Don Dodge on The Next Big Thing

Warner Music's ISP tax and the NFL Network

Warner Music is proposing a plan to charge a $5 monthly fee on your Internet Service Provider (ISP) bill for unlimited access to music...whether you want it or not. Don't worry, it is very unlikely this plan will actually succeed. All the major recording labels would need to agree to participate...and they can't agree on anything.

Mike Arrington at TechCrunch calls it "The Music Industry's New Extortion Scheme". Portfolio calls it "Fee For All". The music industry has been in a steep decline since the advent of Napster. Most of you know I was a VP at the original Napster back in the early days. You can read this post about my experiences at Napster, and conclusions about the music industry.

Warner Music tax versus The NFL Network? All of us in the Napster generation can get angry and indignant about the proposed Warner Music monthly fee. But, isn't it the same concept as the NFL Network trying to force the cable TV providers to pay a fee for EVERY subscriber to carry the NFL Network? The crux of the issue is should it be a premium channel that subscribers choose to add, or should it be a mandatory channel that everyone pays for whether they want it or not. If the NFL Network was available as a premium channel I would subscribe in a minute, and I'm sure lots of football fans would. It is all about economics. Here is a hypothetical example. If you were the NFL which would you prefer? A premium channel at, say $30 a month for the NFL season, that 10 million people might buy, or a $3 per month surtax that 200 million subscribers would pay.

The cable TV networks have mostly resisted the NFL Network demands. I think the Dish Network carries it, but most do not. The ISPs will resist the Warner Music plan too, unless the fees are reduced significantly. Competition maintains a level playing field. The ISPs know that if one of them adds the music service and raises their monthly subscription fee, that their competitor may choose not to...and customers may flock to the lower priced ISP.

It is all about the money. Today consumers have lots of choices for their Internet service, ranging from free ad supported services, to low monthly fees, to all you can eat broadband for $50 a month. Cable TV subscribers have fewer choices; cable, satellite, or phone company. Competition creates choices. The marketplace determines the appropriate price and distribution despite what Warner Music or the NFL Network might like. That is what capitalism and free enterprise is all about.

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Does your startup solve a problem? Vitamin or pain killer?

I saw 20 new startups at Y Combinator earlier this week, and 32 more startups at the Under The Radar conference today. OK, so how do you sort through all of these companies and pick winners?

There are a list of questions I ask entrepreneurs when evaluating start-ups. One of them is "Is your product a Vitamin (nice to have) or a pain killer (got to have it)? Of course everyone wants to think their product is a "must have" painkiller, but very few are. Another question I ask is "Who will pay for this, and how much will they pay?" The last question I ask myself is "Is this a product or a feature?" Meaning, will this product/service stand on its own and generate revenue? Or is it really a feature that should be incorporated into an existing product?

Many products fall into the vitamin category. Things like productivity tools, content aggregators, mashups, utilities, collaboration applications, measurement and monitoring tools, in fact anything that is a tool, development or otherwise, is by definition a vitamin.

Pain killer products are products that solve for a specific pain point. Sometimes the pain is measurable in terms of ROI, winning sales that could not be won before, or satisfying a regulatory requirement.

There is another set of products that are "vitamins" (nice to have) until you feel the pain. Then they become "pain killers" (got to have it). There are actually lots of products that fall into this category.

In the past, corporate governance and compliance applications were "nice to have". Then Sarbannes-Oxley (SOX) legislation went into effect. Suddenly these applications that were "vitamins" became "painkillers". You had to have them to comply with the new law.

Back-up and restore products for small companies or individual users are vitamins until the first time you lose a disk or significant data. Then they become "must have" painkillers. I am sure you can think of lots of products that fall into this scenario.

So, the new questions I have added to my list are; "What catalyst or event causes your prospects to actively seek your product or solution?" "When you look at all the sales you have won versus all the sales you didn't win, what was the main reason?" "Did they buy a competitive product, or not buy anything and just continue business as usual?"

Understanding what makes your product a "must have" painkiller versus a "nice to have" vitamin is the key to successful marketing. Identifying the key pain points and how your product solves them in a simple value proposition is job one. There are sometimes "trigger events" that cause these pain points. These "trigger events" cause your product to convert from a "vitamin" to a "painkiller" for customers. Qualifying your sales leads by trigger events and pain points will help focus your sales and marketing efforts and result in much higher win ratios.

Think real hard, right now. Make a list of the pain points your product solves. Make a list of trigger events that cause the pain to happen. Now think about how to identify these "trigger events" as they happen among the hundreds or thousands of potential customers. Get this right and your sales productivity will sky rocket. Get it wrong and your sales people will end up "dialing for dollars" and wondering why they are not being successful.

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Y Combinator Demo Day - which one will be the next Google?

Paul Graham, Jessica Livingston, and the Y Combinator gang held their Demo Day yesterday for 21 hopeful startups. In most cases these "companies" are only 3 months old, have two or three founders, and are just launching a beta product/service.

Google was once a two person startup - So was Microsoft, Oracle, Sun, Apple, and every other successful company. They all started with a couple founders and an idea. It is truly amazing to see how much these Y Combinator companies have accomplished in just 3 months.

What is Y Combinator? - Y Combinator is a seed stage investor/incubator with a large network of entrepreneurs, VCs, and all the people you need to start a company. It is hard to explain but it is a cross between a startup boot camp and a traditional startup incubator. The best description of Y Combinator is on its application page. BTW, they are accepting applications for the next round of companies now. Deadline is April 2, 2008.

Y Combinator success stories? - There have been a surprising number of exits/acquisitions. They include; Reddit.com, Zenter.com, TextPayMe, Anywhere.FM, and Parakey. Several have also closed Series A or B financing rounds and have gained significant traction. Examples are; Loopt, Xobni, Scribd, Justin.tv, Weebly, Disqus, Wufoo, and Virtualmin.

Best of Show? - There were 21 companies presenting. TechCrunch did a short review of all of them. Here are my picks for most interesting or promising.

Omnisio - Video editing, sharing, tagging, and annotating made easy. Omnisio lets you take a YouTube video you like and create a clip, add tags, comments. You can easily embed your custom clip in a blog or web site. Omnisio creates a link to the source video and starts playing it where you want. There is an obvious advertising play here. Omnisio could insert a short video ad anywhere in your custom clip. It also collects lots of meta data (tags, comments, links) that help describe the video for better ad targeting.

BaseShield - Provides security and virus protection by running applications virtualized, isolated environments. BaseShield effectively quarantines viruses, spyware, and malware inside the virtual environment where they can do no harm. I have seen this idea before but it is hard to get the right balance between usability and protection.

TipJoy - Makes it easy to click a tip button to donate or pay a small amount. Visitors are not required to create an account. Just click the button and type in your email address. TipJoy separates the financial transaction steps from the act of tipping, so it only takes on click. Their demo showed that PayPal takes 8 clicks to complete a payment, while Amazon takes 7 clicks. So, how does it work? When you have accumulated $5.00 in tips or payments TipJoy sends you an email and asks you to "settle" your account by paying with a credit card or PayPal. No one will chase after you if you choose not to honor your tip. TipJoy makes money by charging a 3% fee for transactions...much the same way PayPal or credit cards work.

280 North - They have developed a new way to build web applications that has the "look and feel" and performance of desktop apps. Their first application is 280 Slides, an online presentation tool, that looks and feels something like Powerpoint...if you squint and imagine what it can eventually be.

Others companies have tried to implement a PowerPoint like application in the browser...and they all come up short. 280 North has many more features and feels more like a desktop app. Most importantly, once you are finished creating your presentation you can export it to PowerPoint and present in full screen mode. The founders pointed out that it is very distracting to watch a presentation from a browser with all the tool bars visible. Presenting in full screen PowerPoint is much more engaging and professional.

The 280 North people are building a "platform" for developing lots of online applications that "feel" like desktop apps.

Other notable ideas - Capturing user data, click streams, and attention data, for better ad targeting, was a common theme among many of the companies. Addmired, MightyQuiz, Mixwit, Deluux, Wundrbar, 8aWeek, and WebMynd are fun, engaging applications,with ad targeting as an underlying monetization scheme. Each one of these applications is interesting in its own way, and will evolve into much bigger ideas than what we see today. Which one will be a big hit? Nobody knows. But, we do know there is a profitable market for good attention data for ad targeting. Someone will figure this out and make a lot of money.

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How to make your startup successful

Mike Arrington at TechCrunch wrote "Startups must hire the right people and watch every penny, or fail" This was in response to a blog by Jason Calacanis, founder & CEO of Mahalo, who wrote "How to save money running a startup". Both stories stirred up a ton of comments, mostly negative, on why they were wrong, and trashing Calacanis for being a ruthless task master.

I agree with much of what Arrington and Calacanis say, and I love this picture that Mike used in his post to illustrate failure. It is very important for a startup to hire the right people and watch every penny. Bigger companies can make a few mistakes and spend too much money on things, and still do just fine. Startups have no margin for error.

I have worked at five startups (Forte Software, AltaVista, Napster, Bowstreet, Groove Networks), and helped hundreds more. There are some common success factors like;

1. Build a product or service people want
2. Customers are willing to pay for it
3. Competitors can't easily replicate it
4. Assemble the best management team
5. Hire only the best people

Those are all obvious points...but extremely difficult to get right. It only looks easy in retrospect. Most successful startups are unique, one of a kind, at a certain point in time, non-repeatable events. If it was easy or obvious everyone would have already done it, or just copy what has already been successful.

Tony Wright, cofounder of RescueTime, a Ycombinator company, has a great post showing that for every example of success there is a counter-example. Tony points to the following examples;

• “Release Early and Listen to your users” VS “Ignore your Users and Build for Yourself.”
• “Seek out Press early and often” VS “go guerrilla until you have a brilliant product“
• “Failure to scale kills” VS “you can have tons of downtime and still grow like gangbusters“
• “Take more funding than you need” VS “overfunding kills“
• “Viral always wins” VS Google Search (which is not REMOTELY viral).
• “Design is critical for user engagement and trust” VS um…. MySpace. CraigsList. Google.
• “Starting a business on Microsoft technologies is ridiculous” VS MySpace or PlentyOfFish (2-3 people, classic ASP, a few MS servers = millions of bucks)
• Headcount! VS Keeping your team lean to force scarcity (CraigsList and 37Signals)

I talk to hundreds of startups every year. They all have some of the elements of success. VCs invest billions of dollars in startups every year. Every entrepreneur and every VC believes they are going to be successful. Very few are.

There is no secret formula or obvious path to success. Just one common trait...an indomitable desire to succeed against all adversity and doubt. Very few people have this drive and the leadership ability to attract great people to their cause. This drive is indefinable but we know it when we see it. It is sometimes misdiagnosed as being delusional and fanatical. The difference in diagnosis is success or failure. Succeed and you are a brilliant visionary. Fail and you are a delusional loser. The line between them is very fine.

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Kevin Rose, Robert Scoble, Dave McClure at MIX08

Is Web 2.0 Sustainable? What business models will work? That was the topic of our panel discussion today at MIX08. We had a diverse panel; Robert Scoble (Fast Company), Kevin Rose (founder of Digg), Dave McClure (500 Hats blogger), Ryan McIntyre (Co-founder Excite, VC at Foundry Group), and Kimbal Musk (CEO at Me.dium). 

The panel ran about 90 minutes and covered lots of topics. Some of the highlights for me were;

• Kevin Rose, founder of Digg, said it is all about the community, listening to them and providing a great service. When Jason Calacanis was at Netscape he offered to pay top Digg contributors $1K per month to submit stories at Netscape. Community was stronger than money. Nearly everyone stayed and Digg has continued to grow.
• Pownce, Kevin's new company, uses the Freemium business model. Free to use the basic service, but pay a premium for additional services. My survey of companies using the Freemium model showed an average of 3% of users will pay for premium services. Pownce is seeing the same conversion rate, and building a profitable business.
• Robert Scoble said the transition from blogging to video was easier for him because he has access to interesting people doing cool new things. Scoble sees thousands of channels focused on small topics versus just three channels when we were kids. Robert said search engines make it easy for the audience to find your video when and where they want it.
• Facebook apps can easily attract a million users. But, Dave McClure says they can easily lose them too. The best opportunity for Facebook Apps are focused on vertical markets like autos, movies, restaurants, and travel. The intersection of community and commerce is the sweet spot.
• Ryan McIntyre is a founding partner at Foundry Group, along with Brad Feld and several others. Ryan has made some great investments over the past several years. Postini (fee per user/per month), SlingMedia (hardware, no subscription), and Feedburner (free to users, but ad supported on feeds). Ryan looks for multiple revenue streams with high potential or leverage effects. They will invest from $500K to $10M, all early stage.
• Me.dium is creating a new social browsing experience, and in the process, a whole new advertising model based on real time click stream data and social patterns. The challenge is to create a great user experience while also delivering relevant advertising. If they can find the right balance it will be a huge financial success.
• Can an advertising supported business get to $25M in revenue? Jeremy Liew at Lightspeed Ventures calculated that it would take 833 million page views at $2.50 CPM to generate $25M in revenue. How many web sites generate that kind of traffic? The panel said very very few.
• How does privacy factor into this? Kevin Rose (Digg) said they try to be very open and explicit about how click stream data will be used for advertising, but totally protective of personal information. Robert Scoble said privacy is dead. There is no privacy, and the younger generation doesn't expect any.
• The consensus of the panel was that advertising is a good model if you have huge traffic that can be targeted, but all businesses should have multiple revenue streams. Freemium, subscription, pay for leads, and CPA (cost per action) are the most promising business models.

A video recording of the session will be available on the Mix08 web site. ITWorld wrote a story about this panel, and this blogger covered it well too.

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The Olympics on NBC powered by Silverlight

Microsoft announced  Silverlight V2, a cross-browser, cross-platform plug-in for delivering the next generation of media experiences and Rich Internet Applications (RIAs) for the Web.

NBC will show 2,200 hours of video from the Summer Olympics on five different channels on NBC Olympics.com. The NBC video service will have;

• 2,200 hours of live event video coverage, with more than 20 simultaneous live video streams at peak times
• More than 3,000 hours of on-demand video content including full-event replays, highlights, features, interviews and encore packages.
• An "enhanced playback mode" powered by Silverlight that gives users the choice of a high-quality full screen viewing experience that is as good or better than anything on the Internet today
• Unique metadata overlays    powered by Silverlight that enable fans to have access not only to high quality video, but also to the wealth of related content including results, statistics, comprehensive bios, rules and expert analysis from NBC's Olympic digital media team in Beijing
• Live video alerts so fans can stay connected to the events and teams they care most about
• Social networking features that enable fans to share aspects of their Olympic experience with friends

Duncan Riley at TechCrunch called the NBC Olympics demo "kick-ass". The audience certainly agreed. Lots of applause with ooh's and aahhs.

Silverlight has some big supporters;

Nokia announced they will support Silverlight technology on their S60 phone, as well as the Series 40 devices and Nokia Internet tablets.

Of course Microsoft's Windows Mobile OS will also support Silverlight.

The NBA (National Basketball Association) had previously announced they will employ Silverlight technology.

Major League Baseball (MLB) announced last year that they will support Silverlight.

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Microsoft MIX08 - IE8 features revealed. Me.dium announces support

Dean Hachamovitch, GM of the IE group, unveiled IE8 for the first time today at MIX08. There are lots of new features, but two really jumped out at me; Activities and WebSlices.

Activities lets a user highlight text on a Web page and click a button to use the highlighted words in various online services, like maps, product searches, weather, or other related web services.

WebSlices allow IE8 beta users to easily subscribe to portions of a page that update dynamically, allowing users to receive updates from that page as content changes.

For example, you could hover over a feed on a Facebook page, then a small WebSlices icon will appear. You click on the icon to subscribe to the feed.

Me.dium, a Microsoft Startup Accelerator Program company, released a special version to support the first public demonstration of IE8 today at MIX08.

“In less than a week developing on IE8, Me.dium has delivered some incredibly sticky and fun ways to stay connected with our users, while emphasizing new functionality delivered in IE8,” commented Kimbal Musk, Me.dium’s CEO. “We are excited and humbled with the trust that Microsoft has shown around IE8 development and look forward to providing even more functionality for IE users
moving forward.”

The new Me.dium features were specifically designed to highlight the new functionality introduced in IE8, including Webslices and Activities.

Me.dium now helps surfers discover and view WebSlices directly from the sidebar. The Me.dium sidebar alerts users to the presence of WebSlices on any page – and even allows users to read each WebSlice, without leaving the Sidebar. In addition, Me.dium makes real-time recommendations for other WebSlices on other relevant web pages and provides direct links to them based on the real time activity of other
Me.dium users.

IE8 will also feature Web compatibility mode, or what is called Standards Mode.

The demos were awesome, as usual. You can see a web cast of the keynotes and demos here.

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Microsoft conference week

The first week of March is a big week for Microsoft. Thanks to Todd Bishop at Seattle P-I for summarizing the events on his blog;

• Bill Gates speaks Monday morning at Microsoft's SharePoint conference in Seattle. As part of the event, the company announced plans to expand its online offerings with subscription-based versions of Exchange Server and SharePoint Server for corporations.
• Chris Liddell, Microsoft's chief financial officer, speaks Monday morning at the Morgan Stanley Technology Conference in California. Microsoft's pending Yahoo acquisition bid will no doubt be among the subjects on the minds of the attending investors, whether or not Liddell has any news to share. Webcast available here.
• Steve Ballmer, Microsoft's chief executive, gives one of the keynote addresses Monday evening at the big CeBIT technology conference in Hannover, Germany.
• Microsoft Research holds its TechFest event in Redmond on Tuesday. This is the annual science fair where Microsoft's researchers show some of their latest projects to the company's product groups and managers. Watch for coverage here.
• Microsoft's Mix08 online-technology conference begins Wednesday in Las Vegas. Among other things, the conference is expected to bring news about Internet Explorer 8, the next version of the company's Web browser. Ray Ozzie, Microsoft's chief software architect, headlines the Wednesday morning agenda. Ballmer speaks Thursday. I'll be attending Mix and posting from the event.

MIX08 in Las Vegas

Many members of the Emerging Business Team, including me, will be at MIX08 in Las Vegas. Tough duty :-)   I am moderating a panel at MIX on Thursday with Robert Scoble, Ryan McIntyre, Kimbal Musk, and Dave McClure.

There will be some interesting product announcements at MIX. Watch this blog and TechMeme for the news on Wednesday.

TechFest

I have attended TechFest in the past and always enjoy seeing all the new technology coming out of the Microsoft Research Labs. TechFest is MSR's science fair, showing many of the most advanced research projects at Microsoft. Of course it is mostly all secret so I can't write about it. Unfortunately, I will be at MIX08 this year and unable to attend TechFest.

Last year Microsoft invited several press people to the event and showed them some of the projects that were OK to write about. I will watch the news feeds to see what comes out...and summarize it here.

SharePoint Conference

There is a lot of speculation around where Microsoft is going with online services. Some things will be announced at the SharePoint conference and other things will be announced at MIX. There is a lot going on...much more than will be announced this week. Here is a quote from Bill Gates about where Microsoft is headed;

“The combination of software plus services gives customers advanced choice and flexibility in how they access and manage software,” Gates said. “With Microsoft Online Services, businesses can deploy software as a subscription service, from servers they manage on-site, or a combination of the two, depending on their specific needs. In the future, customers and partners should expect to see this kind of choice and flexibility for all of Microsoft’s software and server products.”

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