More tea leaves from Google’s analyst day presentation

It seems that a lot of the interesting content from last week’s analyst event at Google is in the speaker notes from the PowerPoint slide deck. Greg Linden and others have already pointed out the notes about Google’s storage plans (GDrive, Lighthouse on slide 19).

This afternoon there’s another blip on CNBC about accidental communications in the slides.

The previously undisclosed notes stated that Google’s core advertising business was expected to grow by nearly 60 percent to $9.5 billion in 2006 but that profit margins in its mainstay AdSense business could be squeezed this year and beyond.

I didn’t remember seeing a revenue forecast in there, so I went back and looked to see what it actually said (slide 14).

Our ads business for the moment is healthy and growing and we’re on a strong trajectory
projected to grow from $6bn this year to $9.5bn next year based purely on trends in traffic and monetization growth

But strong competitors are attempting to aggregate traffic
AdSense margins will be squeezed in 2006 and beyond
Y! and MSN will do un-economic things to grow share
The ad network will be commoditized over time
So, we need to build a more complete ads system that is characterized by two words: wider and deeper. That is, cast the net wider to attract new customer types) and deeper to enhance our relationship with existing customers.

Reuters says these particular notes were supposedly left in accidentally from internal planning discussions in late 2005.

“These notes were not created for financial planning purposes, and should not be regarded as financial guidance. Consistent with past practice, Google is not providing revenue guidance,” Google said in the filing.

I liked “Y! and MSN will do un-economic things to grow share”.

Don’t think we’ll be getting PowerPoint files from Google investor relations next time around. There’s a PDF file up now.

Update 03-08-2006 21:34 PDT: Paul Kedrosky has posted a copy of the original PPT slides.

If they manage to form a new monopoly, I want to see a new Bell Labs

AT&T announced this weekend that they will be purchasing BellSouth for $67 billion. (Light Reading)

The pieces of the original AT&T system continue to reassemble. (AT&T was recently purchased by SBC, which was Southwest Bell merged with Pacific Bell). The companies declare that this will not reduce competition:

“Since AT&T and BellSouth are not actual competitors in the local, long distance and video markets, and because BellSouth is not a significant competitor with AT&T in the enterprise market, the merger will not reduce competition in any of those markets”

If we end up seeing the return of monopolistic carrier practices, I hope they think to fund something like the original Bell Labs while they’re at it.

More from Om Malik.

Will Google grow at this rate forever? No? Then DIE!!

Today was a moderately exciting or irritating day to be a investor in public technology companies. Google’s CFO, George Reyes, apparently forgot that he was webcasting to a public group of investors rather than conferencing with an in-house team at the Googleplex during the Q&A session at the Merrill Lynch Internet, Advertising, Information, & Education conference: (Yahoo/AP News)

Q: Looking back to Q3 2005, was there anything in there that was maybe sort of one-time in nature that accounted for such strong revenue growth…?

A: So we went through a period of probably 18 months where we thought we had…well, let me characterize it…we had what was called a RevForce initiative–Revenue Force–which was really a team of really very bright technical engineers that were trying to tweak and optimize the ad system, and not–you know in very very responsible ways [Don't Be Evil!]–and that sort of paid off nicely with the fruits of that labor.

And what’s happened since then is that we got so good and so efficient at that back then that really most of what’s left is just organic growth, which means you have to grow your traffic and your have to grow your monetization.

But so, I think, we’re now, clearly our growth rates are slowing. And you see that each and every quarter. And we’re going to have to find other ways, you know, to monetize the business.

Later in the Q&A there’s something about the “law of large numbers” ultimately limiting growth due to running out of people to look at advertising. These are high class problems to have, and these sound like perfectly intelligent comments for an internal coffeetalk or private discussion. But when your stock is trading at 72x earnings, it’s a bad thing when the CFO says “growth is slowing” to a room of investors looking for extreme growth. The response is going to be “shoot first and figure it out later”, which is what happened this morning.

Reminds me of a scene in Ghostbusters:

Gozer: Are you a God?
Ray: No.
Gozer: Then — DIE!!

Winston: Ray, when someone asks if you’re a God”, you say YES!


How big is the growth rate? Pulling some data from Google’s IR site, this graph shows GOOG’s quarterly gross revenue growth for 2003-2005. The maroon line is Adsense sites, the light blue line is for Google-owned sites, and the dark blue line is the total.

One simplistic lower bound for future growth at Google would be to assume that it tracks the overall growth of internet use. I’ve inserted an additional blue line just above 4%, which is a rough estimate of the overall growth rate of the internet. I haven’t tried to find detailed data, this is from Jakob Nielsen’s Alertbox, which cites an 18% annualized growth rate from 2002 through 2005.

“We are getting to the point where the law of large numbers start to take root,” Reyes said Tuesday. “At the end of the day, growth will slow. Will it be precipitous? I doubt it.”

Google issued a press statement late in the afternoon:

As we have stated before, monetization improvements will continue to be a key factor in driving future revenue growth. We still see significant opportunities to improve monetization and intend to continue to focus our efforts in this area.

Moreover, as we have stated in our SEC filings, our revenue growth rate has generally declined over time and we expect that it will continue to do so as a result of the difficulty of maintaining growth rates on a percentage basis as our revenues increase to higher levels.

Hey, how’s that GBuy project going, anyway…

Webcast of the conference presentation (registration required)

Henry Blodget has a number of interesting posts on Google, including why he doesn’t own it, approaches to valuation, the most recent earnings, and today’s adventures.

The Google analyst day coming up this Thursday should be pretty interesting. Might be worth trying to catch the webcast. Bet George is getting some extra practice in.

Harmony and Disharmony – Organizational issues in Al-Qaida and startups

There’s an interesting new report out today from the Combating Terrorism Center at West Point (the US Military Academy), titled “Harmony and Disharmony: Exploting Al-Qa’ida’s Organizational Vunerabilities“, which has some useful insights for entrepreneurs and corporate managers as well as for those dealing with global jihadist movements or with a general interest in global security issues.

The report is based on a collection of captured documents which have been recently declassified, and examines some of the strengths and weaknesses of the Al-Qa’ida organizational structure. The merits of a 21st-century, networked, mobile, internet-enabled insurgency have been observed elsewhere at length, as summarized by James Na at Korea Liberator:

Martin van Creveld of Hebrew University, the author of the highly influential Transformation of War who has been lauded (including by me) as a leading prophet of military transformation, even went on to suggest that the small/weak would always beat the big/strong in a long war. (The stronger side is more constrained in methods; it also loses morale more rapidly from inability to defeat the weak completely over a long period of time; on the other hand, the weaker side often enjoys a more flexible, networked organization, and has a faster decision making cycle, i.e. the OODA loop).

The captured documents (available online in both original Arabic and translated English) have a remarkably familiar feel to them. Take out the parts about politics, religion, and carrying out jihad, and it looks kind of like an odd startup, with position descriptions (“must have work experience of no less than 5 years and have complete military operational experience in the battlefront and bases”), employment contracts (“vacation requests must be submitted two and a half months before the travel date”), and bylaws (“Goals – To spread the feeling of Jihad throughout the Muslim nation”).

Part of what makes the report interesting is that it’s based on Al-Qa’ida’s own self-assessment of what’s working and what isn’t working. Here are some sample items from a post-mortem summary of Al-Qa’ida’s experience in Syria:

  1. Absence of an advanced comprehensive plan and strategy
  2. The faithful mujahideen were spread among numerous organizations
  3. Failure to explain the mujahid revolutionary theory and clarify it’s objectives on an ideological level
  4. Low level of religious instruction and scarcity of revolutionary and political awareness
  5. Dependence on quantity after the 1st blow did away with the quality
  6. Weak public relations campaign both inside and out
  7. Dependence of the mujahideen on outside sources for support instead of being self-sufficient
  8. Getting bogged down in long term gang warfare unsuitable for the country
  9. Moving out of the country for an extended period of time, losing touch with the masses, and the decline of the religious and revolutionary level among the members
  10. Not benefiting from the Islamic and international gang warfare experiences
  11. Dealing with the neighboring regimes as if they were permanent supporters of jihad
  12. Operating publicly was a grave error
  13. Deficiency of military operations on the outside and failure to deter the enemy and their friends
  14. No planning for the aftermath of the regime
  15. Not rallying around the religious scholars and benefiting from them

A lot of this looks like the “before” part of a management consulting project.

Some items here remind me of Noel Tichy’s views on management, on the need for aligning ideas and values to achieve effective action within the organization. At the same time, many of their operational problems are linked to “agency” problems. This is when individuals or affliates have an incentive to do something in their own interest rather than those of the organization, and which get worse in the presence of personal risk and operational secrecy. This tends not to happen as much in companies, but there are still spectacular failures from time to time (think Enron’s SPEs).

If you’re interested in thinking about startup organizations and competition from a very different perspective, check it out.

Update 02-14-2006 23:37 PST: You may also be interested in “Unrestricted Warfare“, on asymmetric warfare, a 1999 paper by senior Chinese PLA officers, and Scott Maxwell’s recent series of posts, “How David can beat Goliath“.

Update 03-08-2006 10:58 PST: You may be interested in “Stealing Al-Qaida’s Playbook” which reviews other writings from active jihadists, also from the Combating Terrorism Center, although it’s probably less useful in a business context than the ideas on asymmetric warfare.

Google and magazine covers as a contrary indicator

Is Google headed for a downturn? Not only is it featured in a generally negative cover article in this week’s Barron’s, but now it’s featured on the cover of Time as well. These magazines cater to very different audiences, so turning up on both at the same time could be considered a sign that Google is reaching a peak of sorts on both the financial and general cultural fronts.

There’s a long tradition of things going badly for companies and people after getting this sort of high profile magazine cover treatment. If Google turns up next on the cover of People or Entertainment Weekly they’re probably doomed…

Update 02-12-2006 18:31 PST: John Battelle suggests that having made the cover of Time, Google has “jumped the shark”, while Matt Cutts offers a recent historical perspective of Google’s non-shark-jumping behavior while simultaneously demonstrating effective link baiting technique.

I don’t consider myself an expert on shark-jumping, but I do think that hitting the covers of Barrons and Time is qualitatively different than the counter-examples that Matt offers. Google is transitioning out of being loved for being better, new, and whizzy, and into a stage where people expect it to “just work”. Google has gotten large enough that people are developing a love/hate relationship with it (and web services in general) like they have with e-mail, and where the discussion about privacy, media, and commerce is just starting to get some critical attention from people outside tech land.

A primer on the evolving media industry from Carl Icahn and friends


The proposal on the table is to split Time Warner into four pieces, undoing years of mergers and acquisitions. The (massive) report from Carl Icahn’s investment banking team at Lazard is worth a look for anyone with an interest in online or traditional media businesses or who simply lived through the dot-com boom and crash. I’ve only skimmed through it so far, but it’s practically a textbook on the evolution and current state of the media industry.

TWX is at the center of the storm that has and will continue to jolt American industry. Technology, regulation and competition are changing at an accelerated pace. The markets are increasingly rewarding companies—across all industries—with a well-defined vision, as shareholder expectations on transparency, capital returns, appreciation and corporate governance increase. Against this backdrop, anticipating and harnessing change is critical for success.

If you want to get a quick look at market sizes, margins, and fees, this is a fascinating read. It’s packed with details comparing the financial and operating performance and market reach of AOL with Google, Yahoo, MSN, and other online properties, television properties such as HBO, CNN, Cartoon Network, Court TV, and others, print publishing for People, Time, and dozens of magazines, the Time Warner cable system, and the Warner Brothers movie business.

The proposed restructuring would create four new businesses: AOL, a television and film media business, a print publishing business, and Time Warner’s cable distribution business. I have no stake in TWX, but if I were a long time shareholder, I’d be wondering why I’m getting a lower return than holding cash, while I see hugely successful franchises (The Matrix, Harry Potter, AOL, HBO, People) operating in the various business units. Icahn only holds about 3% of the company, so the proposal doesn’t seem likely to succeed soon, but this is a pretty major prod for the TWX management team.

The 300-something-page report, along with various SEC filings, is available for free download from enhancetimewarner.com

More from Bloomberg, Business Week.

See also:

Consumables and the decline of recording studios

Today’s Wall Street Journal (January 24, 2006) has a short profile of Paul Motian, an outstanding jazz drummer who was part of the Bill Evans Trio in the early 1960s. (If you haven’t heard of Bill Evans and have any interest in jazz piano, I highly recommend checking out their recordings).

What caught my attention, however, was this comment from Paul Motian on the decline of the recording studio business:

“A lot of recording studios are closing because people don’t use tape anymore, and that’s where the recording studios make their money. Everyone comes in with their hard drive, puts it on their computers.”

I still have a bunch of 1-inch 16-track master tapes somewhere out in the garage and remember spending a relative fortune on studio time and services, back in the 80s, probably the waning days of multitracking and overdubbing by hand on a mixing board. The Cars were wildly successful at the time and had opened a state-of-the-art studio at Synchro Sound, which was starting to use digital recording systems, but which far exceeded our band’s budget.

There’s still no substitute for good microphones, but these days digital mastering to hard disk is a big win over tape.

I’d never thought about the recording tape as being a critical profit driver for a recording studio, but in retrospect it makes some sense. When the only copy of your work is on a little strip of magnetic film shuttling back and forth on open reels, who’s going to buy cheap tape?

VoicePulse – Hasn’t signed new subscribers since November 2005 due to E911?


The VoicePulse signup problem I described earlier today seems both worse and sillier than before. They apparently stopped signing up new subscribers at the end of November 2005, due to non-compliance with the FCC E911 requirements. They’re currently doing integration testing with Intrado for 911 service as well as negotiating with the FCC on what constitutes an acceptable solution, with an expected resolution sometime in January 2006.

Here’s someone who ran into a similar signup problem (although I didn’t get a warning prompt about no E911 today):

It turns out that Voicepulse isn’t selling new service at all right now. Of course it’s all the big bad FCC’s fault (never mind the fact that many other VOIP providers are selling new service at the moment, and many of them are providing usable 911 service.) I’m sure the FCC is making it hard on these providers, since the old-line phone companies are pulling the strings, but a) other companies are currently selling new service (I proved this to myself, I ordered VOIP service from a known-good provider) and b) many of these other companies are providing 911 and E911 services.

I spoke to a Voicepulse representative who did confirm that they’re not selling ANY new service at all, and don’t know when they will be again. Of course, he said it would be “soon” and the delay was entirely because they were waiting for replies from the FCC. When I commented that it might be a good idea to announce that BEFORE potential customers spend 20 minutes filling out information on their site only to be told that they couldn’t buy anything, he said that “had been discussed in meetings and it was decided to put the message where it is because that’s where the 911 disclaimer already was in the ordering process.” I suggested that he start looking at the help-wanted ads, because I didn’t think an inbound phone sales rep was going to have a job very long at a company that isn’t selling anything, and it couldn’t be satisfying to answer calls from irritated potential customers all day.

My existing VoicePulse line has been working fine, and they’ve never asked for E911 location profile data yet. I have been following the news on VOIP E911 requirements over the past few weeks, but was under the (false) impression that most of the US VOIP service providers had gotten various combinations of deadline extensions from the FCC and technical solutions in place.

This thread lists the current E911 status of US VOIP providers as of January 8th:

[VoicePulse] Not Taking New Orders? (DSL Reports)

Tried to order VP today and was rejected because of the 911 fiasco. So I can’t even order it even if I understand and agree to the 911 situation?

Nope, thanks to the FCC they need to get e911 before they can sell service again.

No, applies only to the VOIPs that failed to get their 911 house in order during the time allowed by the FCC. Of the well-known brands that would include Voicepulse, Lingo, Nuvio. The others managed to get it done and are selling right now: Vonage, Sunrocket, Viatalk, Packet 8, Broadvox, ATT CallVantage (in about 70% of their markets.)

I’m astonished that VoicePulse appears to have gone for nearly two months with an known-broken signup process (and presumably no new subscribers) without mentioning that detail on their website. They also appear to have a lot of company.

It looks like I’ll need to do a bit of work to find an alternate provider, assuming that VoicePulse isn’t able to take orders by tomorrow. I’m trying to set up a phone number in the Malibu, California service area, and would prefer to use an existing SPA-2002 or SPA-3000, rather than buying another adapter. The E911 aspect is irrelevant as the physical IP connection will be here in the Bay Area most of the time but forwarded to various other locations.

More Links:

VoicePulse – how not to implement a customer feature transition


I just got off the phone with VoicePulse, my current VOIP service provider. They are demonstrating how not to manage a web service feature transition today, by both turning away new customers and annoying their existing ones.

I’ve been relatively happy with VoicePulse, having signed up with them a few months ago for commercial US PSTN access. The voice quality and stability has been OK, and they also offer IAX access which I was thinking about using for future integration with our Asterisk implementation.

All day today I’ve been trying to add a new device and a new number to my existing account. The sign up process requires entering the serial number and MAC address from the VOIP adapter (in this case, a SPA-2002 I picked up a few days ago), selecting a telephone number, and providing contact and billing information. I noticed that since I signed up for my account a few months ago they’ve started collecting E911 contact information, and added some verbiage explaining the limitations of VOIP’s 911 service (i.e. they don’t really have any idea at all where you are).

The process only takes a few minutes, so I’ve been trying it in between various other tasks today, expecting that it wouldn’t take very long. Each time I’ve tried it, I get an error page at the end.

Sorry!

You have encountered a problem while going through the ordering process. This is usually due to your session expiring if the browser was left unattended for too long.

If you have encountered an error with our ordering system, VoicePulse’s development team has been automatically notified.

Please close this window, go back to www.voicepulse.com in a few minutes and try again. If you continue experiencing problems, please call 732-339-5100 M-F 9am-7pm EST to place your order with a customer service representative.

The first couple of times it seemed vaguely plausible that the session might have timed out, but the third time I went straight through all the forms, now well practiced and fully equipped with all the information. Still got the error message. This time I called the customer service number.

According to the Voicepulse phone rep, their system is unable to accept any new orders at all today. They’re apparently rolling out changes to their order application, related to the E911 service that I observed during the signup process. Here are some observations:

  • The VoicePulse customer service rep I spoke with didn’t learn about their phone order application being out of service until this morning. You’d think that they’d give their own CSR team advance notification about a planned application outage.
  • The VoicePulse web application team didn’t bother to build a page indicating that they were unable to accept new orders, and that customers keying in any user account data (like me) would be wasting their time.
  • The VoicePulse web application team left the existing failed-signup message in place. Although “true”, it’s misleading, since the site failure has absolutely nothing to do with the session timeout, and they know that the order process could never have worked in its current state.
  • It didn’t sound like they had a committed “time to fix” — the CSR said it should be tomorrow afternoon sometime, but the fact that they didn’t tell them about it until this morning makes me think it might not have been planned. They suggested I call back tomorrow to see if it was working before trying to place an order. Ugh.

I can’t think of a good rationale for not blocking new orders on their site and putting up a maintenance message of some sort. Maybe they didn’t want people to know they couldn’t take orders?

I can’t think of a good rationale for not telling the customer service department ahead of time.

I suspect that most customers might be unhappy about keying in the 12-digit MAC, 12-digit serial number, along with their credit card data and having Voicepulse’s order processing application choke on it repeatedly, especially when they already know it won’t work. A lot of them don’t know how to cut and paste from the Sipura’s configuration page, and are vaguely uncomfortable with giving out their credit card numbers online as well.

I am a relatively patient person, but I’m astonished at the poor planning and execution exhibited at Voicepulse today. They either can’t plan and manage basic site upgrades, or they’re trying to hide some unexpected maintenance work.

If anyone has a VOIP carrier that they actually like, as opposed to simply tolerate, let me know. I may be looking for a new service provider soon.

Googlepark: the battle for AOL


More business comics – the latest installment of Googlepark is up at Channel 9 (via Google Blogoscoped)

If you haven’t seen the previous episodes of Googlepark, here are links to the other installments: Googlepark.

Yahoo goes after more tagging assets, buys del.icio.us

Yahoo continues down the path of more tagging and more collaborative content. Having already purchased Flickr, this morning they’re acquiring del.icio.us (terms undislosed):

From Joshua Schachter at the del.icio.us blog:

We’re proud to announce that del.icio.us has joined the Yahoo! family. Together we’ll continue to improve how people discover, remember and share on the Internet, with a big emphasis on the power of community. We’re excited to be working with the Yahoo! Search team – they definitely get social systems and their potential to change the web. (We’re also excited to be joining our fraternal twin Flickr!)

From Jeremy Zawodny at Yahoo Search Blog:

And just like we’ve done with Flickr, we plan to give del.icio.us the resources, support, and room it needs to continue growing the service and community. Finally, don’t be surprised if you see My Web and del.icio.us borrow a few ideas from each other in the future.

From Lisa McMillan, an enthusiastic user of all 3 services (comment on the del.icio.us blog):

Yahoo that’s delicious! I live here. I live in flickr. I live at yahoo. This is insane. You deserve this success dude. Just please g-d don’t let me lose my bookmarks :-D I’m practically my own search engine. LOL

Tagged bookmarking sites such as del.icio.us can provide a rich source of input data for developing contextual and topical search. The early adopters that have used del.icio.us up to this point are unlikely to bookmark spam or very uninteresting pages, and the aggregate set of bookmarks and tags is likely to expose clustering of links and related tags which can be used to refine search results by improving estimates of user intent. Individuals are becoming their own search engine in a very personal, narrow way, which could be coupled to general purpose search engines such as Yahoo or Google.

I think Google needs to identify resources it can use to incorporate more user feedback into search results. Looking over the users’ shoulders via AdSense is interesting but inadequate on its own because there are a lot of sites that will never be AdSense publishers. Explicit input capturing the user’s intent, whether through tagging, voting, posting, publishing, is a strong indication of relevance and interest by that user. I think the basic Google philosophy of letting the algorithm do everything is much more scalable, but it looks like time to capture more human input into the algorithms.

In a recent post, I pointed out some work at Yahoo on computing conditional search ranking based on user intent. The range of topics on del.icio.us tends to be predictably biased, but for the areas that it covers well, I’d be looking for some opportunities to improve search results based on what humans thought was interesting. As far as I know, Google doesn’t have any assets in this space. Maybe Blogger or Orkut, but those are very noisy inputs.

This seems like a great move by Yahoo on multiple fronts, and I am very interested to see how this plays out.

See also:

Update 12-12-2005 12:30 PST: No hard numbers, but something like $10-15MM with earnouts looks plausible. More posts, analysis, and reader comments: Om Malik, John Batelle, Paul Kedrosky.

New and improved HP board election rules

Peter Burrows points out the new and improved HP board election rules:

Today’s Good Governance Award Goes To…
…the board of Hewlett-Packard. That’s not a sentence I would have forseen myself writing, given some of the nonsense that’s gone on in Palo Alto in recent years. But yesterday, HP announced that board members from now on would need to win a majority of shareholder votes to be re-elected to the board. If they don’t, they’re required to submit their resignation.

HP press release:

Under the policy, any nominee for director who receives a greater number of votes “withheld” from his or her election than votes “for” such election will tender his or her resignation for consideration by the nominating and governance committee of HP’s board of directors.

Follow the Money – Microsoft Windows Live, Google, and Web 2.0


Some thoughts following the Microsoft splash this week:

The big PR launch for Windows Live last Tuesday announced a set of web services initiatives. It probably drives a lot of Microsoft people crazy to have the technology and business resources that they do, and to have so little mindshare in the “web 2.0″ conversations that are going on. I haven’t read through or digested all the traffic in my feed reader, but it looks like a lot of people are unimpressed by the Microsoft pitch. Been there, done that. Which is true, as far as I can see. The more interesting question is whether this starts to change the flow of money and opportunities around developing for and with Microsoft products and technologies.

If I do a quick round of free association, I get something like this:

Microsoft:

  • corporate desktop
  • security update
  • vista delayed
  • who’s departed this week

Microsoft is a huge, wildly profitable company. It initially got there by being “good enough” to make a new class of applications and solution developers successful in addressing and building new markets using personal computers, doing things that previously required a minicomputer and an IT staff. Startup companies and individual developers that worked with Microsoft products made a lot of money, doing things that they couldn’t do before. All you needed was a PC and some relatively inexpensive development tools, and you could be off selling applications and utilties, or full business solutions built on packages like dBase or FoxPro.

Microsoft made a lot of money, but the software and solutions developers and other business partners and resellers also made a lot of money, and the customers got a new or cheaper capability than what they had before. Along the way, a huge and previously non-existent consumer market for IT equipment and services also emerged. Meanwhile, the market for expensive, low end minicomputers and applications disappeared (Wang, Data General, DEC Rainbow, HP 98xx) or moved on to engineering workstations (Sun, SGI, HP, DEC/MIPS) where they could still make money.

The current crop of lightweight web services and “web 2.0″ sites feels a little like the early days of PC software. In addition to recognizable software companies, individual developers would build yet-another-text editor or game and upload it to USENET or a BBS somewhere, finding an audience of tens or hundreds of people, occasionally breaking out into mass awareness. Bits and pieces are still around, like ZIP compression, but most of it has disappeared or been absorbed and consolidated into other software somewhere. I have a CD snapshot of the old SIMTEL archive from years ago that’s full of freeware and shareware applications that all had a modest following somewhere or another. Very few people made any money from that way. In the days before the internet, distribution of software was expensive, and payment meant writing and mailing a check, directly from the end user to the developer.

Google has become a huge, wildly profitable company so far by building a better search engine to draw in a large base of users, and using their platform to do a better job of matching relevant advertising to the content it’s indexing. Now, a small application can quickly find an audience by generating buzz on the blogging circuit, or through search engines, and receive two important kinds of feedback

  • Usage data – what are the users doing and how is the application behaving
  • Economic data (money) – which advertising sponsors and affiliates provide the best return

Google’s Adsense and other affiliate sales programs are effectively providing a form of micropayments that are providing incentives and funding for new content and applications, with no investment in direct sales or payment processing by the developers, and no committment from the individual end user.

It’s simply a lot easier for a small consumer targeted startup to come up with a near term path to profitability based on maximizing the number of possible clients (=cross platform, browser based), being able to scale out easily by adding more boxes (not hassling with tracking and paying for additional licenses), and with a short path to revenue (i.e. Adsense, affiliate sales). A developer who might have coded a shareware app in the 80′s can now build a comparable web site or service and find an audience, and actually make a little (or a lot of) money. Google makes a lot of money from paid search ($675MM from Adsense partner sites in 3Q05), but now some of that money is flowing to teams building interesting web applications and content.

In contrast, in the corporate environment (where it’s effectively all Microsoft desktops now), things are different. Most organizations won’t let individuals or departments randomly throw new applications onto the network and see what happens. This is a space that usually requires deep domain expertise, and/or C-level friends, in order to get close enough to the problems to do something about it. But the desktops all have browsers, and the IT managers don’t want to pay for any more Windows or Oracle licenses than they are forced to, so there’s some economic pressure to move away from Windows. But there’s also huge infrastructure pain, if your company is built on Exchange. There’s less impetus here for new features, the issue is to keep it secure, keep it running, and make it cost less. Network management, security, and application management are all doing OK in the enterprise, along with line-of-business systems, but these are really solutions and consulting businesses in the end. The fastest way to get “web 2.0″ into these environments is for Microsoft to build these capabilities into their products, preferably in as boring but useful a way as possible. Not a friendly place for trying out a whizzy new idea, and generally a hard place for a lightweight software project to crack.

On another front, Microsoft also has most of the consumer desktop market, but by default rather than by corporate policy. Mass market consumers are likely to use whatever came with their computer, which is usually Windows. They’re also much more likely to actually click on the advertisements. Jeremy Zawodny posted some data from his site showing that most of his search traffic comes from Google, but the highest conversion rates come from MSN and AOL. MSN users also turn out to be the most valuable on an individual basis, in terms of the effective CPM of those referrals on his site.

So let’s see:

  • Many new application developers are following the shortest path to money, presently leading away from Microsoft and toward open source platforms, with revenue generation by integrating Google and other advertising and affiliate services
  • Microsoft has access to corporate desktops, as well as mainstream consumer desktops, where it’s been increasingly difficult for independent software developers to make any money selling applications
  • Microsoft is launching a lot of new me-too services in terms of technical capability, but which will have some uptake by default in the corporate and mass market
  • Microsoft’s corporate users and MSN users are likely to be later adopters, but may be more likely to be paying customers for the services offered by advertisers.
  • Microsoft could attract more new web service development if there were some technical or economic incentives to do so; at present it costs more to build a new service on Microsoft products, and there’s little alignment of financial incentives between Microsoft, prospective web application developers, and their common customers and partners.

Mike Arrington at TechCrunch has a great set of play-by-play notes from the presentation and a followup summary. He thinks the desktop gadgets and VOIP integration are exciting.

what really got me today was the Gadget extensibility and the full VOIP IM integration.

In the past, Microsoft grew and made a lot of money by helping a lot of other people make money. Today, the developers are following the money and heading elsewhere, mostly to Google. This could quickly change if Microsoft comes up with a way to steer some of their valuable customers and associated indirect revenue toward new web application developers. They are the incumbent, with huge market share and distribution reach. I don’t think they’ll ever have the “cool” factor of today’s web2.0 startups, and I don’t think they’ll regain the levels of market share they have had in the past with Windows, Office, and Internet Explorer. But they could be getting back in the game, and if they come up with a plan to make some real money for 3rd party web developers we’ll know they’re serious.

The Cambrian Age 2.0


Haven’t been keeping up on feedreading due to this cold for the past few days. I’m still kind of out of it, but I finally went to see the doctor and the prescription meds seem to be knocking it back a couple of notches.

I see that Riya (née Ojos) is about to start their public alpha trials. Mike Arrington got an early look today. Looking forward to trying it out.

During the past few days of semi-coherent downtime, I was having something like the following thought, which Russell Beatty articulated in a post this evening:

All these startups in my feeds lately are killing me! There are tons of them, but none seem to be doing anything particularly special. I mean, it’s nice that there’s a sort of rebirth of small startups, but there’s absolutely no sort of wow factor that I’ve seen. And no, this isn’t an anti-Web 2.0 style backlash: I really believe in the idea of the web as a platform. Amazon and eBay’s web services are perfect examples of platforms which have created huge value for both companies, as well as the developers using their APIs. That’s not the problem. It’s all these Flickr-wannabes, flip-it-quick companies that are bugging me.

He goes on with a quick taxonomy of web2.0 startups:

  • Scrape Engines
  • Mashed Ups
  • Web Trapps
  • Social Anything
  • Phile Sharing
  • User Generated Dis-Content
  • RSS Holes
  • Firefoxing

It just seems that no one is trying to change the world any more. No one is aiming to create “insanely great” products or do the impossible. Why not? Why are so many people grasping at the low-hanging fruit, when there’s so much more goodness for everyone if they just stretched a little higher?

A lot of people are wrestling with the question of where’s all this “web2.0″ stuff going to take us. Many of the past barriers to entry have dropped, with free software, nearly free hardware, inexpensive and widely connected networks, and lower cost labor than ever before. As a predictable consequence, a lot more ideas are getting tried out. Unlike before, we now have tools and infrastructure that allow what would have been just paper concepts or slideware be turned out as functioning web sites on the internet.

We presently have a wonderful but frenzied universe of new-this-mashed-with-that-meets-flickr. Trying to think about it during this cold has been making me dizzy, but I had visualized something like an old science movie illustrating the Cambrian Explosion, in which life suddenly went from fairly simple cell-based organisms to a diverse assortment of fascinating, squiggly, twitching, wiggling, multi-colored creatures, bumping into each other, gobbling each other up, and most of which subsequently disappeared.

Obviously, not everything worked out. But:

Aside from a few enigmatic forms that may or may not represent animals, all modern animal phyla except bryozoa appear to have representatives in the Cambrian, and most except sponges seem to have originated just after or just before the start of the period. Many extinct phyla and odd animals that have unclear relationships to other animals also appear in the Cambrian. The apparent “sudden” appearance of very diverse faunas over a period of no more than a few tens of millions of years is referred to as the “Cambrian Explosion”.

OK, so we’ll have a few winners left standing after the next crash.

The economics for many of the web 2.0 startups is driven by companies like Google, Yahoo, and Amazon. The existence, success, and low entry requirements for pay-per-click advertisement and affiliate sales has shaped their implicit revenue plans, while the cheap-or-free access to and straightforward implementation of the web service APIs has shaped their technology and investment (or spending) plans. They also provide the possibility that “if you build it, we will buy you”.

So, any number of things could bring an abrupt end to our web2.0 “Cambrian Age”. Here are some random possibilities:

  • Paid search gets screwed up by click fraud, spamblogs, or other, thus removing money from the system
  • XML patent guys make some headway, thus making lawyers central to the system
  • Avian flu crosses over to humans and puts a dent in the globally mobile elements of society

For a quick view of the landscape for web2.0 startups, go check out Paul Kedrosky’s presentation slides from the Vancouver Enterprise Conference, titled “Get Your Head Out of the F*cking Tag Cloud”

  • The cost of customer acquisitions is falling
  • The cost of infrastructure is falling
  • The cost of people is falling
  • The cost of company creation is falling
  • The cost of venture capital is falling

  • Web 2.0 is the democratization of technology entrepreneurship.

I like the taxonomy and evolution slide near the end. Wish I could remember what movie the “explosion of life” clip was from. Probably one of those old Bell System science movies. (I saw Hemo the Magnificent the other day.)

Now I’m off for another round of meds…

See also:
The Home Pages of this New Era
At least it’s not Avian Flu (yet)

Some disconnects in China GDP reporting

SimonWorld notes some analysis in the South China Morning Post on last week’s official Chinese GDP numbers.

Last week China reported another stunning GDP growth number of 9.4%. But as we’ve found numerous times before, the numbers underlying the GDP calculation don’t add up. Either China’s consumers went on strike or fixed asset investment has been over-estimated. Jake van der Kamp is on the case and reaches an unsurprisingly but important conclusion:

…It seems from this that in the year to September the man on the street spent 17 per cent less on daily necessities and toys than he did the previous year. But this is not what other official statistics say. They say that retail spending for the year to September was 13.6 per cent greater than it was the previous year (the blue line) and that this retail spending alone was almost twice as great as the remainder number we calculated for all personal consumption spending.

How is it possible?

It is not. The latest GDP figures from the mainland simply do not add up. I hesitate to use the word “rubbish” to describe them but I am starved of a better one.

I think the enormous discrepancy most likely results from an overstatement of fixed asset investment. Capital spending probably is much less than the National Bureau of Statistics says it is. This would imply something else again, however. It would suggest that a vast amount of money earmarked for capital projects was embezzled by corrupt officials and used instead for personal spending on luxury services and toys.

I shall not suggest that this surprises you.

Every second anecdote from the mainland tells you it happens every day. All I have done is put some possible numbers to the scale of it, a very big scale indeed. But I do suggest to the National Bureau of Statistics that it adopt a brand new approach for checking statistics, a new one to the bureau that is. The next time it publishes data it might want to check that the sum of the parts adds up to a given total.

It’s always worth taking any government reports with a grain of salt. In particular, no one actually believes the published numbers by the Chinese government. But this offers a glimpse at some of specific disconnects in the official reporting system. Plus, “rubbish” as financial commentary is pretty entertaining.

For reference, 15 trillion yuan is roughly $1.85 trillion US dollars. The US GDP in 2004 was roughly $11.75 trillion US dollars.

The Inevitability of Blog Outsourcing

The blog outsourcing topic has rolled along while I’ve been spending the day at the Blog Business Summit, listening to discussions on commercializing blogs. There’s now a post about it (Outsourcing bloggers in China) at CNET, which turned up a few other skeptics, and it’s looking like the Blogoriented guys are probably a hoax.

Despite that, I also think it’s inevitable that we’ll see at least a couple of real projects along these lines within a year, not aimed at simulating teenaged girls, but rather at building blog networks, filled and buzzed by creating inexpensive original content and editing search feeds that target specific niches.

David Sifry at Technorati has a good summary on the growing problems of spam blogs and fake blogs, and all the search engines are likely to make progress against what are essentially the next generation of link farms. Unfortunately, as discussed in this afternoon’s sessions on web advertising and affiliate models, if you can get traffic, there’s potential for a lot of money to be made by simple manipulations of the system, at least until the search engines improve. Content picked up by the blog search engines gets indexed immediately, leaving a way around some of the the sandboxing and other mechanisms used by Google and others, and makes profitable links visible immediately.

It’s cheap and apparently effective to implement spam and fake blogs. I’ve noticed the volume of junk e-mail is decreasing, while the number of spam blogs in search results seems to be increasing. It’s going to take cooperation among multiple parties to fix this, but everyone recognizes this as a problem, so it’s going to get better. (Here’s Mark Cuban’s take.)

I think that a follow on issue is that genuinely “original” content, in the “first author” sense, rather than in the “new idea” sense, can be probably be reliably cranked out through a well defined process. Think of something like an Indian call center or coding shop crossed with a daily news bureau, supervised by an editor who picked topics with some guidance from Wordtracker, Google and others. You’d get low cost, original writing, around an editorially consistent, topically relevant set of themes, and perhaps even with some interesting domain expertise, all tuned to be informative and keyworded to be search engine friendly.

Many of the same processes used at Wipro, Infosys, and other software and BPO outsourcers could be adapted to this application. Why cheat the search engine rankings when you can just reduce the cost of production and actually receive ranking benefit when the search engines get better at filtering for contextually better results and get rid of the “really fake” blogs? The Weblogs Inc blog network model seems to be working so far – Jason Calcanis says they’ve just hit a $1M annual ad revenue rate. Reducing the content production costs can’t hurt. I’m sure they could apply some of these ideas, if they haven’t already, and if they don’t, some other new blog network will certainly try.

This approach to farming out the process-oriented writing tasks should apply equally to a number of periodicals, such as magazines and newspapers. The difference between the news content in many newspapers is already often just the local editor’s preferences on the AP or Reuters newsfeeds and what fit in between the committed ad inches.

I don’t think this sort of blog or content outsourcing would be “bad” or “evil” in the sense of creating lower quality content, at least in some topic domains, since a pool of skilled professionals already exists offshore, and is growing rapidly. If you got a good editor in place, it might even improve the overall quality of online content. It’s not misrepresentation, unless you tried to pass off your authors as being something they’re not. But I wouldn’t even bother with attempting the nuances of local US culture with a staff of offshore bloggers, despite the availability of cultural indoctrination programs they run call center trainees through. That would work about as well having US bloggers cover cricket or Bollywood gossip or Korean K-pop singers for their respective local audiences.

This seems to leave American pop culture as a secure niche for a while. Unfortunately, I’m incredibly bad at celebrity gossip. Although, now that I think about it, I did meet Cher once at her house in Malibu…

Putting on my evil genius hat, here’s a hypothetical approach for building an astroturfing blog empire, filled with posts from simulated teenaged (18-35) girls. Start by extracting common phrases, topics, and contexts from some LiveJournal and MySpace blogs. Next, build some auto-blogging agents resembling Weisenbaum’s Eliza program crossed with some modern chatterbots. Finally, set it loose on LiveJournal, Xanga, and MySpace and have it start forming its own blogrings and online cliques, responding to filtered inputs from comments, selected feeds, and topical news, biased for the current hot keywords and with statistically plausible content and linkage…any Emacs Lisp and SQL hackers want to take this on?

See also: Outsource your Blog, Reasons I Still Read Newspapers

Update 08-19-2005 12:32 – some discussion at My Heart’s in Accra

Update 08-27-2005 00:10 – See also Goofy algorithm generates web page about “Prostitute Phobia” (at BoingBoing), which comments on this site, which is one of a collection of automatically generated pages.

Yahoo-Alibaba

“Yahoo! is investing $1 billion in cash to purchase Alibaba.com shares from the company and other shareholders. The agreement gives Yahoo! an approximately 40 percent economic interest with 35 percent voting rights, making it the largest strategic investor in Alibaba.com. ” … “The overall transaction is valued at more than $4 billion.” …. “The combined entity will have a four-person board. Management of Alibaba.com will hold two seats, with CEO Jack Ma serving as the board’s chairman. Other directors will include Jerry Yang, Yahoo’s co-founder and Chief Yahoo!, and a representative from Softbank. ”

Press release, Reuters (via MSN)

Summary from China Net Investor

Yahoo’s online assets in China:
Yahoo China: Yahoo China’s main site; Portal
Yisou.com: Search engine
3721.com: Search technology provider
Share of China’s search market (all three combined): 22.7 percent
Source: Shanghai iResearch

Alibaba’s operations:
Alibaba.com: Business-to-business e-commerce site; handled $4.5B in transactions in 2004
Taobao.com: Online auction site; eBay’s main competitor in China
Alipay: Online payment system; more than 2 million users; competes against eBay’s PayPal

more and roundup of comments at PaidContent

more from Bill Bishop

This deal is potentially disastrous for Ebay in China. Taobao was eating its lunch on a small budget; now they have the backing of Yahoo to ramp up their efforts several notches. Some people thought if things got really bad for Ebay they could always buy up Alibaba (Ebay is rumored to have offered Alibaba $1B a few months ago). Now that option is gone and there is not another auction player they can buy that would be meaningful. The Alibaba transaction may be the deal that leads Yahoo to ‘Japan-ning” Ebay again, this time in China.

Quotes on the Baidu IPO

Shades of 1999:

A fine collection of analysts’ comments from around the web at China Net Investor:

Consider that CBS Marketwatch cited a IDC report as saying the entire China online ad market was $130 million in 2004. Now I think Baidu may surpass a $1.3 billion market cap by the end of first day of trading (China Net Investor: Baidu now has a market capitalization of $3.92 billion!), and if that happens, then I must say that I don’t know of that many other companies that trade at 10x INDUSTRY revenues, even if the industry happens to be growing real fast.

and

“Baidu.com’s P-E ratio is sick”

and Bill Bishop (via Silicon Beat):

“Who in the world doesn’t now think Baidu is China’s Google, even though Google is still really China’s Google?”

and from a comment to the same post:

I watched the stock price like watching a movie. A fantastic show for traders. There are 4 million shares outstanding and the trading volume is 22 million. This means every share has been traded 5 times. It is absolutely not long term investment. it is a toy for traders only.

Good news: It’s a real company, with a real market.
Bad news: Retail investors want to buy shares because they have a feeling it’s like Google. It’s not.

See also: link, link

Looking at the MySpace deal

Intermix Media, which is mostly MySpace.com (plus assorted spyware), was purchased by News Corp for $580MM yesterday.

A look at how the investors (VantagePoint and Redpoint) did by Bill Burnham:

For VCs, this sale is significant because it represents the first real payday in the social networking space, a space that to date has seen lots of VC hype but very little returns. Just how big a payday was it for VC’s? Thanks to the fact that Intermix was a public company it’s possible to take very educated guesses at how the VCs made out. There were two main VCs involved in MySpace/Intermix. VantagePoint had been involved with the parent company for some time, while Redpoint recently invested in MySpace itself.

Paul Kedrosky notes:

Oh my, but the MySpace.com acquisition for more than half-a-billion dollars is going to cause a VC-driven content train wreck. We already had startups falling out of trees making MySpace comparisons, now they’re going to be thick on the ground, with the “MySpace of X” and the “MySpace of Y”, and the “MySpace crossed with Google”, etc. etc. I shudder to think how many VCs will fund MySpace-alikes through a thought process like the following…

MySpace is an interesting phenomenon for many reasons. It’s wildly popular among the teen-to-mid30′s bracket, and is also largely invisible to people outside that group (i.e. 35+). It’s not quite a dating service, although this is clearly one of the core attractions of the site, along with music, gossip, classifieds, and blogging. It fills a lifestyle niche in a way that echoes the boom days of America Online, but rather than chat rooms, message boards, and a first glimpse of the internet, MySpace is drawing in many new users for their first experience with blogging, social software, and Web 2.0. It also draws some of the same criticism, of being insecure, hacked together, and technically lacking. Despite this, they’ve grown to a massive level of traffic and corresponding ad revenue in a short period of time. I don’t generally get how to make money on social web sites, but ad revenue on 7.5 billion page views (more than Google) I understand. All this while being virtually unknown to at least half the people I talk to.

Tim Oren on VCs and MSFT

There’s been a bit of traffic on whether VCs are “loyal” to Microsoft .NET, and more broadly on Longhorn et al. Tim Oren’s response is right on:

Rich rightly observes the lack of VC loyalty to any particular technology. You all know what we are loyal to, right? That’s right, long term capital gains.

Longhorn is tactically and strategically compromised. Tactically because it is grossly late, and keeps shedding features. Any venture that relied on it has already died on the road somewhere. Any business or product plan based on it has serious cred problems. Longhorn is strategically compromised because it is still fundamentally a play on the desktop.

Strategic leverage as negative indicator. …. Do you think the average VC would be happier today if they had made a bet five years ago on Longhorn dependent applications, .NET dependent web services, or a few XBOX titles? It’s the market where MSFT was unable to use its strategic leverage where it’s the most competitive. That ought to scare you.

The storage learning curve beat out even Moore’s Law, so we just keep everything now.

What have you done to help us as users? Staying too close to the desktop has let entrants like Google move right onto the pain point of the market without opposition.

Go read Tim’s post. Also, go check out his post on The Art of the Fast Take.

Page 3 of 41234