Don Dodge on The Next Big Thing

Microsoft innovation in Boston/Cambridge

Microsoft is making a big investment in innovation in Cambridge, Massachusetts. The Boston Globe has a front page story about Microsoft's new Concept Development Center led by Reed Sturtevant. Reed was recruited by Ray Ozzie and his brother Jack to build the new lab.

The Boston Globe story says;

Boston software legend Ray Ozzie replaced Bill Gates as Microsoft's chief software architect in 2006. Ozzie has been pushing for a transition from the desktop software that accounts for the bulk of its revenue to the Internet services that are the wave of the future.

"Microsoft is making a big investment in Massachusetts," said Reed Sturtevant, 51, the director of the Boston Concept Development Center, who worked with Ozzie in the 1980s at Lotus Development Corp. and joined Microsoft last fall. He's spent most of his time so far recruiting. "There's a huge amount of talent in Boston," he said, "and the question is, how do you bring new talent into Microsoft?"

Microsoft's presence in Massachusetts is growing with the acquisitions of Groove Networks, Softricity, and Danger Inc. Microsoft is also growing internal product groups in the Boston area and consolidating many of the groups at One Memorial Drive in Cambridge.

Ray Ozzie, creator of Lotus Notes, and founder of Groove Networks, has lived and worked in the Boston area most of his life and wants to see Microsoft build a much larger presence over time.

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IPO market ups and downs - Q2 worst in 30 years

Not one single VC backed company went public in the 2nd quarter of 2008 according to the New York Times. The last time that happened was 30 years ago. However, 2007 was one of the best years for IPOs since the dot com bubble of 1999. Such are the cycles of VC investing and IPO exits.

	Investments	Returns
Year	VCs	M&A	IPO
2001	$32.1	$16.8	$3.5
2002	$22.1	$7.9	$2.1
2003	$19.6	$7.7	$2.0
2004	$22.4	$15.4	$11.0
2005	$23.7	$16.0	$4.5
2006	$25.5	$17.1	$5.1
2007	$29.4	$25.4	$10.3
Totals	$174.8	$106.3	$38.5

Fear is temporary, greed is permanent. We are in a "fear" cycle now. There is fear in the public IPO markets due to slow growth, high oil prices, and recession fears.

VCs continue to raise funds and invest aggressively. Last year VCs invested nearly $30 Billion, the most since 2001. VCs have a long term view. They don't expect their investments to pay off for at least 5 years, sometimes much longer.

Fred Wilson has an interesting post today that includes this 10 year chart of the Dow Jones Industrial Average for the 1970s.

The Dow tanked in 1974 when OPEC put on an oil embargo that caused wide spread shortages and gas prices to sky rocket. The 70s were a dismal decade for business and investing. The Dow hovered around 900 and hit 1,000 just twice in the decade. It is hard to imagine now with the Dow around 12,000, but we have seen massive swings, up and down, in the 30 years since the last oil crisis.

Is this IPO market "goose egg" a one time thing? Will M&A transactions remain strong? What do you think?

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Dan'l Lewin in San Francisco Chronicle

Dan'l Lewin is Microsoft's Corporate VP for Strategic and Emerging Business, based in Silicon Valley. I work in Dan'l's organization so it was a treat to read a story in the Chronicle about Dan'l's work with VCs and startups around the world.

Dan'l is a legend in Silicon Valley where he was one of the early employees at Apple, and later started Next with Steve Jobs.

Dan'l (that is not a typo, that really is his name) was hired by Steve Ballmer almost 8 years ago to oversee Microsoft's global relationships with venture capitalists, startups and Microsoft technology partners as well as industry and community organizations in Silicon Valley.

Great quotes from Mike Moritz of Sequoia Capital "He ensures nothing gets lost in translation between here and Redmond" and Sam Altman, CEO of Loopt "Were it not for Dan'l - if we just knew Microsoft by reputation - I don't think we'd be working with them nearly as closely as we are."

The Chronicle story goes into how Microsoft works with VCs and startups, what areas are hot now, and how Microsoft handles acquisitions. You can read the whole story on SFgate, the Chronicle web site.

TechCrunch 50 Conference panel of experts

Mike Arrington and Jason Calacanis asked me again this year to participate on the TechCrunch 50 panel of experts. TechCrunch announced yesterday that Mark Cuban, Marc Benioff, and I will be on the panel. I am humbled…and honored to be mentioned with those guys.

The complete list of “experts” is listed here. They include; Mark Andreessen, Marissa Mayer (Google), Jeff Weiner (formerly Yahoo), Chris DeWolfe (MySpace), Sheryl Sandberg (Facebook COO), Kevin Rose (Digg), and journalists Dan Farber and Om Malik.

TechCrunch 50 will be on September 8-10 in San Francisco. Companies can submit applications to participate here.

The panel of experts will sort through the hundreds of applications and narrow it down to 50 companies who will present at the conference. We will also judge the company presentations at the conference and select winners in various categories.

TechCrunch40 sold out quickly last year. Register here for TechCrunch 50.

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First Mover vs Fast Follower - Who wins?

Innovation drives our industry, attracts the best talent,  attracts VC money, and wins fame for its leaders. Innovation leaders burst onto the scene, win early market leadership, but sometimes can't sustain the pace. Why do "fast followers" often jump in later and make fortunes? Is management responsible for the success or failure? Or, are these innovation leaders acquired by larger players before they have a chance to evolve into successful stand alone companies?

I have been on the leading edge, sometimes bleeding edge, of technology for most of my career. I have been fortunate to be part of start-up teams that have created "first-of-its-kind" innovations at companies like Forte Software, AltaVista, Napster, Bowstreet, and Groove Networks. All of these companies were first in their field, yet few of them realized the financial rewards one would expect. Is it all timing and luck? I don't think so.

Before exploring the reasons for success or failure lets review a list of innovation leaders and fast followers.

• AltaVista -> Google
• Napster -> iTunes
• VisiCalc -> Lotus 123 -> Excel
• Word Perfect -> Word
• Netscape -> Internet Explorer
• Apple Newton -> Palm Pilot -> Blackberry
• IBM PC -> Compaq -> Dell
• Double Click -> Google Ad Sense
• Ofoto -> Flickr
• Compuserve -> AOL -> @Home -> Comcast & Verizon

All of these companies were innovation leaders and market leaders. Yet, they were eclipsed by fast followers, in some cases multiple times, who imitated their innovation. My belief is that the technology was outstanding...the management was not.

Clayton Christensen wrote The Innovators Dilemma which I reviewed in an earlier post. The basic premise of the book is that management optimizes around protecting their existing business and fails to recognize and react to disruptive threats. However, the examples in Christensen's book play out over 10 or 20 years. The above examples played out in 5 or less years. Are the same factors at work here? Lets take a look.

AltaVista was the first search engine and the clear technology leader. The management at DEC didn't understand what they had and didn't invest the necessary resources to make it a business success. Later Compaq and CMGI squandered the search opportunity and tried to imitate Yahoo, Excite, Lycos, and AOL in the consumer portal game. Big mistake. Fault management.

Napster was the first P2P file sharing application to bring together search, FTP, and Instant Messaging. Brilliant technical synergy. There are lots of reasons for failure here, mostly management decisions and unfortunate timing.

VisiCalc was the first spreadsheet, invented by Dan Bricklin and Bob Frankston. I know Dan fairly well but have never asked him why he thinks VisiCalc fell behind and Excel moved ahead. This topic deserves its own post. My memory is that VisiCalc was slow to adopt the DOS platform. Lotus 123 moved ahead on DOS and achieved market leadership, but failed to jump onto the Windows platform fast enough. Excel did make the move and the rest is history.

IBM created the PC revolution and was the early leader. Compaq was a fast follower focusing on "transportable" PCs and won huge market share. Dell came in later and trounced them all with a better business model.

Compuserve was the first dial-up service provider. Together with Prodigy they dominated the market. Later AOL entered the game with superior marketing and original content. AOL absolutely dominated in the 80's and early 90's. Then @Home created the cable Internet market and took the early lead. It wasn't long before Verizon, Comcast, and other cable providers owned the broadband market. AOL never really made the transition from dial-up to broadband.

In nearly every case the early innovators were eclipsed by fast followers. Why did the fast followers take over market share leadership?

• Better business model (Google, Ad Sense, Dell)
• Better market position (Word, Excel, Comcast, Verizon)
• Better timing (iTunes, Flickr)
• Better platform choices (Blackberry, Word, Excel)
• Better management (all the fast followers)

It is overly simplistic to pin the success or failure of these innovators on one factor. There were a combination of factors at work. But in most cases the problem was not inferior technology, it was inferior management decisions.

So, were these early innovators led by technical visionaries who were not good managers? Will the imitators  and "fast followers" suffer the same fate and be overtaken by new fast followers?

The list of "fast followers" above are more than just imitators. They have continued to innovate far beyond the original idea or feature set and have maintained market leadership. If you look closely at these companies they have a  mix of technical visionaries and business management leaders. I discussed this with Robert Scoble who pointed out that it takes a different set of skills to start a company than it does to sustain a company. This balance of skills, I think, is the key to sustained market leadership.

Cisco is an example of an early innovator that kept their market leadership position over time. Their technical founders brought in professional managers to take them to the next level.

There is a rare breed of technical visionaries who are also great business leaders. Bill Gates, Gordon Moore, Larry Ellison, and Scott McNealy are examples. They are truly extraordinary and rare. However, I suspect that each of them has a strong business management team behind them. Bill Gates has Steve Ballmer. Larry Ellison had Ray Lane. The early innovators who failed did not have the business leadership necessary to sustain them.

Lessons for entrepreneurs;

• Never stop innovating
• Build a well rounded management team early
• Value sales and marketing talent as much as technical talent
• React quickly to disruptive technologies or business models
• Don't be too proud to imitate when it makes sense

NOTE: This is a reprint of a story I wrote three years ago. I was speaking at a conference today and several people asked me about this story. I thought I would reprint it for the benefit of my new readers.

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11 Billion videos served - Profits ???

Comscore says Americans watched 11 Billion videos in April. Nearly 75% of Americans with Internet access watched at least one video. The "average" user watched 82 videos. Average length was 3 minutes. Hmm...I guess I am way below average.

John Paczkowski at AllThingsD says most of those 11 billion videos were unmonetized.

Mark Cuban says Hulu is making more money at video than YouTube. Although Hulu is tiny by comparison, they are better able to monetize their traffic...and use YouTube as a traffic generator.

 

Google / YouTube streamed over 4 Billion videos. Hulu wasn't even in the top 10. This is a case where bigger isn't better. My guess is that 5th place Viacom made way more profit on their videos than YouTube made streaming 20 times as many videos. Google CEO Eric Schmidt admitted in a recent interview that they haven't yet figured out how to effectively monetize YouTube.

Video is incredibly expensive to host on servers and stream out to users. YouTube is loading 10 hours of video every minute of every day. Imagine how much storage and bandwidth it takes to handle that. The costs are staggering. The revenues? Not so much.

Andrew Chen asks "where are all the video startups on this list?" Simple answer Andrew, the online video business is way too expensive for any startup to compete on volume. Every company on this list is a huge media company because the costs of creating, hosting, streaming, and audience building is enormously expensive. Well beyond the means of any startup. However, there is a place for clever startups like Hip Mojo. Small is beautiful...and profitable.

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Amazon, Twitter, Disqus down. Do you really want your data in the cloud?

I woke up this morning and checked TechMeme to see what was happening in the tech world. Three stories jumped out at me. Amazon was down due to a Denial of Service attack. Twitter has been down many times over the past few weeks. Dave Winer says he needs a Plan B for Twitter. Disqus, the blog commenting service, has also been down several times recently.

So, I decided to write a quick post about the unreliability of cloud based services. Normally I use Windows Live Writer, a desktop based program, to compose my posts. But, since this was going to be a quick post with no graphics or photos I decided to use TypePad's web based service. Big mistake. It crashed when I tried to run the spell check service just before posting. I swear, I am not making this up.

Typepad provides a browser window to compose your post. Then when you want to use spell check it calls out to another service and runs your text through it. At precisely this point the service failed. Actually it said it was running the spell checker...forever. I decided to let it run for a while to see if it would recover. Nope. I tried to refresh the screen. It said if I navigate away from this screen all work would be lost. It had already been 20 minutes and nothing else seemed to work so I tried the screen refresh. Gone...everything gone. I tried the back button. No luck.

TypePad has lost my posts under similar circumstances probably 10 times out of 300 posts. So failing 3% of the time isn't bad, right? No way. That is why I stopped using TypePad for posting a long time ago. I thought I would be OK with a quick simple post. But, no, screwed again. That is it for me. Never again.

The web fanatics and blogosphere would have you believe that all applications will move to the web. Some will, most will not. Reliability, scalability, security, and a host of other issues will prevent most businesses from moving their mission critical applications to hosted services or cloud based services. The risk of failure is too great.

Amazon is the leader in cloud based services, but even Amazon has experienced down times for its own business. Cloud services will continue to improve. But my guess is the uptake will take longer than most people predict. Today was another reminder of the reality and risk.

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The Web 2.0 Bubble Debate

Is Web 2.0 headed for Bubble 2.0? That was the subject of debate at the TiECON East Confernece. Fred Wilson (Unionsquare Ventures), Don Dodge (Microsoft), Nabeel Hyatt (Conduit Labs), and Brian Balfour (Viximo) had a lively debate and arrived at very different conclusions.

All booms go bust - Business runs in cycles. All big booms have been followed by painful busts. The market is ruled by two things; fear and greed. Greed fuels the boom, and fear prolongs the bust. Fear is very powerful. Everyone starts to question their own beliefs. But, fear is temporary, greed is permanent. We have all pretty much forgotten the Dot Com Bubble. Greed and optimism always overcome fear and lead a new economic boom.

Hundreds of smaller successes- Fred Wilson believes there will be hundreds of companies with smaller successes, not a few billion dollar successes. Facebook and MySpace get all the headlines but hundreds of smaller companies with $50M in revenue and $20M in profit will be successful. But, will VCs invest in these companies? Lots of VCs look at Web 2.0 companies and say "I like the concept, and I like the team, I'm just not convinced it will generate VC level returns at exit."

Capital efficiency matters - Web 2.0 companies can be launched for far less money than ever before. Many don't take VC money at all. The point is that capital requirements and operating cost structure must be commensurate with the opportunity.

Is advertising the only revenue model?- Too many startups point to Google and Facebook as evidence that advertising is the best path to success. They fail to understand the scale (users and page views) required to make it work. Most social network sites generate CPMs of $0.40 or less. To generate $1M in ad revenue would require 2.5 Billion page views. Not many sites attain that scale.

Freemium Model- Free services like Flickr, TypePad, and others provide a free service with premium upgrades for more storage, more features, or other services. This model works as long as the marginal cost of providing the service is close to zero. Conversions from free to paid run about 3% to 5%, so the revenue from paid subscribers must cover the cost of all the free service plus provide a profit. Think of the cost of free service as marketing costs...and make sure it fits your business model.

Virtual or Digital Goods-  The cost of goods and distribution costs of digital/virtual goods is almost zero. Ringtones, avatars, icons, virtual flowers, widgets, virtual cards, and lots of other products are producing big revenues (and profits) for web companies. Socializing online is similar to real life. We want the same sorts of fun, impulse items, and entertainment online, and we are willing to pay a few bucks for them. The gross profit on these impulse items is huge.

New models?- Social networks and word of mouth recommendations are powerful. All the demographic data, ratings, attention data, profiles, and social connections will enable new ways to target advertising and ecommerce. Advertising is annoying when it is irrelevant, but very helpful when it is timely and relevant.

Facebook's Beacon attempted to leverage the social network and user intentions into a new advertising and revenue model. It didn't work, but something like it will emerge that strikes the right balance between privacy and convenience. Being able to selectively opt-in or out is critically important.

One panelist said "Privacy doesn't matter anymore. If it did, Facebook, MySpace, and YouTube wouldn't exist. This is the "Full Monty" generation." The trend is certainly in that direction, but the Facebook Beacon experience suggests we aren't there yet.

Conclusions?- Web 2.0 and social networks have already changed the way we interact on the Internet. There have been some successes like Facebook, MySpace, and YouTube, but future successes are likely to be smaller.

Valuations and expectations are reaching "bubble levels". New revenue models will emerge that leverage our social interactions. Most business cycles run for 10 years, and we are in the early stages of this social network cycle.

MacroMyopia, the tendency to overestimate the short term impact, and underestimate the long term results, is evident today. It is similar to the hype cycle; a period of early hype, followed by disillusionment, followed by real payoffs and impact. It happens in every business cycle. The question is, where are we now in the cycle?

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Social Networks 1% rule or The Community Pyramid

What is the social network 1% rule? Generally in a group of 100 people online, one will create content, 10 will "interact" with it (commenting or adding to it) and the other 89 will just view it. But, everyone benefits from the activities of the whole group.

Bradley Horowitz,  an old friend from my AltaVista days, and one of the smartest guys I know uses this simple illustration to convey the idea.

I have seen this natural hierarchy many times. My experience with SiliconInvestor, one of the first investment discussion boards on the web, matches these findings. The contributor to commenter to reader ratios were about the same. Later at Napster I saw a similar pattern. Very few people shared their music collections while millions downloaded.

Web 2.0 social network sites are finding the same thing. It takes a relatively small group of contributors to create the content. These contributors attract the commenters or editors, which in turn attracts the huge audience.

At Wikipedia about 50% of all article edits are done by 0.7% of users, and more than 70% of all articles have been written by just 1.8% of all users, according to the Church of the Customer blog (http://customerevangelists.typepad.com/blog/).

Fred Wilson says his vision for social media is; "every single human being posting their thoughts and experiences in any number of ways to the Internet." TechMeme has picked up Fred's post, contributors are sure to follow, and thousands of readers will enjoy the benefits.

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