The Gong Show

Sometimes I read something that is so boneheaded that I literally smack my forehead. It happens frequently enough, that I’m going to start a series of posts on the subject. I’ll tag them all with the tag “smacksforehead” if you want to follow them in the future.

Here’s my first *smacks forehead* comment of the day, courtesy of the McCain campaign:

“You don’t actually have to use a computer to understand how it shapes the country,” said Mark Soohoo, a McCain aide for online matters. Source: NYT

Are you kidding? You undoubtedly need to use a computer to understand it’s influence on our country. It’s like seeing in color… if you see in black & white only, there’s no way I could possibly trust your judgment on color.

*Smacks forehead*

Luckily, the second half of the paragraph from the NYT article sums up my feelings succinctly. Here’s the full quote:

“You don’t actually have to use a computer to understand how it shapes the country,” said Mark Soohoo, a McCain aide for online matters, at a conference on politics and technology. “You actually do,” interrupted Tracy Russo, a former blogger for John Edwards.

Yes, you do.

Marco quoted the following paragraph from an article on MacUser. The article bemoans users expectations that web services and software be free. See the quote:

Despite the recent advent of ad-supported programs, people have been paying for software for years. And developers put no less time and energy into writing software than a woodworker puts into fashioning a table or a chef puts into cooking a dinner—yet nobody demands that those products be provided on an ad-supported basis.

I’ve heard this analogy used frequently, and it’s time to put it out to pasture.

Users expect software, music, and other digital goods and services to be free because they know it costs zero to copy and distribute the digital goods to them. Users expect to pay the marginal cost of a good, especially when it created for the purpose of being distributed at mass scale. Most users don’t understand what “marginal cost” is, but most rational users will indicate they want to pay the minimum price possible for a good or service, and that minimum price (in any medium or market, not just digital media) is always the marginal cost of production and distribution.

Returning to the faulty analogy which kicked off this post, prices trending towards marginal cost is true in woodworking or culinary disciplines too. If two restaurants offer a comparable cheesecake, all else being equal, a consumer will be drawn to purchase the cheaper one. The two restaurants will compete on price, and the minimum price that either restaurant can afford to offer (while managing to stay in business) will be the marginal price.

Consumers’ demand for free software isn’t novel. It’s as old as trading itself (think: animal furs and crude weaponry in caveman society). It’s the basic desire to receive goods or services in exchange for as little as possible. The reason why the demand for free software deceivingly feels novel is that we have never before had a medium where so many goods and services can be viably offered for zero marginal cost.

So, enough comparing software to bookshelves and desserts. If you want to make an analogy to other industries, choose one where marginal costs are also zero, so you have an increased possibility of pulling off and apples-to-apples comparison.

I have noticed a meme in the constant conversation about revenue models for web services recently. People are proposing a version of the “freemium” business model with the following twist: a product has slightly intrusive (but contextually relevant) ads baked in that users can remove by paying a small monthly fee.

I understand the intuition of the people proposing this revenue model. They know that consumers dislike ads, yet ads are a “necessary evil” in order to make free web services sustainable, or hopefully profitable. So, they’re trying to strike a compromise with consumers that appeases both free-zealots and anti-advertising-zealots.

But, this revenue model seems silly to me. Advertisers pay a premium in order to reach people in their specific demographic with disposable income. This idea of people paying to remove ads ensures that the audience for your ads are actually CHEAPER than the average internet audience. Why? Because the people in your audience with disposable income who are willing to pay for web services are the ones that will self-select out of your audience for your ads because they are willing to pay for your product. So, all that remains in the audience for your ads are people that are too cheap to pay for your service. That doesn’t sound like the audience that Disney, Coca Cola, or even your average direct response advertiser wants to reach.

Paying to remove advertising is an interesting thought, but it’s not fully baked at this point. The real sustainable solution is to create “paid content” that your audience doesn’t actually view as “ads.” For example, the last time I tried Adblock Pro, I noticed that it didn’t remove AdWords… in other words, the creator of the ad blacklist I used saw AdWords more as content than as advertising. That’s the real home run.

I had an itch to build something over the weekend, so I wrote a little Twitter toy script. I call it TwitterSnooze. It allows you to hit the snooze button on your Twitter friends. That means, you stop following them for a period of time, and then automatically re-follow them X days later.

Why use TwitterSnooze…?

• It’s a good tool to avoid a blast of tweets from a conference you are not attending… just snooze the conference goers for a few days.
• It’s a nice way to get back at someone for saying something stupid… give them the silent treatment ;)
• It’s a good way to ignore someone that just flooded your timeline for no good reason… but it was just a one-time offense and doesn’t merit permanent unfollowing.

Who shouldn’t use TwitterSnooze…?

• As Dave Winer points out, TwitterSnooze is not ideal because when a person is unsnoozed, Twitter will send them an email alerting that person that you are now following them again. This is an unfortunate side-effect of the only way I know to implement a “Snooze” feature (by unfollowing and then re-following a user) given the current API. If you don’t like your snoozers getting alert emails, then TwitterSnooze is not for you.
• Security Note: TwitterSnooze stores passwords on the DB. TwitterSnooze deletes all passwords once they are no longer needed, but if the idea of your password being stored on this server makes you squeamish, then TwitterSnooze is not for you.

TwitterSnooze is inspired by a Merlin Mann post.

Update: If you do use TwitterSnooze, I highly recommend sending this someecard along with it.

Anand Rajaraman, who is teaching a data mining class at Stanford, wrote up a great example of the power of a superior data asset. Anand instructed his data mining students to break into teams and create entries for the Netflix prize. Here’s what happened:

Different student teams in my class adopted different approaches to the problem, using both published algorithms and novel ideas. Of these, the results from two of the teams illustrate a broader point. Team A came up with a very sophisticated algorithm using the Netflix data. Team B used a very simple algorithm, but they added in additional data beyond the Netflix set: information about movie genres from the Internet Movie Database (IMDB). Guess which team did better?

Team B got much better results, close to the best results on the Netflix leaderboard!

We, at USV, talk about the advantage of more (or better… or proprietary…) data all the time. Brad wrote about the subject in his December post on Google’s data asset:

Google has so much more data at their fingertips that even if a startup does a much better job leveraging data to deliver recommendations, Google could potentially provide a better value proposition to the end user with an inferior algorithm powered by more data, sourced from a broader range of services.

Brad’s example makes an important point: data is one of the few remaining means of defensibility. In the first dot-com boom, you could find defensibility in patents, out-fundraising your competition, proprietary code and algorithms. Now, by contrast, no one respects patents (and they’re too costly to defend), web services are so capital efficient that out-fundraising your competition is just a distraction, and open source code has eroded the advantage of proprietary code and algorithms. The main source of defensibility that remains is in your data asset. If you can aggregate more data, license more proprietary data, generate more of your own implicit usage data, or crowdsource more data than your competitors then you will be at a significant and defensible advantage.

James Carville hung a sign in the Clinton campaign headquarters in 1992 that said, “It’s the Economy, Stupid” as a constant reminder of what fundamentally mattered in the process of unseating George H. W. Bush. I would love to see some pictures of people with It’s the Data, Stupid signs in their startup’s office.

Albert Wenger writes about the structural changes in both the firm and in web services that make a B2B marketplace more viable today than in the original dot-com boom. It’s a thoughtful piece that’s worth a careful read, and I want to add my $0.02 here:

Albert surfaces some remarkably interesting facts about how non-employer businesses (business where the owner is the only employee) are growing rapidly.

For instance, the US Census Bureau tracks non-employer businesses, which are businesses with no paid employees other than the business owner(s). The number of such businesses increased from 15.4 million in 1997 to 17 million in 2001 or about 10% in 4 years, but then grew by 20% over the next 4 years to 20.4 million in 2005 (most recent year for which data is available).

I think this shift in the makeup (or deterioration) of firms will have many interesting impacts. For example:

• We will see an increase in micro-acquisitions for the primary purpose of building HR. Large firms will buy one-person companies instead of trying to hire people. This is already happening today: RockYou and Slide are “acquiring” Stanford kids from the Facebook Apps class that BJ Fogg and Dave McClure ran. Instead of trying to hire these grads, RockYou and Slide are giving these kids an acquisition price that is the functional equivalent of a large starting bonus.
• The SMB services market will become very competitive, and specific verticals will commoditize as this market balloons and entrepreneurs chase the gold rush.
• The blending of consumer and enterprise software will increase rapidly. When the difference between a firm and a consumer is blurry, the software targeting a non-employer business will be equally as blurry in terms of its defined target user. For example, AOL Instant Messenger and Salesforce.com will start seeing increasing overlap in their user base.

In short, this growing market of Non-Employer Businesses is ripe with investment opportunities, and they will look very different from the current Enterprise and SMB investment opportunities. I’m excited to chase it down.

Here’s an interesting comment on software licensing from a recent article in Wired regarding the business of open source software:

“I think the software-license business model is archaic,” says Kevin Harvey, a venture capitalist at Benchmark Capital, which recently cashed in on its investments in MySQL and the open source mail-client firm Zimbra, which Yahoo picked up in late 2007 for $350 million. “I wouldn’t fund a company with that model, and I don’t think anyone else would, either.”

I definitely agree with Kevin’s statement, and, in general, I’m not interested in software businesses that employ a straight pay-for-license model. But, that means I (and Kevin) am being dismissive of a $270bn business: Microsoft. As fun as it is to proclaim that Microsoft is Dead, MSFT has an army of talented developers, a mountain of cash, and a couple monopolies that aren’t going anywhere anytime soon. Will they evolve away from their software licensing revenue? Only if they are forced to do so by disruptive competitors in each of their software verticals, and in the mean time they’re going to continue to mint money using an “archaic” model.

I have to reiterate that, especially in the long run, I 100% agree with Kevin on this issue, but it’s hard for me to reconcile my opinion with Microsoft’s success.

@msg went around and did short video interviews at SXSW asking people a simple question: WTF is Twitter? As one might expect (considering how amorphous Twitter is), the responses are all over the map. Go check out the project and @msg’s breakdown of each contribution for a deeper dive.

My favorite responses are @innonate’s “EKG” and @laughingsquid’s “people mover,” both of which are embedded below.

Twitter according to Scott Beale from michael galpert on Vimeo.

Twitter according to Nate Westheimer from michael galpert on Vimeo.

A simple open question: what web services do you pay for online?

My answers are:
- Flickr: I have a pro account… $24.95/year.
- eBay: I have sold items on eBay, thus I pay them listing fees and a % of final sale. This has only been a couple dollars over many years of eBay usage.
- Akismet: This is the anti-comment-spam service from Automattic. Based on my level of usage, I don’t have to pay for it, but I do anyway. I’ll likely stop paying for it now that I have switched to Disqus. I believe it was $5/month.
- Dreamhost: They host my blog, in addition to a number of sites and email accounts I manage in a consulting gig for a little income on the side. It costs about $10/month.
- NetFlix: I consider this a web service because the majority of my NetFlix consumption comes through their new online streaming offerings. Cost is $13.99/month.
- Skype: I don’t have a Skype Pro account, but I do pay for SkypeOut minutes. It’s a heck of a lot cheaper than getting a landline. I spend about $3/month in SkypeOut calls.

And, that’s all. It’s amazing how much utility I get from web services considering how little I pay in cash. Of course, having seen hundreds of web services’ business models, I know that I pay for the majority of services I use in two ways: 1) my attention to advertising and 2) the data I create through my usage of a service.

Seems like a great deal to me.