10 May

Doc Searls’ well-timed new book: “The Intention Economy. When Customers Take Charge”

I have always been a fan of Doc Searls, an author of one of the first guides to the transformation of marketing in the internet age: The Cluetrain Manifesto. First pronounced in 1999, the manifesto still relevant today.

Doc’s new book The Intention Economy has impeccable timing. The book (here Doc’s blog post about his book on Forbes) is a cleverly argued consumer’s call to arms in our internet-based, mobile world of big data. Doc starts with the very word “consumer,” which is suspect in Dos’s eyes; he prefers “customers.”

Sellers control buyers

Doc warns that businesses have an asymmetric amount of control over relationships with consumers in the internet marketplace. While Searls singles out some of the largest and fastest growing internet gorillas, this degree of control applies in general to sellers vis-à-vis buyers.

Many of us are aware that our data is being used in ways we cannot control, but most of us accept this, because of the benefits the internet brings. We do not want to withdraw from participating in the internet economy.

The Intention Economy

This is where Doc Searls’ genius kicks in. In The Intention Economy, Doc does not advocate withdrawal. On the contrary, the debate regarding personal data and identity control is turned around. Doc’s book is entirely positive and constructive.

Vendor Relationship Management (VRM)

The Intention Economy is accompanied by a software-based project called “Vendor Relationship Management” (VRM). Instead of lamenting the infringement of rights, Doc and his friends boldly define a box of software tools and protocols, which allow customers to control where and how they buy. VRM is designed as your private, personal counterpart of the CRM systems that e-commerce vendors use.

Searls describes a vision of a digital world with a Siri-like interface. In this world, we provide “Personal RfPs” such as: „I need a new baby stroller when I arrive at LA airport.“ But instead of the intention being processed by Apple and Amazon, VRM sets up an open request where different companies compete for our business on our terms. This is only once VRM use case among many.

VRM is being developed as an open collaborative project by about 30 companies and groups (listed here).

Doc is no stranger to this kind of movement, designed to transform software into a beneficial, positive force. In addition to having co-authored The Cluetrain Manifesto, he is Senior Editor of Linux Journal.

A positive agenda

Doc’s new book offers a positive and positive and constructive take on the lack of consumer control in e-commerce relationships. The timing for Doc’s new book could not be better. If we are to design software-enabled customer control into e-commerce relationships, we can still start now. We are still at the beginning of the internet era.

06 Feb

$100bn is Right if Facebook is the New TV

Facebook’s stats are amazing:

  • A huge and loyal customer base: 845m users, of which a whopping 483m are daily active users (DAU).
  • Dream margins of 75-80%.
  • Cash reserves of $3.9bn, with the IPO come $5bn more.

But is Facebook worth $100bn? This means 17x 2012 sales and a P/E ratio of 60. Google’s current Price/ Sales is 5 and P/E is 20.

Discussing Facebook’s valuation, many internet pundits have quoted and retweeted a blog post by Silicon Valley VC Bill Gurley . Gurley’s excellent blog post lists several reasons why Facebook should be valued in the $70 to 100bn range. Regarding the much-cited threat of Google+, Gurley, who knows a thing or two about internet platforms, says that it is very, very hard to leave Facebook. Nobody likes to leave their friends behind.

In a recent CNBC show, Facebook was called a “beast.” The journalists went on to say that Facebook is “not a dotcom” but instead a “real company.” Nice statement, considering that Mark Zuckerberg’s Letter to Shareholders in the Facebook SEC filing begins with the words: “Facebook was not originally created to be a company.”

Facebook certainly isn’t a normal company and this is not your average IPO.

Thank you Wikimedia, Creative Commons Licence, for file reuse.

But if Facebook is to be valued at $100bn, it needs to grow. And growth does not mean number of fans, but paying advertising customers. In 2011, Facebook grew by a stunning 88%. But in Q4 2011, the company grew only by 55%. In it’s February 1 SEC filing, Facebook itself states that an 88% growth rate is not sustainable.

The global advertising market is an established industry. There are only two ways to grow: (1) Take revenue away from other competitors currently generating ad revenues, or (2) grow the advertising market as a whole.

The global advertising market is huge: $464bn in 2011 (all figures from Zenith Optimedia). However, the market itself does not grow significantly (+3.5% last year). And Google will soon make up almost 10% of the global ad market. Google already accounts for 44% of total internet-based advertising. Can the ad market sustain another rapidly growing internet gorilla? If Facebook starts to eat into Google sales, this would be detrimental for both companies; there would be little headroom for Facebook and it would be a savage and expensive competitive fight.

Offline to online substitution is the key. While Google sales grew by $9bn in 2011 alone (from $29bn in 2010 to $38bn in 2011), newspaper ad revenues were in constant decline in past years (dropping from $95bn to $91bn). Mind that we are comparing a single company to the whole newspaper industry. Of course, Google is not alone responsible for the decline of newspaper revenues, but there certainly was a competitive shift taking place with revenues moving from offline to online.

Facebook has a lot of potential to convert offline ad sales into its own revenues, too. Facebook ads have better branding power than search ads, so it may even have an advantage to Google. Facebook’s attack trajectory is against TV. With revenues of $184bn (2011), TV is much bigger than newspaper publishing. There is enough headroom for Facebook here for the next couple of years.

Can Facebook pull off being the new TV, at least in terms of attractiveness to advertisers? TV is the domain of large advertisers, such as Coca Cola. Coca Cola’s ad budget in 2010, for example, was $2.9bn.

A shift will not happen overnight, and television is a beneficiary of massive events, like this year’s Olympics in London. Facebook will certainly do all it can to persuade large advertisers to shift part of their ad spend. Getting large advertisers on board is the Number 1 challenge Facebook will face in coming months.

It is possible, however, that Facebook has the power to grow the whole ad industry. I hate to use the Groupon example, because the company has in my opinion been poorly understood. But Groupon uncovered a new hyperlocal demand for advertising among small, mostly service-based companies, which had been improperly addressed by conventional advertising offerings. There is no other way to explain Groupon’s massive growth in such a short amount of time.

Facebook has this potential to uncover new demand, too, but in many more ways than Groupon. Facebook is a top mobile application. Facebook’s mobile apps do not show ads now, but that is being changed as you read this blog post. Facebook ads can be hyperlocal (restaurant in your part of town), hypertimely (there is a sale near where you are right now) and hypertargeted (new book by your favorite obscure Brazilian author).

Facebook will generate new sources of ad revenues from millions of small companies who have never relied on advertising before.

The only limit to Facebook’s ability to generate advertising revenue growth is Facebook itself. The trick about advertising- offline and online – is not to overdo it. In the book SimplySeven I co-authored, we describe the downfall of MySpace, at one point in time much larger than Facebook. The quantity and quality of advertising always needs to be delicately balanced and MySpace simply overdid it, going for short-term cash instead of user satisfaction.

Facebook clearly recognizes the danger of ad overload, however. To quote again from Mark Zuckerberg’s letter in the SEC filing: “Simply put: we don’t build services to make money; we make money to build better services… These days I think more and more people want to use services from companies that believe in something beyond simply maximizing profits.”

Facebook will continue to grow if it executes well. Smaller advertisers will discover and use Facebook for hyperlocal, hypertimely and hypertargeted ads, even through they did not advertise much before. The bigger challenge probably are the large ad accounts, which embrace the branding power and emotional quality of television.

There may be a third source for revenue growth, however, beyond advertising. In a previous blog post, I described how the internet flagship companies eBay, Google and Amazon already generate US$1bn each with complementary business models – on top of its original business. Already today, Facebook derives more than half a billion (15%) of sales from non-advertising sources, the bulk of this probably from Zynga. Zynga sells virtual goods in its games, providing Facebook with a commission (it also buys advertising directly on Facebook). There is more. Imagine if Facebook would offer premium subscriptions to its 845m members. Or if it offered its own (cash-) payments system like PayPal? At the moment, Facebook is still focusing on its primary revenue model advertising and the challenge of winning over large accounts, but the potential for growth on top of advertising itself certainly is there.

03 Dec

Lunch with Soundcloud: “The Longer You Wait, the Bigger Your Idea Has To Be.”

To celebrate the release of SimplySeven, our new book about internet business, we spoke to the Founders of one of the hottest web start-ups around. Soundcloud is the world’s leading social sound platform. The company has an investment roster that reads like a Who’s Who of the best-known and most savvy internet investors, but the Founders themselves prefer to talk about their product and their community of 9 million users.

The Soundcloud Founders are literally based more in the clouds than any one place on the globe, shuttling back and forth on a biweekly basis between San Francisco and their product development center in Berlin. We talked business with Alexander Ljung and Eric Wahlforss over a ginger tea and sashimi rice bowl whilst they were in their Berlin week.

Soundcloud had a business model from the very beginning

Some flagship internet companies like Google, Facebook and Twitter initially launched without a business model in place. It took months, if not years, of searching and testing for these companies to arrive at their business model.

Soundcloud, on the other hand, never was entirely free, apart from when the service was in closed beta stage. Soundcloud had a freemium subscription model from day one, meaning that beyond a certain level of use, professional services are charged on a monthly basis.

After about one year of hands-on experience with the different pricing levels and corresponding services, the Soundcloud team analyzed usage data in detail and made some adjustments, to match the pricing system better to their user community’s casual and professional use patterns. These changes were explained in detail to the Soundcloud community.

Community management and the importance of communication

The Soundcloud community is at the center of Alex and Eric’s concerns in all aspects of the business: “Some internet services feel actually like something that is generated entirely by a computer. Soundcloud is a technology we are proud of, and which we keep developing, but above all, we are a growing group of real people, including our community of users. We communicate with our community about all aspects of what we do, including our business model. We want everyone to understand what we are doing, and that we are people, too.”

The Soundcloud Founders Eric Wahlforss and Alexander Ljung

In most companies, web community and social media management is a part of the Marketing Department. Soundcloud has separated its Community Management – run by David Noël – from its Marketing team. Alex and Eric do not believe the two belong together. Communities have to be interacted with in real-time and communication needs to be authentic. There is no time to check back with Marketing every time David Noël interacts with the Soundcloud community. Since Marketing is all about longer-term communication strategy and partnering, making them in charge of Tweets, Tumblr, the Soundcloud Blog and Facebook would adversely impact the authenticity of the response.

The longer you wait, the bigger your idea has to be

Launching without a monetization model in place was never an option for Alex and Eric. In the beginning, they had no idea how big their service would get, they just wanted to create something that would be useful and encourage creativity in the music community. Alex and Eric advise companies that launching without monetization is an option, “but you better make sure your idea is big.” Without incoming revenues, a start-up’s growth is financed entirely by venture capital and “…the longer you wait, the bigger your idea needs to be.”

By the end of the lunch, only Alex was left because Eric had to rush off taking care of some urgent technology issues. Sipping his ginger tea before he himself had to speed away to some meetings, Alex noted that “…not all companies need to be VC-financed. There is something very beautiful about two people with a smart SAS/ cloud-based service, bootstrapping their company over time with a slowly growing base of paying users.” Sounds nice, but not all all like Soundcloud.

16 Nov

Palgrave Macmillan Just Released SimplySeven, A Guidebook to Sustainable Internet Business

Erik, Jörg and I are really pleased that our book SimplySeven has just been released by Palgrave Macmillan.

SimplySeven explores three main ideas:

(1) There are only seven internet business model building blocks.

All internet business models, from real-time ad exchanges (which have a high level of complexity in the number of involved parties and their relationships to each other) to a straightforward internet shop, are based on just seven internet business model building blocks.

When setting up their web business, most Internet entrepreneurs and managers fail to systematically consider all business model building blocks, despite the fact that there are only seven options.

(2) A sustainable internet business thrives from experimentation and is constantly evolving. 

Each of the seven business model building blocks goes way back to the beginnings of web business. But they have constantly evolved, through the incessant efforts of flagship companies and startups.

For example, Zynga actually is simultanously running hundreds of slightly different versions of its games, testing out live a multitude of tightly interlinked parameters involving content, social interaction and revenue generation. We interviewed Ken Rudin, Zynga’s General Manager of Analytics, for our book.

Most flagship companies combine different business model building blocks – creating their own constantly evolving “secret sauce.” Amazon.com combines subscriptions with retail sales and digital license downloads based on Kindle and Fire. The Amazon Prime subscription promotes repeat retail purchases. Interestingly, Prime probably is loss-making on a stand alone basis ($11 per member, according to Time) but an excellent way to create a “club-like” feeling of allegiance to Amazon.com.

(3) Pay heed to the free Internet.

A lot has been written about the fact that much of the Internet is based on “free” donations of time and effort by millions of people. Many business models actually are so-called “Freemium” models, combining free with paid services, check out, for example, Dropbox or SoundCloud.

Businesses will fail if they treat “free” merely as a clever type of marketing activity. We describe the fascinating story of MySpace in the book; MySpace was once much larger than Facebook. “Free” is far more than marketing. Many Internet services would be worthless without donations of time and effort by thousands of people. Games not populated with other players would be no fun. Google would not work without the input of millions of Internet users.

SimplySeven Workshops and Discussion 

Erik, Jörg and I hope that you will enjoy the book and that it will be helpful to you, regardless if you are a business student, an entrepreneur or Internet manager.

Palgrave Macmillan just released the book SimplySeven

We have thanked those that have helped us in the “Acknowledgements” section of the book. We are grateful that the IE Business Publishing Series has included SimplySeven as one of the first books in their new series, set up to promote a dialogue between business school insight and entrepreneurship.

Erik, Jörg and I have together and individually presented the main ideas of SimplySeven and the seven business model building blocks in speeches and workshops. We have had the pleasure of working with the classes of the LSE Department of Management, for example, or the Citigroup Entrepreneurship Program.

We are grateful for any feedback you may have about SimplySeven on this blog directly or on our Facebook Page /SimplySeven.

The SimplySeven Interviews

The book benefitted greatly from the interviews we were able to carry out. The list of our interview partners goes out with many thanks for the valuable time these cutting edge thinkers and leaders of the web contributed to SimplySeven.

Rich Aberman, Co-Founder, WePay, Palo Alto

Trip Adler, Co-Founder and CEO, Scribd, San Francisco

Immad Akhund and Jude Gomila, Founders, Heyzap, San Francisco

Matt Bannick, Managing Partner, Omidyar Network, San Francisco

Roberto Bonanzinga, Partner, Balderton Capital, London

John Seely Brown, Visiting Scholar at the University of Southern California and Independent Co-Chairman of the Deloitte Center for the Edge

Brad Burnham, Partner, Union Square Ventures, New York

Frédéric Court, General Partner, Advent Venture Partners, London

Esther Dyson, Principal, EDventure, New York City

Joe Gebbia, President and Co-Founder, Airbnb, San Francisco

Mark Gorenberg, Managing Director, Hummer Winblad Venture Partners, San Francisco

Bill Gross, Chief Executive Officer, Idealab, Pasadena

Howard Hartenbaum, Partner, August Capital, Menlo Park

Roland Manger, Co-Founder and Managing Partner of Earlybird Venture Capital, Munich

Joshua Reich, CEO and Co-Founder, Simple Finance Technology Corp., New York City

Ken Rudin, General Manager of Analytics, Zynga, San Francisco

David Rusenko, Founder, Weebly, San Francisco

Vivek Wadhwa, Director of Research, Center for Entrepreneurship and Research Commercialization and Executive in Residence, Pratt School of Engineering, Duke University

20 Oct

Steve Jobs. Magician. Genius. And a Lot of Work Behind the Scenes.

The sad news of Steve Job’s death hit everybody hard today. People like Walt Mossberg who are far more qualified than I am have provided deep insight and have expressed grief at the passing away of one of the greatest entrepreneurs and visionaries of our time. The authorized biography of Steve Jobs by Walter Isaacson coming out this month is much anticipated and will contain important insight about this great man. We wish we would have had this resource while writing our book.

To all of this important and kind insight, I would like to add just one more thought: Steve Jobs carried out a lot of work behind the scenes. And he shaped a company that worked harder than most others.

Apple worked harder than others in orchestrating a complete, end-to-end digital ecosystem – and not simply stopping at one single part. Steve Jobs did this because he did not want us, Apple’s customers, to have to be responsible for picking and combining. Most companies are happy if they contribute one piece to an ecosystem. Or worse, they mistakenly think that if they create one part of a platform, all the rest will appear by itself. Most companies are lazy.

Orchestrating a whole ecosystem also means one has to say no to many potential partners. It involves disappointing a lot of people at these partner companies. It requires you to go for powerful partners that can cover large chunks of your platform value proposition in one go. Saying no is not necessarily a sign of Apple being arrogant or even evil, it comes from the sheer necessity of efficiency given the daunting task of being an orchestrator.

Steve Jobs at Macworld 2005 by Mylerdude. Used under Creative Commons Attribution 2.0 Generic License.

Ecosystem orchestration also requires the masterful creation of momentum, pulling partners along by the excitement of being part of a grand vision. Magical, yes. Inspired, of course. But also a lot of brutally hard work backstage, behind the show.

Finally, Steve Jobs and Apple also picked a business model for its digital business which required more work than other available business models. Each digital chunk, each music piece and app license, has to be sold separately. Licenses are like property, people are buying to own something. This means they will complain, they will be demanding. When Steve Jobs and Apple launched iTunes, the status quo was that it was far easier to provide content for free and to charge advertisers. Apple went down the hard path and did not follow everyone else.

Steve Jobs made Apple into a company that does not just try to survive from one quarter to the next. Apple picks the hardest battles which require the hardest work.

13 Aug

Google, Amazon, Apple and eBay Are Each Making Over a Billion With Alternative Revenue Models

Much of the discussion surrounding high valuations of internet companies is besides the point. The valuations of successful internet companies are justified, because they reflect an increasing capability to monetize internet reach and traffic.

One way that this capability is manifested is through the diversification of dominant internet companies away from their traditional business models towards business model combinations. These companies are transforming themselves into multi-faceted and increasingly individualized monetization platforms, serving both an ecosystem of business partners and millions of end customers.

While the dominant companies Google, Amazon and Apple are still generating over 90% of their sales with their traditional business model, sales from alternative revenue sources are growing fast. Each of these mega-platforms now make a billion dollars or more from new revenue sources. Google’s new businesses – worth one billion – are enterprise subscriptions for its hosted email, office and search software, licence sales on Android Marketplace and the Google Checkout payments solution. More will follow, like Google Offers. In its financial reporting, Amazon unfortunately combines its direct internet retail sales with its third-party marketplace commissions. The split would be interesting. But Amazon Web Services for enterprises and other new businesses contributed very close to a billion in sales in 2010. More than four billion Dollars of Apple’s sales comes from its nontraditional internet segment: Selling software and music licences on iTunes and the App Store.

eBay beats them all with a whopping 40% of its sales originating from non-marketplace activities, mostly payments solutions and advertising. For eBay, alternative business models are a three billion Dollar business.

This trend towards using combinations of business models like building blocks can be observed among dominant internet companies, as well as new challengers. Once they achieve a dominant position in terms of reach and traffic, internet companies new and old are becoming very savvy about which business models to combine in what way. Twitter took a long time to develop its business model it is gradually launching now, which actually is a combination of two building blocks: Advertising for those enthusiasts who don’t mind sponsored Tweets and subscription payments for those that want a pure, unsponsored desktop. This is what personalized business models are about, payment in whichever way fits the individual best.

For established businesses and start-ups which are only now beginning to focus on growing their internet activities, the trend is good and bad. The dominant players are offering a number of standardized payment services which can be more or less easily integrated in a plug and play fashion. But there is always a dependence which often means giving up a significant share of revenues.

Setting up one’s own dominant monetization platform is difficult, but despite the challenges, a few companies have achieved this recently: Facebook, Twitter, Groupon, Zynga and Airbnb. Their valuations are high, but their powerful ability to monetize is unique.

Some of these companies are from the start not relying on a single business model, but are diversified into different monetization approaches. Facebook relies on advertising, but is also evolving its virtual currency, Facebook Credits. In the case of Zynga, developing outside revenue sources which are independent from Facebook is critical for long-term success. All these successful newcomers took their time to carefully select and test different monetization approaches and are still fine-tuning them.

Sources: 2010 Annual Reports of Apple, Amazon, Google and eBay.

14 Jun

Google’s Admeld Acquisition: Real-Time Ad Bidding Really is the Future of Ads

A couple of hours ago, Google officially confirmed the acquisition of Admeld, an advertising optimization platform for online advertisers. Admeld is part of a set of highly innovative companies in the rapidly developing space of real-time ad bidding.

There has been a lot of buzz about real-time ad bidding in the last weeks – with full length analyses in the Financial Times on 22.05.11 and The Economist on 05.05.11. This is justified, since real-time ad bidding represents a milestone in advertising innovation.

The question I ask myself is: Is ad bidding merely a continuation of a trend towards ever more targeted advertising, or are they something fundamentally new?

The term “ad bidding” alludes to something beyond advertising. Bidding takes place on exchanges and marketplaces. Individual buyers and sellers are matched to generate a transaction. The marketplace recieves a commission from the sale, in the event of a successful transaction. An agent brokering a sale on a marketplace accepts sales risk, but in turn receives a nice reward: A cut from the sale.

Googleplex Welcome Sign from Wikimedia Commons under GNU Free Documentation Licence

In part, this is what ad exchanges do: They match up individual consumers with very specific advertising offers. But they are information brokers only. What they don’t do is take on sales risk for the actual sale of the advertised item.

Ad exchanges do take targeting to the next level. A consumer is identified according to the clicks he or she carried out in the past couple of weeks. The individual could, for example, have looked at hiking boots on a web site selling hiking equipment. While he or she is surfing many days later, an auction runs real time in the background, selling advertising on these sites to interested bidders. In this case, the most interested bidder for this individual consumer may be the hiking equipment online retailer. If the hiking retailer wins the auction, the consumer will see hiking boots displayed on the web sites he or she is looking at, perhaps even in his or her favorite style or color and even at the appropriate price.

Real-time bidding has revitalized internet banner ads (which were beginning to be relegated to the dinosaur cabinet). It is a nice example for a business type that was thought dead, only to be revived by a new technology.

Real time ad exchanges are incredibly sophisticated, from organization, process and technology perspectives. Apart from Google, the 800 pound gorilla, there are many highly specialized companies. The data handling and analytical capabilities of these companies are impressive. There are players focused on the supply side of advertising, such as the recently acquired Admeld. The Supply Side Platforms (SSPs) are focused on publisher yield management. On the demand side, one of the leading companies is AppNexus. AppNexus manages data from its clients, which are the advertisers. In Germany the leading DSP is Sociomantic Labs. Sociomatic Labs has many of the most active ecommerce companies in Germany as its clients.

Ad exchanges therefore facilitate these brokered, real-time deals between different specialist agents, representing the publishers on the one side and the advertisers on the other side.

The deals are about one thing only: The individual consumer. On the one side, the individual is surfing on some web sites. On the other side, this specific individual has been identified as a potential customer and a price has been set for the value this customer brings.

One consequence of this type of deal-making is that the context of the advertising inventory itself is not so important as it was in the past. A potential customer may surf on the expensive home page of The New York Times but also on relatively cheap pages like a mountain camping site. Real-time bidding thus whittles away at the power of these big web sites. It is all about the individual customer and his or her purchasing intentions.

In a way, the capability real-time bidding brings to banner ads is long established in search advertising, which carries out individual targeting according to individual intentions. It also is a forerunner of what advertising will increasingly be like on Facebook. By its very nature, Facebook ads are about individuals and their preferences, too.

The price paid per brokered ad approaches a percentage of the potential sales ticket size, rather than reflecting the value of the ad inventory. This means that individually targeted hiking boot ads may cost less than individually targeted automotive ads. Wow. Imagine Super Bowl ads priced according to the product sold.

This is a huge step away from the traditional advertising model, for sure. It is too early to tell if is good or bad for the owners of popular, expensive domains – it may lead to revenue growth (due to elastic pricing) or decline (due to ads moving into the long tail and away from the big domains).

The more targeted advertising becomes, the more pricing will tend to reflect ticket size (of the product) and pocket size (of the individual customer), instead of the advertising inventory and the content itself. Performance pricing based on actions such as clicks is commonplace in this environment. Facebook ads will be priced like this, too.

But, search ads, social media advertising and real-time ad bidding will shy away from taking on sales risk (and being paid only in the event of a completed sale). As such, they are part of a proposition that involves customer acquisition and reach and motivation, instead of transaction facilitation. There is a reason for both and for both business models to exist. Marketplaces will stay marketplaces. Advertising will stay advertising.

10 Mar

Foursquare 3.0, Square and Augmented Business Reality: Casting Web-Based Business Models Over the Real World

Stage 1: Offline > Online

Just a few days ago, a friend offered some advice about our book on internet business models: “Why write a book about internet business models, everything is internet business these days.” At first, we did not get it.

Wait a minute, we thought, there still is a lot of difference between offline and online business. Just think of the different cost structures and competence requirements when running offline compared to online retail.

In fact, the relationship works the other way. It is not internet business which is shaping offline business. On the contrary, our buying experience from the offline world has shaped the way we perceive online commerce. This is why we have a limited number of seven basic building blocks of web business, the Simply Seven, in the first place. In our head, we carry around real-world metaphors for how we buy online.

Stage 2: Advanced Web Business

This is changing fast, however. Let’s call this Stage 2 for the sake of argument. As people are becoming more familiar with online business, they are accepting more sophisticated online business models. Fremium models are becoming ever more advanced. Business building blocks are being offered ready-made as web services on platforms and combined in innovative ways. For example, subscription systems available within the Apple Apps shop. Virtual currencies such as Facebook credits will lead to fascinating new business model innovations, including financial ones. There will be fewer “pure” building blocks used for monetization – as in the early Stage 1 days of Amazon, eBay and Google. Digital business is becoming more exciting all the time.

Stage 3: Online > Offline

In Stage 3, through mobile technologies and devices, web-based business is being cast over the real world. One could call this “augmented business reality.” We associate augmented reality with superimposed data over real world, real time images. Here, we are talking about superimposing digital business transactions over the real world, real time. The new device-based mobile payments systems by Square, Inc. are part of this development, but so is mobile advertising and mobile commissions. As a start date for Stage 3, maybe we should pick the 1st of December 2009, the day Co-Founder Jack Dorsey (@jack) posted to Twitter: “Announcing our new company, called @Square, which I’m thrilled to be a part of …” (Source: MIT Technology Review)

There has, of course, always been significant interaction between the real world and the web. But it has increased continually and has now reached the next level. In the beginning, catalogues like Yahoo! or search engines such as Google provided aids to navigate the internet world. Craigslist and Groupon are navigational aids which help us localize deals in the real world. Facebook connects real world people together and creates a social graph.

The next level we are talking about is the superimposition of digital business on the local, real-world environment. Some would call this mobile business, but mobile makes us think of mobile devices, which is only one part of the story. Maybe local commerce is a better term.

The observation that everything will have an IP-address and communicates with each other increasingly is nothing new. Kevin Kelly wrote about “the new biology of machines” in 1994. This is about the combination of a wired world and increasingly sophisticated web-based business models.

Square Inc. is not just enabling mobile payments, it is providing offline retailers with the rich data only an online retailer so far had access to. In a video for Stanford University’s Entrepreneurship Corner (dated 09.02.11), Jack Dorsey describes the dearth of data real world coffee shops live with every day. They know they made $400, but have no idea with what products, at what times, sold to which clients. There is no way to recontact customers with special offers and use these offers to build a relationship. Square is making money by realizing commissions for itself, but in the process, it is making offline retail become more like online retail.

TechCrunch and others have reported on Foursquare’s 3.0 version, launched on March the 8th, just in time for the SXSW conference in Austin. In a pilot carried out in cooperation with American Express, people can use their credit cards to unlock local merchant deals during the conference. The future of local deals are real time offers provided as bypassers move through a street. A street’s business will thus be reflected in augmented reality as one walks through it. Not everyone will enjoy being bombarded with coupons. But its not only about walking.

In automotive-obsessed Germany, a recent study found that younger clients don’t seek cars for status any more, but as mobile, wired platforms communicating online for purposes of entertainment, safety (with other cars) and, yes, to point out special commercial offers on the way (Source: “Nur voll vernetzte Autos locken junge Kunden an,” Die Welt, 10.03.11, page 12).

Our friend Max had it right after all, real world business is rapidly being subsumed by web-based business models.

04 Mar

Evolving through Measurement and Experimentation

It is amazing how few internet execs or entrepreneurs make systematic use of the data available to them. Sometimes one just wants to scream out: “You are on the internet, you have data, lots of data – use it.” Make use of your data and you will have a far more successful web site.

Here we will discuss two aspects of internet business model design closely linked to data: Analytics and experimentation. They actually go together; the ability to measure and the ability to test are a powerful combination. Obviously, even on the internet, there are some things you cannot try out without risking your current business. But much more experimentation is possible than people realize. Two companies that have engrained analytics and experimentation into their DNA are Zynga and Netflix.

Ken Rudin is General Manager of Analytics at the social media game company Zynga. His whole career has revolved around analytics – but this is his dream job. Imagine the possibilities to measure and test Zynga has with its 100m monthly players. Rudin said about Zynga: “I’ve never seen a company that is so analytically driven. Sometimes I think we are an analytics company masquerading as a gaming company. Everything is run by the numbers.”

In a presentation Rudin held before an association (TDWI, The Data Warehousing Institute) in late 2010, Rudin outlined three development stages of analytics: Reporting, Analysis and what Rudin calls Impact Game Design. All companies report, it is necessary but usually does not lead to increased value. Analysis will result in a little more insight, but in combination with experimentation it becomes very powerful. Impact Game Design actually is the combination of analysis and experimentation and for Rudin the pinnacle stage of development. Here, we will talk about Impact Game Design as well as another form of combined analysis and experimentation, A/B Testing.

Take, for example, advertising. For testing out different web page setups, for example a set of pages with advertising and one set without, A/B Testing is perfect. In the real world, it is difficult to offer advertising to one set of your customers and leave it out for the other – and then analyze the results after a month to see the impact. Even if you have the luxury of running your business in different locations and you can, say, run the advertising trial in Denver and not in Detroit, you will not come close to generating the amount of data that an internet trial would provide you with. The length of time people spent on your web site, what they clicked at, what they avoided, what they bought.

Zynga uses “Impact Game Design.” It is much more comprehensive than A/B Testing. As Rudin describes it, Zynga hurls many different games out at the community, and “most will fail.” The products are created with just the amount of effort required to create a working game, but not more. These “Minimum Viable Products” (MVPs) are buggy, but yield the required insight.

Both approaches A/B and MVP Testing can be used to test payment options, business models and complete products. It is critical, however, to set these tests up on an already pre-existing foundation of data. Before trying anything new, it makes sense to know how the web site is used currently.

Some companies are thoroughly immersed in analytics and apply the approach to everything they do. Zynga is one of these companies. Netflix another. In his book on analytics, Harvard Business School Professor Thomas Davenport describes the fascinating fact that an earlier phase of Netflix’s business model (based on shipping DVDs to customers instead of digital downloads) would not have been viable without meticulous analytics. The high shipping costs generated by active users of the service would have eroded the profits of Netflix. To retain their profitability, the company added a controversial “throttling” process which delaying DVD shipments for this subset of users. Netflix also uses detailed analytics and algorithms to recommend films to its customers. Finally, it extracts insight derived from viewer data of similar films as a negotiation advantage vis-à-vis media rights owners (source: Thomas H. Davenport and Jeanne G. Harris, Competing on Analytics, Harvard Business School Press, Boston, 2007, page 4).

Let’s step back a little from the details of different measuring and testing approaches. The ability to experiment on the web is not automatically a given, it is an aspect engrained into the very architecture of the internet. As Barbara van Schewick has pointed out in her excellent book on internet architecture and innovation, the so-called “end-to-end” architecture of the internet is the reason why rapid experimentation can happen at all. In a “core centered network,” innovation requires substantial systemic change on several levels. The current design of the internet allows rampant innovation at the edges, the “ends,” without requiring significant investment. In fact, as van Schwick points out using many great examples: Innovation can happen in one’s spare time (eBay, Del.icio.us, Yahoo, Facebook), can be paid for by consulting projects on the side (37signals, Blogger) or by family and friends (Amazon.com) (source: Barbara van Schewick, Internet Architecture and Innovation, MIT Press, Cambridge, 2010, pages 204 – 214).

While “end-to-end” architecture was part of the original design of the internet, software costs have fallen considerably year over year, due to the prevalence of Open Source and ready-to-go web services. In 1997, Silicon Valley-based venture financed internet companies still required hundreds of thousands of dollars to get started – this has been reduced to tens of thousands. Y Combinator, for example, provides companies with a comfortable starting package of $150.000, courtesy of two angels, Ron Conway and Yuri Milner.

As a result of falling costs, there has been a “remarkable increase in the degree of entrepreneurial experimentation,” according to Bill Sahlman of Harvard Business School. The same article that quotes Sahlmann also cites Apax founder Alan Patricof and his appetite for entrepreneurs that can “pivot” (source: „The pivotal moment. Bet on a boss who can twirl on his toes,“ The Economist, 04.12.10, page 74). In the history of its existence, Skype has changed payment options several times including trying out several variants of service and subscription fees. Twitter is perfecting its monetization scheme based on Tweet promotions continually as we are writing these words.

In an interview for the book Simply Seven, Frédéric Court, General Partner of the London-based fund Advent Venture Partners emphasizes the advantages of experimentation, adding that globalization of the internet provides further possibilities: “It is becoming easier and easier to launch a product extremely fast in different markets all over the world and see where it sticks. The whole world has become a business laboratory.” Court notes: “We love the globalization of opportunities via the web, especially as it enables start-ups in markets like Europe or the U.S. to remotely address high-growth emerging markets very efficiently.”

The costs of launching new ideas globally will fall even further. “Software as a service” (SaaS) and “cloud” offerings allow clever combinations of different services provided by different companies. This means that business building blocks will also be combined in new ways, too. Leading internet companies such as Apple and Google have started to offer payment options as part of their platforms, essentially extending web services into the area of monetization. We will discuss this more in the final chapter. As costs fall further, it will become even easier to experiment – these are exciting times.

Thank you, Frédéric Court, for taking the time for the interview and providing us with your insight on experimentation and globalization. Check out Frédéric’s Tweets on @fcourt.

21 Feb

Google’s One Pass Annoucement… yet another “Business Model as a Service.”

One Pass, Android Market and Chrome Web Store Have Broad Significance for Business On the Web – Not Just For Media

The announcement made by Google on the 16th of February in Berlin about One Pass, a micropayment and subscription payment service for newspapers and magazines, may at first glance seem like a specialized offering for the media industry.

Indeed, One Pass is an extremely interesting offering for media companies, because it charges a 10% commission payment – low compared to the 30% cut that Apple takes as a standard for being on its platform. Google also states that content providers will be able to access customer data, too. Eric Schmidt is quoted in the Financial Times (Tim Bradshaw and David Gelles, “Google’s One Pass to take on Apple,” 16.02.11) saying: “We basically don’t make any money on this.” A great message for media, because the more platform options there are, the better (as the music industry can attest to).

One Pass has a far broader significance for business on the web beyond media, however. It is only the most recent announcement made by Google regarding different payment solutions as a service. Its Chrome Web Store facilitates licence fee payments for browser-based games, Google Checkout is a unified payment system and Android Market is being extended rapidly. Not all these initiatives are faring equally well, but there is a lot happening, no doubt.

What Google is doing is a further important developent in the extention of the masheable web to include business model building blocks. The basic building blocks of internet business have been around for a long time. Our upcoming Simply Seven book provides a navigational guide to the seven different building blocks and highlights some of the main opportunities and threats associated with each. Now, a handful of powerful internet companies are offering these basic business building blocks as ready-to-go services, “business models as a service.”

Google’s many moves in this area are smart competitive reactions to the massive success of Apple in attracting developers and content owners to its App Store. What Google is doing will in turn result in reactions by others who have the ambition to extend their own business model funtionality to the web, such as Amazon, Microsoft, PayPal and also Facebook.

What Will Facebook Do?

The strategy of Facebook in the next months in this regard will be extremely interesting. Right now, the company is focusing primarily on creating a robust and sustainable social web business powered by advertising. Introducing advertising has been a learning experience for both the company and the Facebook user community. Facebook Credits, the mandatory payment system for Facebook games, is still pretty much contained to the social games area.

If the half a billion power house starts to offer “business model as a service” functionality, either through Facebook Credits or through another solution, start-ups and other internet businesses may not only see this as an interesting option, they may find that being on the Facebook business platform is a must have requirement. (By the way, this may be the reason Facebook is purposely not extending into this area just yet, because it would gain too much commercial power too quickly.)

Even without Facebook, the web has numerous ready-made business building block options available already today. Software, games and content can be sold as licences and subscriptions over App Store/ iTunes or Android Market/ Crome Web Store/ One Pass. Retailers can choose to sell their physical products over the third party marketplaces of eBay or Amazon.

Right now, these transaction platforms are available on the respective marketplace or mobile sites. We can expect these funtions to be integratable into any web site in the future, similar to the way Facebook Connect makes a user’s social graph transportable into third party web sites.

How Companies Can Take Advantage of the Emerging Business Model APIs as a “Fast Track” Business-Building Approach

Google and Apple are leading the way to build what essentially is a business model API. This is exciting for companies. We are moving from the ability to use services like SendGrid (massively scalable email service), Amazon Web Services (infrastructure web services), Force.com (enterprise applications) to yet another level. As these different internet business building blocks develop, it becomes easier and easier to launch complete web businesses from scratch very fast. However, the solutions provided by Google and Apple are not free and they do have strings attached. It is important to understand the offerings very closely especially the ownership of customer data.

The proprietary business building blocks offered by Apple and Google leverage these companies’ internet reach and ecosystem and generate sales from commissions. This should not be taken lightly. The ability to ask for significant commissions on sales of up to 30% (in the case of Apple) means that these companies are providing actual strong value add to their business partners to enable sales, in the form of reach, registered members, technical functionality and a device-based ecosystem. An important value-add is that Apple and Google provide a trusted environment – a big benefit for unknown brands. Executives from many other companies are watching Google and Apple closely saying: “I wish I could do that.” This includes media companies, mobile phone and device manufacturers and a slew of internet players.

In an interview for the upcoming book Simply Seven, Roland Manger, Managing Partner of the European venture capital fund Earlybird differentiated between two kinds of start-ups. Those which will attempt to independently build up their own user base and those companies, let’s call them “fast track start-ups,” which leverage existing platforms populated with users and built-in business model functionality. “Companies need to make a choice fairly early on in their lifetime,” Manger says, “if they want to make a good living with a smart idea on the back of a proprietary platform or if they want to own their whole value chain.”

But being a “fast track start-up” does not have to be a one-way street. Zynga is a powerful example of a highly successful company which initially leveraged the Facebook platform to make its social games popular. In the past months, it went beyond Facebook with independent web- and mobile-based games.

In fact, launching “fast track start-ups” based on a unique idea, but built on pre-existing business platforms, is a great way to test new concepts. Some of these will graduate to “whole value chain” status. One of the challenges is to integrate the different web services driven technologies and building blocks into a working and scalable system.

It is this “fast track” path to success which new style seed initiatives such as Y Combinator, TechStars, The Founder Institute and others are taking advantage of. (Everybody avoids using the term “incubator” these days.)

The ecosystem of leading internet platform players and new businesses is evolving extremely fast and resulting in significant opportunity. The power to facilitate business transactions is being added into the mix as efficiently as it is to integrate into the social web and build on other pre-developed web services.

Thank you Roland Manger for taking the time for an interview in the midst of your busy schedule and thanks Gabriel Matuschka for adding important insight to this blog. Roland Manger’s own blog can be found under “Bird’s-Eye View.”