Don Dodge on The Next Big Thing

Here comes another bubble - bubble economics

Here Comes Another Bubble...a painfully funny video about Bubble 2.0. created by Richter Scales. Mike Arrington (pictured below), founder of TechCrunch makes a cameo appearance in the video.

Richter Scales, is a non-profit singing group in Silicon Valley. What makes it funny is that it is all true, yet people inside the bubble don't see. The video starts with Peter Thiel (Paypal) saying "There is absolutely no bubble in technology".

Some of the lyrics are priceless...

"Thought I had the perfect plan, took the job at WebVan"

"Suffered through the market crash, lost a giant wad of cash"

"Make your elevator pitch, code it up and flip the switch"

There are a lot more nuggets in the video. Take two minutes and watch it. It will make you smile...and perhaps rethink your investments.

A reader reminded me of a post I wrote earlier this year on bubble economics entitled "I'll Trade My Two $50K Cats For Your $100K Dog". Given the astronomical bubbl-flation I should edit the title to "Two $5M Cats For Your $10M Dog". This post explains how bubble acquisitions acquired with bubble inflated stock have no cash impact to the company, but they certainly do dilute existing shareholders. In the last bubble the impact was devastating.

In case you are scratching your head about the dogs and cats reference, here is the relevant passage;

I grew up in Maine, and I am reminded of the negotiations between two farmers from Maine at the county fair. One farmer was showing off his "blue ribbon" dog and proposing to sell it for $100,000. The other farmers were laughing hysterically at the idea of a $100K dog. Dogs don't produce income. How could a dog be worth $100K? Then one farmer stepped up and offered to trade two of his $50,000 cats for the $100K dog. The dog owner quickly agreed and bragged to all his friends how he sold his dog for $100K.

Enjoy the video...and the bubble while it lasts :-)

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Does Google have its head in the clouds?

Yesterday the New York Times said "Google Ready To Rumble With Microsoft", referring to Google's foray into online Office Apps. Today a survey from NPD says 73% of PC users have never heard of Google Apps, and another 21% have heard of them but never used them. Just one half of one percent said they use web based apps instead of desktop software.

Google CEO Eric Schmidt was asked by the New York Times if he really believed that 90% of all computing would be done in the cloud. Schmidt's response?

“In our view, yes,” Mr. Schmidt says. “It’s a 90-10 thing.” Inside the cloud resides “almost everything you do in a company, almost everything a knowledge worker does.”

The NPD survey supports what Microsoft's Jeff Raikes said in response to Google's claim;

“It’s, of course, totally inaccurate compared with where the market is today and where the market is headed,”

It is fair to say that Google has its head in the clouds. (pun intended) That is a fine place to be if you are a web search company, but that is not where office productivity software is now, or will be anytime in the near future. Google's arrogance will be its undoing. Their total reliance on internal Google engineers while ignoring customer feedback, and their lack of experience in direct sales and customer support, will not work in the business software world.

Duncan Riley at TechCrunch is singing the Google song. He proclaims "Majority of Americans on Google Docs" and says "...given the online alternatives there is little doubt that the number making the switch to online apps will continue to grow."

Joe Wilcox at eWeek takes the other view with the provocative headline "R.I.P.- The Web 2.0 Office Suite" The eWeek article included this pie chart of survey responses.

 

The eWeek article goes on to say; "The scant adoption makes some sense of Microsoft's Office Live Workspace, which went into broad beta last week. The service clearly is designed to be an adjunct to Office desktop software rather than a Web-based alternative. If NPD's numbers are indicative of real-world usage, Microsoft hasn't much to worry from Google Docs and Spreadsheets or other online alternatives. Maybe too many people make too much about the Web 2.0 threat to Office. "

Mary Jo Foley of ZDnet gets it right when she says;

To me, the way that Microsoft is addressing the so-far small number of users who want Web-based productivity software is disruptive. Microsoft isn’t listening to the venture capitalists and A-list bloggers who are ridiculing the Redmondians for not discontinuing immediately any more client-based Office development and turning Office into a Web-based product.

Instead, Microsoft is doing what the majority of productivity-suite users currently want, by adding a Web-collaboration element to Office with Office Live Workspace. At the same time, Microsoft also is sowing the seeds for a Web-based consumer office suite with the Notes and Lists components of Office Live Workspace. If and when there’s enough customer demand for such a product, Microsoft won’t be starting from scratch to build a Web-based suite.

Not rushing headlong into a bubble-licious market doesn’t equal denial. Sometimes resisting peer/pundit pressure can be pretty disruptive, too….

As I said yesterday, Microsoft has played the role of market disrupter before against IBM and the mainframe software crowd. Microsoft has adapted to many market shifts and disruptions over the past 20 years.

Microsoft has a long history in enterprise software and office productivity applications. Microsoft has done a great job listening to customers and even anticipating their needs. The recent announcements from Office Live and the investments in massive data centers signal where Microsoft is going.

Software plus Services as opposed to Software as a Service. Microsoft is giving customers the best of both worlds; powerful desktop software, complimented by web based services. It may not make headlines with the Web 2.0 crowd, but it is the best path for customers who want the best of both worlds.

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Google vs. Microsoft = Microsoft vs IBM 30 years ago

This battle of the titans has been brewing for 5 years or more. It is inevitable. Not because of animosity between the companies, but because of underlying business and technology trends driven by new customers and technology advances. There are lots of examples of this happening in many different industries. Think Toyota vs. Ford 30 years ago, or Microsoft vs. IBM.

The New York Times has a story today "Google Gets Ready To Rumble With Microsoft". The NYT interviews Google CEO Eric Schmidt, and one quote sums up the Google view that the future of computing is web based applications and services hosted in "the cloud" on the web.

To explain, Mr. Schmidt steps up to a white board. He draws a rectangle and rattles off a list of things that can be done in the Web-based cloud, and he notes that this list is expanding as Internet connection speeds become faster and Internet software improves. In a sliver of the rectangle, about 10 percent, he marks off what can’t be done in the cloud, like high-end graphics processing. So, in Google’s thinking, will 90 percent of computing eventually reside in the cloud?

“In our view, yes,” Mr. Schmidt says. “It’s a 90-10 thing.” Inside the cloud resides “almost everything you do in a company, almost everything a knowledge worker does.”

Jeff Raikes, President of Microsoft's Business Division, responds by saying;

“It’s, of course, totally inaccurate compared with where the market is today and where the market is headed,” says Jeff Raikes, president of Microsoft’s business division, which includes the Office products. TO Mr. Raikes, the company’s third-longest-serving executive, after Mr. Gates and Mr. Ballmer, the Google challenge is an attack on Microsoft that is both misguided and arrogant. “The focus is on competitive self-interest; it’s on trying to undermine Microsoft, rather than what customers want to do,” he says.

Henry Blodget, former Wall Street analyst and currently of Silicon Alley Insider, casts the debate as the classic "Innovators Dilemma", made famous by Harvard's Clayton Christensen. Henry distills the essence of 'The Innovators Dilemma" and the situation between Google and Microsoft in a few short paragraphs;

Disruptive technologies do not destroy existing market leaders overnight. They do not get adopted by the entire market at the same time. They do not initially seem to be "better" products (in fact, in the early going, they are often distinctly "worse.") They are not initially a viable option for mainstream users. They do not win head-to-head feature tests. Initially, they do not even seem to be a threat.

Disruptive technologies begin by providing a cheaper, more convenient, simpler solution that meets the needs of the low-end of the market.  Low-end users don't need all the features in the Incumbent's product, so they rapidly adopt the  simpler solution. Meanwhile, the Incumbent canvasses its mainstream customers, reassures itself that they want the feature-rich products, and dismisses the Disruptor as a niche player in an undesirable market segment.

But then the Disruptor improves its products, adding more features while keeping the convenience and low cost. Now the product appeals to more mainstream users, who adopt it not because it's "better" but because it's simpler and cheaper. Seeing this, the Incumbent continues adding ever more features and functionality to its core product to try to maintain its value proposition for higher end customers. And so on. Eventually, the Incumbent's product overshoots the needs of the mass market, the Disruptor grabs the mainstream customers, and, lo and behold, the technology has been "disrupted."

It is important to remember that Microsoft has played the role of "Disruptor" in the past, and learned a lot along the way. Jeff Raikes and Ray Ozzie totally get it. The people in charge of Office and Live get it. .

Microsoft has a carefully planned strategy to provide customers with the best of both worlds; packaged software for applications that require lots of graphics and computing power, complimented by web based services for easy access and group collaboration. Microsoft calls this "Software plus Services", and it is important because the user experience is seamless and synchronized no matter where you are. Microsoft has invested billions in huge data centers to support this vision.

On the business side there is another delicate balance. Microsoft Office is a $15 Billion dollar business. Balancing that business with advertising supported web services, or monthly subscriptions, will happen gradually over time.

Another important thing to remember is that this isn't a "winner take all" scenario. This is a huge market and there is room for different solutions and business models. Look at IBM. They are still a very large and successful company 30 years after they were "disrupted" by Microsoft.

Ultimately the customers decide who wins. Great companies adapt to changes in the marketplace. Lazy companies cling to their "tried and true" business models in the face of disruptive forces. Microsoft is a great company...so is Google. Both will be successful in their own way...and the customer wins either way. That is the American way!

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Googlepedia - Knol is Google's knowledge base

Nick Carr used the moniker Googlepedia which I think in one word sums up the essence of Google's Knol announcement. This makes a lot of sense for Google. Over 70% of Wikipedia's page views originate from a Google search. And, Wikipedia is the number one search result for LOTs of queries. As Nick Carr pointed out, this trend is increasing. Wikipedia is the trusted source for unbiased, up to date, information on almost any subject.

Danny Sullivan at SearchEngineLand got a look at the Knol service, see the screen shot below, and says this about Knol;

Google Knol is designed to allow anyone to create a page on any topic, which others can comment on, rate, and contribute to if the primary author allows. The service is in a private test beta. You can't apply to be part of it, nor can the pubic see the pages that have been made. Google also stressed to me that what's shown in the screenshots it provided might change and that the service might not launch at all.

 

Udi Manber, Google VP of Engineering wrote a blog today about Knol, and describes it this way;

The key idea behind the knol project is to highlight authors. Books have authors' names right on the cover, news articles have bylines, scientific articles always have authors -- but somehow the web evolved without a strong standard to keep authors names highlighted. We believe that knowing who wrote what will significantly help users make better use of web content. At the heart, a knol is just a web page; we use the word "knol" as the name of the project and as an instance of an article interchangeably. It is well-organized, nicely presented, and has a distinct look and feel, but it is still just a web page. Google will provide easy-to-use tools for writing, editing, and so on, and it will provide free hosting of the content. Writers only need to write; we'll do the rest.
A knol on a particular topic is meant to be the first thing someone who searches for this topic for the first time will want to read. The goal is for knols to cover all topics, from scientific concepts, to medical information, from geographical and historical, to entertainment, from product information, to how-to-fix-it instructions. Google will not serve as an editor in any way, and will not bless any content. All editorial responsibilities and control will rest with the authors. We hope that knols will include the opinions and points of view of the authors who will put their reputation on the line. Anyone will be free to write. For many topics, there will likely be competing knols on the same subject. Competition of ideas is a good thing.

From everything I have read Knol sounds like the best of Wikipedia and About.com, with great opportunities for quality traffic and advertising. Good move.

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Mark Cuban for President!

Politics, once a noble calling, has degenerated into slime ball, double speak, demagoguery usually reserved for defense lawyers. Many years ago, while I was in college, I did an internship for U.S. Senator Edmund Muskie, and later was a paid staffer for U.S. Senator Bill Hathaway. Politics was different then. Now it is disgusting.

The politicians of both major parties should listen to Mark Cuban.  Mark is talking sensibly about business and tax policy. Please read his blog post (linked above) to get the full picture. Mark has done a masterful job of explaining why taxes should be higher on the super rich, and why $250K per year should not be considered rich.

Warren Buffett has been in the news a lot lately saying that he, and most wealthy people, pay a lower percentage of income in taxes than their secretaries do. That is because Buffett gets most of his income through capital gains which is taxed at only 15%, while most people get most of their income from a W-2 salary which is taxed at much higher rates. Everyone pays a social security tax, known as FICA, of 6.2%, but it caps out at $90K of income. Everything over that is free from FICA tax. Sales tax is another regressive tax ...proportionately it effects lower income people more than rich people.

Mark Cuban actually makes sense of all of this by making several proposals.

Consumption tax on luxury items - "I would be perfectly fine paying a higher percentage of income, both in federal income taxes and as part of a consumption tax on luxury items. If Warren wants to buy or build a yacht for a hundred million dollars. Nail him with a 10pct federal tax surcharge. If I want to buy a Gulfstream Jet for 40mm dollars. Nail me with a 10pct federal surcharge above and beyond current taxes."

$250K per year is not rich - "The perspective that Hillary Clinton is offering that 250k in annual earnings qualifies you as rich is not only ridiculous but its a huge disincentive to those who work their asses off every day and have accomplished a salary that rewards their hard work. It also will impact millions who can least afford it.
I will tell you who will suffer the most if a "tax increase for the wealthy" starts at only 250k. The 50 plus year old executive who has spent the last 25 to 35 years working his or her butt off to reach a 250k salary. The 60 year old executive who is already scared shitless that their job could be eliminated tomorrow and that they have not saved enough for retirement."

Cut taxes on small business - "If we really want to stimulate job creation in this country, take the same approach to small business with fewer than 25 employees that we take to Internet taxes. Outlaw them.
No taxes of any kind on small businesses with fewer than 25 employees. No employer payroll tax. No state or local taxes. No taxes on earnings. Nada. The business owners will pay income taxes on their personal income they pay themselves, but not corporate earnings."

Mark Cuban has it right. The politicians are wrong. They want to make this a class warfare issue pitting the low income people against the high income people. Mark says raise taxes on the truly super rich, not the "high income" people who work hard every day for $100K to $250K.

Mark's idea for not taxing small business (up to 25 employees) would do more for real job growth and economic growth than anything the politicians from either party could dream up.

Give the death tax the death penalty. I have never understood the logic or fairness of the estate tax, which is really a death tax. How is it fair for an entrepreneur to work really hard to build their business, pay very high taxes on their income every year, then pay even more capital gain taxes on their investment income, then pay another 55% in estate taxes on top of all that when they die? How is that fair? Many entrepreneurs have to sell their businesses because their children can't afford to pay the estate taxes. The politicians always trot out the "family farm" example, but the far more common example is the thousands of small businesses of every description that must be sold every year to pay estate taxes.

These issues are too complicated for politicians to understand, and they don't fit into pithy 20 second sound bites...so they never get addressed. Instead we are treated to pontifications on immigration, national defense, and education. And nothing changes.

Mark Cuban, please run for president!

OK, now that is off my chest...I will return to topics I love like technology and business.

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Search engines are the Start page for the Internet

Google released its 2007 Zeitgeist list of most popular search terms. What is interesting about the list is how obvious the search terms are. Meaning, why would anyone enter these search terms, since in most cases the search term is itself the URL. Why not just type in the URL directly?

The answer is that search engines are the Start Page for the Internet. My guess is that most people have a search engine as their default home page on their browser.

There is another more subtle answer. Search engines are better at finding relevant content than the destination sites themselves. For example, if you were searching for a specific story on CNN or a specific topic on Wikipedia, would you go to that site and enter the search term on their internal search engine? Or would you just enter the term into your default web search engine? I have found that the major search engines are better at finding content than the destination sites themselves.

HitWise says that 70% of Wikipedia's traffic comes from Google searches. I know on this blog about 75% of the page views come from search engines, mostly Google.

Your regular traffic goes up when you advertise - Here is another odd fact about search engines. Search Engine Marketing people at many companies have told me that their organic search traffic goes up when they buy keyword advertising. They are perplexed as to why...and have considered reducing their advertising. I tell them to increase it. Here is why.

Free advertising -  A large portion of people don't like to click on ads. I have observed many people searching for things. They will glance at the ads on the right side bar, see something they like, and re-enter it into the search bar, rather than click on the ad. Why? They trust the search engine more than the ad. It is deeper than that. They trust the search engine to give them more useful information than the advertisement.

People are frustrated with search? I hear this all the time from the lesser known search engine people. They believe they have the answer, and can deliver better results. The facts say otherwise. The reality is that people are quite skilled at entering search keywords and finding what they want. They are not frustrated...and search traffic is increasing every month.

Search is big business. Each 1% of search engine market share is worth $1 Billion. But, even 1% is incredibly difficult to achieve. Google's market share is at 64% in the US and has been growing every quarter. Yahoo has 22%, Live has 7% and Ask has 5%. That is 98% for the top 4 search engines. AOL has at least 1% so that leaves less than 1% for the other hundreds of search engines to fight over. Not very good odds for a startup.

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Web software makes sexy headlines, enterprise software makes bottom lines

Robert Scoble says the reason bloggers and journalists don't write about enterprise software is because it isn't sexy, and doesn't generate page views...which drives revenues. He is right. Bill Gates says "The business computing market, which is way bigger than the consumer computing market, no one pays attention to it. Even in the Wall Street Journal, and you think, oh, this is the paper they're going to tell me about business computing; no, it's all about consumer computing."

To which I say - Consumer web stuff makes sexy headlines, but enterprise software makes great bottom lines. In business bottom lines matter. Given a choice between fame and fortune...I would take the fortune and leave the headline fame to others. Bill Gates has plenty of both. Maybe it is respect he is looking for. Hey Bill, you have plenty of respect too.

Donna Bogatin at InsideChatter does a great job covering enterprise software. So does Dan Farber at ZDnet.

Must be a slow news day for bloggers. Get a life guys. Hey, the New England Patriots just crushed the Steelers. And I am going to the Patriots - Jets game next week! Now that is living! Have a great weekend!

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58 Video Search companies - are any of them making money?

Video Search has been around a long time. My group at AltaVista was a pioneer in web video search back in 1996. The multi-media search technology is still in use today at Yahoo. Since then many startups and big players have entered the video search space. Are any of them making money? Are there any clear leaders?

VCs often call me for advice when they are considering investments in sectors or specific companies. I just did a meeting about the video search space. In preparation for the meeting I compiled a list, from various web sources, of companies involved in video search/sharing/tagging, and community. I was surprised to find over 50 companies, and I am sure I missed a bunch more.

My take? There is some great technology out there but no good business models or monetization mechanisms. The biggest players in the industry are making bets in this space and none of them have paid off yet. I don't see that changing for many years.

Google bought YouTube which combined great search technology with the biggest video library available. Google certainly knows the advertising game too. So, how is it working out for them? Well, the polite answer is...it's too early to tell. But, it is a good bet that they will figure it out in the long run and make it successful.

AOL bought Truveo and I would say the circumstances and results are about the same. Again, politely, it is too early to tell.

Yahoo, Microsoft, and Ask also have video search offerings. It is sort of expected that a world class search engine will have video, image, and music search. Do they attract big traffic numbers or revenues? Probably not, but it is considered "table stakes". With all these big players in the game do startups have a chance?

The innovative start-ups are not discouraged. They are charging ahead with new video search ideas. Many of them are adding social networks around video. They are adding sharing, voting, tagging, comments, and all the typical social networking features around video search hoping that will create a viable business model.

Take a look at these 58 web video companies as examples of different ways to approach the problem. In alphabetical order... 

AOL Uncut, Blip, Blinkz, Break, Brightcove, Clesh, Cuts, Dabble, Daily Motion, Dave.tv, DivX Stage 6, eefoof, EveryZing, Eyeka, Eyespot, Fliqz, FlixYa, Forscene, Google Video, Gotuit, Grouper, iFilm, JayCut, Jumpcut, Kewego, LiveVideo, Lycos Mix, Metacafe, Mojiti, MotionBox, MyHeavy, MyNumo, MySpaceTV, Ning, OneTrueMedia, PodTech,  Photobucket, Revver, SevenLoad, Soapbox, StashSpace, Sumo, Twango, Veoh, Viddler, Vidilife, Vimeo, Vmix, VodPod, Vsocial, Webshots, Yahoo Video, YouAreTV, YouTube, Yurth, Zeec and Ziddio.

What do you think? How many did I miss? Who do you think will emerge as winners? What business model will work? Should video content include video advertisements or standard text ads? Leave a comment and let me know what you think.

Oh, in case you are wondering...my advice to this investment group was to pass. There are lots of other areas to invest with better prospects for profits.

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