Entries Tagged 'strategy' ↓

A few successful websites were built almost entirely through viral growth. The vast majority, however, started off by partnering with other, already successful websites. Even Google began by partnering with Yahoo. As superior as Google’s search algorithm was, it was very hard to get the masses to switch to a new search engine.

In the web 1.0 world (approximately pre-2004), integrating two web services involved lots of manual work, such as negotiating legal contracts and custom technical integration. Creating these kinds of partnerships is usually referred to as “business development” or “BizDev” (personally, I usually just call it “BD”). In the web 2.0 world, it became common for websites to create fully functional, self-service API’s with standardized legal terms. This made it possible to drastically reduce the friction of integrating services. My Hunch cofounder Caterina Fake coined the term “BizDev 2.0″ to refer to this idea (and of course Flickr was a pioneer of super robust APIs).

There is no question that removing legal and technical hurdles is a win for everyone (except lawyers). However, unless your service is extremely high profile and its value is easily understood, it still needs to be marketed to potential partners. Many websites won’t consider using a self-service API until they’ve seen it working on other sites with measurable results. So how do you overcome this particular kind of chicken-and-egg problem?

During his interview process, Hunch’s Shaival Shah, said something that struck a chord with me: he didn’t want to be called “VP BizDev” because, he said, a good BizDev person makes BizDev irrelevant. The idea is to create a number of BizDev 1.0 partnerships while simultaneously building and marketing a full service API.  If you can do BizDev 1.0 with some number of (ideally high profile) websites and demonstrate that it is valuable to them (ideally quantitatively), you can then scale your service BizDev 2.0 style. Maybe this could be called BizDev 1.5.

Shaival wrote up a much more detailed post on self-cannibalizing BizDev that is well worth reading.

A huge challenge for user-generated websites is overcoming the chicken-and-egg problem: attracting users and contributors when you are starting with zero content. One way to approach this challenge is to use what Geoffrey Moore calls the bowling pin strategy: find a niche where the chicken-and-egg problem is more easily overcome and then find ways to hop from that niche to other niches and eventually to the broader market.

Facebook executed the bowling pin strategy brilliantly by starting at Harvard and then spreading out to other colleges and eventually the general public.  If Facebook started out with, say, 1000 users spread randomly across the world, it wouldn’t have been very useful to anyone.  But having the first 1000 users at Harvard made it extremely useful to Harvard students.  Those students in turn had friends at other colleges, allowing Facebook to hop from one school to another.

Yelp also used a bowling pin strategy by focusing first on getting critical mass in one location – San Francisco – and then expanding out from there.  They also focused on activities that (at the time) social networking users favored: dining out, clubbing and shopping. Contrast this to their direct competitors that were started around the same time, were equally well funded, yet have been far less successful.

How do you identify a good initial niche?  First, it has to be a true community – people who have shared interests and frequently interact with one another.  They should also have a particularly strong need for your product to be willing to put up with an initial lack of content. Stack Overflow chose programmers as their first niche, presumably because that’s a community where the Stack Overflow founders were influential and where the competing websites weren’t satisfying demand. Quora chose technology investors and entrepreneurs, presumably also because that’s where the founders were influential and well connected. Both of these niches tend to be very active online and are likely to have have many other interests, hence the spillover potential into other niches is high. (Stack Overflow’s cooking site is growing nicely – many of the initial users are programmers who crossed over).

Location based services like Foursquare started out focused primarily on dense cities like New York City where users are more likely to serendipitously bump into friends or use tips to discover new things. Facebook has such massive scale that it is able to roll out its LBS product (Places) to 500M users at once and not bother with a niche strategy.  Presumably certain groups are more likely to use Facebook check-ins than others, but with Facebook’s scale they can let the users figure this out instead of having to plan it deliberately. That said, history suggests that big companies who rely on this “carpet bombing strategy” are often upended by focused startups who take over one niche at a time.

Your #1 competitor starting out will always be the BACK button, nothing else. – Garry Tan

Suppose you have an idea for a startup, and then do some research only to discover there are already similar products on the market. You become disheartened and wonder if you should abandon your idea.

In fact, the existence of competing products is a meaningful signal, but not necessarily a negative one.  Here are some things to consider.

1) Almost every good idea has already been built. Sometimes new ideas are just ahead of their time. There were probably 50 companies that tried to do viral video sharing before YouTube. Before 2005, when YouTube was founded, relatively few users had broadband and video cameras. YouTube also took advantage of the latest version of Flash that could play videos seamlessly.

Other times existing companies simply didn’t execute well. Google and Facebook launched long after their competitors, but executed incredibly well and focused on the right things. When Google launched, other search engines like Yahoo, Excite, and Lycos were focused on becoming multipurpose “portals” and had de-prioritized search (Yahoo even outsourced their search technology).

2) The fact that other entrepreneurs thought the idea was good enough to build can be a positive signal. They probably went through some kind of vetting process like talking to target users and doing some market research. By launching later, you can piggyback off the work they’ve already done. That said, you do need to be careful not to get sucked into groupthink. For example, many techies follow the dictum “build something you would use yourself,” which leads to a glut of techie-centric products. There are tons Delicious and Digg clones even though it’s not clear those sites have appeal beyond their core techie audience.

3) That other people tried your idea without success could imply it’s a bad idea or simply that the timing or execution was wrong. Distinguishing between these cases is hard and where you should apply serious thought. If you think your competitors executed poorly, you should develop a theory of what they did wrong and how you’ll do better. Group buying had been tried a hundred times, but Groupon was the first to succeed, specifically by using coupons to track sales and by acquiring the local merchants first and then getting users instead of vice versa. If you think your competitor’s timing was off, you should have a thesis about what’s changed to make now the right time. These changes could come in a variety of forms: for example, it could be that users have become more sophisticated, the prices of key inputs have dropped, or that prerequisite technologies have become widely adopted.

Startups are primarly competing against indifference, lack of awareness, and lack of understanding — not other startups. For web startups this means you should worry about users simply not coming to your site, or when they do come, hitting the BACK button.

With the introduction of the iPhone, Steve Jobs achieved something that might be unique in the history of business: he single-handedly upended the power structure of a major industry.  In the US, before the iPhone, the carriers (Verizon, AT&T, Sprint, T-Mobile) had an ironclad grip on the rest of the value chain – particularly, handset makers and app makers.

Ask anyone who ran or invested in a mobile app startup pre-iPhone (I invested in one myself). Since the carriers had all the power, getting any distribution (which usually meant getting on the handset “deck”) meant doing a business development deal with the carriers. Business development in this case meant finding the right people at those companies, sending them iPods, taking them to baseball games, and basically figuring out ways to convince them to work with you instead of the 5,000 other people sending them iPods and baseball tickets.  The basis of competition was salesmanship and capital, not innovation or quality.

The carriers had so much power because consumers made their purchasing decisions by choosing a carrier first and a handset second. Post-iPhone, tens of millions of people started choosing handsets over carriers. People like me suffer through AT&T’s poor service and aggressive pricing because I love the iPhone so much.

I’ve talked to a number of mobile app startups lately who say their former contacts at the carriers are shell shocked: no one is knocking on their doors anymore. I guess they have to buy their own iPods and baseball tickets now.

Yes, Apple has rejected some apps for seemingly arbtrary or selfish reasons and imposed aggressive controls on developers. But the iPhone also paved the way for Android and a new wave of handset development. The people griping about Apple’s “closed system” are generally people who are new to the industry and didn’t realize how bad it was before.

The brewing fight between Facebook and Zynga is what is known in economic strategy circles as “buyer-supplier hold up.” The classic framework for analyzing a firm’s strategic position is Michael Porter’s Five Forces. In Porter’s framework, Zynga’s strategic weakness is extreme supplier concentration – they get almost all their traffic from Facebook.

It is in Facebook’s economic interest to extract most of Zynga’s profits, leaving them just enough to keep investing in games and advertising. Last year’s reduced notification change seemed like one move in this direction as it forced game makers to buy more ads instead of getting traffic organically. This probably hurt Zynga’s profitability but also helped them fend off less well-capitalized rivals. Facebook could also hold up Zynga by entering the games business itself, but this seemed unlikely since thus far Facebook has kept its features limited to things that are “utility like.”

The way Facebook now seems to be holding up Zynga – requiring Zynga to use their payments system –  is particularly clever.  First, payments are still very much a “utility like” feature, and arguably one that benefits the platform, so it doesn’t come across as flagrant hold up. It is also clever because – assuming Facebook has insight into Zynga’s profitability – Facebook can charge whatever percentage gets them an optimal share of Zynga’s profits.

The risk for Zynga is obvious — if they don’t diversify their traffic sources very soon, they are left with a choice between losing profits and losing their entire business.  But there is a risk for Facebook as well. If buyers of traffic (e.g. app makers) fear future hold up, they are less likely to make investments in the platform. The biggest mistake platforms make isn’t charging fees (Facebook) or competing with complements (Twitter), it’s being inconsistent.  Apple also charges 30% fees but they’ve been mostly consistent about it. App makers feel comfortable investing in the Apple platform and even having most of their business depend on them in a way they don’t on Facebook or Twitter.

When having the “open vs closed” debate regarding a technology platform, a number of distinctions need to be made. First, what exactly is meant by “open.” Here’s a great chart from a paper by Harvard professor Tom Eisenmann (et al).:

(Eisenmann acknlowledges the iPhone isn’t fully open to the end user – in the US you need to use AT&T, etc.  I would argue the iPhone is semi-open to the app developer and mobile app development was effectively closed prior to the iPhone. But the main point here is that platforms can be open & closed in many different ways, at different levels, etc.)

The next important distinction is whose interest you are considering when asking what and when to open or close things.  I think there are at least 3 interesting perspectives:

The company: Lots of people have written about this topic (Clay Christensen, Joel Spolsky, more Eisenmann here).   In a nutshell, there are times when a company, acting solely in its self-interest, should close things and other times they should open things.  As a rule of thumb, a company should close their core assets and open/commoditize complementary assets. Google’s search engine is their core asset and therefore Google should want to keep it closed, whereas the operating system is a complement that they should commoditize (my full analysis of what Google should want to own vs commoditize is here). Facebook’s social graph is their core asset so it’s optimal to close it and not interoperate with other graphs, whereas marking up web pages to be more social-network friendly (open graph protocol) is complementary hence optimal for FB to open.  (With respect to social graphs interoperating (e.g. Open Social), it’s generally in the interest of smaller graphs to interoperate and larger ones not to – the same is true of IM networks).  Note that I think there is absolutely nothing wrong with Google and Facebook or any other company keeping closed or trying to open things according to their own best interests.

The industry: When I say “what is good for the industry” I mean what ultimately creates the most aggregate industry-wide shareholder value.  I assume (hope?) this also yields the maximum innovation.  As an active tech entrepreneur and investor I think my personal interests and the tech industry’s interests are mostly aligned (hence you could argue I’m talking my book).  Unfortunately it’s much easier to study open vs. closed strategies at the level of the firm than at the level of an industry, because there are far more “split test” cases to study.  What would the world be like if email (SMTP) were controlled by a single company?  I would tend to think a far less innovative and wealthy one. There are a number of multibillion dollar industries built on email: email clients, webmail systems, email marketing, anti-spam, etc.  The downside of openness is that it’s very hard to upgrade SMTP since you need to get so many parties to agree and coordinate.  So, for example, it has taken forever to add basic anti-spam authentication features to SMTP.  Twitter on the other hand can unilaterally add useful new things like their recent annotations feature.

Here’s what Professor Eisenmann said when I asked him to summarize the state of economic thinking on the topic:

With respect to your question about the impact of open vs closed on the economy, the hard-core economists cited in my book chapter have a lot to say, but it all boils down to “it depends.” Closed platform provides more incentive for innovation because platform owner can collect and redistribute more rent and can ensure that there’s a manageable level of competition in any given application category. Open platform harnesses strong network effects, attracting more application developers, and  thus stimulates lots of competition. There’s some interesting recent work that suggests that markets may evolve in directions that favor the presence of one strong closed player plus one strong open player (consider: Windows + Linux; iPhone + Android). In this scenario, society/economy gets best of both approaches.

Society:  I tend to think what is good for the tech industry is generally good for society.  But others certainly have different views.  Advocates of openness are often accused of being socialist hippies.  Maybe some are.  I am not.  I care about the tech industry.  I think it’s reasonable to question whether moves by large industry players are good or bad for the industry.  Unfortunately most of the debate I’ve seen so far seems driven by ideology and name calling.

I can’t remember the last time the tech world was so interesting. First, innovation is at an all time high.  Apple, Google, Facebook, Twitter and even Microsoft (in the non-monopoly divisions) are making truly exciting products. Second, since the battles are between platforms, the strategic issues are complex, involving complementary network effects.

Twitter’s moves this week were particular interesting.  A lot of third-party developers were unhappy. I think this is mainly a result of Twitter having sent mixed signals over the past few years. Twitter’s move into complementary areas was entirely predictable – it happens with every platform provider. The real problem is that somehow Twitter had convinced the world they were going to “let a thousand flowers bloom” – as if they were a non-profit out to save the world, or that they would invent some fantastic new business model that didn’t encroach on third-party developers. This week Twitter finally started acting like what it is: a well-financed company run by smart capitalists.

This mixed signaling has been exacerbated by the fact that Twitter has yet to figure out a business model (they sold data to Microsoft & Google but this is likely just one-time R&D purchases). Maybe Twitter thinks they know what their business model is and maybe they’ll even announce it soon. But whatever they think or announce will only truly be their business model when and if it delivers on their multi-billion dollar aspirations. It will likely be at least a year or two before that happens.

Normally, when third parties try to predict whether their products will be subsumed by a platform, the question boils down to whether their products will be strategic to the platform. When the platform has an established business model, this analysis is fairly straightforward (for example, here is my strategic analysis of Google’s platform).  If you make games for the iPhone, you are pretty certain Apple will take their 30% cut and leave you alone. Similarly, if you are a content website relying on SEO and Google Adsense you can be pretty confident Google will leave you alone. Until Twitter has a successful business model, they can’t have a consistent strategy and third parties should expect erratic behavior and even complete and sudden shifts in strategy.

So what might Twitter’s business model eventually be?  I expect that Twitter search will monetize poorly because most searches on Twitter don’t have purchasing intent.  Twitter’s move into mobile clients and hints about a more engaging website suggest they may be trying to mimic Facebook’s display ad model. (Facebook’s ad growth is being driven largely by companies like Zynga who are in turn monetizing users with social games and virtual goods.  Hence it’s no surprise that a Twitter investor is suggesting that developers create social games instead of “filling holes” with URL shorteners etc.) Facebook’s model depends on owning “eyeballs,” which is entirely contradictory to the pure API model Twitter has promoted thus far.  So if Twitter continues in this direction expect a lot of angst among third-party developers.

Hopefully Twitter “fills holes” through acquisitions instead of internal development. Twitter was a hugely clever invention and has grown its user base at a staggering rate, but on the product development front has been underwhelming.  Buying Tweetie seemed to be a tacit acknowledgement of this weakness and an attempt to rectify it. Acquisitions also have the benefit of sending a positive signal to developers since least some of them are embraced and not just replaced.

What’s Facebook doing during all of this?  Last year, Facebook seemed to be frantically copying Twitter – defaulting a lot of information to public, creating a canonical namespace, etc. Now that Twitter seems to be mimicing Facebook, Facebook’s best move is probably just to sit back and watch the Twitter ecosystem fight amongst itself.  As Facebooker Ivan Kirigin tweeted yesterday: “I suppose when your competition is making huge mistakes, you should just stfu.”

Disclosure: As with everything I write, I have a ton of conflicts of interest, some of which are listed here.

In an earlier blog post, I talked about how sites that generate purchasing intent (mainly “content” sites) are being under-allocated advertising dollars versus sites that harvest purchasing intent (search engines, coupon sites, comparison shopping sites, etc).  As a result, most content sites are left haggling over CPM-based brand advertising instead of sponsored links for the bulk of their revenue.

But there is an additional problem:  even among sites that monetize via sponsored links there is a large overallocation of advertising spending on links that are near the “end of the purchasing process” (or “end of the funnel”). For example, an average camera buyer takes 30 days and clicks on approximately 3 sponsored links from the beginning of researching cameras to actually purchasing one.   Yet in most cases only the last click gets credit, by which I mean:  1) if it’s an affiliate (CPA) deal, it is literally usually the case that only the last affiliate (the site that drops the last cookie) gets paid, 2) if it’s a CPC or CPM deal, most advertisers don’t properly track the users across multiple site visits so simply attribute conversion to the most recent click, causing them to over-allocate to end-of-funnel links 3) if it’s a non-sponsored link (like Google natural search links) the advertiser might over-credit SEO when in fact the natural search click was just the final navigational step in a long process that involved sponsored links along the way.

What this means is there are two huge misallocations of advertising dollars online: the first from intent generators to intent harvesters; the second from intent harvesters that are at the beginning or middle of the purchasing process to those at the end of the purchasing process.  This is not just a problem for internet advertisers and businesses – it affects all internet users.  Where advertising dollars flow, money gets invested. It is well known that content sites are suffering, many are even on their way to dying. Additionally, product/service sites that started off focusing on research are forced to move more and more toward end-of-funnel activities.  Take a look at how sites like TripAdvisor and CNET have devoted increasing real estate to the final purchasing click instead of research.  For the most part, you don’t get paid for the actual research since it’s too high in the funnel.

As with all large problems, this misallocation of advertising dollars also presents a number of opportunities.  One opportunity is for advertisers to correctly attribute their spending by tracking users through the entire purchasing process (in the case of cameras, the full 30 days and multiple sponsored clicks).  Very likely, these sites are currently overpaying end-of-funnel sites (e.g. coupon sites) and underpaying top-of-funnel sites (e.g. research sites). There is also an opportunity for companies that provide technology to help track this better. Finally, if over time advertising dollars do indeed shift to being correctly allocated, this will allow research sites to be pure research sites, content sites to be pure content sites, etc instead of everyone trying to clutter their sites with repetitive, “last click” functionality.

Significant new technologies often emerge as “stacks.” You can look at stacks through a technological (e.g. OSI stack) or business lens. Here I am using a business lens, thus dividing layers by function and including things that aren’t technologies but have economic value, e.g. relationships with customers and users.

Normally stacks are constructed from the bottom up and some layers turn out to be valuable and others do not (Christensen argues compellingly that stacks tend to alternate between commodity and non-commodity layers).

The PC is a famous stack.  In the 80’s and 90’s the most valuable layers were the processor (Intel won), OS (Microsoft won), and applications (Microsoft mostly won with Office). Assembly of desktops became a commodity which Dell exploited (you can still make profits on commodity layers, you just need to take a low-cost strategy). The PC demonstrates how hard it is to predict which layers will become valuable: otherwise IBM would never have allowed Microsoft to own the OS.

The internet is another famous stack. In the 90’s a ton of investment went into the infrastructure layer – switches, fiber, CDNs etc. Innovation on that layer continues (particularly in wireless), but mostly the action has moved up the stack to web apps.

An interesting new, emerging stack is the “geo stack.”  The first layer is latitude/longitude location detection. This is mainly provided by satellites and GPS chips which seem to be getting so affordable they will be in every mobile device soon.

The next layer is connecting lat/long to human-understandable locations. Google Maps, NAVTEQ etc. do this by connecting lat/long to roads. Location-based apps like Foursquare, Gowalla, and Yelp do this by connecting lat/long to “venues.” It seems Gowalla is building their own venue database.  I assume Yelp has built their own.  I don’t know how Foursquare gets theirs. I suspect venue databases will become mostly a commodity as they are fairly inexpensive to build and once built mostly interchangeable.

The next layer is the relationship with the user, particularly getting a user’s permission to track her location.  Apps like Foursquare require explicit check-ins at each venue. Other apps like Loopt automatically check in for you. Building this trust relationship with users could be very valuable.

The next layer is what I’ll call “recommendations”:  giving useful advice to users based on their location.  Maps do this by providing driving direction, traffic info etc. Foursquare is doing this with “tips.” I think recommendations will be critical for geo apps to appeal to Normals.  Geo apps are currently wooing early adopters with badges, games, and the idea that you might have a serendipitous meeting with your friends at a bar.  I suspect these incentives won’t work for the broader population, but recommendations could.  Recommendation data is hard to build and vast, hence could be a very valuable layer. (I am biased here as Hunch is working on this layer).

Social graphs could be a geo layer. It’s rumored that Facebook will be adding venue check ins soon.  Facebook has by far the largest (opt in) social graph.  As the recent Google Buzz debacle demonstrated, it’s not obvious that the people you email with are the same as the people you friend on Facebook.  Perhaps the people you want to share your location with are different than the people you friend on Facebook. If so, there could emerge valuable geo-specific social graphs.

Finally, monetization could be a very valuable layer.  There are (at least) two parts to monetizing location. Getting local businesses to embrace the internet has been very slow going. Companies that make money on local businesses today (Yelp, Yext, ReachLocal) use expensive outbound calling and other “push” techniques to sign up local businesses. There remains a huge opportunity to supplant the yellow pages as the default advertising platform in local business owners’ minds. If apps like Foursquare can build up enough marketing / PR momentum that every restaurant, dry cleaner etc feels like they need to “get on Foursquare” this could finally open the floodgates for local business advertising.

The second part of monetizing location is facilitating and tracking offline purchases. 90%+ of purchases are still offline, although for many of those transactions people do research and make their decisions online. The internet doesn’t get paid for these transactions.  Companies like Milo (disclosure: I’m an investor) are doing interesting things in this space and I expect we’ll see a lot more activity on this layer soon.

It is almost religious orthodoxy in the tech community that “open” is better than “closed.” For example, there have widespread complaints about Apple’s “closed” iPhone app approval process. People also argue Apple is making the same strategic mistake all over again versus Android that it made versus Windows*. The belief is that Android will eventually beat the iPhone OS with an “open” strategy (hardware-agnostic, no app approval process) just as Windows beat Apple’s OS in the 90’s.

With respect to requiring apps to be approved, consider the current state of the iPhone platform. There are over 100,000 apps and thus far not a single virus, worm, spyware app etc. (I don’t count utterly farfetched theoretical scenarios). As a would-be iPhone developer, I can report firsthand that the Apple approval process is a nightmare and should be overhauled. But what’s the alternative? Before the iPhone, getting your app on a phone meant doing complicated and expensive business development deals with wireless carriers. At the other end of the spectrum: If the iPhone OS were completely open, would we really have better apps?  What apps are we missing today besides viruses?

With respect to the strategic issue of tightly integrating the iPhone/iPad software and hardware, a strong case can be made that Apple’s “closed” strategy is smart. Clay Christensen has given us the only serious theory I know of to predict when it’s optimal for a company to adopt an open versus closed strategy for (among other things) operating systems. The basic idea is that every new tech product starts out undershooting customer needs and then – because technology gets better faster than customers needs go up - eventually “overshoots” them. (PC’s have overshot today – most people don’t care if the processors get faster or Windows adds new features). Once a product overshoots, the basis of competition shifts from things like features and performance to things like price.

The key difference today between desktop computers and mobile devices is that mobile devices still have a long way to go before customers don’t want more speed, more features, better battery life, smaller size, etc. Just look at all the complaints yesterday about the iPad - that it lacks multitasking, a camera, is too heavy, has poor battery life, etc. This despite the fact that Apple is now even building their own semiconductors (!) to squeeze every last bit of performance out of the iPad. Until mobile devices compete mainly on price (probably a decade from now), tight vertical integration will produce the best device and is likely the best strategy.

*It’s worth noting that Steve Jobs wasn’t the one who screwed up Apple. Jobs co-founded Apple in 1976. He was pushed out in in May 1985 when the company was valued at about $2.2B. He returned in 1996 when Apple was worth $3B. Today it is worth $187B.