SmoothSpan Blog

For Executives, Entrepreneurs, and other Digerati who need to know about SaaS and Web 2.0.

Archive for February, 2008

Does Free Really Have Value?

Posted by Bob Warfield on February 28, 2008

Giving things away on the Internet for free and figuring out how to make money later has been a time-honored tradition.  The wisdom of it is chiseled in granite, and those who would dispute it are the heretics of our day.  Yet, I am vaguely uncomfortable with it’s efficacy.

Seth Godin wrote another of his 600 (his number) posts about the goodness of free.  He equates free to being a way to pay for someone’s attention, because they sure won’t give it to you for free in this day and age:

If you want someone’s attention, I’m afraid you’re going to have to earn it. To pay for it. To do something that makes the person who just gave you this attention feel like a fair bargain was struck.

If I give you my attention, I want to get something of value for it.  But is “free” still a value when almost everything is free?  I’m concerned that free has become undifferentiated and that it now has a lot less value than we think.  It is the last refuge when you’ve no idea whether you have a good idea or can sell it, so you loudly proclaim it’s free and wait for the huddled masses to assemble at your doorstep.  Except, it’s not enough any more.  They may check in, but free doesn’t get it by itself.  Whatever you are offering, the world has come to equate the value of free less and less.  The ultimate example is the music industry.  The digital age made the cost to manufacture music via copying free.  Hence many began to feel that it wasn’t really stealing.  How can taking something that’s free be stealing, after all?  Free didn’t work there.  Now, many will be quick to argue that the media people created their own problem by not embracing free, and that’s true.  But it’s hard to escape the idea that free also reduced the perception of value too.

Dharmesh Shah’s article on Why Startups Fail struck me as a strangely syncopated variation on this melody.  He argues that it is through lack of capital or commitment.  That seems to me a strange cart before the horse juxtaposition.  Don’t they fail for having poor execution or a bad idea?  Yet Shah seems to feel that with enough capital and or commitment, the startups can keep on trying until they get the right idea or execution starts working.  In a sense, if capital was free and commitment easy, everyone could succeed with a startup.  Except, I don’t believe that.  Do you?  Aren’t there some who would never get there no matter how long they tried? 

In the end, we must not lose sight that most people are relative thinkers.  Free relative to $500 is valuable, but not because its free, but because it saves us $500.  If everything is free, where is the relative to compare it to and derive value?  Free is most valuable when its early.  If you’re the fourth or fifth free offering in a space, think hard about what you get for that.  Even if you’re the first, free may be a long haul.  Take MySQL.  The Sun acquisition was ultimately a nice conclusion, but they struggled long to get there, and ultimately only got to $60M a year.  One in ten thousand customers were paying them anything.  Is that really what you want to get from the power of free?

Fred Wilson likes writing about Free.  Free is a great way to make moneyIn Defense of Free.  The latter has the most telling quote right up front, from Stewart Brand:  Information wants to be free.  We’re back to the digital music thing again.  Because it costs nothing to produce, it ought to be free.  We want it to be free, and we feel we’re being taken advantage of if it’s not free.  Outrage leads to taking liberties.  Is this a good basis to build a business on?  Sometimes, but it feels like starting out from a position of disadvantage.

How is your company using free?  Is it an appology, because information wants to be free and it costs you little or nothing to deliver your product?  Is it paying the user for their attention?  I find I like Seth Godin’s payment for attention approach much better.  I want to pay the user, not acquiesce to their view of my value.  That feels like starting out from a position of strength.

The other great quote from Fred’s In Defense of Free is, “that a paid model can actually be beneficial, is really interesting and needs to be better understood.”  This goes back to the observation that people are relative thinkers.  Relativity can be directionless.  When everyone is charging, go free.  Did you get value because you’re free, or because you are different than the rest, and therefore interesting?  It’s both.  So if everyone is free, consider charging.  It will make you different.  It will enable you to increase your differences too.

I like what I call the “Near SaaS” model.  It isn’t free, but it isn’t at SaaS prices either.  One of the best examples I know is SmugMug.  Their proposition is simple and credible:

We’re going to charge you a little bit, because it allows us to offer you a better service.  Since you want the best, that’ll be okay and we both win.

SmugMug is much more profitable.  They provide the better service.  And they’re different.  Being different is extremely valuable.  When you consider it, the web brings two things.  It’s much easier to make things free and its much easier to have a lot of choices.  Being different is how you succeed when there are too many choices.

Free may not always be the best answer.  Think about being different.

Posted in Marketing, strategy | 3 Comments »

Salesforce.com Prooves the SaaS Point

Posted by Bob Warfield on February 28, 2008

SFDC is up big in the markets this morning on great quarterly results.  Importantly for SaaS skeptics, profitability is also way up.  Equally as important is management’s commitment to continued improvements.  They’re projecting over a billion dollars in revenues and 32-33 cents a share in profitability, up from not quite $750M and 15 cents this year.  In other words, profitability is expected to increase even faster than revenues.  Salesforce will evidently be more efficient going forward. 

I’ve said for a long time that it’s cheaper to acquire SaaS customers than perpetual customers, and that the only reason companies like Salesforce aren’t more profitable is that they’re throttling expenses to maximize growth.  With Salesforce coming up on the $1B mark, there will be less need to spend so much.  Growth has flattened a bit, although its still excellent, and as they’re coming up to the $1B mark, the brand, and more importantly, SaaS itself, is well established.  Time to dial back on the aggressive spending a bit and show how the business can shine for shareholders.

Various pundits have speculated on whether SaaS is recession proof.  I’m not sure anything is truly recession proof, but a recession certainly favors SaaS over the traditional On-premises model.  Why?  Because the risks are lower for SaaS, the up front costs are lower, and it’s just plain easier.  When you’re facing a recession with budget cuts, that matters a lot more than getting best of breed or starting some new boil-the-ocean IT project.

The next shoe to drop will be the acquisition game.  As Salesforce makes its shares more valuable through increased profitability and continued growth, they create a valuable currency that gives them an unfair acquisition advantage.  Simply put, if their stock is more valuable than what they acquire, they newly acquired profits and revenues will be more highly valued too.  This creates the sort of virtuous cycle that has kept Oracle going lately, and is an important tool in the growth arsenal as a company reaches that stage where it has an unfairly valuable currency with which to acquire.

There are certainly lots of great targets out there, but Salesforce will need to be careful to look at companies that can be folded in with a minimum of trauma.  Avoid products that have high installation costs, for example.  Increasing Salesforce’s market cap will also be important to warding off the bigger fish, such as Oracle, that may want to acquire them.

Posted in saas | Leave a Comment »

SaaS Creates New Markets in Plain Sight

Posted by Bob Warfield on February 26, 2008

David Feinleib at Mohr Davidow Ventures likes SaaS.  He eloquently lists some great reasons:

- Recurring Revenue Model:  As a Sales VP I once knew said, “Why do we have to start all over again every quarter?”  SaaS, term licenses, subscriptions, and a very few other models help fix that problem. 

- Low cost of sales:  I’ve actually done the numbers on this one and can tell you without a doubt that SaaS provably costs less to sell.  The hubub about SaaS profitability is because these companies do backload their revenue and frontload expenses, and also because most are throttling for maximum growth not maximum profitability.

- Ease of Delivery:  Reducing friction in the transactions your business depends on is always a good idea.  So far, SaaS is the lowest friction model yet seen and in some cases results in true click-to-buy self service.

- Stickiness:  This is not a special advantage of SaaS, but rather of Enterprise Software in general.  Once up and running, vendors have to do something really bad to get kicked out.  Customers face the daunting task of moving data from one mission critical system to another one, fighting through any incompatibilities and outages that may bring.  One could argue the ease of adopting SaaS may even make it the least sticky variant of Enteprise Software, but it’s still pretty darned sticky.

- Measurable growth:  I personally think this is a restatement of the Recurring Revenue Model.  Everything new, less churn which should be small, falls into the gift that keeps on giving category.

Feinleib misses out on another huge advantage of SaaS though:  it creates new markets in plain sight

What I mean by that is SaaS is such a corrosively disruptive business model that the incumbents generally can’t adopt it when an upstart comes along.  For all intents and purposes a SaaS and Perpetual License Vendor may as well be in completely different markets.  The Perpetual License company has to slit their own wrists to win by accepting monthly revenue instead of the big license payoff that is all recognized the month the software is sold.  It’s all but impossible for these companies to do it it.  The short term pain in order to achieve long term success is simply too great.

There’s a lot more on this point in my interview with Concur’s Steve Singh, but having decent barriers to entry, especially from big established companies, is hugely important for startups. 

Posted in saas | 5 Comments »

What’s Next on Sun’s Open Source Shopping List?

Posted by Bob Warfield on February 26, 2008

MySQL is done, and Sun is now cranking up their machine to take it to the next level.  As Jonathan Schwartz says in his blog:

The overall message is simple: we’re bringing our largest customers the innovation and performance the world’s most important on-line companies are already experiencing – giving them the option of putting MySQL into global, mission critical deployment.

 More strategically, Schwartz puts it that, “Companies that freelydistribute their products, rather than limit access via pricing or proprietary licensing, are simply prioritizing adoption over immediate revenue.”  Translation: Sun wants massive adoption.  That’s a good thing, really.  They’ve been suffering from massive de-adoption in the wake of the last Internet Bubble and this time around want to make sure they have a firmer grip on their markets.  Open Source seems an excellent way to accomplish that, and is a bold new strategy to go forward with.  In particular, if it can help drive hardware sales, Sun can well afford to give it away.  Jonathan sees this clearly and said as much:

…although a small (but growing) percentage of their downloads convert to purchase orders, 100% of those downloads require a hardware purchase – for many, a server and storage device (for just as many, a laptop). We’d like to believe we can earn some of that business with solutions optimized for MySQL – even if the end customer isn’t (yet) paying for software.

There’s even a nice competitive backhand dig at Oracle and Microsoft (who are lately doing well at DB2′s expense in the database market):

Finally, remember that database licenses often make up a considerable part of any company’s budget – to the extent we can introduce new options for those customers (even via the appearance of a well designed coffee mug on the procurement agent’s desk), we can free up budgets for new investments. Which drives more customers to seek out Sun – vendors that save money with better performance are well liked.

Nice!  I predicted this sort of tit for tat with Oracle would be going on, and it’s only going to get stronger.  Oracle doesn’t partner well, and generally Larry’s minions perceive the world as Alexander the Great’s generals must have seen it in Ancient Times.

With the MySQL transaction done, Sun has also made it clear that intends to continue pounding the Open Source beat looking for more good acquisitions.  Larry Dignan points out Schwartz’s remarks on the conference call:

“Open source is really in the DNA of Sun,” said Schwartz on a conference call to trumpet MySQL as a transforming acquisition. Schwartz also added that Sun was “looking forward to more tuck in acquisitions on the open source front.”

So what makes sense for Sun to go after next?  More systems software and tools?  RedHat with JBoss?  The latter would be a definite dig at Oracle in the wake of their BEA acquisition.  And why not?  They could do a lot worse than to add a big Linux and J2EE app server business to their portfolio.  Per my SaaS market segmentation study, I would look for Sun to hang out in the lower levels of my stack.  It’s probably early to buy a language, but PHP and Ruby are out there and would also make interesting plays.

Posted in strategy | 2 Comments »

Celebrate What’s Different About the Internet or be Irrelevant

Posted by Bob Warfield on February 25, 2008

The Internet offers the promise of radically reinventing or at least extending most every facet of our daily lives.  But to really get the advantages the Internet enables requires us to do something different with the Internet.  It’s too easy to think we are using the Internet when in fact we have only a slightly better version of whatever we do off the net presented on the net. 

Do you really use the Internet for communication, or are you simply using email as a slightly lower friction version of snail mail?  Are you getting your message out, or is your web site just an electronic version of the conventional storefront or paper brochures that your business had before the Internet ever became popular?

Let’s look at what the Internet does differently.  Consider each one and ask yourself how you should be taking advantage of it.  If you’re not taking advantage of at least a few of these, you have just a token Internet presence that is probably irrelevant.  Is that what you want?

You can reach a “Far Outer Circle

David Armano has a great concept he calls the “Far Outer Circle”.  David presented the Far Outer Circle with respect to Twitter:

Here’s what you need to know about Twitter.  If you have an inner circle of friends, and outer circle of contacts, but you don’t have a “far outer circle”, then the Web application may not be for you.   

I think the concept applies to the web in general.  Everyone has an inner circle of friends and an outer circle of contacts that exist whether or not there is an Internet.  What the Internet uniquely enables is the Far Outer Circle.  Who are these people and why are they important?

In some sense they are strangers.  They are strangers you strike up a conversation with in the line at the theater, or in a restaurant, or beside you on the plane.  We all know you can learn valuable things are just have an enjoyable time with such conversations.  But where they stop being strangers and become a unique asset only available on the web is in three ways.  First, you can see them again and again.  The web keeps that place in the line at the theater available for you to go back to.  Second, these strangers have self-selected their way into your life based on what you’re saying or who you’re hanging out with.  That means they’re more relevant.  They’re a richer feedstock for you to know and converse with.  They may very well find their way into the circle of contacts or even into your friends circle if you give them a chance, and the Internet will give a whole lot of them the chance, if you let it.  Third, you have agreed to let them into your circle.  You’ve vetted them based on the initial introduction.  You’re in control, whether you feel that way or not, and you can take advantage of that.

Businesses should be thinking about their Far Outer Circle too.  These are folks that aren’t even really prospects.  If you pursue them as such, they will likely go away, be irritated, or otherwise think less of you.  They just want to know a little more about what you’re doing or your products.  If you make it easy for them to do that, they may let you keep track of them and occasionally have a brief conversation if you don’t come on too strong.  Over time, you may convince them to come close enough to be prospects, but meanwhile, they’re much more valuable than the next random lead if they’ve asked to be a part of your Far Outer Circle.  Yet many business don’t even have a way to ask.

You can change the web by creating content

Yes, this aspect is not so different I suppose, but the creation of content is much more egalitarian than it used to be.  Anyone can create a blog, and there are so many millions of them that many have.  You can even create a physical book, paperback or hardbound, courtesy of Lulu and other services like it, using the web.  The point is that creation of content is no longer the highly specialized field it once was.  You don’t have to be a web designer or professional writer to create content.  In many ways, content is still King.  All the rest of these things matter little if you aren’t giving back any content.  Content is the currency of the web, and if you don’t have any currency, you have little to trade.

Given how much easier it is to produce content, ask yourself whether you’re taking advantage effective advantage of it.  As a business, are you enabling more people than ever to create content around your business, or are you tightly reserving that function to a small cadre of professionals whose every word is scrutinized?  The latter is the old style.  It may feel a lot safer, but you’re missing out on a big opportunity.   What about giving your customers a way to create content?  Many people want to participate.  If you own a great brand, you have the ability to let others be a part of it if you let them contribute content.  Think about that.  Wouldn’t you want your wildest supporters empowered to give content on your behalf?  Don’t you care what they have to say? 

You can be found 

Before the web, before Google and other search engines, the hardest part used to be getting noticed.  Books on writing are filled with accounts of how many rejection letters the famous authors had to get through before they were published.  Eventually, they got a hit, and everyone would beg to publish their writings. 

The web is different.  It’s much more egalitarian.  The pen is once again mightier than the press, and that’s a powerful thing.  But a lot of that power is in the ability to be found.  You can just take that for granted, or you can learn the ways in which the web leads traffic around and take advantage of it.  By now, everyone thinks at least a little bit about Search Engine Optimization.  However, I’ve met way too many people that think buying a few keywords on Google is all that amounts to.  These are professional marketers, and it’s silly that they don’t have a deeper understanding of the web. 

What is your unique strategy to take advantage of the web to be found?  Do you just put content out there and hope it will be found?  Hope is not a strategy.  Figure out how to maximize your chanced.  Develop a real strategy.  Or you will be irrelevant.

You can change connections by linking

Scott Karp says influentials on the web are people with the power to link:

In the networked web era, influentials may not be people with a particularly connected temperament or Rolodex, or people who control and influence monopoly distribution channels (e.g. newspapers), but rather people who influence the network by leveraging the most powerful force on the web — the link. People like bloggers, top Diggers, del.icio.us power users, Facebook users who share lots of links, MySpace users who embed videos, Twitter users who post lots of URLs, or any social network user with links to lots of friends.

Linking starts from content and being found.  If your content isn’t being found, linking to others matters little.  Nobody will find your links.  But once you have content that is being found, linking is very powerful.  It is your next currency to trade.  Think of the content as cash.  Linking is your credit cards and checking accounts.  It is virtual currency.  It is lending your authority to others by endorsing their content with a link.  As Scott shows, there are many forms of linking, ranging from simple links in your content to specialized web services like del.icio.us that are strictly about managing and publishing links.

Links are a place that most businesses are completely clueless about.  Why would I link?  Doesn’t it just move traffic away from my site?  Isn’t that a loss to me?  By thinking this way, businesses lose the ability to influence and partneron the web.  If content creation and SEO are marketing, then linking is business development.  It isn’t surprising most companies are lousy linkers when you consider that most companies are lousy at Business Development too.  We’ve all heard of the bus dev guy who is a sales guy that couldn’t quite carry a quota but that was well liked. 

Influence is a bankable commodity.  Establishing your business as the foremost group of experts on a particular domain is going to require that you link out to a lot of other information in that domain.  If you do that well, pretty soon people will trust that you are the foremost experts.

You can harness the long tail of hyperspecialization and micro-niches

The world has always been full of strange little cul de sacs of experience and interests.  But in the past, it was impossible to reach them in any meaningful way, so they languished as back waters.  In today’s world, the Internet lets you very efficiently connect to such groups.  The upshot?  There are more opportunities to be the best in the world at something because you don’t have to stick to large horizontal markets or even large vertical niches.  Frankly, it may be easier to move out of the direct spotlight of competition and into worlds that are flattered by the attention. 

What micro-niches are relevant to your business that ought to be tapped?

You can match media to audiences

We all have preferences in terms of how we like to receive information.  One size does not fit all.  Some people love Twitter or video, while others loathe them.  With the Internet, you have the opportunity to match media to audiences.  You don’t have to serve everything up in a one-size-fits-all format.  I’ve written before about personality types and the web, and came up with this grid to help charactertize the different styles:

Web 2.0 Personalities

Think about media coverage for your web presence.  Do you have something for everyone?  Do you collect information about what formats each customer prefers to receive their information in?  Do you use that information when you follow up with the customer, or does everyone get the same email or other contact style?

You can focus on getting to zero friction for your business

One of my old associates used to refer to wanting our software to be “credit card self-service.”  He meant that there should be so little friction to adopting the software that all you would need is a credit card and an email address and you could be using it.  His goal was to eliminate friction from the process of adopting our product.  The Internet makes it possible to eliminate a lot of friction.  Whether that’s friction that’s involved with reach your customers, selling your proposition, or delivering your product, it’s important to eliminate friction everywhere you find it.  In some cases, those efforts are so successful that instead of friction, you get the opposite: viral attraction.

Have you looked at everything you’re doing with an eye towards identifying and eliminating friction?  Is your product “click to buy” or “credit card self service”?

You can get others to paint your fence via Wikinomics

The Internet is a social phenomenon.  It is a means to enhance interaction between people.  Companies have gradually discovered that the interaction goes well beyond the social.  It reaches a point where people on the web will actually do useful work for you, for free.  That was the point of the fascinating book Wikinomics, by Don Tapscott and Anthony Williams.

Are you engaging your customers in this way.  Do you give them a way to help you out, or do you just assume they wouldn’t be interested?  There are so many ways your customers can come to your assistance, but you have to enable that to happen:

-  Do your customers have a convenient way to refer others to your product? 

-  Can your customers give you raw unfiltered feedback about what you’re doing right and what you’re doing poorly?  Do you ask for that, or is it one of the 3 “impossible” conversations  Jeremiah Owyang talks about?

-  Can your customers tell you how to change for the better?

-  Can your customers contribute to making your product better for others?  Perhaps by helping out in tech support forums, or even assisting with language translation.

There are many ways to enable others to paint you fence.  Be sure to take advantage of them. 

Related Articles

Brian Carroll of B2B Lead Generation Blog has some great thoughts that are applicable to your Far Outer Circle communications as well as content creation.

Posted in Marketing, strategy, Web 2.0 | 2 Comments »

Microsoft’s New Openness Is About Making It Easier For You To Do What They Want You To Do

Posted by Bob Warfield on February 21, 2008

Om Malik says Microsoft’s newfound openness is all about not having the EU try to shut down their proposed Yahoo acquisition.  As he says, “Microsoft is worried, scratch that, very worried about developers leaving them in the cold.”

Let’s look at the announcement’s major components:

Ensuring open connections to Microsoft’s high-volume products.

Microsoft is going to publish documentation for all API’s and communications protocols for its high volume products.  Originally, these API’s were regarded as trade secrets, and if you could gain access to them at all, it was only via negotiating a deal with Microsoft.

Translation:  We found that giving our own developers proprietary advantages wasn’t nearly as helpful as making sure outside developers tie back to our products.  Remember that this announcement only matters if you plan to add further support for Microsoft products.  This is exactly what Microsoft wants you to do to help cement the market position for these products.  In addition, you do all the work.  By the way, some of this is covered by Microsoft patents.  In their announcment, Microsoft says they will license those patents at “low royalty rates.”  So you may have to pay for the privilege of modifying your products to help Microsoft further improve their market position.

If you are an Open Source developer, Microsoft will further agree not to sue you if you support the protocols and help them advance Microsoft dominance.  However, they only promise to do this for developer and non-commercial distributions.  If you actually have the temerity to want to make a living doing what you do, you will have to negotiate further with Microsoft.  Remember, this is the King’s forest, and all of the game in the forest belongs to the King.

Documenting How Microsoft Supports Industry Standards and Extensions.

Whenever Microsoft uses an industry standard, it will document how it supports the standard including Microsoft extensions to the standard that affect interoperability with other standards.  These actions will allow third-party developers implementing standards to understand how a standard is used in a Microsoft product.  Microsoft will make available patent licenses on reasonable terms.

Translation:  All your standards are belong to Microsoft.  We may use them, as we see fit, and we may even deviate signficantly from them while still claiming to be using the standard.  If you want to survive, you’d better implement our deviant behaviours when you use the standard too.  This is called “embrace and extend” and is how Microsoft has taken many balls away from the other kids on the playground.  And BTW, we may patent your standard and make you pay us to use it. 

Enhancing Office 2007 to provide greater flexibility of document formats.

To promote user choice of document formats, Microsoft will design new API’s for the Word, Excel, and PowerPoint applications to enable developers to plug in additional document formats and to enable users to set these formats as their default for saving documents.

Translation:  Your pitiful rebel alliance will get no further.  We want you to invest in writing the file translators for your formats to make it easier for us to take back what is rightfully ours.  No matter what you think you may have invented, if it ain’t in Office, it ain’t relevant.

Launching the Open Souce Interoperability Initiative

Microsoft will provide resources, facilities, and events, including labs, plug fests, technical content, and opportunities for ongoing cooperative development.

Translation:  Hey, bring your code.  We want to check it out.  We want to hire you, and if not, we want to indoctrinate you to our way of thinking.

Expanding industry outreach and dialogue.

An ongoing dialogue with customers, developers and open source communities will be created through an online Interoperability Forum.

Translation:  Your suggestions will be duly noted, harvested, and the remainder will be filed as appropriate.  Thank you for your support.

Is this really groundbreaking?

I don’t know about you, but I did not find this announcement to be especially groundbreaking.  Microsoft wants to make it easier for you to do what they have always wanted you to do:  totally embrace their technologies and quit wasting so much time making them chase you outside their sphere of competence.  I can’t blame them for trying, and no doubt some of this will be helpful to others. 

Erick Schonfeld at Techcrunch says, “Redmond has finally decided to stop trying to fight open-source software.”  I cannot find much of a hint in Microsoft’s annoucement that this is the case.  Schonfeld bases this premise on the idea they won’t sue the Open Sourcers for infringement on Microsoft’s protocols.  Wow, the lawsuit game sure worked well for SCO.  I’m not sure Microsoft was eager to follow that route nor does the weasel language about “developer and non-commercial” use leave me with any great confidence they won’t just turn around and sue anyway.  Erick’s article included a poll that indicated (at least when I took it) that the majority who answered the poll remain deeply suspicious of Microsoft.

I’m not surprised.  They’re not doing anyone any favors.  Most importantly, they still have the mindset that the only ones going to make money from the Microsoft ecosphere are Microsoft.  Until they get past that, things are unchanged.  Microsoft still has a significant rift with the web.

Posted in strategy | 1 Comment »

Two Strikes Against Yahoo vs Google

Posted by Bob Warfield on February 21, 2008

I am convinced that advertising is not well understood, else why would so much of it be wasted?  As John Wanamaker mused as early as the 1800′s:

Half the money I spend on advertising is wasted; the trouble is I don’t know which half.

So it is with Yahoo vs Google.  Microsoft is working hard to spend an incredible fortune to acquire Yahoo.  Yahoo is working hard to stay independent.  Meanwhile, Google has built was is perhaps the greatest advertising engine ever seen.  Why?  What makes Google so much better?  Isn’t Microsoft’s idea that it can capture 30% of the search world and thence take Google on more even terms a good one?

There are two critical advantages that Google has.  First, it’s all about searach.  Search is so far the most valuable advertising property there is.  It’s all about location, or in this case, timing.  Search let’s users tell us what they’re looking for, and based on that advertising can be served up.  It is a uniquely 2 way process that doesn’t exist with simple banner ads.  Give someone targeted advertising at the point in time where they are actually looking for what you advertise and you dramatically increase the likelihood the advertising will matter.  This is rare, hard fought, and extremely strategic ground.  If someone ever figures out a similar way to tell when users are mentally prepared to recieve advertising, we will see another Google scale company built around the idea (provided they execute and can protect the idea, of course).  Meanwhile, Google has an almost overwhelming lead.  Yahoo brings a fair bit of search business to the Microsoft empire, but an awful lot of their traffic is not search related.  It comes, for example, from their portal and other properties. 

What would it take to beat Google at its own game?  It’s very hard to impossible.  First you have to invent a search algorithm that is enough better than Google’s so that people will switch.  Next, you must protect the algorithm in some way so that Google can’t just copy it.  Patents are the obvious answer, but they can be a two edged sword.  To acquire a patent, you must be willing to tell the world what you’ve done.  In so doing, you may give them an insight that leads to an alternative solution that does not infringe but that works every bit as well.  My best guess is that to beat Google will require specialization.  It will be possible to build specialized kinds of search for niche domains that function a lot better because the semantics of the domain are built into the search algorithms.  If you’re lucky, you get left alone long enough to get big enough to be interesting.  But it won’t be easy.

There’s a second strike against Yahoo aside from the fact they don’t have a better search mouse trap.  Recent information on their demographics is not encouraging.  Heather Hopkins at Hitwise has an article that indicates Google has locked up the more well-heeled crowd.  Here is a chart depicting who favors which services:

yahoogoogleaudiences.png

Google’s power alley is the lower right quadrant, and Yahoo’s is the top left.  Google gets Affluent Suburbia, Small-town Contentment, and Upsacle America almost to itself.  BTW, the circles are larger so these are bigger audiences with Google too.  Yahoo is stong with Struggling Societies, Urban Essence, Blue-collar Backbone, Remote America, and Aging Contemporaries.  Which seems more likely to have a lot of purchasing power worth targeting with advertising?

Posted in Marketing, strategy | 1 Comment »

NYT Correctly Calls the Biggest Microhoo Challenge (Hint: It’s the Microsoft Rift With the Web)

Posted by Bob Warfield on February 18, 2008

I’ve been complaining about Microsoft’s unneccesary Rift with the Web for quite a while, and occasionally taking grief for it from Microsoft supporters.  The NYT has a great article about how the incompatibility of Microsoft’s proprietary with Yahoo’s Open web technology is the biggest obstacle that the combined entity will face.  When we reach a stage where the NYT sees that Microsoft has a Rift, it’s pretty hard to deny the Rift exists.

What if the merger signalled the end of the Rift?  Wouldn’t it send an amazing message to the world if Microsoft flat out abandoned their insistence on their own platforms.  They don’t have to kill those platforms, they just need to quit insisting on them to the exclusion of all else.  Can you imagine a world with Microsoft pushing Linux, PHP, MySQL and all the rest?

No, me neither.  I guess they’re in for a rough ride!

Posted in platforms, strategy, Web 2.0 | Leave a Comment »

The Hidden Gems that Social Graphs Bring to Light

Posted by Bob Warfield on February 18, 2008

YouNoodle.com claims to be able to predict which startups are more likely to succeed.  While I hesitate to endorse the idea that their predictions are accurate, the methods are quite interesting.  According to the NY Times that introduced YouNoodle from stealth:

their algorithm uses sophisticated modeling pertaining to how social capital and networks can affect an organization’s performance.

They also say that they are focusing in general on assessing the experiences and social and business contacts of entrepreneurs who start a company, and on how the entrepreneurs within that company might fit with one another. They will not disclose precisely what factors they use to predict a start-up’s success, or how their algorithm processes those factors.

If you visit the site, YouNoodle is still not revealing all, but it looks a lot like a social network for startups.  Here’s the entry for startup SnapTalent, for example.

What does all this have with the likelihood for success?  I can but speculate, but my speculation goes something like this, and is based on my own experiences as an entreprenuer.  I suspect the Social Graph piece is attempting to determine whether the founders are connected enough to reach critical mass in getting their ideas noticed.  That fits well with “using sophisticated modeling pertaining to how social capital and networks can influence an organization’s performance.” 

Can a startup succeed without social capital?  I doubt it.  After all, they have to get the word out somehow.  I’ve suggested in the past that maybe startups ought to insist on having a top-notch blogger on staff, but these guys are taking it another step up altogether.  They seem to insist that a startup be sufficiently linked in to the right groups of people.  It’s a fascinating premise.  As we interact with the web, we leave behind our footprints.  Suitable forensic research can determine from those footprints something about our networking and sales skills.

A lot more is likely possible from a detailed analysis of Social Interactions on the Web.  LinkedIn recently announced they were going after the investment community.  Tim O’Reilly described the service thusly:

While the service isn’t going live for several months, Mike outlined the core of the value proposition, which I could sum up as a Web 2.0 version of the Gerson-Lehman Group‘s expert network. Gerson (or GLG as it is often called) has made a splash in investment research by assembling a network of experts on virtually any topic. Subscribers pay a hefty subscription fee for access to that network.

Think about it.  If it’s true that it isn’t what you know but who you know, the Internet could be the ultimate wealth enabler.  This kind of information is very new in the world.  Even ten years ago, what mechanism would have been available to assess from afar how well networked various people are?  Social Graphs are revealing new and compelling hidden gems of insight that can be mined for various purposes.

What other uses can such information be put to?

Posted in venture, Web 2.0 | Leave a Comment »

Amazon Ran Out of Capacity

Posted by Bob Warfield on February 18, 2008

As I suggested in my original post on the topic, Amazon’s recent S3 outage was due to running out of capacity.  Specifically, they ran out of authentication capacity.  In part, this problem was due to the fact that Amazon wasn’t monitoring exactly this part of their capacity envelope very well.  High Contrast has the Amazon quote telling us that it was also due to just a few customers radically increasing their load on the system in an unpredictable way:

the surge was caused by at least one very large customer plus several other customers suddenly and unexpectedly increasing their usage. 

So far, most of the pundits are in something of a denial mode.  They argue that nothing really new and interesting is happening here.  All services go down, including the electric companyVinnie Merchandani says corporate data centers have been going down a lot more often than 99.999% uptime allows for since forever.  Folks like Nick Carr seem to feel the biggest issue in this outage was that users didn’t have timely information and Amazon is fixing that.

This all misses a bigger point.  What these writers are doing is attempting to apply the old standards and methods against the new world of Cloud Computing.  The trouble is, there is something genuinely new at work here that goes beyond the inevitability of some outages and the need to be more transparent with customers about what is going on.  The problem Amazon and other would-be cloud platform purveyors face is predictability.  The world they deal in is radically less predictable than corporate data centers of old because the Internet today has much lower friction and higher connectivity between different web sites that make load spikes increasingly sudden and intense.  There is a cascade of dominoes effect that is enabled by the low friction web that wasn’t nearly so twitchy in the past. 

The premise of any large computing infrastructure is that by sharing the load across many customers (and in Amazon’s case, sharing excess capacity from their core retail business), we enable headroom for such load spikes.  But how realistic is that concept?

Consider this Alexa plot of CNN and Flickr traffic over time:

 Flickr Traffic

Do these two curves look predictable to you?  Take CNN, for example.  To handle the big spikes requires 2-3x overload capacity.  Flickr is a little less crazy except for one massive event that involved a doubling in a very short time.  This latter even was permanent in its effect, so if you were counting on temporarily borrowing some headroom, you would have had to keep it in place indefinitely and grow from there.  Ironically, that chart was brought to my attention at Amazon Startup Project where they used it to sell the idea of unlimited headroom a startup can’t afford to purchase by using Amazon Web Services.

These charts are displaying non-linear behaviour, the hardest of all phenomena to predict.  This non-linearity is becoming more and more common because the Internet has become extremely viral.  It is crosslinked, the very meaning of the word “web”, and messages travel along the links with almost no friction.  Viral has become a virtue, and much of the current innovation is focused around how to make the viral spread of information more likely.  Social Networks are all about such behaviour.  Take a look again at those CNN spikes.  Now let’s imagine your cloud computing infrastructure is hosting a bunch of different blogging, micro-blogging, video, photo sharing, and other social sites.  The CNN spikes no doubt represent something newsworthy happening.  The greatest likelihood is that each spike will be echoed at some level across all of these sites that are in the business of spreading information.  Friction has been lowered to the point it is almost non-existent when it comes to the spread of memes on the Internet.  We have major spikes from world events, such as the assassination of a world leader.  In the Internet, we can have major spikes from such inane moments as Scoble shedding tears of delight over new Microsoft secret software.  And the whole thing is wired together.  That one tear on Scoble’s cheek breeds a thousand or more accounts ranging from poking fun to trying to guess what this secret software is.  There is a ravenous beast poised over the keyboard waiting for something interesting to pass onto its network of other ravenous beasts.

This is decidedly non-linear behaviour and impossible to predict.  The answer is major cloud computing infrastructure providers will need to have considerable excess capacity available on tap at all times to avoid outages.  Take Amazon.  Web bandwidth to their web services now exceeds to total traffic to all of their other properties.  What might have once been a nice remaindering business allowing them to resell their excess capacity is now driving the need for more capacity.  They have just a few choices.  They can invest in a lot more hardware and lower the margins on their business, or they can implement some strategies to limit the availability of the service to some customers.  It strains credulity to think they’ll limit capacity to their retail business.  How will they decide?  Tiered pricing of some kind? 

Think in terms of other unexpected networked events.  I’m reminded of financial markets and the law of unintended consequences.  Look at today’s housing market.  Remember Long Term Capital, a hedge fund with Nobel Laureates who had mathematical proofs they would continue making money.  Right up until they unpredictably went bankrupt.  BTW, this sort of thing used to happen with the electrical grid too.  In both cases, the financial markets and the electrical grid, elaborate means were put into place to artificially inject friction to damp the machine’s oscillations before it could destroy itself.  There are elaborate rules in the stock exchanges about shorting stocks that are falling.  They inject a form of friction back into those markets to prevent total free fall. 

Perhaps this points the way to new technology for Cloud Computing infrastructure.  A gentle injection of the right kind of friction at the right point for a limited time might prevent suddenly massive spikes and outages.  It’s an area ripe for innovation.  Meanwhile, Amazon could sorely use some competition.  If a customer could contract for emergency capacity from elsewhere, or even better, if the Cloud Computing Providers could share slack capacity as the electrical companies do, it would be tremendously helpful when the inevitable load spikes arrive.

Posted in amazon, data center, platforms, saas, Web 2.0 | 3 Comments »

 
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