Disruption
David Pakman's Blog www.pakman.com

Who Holds the Power in Media − Content or Distribution?

Television production concept. TV movie panels expand
Oct 06
Television production concept. TV movie panels

On Friday night, Chris Dixon (@cdixon), Jonathan Glick (@jonathanglick), Peter Kafka (@pkafka), Todd Sawicki (@sawickipedia) and I had a conversation on Twitter about media concentration and where the power lies these days. It was inspired by an Erin Griffith (@eringriffith) post called “Spotify’s Best Chance at Beating the Digital Streaming “Suicide Pact” Is With Ads.” Chris assigned me the homework of blogging about it, so here goes.

Typically, as a distributor gains scale with lots of customers, we expect market power to accrue to them and provide them negotiating power over rights and rates of content from the content owners. As we will see below, this is true in some forms of media, but not in others. What types of media are more prone to distributor power? Jonathan offers us a framework:

  • Content tends to be more fungible and less likely to benefit from concentration when it takes less time/cost to create a hit, the value of a hit is in decline, many substitutional offerings exist, aggregators have existing strong market power, and/or a strong motivation exists for self-publishing.
  • Content tends to be less fungible and offers concentrators great benefit when it takes significant time/cost to create a hit, the value of a hit is increasing or sustained, there are few substitutions available (by regulation, uniqueness or otherwise), aggregators have low value, and/or content creators have strong and sustaining brands.
  • A shift seems to occur allowing distributors to amass power when a disruption materializes in the format/form of the media object itself (usually the new object has higher volume, velocity, virality). Some recent examples, perhaps, are YouTube clips, Tweets and Kindle singles.
  • Any media that’s worth owning is worth concentrating and there will always be capital available to do so. Only limit is regulators, until a format disruption occurs.

Let’s examine the state of many top media categories.

Music

One assumption many people have made about Spotify is that, while their current economics as provided to them by label licensing rates are essentially unsustainable, once they reach scale, they will have leverage over record labels and will be able to reduce their on-demand royalty rates. The reason this won’t happen is because of extreme continued concentration of supply. In 1999, when Napster was the harbinger of the demise of the recorded music business, there were six major labels who controlled about seventy-five per cent of the commercial recorded music market. With the EU’s recent approval of UMG’s purchase of EMI, there are now only three major labels. They control about seventy per cent of the world’s music catalogs. Indies have made a good run, and have grown in importance, but the world’s superstars are, for the most part, on major labels. And you just can’t operate a digital music retailer at scale without hit music content. I tried, when I ran eMusic for five years. We were the largest online retailer of indie music, but only reached about a half a million subs at our peak and came to believe that we could never be significantly larger than that without major label content.

So, suppose Spotify reaches 50M listeners and 10M paid subs? Or even 50M paid subs? Will they be able to demand better rates? No. Because they don’t have a service without the full catalogs from those three majors. If even one of them pulled their catalog, at least twenty per cent of all Spotify’s content would disappear. All the playlists on the service would break. And a third of the hits would be gone. Paying consumers would never stand for it and the service would crumble. The labels know this. They know they have fully concentrated power. In fact, I would bet that if Spotify ever reaches that scale, the majors will demand even higher rates, and they may be able to get them. Highly concentrated popular content allows owners to extract unprofitable rights deals. Even though Spotify is building listener scale, the absolute dollars they pay to labels still small, given that streaming rates are very low per play.

Does this mean Spotify has no future? That’s a different discussion, and my view is they do, if they diversify into other content types. But the music business for them will be, at best, a twenty per cent gross margin business (it was two per cent last year), and that is tough. (Remember, even Apple, the world’s largest music retailer did not have leverage to hold rates steady and gave in to rate increases imposed by the majors.)

So, in music, the power is in the hands of the content owners, not the distributors. Will this change? Will there be fragmentation among ownership? I hope so, and it is conceivable, but the amount of time it will take for a highly fragmented market to occur could be 10 – 50 years. At this rate, we will likely have two major labels within the next three years.

TV

I blogged about Hunter Walk’s view that TV content sits in three main buckets, No Substitute, Nice to see, and Filler. If you want to be an MVPD, you must have the No Substitute and the Nice to see content. Sure, you could try to operate a service without the Filler, but that is not how programming is sold. It’s sold by the channel, and each channel has its mix of each of the three tiers above. (Actually, it is sold as a package of channels, to be more precise. If you want MTV, you must also take Logo, etc.) Whenever an MVPD gets in a rate dispute with a programmer and the channels get pulled, the customers go crazy, put huge pressure on the MVPD, and start switching services. The MVPD generally gets beat. This is why Comcast bought NBC…to finally have some hedge protection against the power continuing to concentrate in the hands of the programmers. So, in traditionally delivered TV, the power is in the hands of programmers. I am told the NFL Sunday Ticket deal leaves DirecTV with essentially no margin in ways similar to online music rights deals.

How might this change? Well, one scenario is that the rise of IP-delivered TV programming (Netflix, Amazon, Apple TV, YouTube, etc.) breaks the channel model back into shows, since that is all we care about as consumers. In that case, the supply is quite fragmented. You can operate an IP-delivered video service without all the content (in fact, all of them do today, since none of them offer a package as complete as an MVPD). The challenge here is that the programmers are pricing their hit content in such a way as to make it economically challenging for you to assemble all of your shows on-demand, and/or they are withholding key programming from IP delivery unless you authenticate as a paying MVPD subscriber. Note that YouTube is attacking this market differently, and is going after the time we spend watching Filler programming. I think they will succeed.

News

In this category, supply is highly diversified. Content is highly substitutional. While important brands exist here, and we show a preference for many of them, the power exists in the hands of the distributor. Audience size brings increased revenue (whether ad-supported or consumer paid). This content category is highly fungible. A storm-is-a-brewing because of social media, however. Many prominent writers (and ones less so) are building enormous social media brands sometimes bigger and more loyal than the audience size of the news distributors themselves.

Books/eBooks

As Benedict Evans (@benedictevans) points out, there is considerable diversity on the supply side here, with many book publishers and one dominant eBook distributor today in Amazon. In traditional book retailing, there is less of an all-or-nothing phenomenon  It is possible to create retailers without complete book catalogs. Nevertheless, a hit dynamic happens here too, and it’s hard to be a leading seller of books/eBooks if you don’t carry Harry Potter or whatever 4-5 titles dominate the bestseller lists. Today, in eBooks, Amazon has the balance of power and is certainly exercising it on pricing. Publishers hope Apple and B&N pose some competition here.

 

Generally, we expect the distributor to have power when supply is highly fragmented, and most media follow that axiom. While the internet has allowed a massive diversity of publishers and contributors to enter the market, big media ownership of “hit” content has been consolidating to extend their grip on pricing in the short-term. It’s reasonable to expect, however, that more and more “hits” will come from outside the consolidated super-structure. In TV, one could argue that nothing stops Netflix from buying high-end video programming direct from content creators, for example. But in the last few years, the networks (who often own/fund production companies) have worked hard to prevent this from happening and try to extract full value from their content before it gets into Netflix’s hands. In written media, super-blogs employ well-established mainstream writers. And in music, Adele is signed to an indie. But where hit media remains consolidated, media giants will exercise leverage.

 

Not All Traffic Is Created Equal

Sep 26

To build the online media giants of tomorrow, companies need models where the costs of both content and distribution are near zero. Google, Facebook, Twitter, Instagram, Pinterest and countless others employ this model. These models allow scale to emerge at very low-cost.
And in these particular examples, the scale achieved is astronomical — on the order of hundreds of millions or billions of users. In thinking through how to build businesses around this scale, a lens emerges: what kind of traffic produces that scale?
In the case of social media companies like Facebook, Twitter, Instagram, Pinterest and Tumblr, the root activity on the site is the sharing of content. But the content shared on those sites differs widely, particularly around which content attracts the most engagement. Broadly, Facebook attracts photo sharing and light-hearted personal content. Twitter responds far better to true news and topical information sharing. Tumblr seems to resonate around entertainment and creative media. And Pinterest lights up around home design, apparel, food and other commercial items. (I am taking some liberties by generalizing, but you get the point.)

At the scale of Facebook, you could have your users share almost anything and still be able to build a large business, purely by loading the site up with lots of advertising that is (at very least) rudimentary targeted. At that scale, you can reach billions of dollars in revenue. And I believe, even at their scale, their ad load will need to further increase (along with their targeting abilities) in order to signficantly grow the business. (They also must move advertising off-site, as they are now doing, which I detail in this post.)

But if your service attracts particular verticals of content engagement, not all content is created equal, and some is much more valuable than others.

I divide traffic/content engagement into three buckets: topical, informational and transactional.

  • Topical content engagement is what is mostly taking place on Facebook, Tumblr and Twitter. It is comprised of posts generally linking to news, information, family, entertainment, photos, etc. The signal in this stream is the lowest of the three in terms of monetizeable traffic.
  • Informational content, often found on sites like SlideShare, Zillow and automotive blogs is the sharing of information that is near the top of the funnel for demand creation. Things like business white-papers or product reviews are perfect examples of informational traffic. This traffic has significantly more value than topical traffic, and excels at attracting endemic advertisers in the key verticals of travel, auto, tech, financial services, real estate and pharma, to name a few. Intent is well understood in this traffic and the signal is strong.
  • Transactional content is traffic that is essentially one click away from a purchase. Obviously, traffic found on ecommerce sites is the prime example of this and search traffic is a close second, but increasingly Pinterest is proving itself to be a massive source of high-converting traffic. Here, intent is clear and the signal is strongest.

I believe, with the Facebook share price correction, we are entering a period where sites based on topical content traffic are going to struggle in generating value for themselves. Much of the valuations around the consumer web are rationalizing, and because of that, investors are once again focused on understanding business models. Social media properties building traffic around informational or transactional content will be significantly more valuable than topical ones in this forthcoming period. This general notion that every social property with scale will be able to create their own custom “social ad” units and monetize themselves consistent with their earlier valuations, I think, is flawed, unless those properties are in the two higher tiers of content.

Wither the Giants? The Arrogance of Aging Incumbents

Jan 25

My friend and former colleague Greg Scholl sent me an article this week and a provocative quote jumped out of it. Here is the view of Irwin Gotlieb, CEO of one the largest global advertising agencies on the planet, as he shared his view on this year’s CES. Given last week’s SOPA/PIPA debate, I thought Mr. Gotlieb’s observations were worth elevating, as they effectively capture a way of thinking that ultimately undermines incumbent media companies and the businesses that serve them:

 

Much of what we saw at CES relates to things we’ll be seeing 24 months out. In my mind, it’s all good: we’ll be able to target better, we’ll be able to segment better. The ads will be delivered on screens that are sharper, look better, larger, which ultimately provides more effective communication. There’s one last element: in the role that we [media buyers] play, we have a responsibility to ensure that technology develops in a manner that doesn’t shake up the supply-and-demand equation of our business, doesn’t destroy the content amortization business, isn’t disruptive simply for the sake of being disruptive.

If it does alter the supply-and-demand equation, it needs to do so positively, not negatively. When you have the share of the deal volume that we do, you can’t just be passive about it. You have to try and influence it. The technologies and devices that begin to get manifested at a trade show like this needs to be guided, so that it all works out in the best interests of our clients.

- Irwin Gotlieb, Global CEO, GroupM, originally appeared at TVExchanger.

We have a responsibility to ensure that technology develops in a manner that doesn’t shake up the supply-and-demand equation of our business.

A bold statement and, it seems, a common mindset for many incumbent business giants in their respective industries; a mistaken belief that they can somehow coax disrupting forces (be they new companies, or larger macro consumer trends) into conforming to their legacy business models and cost structures. As we have seen countless times, the actions of incumbents, when faced with technology disruption, often is to turn to litigation, legislation or other non-market strategies (i.e., anti-trust investigations, artificial price barriers) in an attempt to delay or block the challenging technology or companies. This perhaps work as a delaying tactic in the short term (Rio MP3 player case, Napster, book publishing agency pricing model with Amazon) but fails in the long term.

Mr. Gotlieb’s apparent belief that he and other advertising agency leaders can “ensure that technology develops in a manner that doesn’t shake up the supply-and-demand equation of our business” is futile in the long run but perhaps more pernicious is the implicit arrogance of thinking the market force of the web can be channeled into their bank accounts by sheer force of will. Of the many problems with this way of thinking, paramount is the ability to rationalize away making the hard choices and decisive actions to ensure the Group M’s of the world play a vital role in the new economy as they have done in the legacy one. (Cue Scotty from Star Trek…) “You cannot change the laws of physics.” For Group M and other incumbents, it’s almost difficult to fathom, given how entrenched and advantaged they are, that they could drop the ball. But, many will, as history has shown over and over again in times of market transformation.

Technology forces which bring greater efficiency and transparency to markets simply don’t care about privilege, access, and rolodexes. They disrupt predecessor markets because of structural problems like price opaqueness and false scarcity that no longer “work” in the new market. Look at Google: their entire approach to advertising is to ultimately remove the middle man just as increasingly, the media buying side of traditional agencies is the inefficient middle man, marketing up the cost of media to provide their services. Google is now selling $40B of media every year, the majority of it without a middle man (or at least with different sort of middle man … and in any case, getting far lower margins than traditional media bought by agencies.)

We watched as the music industry delayed their demise by suing Rio, Napster, and literally hundreds of others, delaying adoption of new business models not based on scarcity. We listen to Jeff Bewkes decry Netflix as the Albanian Army as he feverishly works to reduce their influence with his content. We observe the movie industry fight with everything they have to protect the windowing strategy and defend limited access to content instead of move towards open and immediate paid access to their movies. (Fantastic post on this from Rich Greenfield here, “Innovate Don’t Legislate”.)

And, as a microcosm of this larger conversation, we watched, over a very short period of time in the SOPA/PIPA debate, as the web demonstrated the disruptive advantages of network effects and scale, as over a period of weeks, legislation that appeared all but ratified was shuttered, up to and including an implied Presidential veto. Heady stuff. Granted, if we extend the metaphor and use SOPA/PIPA as a microscope, there are extremes on both sides, and it will be messy and require compromise if the big media incumbents and new technology disruptors are to learn how to co-exist. For big media companies and the service businesses that cater to them, this means recognizing the practical realities of changed business models – probably mostly that their cost of production needs to drop dramatically and they need fundamentally to re-think distribution and customer relationship management to remain profitable and relevant. On the tech side, it means recognizing that progress requires some level of institutional engagement and political compromise – because like it or not, this is the way our system of government works and how laws get written. This won’t be easy or natural, as it’s anathema to the culture of how new media tech and the startups that encompass it conceptualize and operate in our worlds. Facing reality and then demonstrating a bit more collaboration and compromise, however, would go a long way and be better for the customer, who, like our democracy, these industries ultimately serve. Because it’s the customer who is in the driver’s seat, and increasingly, they know it.

Perhaps it’s Pollyanna, but if so, my chips go on technology. Big media has the most to lose because after decades of the game being rigged in their favor, increasingly, it’s the opposite. Of course it is difficult and painful for media incumbents to embrace digital markets considering these markets ultimately are smaller and have less attractive economics. That’s presumably why big media executives are so well compensated – if it was easy, anyone could do it. The alternative, however, is to be disrupted by new entrants which don’t have any allegiance to aging business models and who could care less how out of whack someone else’s cost structure is. Coming back to Mr. Gotlieb’s view, I offer these thoughts. First, incumbents won’t be able to meaningfully guide the technology juggernaut of more efficient advertising mechanisms, so it’s perhaps better for them to focus their energies and advantages towards thoughtful reinvention. New technologies are bringing actual measurable performance and more efficient means of buying to a large share of advertisers. The challenge for incumbents is to adapt their enterprise to embrace this chaos and profit from it. The good news is, it’s doable. However, to think they can bluster their way out of this disruption is a fool’s errand.

This work is licensed under a Creative Commons Attribution 3.0 Unported License.

Fighting Disruptive Business Models Through Legislation

Nov 16

While there are countless examples of emerging technologies disrupting incumbent industries, there are very few examples of new industries beating the old through legislation. Generally, Washington influence and power is amassed over many years as nascent companies and industries grow. Few industries have the power and influence of the copyright industry. Coincidentally, very few industries are under as much business pressure thanks to tech disruption than the content industry. The two are mixing in poisonous ways.

In 1996, I had a front row seat through my friend Nicholas Butterworth and his involvement with DiMA as the Copyright industry forcefully negotiated dramatic changes to copyright law for the digital era. Most importantly, the DMCA included a hard-fought safe harbor protection for online companies providing them protection from infringement claims if they dutifully followed certain procedures. This has served our online community well.

Despite this, the copyright industry, still not comfortable with navigating the transition from analog to digital, is agressively attempting to force new changes to copyright law that would unquestionably cause lots of collateral damage to the internet and to internet companies with digital native business models (which are, coincidentally, a threat to traditional media companies). The Stop Online Piracy Act (H.R. 3261), introduced in the House in late October (which includes the most controversial parts of the Senate’s PROTECT IP Act (S. 968)), would be bad for internet companies, for internet expression, and for the future of copyright law. Right now, the digital innovation community is the likely engine of economic growth. This is not the time to hand out business model protection to traditional media companies.

More information here and here.

The Magic of Minecraft

Sep 01

On the Saturday night before Father’s Day, I called my three kids together and asked them if they’d like to earn an extra five dollars. My wife and I were having a dinner party at our home that evening, and if they agreed to take baths/showers themselves, put on their jammies, brush teeth and settle into bed themselves, they could earn the extra money. Highly motivated, they took the challenge and went to bed without parental involvement. The next morning, after awarding them their well-earned compensation, the older two (ten and eight years old) immediately asked if they could buy the paid version of Minecraft with their money. And from that moment, my eyes have been opened to a magical creation.

A view of a Minecraft world

What is Minecraft? It is a java-based web computer game the kids had been playing for a few weeks. The free version allows them to play a primitive version of the game in single-player mode. I checked out the paid version and upgraded them each for €15. The game was created by a mysterious and revered Swedish indie game developer named Markus Persson, known as Notch (@notch) and his team of 8 others called Mojang. As my kids showed me the somewhat crudely drawn lego-inspired world of trees, grass, oceans, islands, zombies, spiders, skeletons and the dreaded creepers, I was intrigued. They were mining for ore, collecting supplies, crafting new items with pre-determined recipes and sharing their learnings. There were no spaceships, no lasers, no bullets, no armies, and no blood. In place of the fast-twitch first-person-shooter games dominating console and PC gaming was a construction oriented world set in primitive times that has captured the imagination of about 10 million free users and 3 million paid users worldwide. (Yep, that’s more than $66M in revenue in less than two years.)

The dreaded Creepers!

Watching them play in parallel on two different computers, I assumed there was a multi-player version. After some googling, I found literally thousands of multiplayer serversrun entirely independently from Mojang. We tried one and found very rich worlds with scores of simultaneous players and lots of rules. Not feeling advanced enough to join these evolved worlds, some googling brought me to a free java version of the server. It was Father’s Day after all and I’d rather be playing with my kids than not, so I launched a local server in our house. It worked like a charm. We all logged in and then the magic really started. We were now playing in the same world, chatting with each other, banding together to mine, build and defend our creations. After a few hours glued to our computers and to each other, it was clear we were going to be playing this for a long time. I was flying to California that night and thought this would be a great way to keep in touch with the kids, so from the car on the way to the airport I spun up a Rackspace linux box (Ubuntu, of course), installed java, and brought the server up. I made some DNS changes to the pakman.com domain name and launched our server more publicly. It would now be possible for us to play together no matter where we all were. Quickly addicted to the tasks of mining and building, I awoke at 4am California time each morning to play with my kids online for an hour before they left for school and I left for meetings. At night I’d check out what they made. They wanted to play Minecraft every waking hour of the day. And so did I.

Creative City on the Pakman Minecraft Server

Fast forward to today. The three of us have played probably more than 200 hours of this game, mostly together. We pray for bad weather on a Saturday to cancel tennis or other outdoor commitments so we can build and explore more of our Minecraft world. My kids have invited many of their friends, almost all of whom were already playing Minecraft, to join our server. We have more than 30 kids who have tried our world and at least 4 kids on at any waking moment of the day. I have consulted other Minecraft server Operators (“Op”, for short) and become a sophisticated Op myself. I upgraded the server to an 8GB quad core box to allow more simultaneous players. I moved the world onto a RAM disk to accelerate the delivery of graphic chunks to the clients. I now wrap our server in the community-created Craft-Bukkit framework to allow me to add and modify server mods without bringing the server down (the kids hate downtime). I added an economy to our world so the kids can buy, sell and trade items in exchange for money. I added a bunch of NPCs (non-player characters) to richen the world experience. I added a Group structure. New players come in as guests with limited abilities so they cannot trash the world (“griefing” in Minecraft parlance) until we trust them and know them. We even added an alternate world called The Creative where kids are encouraged to build elaborate structures. These kids created an entire town complete with a church, fire station, castles, restaurant, airport, farm, houses and a library (okay, I made the library).

The mercurial and revered Notch

A few weeks into the experience, I got a frantic call at work. Some kids had come into the server and were destroying homes and killing players. “Dad, quick, you have to do something. You have to ban these kids from our server!” So, I banned a few of the wrong-doers. It may not surprise you to find out that the few who were banned were already somewhat known as the trouble-makers at school. Now we have griefing-protection tools and anti-cheat technology on the server to help bring a little order to the world. Not too much, but just enough to keep the community healthy. What is happening here? First, it is important to understand that Minecraft is not just a game. Although known as a “sandbox” 3D construction game where users create in a virtual world with basic rules and logic that determine the way the world operates, Minecraft is a true phenomenon. Head over to YouTube to see this first hand. There are more than one million videos uploaded by gamers showing off their creations, tips and ways to mod the game. In this video that made its way around twitter a few weeks ago, a group in the UK created one of the most elaborate looking dams I have ever seen. In another one, a group on a server created a Happy Birthday message to Notch. Most extreme? This block for block replica of the Starship Enterprise or the Arc de Triomphe. The game is actually still in beta, the server is buggy and there is very limited developer support from Mojang. Despite this, there are tens of thousands of developers who have written mods and plugins, hundreds of thousands of skins and texture packs to alter the look of the game, and many community wikis and forums with hundreds of thousands of posts and articles. (It’s not particularly easy to mod the game without a nice API…these devs are disassembling java code and hacking it to make the game work differently.) Unconvinced? Watch this Best of Minecraft 2010creations video.

Arc de Triomphe, Pyramid and the Parthenon

Notch and his unbelievably gifted team at Mojang have unlocked an enormous reservoir of creativity largely among kids. I was not too surprised to find my ten year old’s teacher allows the kids to play Minecraft in the classroom to teach construction and encourage creativity. But more than that, I am observing first hand how the players develop ad hoc rules for social interaction in these worlds. This is so much more than a game. This is the inevitable progression from one-dimensional social networks like Facebook to virtual world social networks. If the Mojang folks supported a more robust server architecture and possibly larger game maps, we could see worlds with hundreds of thousands of simultaneous players. I believe Minecraft fulfills the promise Second Life and IMVU have not; these players are not waking up and deciding to go into a virtual world. They are deciding to play and build in Minecraft and the world and social rules follow from that. Minecraft gives its players a reason to come together to interact, much like an outdoor BBQ brings us together to eat and socialize or a dance club brings us together to dance and socialize. Minecraft also presents a number of challenges to traditional video gaming in general. One of the reasons I believe kids love it is because every single block in the game is moveable and alterable. The entire game landscape can be redrawn by the players, one block at a time. This is enormously empowering to a child who lives within a strict set rules about what may and may not be touched in the real world. In Minecraft, you can touch everything. (The blocks do adhere to primitive logical rules like gravity and the effects of states of matter, so it is not a complete free for all.) In addition, the marvel of the game’s success cannot be understated. It has not even been formally released and it has 10M players? And it was developed by a tiny team (relative to big game development) who built and then leveraged a rabid community of their users, many of whom are technical enough to hack and improve the game in all sorts of unimaginable ways. So where can this all go? If the team at Mojang wanted to and thought this way, I think this game could be a platform for global social interactions and easily become the largest virtual world social network. I can see this reaching 100M players. They could more formally support the developer and multi-player server interfaces to really let the game be extended in more reliable ways. They could allow for different world generation algorithms to be used to create more variety in the basics of the map structure (which could unlock a different set of creativity). My friend (XMPP, Telehash and Singly co-founder) Jeremie Miller excitedly hopes for an ability to teleport among various servers without re-starting the game. This would require intra-world permanence of your items and state but would allow people to move from community to community very quickly. As constructed today, each client actually can create and run its own single-player game. Why not allow every client to be a server and host additional players? If they used Telehash, Jeremie points out that “anyone can portal to any other running world on any computer anywhere in the world.  Any server you’re on you can always build a “home” teleport to a world on your computer, as well as build portals from yours to all your favorite multi-player servers.” This is an exciting vision. Jeremie also suggests allowing media assets to be delivered from the server to client, currently not permitted. The only way for new characters and scenery to be introduced is to simultaneously mod both client and server. Allowing the server to add new elements to the client would obviate the need for all users to upgrade their clients just to receive new game items. This all being said, I wouldn’t change much. Ecosystems like this are fragile and are very hard to get right. Notch and his crew have gotten it pretty much perfect as it grows organically every day. I truly believe this team is quite genius. The amount of thought that went into getting this balance just right to encourage us to explore and learn on our own and then want to share our learnings is staggering. This week I purchased three tickets for me and my two kids to attend MineCon in Vegas in Novemeber, a community-created convention when the game will be officially released. Wanna come? If you’d like to try out the Pakman Minecraft Server, please send me an email and I will happily send you the address.

IPO Market Failure: More People Must Benefit from Tech’s Wealth Creation

Apr 26

This post will sound terribly self-serving: a VC calling for more IPOs. But hear me out.

The massive contraction of IPOs in the tech markets has not just hurt VCs, it has deprived citizens from participating in the largest wealth creation opportunities currently available to us. We know wealth creation in this country is largely driven by entrepreneurs. It’s entrepreneurs who create new companies. Very successful companies are wealth creation machines. Sometimes millions of people get to participate in this wealth creation. Lately, only a few thousand people have. How so?

Consider Facebook. This company has largely helped inspire and create the entire social media industry, a revolution so profound every company will eventually be subjected to its new rules of customer engagement. It continues to turn traditional media on its head and offers fresh challenges to web incumbents as well. In seven years or so, it has convinced a cool 600 million of us to join its community and power its business. It has revenues well north of a few billion dollars a year, on its way to $20B. And it grew from nothing to $70B of value in that time. How many people have participated in this massive wealth creation? Likely fewer than 5000 people. That’s the 2500 employees or so I estimate have ever worked there and received stock or options, and the 2500 or so individual investors (GPs and LPs) who have either invested directly or bought shares second hand. If I am off here, it is likely by a few thousand and not by an order of magnitude. The demand for this stock is so high that entire semi-liquid markets have been created to help manage it. Yet this stock does not trade on any public market and its ownership is restricted to just a few thousands elite investors. But this company is the single largest creator of wealth in the tech sector over the last five years or so! This is what our incredible entrepreneurial ecosystem is capable of producing, but so many are deprived of its benefit. This is broken. And the same concern applies to Zynga, Groupon, Living Social, LinkedIn, Twitter and other emerging tech leaders.

Now consider Apple, Google, Amazon, Netflix, SalesForce and other tech giants. Tens or hundreds of millions of people have participated in their incredible wealth creation. All because their stocks are traded on open, democratized public markets.

So, if I were “President of the U.S. Economy”, or even the Global Economy, one of the many things I would want to correct is this phenominon. If I were seated between Obama and Zuckerberg in the Bay Area a few weeks ago at that dinner, I would have taken careful notes of Zuck’s response when Obama hopefully posed this conundrum to him. “Tell me why you won’t be a public company?” I imagine the issues are numerous (Sarb-Ox, cost of being public and dealing with complex reporting/regulations, liability, it’s sucks being a public company CEO, etc.) but that is not a reason not to try and solve this conundrum. There are broad benefits to re-starting the tech IPO market. The NVCA and Dixon Doll have done a better job than I have in articulating this. And there are signs that things are improving with maybe 70 – 90 new venture-backed IPOs reaching market this year. But the current situation strikes me as inefficient and in many ways, unfair.

The best summary of this situation and proposed solution I have seen is the Dixon Doll/NVCA presentation here.

Thoughts on Amazon’s Locker Service

Mar 29

Amazon’s new “Cloud Player” music service is a welcome addition to the field of online music services. It is a basic music locker service in its current form, largely identical to the Myplay Locker Service Doug Camplejohn and I pioneered and launched in 1999. Users get 5GB of storage free (Myplay was 3GB free), can use a desktop uploader client app, and can click to stream music back to web and Android mobile devices. Amazon will charge you $1 per GB per year beyond that. (free upgrade to 20GB if you buy an MP3 album).

LEGALITY
The service is entirely legal. Users are uploading music they own (or have otherwise acquired), Amazon is presumably segregating accounts, and users are authenticated into the locker to stream or download back. By segregating, I mean I assume Amazon is storing individual copies of every song uploaded, rather than storing a single copy of every song and using pointers in each locker. (such a shortcut would likely require licenses from sound recording copyright holders and publishers). Amazon is also not offering sharing. I presume they are allowing only single-user sign-on to avoid locker sharing.

STORE INTEGRATION
Amazon auto-loads your AmazonMP3 purchases into your locker. Very nice. I have not yet checked if they will do this retroactively for all of your previous purchases, which would make sense.

PRICING
The pricing is somewhat surprising to me. The service is clearly targeted to people with smaller digital music collections, which is the majority of the world. Power users with large collections would find the service uneconomical. For instance, I have about 800GB of music, which would cost me $800 a year. Yet Spotify is $120 a year and gives me access to millions of other songs I don’t yet have.

WHAT’S MISSING
A bunch, actually. Obviously the lack of iOS apps is a curious omission. Also sounds like they are using flash quite a bit. Odd there is no nice HTML5 support with use of audio tags. You could imagine an amazing HTML5 player which would work fantastically well on iPad and all tablets without needing an app download. HTML5 is extremely well-suited to this application, in that Amazon could make use of the local database to store song names and metadata to mimic an ITunes-like experience in the browser. I presume iOS support is coming or will otherwise be blocked by Apple. Most disappointing is the complete lack of any social features. No integration into Facebook or existing social networks. No playlist sharing. No music news feed to see what my friends listen to. This is an area where Spotify shines. In many ways, this is not surprising since Amazon has under-innovated around social across their regular shopping experience today. In addition, they don’t seem to be offering any library clean-up tools, which could be a differentiator here (de-duping, metadata cleanup, adding missing album art, etc.) Finally, for cloud services to work really well on mobile devices, there needs to be limited playlist syncing to the local device. Spotify does this really well and prices it as a premium feature. Looks like Amazon overlooked this in the first version.

In short, the service is useful but basic as launched. It is likely to be improved over time. I am happy to have Amazon offering the service and expect others like Google will do the same. (please excuse the lack of links in this post. Writing this on my iPad in the wordpress app.)

Author David Pakman
Category Technology
Comments 5 Comments
Tags , ,

Immoveable Platforms are Toast

Mar 21

Consumers now expect rapid platform advancement. Accustomed to accelerated development cycles, the benefits of agile development and the incessant pace of innovation, no longer are we content to wait years for our consumer devices to improve. It used to take Blackberry a few years to rev its software and introduce new features. And even then they didn’t always make new OS software available to previously purchased units. Before iPhone, we didn’t expect things like free updates to the OS on our smartphone. Apple changed all that, applying the maxims from the computer OS/software industry to consumer electronics. Now, we buy a device and expect it to improve over time, not be static. We accept a few missing features, because we know they are likely to appear as a software update within the life of the device.

Before the software industry update model invaded consumer electronics, most devices used immoveable platforms. These are platforms that were certified for the device, shipped with the device, and would never change. A few examples are set-top boxes, TVs, home alarm systems and home phone systems. Innovation moves very slowly on immoveable platforms. The development model is based on infrequent, big release milestones. Immoveable platforms encourage complacency among their manufacturers. Once a device has shipped, all innovation is focused on the next product. No one tries to bring new delight to existing customers.

But now CE manufacturers think about devices as upgradeable platforms. This encourages them to concentrate on core hardware design and broad adaptable software infrastructure that supports innovation. Moveable platforms inevitably lead to developer ecosystems, public APIs and app stores. Purveyors of moveable platforms encourage others to help innovate on their platform or device. Immoveable platforms keep others away. They are almost always closed. And they underwhelm us.

To me, one of the biggest sitting ducks and one of the largest purveyors of slow, painful, immoveable platforms are the auto companies. There is a huge amount of technology in our cars: engine data and performance, usage and wear and tear information, communications system, navigation systems, audio and entertainment systems, integration with our personal data and devices, etc. But talk about an immoveable platform! Anytime you buy a brand new car, you can pretty much expect that the technology in the dash is three to five years old already. It is impossible to get state of the art from a car dealer. A whole after-market “mod” community exists to upgrade cars and their platforms, but this should be the domain of the manufacturers, and it is not. The systems are almost always closed. They can only be updated, when possible, by dealers. The navigation system in your car is significantly worse than the one on your phone. Why? Because the latest can be shipped to your phone any day as an app. Some car company chose the nav system in my 2010 car probably back in 2007 when they were designing it and testing it. And now it shows.

The solution, of course, is to get off of immoveable platforms and create a more open platform that allows new functionality to be delivered via consumer-initiated updates and third party applications. I am sure the folks who follow the “digital car” markets, like my Venrock partner Dev Khare know this stuff is coming. But it can’t come too soon. My friend Doug Camplejohn remarked that he was surprised the Tesla guys, with their Silicon Valley DNA, instead of designing their own iPad-like interface to their car control systems didn’t just include Apple’s 30 pin connector and place an iPad right into the dash. Talk about a platform!

I reward moveable platforms with my money. Hope you do, too.

Author David Pakman
Category Technology
Comments 3 Comments