State of the News Media

21 Feb

I traded some messages on Twitter last week with someone who was lamenting that there isn’t as much investigative journalism as there was in the past, and also that editorial standards had fallen.  Similarly, this echoes comments you hear often from people about how there aren’t any “unbiased” news sources that people trust anymore.  I couldn’t disagree with these criticisms more.  

For one, there’s more media, choice, and reporting than ever before.  It might not look like the media of +15 years ago, but it’s there and in huge quantities.  Pre-internet, you were relegated to a handful of media outlets.  Generally speaking, there were (any I’m missing?):

  • National newspapers like the NY Times and WSJ
  • Regional/local newspapers
  • Magazines like Time, National Geographic, Life, etc.
  • The major news networks – CBS, ABC, NBC
  • CNN as of the late 1980s
  • Radio news and personalities

When people lament the decay in supposed bias-free news, I think they’re really focusing on the newspapers of old and the traditional nightly news broadcast.  Newspapers and TV news anchors like Dan Rather, Walter Cronkite, and Peter Jennings were supposed to give you a summary of important events and supposedly do so in a biased way.  There are two problems with telling it this way.  

For one, there’s always a bias in the news.  There’s no such thing as an “unbiased” telling of an event.  By definition, a newspaper editor or TV producer’s job is to be biased since there are hundreds of events they could cover but can only choose to cover a few.  By choosing to place event X on the front page and event Y on page 20, the newspaper is exhibiting bias.  

Second, the newspaper and the nightly news broadcast are incredibly limited formats.  There are only a handful of events that a 30 minute news program (probably closer to 23 minutes of actual broadcasting) can cover, or even a large newspaper like the NY Times.  

The beauty of the internet is that it has allowed for an explosion of niche content and gives a distribution outlet for proper coverage of that content.  Anyone can write on just about any topic, and they do.  The better economics of online journalism means that it’s much easier to sustain a professional media business focused on a small niche than it is offline.  You have more access today to high quality coverage of all sorts of events, people, and regions that you had zero visibility into before.  Think of coverage of the technology industry or sports as an example.  This is a good thing.  

One byproduct of the explosion in content is that perhaps average editorial standards have fallen versus the standard of old.  In this new world, not everyone has the rigor of a New York Times editorial board.  But that’s OK, I’m willing to take that trade off if it means more access to news and opinion.  And, generally, if you’re smart about using your own filter and not being a 100% passive consumer of information, then I don’t think this is too much of an issue.  

Another aspect of this new world is that there is much more opinion journalism and strong points of view than in the past.  The best bloggers today – Nate Silver, Andrew Sullivan, Andrew Ross Sorkin, Ezra Klein, etc. – all have strong points of view.  That’s the point.  Their job is to have an opinion and to argue their case in favor of that opinion.  I’m no fan of Fox News, but I’d say the same thing about a Bill O’Reilly or Sean Hannity.  If you’re watching their programming in the same way you used to read say that Washington Post (“this is my daily source of ‘unbiased’ news”), then you don’t get it.  

A final and crucial point I’d make is that the internet provides a mechanism for fact-checking the media that never existed before.  Pre-Google, you had no way to actually check whether what a media source was telling you was true or not.  And you had no way to quickly educate yourself on issues.  Right now there’s a debate going on over whether a recent CBO report means that Obamacare is costing jobs or not.  Pre-internet, you’d have to accept the analysis of whatever news source you used at face value.  Today, you can go read the actual report online, you can read competing analyses of it, and you can form your own opinion.  In fact, today there is better coverage of and watchdogging of the media than ever before.  

To call our current news media environment “biased” or to pine for the days of old is to be lazy and is to paint the past with too rosy a brush.  

Google: The March to a Trillion Dollars

13 Feb

google vs microsoft

The appointment last week of Satya Nadella to lead Microsoft got me thinking about another company: Google.  There are many points of similarity between the two companies, but the differences are key.

Both companies are effectively monopoly businesses.  Microsoft was and on the desktop perhaps still is an OS software monopoly.  Until recently with the rise of tablets and smartphones, Microsoft never faced real competition in its market.  Similarly, Google possesses roughly 2/3 market share in the online search industry and its share of online search profits are higher.  Like the Microsoft of yore, Google faces few credible threats to its core search monopoly.  Bing and Yahoo’s efforts have largely failed, and the worry of Facebook challenging Google through social search  is much more benign than once thought.

Microsoft and Google’s monopolies in their respective core businesses leads to two of the biggest cash machines the business world has ever seen: Windows and AdWords/AdSense.  Both businesses are high margin and throw off tons of cash.  This has given both companies incredible leeway to do three things: #1. Enter new lines of business; #2. Be highly acquisitive in support of #1; and #3. Retain talent.

I think this is where the comparisons between the two companies largely ends.  The main difference I see is that Google is ambitious in a way that Microsoft never was and no other company is, and Google is much smarter at building around its core search business.  These are two sides of the same coin.

On the one hand, Google is expanding into new areas far afield from core search.  Take Google’s well publicized self-driving cars initiative.  This requires a huge level of technical talent and investment that very few companies can make.  It’s also incredibly audacious and a potentially huge new  business for Google.  Compare this to say Microsoft’s Xbox effort.  Xbox has been Microsoft’s most successful consumer business and its a great product (I own one).  Having said that, I’d argue that it’s a less ambitious effort than something like self-driving cars and the potential size of the business is more limited.  Google is tackling huge, unsolved technology problems with much larger market opportunities.

Aside from more ambitious efforts to expand beyond its core business, Google is also much better at and more strategic about defending and growing its core.  Microsoft is limited in some ways because it’s much harder to introduce new products that monetize off of the Windows monopoly, whereas Google has plenty of options to introduce new products that monetize off of core search and its ad platforms.

For example, Microsoft’s efforts at building an online business – Bing, MSNBC, etc. – have a completely different monetization model than Windows.  Ditto for Windows Mobile.  You could argue that Windows Mobile makes it easier for Microsoft to retain its desktop users and therefore defends their  OS monopoly, but the only way they’ve made new revenue off of Windows Mobile is by selling licenses to smartphone OEMs and now by selling Nokia hardware bundled with Windows.

Contrast this with Google where much of what it does not only defends its search monopoly, but also grows it and creates revenue.  Whereas Microsoft started off by licensing its Windows Mobile platform to OEMs, Android is free.  Google did this because Google is able to earn money off of mobile search ads.  It’s a way for Google to protect its core business as user’s spend more of their online time on mobile devices.  Similarly, Google Glass and self-driving cars may very well end up monetizing primarily through serving ads off of Google’s existing platform.

To summarize it all, I think Google is far more ambitious in entering potential new businesses than any large tech company today, and its in a much better position to defend and grows it search monopoly than Microsoft was with Windows.  AI have no doubt that Google will be the world’s most valuable company in the not-so-distant future, and that it will be the first company in history to reach $1 trillion of market cap.

Switching to iPhone after 2 Years on Android

19 Dec

I recently switched to an Apple iPhone 5s after 2 years as an Android user.  I had a Samsung S2 for half a year and then had been using a Samsung S3 for another 1.5 years.  After moving back to the US, I was increasingly disappointed with the selection and quality of apps offered on Android.  I was also increasingly frustrated by the lack of performance of the device.  So I ended up switching.

I don’t have a bone to pick in the whole open (Android) vs. closed (iOS) debate.  There are compelling business and product arguments in favor of both approaches.  This post is meant to merely highlight my views on the quality of both products from a user’s perspective. And in that regard, I think Apple is the winner.

The biggest difference you notice as an Android user is the selection the selection, stability, and quality of the apps on iOS vs Android.  For one, there are a number of iOS apps that just aren’t available on Android.  This is particularly true of any new app in the US.  And for those apps that are on both iOS and Android, generally speaking, the Android version is less polished.  The UX is worse, they crash more often, updates are pushed less frequently, etc.  On iOS, everything integrates more smoothly.  Facebook oauth is easier, for instance, or navigating from notifications to the actual apps is smoother.

Another huge pet peeve of mine on Android is all the crappy software the handset manufactures pre-load onto the device, in this case Samsung.  Samsung’s chat service (ChatON), Samsung’s app store, etc.  I don’t know who uses this stuff.  There are better versions of all these services from folks other than the OEMs.  Ultimately, the S3 was full of tech that just doesn’t quite work.  For instance, a facial recognition feature on the security screen that’s supposed to unlock the phone.  It doesn’t really work and it’s not secure, so why include it?  Compare this to the fingerprint scanner on the iPhone 5s, which works perfectly and is actually useful.

Android has its pros no doubt.  In terms of the hardware, there’s the larger screen.  This to me is the biggest plus of Android devices.  Once you’ve used a slightly larger screen, the iPhone feels cramped and typing is more difficult.  I expect Apple to introduce a larger screen option when it releases iPhone 6.  As we spend more and more of our online time on phones, having a slightly larger screen only makes sense.

The other thing you notice once you start using iOS after Android is how bad the autocorrect capability is.  On Android, Swiftkey is awesome – much, much better than the native iOS autocorrect.  I’m not sure why Apple isn’t better (they don’t do software well), but it isn’t.  And it doesn’t feel like it’s improved much over where it was a few years ago.  It may sound minor, but if you send a lot of email or other messages, you notice the difference between Swiftkey and Apple instantly.

All in all, I think Apple offers a more polished experience versus comparable Android devices.  I expect this to continue to give an edge to Apple in more developed markets, especially the US where handsets are carrier subsidized.  Outside the US, Android will continue to dominate (see here for more on this) given the range of price points it offers.

Explaining the Snapchat valuation

19 Nov

There was a lot of buzz this past week about reports that Snapchat turned down a $3b all-cash offer from Facebook and a subsequent $4b counter-offer from Google.  It’s admittedly an extremely rich valuation for a young company with no revenue.  But I think there’s some nuance to note:

  • I think the investor psychology and math here is important.  VCs are more worried about missing out on the next Facebook/Twitter/Workday/etc. than they are in investing in the next MySpace/Bebo/etc.  For say a $500m fund, the cost of not being in one of the 2-3 huge outcomes that drive investor $ returns every year is higher than the cost of writing a say $30m investment to $0.  Investors, moreover, are probably more keenly aware than ever of the power law dynamics at play in tech investing (see here and here)
  • There’s been some handwringing over how Snapchat will monetize.  I wouldn’t be so worried about this.  Consumer internet companies don’t fail because they can’t monetize.  It seems unlikely that you’re going to have a highly engaged audience of hundreds of millions of users and not enough opportunities to make money.  Consumer internet companies are adept at finding ways to monetize with ads and advertisers are keen to experiment with new potential ROI.  The common early refrain on Facebook, Twitter, Instagram, etc. was that “they didn’t make enough money.”  That, of course, turned out not to be true.  There is a risk though that it doesn’t monetize as well or as quickly as its current backers hope (see Tumblr as an example).
  • Part of the challenge for Snapchat is that it’s grown its user base so quickly so fast.  The company is less than three years old and the rocket ship took off less than 18 months ago.  It hasn’t had an opportunity to explore monetization.
  • The concern of Snapchat’s team and investors should be around the product and making sure its audience stays engaged.  It’s captured the teen and 20-something audience, which is also probably the most fickle set of users.  I think the concern is whether these users move on to some other app over time.  But I think it’s reasonable to bet otherwise as the network effects in a business like this are incredibly powerful.
  • There have been some rumors that Snapchat is going to be raising another large round of funding, much of it going into secondary purchases of founder shares.  I’d be a bit concerned about this.  The founders already took $10m each off the table in the last round.  If the rationale for pre-exit founder liquidity is to give founders the ability to go for big wins, I’m not sure how another large secondary cash out makes sense, especially given that the company isn’t monetizing.  It’s one thing to sell down your stake as a founder when you’re a later stage, EBITDA-generating company.  But I don’t see how it aligns investor, founder, and employee interests at this stage.

How Do You Make SaaS Defensible?

4 Oct

I’ve been thinking about SaaS and what makes it defensible.  SaaS is an extremely broad term.  Evernote, Linkedin’s recruiter product is SaaS, Basecamp, Salesforce, etc. are all SaaS and are all very different.  But I think many of these products share a common challenge.  If someone comes up with a new SaaS product and it starts to gain market traction, these products can be and often are copied.

Let’s look at the HR software market as one example.  HR and the associated “Human Capital Management” software space is a massive segment with billions of dollars of annual spend by companies large and small.  Any company small to large in size has some potential need for HR software.  Inside the HR software suite, there are lots and lots of different types of products.  Applicant tracking software for recruiting.  Performance review and tracking software.  Time sheet management.  Org design tools.  Benefits administration software.  Employee on boarding and off boarding software.  Etc etc.

Many times these components are bundled together into a single suite of SaaS products, which is what you find from the bigger players like Taleo (now part of Oracle), SuccessFactors (now part of SAP), SilkRoad, Workday, and others.  Other times they are separate point solutions.  For instance, there are literally dozens of providers of point solutions for Applicant Tracking (ATS).  Why?  Because it’s fairly easy for even a single good developer to copy the design and functionality of existing ATS products in order to put together their own serviceable SaaS offering.

The result may not be as feature rich or stable as more established products, but can be enough to gain some market share, albeit often small.  When you have a large enough market, there’s enough spend to support several large players offering  variations on essentially the same SaaS product.  And that same large market can support a very long tail of smaller copycats.  The latter may not be large, VC-supportable growth companies, but they can be very nice, profitable enterprises for their owners.

Another example of this is in the customer service management software space.  Zendesk created a “next gen” SaaS product for customer service agents to better manage customer service tickets through multiple channels (email, phone, social media, etc.) from anywhere.  Freshdesk, an India-based company, started in 2010.  While I’m not a user and I haven’t looked at either company in detail, best as I can tell there is limited differentiation between the two companies.  And there is a whole host of smaller companies with similar general product offerings.  Google it.

Like the HR and ATS examples above, the customer service management space is very large.  It can support more than one large player and long-tail of smaller providers who compete with the bigger guys through cheaper pricing, a specific vertical focus, or simply taking a tiny bit of market share in a very large market.  Often times it’s the latter and customers and some portion of customers just don’t know better that there’s a potentially better, more established product out there.

I could go through other examples with similar characteristics.  CRM, accounting software, social media management for marketers, email marketing, you name it.

An important point to make here is that these typically aren’t winner-take-all situations.  These usually aren’t marketplace businesses where there’s a network effect where increase scale creates a bigger and bigger moat around your business until the point where it makes no sense for either side of the marketplace to use any service but yours.  So how do you differentiate yourself?

A few ideas:

  1. Scale allows you to invest in a better product, and there’s not better business advantage than a better product.  I think the real benefit to scale is the ability to create a better product.  When you have more dollars to invest and you can attract better tech talent, you can build a better product.  More stability, more core features, more integrations, etc.  The more this happens, the harder it is for someone to simply copy what you’re doing.  It’s also hard to engineer for scale, so being able to create an awesome, reliable product that works at scale (think Evernote, Dropbox, etc.) is an advantage in and of itself.
  2. Try to create platforms, which in turn generate network effects.  Salesforce’s Force.com is a great example of this.  Salesforce essentially has thousands of developers doing R&D for free on their platform.  Salesforce can’t possibly think of every potential feature or customer need, and they don’t have to.  Others can experiment and do this for them.  This is very hard for competitors to replicate.
  3. Similarly, creating some type of network and then placing a SaaS service on top creates defensibility.  Linkedin is a cardinal example of this.  The core software tools Linkedin provides to recruiters aren’t anything special in and of themselves.  But they are incredibly powerful and proprietary given the network they’re built on top of.
  4. Having a unique angle and/or world class capability in Sales & Marketing is huge.  Selling to large, enterprise grade customers requires sophisticated sales teams and strategy.  Building this isn’t easy or quick, nor is it the realm of “copycats.”  Similarly, for people selling into consumers or SMBs, creating a great online marketing capability, perhaps supplemented with some inside sales, is tough.  It requires talent, full-time effort, the ability to experiment with multiple channels, etc.   If you can build this, you’ve created a big moat for yourself in terms of sales and distribution.

If you can nail 2 out of 4 of these, I think you’re on your way to building a SaaS business with a chance to occupy market share at the head of your market rather than the tail.  What other concepts would people add to this list?

Was Ballmer Really That Bad?

9 Sep

There has been much criticism of Microsoft CEO Steven Ballmer over the last few weeks since he announced he’s leaving the company within a year.  Some have gone as far as to call him the “worst CEO ever.”  He certainly hasn’t been an exceptional CEO.  Microsoft’s stock has languished during his tenure, it’s organization has become bloated, and most importantly, it’s missed out on the big technology trends of the last decade – smartphones, tablet cannibalization of PCs, the rise of paid search, cheap cloud computing, Social, etc.  But, it seems to me, some of the criticism is overblown.

Without digging too deep, I can think of a few tech CEOs far worse than Ballmer.  Leo Apothekar at HP with his ill-conceived acquisition of Autonomy, decision to spin off its PC business, and relationship issues with the Board.  RIM’s co-CEOs for their corporate infighting and inability to create an OS challenge to iOS or Android (or go all in on the latter).  Or, if you’re looking for a CEO that truly lost his company, how about Stephen Elop, CEO of Nokia, which Microsoft just bought?  Nokia used to be one of the world’s most recognized brands, the dominant force in handsets.  And now, because of it’s strategic error in aligning itself with Windows Mobile instead of Android, (Nokia should have been what Samsung is to day), it’s selling itself for less than $8 billion.

In terms of stock price, yes, Microsoft’s stock has been essentially flat since the Dotcom bust, which is on Ballmer.  See this stock chart I pulled from Yahoo! Finance:

ImageBut Microsoft isn’t the only high-flying Dotcom era stock that has struggled in the last decade plus.  Check out Cisco to name one company with a similar price trend:

Image

Microsoft could have fared far worse these last 10 years.  Ballmer inherited a monopoly business tied to distributing incredibly high gross margin Windows software on PCs.  And he inherited this business at its peak.  With the growth of Google and mobile computing among other trends, it was always going to be hard to sustain Microsoft’s position as the kind of software and the top destination for tech talent.  Tripling revenue and doubling operating profits while creating new billion dollar business lines isn’t bad when seen in this context.

Great CEO?  No.  Worst CEO ever?  Hyperbole, for sure.

The Mom ‘n Popification of E-Commerce

3 Sep

The e-commerce market in the US has grown at double digit percentages for the last several years despite the general economic slowdown.  This growth is expected to continue as e-commerce continues to take share from traditional retail.  Forrester estimates that  e-commerce will continue to grow at over 10% annually for the next few years and will hit 10% of total retail sales in 2015:

Image

This growth and other factors like new business models (subscription commerce, direct-to-consumer, etc.) has led to an explosion in new venture-backed startups over the last 5 years.  As some have said, it’s “E-commerce 2.0.”  Birchbox, OpenSky, ShoeDazzle,  ModCloth, NastyGal, Warby Parker, Chloe + Isabel, etc. – just to name a few.  

One trend that I think is overlooked in this mix of new e-commerce startups is what I call the “mom ‘n popification” of e-commerce.  You now have thousands upon thousands of online retailers and small manufacturers-cum-online retailers that are trying to build businesses online.  And unlike their venture-backed counterparts, they are bootstrapped or have taken non-institutional friends and family capital.  

These are the online equivalents to the small, local physical retailers we see all over the country.  Some will perhaps grow into much larger businesses, but the vast majority will either stay small or in some cases grow to medium size through slow but steady growth.  Like their physical retail cousins, they need to contend with their big box WalMart equivalents – Amazon, eBay, Blue Nile, etc.  

In the physical world, retail started as small, highly local businesses.  Even though organized retail concepts like the department store had been around for quite some time, it was only really in the last half of the 20th century where you saw the establishment of big, national chains in American retail.  

The online world seems to be operating a bit in reverse.  Amazon, eBay, Overstock, etc. were the early pioneers starting in the mid 1990s and grew quite rapidly in sales and market cap.  

What’s happened now though is that the barriers for small, “mom n pop” entrants to start selling online have really lowered.  It’s easier than ever for someone without an existing brand and very little capital to start selling online.  I think this is due to many factors:

  1. The growth of cloud services means that there’s now e-commerce infrastructure delivered as a service.  And it’s affordable.  Anyone, for instance, can create their own e-commerce store using Shopify and be up and running with a professional looking storefront in a matter of hours.  There’s affordable SaaS products for dropshipping, managing social referrals campaigns, and so on and so forth.   
  2. Payments – a subset of the above services – has been a particular pain point for people looking to sell online.  Mundane issues like accepting multiple currencies have historically been a nightmare for storefront developers.  These problems are being solved today by Braintree, Stripe, Google Checkout, etc.  
  3. The mainstreaming of using your credit card online.  Everyone transacts online now in the US and levels of trust when buying online are much higher than they were 10-15 years ago.  Simply put, it’s easier for a small, no-name seller to credibly hawk their products online.  
  4. The growth of Google since the early 2000s and the growth in Facebook/Twitter has created huge new channels for online marketing.  There are more opportunities than ever for sellers to get discovered organically or through advertising.  
  5. Finally, I wouldn’t underestimate the importance of free shipping, which was pioneered by Amazon Prime and has become table stakes in many e-commerce categories.  

I expect this trend to continue.  Aggregate e-commerce volume will continue to be concentrated heavily between Amazon, eBay, Walmart.com, and a few other large players.  But I think the long tail of sellers will keep growing.  Also, new categories of e-commerce will open up to smaller players as services like same-day delivery 3PL gain traction.  Most of these companies will occupy small niches, but they can be profitable businesses for their owners and good employers.  

Finally, I’m very bullish on prospects for horizontal players who are providing software or services to the mom ‘n pop e-commerce market.  Shopify, for instance, has a very bright future as a public company, assuming they don’t let an Amazon or eBay buy them beforehand. 

Monetizing Mobile the “Micro SaaS” Way

25 Aug

In June, I wrote a post about the  staggering growth of Android lately, especially in emerging markets.  And yet, despite this growth, Android doesn’t monetize nearly as well as Apple’s iOS platform:

iOS vs Android - Downloads vs. Revenue

The monetization gap is understandable given the huge difference in price points between the iPhone and the hundreds of Android devices.  Unlocked, the iPhone is the most expensive smartphone on the market.  There’s one device and the only option is storage  (and color).  In contrast, the cheapest Android can be had for <$50.  The vast majority of new smartphone users coming online in emerging markets are from the lower and middle income groups, many of whom are accessing the web for the first time ever.  They can’t afford a $1000 device, which is what an iPhone can sell for unlocked.

This helps explain the monetization gap among other reasons (Android fragmentation, etc.)  And it poses a problem for developers trying to make money from the millions of Android users in emerging markets.  Mobile advertising really isn’t an effective strategy since ad markets are nascent – extremely small in aggregate size and much less productive (i.e., lower CPMs).   And even on iPhone or in developed markets, ads can worsen the user experience and are tough to make money off of unless you have huge numbers of users or a highly valuable audience.  So ad-supported isn’t a viable model.

What about paid app models?  There are problems here as well.  For the lower end of the market, willingness to spend just isn’t there.  It’s hard enough to get someone to spend a few dollars upfront on a paid app download in developed markets, let alone in a market where a user might only be earning $5-10k a year, maybe less.  So charging upfront doesn’t work well.

So what’s the solution?  I think WhatsApp has figured out an interesting model.  A user can use the service for free for a year, but after 12 months has to pay a flat $1 per year to continue using the app.  It’s a sort of “micro SaaS” model.  You get a 12-month free trial period and then have to pay an annual upfront fee to subscribe to the service.

WhatsApp has a very strong network effect, so the likelihood that someone who’s used the service for a year and whose friends are all using the service will balk after a year at paying $1 to continue subscribing is low.

At a $1 per year, WhatsApp is reasonably priced for any user that’s able to afford even a cheap Android device.  A basic SMS plan will easily cost as much as WhatsApp charges for a year and will also be volume capped.  It’s a good value.

The downside of this model is that it really only works at large scale.  Having 10m users paying you $1 a year isn’t a venture-scale business (though very interesting if you can bootstrap).  At 300m, which is Whatsapp’s latest user count, this is a sweet business (see image below via Statista).  And, as I wrote last week, Messaging happens to be “one of the two killer apps on the smartphone,” so it has huge addressable reach.

chartoftheday_1341_Whatsapp_Reaches_300_Million_Active_Users_b

There’s also some risk that the service is challenged by free services that don’t ever charge for users to subscribe and look to advertising, freemium, or in-app purchases for monetization.  At a $1 subscription, there’s really no sunk cost and there’s no technical challenges around switching as there might be in an enterprise SaaS.  There is a huge switching barrier though in the network effect, so I think fears of WhatsApp displacement are overblown (not to mention the fact that it’s a simple, reliable, very well-designed product).

I’m not saying this model is for everyone.  Mobile ads, mobile commerce, and in-app purchases work extremely well in some cases, especially in developed markets.  But I’d like to see more services experiment with the “Micro SaaS” approach and would love to hear thoughts on other categories that are suitable.

The Third Wave Opportunity on Mobile

19 Aug

There’s really two sets of major players on mobile.  The first is historically desktop-focused companies where their pageviews started on the desktop and are now shifting rapidly to mobile as the share of time spent by users switches from the desktop to smartphones and tablets.  This includes services like Groupon, Google Maps, Yelp, Dropbox, Facebook, Twitter, eBay, Fab, Digg, Huffington Post, Gmail, Linkedin, Amazon, Skype, Salesforce, Kayak, TripAdvisor, and a whole host of others.  The second group is companies who started on mobile and don’t make sense without it.  Evernote, Uber, Prezi, WhatsApp, most mobile games, Roambi in the enterprise, and others are in this category.   

What’s interesting is that in terms of pure reach, the traditional desktop companies are really dominating.  The first wave of adoption of mobile apps has benefited strong desktop brands whose services make as much sense or are stronger even on mobile.   Check any smartphone n the US and you’re likely to see some mix of Facebook, Yelp, Google Maps, and Twitter apps to name a few.  Perhaps this shouldn’t be surprising since these are some of the most popular services globally.  And as mobile increases as a percentage of online time spent and as total hours spent online increases because of mobile, you’d expect these services to benefit.   

The next wave of adoption is of mobile-first services.  For some companies like Evernote and Whatsapp, the boat has already sailed in this regard.  For others, there’s huge headroom for adoption.  I’d also argue that there should be a whole slew of services built from the ground up for mobile that we haven’t seen yet.  This is the “third wave opportunity” for mobile apps.  

Gaming and Messaging have been the two killer apps on the smartphone, the former in terms of total time spent and the latter in terms of frequency.  After these, your traditional desktop services like Gmail and Facebook consume a ton of time.  And then you have your set of mobile-first services like Uber that aren’t in the Gaming or Messaging categories.  That last category is growing rapidly and should see many new players emerge.  

There are new ways of re-imagining everything we do on the Web, but for mobile.  For instance, Prezi is re-imagining how you create and view PowerPoint-like presentations on the iPad, and Roambi is reimagining Business Intelligence for mobile. 

In particular, I think there’s a whole host of enterprise applications that can be rebuilt from the ground up for smartphones and/or tablets.  CRM, corporate chat clients, time sheeting, meeting management, conference dial in, and Excel/spreadsheeting are a few examples of generalized apps that need to be rebuilt for smartphones and tablets.  

I also think there’s a whole slew of vertical-specific apps that are ripe for the taking.  Hospital management, big law firms, personal financial advising, hotel management, auto dealers, financial traders, and many other areas have a need for specialized mobile apps.  

In some cases, the incumbent, traditional desktop players will get their act together when it comes to mobile and continue to dominate.  In other areas, these players will either be too late to the opportunity or might lack the ability to, whether because of organization issues, a lack of talent, or something else.  

If I was investing in or looking to start  a company, I’d be looking for these third wave opportunities, especially in areas where the incumbents aren’t equipped to capitalize on the opportunity.  

Wall St’s too short term? Look in the mirror.

11 Aug

A friend sent me a link today to Jeff Bezos’ letter to shareholders from Amazon’s 1997 Annual Report.  It’s a great read.  Bezos lays out his long-term operating principles and basically cautions investors that Amazon will (a) focus on long-term strategy and dominance; and (b) this will mean that it will sacrifice short-term profitability.  Amazon continues to follow this strategy today as it invests heavily in long-term bets (AWS, Kindle, logistics infrastructure, etc.) and runs a low-margin business.  And investors continue to reward the company.  The stock is at an all-time high and it’s market cap is approaching that of traditional software giants like Oracle.  The latter fact is pretty astounding when you realize that Oracle had $5b of operating income quarter, whereas Amazon had <$100m.

I say all of this because one of the big debates in Silicon Valley over the last 4 years has been over the merits of going public versus staying private.  And one of the most often cited reasons for staying private is the ability to “innovate” outside the quarterly earnings pressure of public markets (other reasons are the distraction of the IPO process itself, cost of filings and ongoing SOX compliance, etc.)  In most cases, I don’t think the idea that Wall St is too short-term is a valid reason to stay private, though there may be other reasons.

wall st bull

There are two related arguments people make.  One is that the market is too focused on short-term earnings.  The other is that public companies can’t innovate because of this.  So I ask: what’s the evidence for this?  Some of the most innovative companies in tech – Google, Apple, Amazon, VMWare, eBay, Tesla, Netflix, Linkedin – are public.  These companies don’t have any trouble pursuing new initiatives, speculative ventures, interesting M&A, high R&D spend, etc. under the glare of the public market.  And every company on this list has been richly rewarded by the market.

In fact, some of these companies actively shun Wall St’s supposedly myopic focus on short-term earnings.  Amazon continues to be an incredibly low margin business and continues to invest heavily in growth and new businesses.  Similarly, Google doesn’t even provide quarterly guidance to investors.

The reality is that the public companies that face supposed Wall St “short termism” are the ones that have flawed business models.  Would Zynga and Dell (to name two troubled companies) rather be private right now?  Of course, well at least we know for sure in the latter company’s case.  It would take the heat off.  But the reason there’s heat to begin with is they’re flawed companies.  People don’t want to play expense-to-produce Zynga style social games on their desktop, and PCs are rapidly losing favor to the tablet revolution.  Public markets are very efficient at recognizing this.

If Dell and Zynga laid out a credible, long-term story to investors then I public markets could be receptive.  But they haven’t.  Dell has been trying to transform itself in to an IBM style enterprise software and services company for years.  It has spent billions of dollars in the process, which incidentally it may not have had access to as a private company.  Similarly, Zynga hasn’t laid out a credible story for where it goes from here, for example backtracking on earlier talk of exploring the online gambling market.  Zynga might even be in a worse position right now if private because they wouldn’t have access to the $1.1b of cash they currently have on their balance sheet.  Ditto all of this for other companies like RIM, which is also reportedly thinking of going private to “refocus with less scrutiny.”

Maybe the point of all of this is that a few exceptions withstanding, the best companies go public and they have no problem doing so.  They’re able to think about the long-term and invest in innovation without difficulty.

If you can’t compete effectively under the lights of the public market, don’t blame Wall St.  Look in the mirror instead.

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