Recently, Stephen Colbert swung by Google’s New York Office for a turn as interviewee at the hand of chairman Eric Schmidt. After opening with an esoteric question about what the title of Colbert’s newest book means — it’s called America Again: Re-Becoming the Greatness we Never Weren’t — the conversation moves on to the infamous Bush White House Correspondents Dinner and the differences between Colbert the man and Colbert the character. The comedian lets the truthiness fly when Schmidt jokingly tries to cajole him into starting a YouTube show, saying "does that violate my contract with Viacom to have that? You guys had a billion-dollar lawsuit against each other, you realize. And Sumner Redstone would rather see your head on...
How can we make sense of it all?
A few weeks ago, I had dinner with Saumil and Sailesh, co-founders of LocBox.* Instagram had just been acquired by Facebook and there was speculation (later confirmed) about a big up round financing of Path. The recent large financing of Pinterest was still in the air, and the ongoing parlor game of when Facebook would go public and at what price was still being played. A couple of months prior, Zynga had acquired OMGPOP.
Sailesh wondered aloud, “How much time do we have for any of these?” “How many of them can coexist?” and “Do we really need them?” My answers were, respectively: “A lot.” “Many of them.” and “No, but we want them.” That dinner discussion prompted some observations that I am outlining here, and I invite you to share your own observations in the comments below.
In a nutshell, the Internet has evolved from being a need-driven utility medium with only a handful of winners to a discovery-driven entertainment medium with room for multiple winners. The necessary and sufficient conditions for this evolution are now in place — broadband, real names and tablets are the three horsemen of this New New Web. As consumers, entrepreneurs and investors, we should get used to the fact that the online economy is increasingly blurring with the offline economy, and in the limit, that distinction will disappear. As a result, just as in the real world, the Web of entertainment will be much bigger than the Web of utility.
A Theory of Human Motivation
One framework for understanding the consumer Internet is Maslow’s Hierarchy of Needs, which Abraham Maslow put forward as a way of explaining human behavior at large. The core premise is that once our basic needs of food, shelter, safety and belonging are satisfied, we tend to focus on things that are related to creativity, entertainment, education and self-improvement. A key aspect of this framework is that it’s sequential: Unless the basic needs are met, one cannot focus on other things. As an example, a study in 2011 showed that humans who are hungry will spend more on food and less on non-food items compared to those who are not hungry. Using this framework, we can see how consumer adoption of the Web has evolved over the last 20 years, and why all of the ingredients are only now in place for consumers to use the Web for what Maslow called “self-actualization” — a pursuit of one’s full potential, driven by desire, not by necessity.
1992-2012: Web of Need
Between the AOL IPO in 1992 and the Facebook IPO last month, the Internet has largely been in the business of satisfying basic consumer needs. In 1995, the year Netscape went public and made the internet accessible to the masses, I was a young product manager for a consumer Internet company called Global Village Communication. We were a newly minted public company and our hottest product was a “high speed” fax/modem with a speed of 33.6 kbps. Back then, using the Internet as a consumer or making a living off it as a business was rather difficult, and sometimes simply frustrating. In the subsequent years the basic needs of access, browser, email, search and identity were solved by companies such as AOL, Comcast, Netscape, Yahoo, Google, LinkedIn and Facebook.
2012-?: Web of Want
Today, the billion users on Facebook have reached the apex of Maslow’s hierarchy on the web. All of our basic needs have been satisfied. Now we are in pursuit of self-actualization. It is no surprise that on the Web, we are now open to playing games (Zynga, Angry Birds), watching video (YouTube, Hulu), listening to music (Pandora, Spotify), expressing our creativity (Instagram, Twitter, Draw Something), window shopping (Pinterest, Gojee*) and pursuing education (Khan Academy, Empowered*).
The Web Is Becoming Like TV
How do we make sense out of a Web where multiple providers coexist, serving groups of people who share a similar desire? Turns out we already have a very good model for understanding how this can work: Television. Specifically, cable television. The Web is becoming like TV, with hundreds of networks or “channels” that are programmed to serve content to an audience with similar desires and demographics. Pinterest, ShoeDazzle, Joyous and Alt12* programmed for young, affluent women; Machinima, Kixeye and Kabam programmed for mostly male gamers; Gojee* for food enthusiasts; Triposo* for travellers; GAINFitness* for fitness fans and so on.
In this new new Web, an important ingredient to success is a clear understanding of the identity of your users to ensure that you are programming to that user’s interests. The good news is that unlike TV, the Web has a feedback loop. Everything can be measured and as a result the path from concept to success can be more capital efficient by measuring what type of programming is working every step of the way — it’s unlikely that the new new Web will ever produce a Waterworld.
Why Now? Broadband, Real Names & Tablets
As my partner Doug Pepper recently wrote, a key question when evaluating a new opportunity is to ask “Why Now?” Certainly, companies like AOL, Yahoo and Myspace have tried before to program the Web to cater to interests of specific audiences. What’s different now? Three things: Broadband, real names and tablets.
The impact of broadband is obvious; we don’t need or want anything on a slow Web. With broadband penetration at 26 percent in industrialized countries and 3G penetration at about 15 percent of the world’s population, we are just reaching critical mass of nearly 1B users on the fast Web.
Real names are more interesting. In 1993, the New Yorker ran the now famous cartoon; “On the Internet, nobody knows you’re a dog.” This succinctly captured the state of the anonymous Web at the time. Reid Hoffman and Mark Zuckerberg changed that forever. Do we find Q&A on Quora to be more credible than Yahoo! Answers, celebrity profiles on Twitter more engaging than Myspace and pins on Pinterest more relevant than recommendations on early AOL chatrooms? I certainly do, and that is largely because Quora, Twitter and Pinterest take advantage of real names. Real names are blurring the distinction between online and offline behavior.
Finally, the tablet, the last necessary and sufficient piece that fuels the “Web of want.” The PC is perfect for the “Web of need” — when we need something, we can search for it, since we know what we are looking for. Searching is a “lean-forward” experience, typing into our PC, either at work or at the home office. The Web over the last decade has been optimized for this lean-forward search experience — everything from SEO to Web site design to keyword shortcuts in popular browsers makes that efficient. However, smartphones and tablets allow us to move to a “lean-back” experience, flipping through screens using our fingers, often in our living rooms and bedrooms, on the train or at the coffee shop. Tablets make discovery easy and fun, just like flipping channels on TV at leisure. These discoveries prompt us to want things we didn’t think we needed.
This thesis is easy to postulate, but is there any evidence that users are looking to the Web as anything more than a productivity platform? As has been reported, mobile devices now make up 20 percent of all U.S. Web traffic, and this usage peaks in the evening hours, presumably when people are away from their office. Analysis from Flurry* shows that cumulative time spent on mobile apps is closing in on TV. We certainly don’t seem to be using the Web only when we need something.
Economy of Need Versus Want
The economy of Want is different from the economy of Need. We humans tend to spend a lot more time and money on things we want compared to things we need. For example, Americans spend more than five hours a day on leisure and sports (including TV), compared to about three hours spent on eating, drinking and managing household activities. Another difference is that when it comes to satisfying our needs, we tend to settle on one provider and give that one all of our business. Think about how many companies provide us with electricity, water, milk, broadband access, search, email and identity. The Need economy is a winner-take-all market, with one or two companies dominating each need. However, when it comes to providing for our wants, we are open to being served by multiple providers. Think about how many different providers are behind the TV channels we watch, restaurants we visit, destinations we travel to and movies we watch. The Want economy can support multiple winners, each with a sizeable business. Instagram, Path, Pinterest, ShoeDazzle, BeachMint, Angry Birds, CityVille, Kixeye, Kabam, Machinima and Maker Studios can all coexist.
Investing in the Web of Want
The chart below shows that over a long term (including a global recession) an index of luxury stocks (companies such as LVMH, Burberry, BMW, Porsche, Nordstrom) outperforms an index of utility stocks (companies such as Con Edison and Pacific Gas & Electric that offer services we all need). The same applies to an index of media stocks (companies such as CBS, Comcast, News Corp., Time Warner, Viacom) which outperforms both the utilities and the broader stock market. Of course, higher returns come with higher volatility — Nordstrom’s beta is 1.6 and CBS’ beta is 2.2, compared to 0.29 for PG&E. It is this volatility that has cast investing in the Want business as a career-ending move in Silicon Valley for the past 20-plus years. As the Web evolves from serving our needs to satisfying our wants and, in turn, becomes a much larger economy, sitting on the sidelines of the Web of Want may not be an option.
Let’s Not Kill Hollywood
With a billion users looking for self-actualization and with the widespread adoption of broadband, real names and tablets, the Web is poised to become the medium for creativity, education, entertainment, fashion and the pursuit of happiness. As the offline world shows, large, profitable companies can be built that cater to these desires. Entrepreneurs and investors looking to succeed in the new new Web can learn quite a few lessons from our friends in the luxury and entertainment businesses, which have been managing profitable “want” businesses for decades. The fusion of computer science, design, data, low friction and the massive scale of the Internet can result in something that is better than what either Silicon Valley or Hollywood can do alone. It is no wonder that the team that came to this conclusion before anyone else is now managing the most valuable company in the world.
When we go see a movie or splurge on a resort vacation, we don’t stop using electricity, brushing our teeth or checking our email. The Web of Want is not a replacement for the Web of Need, it is an addition. Many of the Internet companies that satisfied our needs in the last 20 or more years of the Web are here to stay. In fact, they will become more entrenched and stable, with low beta, just like the utilities in the offline world. Microsoft has a beta of exactly 1.0 — it is no more volatile than the overall stock market. And for those longing for the days of “real computer science” on the Web, do not despair. Just keep an eye on Rocket Science and Google X Labs — there is plenty of hard-core engineering ahead.
Disclosures: * indicates an InterWest portfolio company. Google Finance was used for all of the stock charts and beta references.
Keval Desai is a Partner at InterWest, where he focuses on investments in early-stage companies that cater to the needs and wants of consumers. He started his career in Silicon Valley in 1991 as a software engineer. He has been a mentor and investor in AngelPad since inception. You can follow him @kevaldesai.
eldavojohn writes "Scientists have long been criticized of their inability to communicate complex ideas adequately to the rest of society. Similar to his questions on PBS' Scientific American Frontiers, actor Alan Alda wrote to the journal Science with a proposition called The Flame Challenge (PDF). Contestants would have to explain a flame to an eleven-year-old kid, and the entries would be judged by thousands of children across the country. The winner of The Flame Challenge is quantum physics grad student Ben Ames, whose animated video covers concepts like pyrolysis, chemiluminescence, oxidation and incandescence boiled into a humorous video, complete with song. Now they are asking children age 10-12 to suggest the next question for the Flame Challenge. Kids out there, what would you like scientists to explain?"
Read more of this story at Slashdot.
In last week’s Get Rich or Die Trying article, I mentioned that “tech is a zero-sum, winner takes all game”. A reader objected, arguing: “I think that may be an inappropriate use of the term ‘zero-sum’ – one company’s increase in profits (or revenue) does not mean a competitor must see declining profits (or revenue)”.
History suggests that Jack Welch’s philosophy that “a company should be #1 or #2 in a particular industry or else leave it completely” is even more applicable to the tech industry, where the top player can build a sustainable and ever-growing business but everyone else is practically better off getting out.
Examples of market dominance by the #1 that come to mind include:
- Google in search,
- Facebook in social networking,
- Groupon in daily deals, and
- Amazon in e-Commerce.
This doesn’t mean that the:
- #1 player isn’t susceptible to the Innovator’s Dilemma, or
- #2 competitor can’t build a massive business.
Indeed, Microsoft’s Bing or LivingSocial are meaningful #2’s in search and daily deals respectively, but clearly the network effects and economies of scale that come with market share dominance make it nearly impossible for challengers to remain relevant over-time. Monopolies are nothing new and come and go: Google is the evolution of Standard Oil, AT&T and Microsoft in search, you can argue that Apple is next in line in mobile.
What is Zero-Sum Game Anyway?
First, the definition:
“In game theory and economic theory, a zero-sum game is a mathematical representation of a situation in which a participant’s gain (or loss) of utility is exactly balanced by the losses (or gains) of the utility of the other participant(s). If the total gains of the participants are added up, and the total losses are subtracted, they will sum to zero.”
Indeed, while the tech sector is huge, within each segment, you see a zero-sum game from each individual purchasing decision out. For example,
- a consumer will buy a Mac or PC; an iPhone or Android device, etc.
- a business will adopt a solution from Oracle or Siebel, for example,
But it’s rare for a consumer to buy or a company to adopt both.
If you repeat this binary-like decision process throughout the industry and economy, you get a zero-sum situation where one competitor’s gains come at the expense of others’ in the industry: Apple’s iPhone sales obviously put a dent in the Blackberry; and its iPads are evidently going to affect PC sales – no matter how much some want to deny it.
It’s Like This in Most Industries, The Only Difference Is Severity
I run an online video content company and categorize video companies into four quadrants:
- Content (creators),
- Distribution (search, distribution),
- Technology (content management systems, content delivery networks), and
- Advertising (ad networks, servers)
Clearly there’s a lot of overlap and how those four interact with one another merits an article in of itself (or hundreds). While technology (with a lower case) enables Content companies, it increasingly underpins Distribution, Technology and Advertising companies.
As such, I see this zero-sum phenomenon every day with the latter three. When TechCrunch’s parent AOL bought 5Min for example, it was a matter of time before AOL stopped licensing Brightcove’s Online Video Platform and instead use 5Min’s player. Seeing how AOL and 5Min were my distribution partners, I kept that thought to myself, but it was a matter of time. Today AOL’s main platform for video is indeed 5Min (note: I am not an AOL/5Min employee).
Content Isn’t a Zero-Sum Game: “I’m Your Pusher”
In content, it’s not really like that. ABC, CBS, FOX, NBC all have meaningful franchises. Sure, if you watch FOX on Sunday at 6pm then you may not watch ABC at that time, increasingly with cord-cutting and time shifting that isn’t the case anymore. In fact, content is so not a zero-sum game that a company like Viacom has multiple brands to address that reality.
Indeed, if you want to travel to Barcelona, you won’t watch one video or read an article, you will read/watch many and I’d argue that content consumption – like a drug – just creates more demand.
But if you want to book a ticket to Barcelona, you will either use Travelocity or Expedia, for example.
Place Your Bets
That makes content a less-risky endeavor, and, with digital media and digital distribution reducing the marginal cost of production and distribution, then content has become a better risk-adjusted bet, though arguably not as scalable and certainly not a winner-takes-all gamble.
It will take an entire generation before investors realize this; though some argue that it’s already started. According to media guru Jack Myers, “VC funds are being redirected away from tech and toward content. Technology-based venture opportunities in the media and advertising space have been largely played out. Bottom line, venture capital funds will be shifting from technology to content, context, commerce and research.”
I’m not holding my breath, even though digital content is effectively the new software.
In Tech, Competition Becomes Blurry Over Time
The same way that the Internet has changed content, it has also changed technology. For one, with consumer-focused technology companies being free, advertising-supported businesses, the prevailing asset isn’t necessarily the underlying hardware or software, but rather, the audience.
This is why tech companies are all seemingly fighting one another:
- Facebook vs Google in search and social networking,
- Google vs Apple in mobile,
- Amazon vs Apple in tablets and entertainment,
- Microsoft vs Google in search.
You get the idea: in tech, everyone morphs into everyone’s competitor… and since the main asset – the audience or consumer base – is so fleeting, tech becomes an even riskier bet.
The Four Horsemen
Whereas initially the Web pitted “content vs. tech”, as the Web matures, it becomes “tech vs. tech” with Content becoming Switzerland amongst Distribution, Technology and Advertising companies.
In the real world, there is no perfect example of a zero-sum game – granted. But whereas Jack Welch argued that a business ought to be #1 or #2 or get out, the network effects that the web has unleashed over time force technology (lower case) businesses to either be #1 or get the hell out.
In his first extensive interview since leaving a New Zealand prison on bail, Megaupload founder Kim Dotcom (read our in-depth profile) describes himself as a family man with a "big kid inside me" who is looking for "happiness and nature and peace" for his family. Sure, he used to drive in crazy road races and style himself “Dr. Evil” and hire lavish yachts, but those days are a decade behind him now.
It's a far cry from the way he has been depicted by US law enforcement. They charged the “Mega conspiracy” in January with some of the most heinous criminal copyright violations on the planet. The sit-down interview with New Zealand journalist John Campbell gave Dotcom a chance to dispel this image and make the case his company really is just like YouTube.
It's not a hard-hitting interview—featuring questions like "Are you as bad as possible, Kim? Are you a very naughty man...?"—but hearing directly from Dotcom at last is fascinating.
Let's face the music and dance.
For a moment there it looked as if music games had died. Activision had pulled the plug, at least temporarily, on Guitar Hero and DJ Hero, while Viacom had washed its hands of Rock Band developer Harmonix. Soon the news stories became obituaries for the genre that had conquered and cluttered the world with toy guitars.
But just as when the New York Journal pronounced Mark Twain dead by mistake, reports of music gaming's demise turned out to be an exaggeration. Guitar Hero's best days may be behind it, but Ubisoft's Just Dance is flying off the same shelves that were once packed with imitation Gibsons and there's a more-than-healthy supply of new music games on the horizon.
What those declaring the genre's death forgot was that games with pretend instruments are but one strand of a game type that also counts the booty shaking of Dance Central, Rez's techno remix of the on-rails shooter and Donkey Konga's tub-thumping platforming among its number. "Music games include rhythm action controller titles, musical shooters or platformers, simulation games like Rock Band and dance games ranging from Dance Dance Revolution to Dance Central 2," says Greg LoPiccolo, the vice-president of product development at Harmonix.