The Stickiness of Online Media

Online content properties critically need a own/develop a compelling reason for media consumers to come back, and "a better experience" just doesn't cut it.

On the interwebs, consumers have nearly infinite choice of news sites and we are all faced with a seemingly endless buffet of information & content destinations to choose from. Never before has the media industry had to deal with such a techtonic shift of available inventory & fragmentation to the nth degree.

So if content isn't so differentiated and distribution isn't controlled, what's the glue that makes a reader come back to a specific web property?  Does "brand" have enough strength in a world of attention deficit disorder and infinite choice?  Over the past decade, or even past couple of years, we have seen companies rise in from nowhere thanks to the power of the internet.  Yet, I question the long-term sustainability of a brand for a content destination online.  Not because a brand can't get awareness, but more because thousands of brands can get awareness and consumers don't have to stick to just one media outlet.

Printed newspapers & magazines are by & large "pushed" to consumers.  The New York Times is delivered to our doorsteps and Time Magazine shows up in the mail.  Since these products are delivered to us (for the most part) we are practically forced to read them.  Before the Internet, I read the NYT day in & day out because (a) it was one of the few options and (b) because it fell in my lap.  Once I signed up it was made easy for me and I was hooked on a handful of media brands/outlets, rarely changing my devotion.

When broadcast television was introduced and became prevalent, the same held true for that media.  Practically push as well, the TV was the centerpiece of the living room and we had the choice of a half dozen channels to choose from.  If the TV was on, there was a 1 in 6 chance that we were watching said media companies content.  Empires could be built because the $70 billion in ad spend was spent across a handful of media properties.

With cable, TV faced fragmentation and the broadcast channels had to step it up a notch.  But, even so,  we consumers are still laze and the top ten channels on the cable box still get most of our attention.  It's hard to be channel 73 but it's really easy to be channel 1 or 2.  Viewership in the latter dwarfs the former.  And, although cable expanded our channel choice exponentially, it's still a finite selection of content.

The fragmentation caused by the Internet is a million times worse! Very few new media companies have figured out how to get consumers' repeat attention in the world where media isn't push.

Steve Rosenbaum recently wrote a post called Content Is No Longer King: Curation Is King, which argues that content is no longer scarce and in fact "it's everywhere, it's overwhelming, and it's gone from quality to noise."  I couldn't agree with Rosenbaum more.  However, I would also argue that curation isn't all that scarce either.  Rosenbaum added to his thesis of curation in this post about online media consumption, but all that highlighted to me is that nobody is really winning as it's a dog eat dog business and there are no barriers to entry right now.

Vin Crosbie also recently opined on the matter with "the greatest change in the history of media is that, within the span of a single human generation, people’s access to information has shifted from relative scarcity to surfeit." This is exactly the change that leads to the question being posed here - with so much content available everywhere, in hundreds of forms, by hundreds of editors, how does it get monetized at scale?  How does a single media company own & defend enough scale on the hyper-competitive internet?

One way that new media companies have created recurrence in consumer usage is by creating a communications channel, which is critical to walled garden media companies. Communications services create a network effect barrier.  Hotmail was one of the best acquisitions MSN has ever made.  Yahoo has webmail and Google has gmail. Search engines rely heavily on return & recurring traffic from their respective mail applications. Even Facebook now relies heavily of it's messaging tool.   Blackberry has managed to hold on to millions of consumers because of it's closed BBM network and Bloomberg seemingly still holds strong because of the critical use of Bloomberg chat by thousands of traders everywhere.

Content & product alone don't seem to be enough to get users to come back.  When it comes to choosing where to go on the web, users need a stronger deeper hook than just "better" content.  It's painfully clear that content is not "king" today and instead the world of online content is being ripped apart by aggregators, curators, and indexers.  Twitter, RSS, and Bit.ly are fantastic tools for disseminating content, but they clearly devalue the destination.

How does one create a single content brand that can withstand the attention deficit affliction on the web?


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News Isn't That Complicated

A few days ago, Google’s economist-in-chief, Hal Varian, was the keynote speaker at the Federal Trade Commission’s hearings on the future of journalism - "How Will Journalism Survive the Internet Age?" Of note specifically is the slide deck from his presentation, entitled "Newspaper Economics, Online and Offline."

Varian assembled the following chart in his deck:

In addition, he subsequently derives a number of macro trends affecting the online newspaper model, consumer habits, etc, etc. No need to discuss those here since he covered them so aptly, so I will just ask the following question: What if, newspapers could, from one day to the next, turn off the print business entirely and become pure play online businesses?

In the interest of grossly oversimplifying a restructuring, I've taken a stab at revising the income statement (yes, I know, there are dozens of additional atrocities on the balance sheet that I'm ignoring) to the following:

Note that the net margin is still $13, on roughly half of the revenue!! Whether that incremental margin percentage is sustainable over time is debatable, but one of the beautiful things about restructurings is that you get to look at things with a clean slate.

With printed newspapers out of the picture, in my perfectly rudimentary analysis, I've assumed that retail & national advertising remain where they are, that classified revenues take a nosedive by over 85%, newsstand sales vanish, and subscription sales manage to maintain by simply shifting to web only (for premium editorial, crosswords, or things such as tablets). On the cost side, I've assumed that 33% of administrative overhead costs are saved by the simplified model, that production costs are halved since print isn't needed, and distribution & raw materials vanish.

Obviously, you might have a different take on my assumptions, but the basic exercise is that if you stop focusing on revenues so much and instead focus on gross profits, the world might improve dramatically (or might not look so bleak, as in the case of newspapers).


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The Third Inning of Innovation

Although the general economic outlook in the United States is not great - John Mauldin uses the term "muddle-through" economy, I'm extremely optimistic about the prospects for innovation during the next several years.

The internet has changed the game for startups & venture investing dramatically. The worldwide number of internet users is approaching 2 billion in 2010; up from only 2 million in 1990 and 430 million in 2000.  Although US penetration rates are over 80% today, the rest of the world is rapidly coming online from a connectivity percentage of roughly 25% today.  Obviously with the declining cost of computing, connectivity, and mobile broadband, internet media will only continue to grow outside the developed nations of the US and Western Europe. Marshall McLuhan's "Global Village" really is finally coming in to its own.  By 2015 there will be nearly 3 billion internet users, over 5 billion cell phones in use, and over 2 billion wireless internet users.

The last wave of innovation pre-internet (so, personal computing & software, and even early internet) had a fraction of the addressable market that internet companies can reach today. Put in to context, a mere 30 million PCs were sold globally in 1992. Today that number is estimated at over 360 million units globally. And that doesn't even count the 1+ billion mobile devices sold annually, many of which are rapidly transitioning to 3G data enabled.

There is certainly an increasing pace of innovation, and a lot still to be "invented" leveraging this broad thing called the "internet" and its reach globally.  As a friend put it to me over breakfast last week, "we are only in the third inning" of this game of change.

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Please Define the VC Industry

Over the past months, there has been a lot of debate & discussion around how many VC funds there should be and how much money should be allocated to the VC asset class by investors. Many venture capitalists and pundits have argued that the VC model may be "broken" and needs to shrink for things to be better.

"While the venture industry is known for backing icons such as Google, Genentech, Home Depot, Microsoft and Starbucks, less than one-in-five of the fastest-growing and most successful companies in the United States had venture investors, according to the study."

What that tells me is that the VC industry is broken because investors weren't able to get into the 4 of 5 other fastest-growing companies.  Maybe if VCs spent less time blogging (yes, I get the irony here), tweeting, and checking-in they might be able to spend more time proactively sourcing and adding value?

I could go on and on with tongue in cheek commentary about the debate, but I won't.  Instead, we should reflect on some data.  According to the NVCA, in 1989 there were 389 firms in existence and in 2009 the count was 794.  Roughly speaking, that's about twice as many firms.  Considering the impact that both the Internet and globalization has had over the past 30 years, that doesn't seem so unreasonable.  Additionally, how possible is it that the actual count of firms 30 years ago was off?  After all, this is a cottage industry and it's very private.

The average capital under management per firm in 1989 was $73 million and today it's 226 million.  This points to (a) the institutionalization of the industry (ie firms raising multiple funds over time) and (b) some level of inflation over a thirty year period.

The average fund size raised thirty years ago was $47 million, today $121 million.  Although inflation probably only accounts for the average fund size growth to about $80 million, that incremental $41 million, I would argue, likely comes from "mega" funds skewing the average.

With that as a preface, here are some questions that I keep asking myself about the data and about the many conclusions that pundits have made about the industry needing to shrink:

• What about firms like NEA that manage two funds of $2.5 billion each?  And, Oak Investments with a 2006 fund at $2.5 billion as well?  Are those entire amounts considered "venture capital" and is it fair to put those dollars in the same bucket as a $150 million True Ventures fund?
• Although not as large as the above, what about firms like Austin Ventures, Accel Partners, Battery Ventures, and Sequoia?  They invest in both startups and (sometimes) buyouts.  And, in fact, some of these firms have invested in publicly traded PIPE securities.
• What about the Founders Collective at $40 million?  Is that angel money or is that venture capital?  How about IA Venture Partners, David Rose, or Ron Conway's vehicles?
• Do Insight Venture Partners, TCV, Summit, and TA Associates count as venture funds since they do provide growth equity to technology companies but also often provide liquidity?
• What about the later-stage venture capital and growth equity shops that play the venture game: FTV Capital, Tudor Ventures, InvestorAB, or Institutional Venture Partners?
• Is Elevation Partners considered a venture investor since they provided some capital to Yelp?  What about Digtal Sky Technologies (DST), the Russian Internet-focused investment firm that's put $200 million in Facebook?  Do they, and other non-domestic shops, get included in the numbers?
• Mostly offline today, how do hedge funds get counted in the mix?  Firms like DE Shaw, Moore, Galleon, Pequot, and Tiger Global have all made significant investments in venture capital over the past decade?
• And, what about secondary direct shops like Saints Capital, Industry Ventures, W Capital, and Millenium Tech Venture Partners?  They provide liquidity to selling shareholders & founders, but also often provide growth capital.  What percentage of their funds are considered venture capital?
• What about firms like Kennet Partners or InvestorAB that have offices in Europe and in Califonria?  And, what about the dozens of venture capital funds that have offices in China or in India?  Does geographic expansion have any say in the relative increase to the venture capital asset class?
• DCM, Canaan, Globespan, and Greylock are in China, India, Japan, and Israel, respectively, in addition to having headquarters in the United States.  Is it fair to compare their current fund sizes to a fund size from twenty years ago when they only invested in the United States?

I don't think that anyone is capable of "bucketing" these investment dollars accurately.  The reality is that the PEVC asset class is a blur.

I keep seeing plenty of really interesting private investment opportunities and am strong believer in the overall asset class.   There are certainly problems around compensation and alignment of interests, but that's an entirely different post for a different day.

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The Coming Data Deluge

The top vendors in the overall storage software market are led by EMC with 24% share in 2008, followed by Symantec at 18%, IBM at 13%, and NetApp at 8%.  Interestingly, although these players command substantial presence smaller companies continue to chip away at market share.  I would not be surprised if, in ten years, the list of top ten vendors shuffles around quite a bit.

According to IDC, the total data created by businesses and consumers is roughly doubling every 18 months.  At this current rate, the universe of content created across the globe will grow five-fold by the end of 2012.  And, there’s no clear end in sight. It doesn’t take much to understand this when one starts to think about their own personal storage growth over just a few months.  Among others, the obvious following factors are playing a key role in this data deluge:

• Global growth in Internet users, broadband penetration, and Internet-connected devices (both in terms of multiple computers per user and, now, powerful mobile devices).
• Adoption of social networking applications and the exponential growth in media (photos, video, & music) that gets duplicated & distributed across the network.
• Increasing bandwidth availability (which enables richer and bigger applications, especially video).
• Migration of content stored on old media (paper, film, etc.) into digital format (movies, music, legal files, letters, books, magazines, etc) and the coming digitization of healthcare and other records.

This increasing deluge of digital data, I believe, is bolstering a continuously growing demand for focused storage software (and services), starting with traditional backup & recovery (with improved functionality across platforms & media), replication, archiving, and storage management.

Another important data point to consider is that today corporate organizations spend, on average, 28% of IT capital expenditures on data storage hardware, software, and services.  That’s a massive percent.  Given that a large majority of that is hardware today, how will that percent evolve over the next ten years as data continues to grow exponentially and historic data continues to accumulate?

Put into perspective from a consumer angle; think about what your files would look like if you had kept every single photo you ever took, every letter/paper you ever wrote, every card you ever received, every drawing you ever drew, and every document you ever saw or read.  Had you kept all of that material/ media for your lifetime, how would you manage it today?  How would you go about finding something?  How would you decide where to file something?

In this digital age, where we are individually clearly keeping more personal media than we ever have before (just think about the number of digital photos you have on your hard drive versus three years ago),  we are individually spending much less, as a percent, than corporations do.  Our spending on media & communications has dramatically increased over the past twenty years, but our personal spending on filing & storage of that media has not increased in a corresponding manner.

This material increase in data clearly presents a huge opportunity for continued innovation in capacity optimization technologies and more efficient system architectures to address this massive piece of our IT ecosystem (both in corporate environments and in the consumers’ living room).

Storage is a key component of this wave of digital media innovation we are living in.  So, if you ask me, the innovative companies in storage software are going to appear & grow mainly because of:

• As mentioned above, absolute growth in bits & bytes, highlighting increased for storage management and protection processes, both for ease of access and for cost reduction.
• Cloud computing, which is shifting the physical location of data, and demanding new tools & solutions to deliver storage-as-a-service, archiving & de-duplication, and multi-tenant management.
• Increasing platform & application complexity, where we are moving from a singular platform (Microsoft) and a handful of application standards (text, images, email) to multiple platforms and applications.

This last point is critical.  A few years ago, we lived a world where we basically backed up Microsoft and, mainly, MS Office applications (along with some basic 2D & 3D media files).  Today, storage software has to deal with heterogeneous environments (for instance, various kinds of mobile data devices, networked computers, netbooks, and Apple, gaining ground in the desktop world), and an increasing number of file types & media.

There is clearly a lot of innovation yet to come in an industry that many view as mature.

Kurzweil's Transcendent Man

A few years ago, at some technology conference, I received & read The Singularity is Near by Ray Kurzwell, and all I could think of was Skynet from the film series The Terminator.   The book insightfully explores the merging of technology and biology, and its implications for the future. The 672 page tome dives into nerdy augury of the coalescence of genetics, nanotechnology and robotics.  As a Blade Runner fan, Kurzweil's predictions of evolution are a scientists wet dream.



Paul Kedrosky recently posted the above trailer and it's gotten me excited to to see the documentary, Transcendent Man.  As in the book, Kurzweil argues that artificial intelligence is improving exponentially, and eventually – the latest ETA is apparently 2045 – computing will become self-conscious and "alive".  Bring it.

Mobile Operating Systems

Yesterday, Google introduced its long-awaited touch-screen phone, called the Nexus One.  This long-awaited new device/announcement is driving some chatter about the future of the Mobile OS world.  Much of the chatter is around pricing (to carriers), revenue model, and market share.  Google is effectively paying carriers to sell it's phone (platform) with the intent to generate revenues from search down the road.  That's a substantially different approach than Apple took with the iPhone.

Rather than re-hashing all the ins & outs of Apple versus Google, Bill Gurley does a good job here.

But, the question to ponder is whether the market will evolve as Macintosh and Windows did or whether Apple will hold ground & continue to grow. Will, over time, the Mobile OS world sustain multiple providers or will we end up in a world where one OS dominates market share?

Is there a developer, application, and user network effect in the mobile world? Any kind of network effect could impact this outcome uniquely.

On the face of things, it would seem to me that Google is taking a page from the Microsoft Windows playbook and Apple is taking a page from, well, the, uh, not so successful Apple Macintosh playbook.

It could also just be that the Mobile OS world can end up looking very much like the video game console industry, with three players (Microsoft XBox, Sony PlayStation, & Nintendo Wii) today equally vying for market share along with several other players (Sega, Atari, 3DO, NEC, RCA, etc) making waves here & there.

What about RIM, Nokia, Motorola, and Symbian in this above discussion? And, dare I say, Palm?  Is it sound to simply assume that these players are out of the running?

Although more free market examples would imply a standard Google & Microsoft analogy, only time will tell how the Mobile OS world evolves differently.  As mobile applications become more complex, 3G connectivity becomes more pervasive, and devices become more powerful, the Mobile OS landscape will also become more expensive to compete in.  For now, though, my guess is that it's still pretty early to start predicting the next Windows.