Global Nerdy

A little post-Zune (pre iPhone) primer in DRM, and its effect on customer choice, from the New York Times:

THIS week Microsoft introduced Zune, its answer to Apple Computer’s mighty pairing of the iPod portable media player and the iTunes music and video store. Though Zune offers a new choice for customers, it also highlights how restrictive such choices can be.

The many conflicting approaches to rights management can also limit choices. Apple, for instance, does not license its rights-management technology, FairPlay, to other companies. So customers with songs from the iTunes store have to stick with the iPod. The same applies to the Zune player and Zune Marketplace.

Given the number of competing formats, Apple seems to offer the safest bet. IPods are nearly ubiquitous, and the iTunes store — which has sold more than 1.5 billion songs — looks as if it will be around for a while. But there are alternative strategies for those who want to try players other than the iPod or preserve options for the future.

Ah, even when Apple's DRM is just as much an instrument of lock-in as Microsoft's, Apple still wins.

Link

Tags: DRM, Apple, Microsoft

In the O'Reilly Radar paper Web 2.0 Principles and Best Practices, one of the six “market drivers of Web 2.0” is the abundance of new revenue opportunities for web site and applications, thanks to a 37% percent growth in online advertising in the first six months of 2006 over the same period in 2005. According to the report, spending on online advertising now exceeds business magazine ad spending and is set to soon surpass consumer magazine ad spending.

Here's the graph that accompanies that point:

Confirming the O'Reilly observation is the just-released Interactive Advertising Bureau's report that internet advertising revenues have surpassed the $4 billion mark for the third quarter of 2006. Here's their graph:

Jason Calacanis believes that internet ad spending, high as it is, will only increase, citing the following reasons:

• There are more advertisers online today
• It's getting easier to spend money online
• Google Adsense/Adwords (a huge part of the point above)
• Yahoo, MSN, AOL, and Google reaching scale, which in turn allows major advertisers to reach comparable audience sizes to TV
• Audiences shifting from TV, radio, and magazines to the Internet

What does this all mean? Here's my take:

• Watch for an increase in “long tail” marketing. It may get you only a slice of the pie, but that pie's very big now, and continuing to grow. That's not just me saying it, it's also in O'Reilly's Web 2.0 paper. (See? I just saved you $375.)
• Watch for an increase in “long tail” web applications and sites. In the 1990s, the “planetary alignment” of the CD-ROM, RAD tools, desktop adoption and a willingness to outsource development made it possible for an ecosystem of small niche desktop application developers and customers to flourish — I know, I was a developer in that ecosystem. The current alignment of broadband adoption, Ajax, scripting languages, frameworks like Ruby on Rails and internet advertising makes it possible for a similar ecosystem of web application developers and web site writers and their customers and readers. Think of SeatGuru.com: it would've been possible to build it before the age of AdSense, but it wouldn't be making $15K a month.

Link

After all the Zune-slapping I've been seeing over the past week, I hereby declare the coinage of a new term: podenfreude. Derived from the German schadenfreude, podenfreude is the malicious satisfaction that iPod owners get when reading bad reviews of the Zune. Feel free to work it into everyday conversation!

George pointed to it in his entry titled Zune Clearance Sale: All Links Must Go — a Michael Gartenberg piece on the CNN segment in which in the Zune gets covered and “un-sold”:

Gary Stein – “I watched CNN this morning and Soledad O'Brien literally interrupted the tech-biz reporter, who was talking about the Zune, to extoll the virtues of her new, $70 iPod Shuffle. The next time the story came through the cycle, she had gotten her iPod out of her office and demonstrated how cool it was that you could clip it, and essentially un-sold the Zune, and pitched the iPod.”

It's one thing to read Stein's and Gartenberg's summaries of the report, but it's another thing altogether to watch this little train wreck. Thanks to YouTube, you can:

The first sign that things are about to go terribly wrong is when guest reviewer Andrew Ross Sorkin says that the Zune “does a couple of things that are a little bit cooler than the iPod, but a lot of things that probably aren't”. He then goes through a short list of Zune's features, but Soledad and Miles O'Brien's questions reveal each one's downside. When he brings up the “backlash against the iPod”, Sorkin sounds like he's pulling a “Hail Mary” play from the Microsoft marketing handbook.

If that weren't enough, Soledad then decides to show off her new iPod Shuffle. “Now that's the thing that's a lot sexier than this,” replies Sorkin. Bad enough that the Zune's getting trashed in its own segment, but it's getting beaten out by Apple's cheapest iPod. Sorkin counters by saying that Microsoft will eventually come out with something almost as nice-looking as the Shuffle. (Dude, when you promote vaporware, you should say that it will be better than the existing competition, not a second runner-up.)

No train wreck is complete without a spectacular explosion at the end, and it comes in the form of Miles O'Brien's unintentional punchline: Miles O'Brien, looking at the Zune, asks “Why don't they get some decent design people?”

Ten years ago, a Microsoft product getting featured on CNN would be fawned over by the anchors and have competitors running for the hills. It's a different world today.

Some vindication for Mark Cuban. A couple of weeks ago, he publicized a rumor that Google had set aside $500 million of their deal to buy YouTube as a fund to deal with the copyright issues the video-sharing service raised.

While onstage at the Web 2.0 Summit, Google CEO Eric Schmidt dismissed the idea.

Late yesterday, according to the Associated Press, this little fact emerged:

Google Inc. has set aside more than $200 million in its just-completed takeover of YouTube Inc. as a financial cushion to cover losses or possible legal bills for the frequent copyright violations on YouTube's video-sharing site.

Without elaborating in a late Monday statement, Google said it is withholding 12.5 percent of the stock owed to YouTube for one year "to secure certain indemnification obligations."

The Mountain View-based company disclosed the escrow account in an announcement commemorating the completion of its much-anticipated YouTube acquisition. As of Tuesday afternoon, Google representatives hadn't responded to requests for more details about the escrow account.

So, it's not $500 million, and Google's statement doesn't explicitly say the cash is for settling copyright issues with Big Content, but what other liabilities would YouTube have? They wrote their business plan with pirated copies of Office?

Link

Tags: YouTube, Google, Mark Cuban, Big Content, copyright, Eric Schmidt

Picking up on the theme of Joey's last post, Bessemer Venture Partners' VC David Cowan has put together his own advice for entrepreneurs today. After listing some of the factors affecting the marketplace he concludes:

And so the winning recipe today for aspiring entrepreneurs is GET BIG CHEAP. Don’t waste expensive development on untested ideas, and don’t let a fat marketing budget mask a weak value proposition. If instead you tinker your way to scalable organic growth, you’ll have a valuable business on your hands. Don’t worry about how long it takes—just make sure your burn rate is low enough to accommodate several cycles of iteration.

But today, entrepreneurs have the opportunity to launch web sites so rapidly into a market that adopts technology so quickly, that with some iterative tweaking and feedback from users they can test their ideas in months, and on a shoestring budget. Without the need for capital, they needn’t sport a proven track record of success, and so many many more ideas can be tested, and the winners can come out of nowhere, from anywhere on earth. With the right user experience, the best innovations can attract 50 million users in their first year of general availability, as proven by Skype, Firefox, Wikipedia, YouTube and MySpace.

To which I'd add that a lot of the infrastructure you need to scale to 50 million users is much cheaper today than it was even five years ago; everything from bandwidth to CPU to storage. And innovative services like Amazon.com EC2 and S3 (for computing and storage) are letting companies avoid tedious tasks like integrating and managing platforms, and the expense of buying 50 million users-worth of infrastructure when you're only starting out.

Just take a look at how SmugMug's taken advantage of the S3 storage service to save and scale, all at the same time:

• Total amount NOT spent over the last 7 months: $423,686
• Total amount spent on S3: $84,255.25
• Total savings: $339,430.75
• That works out to $48,490 / month, which is $581,881 per year. Remember, though, our rate of growth is high, so over the remaining 5 months, the monthly savings will be even greater.
• These are real, hard numbers after using S3 for 7 months, not our projections. They closely match (but are actually slightly better) than our projections.

I expect our savings from Amazon S3 to be well over $1M in 2007, maybe as high as $2M.

It's a great environment for entrepreneurs (and a challenging one for large VC funds).

Link

Tags: SmugMug, Bessemer Venture Partners, entrepreneurs, startups, S3

Paul Tyma, a senior engineer at Google, has written a two-part series of articles (here's part 1, here's part 2) with points to help you evaluate your startup ideas. Tyma advises that these ideas are for the canonical one- or two-person startup; as he says, “if you have 8 million in VC, there's a lot of other magic you can do.”

• If there's no business model, it's just a hobby. “There's nothing wrong with hobbies, as long as you know what they are.”
• The best ideas make your customers money. “If your idea can say 'If a customer uses our product, they will make X% more money' (where X is a positive number, even if quite small) – you have won the game.” Note that he said make money, not save money.
• B2B2C is the best place to be. “That is, you want to be a business that serves businesses that serve consumers.” Another reason to be happy that I'm one of the most visible guys at Tucows.
• If you're going B2C, look for revenue models that don't come right from the consumer. “If you can get the eyeballs, you can sell them. Just try to do that instead of charging them directly. They'll be ornery about it and demand support.”
• Revisit every bad idea every once in a while. Sometimes ideas are bad because of current technological limitations or circumstance. Consider Ajax, which has been possible since 1997, but at the time was limited to IE (which still had serious comptetition in Netscape), a lack of broadband adoption and even a lack of internet adoption. Keep checking on those bad ideas every now and again; their time might be now.
• Do your best to create a system of recurring revenue. That's what Microsoft is doing when they change Word's formats, what HP is doing with printers and ink and what “software as a service” is all about.
• Let ideas gestate. Mull over an idea for 3 days first, and see if it's still good. “Ideas always look better the fresher they are. You're looking for ones that look good even when not fresh.”
• Consider the size of your market. You'd better have a big market, because you're going to be able to get only a sliver of it.
• “Building a business around a new developer tool” is wrong on so many levels. Developers love to build developer tools, so many think that they can build a business around one they've built. The problem is that sp many developer tools are gratis — think Eclipse and Rails. You may have an option if the tools you're developing are for an ecosystem where there's a you-must-pay culture, such as Microsoft development.
• Ideas really aren't worth all you think they are. As Grandpa Simpson said, “The fax machine is nothing but a waffle iron with a phone attached.” Very few ideas are truly novel; they often arise as technologies converge. Execution is more important.
• Competition is good. “If you don't have competition, you don't have an idea. Competition tells you and investors that your idea isn't wacky.”

Link to part one | Link to part two