Disruption
David Pakman's Blog www.pakman.com

Yahoo! has been on a challenging decline for at least three years. It had an incredible reign for about 11 years and was one of the most important internet companies ever created, bringing some order to the web, first as a directory, then a search engine, a portal, and now a multi-product media company. One of the things they did right was to become a very advertiser-friendly solutions provider with enormous scale. They were also great at hiring and retaining talent for many years. Some of the very best internet executives in the business cut their teeth at Yahoo at one time or another.

It’s too early to write Yahoo’s obit, but clearly people will mention that it messed up the three most important internet tidal waves: search (it enabled Google through the legendary search deal), social (it had a fully negotiated deal to buy Facebook but Terry Semel famously killed it), and commerce/transactional advertising (missed the entire Groupon phenomenon).

But when great companies lose momentum, the best talent in the company is the first to take notice. When they start to leave, it accelerates the decline of the company. Talented workers don’t like to work at companies without positive momentum, a great CEO who has a plan, and a good vibe. Yahoo has been losing great talent for more than three years now, and this has certainly contributed to the challenges of turning it around. Those great execs are ending up at the important new companies of the interenet’s future. Here are a few:

• Dan Rosensweig went to Quadrangle
• Jeff Weiner is running LinkedIn
• Dominique Vidal is at Index Ventures
• Wenda Harris Millard became co-CEO of Martha Stewart and now helps run MediaLink
• Greg Coleman became CEO of NetSeer
• Brad Horowitz became VP Product Mgmt at Google
• Madhu Yarlagadda runs development at Skype
• Joanne Bradford is CRO at DemandMedia
• Brad Garlinghouse head up consumer apps for AOL
• Hilary Schneider left recently
• …and now Lee Brown has left and is running sales for Groupon

It goes on and on and on. There are a number of lists which track this. Lost momentum quickly takes its toll in your ability to retain top talent. And once the talent leaves, it can mean the beginning of the end.

I love the iPhone. But it is a work in progress, let’s face it. I wanted to quickly list a bunch of my specific issues with iPhone in the hopes that someone at Apple is listening out there (crazy assumption, I know…). First post of several:

1. When connectivity is limited and I choose to read/delete email, must you pop up seven different dialog boxes in rapid succession telling me “can’t get mail” and “can’t delete message”? Is that really relevant? Can’t you just queue my requests and actions and re-submit them once connectivity is re-established? Blackberry has been doing that for more than a decade. They even clue me in that a task is queued with a clock icon next to an unsent message.
2. When I am on a call and you pop a calendar alert or a text message arrived, must you make me deal with the alert before you let me have access to the phone controls again? Why force me out of the context of the phone call? Why can’t I access things like “speaker” and “end call” before I have responded to a calendar alert or a new arriving text message.
3. Push email is not compatible with the battery capacity you have chosen. Turning on push (for exchange servers) will kill the battery within 3-4 hours, rendering this feature completely unusable. Either fix it or warn users more prominently about this.
4. Why must I enter my iTunes account password every time before downloading free apps?
5. It takes 4-5 steps to delete a calendar event. Really? That’s the best UI you can come up with?
6. New calendar events: can’t I please click the hour on which I want the new event scheduled before clicking the “+” button to create a new event? The interface for setting the time is so tedious, I should be able to tell you when I want the event schedule by a simply gesture.

For decades, companies have been defining the channels their customers must use to contact them. Social media challenges the long-held notion that companies control the conversation. “We are available by phone weekdays from 9am until 4pm Eastern Standard Time” is quickly becoming a thing of the past. “We will attempt to answer the emails we receive within 48 hours, but times vary based on incoming volume” will be no more.

In a world where any customer can, in seconds, tweet or post to Facebook a pithy product review or share an experience they had with a brand, companies are forced to entirely rethink how they interact with their customers. Step one, probably the hardest step, is realizing they are no longer in control. The power of social media has empowered the consumer to reach literally hundreds or thousands of people in seconds. And because we know a consumer’s closest friends are three to five times more likely to share the same preferences for products and brands, this newfound power is not to be underestimated.

Sure companies have Facebook pages and Twitter accounts. Yes, a few thousand companies are already searching Twitter for mentions and engaging customers. This is but a start. The real transformation happens when the companies let go of the conversation and instead work to nurture it. The brands who offer tools to their customers to increase the amount of conversation and encourage their customers to discuss the pros and cons of their products will be the winners who emerge from this disruptive time.

Companies like Get Satisfaction and UserVoice offer tools that change the balance of power between a company and its customers. Get Satisfaction has a fantastic manifesto, or “Company-Customer Pact” (http://getsatisfaction.com/ccpact), which defines a new relationship between a brand and its customers, encouraging public dialog, warts and all, but expecting productive discussion in return for the company’s helpful engagement.

While product forums from companies like Jive Software have been around for many years, I believe public conversations about brands will now be distributed in nature, spread across the web into thousands of tiny corners. The challenge for companies is figuring out how to manage this. A conversation could start with a tweet, be directed to a help forum, be responded to in email, updated in a blog post, and then broadcast on Facebook. How will this be tracked, measured and monitored? This market is ripe with opportunity for both brands and software platforms built to nurture the distributed web-wide conversation. And brands who are seen supporting a public dialog will engender more respect from their customers than those who turn a blind eye to it, or worse, try to shut it down. Ultimately, companies become more customer-centric from this disruption. I am sure United Airlines wishes they had just paid for the passenger’s guitar they broke now that the music video he recorded chronicling the ordeal spread virally and has been viewed more than five million times!

The company/customer relationship is but one relationship forever changed by social media. Similar transformations are happening between companies and their employees and companies and their vendors. New companies and tools will emerge to address these situations. At Venrock, we are looking for the entrepreneurs that are pioneering this space and embracing this opportunity. I would appreciate your point of view.

(This post appeared on Fast Company.)

I am very lucky to be a VC at a prestigious firm link Venrock with such a celebrated history. This year, Venrock turns 40. To commemorate that, we created a book detailing 40 Venrock entrepreneurs and the companies they built. It’s an inspiring read and motivates me to want to work with the highest caliber entrepreneurs and together create such meaningful companies who have, quite literally, shaped the future. Have a look, and please let me know your thoughts.

You can see the book in full-screen mode if you click the button.

For a paper copy, or more info, go here.

I am excited to announce that Media6Degrees has joined the Venrock portfolio. News is here and the press release here.

Social networking is consuming a larger amount of our time spent online. Social media sites attract more than 650M visitors a month and drove more than 2.1 trillion page views last year. A substantial amount of social media ad inventory has gone unsold and, despite lots of trying, few companies have figured out how to use the data gathered by our social media browsing and deliver relevant ads based on it. When search exploded, it created huge ad inventory that was highly monetizeable, since search expresses intent on which ads can be precisely targeted. The growth in social media has largely failed to create a meaningful platform for advertisers to help monetize this creation, especially on a measured ROI basis. With so much more advertising going performance-based (as I have written about before), this problem is ripe for a technological solution.

Enter Media6Degrees, an impressive NYC advertising technology company. They have mapped the social graph (so far on the order of 80MM people) and provide major brand marketers with a way to reach scalable, highly targeted audiences. They are a behavioral targeting ad network, and use their understanding of the social graph to target not just people within target segments, but the people connected to those people who display high degrees of homophily, the tendency of like-minded individuals to cluster with other people who strongly resemble them.

The company is doing fantastically well and the CEO and Founder, Joe Doran, is a true thought-leader in the social media/behavioral targeting space and the ad tech ecosystem in general. I am proud to be associated with this company and its team and am honored to join my fellow investors from Coriolis Ventures, Contour Ventures, and USVP.

I love TiVo. We all do. I have three of the older models. I use DirecTV so I can’t use the newer ones. As a result, I missed something amazing that has been happening on these devices.

Last week I visited a friend who has a few Series 3 Tivos. They are all networked. On these newer devices, TiVo saves you the trouble of needing to set each different TiVo to record the same shows. If you are in the living room and want to watch something recorded on the bedroom unit, no problem! You can access your recorded shows from any networked TiVo in the house. Brilliant, right?

Wrong. More than half of the shows my friend had recorded in one room were not able to be played back in another. Why? “This show cannot be played due to copyright restrictions.”

That’s right. It appears as if certain studios are instructing TiVo not to let their shows be shared from one device to another. Now of all the places to exert control over user behavior, why this one? There is no risk of piracy here. A consumer, in his own home, time-shifted TV in his bedroom. This network feature only lets you move shows around from one device in the home to another in the same home (on the same subnet). How does this impact the Studios? It allows me to watch the show where I want it. What is gained by inconveniencing the consumer?

Last week, before getting on a plane, I spent 25 minutes on the iTunes store looking for some TV shows or movies to add to my iPod. I keep my list of must-see movies in my Netflix queue. Of course, due to DRM issues, I can’t watch my Netflix “watch now” movies (which I am paying $18 a month for) on my iPod. Apple’s store had two out of the 43 movies in my queue. Neither were available for rent. I could buy them for $14 each. No thanks. Much easier just to Torrent something quickly.

Once again, the big media companies fail to grasp that the consumer is in control here. If they don’t make it reasonably easy for me to spend my money (and sell me their media at a fair price), I just won’t. Or worse, it makes piracy more compelling. It’s just plain easier to steal a TV show or a movie today online and get it on your portable device. Well, to be fair, iTunes/iPod is very easy, but at $14 a movie, no thanks. Some are available for rent, but not enough. And with iTunes rental, once I start the movie, it blows up after 24 hours. So much for falling asleep in the middle of watching one. Granted, streaming video online is getting better, but I was going on a plane. Streaming was not an option for me.

And why stop me from doing something completely legal (time/place shifting of my recorded TV show) in my own house? There isn’t even a compelling business reason to do so! It’s just anti-consumer for the sake of it. Here we go again.

In 1996, when many of us were lauding and forecasting the impending digital transformation of media, one observation we made was the great margin enhancement likely to result from analog media turning digital. We saw the disappearance of physical goods as a reason to expect margins to expand. No more trucks to distribute newspapers, no more physical COGS for plastic shiny discs, no more giant warehouse and inventory costs tying up valuable capital.

But two things are happening to undermine that: First, markets are efficient. As the lower digital cost structures appeared, margins naturally compressed to take advantage of that. Second, as advertising for the first time because highly measured, CPMs plummeted based on the (newly discovered) efficacy of online marketing. Where TV CPMs can be $80, video ads online fetch $25 CPMs. Many people argue that this is because TV is “more valuable” a medium. I contend it is simply because we can actually track who is watching online, and it’s far fewer people than we expected to find. If we knew the truth about TV ads, advertisers would not pay $80 CPMs.

Jeff Zucker, in one of the few comments of his with which I agree, said…

“Our challenge with all these [new-media] ventures is to effectively monetize them so that we do not end up trading analog dollars for digital pennies.”

Well, that is exactly what is happening, and it cannot be stopped. The “new” super-blog newspapers and magazines like Huffington Post, and Silicon Alley Insider will continue to be fantastically successful delivering a product highly appropriate for this medium. But they will do so with vastly reduced cost structures more appropriate for the modesty of their business size. They will fetch $10 – $20 CPMs (maybe a bit more when highly targeted) and deliver revenues of $10M – $40M at maturity. Those are interesting numbers when their cost basis includes 10 employees and some space on Amazon S3 and EC2. But these new web businesses do not support housing your employees in a landmark building at 43rd & 8th or the CondeNast building at 4 Times Square. And Hulu and Veoh won’t support the compensation structures and elaborate media exec pay packages at NBC.

Indeed, we now know that digital shrinks the pie. Something like for every $1 of ad revenue that goes to Politico.com or YouTube probably takes $5 away from a traditional media company. The new businesses are taking audience away, selling advertising for less, and doing it all for a fraction of the cost. The good news is that this is disruptive and new value is created elsewhere. The flip side is that the new businesses will have tighter margins as a result of the great efficiency available online. Hey, at least there are no trucks and warehouses.

The only way it makes sense to bail-out the poorly-run and dying US automotive industry is with severe requirements attached to the money. Here’s what I would do:

1. All three must immediately enter Chapter 11 and the US Gov’t becomes the debtor-in-possession.
2. During Chapter 11, the US Gov’t will guarantee the warranties of any cars purchased.
3. Each automaker must close 40% of their factories, 40% of the dealer network and discard at least half of their brands. It doesn’t make sense to keep Buick and sell Volvo. No sacred cows. Under-performing brands are gone.
4. By the end of 2010, no single non-truck vehicle can be sold that gets less than 40 mpg
5. The existing UAW contracts are immediately terminated. The US will assume normal pension benefits to existing retired and terminated workers. All wages, heathcare, and so-called “job bank” programs will be re-neogtiated in accordance with the bankruptcy process. The new UAW deal will reduce wages and all-in labor costs to be 10% less than that of Toyota.
6. Every worker terminated as part of the restructuring can choose to enter the largest job/skill retraining program since the WPA. For one year, a US-sponsored program will retrain every worker to learn how to build solar panels, nuclear reactors, and other clean-tech products. During that one year program, each participant will be paid a fair wage equal to the equivalent salary of a similarly-skilled Toyota employee. At the end of the one year retraining program, the worker is on their own and may have to move to join the green tech companies that will quickly emerge from this program.
7. Each company will sign an agreement forbidding any lobbying on CAFE mileage standards, pollution standards, or OSHA worker safety rules for a period of 25 years.
8. Every C-level and EVP executive in the company is immediately terminated without severance and may choose to enter the job retraining program. Key executives may be selectively re-hired at adjusted salaries but will likely be replaced.

The companies will emerge leaner, stronger, and focused on building competitive, high mpg automobiles at reasonable cost structures. Unless a litany of conditions such as this is placed on all the capital offered to the companies, I am adamantly opposed to a bail-out.

What do you guys think about this?

An open source VC. Suppose I exposed an API that gave you access to every pitch Venrock sees? You could get access to every deck we get and all the work product we produce as we evaluate an investment. There is a lot of data inside Venrock on the performance of past investments, the best structures which produce the best returns, etc. We could group collaborate on valuing the likely outcomes of the company. We could collectively monitor the twitterstream, the blogosphere and crowdsource the view of our network as to the likely prospects of the company. Once we decide to invest, we could use our collective networks to promote the company, create distribution deals for our companies, and otherwise work to build it into a successful enterprise. For every deal we decide to do, we would create some sort of carry-sharing where the economic upside is distributed among those in the network. Not sure how we divide up the spoils in a way that is fair. More to come on this, but surely there is power in the network we have assembled. Thoughts?