often prompted by why. Until they’re normalized by society to believe things are what they are (and there’s no need to question it!), most everything is a why. As they mature, life becomes more binary: yes and no replace why. Creative thinkers are why people too. Why can’t I do this? Why not try this? Why is this like this? Why does this work this way, and not that way? Why not combine this with this? We can all use a little more why in our lives.

My most-recent company, Crescendo, was conceived based on a combinatorial why: Why not combine the lifestyle virtues of luxury destination clubs with the financial security, diversification and upside of owning a real estate investment fund? French novelist Marcel Proust amplifies Crescendo’s creation: "The real act of discovery consists not in finding new lands but in seeing with new eyes." So if you want to find untapped innovation opportunities, watch the world around you with "fresh eyes."

Richard Watson contributed the following in a Fast Company piece:

Creative leaps also tend to emerge when someone with a differing perspective tries something new -- either through bravery or sheer naivety. If that person is young or comes from another place (i.e. a different discipline or perhaps a different country) things sometime start to happen. Put two or more differing people together and the sparks can really fly. But why is this so? In my experience it's because older people have usually invested too much under the current system and therefore have too much to lose if a new idea displaces an older one. Equally, people that don't move around or come from the same department or discipline sometimes fail to see what is hidden under their own noses, whereas people from ‘somewhere else' often see it.
My friend Dave is a great why thinker. He flies airplanes for a living and spends much of his grounded life chasing after two why-uttering kids and posing lots of thought-provoking why questions. He texted me a few weeks ago: If I can lease a car, why can’t I lease a house? Good question, a problem seeking a solution.

Barry Nalebuff and Ian Ayres authored an apt book, Why Not? They offer that the why-not attitude lets you see potential improvements that are just waiting to happen. And, once this mind-set is activated, it’s hard to turn off. You start seeing potential solutions everywhere. Nalebuff and Ayres pose a number of problem-awaiting-a-solution questions, including:
  • Why not have firms call you back rather than have you wait on hold?
  • Why not sell generic first-class postage stamps that remain valid when rates go up?
  • Why not have a fixed-rate mortgage that automatically refinances when interest rates fall?
  • Why not sell pay-per-mile auto insurance?
A few others that amuse me:
  • Why can’t you purchase (own the title/deed to) a self-storage space?
  • Why is the market for private company investments inefficient and illiquid?
  • Why subscribe to satellite radio when – particularly as WiFi becomes ubiquitous and devices become more mobile and potent – you can enjoy Internet radio stations for free?
And, one more: When you ask a four-year-old to do something, why do they always say, “Why, daddy?”

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Post-script (8/3/07): Solid, relevant insight from Seth Godin on the appeal of free content, not just for the consumer but also the producer:
"Now you have paid online radio and free online radio. Paid online video and free online video. At first, the paid stuff is good and the free stuff is less good. But soon, producers seeking an audience start to make their stuff free. Because when they do, the audience goes up 100x. And then, in order to compete, others do the same thing. Wouldn't you if you had a touring band? Wouldn't you if you had already exhausted your DVD sales and wanted a big enough audience for your sequel?"

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Post-script (8/15/07): Mark Cuban chimes in with a thought-provoking why not: Solution for the Real Estate Market? Take Your House Public? It's a tidy, top-of-mind brainstorm about the illogical, binary approach to home ownership ... reminds me a little of our question above (liquidity for private company investments/real estate partnerships), but Cuban has given it much more thought. Instead of home-by-home IPOs, how 'bout bundling homes into an offering? You can do quarterly or annual appraisals (reporting), though the market value/stock price would be based on -- rightly so -- what an investor's willing to pay. Residential home equities. I like it.

Tuesday, July 3, 2007

Bootcamping

I spent the latter part of last week in (check that: at) Lake Tahoe, serving as a mentor and judge for the Entrepreneurship Academy for Environmental Health. The mind-expanding event was hosted by UC Davis’ Center for Entrepreneurship and orchestrated by The Great Andy Hargadon. A few dozen post-docs and professors from 10 or so universities, including Columbia, Duke, UW, and several UC schools, participated. The scientists received training on the fundamentals of innovation, and then formed groups to germinate and extrapolate specific ideas. Cool stuff and immense latent value, spanning OTC cancer diagnostic kits to water treatment plant testing solutions. As always, I think I gleamed more than the participants.

The boot campers were scientists. While most had an eye on commercializing their research, and some aspired to be entrepreneurs, a few (predictably) were reluctant to innovate for the sake of capitalism. They create for science’s sake, and their curiosity lured them to the boot camp. A few interesting and common lessons:

  1. Simplify. Focus on solving a specific problem for a specific customer segment that has gotta have it (versus doing multiple things for multiple constituents with differing degrees of value).
  2. Tell a story. Commence your presentation/investor pitch with a story about your ah-ha, there’s a there there moment. And, presume your audience assumes your science works -- focus on the pragmatic side of your potential venture.
  3. Value. Do not undervalue your product or service, but it’s okay to give it away to prove your innovation (at the start). Several attendees proffered solutions with 5-to-10x efficacy at half the price. Remember (Warrant Buffet?), price is what people pay, value is what they get.
  4. Cui bono? Clearly, vividly understand who stands to gain, how they will gain, and why they will purchase your product or service (versus existing alternatives).
  5. Thinking versus doing. Thinking is essential, but there’s no value until you do (it). And, taking the plunge (transitioning from thinking to doing) is difficult.
  6. Capital x 4. Andy talked about the four kinds of capital new ventures need: financial, physical, intellectual, and social. The latter – social and professional networks, and the combinatorial value of making connections – is oftentimes overlooked or underestimated.
Andy wrapped up the conference with a story, anonymously recapping a conversation with a soon-to-retire professor. After 30-plus years of work, the prof reminisced about his legacy. His decades of research had failed to reach the market, and remorse (depravation?) had set in. Andy’s take-home: You do not need to be an entrepreneur to innovate, to commercially translate your science – there are many ways to bear and share the fruits of your labor.

The Paradox of Choice

I just plowed through The Paradox of Choice, Barry Schwartz’s 2004 analysis of “Why more is less,” and, “How the culture of abundance robs us of satisfaction.” It’s a good, quick and well-reasoned read, though less business-centric that I had expected. And, it’s an interesting corollary to The Long Tail (my previous read).

Choice is good, right? Well, as one of my grad school profs repeatedly opined, “it depends.” Schwartz contends the promiscuity of choice is harmful. Here's his take from a 2005 interview:

Take any of the most commercially successful websites - Amazon.com, for example - and look at what they offer. Click Bestsellers; down come 20. My view is, when people look at 20 book titles, each of them is competing with the others, making the others less attractive. This one looks exciting, this one looks educational, this one is about my own childhood, but this one is exotic and will take me into a world of imagination. Each is attractive in some way.

The result is that you look at 20 and buy none. But what if Amazon did a simple experiment of not showing 20 books, but only the top five? You can always click to the next screen and see more. My prediction is that if you reduce the choice set, you increase the number of books sold. This should be true of anything you're selling - office chairs, CD players, vacation packages; the shorter the list, the more attractive the items on the list will be.

A contemporaneous example: I’m helping a band of amigos create and launch a new company, Ziraffe. The striped giraffe will sell high-end baby and infant gifts, primarily apparel and accessory items. We faced a choice early on: Do we offer a bountiful selection of hard-to-find individual products (the fall-out-of-bed, brain-dead approach), or do we simplify and concentrate our focus. And, if we navigate the latter path, how so?

Our answer is to bundle various products into gift packages, pre-packaged and (hopefully) artfully combined to (hopefully II) simplify the selection and purchase of baby shower, birthday, holiday, and other special occasion gifts. Buyers will navigate based on age, price, occasion, and gender. By reducing choice, we believe Ziraffe will increase satisfaction (for consumers and gift givers) while differentiating the company's offering from myriad online stores. If we can execute, hopefully Ziraffe will make a few bucks too. Results TBD.

In The Paradox of Choice Schwartz weaves a wide range of research from psychologists, economists, market researchers, and decision sciences in his evaluation of choice and decision-making. He makes five primary arguments:
  1. We would be better off if we embraced certain voluntary constraints on our freedom of choice, instead of rebelling against them.
  2. We would be better off seeking what was “good enough” instead of seeking the best (have you ever heard a parent say, “I want only the ‘good enough’ for my kids”?).
  3. We would be better off if we lowered our expectations about the results of decisions.
  4. We would bet better off if the decisions we made were nonreversible.
  5. We would be better off if we paid less attention to what others around us were doing.
Lessons for entrepreneurs? If business is the application of common sense in the allocation of resources, applied common sense dictates that simplicity – targeted, meaningful, and valuable – trumps cluttered chaos or mass selection or being lots of things to lots of audiences. Simplify your offering. Mitigate potential buyers’ remorse. Focus on a specific, actionable, identifiable, and self-referencing market segment. And, keep in mind that “good enough” is often just that; it’s not essential to be or offer “the best”.