The Network Garden - Mark Sigal's Blog

Now Playing: Ready for Some Goose Bumps?

Got five minutes, love sports, and want to get some goose bumps?  This has to be the best sports montage I have ever seen, now playing on vSocial (uploaded by community member, HH32).  Enjoy.

Online Local: An algorithm for information arbitrage

Lately, I have been thinking a lot about information arbitrages.  What are information arbitrages (AI)?  They are instances where the spread between the cost of accessing a piece of information and your ability to resell it is sufficient to be able to make a profit.

A simple example of an AI play in the market today are keyword harvesters like Become.com that purchase a block of "horizontal" search keywords from the Googles of the world and then build a layer of verticalized, or job-specific, value add, such as comparison shopping or product research, on top of these search returns. This layer enables them to build a nicely profitable business.

In fact, in the realm of "eating my own dog food," I am in beta on a stock investing service called Insider Engine that leverages an information arbitrage specific to the buying and selling activities of corporate insiders.  Through this arbitrage, I capture the spread between the release of publicly accessible data and when that data is "priced into the market" of a given stock.

When you peel back the onion, what an information arbitrage really is, is a kind of algorithm.  Algorithms are akin to recipes, where there is a given set of ingredients, in a known measured amount, applied in a given order using a given set of combinational logic, resulting in some fundamental and predictable outcome.

With recipes in mind, and in the spirit of Thanksgiving, here's one type of information arbitrage which I am baking into my own activities that I call Online Local:

1. Start with a "job" that has a very specific context but one where the actual fulfillment of the job takes place at the local level.  A simplistic example to get you started is dating, since the parameters of finding a mate (or just a date) are fairly specific and ideally you would like to meet someone who lives in your own backyard.
2. Look for instances of this job where 90% of the offering is generic or templated so that the same basic offering is able to be deployed across all geographies and a wide range of markets (the proverbial wide net), but where the final 10% is customized to be geography and/or market specific, and can be applied in a systematic, automated fashion.
3. The more complex the configuration, the larger the ASP (average selling price) and/or the more mission critical the "buy decision," the greater the potential for material value add in the arbitrage piece of the equation.
4. Your ability to piggyback on existing sales channels increases the more steps in the pre-sales qualification process that you are able to move to an automated (read: cheap-to-free) online environment which have historically been handled in an expensive offline manner.  This is pure cost reduction, which drops directly to the bottom line, so long as it does not diminish the the prospective customer's perception of the buying experience.

Put the recipe in the oven, bake it at 375 degrees for 45 minutes, and you have a deliciously profitable contextual mashup that scales into a nice cash flow business. Feel free to ping me if this spurs any tasty ideas.  Enjoy.    :-)

M&A as R&D: Google and Yahoo now competing with VCs

In an item that John Battelle of Searchblog dubs "VCs versus The Platforms," both Google and Yahoo are reportedly setting up early stage venture arms to invest in companies that they presumably would want to acquire if all goes well. 

Paul Graham has also written an excellent post on the topic called, "The Venture Capital Squeeze" that addresses how the changing dynamics of the startup game so totally reduce the cost startups face in getting a product to market (and properly marketing the business post launch) that for large categories of companies that can run in a capital efficient manner, the traditional VC cost model is dis-advantageous for the entrepreneur.

On the flip side, I have written a bunch of posts where I argue that many, many of these new fangled Web 2.0 companies are $25M outcomes (if they execute), potentially a great outcome for entrepreneurs but horrible as venture investments.

Enter the platform players -- think Yahoo, Google, eBay, Amazon and Microsoft -- who can play the Cisco hand by agressively investing in early stage deals that may only need $1-3M to launch and be run profitably, especially if the prospect of a distribution deal is in hand.

Those who remember how Cisco successfully moved into segment after segment by using M&A as R&D should be able to see a perfect storm emerging whereby lots of product extension plays exist to build out the platform providers' proprietary-ness in a non-disruptive fashion, make entrepreneurs a lot of money, and do so in a matter that avoids the expensive acquisition after several rounds of venture investment.

This is great for the platform provider, great for entrepreneurs and great for customers since it suggests a model for traditionally slow-moving platform providers to get their running legs and continously inject entrepreneurial DNA into their culture, products and services.

I also think that this is great for VCs as a whole because it will force them to focus on their knitting; namely, building large standalone businesses focused on securing discrete billion dollar market opportunities.  Too much of the business right now is focused on product line extensions NOT large standalone companies.

The only wrinkle that remains to be seen is that, more often than not, corporations prove to be lousy venture investors, as much as anything because they have nebulous goals, fuzzy underwriting criteria and arms-length synergy plans between the upstart and the business unit where alignment is greatest. 

The suggestion here is that this needs to be one of those "begin with the end in mind" types of deals.  When actively investing in a category, do the bake off with startups in the space and set the understanding that the deal is a likely acquisition with the multiple of valuation (upon acquisition) based upon a tiered set of milestones. 

Milestones can include agreed upon product functionality, integration-levels with the mother ship, number of users of the parent service that embrace, paying customers, frequency of usage (and related emotial investment metrics) and time-based and product lifecycle related earnouts.

Pretty cool, though.  The platform play now includes rich, free APIs, cool widgets to integrate with, a large user base to plug into.  And cash!

"Strategic" versus "Win-able"

I was talking with an entrepreneur the other day about her startup.  The upshot of the conversation was that the product that her company has built truly rocks in terms of both functionality and ease of use, prospects completely validate the approach as the "right way" and definitely "the future" of the space.  And no prospect has shot them down in meetings.

You can probably guess where I am heading.  Towards a potentially fatal "BUT."  The but in this case is that customers are not buying with any measure of predictability to the point that even forecasting opportunities is difficult.

Such is the paradox for many a startup.  Great product, clear strategy, warm fuzzies in meetings, but no path to predictable sales. 

In such instances, I advise entrepreneurs to distinguish between strategic and win-able deals.  Strategic deals are customer wins that take advantage of the proprietary differentiators of your products, those that have a likely prospect of embracing your long term product road map, marquee customers whose embrace validates your existence,  customers purchasing your products or services under terms that validate your business model and/or those that integrate your offering with other components critical to your target customer's value chain.

In a nutshell, strategic wins are those that you pictured yourself winning when you came up with the great startup idea on the back of the napkin.  Put another way, strategic wins map directly to the "3.0 stage" company you envision when your products are mature, you have lots of customers and can leverage all of the niceties that industry power and influence have to offer.

In the grand scheme of things, however, if strategic deals are a reflection of your reason for being, win-able deals are the oxygen, and we all know what happens to living entities without oxygen.  They die.

Hence, a good sanity check on your value proposition is to (temporarily) subordinate pursuing strategy at all costs to focusing on win-able deals when you find yourself struggling to define a path to predictable revenues. 

This approach has some obvious benefits.  One, it discerns whether anyone at any price will buy your product in its current form, and failing that, what form at what price people will buy.  Theory and conviction are great but sometimes there is no substitute to putting the "dog bowl" out there and seeing if the "dogs will eat the dog food."

Two, such an approach can be an effective proxy to locking in on strategic customers that happen to be win-able as well.  For example, at an earlier startup of mine called Rapid Logic, we had built a device management tool kit where the strategic customer was one with lots of device platforms (e.g., hubs, routers and DSL gateways) needing to be managed by various flavors of management (e.g., SNMP, Web browser and command line) and with highly configurable devices where management was a core differentiator for the vendor.

Unfortunately, those customers were not ready to buy, the approach was too much of a seed change for them, and this type of positioning forced them to treat third party management providers as a strategic partners versus as a commodity component supplier, as they were used to.

In the end, with not a lot of dollars in the bank to provide necessary oxygen, we focused on any deal that we could win at whatever price we could get it at, and found that packet switch vendors, while not strategic, were indeed win-able.  This lead us to a sub-segment strategy that carried us increasingly to more strategic deals, market leadership and a $67M acquisition by Wind River (who still uses the products as the core of their device management strategy).

Three, such an approach can serve as an effective "land and expand" strategy.  Land and expand is where you so simplify your value proposition for customers (who often pay less for it as a result) that it is really easy to get a win.  Once through the door and integrated, your strategy provides you a path from which to upsell either within the same group or to other groups within the company.

Finally, such and approach can reconcile the "1.0/3.0 Paradox," something that I have written about previously whereby your company is borne of its 3.0 vision, but you only initially deliver a 1.0 product, and customers buy based on their perceived 1.0 needs. 

Focusing on win-able deals in this instance may be another way of acknowledging that your product is not all the way to the complete product solution that your target customer needs to embrace your offering as strategic.  The good news is that 1.0 is usually good enough to get to the customer's 2.0 requirements and by then, you are legacy, securing the vaunted 3.0 lifecycle positioning.

To be clear, focusing on win-able in the scenarios presented is not paradox free.  It can distract your focus, it can lead you to one-offs, and customers, once trained to buy your product a certain way, are hard dogs to teach new tricks.

That said, the approach is the ultimate "show me" indicator for entrepreneurs, investors and the like, and worth considering in such instances.

vSocial gets some decent coverage in SiliconBeat

As blogged about previously, one of my companies, vSocial, a video clip sharing community, recently launched.  Today, it got some decent coverage in SiliconBeat, the tech money and innovation blog by Matt Marshall and Michael Bazeley of the San Jose Mercury.

Here is the coverage: Video sharing site vSocial launches

Here is an excerpt:  "The 'video roll' feature is especially intriguing. It lets you embed a small panel of multiple video images on your web site or blog, in much the same way that people can embed Flickr photo badges on their sites. The process is surprisingly simple, and users can build a video roll with their own videos, or those found on the vSocial site."

Fear, doubt and local max

Seth Godin has a nice post called, "Understanding Local Max," that does a good job of capturing the inherent peaks and valleys one must traverse to achieve breakout success. 

His timing is ironic because I was working on a short post about an axiom that coincides directly with what he is talking about. The axiom is: never confuse fear with doubt.

Why?  Fear can be a natural response to negotiating a treacherous climb. Absence of healthy fear, leads to not being prepared, which unfortunately often leads to death.

Doubt, on the other hand, is a formal belief that there may not be light at the end of the tunnel.

One is all about preparation (preparing the mind to work through fear, readying yourself to successfully negotiate the path).

The other is all about pragmatism (seeing things as they really are).

Never confuse fear with doubt, or vice versa.

Search Optimized: The Artist Formerly Known as...

There is rule in Hollywood that two actors can not have the same name.  The purpose of this rule is to avoid confusing the audience about which performer was in which TV or movie.  (Getting credit, or credits, is the only currency that counts in Hollywood.)  That explains why Michael J. Fox isn't simply known as Michael Fox (someone else already had secured that name).

Flash forward, and we are on the cusp of moving past the S-curve into full blown adoption of digital media.

If a central strategy of old media was avoiding viewer confusion by requiring that TV and movie performers each have a truly distinct name, in the age of digital media the imperative is having a name that is readily discoverable by search engines.

This raises an interesting question.  What do you do if your birth name is not search engine friendly?  Why, of course, you change your name.

I know that sounds ridiculous, but the story that follows is completely true.  Just the other day, a friend of mine who is financially backing a performer (sidebar: I have to be somewhat vague out of respect for both the performer and the person who told me this story) told me that the performer's birth name, while actually quite beautiful, also had the same letter pattern of a number of different acronyms. 

The fear was that having a name which was not search engine friendly would create friction in terms of word of mouth being able to virally propagate the favorable buzz of a budding fan base. 

One person would mention that "you need to check out this artist," and the recipient of that message would run a quick search.  Overwhelmed by the noisy search returns, the recipient would move on to other activities and that flicker of early buzz would die.

So they changed the name of the artist.  True story, and my gut says that this example is the tail of a larger dog not yet in the picture.

Wikipedia: never been quoted before

Doing a google search, I just discovered that I was quoted in Wikipedia for the term mash-up.  To set some context, I have been quoted in magazines and blogs before, which is certainly cool, but for some reason, getting props in the definitive online reference guide, left me with a "gee whiz" smile on my face. 

Then again, unlike physical print resource guides and "authored" web sites, in a wiki, attributions can easily be replaced if better or more relevant articulations come to the fore.  In other words, my humilty is still well intact. :-)

Here is the quote: "The mash-up part of this equation, is the offspring of an environment where application developers see it in their own selfish interest to facilitate the creation of integrated, yet highly derivative application hybrids by third parties, something they do by providing rich public APIs to their user base."  It comes from my O'Reilly post, 'What the Hell is Web 2.0."

Maybe if I keep it up, I can "graduate" to the recipe section of Betty Crocker cake mix. ;-)

Mega brands, online communities and “three walled” gardens

Guest columnist Robert Young, writing in Om Malik’s Blog, provides a really good assessment of how News Corporation’s recently acquired online community, MySpace, can rank higher than Google in terms of number of page views, but will generate only $30 million in revenue this year versus Google’s $6 billion in revenue. 

While recognizing that this is not a pure apples-to-apples comparison, Young’s post poses the central question of whether a MySpace page view is really only worth one-half of one cent to the Google page view dollar.

A core part of his thesis is that historically, advertisers have held little trust in content that was not tightly controlled editorially and, therefore, the value they were willing to attach for ads placed next to such uncontrollable content was very low. 

What is interesting is that Young asserts that with the emergence of blogs as a medium which complements and challenges traditional media for people’s time and attention, the barriers are coming down, and the game plan for securing ad revenue is changing. 

As Young sees it, Google changed the rules when its AdSense service started commingling ads placed in traditional media sites with ads placed in blogs, and now MySpace (and all other community services) can benefit.  The upside is capturing some or all of the 99.5 cent spread on the Google dollar.

In thinking about online communities as a business, I think that this thesis heavily suggests that the best days for community web sites lie ahead (see also “The Second Coming of Community Web Sites” for more fodder on the topic).  Further, my bias is that the growth of this space is not destined to be a zero-sum, winner takes all outcome.  I say this for a couple of reasons.

One is the human fundamental; namely, that real communities are an amalgam of context, meaningful conversations and true self expression around those contexts.  As in the real world, logic suggests that no one service is going to satisfy both the many different “faces” that people wear and the different types of conversations that they desire to cultivate over the course of their online lifetime. 

For example, MySpace was hired by young music lovers and the Long Tail-ed 100,000+ band community.  Facebook satisfies college students looking to cultivate conversations borne of a profile model that facilitates lookup and hookup, or what I call “traversing contexts.”  Flickr enables a totally different type of communal conversation around pictures and tags.  And this doesn’t even touch the surface of the vertical communities beginning to emerge around health or the needs of aging baby boomers, not to mention communities focused on catalyzing the dynamics of mobile communications and rich media.

Two is the fact that people just like variety.  We don’t have one TV channel that everyone watches, and equally important, the market has proven that both broadcast media and more specialized programming like cable channels can grow into very large businesses, supporting many tens of channels with markedly different consumer targets.  In fact, the largest profit centers of media goliaths Disney and Viacom are the most job-specific ones – ESPN and MTV – not their big dogs, ABC and CBS.

Three is that a cornerstone of Web 2.0 is the emergence and embrace of open standards for publishing, syndicating and subscribing to online content, and with it, a de-coupling of such content and related user data from proprietary walled gardens. 

As I have argued in earlier posts, this de-coupling is fundamentally about the market coming to terms with the fact that the future of media and brands is being defined by consumers on an individualized basis versus being served up to consumers in a one size fits all fashion.  I call this trend Channel Me.

The ramifications of this transition for online communities is profound as it suggests that the industry model that will emerge is best thought of as a “three walled” garden.

(Disclaimer: one of my portfolio companies, the appropriately named me.com, is a nascent online community addressing a number of the particulars that follow.) 

What is a three walled garden?  It is probably best understand by what it is not.  In a traditional walled garden like AOL the metaphorical four walls arise from a proprietary, rigidly programmed and tightly controlled environment that serves to lock in advertisers, users and content providers.

By contrast, in the three walled variety, where the fourth wall used to be is now a virtual and open bridge to the community space.  This bridge enables consumers, content providers and advertisers (i.e., branded products or services) to build as much proprietary-ness within their three walls as they like while simultaneously letting them take advantage of the tremendous network effects an online community has to offer.

To frame this one, consider the following use cases for an advertiser, content provider and consumer in a hypothetical three walled garden.

For example, imagine Sony enabling all of their datasheets, how-tos, product comparisons, advertisements and magazine reviews that are housed within their web site to be syndicated to multiple online communities as a kind of virtual marketing, sales and support channel. 

Akin to the web programming mantra of "write once, run anywhere," this channel would enable Sony to dramatically extend the reach of their proprietary content and services beyond their web site.  Moreover, in a community environment, this content could serve as the kindling wood for consumers building user generated content to talk about, rate and review Sony products, as well as aggregate these same components into more value added content packages, such as a Home Theater Starter Kit.  In terms of mindshare, engagement and relevance, there are few better ways that I can imagine for Sony to engage with its target customers.

Similarly, imagine ABC extending their online content resources of video clips, photo galleries, games  and discussion groups for the hit show “Desperate Housewives” such that these resources could transparently be embedded within multiple consumer sites.  How many people that are huge Desperate Housewives fans but have never visited the ABC web site nor desire to could nonetheless cultivate their interest in the show and spread the word in a more viral fashion?

Finally, the consumer is seriously empowered in this model, having broader access to proprietary content and services, and a larger aggregate audience for their user-generated creations (since the flow of information is bi-directional). 

With empowerment and flexible tools for self-service and self expression, such consumers achieve a higher level of emotional engagement with the enabling content, product or service provider, in the process become mavens, connectors and salespeople.  Truly, a win-win-win scenario.

So how does the operator of an online community best position themselves to get hired by consumers, advertisers and content providers as the enabling platform for a three walled garden? 

Well, first and foremost it starts with the operator seeing its site/service as more of a community of communities than a singular entity.  Begin with the end in mind, so to speak. 

Fundamentally, though, a lot of this comes down to nailing the workflow and usability requirements of specific use cases along the lines I discussed earlier, and then ensuring that the underlying technology platform provides a well-integrated set of services and design tools that enable the combined value chain to satisfy those cases. 

Admittedly, it is tempting to reduce such cases down to composite functions (think: utilities for creating radio programs or podcasts; uploading and hosting services for rich media content; posting tools; unified communication services; context-rich user profiles; transparent user and usage tracking mechanisms; and meaningful search).  But the truth is that such capabilities, while critical, are mere ingredients in what is nothing short of a new kind of service recipe.

Think about it. The three walled garden approach represents the consummate 1+1=3, whereby the synergy of brand-specific content being used in a communal space extends the reach of the brand, driving quantitatively and qualitatively richer conversations outside of the walled garden, and ultimately pulls more people back to the brand than would otherwise happen in a web site centric model.  Pretty cool stuff, I think.