Monthly Archives: June 2011

Zynga S1: Virtual Goods Paid With Virtual Money

The Zynga S1 is reported to hit the wire tomorrow, and certainly will reveal details about a compelling and, by all accounts, profitable business model.

One issue that I hope to see disclosure about is Facebook Credits — the currency that Facebook is requiring app developers to implement — that sends a 30% revenue share to Facebook.  Some potential questions that I look forward to possibly seeing answered are below, both about Zynga and perhaps even more interesting in starting to think about the Facebook revenue model and its down-the-road IPO .

1) Zynga is probably not paying 30 in revenue share, perhaps through a mechanism by which Facebook refunds Zynga some money back in advertising credits.  It will be interesting to see how that standoff settled out.

2) The result of that negotiation will reveal some information regarding the negotiating power that Facebook has to take the 30% revenue share, at least vis a vis its bigger partners.

3) We will start to get some data on how big the Credits business is for Facebook, as a big proportion is essentially Zynga revenues multiplied by the percentage that Zynga is paying for its Facebook credits.

4) While selling virtual goods is surely highly profitable, what is the effect of the Credits revenue share on Zynga’s profit model?  Is the business model so profitable that it can absorb a 30% cut?

5) Did the implementation of the Credits payment system in 2010 slow down Zynga’s growth, in terms of usage (perhaps because the increased costs were pass on to end customers in some way)?

J.K. Rowling: Harry Potter, Muggles, and Casting E-Reading Spells

Certainly, every author is not J.K. Rowling.  Few, if any, could match her bold move to bypass the Amazon website or the iTunes Store and sell e-books directly to fans.  Even if the electronic rights were retained, almost no other author has the clout to instantly conjure up her own distribution network, such that it would be more profitable to do so rather than split the bucks with the digital bookstores.  So, it may not set a precedent for other authors.

But it may have an equally profound effect on accelerating the change in reading habits.  Rowling does not need Amazon’s cooperation to sell books that can be read on the Kindle, but it would be a lot easier for readers with Amazon’s cooperation.  It will be interesting to see whether Amazon finds a way to cooperate with Rowling, even without the lure of making money off sales of the Harry Potter e-books.  It is not clear that Amazon makes margin on the Kindle itself, and the point of the Kindle is to sell and profit from the sale of e-books, by placing the Kindle in front of as many reading eyes as possible.  The Harry Potter series, some of the all time bestsellers for Amazon, may be an unprecedented opportunity to get the Kindle (and other e-readers) in front of children and young teens, creating e-reading habits for life.

Punching Back Against OPEC and Oil Speculator Bullies

I am fascinated by this week’s coordinated release of oil reserves from strategic reserves in the US and around the world.  Twenty-eight countries combined to release 60 million barrels, with the US accounting for half of the release.  Some thoughts:

1) Twenty-eight countries taking action reflects fantastic leadership and coordination by the US and others.

2) This is bold and unconventional economic policy, constituting one of the most creative economic strategies we have seen employed during the economic crisis.  It is using David’s slingshot to hobble Goliath.

3) Economic policy is too often hamstrung by ideology.  This action looks past ideology, and the tired and predictable criticisms that this is interfering in the free market or pandering to the electorate or putting our national security at risk or not increasing domestic production.  This action is not cosmetic, nor is it shallow politics; it is good policy.

4) This action was clearly not meant to represent a permanent supply boost going forward.  So much of the criticism stems from this fact, as if it wasn’t obvious to the designers of the policy. But it is obvious that 60 million barrels is not that much in the scheme of things; three days of US or a day of global consumption.  (Indeed, it is only 4% of global reserves, so part of the message here is that this coalition has a lot of dry powder, so to speak.)  This action is about something else other than shifting the supply demand up.

5) It is about sending a message and introducing uncertainty to OPEC (interestingly, Saudi Arabia was consulted, as it itself has been disappointed by its inability to convince a number of other OPEC members to increase oil production to sustain a global recovery) and to speculators, by essentially telling them that a powerful counterparty is willing to call their bluff by taking the other side of a trade by going short oil. For those, who think this is some offensive move that distorts a pristine free market, think again.  The market is already distorted by the presence of both OPEC and speculators; the action by the governments is just pushing back against these forces that are distorting true supply and demand factors in the market.

6) OPEC distorts the market through artificial supply restriction through supplier coordination.  With cartels, the challenge with keeping the members together is the uncertainty that members can rein in supply and keep prices high.  There is always the temptation to cheat and sell more, whether openly or discreetly, particularly if someone else is going to make the sale anyway.  By introducing a huge additional factor for cartel members to think about — that sales may come out of reserves — it makes it harder for cartel members, particularly the smaller ones who need the revenues from oil sales, to continue to hold back supply, faced with the possibility that foregoing sales in the short-term is not keeping prices high anyway.  In that sense, the “symbolism” of tapping the oil reserve is a surgical move that may pay huge dividends beyond the short-term supply boost by weakening the resolve of oil-producing companies to hold back oil going forward.  In essence, the non-OPEC countries have shown OPEC that they can act as a cartel too.

7) Speculators and hedge funds have distorted the market by making and profiting from one-way bets on oil going up.  Any supply disruption news has been magnified by the financial money pouring into the oil markets.  Again, this sends a message to the speculators by introducing uncertainty.  First, for those caught by the news and the fall in oil prices, sustaining the pain of losses will make them more careful about the bets that they are making.  (Seeing whether we hear names of funds that have sustained losses in the coming days will be interesting.)  Second, it makes it clear to those making the bets that going long is not a sure bet, as they need to watch over their shoulder whether oil reserves will be released again, in response to an actual supply disruption or price runup by manipulation.  Again, tapping the oil reserves may prove to be a surgical move that pays big dividends by chasing some of the hot money out of the market, allowing fundamental supply and demand forces to set the market clearing price.  In essence, the government has shown that there is a huge force in the market willing to make the opposite bets to the one-way bets that the hedge funds have been making, and this may encourage some to take their bets off the table and find another casino.

Dreams Deferred and Making your Own Luck

According to Businessweek,

From the factory floor to the boardroom, few Americans these days are willing to tell the boss to shove it. Many of those who have weathered the recession with their jobs intact are now sheltering in place, either fearful of risking a change or simply lacking the opportunity. Since January 2009, an average 1 million fewer Americans per month have quit their jobs than in previous years. Through April, the most recent data available, that adds up to 28 million Americans stuck in jobs they would have left in ordinary times.

That’s a lot of careers slowed and dreams deferred.

For many people, the most sensible or the only thing is waiting it out.  For others, the greater risk may be in doing nothing.  For these folks, perhaps the solution is in a quote that I saw today:

I have found that luck is quite predictable. If you want more luck, take more chances. Be more active. Show up more often.

 

Google, the FTC, Monopolization, and Antitrust

The WSJ reports that the FTC will issue a subpoena to Google imminently, kicking into high gear its monopolization investigation of Google.  Some quick thoughts:

1) As I have said before (see here and here), the purpose of antitrust should be to create an innovation ecosystem.  The first, middle, and last question for the FTC here should be the effect that Google’s practices have had on innovation in the entire entrepreneurial system, the only arena of US economic resurgence today.  The question is not whether Expedia or Tripadvisor would like to have a higher search ranking.  The answer to me to the proper question which concerns the effect on  innovation should have been and remains crystal-clear.

2) Google is critical to the vibrancy of the startup ecosystem today; one that everyone acknowledges is at a high point.  Many disruptive startups today are funded and started because entrepreneurs and investors know one exit possibility is that Google (and others like Facebook, Apple, Amazon etc.) will take the baton, continue investment, and grow a disruptive business model from child to man.  Read In the Plex or look at Crunchbase for numerous examples. For a couple of examples off the bat, think of Youtube and Android, and what they have done to shake up their respective industries and the critical role that Google played in investing in them to take them beyond the limits of what their founders could do independently.

Moreover, what Google  has done in validating search and display advertising has created an enormous industry for others as well, opening up numerous entrepreneurial opportunities.  See here for a chart showing the enormous number of companies in the advertising ecosystem.

3) The analogy to the government’s antitrust case against Monopoly is wrong, misleading, and should be cast aside immediately.  When Microsoft was investigated and prosecuted, the Windows monopoly had slowed the innovation economy.  Venture capitalists hesitated to invest in technologies because of the fear that Microsoft would snuff them out by incorporating new businesses into Windows.  Real Media Player and Netscape are two prominent examples.  Google is not capable of doing this. For example, as I noted in my post responding to Bill Gurley,”the Apple iOS and Internet Explorer are under no threat to be vanquished from Android and Chrome, in the same way that Netscape was, nor by creating these products does Google lock up search for itself.”

4) Google is fundamentally investing to disrupt industries.  Android in mobile phones.  Youtube in video distribution.  Mobile wallets. Chrome.  MapReduce.  On and on and on.  The willingness to make these investments and take these risks is the hallmark of a pro-competitive company.

5) I have written a lot about how vulnerable Google is as Internet users employ alternate ways to find content.  I call the thesis “post-Google search,” and there are a series of posts on this site starting here.  There are social sites like Facebook and Twitter, there are answer sites like Quora, there are other content discovery sites like Flipboard, just to name a few.

Even where Google decides that it wants to provide its own content to its users in addition to linking to others’ content, the notion that Google is going to monopolize that additional area (take local guides) by extending its power from searches is ridiculous.  If the quality is better on Yelp or Citysearch, users will find their way over there, either using Google or alternate means.  It is just too easy for users to do so.  As we all know, Google’s dominance in search engine results has been of little help in establishing a foothold in social.

The internet ecosystem cannot be boiled down simply to market shares in paid search, and neither should the antitrust analysis.

Content Dhobi Ghats: Easier Self-Expression and Better Filters

In Mumbai, there are massive open-air laundromats called dhobi ghats. Somehow, clothing is picked up from a client’s home, is placed into close proximity, if not outright intermingled with the clothes of thousands of other households, but yet it makes it back to the home of the correct owner. This ability to match the right clothing, picked out from a mountain of the wrong clothing, to the right household is critical to the value created by the dhobi ghats, as returning the wrong stuff would have no value and indeed, would drain value by the cascading frustration it would cause to clients.

So what does this have to do with anything?

In my most recent post, which discussed “enablement” as an Internet business model, I linked back to a post from roughly two months ago about Internet-enabled expression as a foundation of successful business models on the Internet and as an unprecedented historic enabler of human expression. I noted that one could trace the history of the Internet through sites that made self-expression easier and easier:

I can chart a chain of  tools from when I first started using the Internet: interest-based UseNet groups, listservs, GeoCities and other “create your own website” tools, blogging tools, YouTube, Facebook and social networking sites, Twitter, Tumblr and microblogging sites, photosharing tools etc.

Coincidentally, also yesterday, Fred Wilson posted on a similar topic. He noted that using posts/day for WordPress, Tumblr, and Twitter that:

The frequency of posts in a service is inversely proportional to the size of the post. Said another way, the longer the post, the less frequently they will happen.

….

If you want to understand the power of Tumblr and Twitter, you need to look at how quick and how easy it is to post. There are of course many other factors at work, but brevity and ease is a big part of why these services work so well.

The point is simple: the easier you make it for people to express themselves by giving them a variety of simple tools to do so, the easier it is for the user to overcome inertia and “say” something, and the more total content is created.

This raises the obvious question: we already have too much content; so isn’t making it easier for users to create further content sort of pointless. Fred’s most illuminating point is in the comments to his post: “that’s why we need filters and curation. we want more posts and more filters”

Filters to sort through the ever-increasing content and present it on a silver platter to those for whom it is most relevant is now a critically important business model and the other side of the coin of the expression thesis. Some system, like the Mumbai dhobi ghats, has to get the content to the right place in order for it to have optimal value. Ultimately, if the content is not read, it will not be created, nor will society benefit from users seeing the content most useful to them. For these reasons, critical to “building better soapboxes” is also creating “dhobi ghats” to keep advancing the enabling of human expression as we have been doing this last fifteen or so years.

Eventbrite: Enablement as an Internet Business Model

Sometimes, the thesis of the Internet business model is enablement, not disruption.

An Internet business model mega-theme revolves around expression.  It gets its power from giving individuals a bigger soapbox, motivating expression through facilitating the communication of ideas and opinions.  We have expression that otherwise might not exist because the Internet puts bodies in the seats of the audience.

Another twist on expression is “enablement” or giving individuals a market for their ideas, talents, and interests.  We express ourselves in ways other than just our words.  Think ebay and etsy and the opportunity it gives artists, craftspeople, and others to sell their crafts or goods from their homes.

The same idea underlies Eventbrite.  The founders of Eventbrite in this interview have an interesting discussion of their “enablement” business model which rests on giving individuals the tools to monetize events by selling tickets.  Bands can have a house concert or people can throw cooking classes, and by being able to charge a little, they are motivated to do so.

By enabling  individuals to generate economic activity that otherwise might not exist, the internet creates new markets.  This is enablement.

Kevin and Julia Hartz (excerpted):

“Ticketmaster will do about $8.5 billion in gross ticket sales…That’s traditional ticketing, we call it, and it’s almost a completely different business model from how we’re approaching our market, and our market is enormous and it’s almost unknown. When you talk about enablement, that’s what really excites us about this opportunity…And on the democratization side, when you talk about enabling markets, that is bands that can now have a house concert, a show in their garage, and be able to promote that to the world and have those tools that were only previously available to the big promoters…This wide variety of content that is springing up; that gives me goosebumps.  It is exciting.”

Apple Retail Stores: The Key To A Decade of Products Selling Themselves

An article in the WSJ about Apple retail stores, on the day that their leader Ron Johnson is lured to JCPenney.

Yes, it’s true that they are not comparable to almost any other store chain for many reasons, but even looking beyond that, the level of success in terms of any metric are equivalent to Babe Ruth redefining baseball out of the deadball area.  For example, sales per retail square foot are approximately 5X that of Best Buy and store profit margins are approximately 27X.

But, more important, it’s hard to see how Apple could have had the multiple smash rollouts of new product categories and upgrades (iPod, iPhone, iPad, etc.) without the retail stores.  The products do speak for themselves, but no way, that the products would have gotten the traction that they received if Apple was completely reliant on employees at big box electronics, department, or mobile phone stores to do the evangelizing to set it all in motion.  Think of your last experience with these folks at non-Apple stores.  I have rarely had the experience to suggest that their mandate was, as it is for an Apple store employee: “Your job is to understand all of your customers’ needs—some of which they may not even realize they have.”  Instead, it is something like “Your job is to convince a customer to buy something despite it being obvious that you have no clue about the product or how the product might meet the customers’ needs.”

The Apple retail stores were essential to the product success over the last decade, because the stores allowed Apple to present the products in a way that the products eventually sold themselves.  For a company that relies so much on product “magic,” much of the development and design magic could be extinguished by a sub-Apple “last mile” experience (which unfortunately describes the state of much of offline retail America).

Netflix and HBO, Small Proxy Wars to Avoid MAD

I posted a while ago about Netflix encroaching on HBO (and cable generally) territory by jumping into the licensing of original content. The move raised questions because Netflix’s core competency isn’t making bets on unproven programming, a different skill set than finding creative methods of distribution.  I ran across an interesting interview with Reed Hastings, and excerpt a part below.

My reading of this is that the move to license House of Cards was a message to HBO and the content/distribution companies generally. The content/distribution conglomerates have publicly complained about licensing content to Netflix, seen as enabling households to cut the cable cord.  The message by Netflix is either license us your content and Netflix and MVPD can both cooperatively win by staggering the viewing of content (cable with originals, Netflix streaming after DVD release) or don’t license us your content and force us to have to compete more directly against you by becoming distributors of original content.  The effect in the latter scenario is to bid up the price of original content and to increase churn of both Netflix and the traditional MVPD players.  In other words, mutually assured destruction.

The game theory at play in the new content industry has the feel of Cold War-style proxy fighting — sending early diplomatic messages to avoid all-out war.

Excerpt from Charlie Rose interview as transcribed in BusinessWeek.

Tell me about Netflix’s move into original content.
When HBO (TWX) does original content, they’re real creative. They do scripts, they cast people, they own it on a global basis. What we did is we licensed the premiere from another studio, Media Rights Capital, that’s creating a show called House of Cards. David Fincher is directing it, Kevin Spacey’s starring in it, and like The Office, it’s a remake of a British success. And that’s what is characterized as original content, because it’s going to be exclusive on Netflix. It’s coming out next fall.

Should HBO be worried?
In some ways. We’re like baseball, and they’re like football. We have no overlap in content, but we sell to the same person, the same aficionados are passionate about our products. But I don’t think the NFL worries about baseball encroaching on their territory.

With this platform, aren’t you going to be inclined to want to create content, not just license it?
Well, we’re inclined to do things that are profitable for us. [HBO has] an incredible competence that we don’t have in creative, and in figuring out what’s going to be popular. We can be a licensor of prior seasons from Showtime, HBO, and others and be very successful, so that’s our current ambition.

We’re All Living in the Bharara Brothers World

I am a huge fan of  the persistence of both these brothers and the lesson of waiting for your time to come.  Preet Bharara is holding the financial world accountable as the US Attorney of the Southern District of New York, the most important prosecutor in the United States, after a number of years as a line federal prosecutor and a Congressional Aide.  Vin Bharara kept at it after the Pit deflated along with the first dotcom bubble, pursuing the unlikely idea to sell Diapers over the Internet.  (See my prior post touching on Diapers.com)

This piece in Dealbook is a nice tribute to the Jersey brothers.