unfinished work

There Is A Reason For Free And It Ain't VCs

The most intersting thing about Hank Williams post on Friday of last week - Free Is Killing Us - Blame The VC, is the comment thread. Many people take Hank to task for what is a simplistic generalization that has little, if any, basis in fact. Dave McClure provides does a particularly efficient job of it

»in most online business categories, it is inherently impossible to start a small self-sustaining business and to grow it.

this is just patently false, and the statement that VCs are making it hard to compete with free is just specious, at best.

Dave goes on to pick apart Hank’s argument point by point.

What surprised me, however, is that no one picked up on what I think is the central reason we see so many free web services. Several people talked about the declining cost of building and hosting a service. Some mentioned that the marginal cost to a web service of another user is often close to zero. These arguments explain why it is possible to offer a service for free many times with no VC funding, but it does not explain why people do it.

The thing that no one talked about was the relationship between the user of a service and the provider of that service - how that has changed on the web and what it means for business models. The reason so many services on the web are offered for free is that the users of the service are not customers in the traditional sense, the are the co-creators of the service. The service provider creates the environment, the users provide the content. Craigslist is a great example of this. Without users to upload the ads and police abuse, Craigslist would be much more expensive to operate. Of course the users get the service for free (mostly), they created it. You could make the argument that Craig should be paying them - that is how the newspapers ran classifieds for years. This is true of many of the most visible free services. Who provides the content at Google or Facebook? Who edits Digg? These services are govenrnance systems that regulate user generated contrtibution. They have to be free.

This is also why so many web services have or will have media business models. I did not say advertising supported business models because most people think of that narrowly - banners on pages. I said media because that implies that we are talking about a threeway. It is not just suppliers and customers. It is suppliers, customers, and sponsors. Even that is too simplistic. Most of these businesses will be supported by a third party who either wants to reach an audience (advertising, sponsorship, etc.) but others will work because the service provider can take a byproduct of their offering and sell that. A search engine could, for instance, package anonymous aggregate attention data and sell it to market researchers, or to other service providers who could then use the data to improve their offering, perhaps by filtering or relevancy ranking some part of their service.

Hank’s complaint that small businesses on the web can no longer succeed at small scale reveals a dated conception of small business, and a limited view of the transformation we are living through. The relationship between suppliers and customers is changing. So is the relationship between scale and profitability. Craigslist is a small business (23 people) but they have scale (20mm uniques).

I am not defending VC’s here. I agree that there was a lot of money thrown at web business in the 90s in an effort to get big fast. But most of the VC’s I know have a much more nuanced view today. They recognize that their best portfolio companies are cultivating an ecosystem, one that they can nourish and influence but not one they can control. Offering some services for free is part of the bargain with the co-creators of their service.

artificial scarcity

I have always hated the idea of artificial scarcity. It seems like such a waste of society’s resources. So I was surprised to stumble across an example that I could not condem out of hand.

Mary showed me the work of a photographer that she thinks is really great. I agree the work is great but learned that he prints a limited number of each image to create a market for his work. He like most photographers or print makers produces a limited set of prints. The first five are sold for $5000, the next ten for $10,000 and the last few are sold for $50,000.

Since he can produce an unlimited number of prints, my first reaction was what a waste, then I started wondering if there are examples where someone could justify limiting the amount of something even if there was zero marginal cost to produce that thing.

I can not think of a moral reason for not doing this in the case of art

Is there a business here?

Lots of folks I know set up standing queries to search for themselves on the web. It explains why Craig Newmark is so quick to comment on a post that talks about craigslist.

» Personal Technology | Walt Mossberg | AllThingsD

This article by got me thinking about Apples resurgence. It makes perfect sense that the Mac would be taking market share from Windows/Intel now. We have for the first time arrived a point when PCs are good enough for most things.

Earlier, when hard drives were not big enough, graphics cards not fast enough, software not useful enough, the Intel PC and Microsoft operating system improved faster because they could capitalize on the innovations of all the entrepreneurs working around that platform. Now PCs are good enough. Additional features just make them harder to use. The premium to day is in making them easy enough so that most users can get most of the value out of the machines they already own. In this world Apple’s focus on simple integrated user experience trumps the WINTEL platforms relatively more open architecture.

So the relative social value and probably the relative stock market value of Apple vs Microsoft should have followed roughly this course. When the Mac was first introduced, Apple should have surged becasue they were showing off the capabilities of a promising medium, As people adopted PCs and became familiar enough to know what was missing the WINTEL platform shoudl have surged becasue of its superior ability ot absorb innovation from elsewhere. Once the market matured to the point that most people had most of the power and features they needed, Apple should have surged again and Wintel lagged. I wonder if the data would show that this is what happened.

An even more interesting question is how the fortunes of the more open web services will compare with those that are more closed when considered in the context of the markets maturity. In theory the closed services should have a greater impact early, but then fall behind the more open services as the need to innovate becomes more important than ease of use, and then the closed services should close the gap again once most user have most of what they need and the focus shifts again to ease of use.

what revenue

If you know the revenue model when you start it is not sufficiently disruptive to make a difference

philanthropy has a demand side problem

Kiva and DonorsChose show that the future challenge in philanthropy will be finding and vetting recipients and then measuring the impact of a gift. Kiva has an advantage because measuring success is easy. If the loan got paid back it was a success. It may not have made a huge difference in the borrowers life but they saw a reason to take the loan, and were able to pay it back. Donors choose has a more difficult problem. When you donate there you get a nice package from the recipient showing the class room and how it is used but there is no way to tell if students learned more.

DonorsChoose might be able to use a trick from the microlending world. Teachers within a school could be a circle of trust that could help vet projects and monitor results.

A reminder that there are no absolutes

I am a huge fan of the shift to server side applications development. Applications hosted on the server side can co-mingle data in ways that provide value for all of the participants in a network - think page rank. But as soon as I have settled comfortably into my server side prejudice, I stumble across something that messes up my tidy world. This time it was Xobni, the Outlook plugin that indexes the Outlook file on your desktop and provides surprisingly useful utilities based on those analytics.

You could do the same thing for Gmail but you would need an API from Google to get at the data set. Maybe they will provide it maybe they won’t. But possession is nine tenths of the law. With outlook the data is on your desktop.

So after several years of watching all of the innovative stuff coming from the server side, here is an example of where innovation is happening on the desktop.

Secrecy No Longer Works

In an open network like the internet many things get turned on their head. Yesterday an entrepreneur pointer out to me that in a world where information does not move easily you want to keep your cards close to your vest, but in a world where memes spread quickly you want to share your ideas aggressively because then you will be seen as the originator of the meme. Credit in a world of commoditized information goes to the creator.

I suppose I should say that the entrepreneur was Scott Karp. I am not sure he originated the meme but he was the carrier in my case

There Are No Open Web Services

Let’s start with a definition. A service is open when anyone can take anything (code, data, etc) from that service and do anything they want with it, without permission from anyone.

You might argue that is an extreme definition. I’d agree. But, anything less that that is not open. It is in some way managed by someone. Even open source software would not meet this definition. Most licenses prohibit folks from taking code and then incorporating that code into proprietary products without contributing their modifications back to the original open source code base. This constraint, this limitation on the openness of an open source system is considered a fair trade. It was consciously designed to perpetuate the collective value of the open source code base.

I can not think of a single open web service. Even services famous for their openness, or thier APIs like Craigslist, Facebook, del.icious, or Google have restrictions on what you can do with their data.

The question is what is the intention behind those restrictions and what is the effect.

Some service providers try to lock in their users by making it difficult for an individual end user to port their investment in one service to another. This is going to end. In networks where the users contribute a substantial amount of the content/value /energy, this adversarial relationship is unsustainable.

The more interesting problem is service providers who place restrictions on their APIs to prevent a newcomer from sucking out their entire data set and replicating their network effect. Seems reasonable but if the restrictions are to tight, they will lose the benefit of others who add value to thier users experience by innovating at the edge - think twittervision or the googlemaps/craigslist mashup. The winners here will be the service providers that strike the right balance between innovation and anarchy. Without any restrictions on the use of code and data, the integrity of the community is at risk - with too many, innovation will grind to a halt (yes I realize there is an embedded assumption here that decentralized innovation trumps centralized innovation - I am convinced it does).

The answer is that if the architecture is designed to further the interests of the community, it will thrive, if it is designed to further the interests of the community sponsor it will not.

So lets get over the idea that the goal is an open architecture. It is not. I live in Manhattan. It is a managed “architecture”. The stoplights on the street corners constrain our freedom, but we accept them because they make it possible for all of us to move around the city. Language is another model. We live in a society where I am relatively free to say what I want, but I have less freedom to change the meaning of the words I use.

So let’s stop debating whether a service is open or not and lets focus on the defining that perfect balance of freedom and structure that will result in vibrant thriving innovative communities.

is the net changing people or are people changing the net