David Rangel's Blog

Will Uber be "just" another Groupon?

The recent news about Uber's huge funding round ($1.2B at a $17B pre-money valuation) has had the effect you would expect: a lot of stories trying to make sense of the valuation, with most just concluding that Uber has the potential to be a very big company.

This post is not about whether or not such a valuation is warranted. Clearly the company is growing very quickly, has executed well so far and is targeting a very large market. If they execute flawlessly over the next few years, I think the company will be worth much more. However, that is the key -- whether they will be able to execute and fulfill their very ambitious vision. And that is where I think it is instructive to look at a recent and very relevant example: Groupon. 

At first pass Groupon and Uber may not seem similar -- they are in very different markets with very different dynamics. But in fact, they face many of the same key challenges:

1. A huge market in aggregate, but one that is composed of many small "local" markets 
2. A race to get big as quickly as possible with very well-funded competitors
3. Building a two-sided platform (merchants/consumers, drivers/riders) where:
• The "buyer" side (consumers, riders) generally only cares about getting the best price
• The "seller" side (merchants, drivers) can fairly easily also use competitors' services

Let me delve into each of these in turn and explore what it means for Uber.

(The post is a bit long - you can jump to the final "Summing up" section for the conclusion.)

1. Market characteristics

Both companies have the exact same "problem" here: their markets are conceptually enormous, but they are fragmented and lack overall network effects.

For Groupon it was all local commerce, while for Uber it is all local transportation (with logistics optionally thrown in). In aggregate, both these markets are in the hundreds of billions, or perhaps trillions, in size. The problem is that each new city is a brand new battle. And having won in one city (assuming that can be done, per point 3 below) means little for who will win any other city. You can argue their brand will carry over, or that their tech infrastructure will give them certain advantages, or that their new-city operational rollouts will become more efficient - but the truth is that each new city presents new challenges. This is even more true in Uber's case, where local regulations and labor practices play a big role.

This is their reality and there isn't much they can do about it. But it does mean that it is important to scale up quickly and be aggressive about entering new markets. So far they have been doing this very well, which leads us to the next point.

2. Get huge fast

Given that these companies carry a limited competitive advantage from city to city and that we now live in a world where ideas are now copied in a flash, it is very important to scale up as quickly as possible. Groupon and competitors did it back in 2010-2012, and Uber, and competitors, are doing it now. 

In 2010, Groupon went from operating in just Chicago (its only city for over a year since founding), to growing at a pace of around 10 new cities per week. It was a blazingly fast and impressive pace. In addition, they acquired a European copycat that had actually managed to scale up even more quickly in the previous six months. To fund this growth, they raised a lot of money: $30M at the end of 2009 to start ramping up aggressively, followed by $135M in April 2010 and culminating with a record $950M in January 2011. At the same time, LivingSocial, Groupon's main competitor, raised well over $600M and was expanding at a very similar pace. The third place company at the time, BuyWithMe, raised over $30M in the same time frame.

Over the last year Uber has raised more than $1.4B (on top of a previous large round) and Lyft, its key competitor has raised more than $300M (with more probably coming soon). The current third place, Sidecar, has raised about $20M. I'm not very familiar with how quickly Uber is expanding to new markets, but it looks like it's a pretty fast pace and Lyft is right there with them.

As you can see, the competitive dynamics are strikingly similar. What can we learn from this point?

First, these dynamics are just the nature of the beast. It's a race to get big and you expect management and investors to pursue the opportunity aggressively. However, this is where the first flag comes up: this frenzied expansion can lead to very real problems down the road. In two ways:

1. Growing this quickly inevitably leads to flawed operational/tactical decisions. Groupon ran into this by late 2012 and had to lay off people and restructure some of its markets soon after. 
2. More worryingly, growing this quickly can also lead to strategic missteps. I'll explore some aspects of this point in more detail in the next point.

Before closing off this section, I'll make two notes that have caught my attention and that may bode well for Uber in this context:

• Uber has grown completely organically (as far as I know). This is in comparison to Groupon, which grew internationally (and also technology-wise) through a super-aggressive acquisition spree and which arguably led directly to the sub-standard operations and eventual restructuring. Uber seems more insulated from this risk.
• Uber's management has apparently sold very little stock, while Groupon management used the funding rounds to cash out hundreds of millions. This is a second-order point, but I would put a bit more stock in a team that is still fully vested in the long term success of their company.

3. Platform strategy

Finally, I get to the the most important part of this post and what will determine true long term value creation. As mentioned above, both companies are two-sided networks, so let's look at each side in turn.

First, the buy-side (consumers/riders). Both companies have a buy-side constituency made up of "standard consumers". While any company in this situation will try to differentiate itself and build up some barriers to entry, the reality is that most consumers just care about getting the lowest possible price. In the case of Groupon, consumers could easily subscribe to both Groupon and LivingSocial emails and very often did so, buying whatever offers caught their attention from either company. In the case of Uber, it is completely feasible for someone to have both the Uber and Lyft apps installed on their phone, and use one or the other depending on who offers the cheapest rates.

Is it possible to improve on a situation like this and build some actual consumer differentiaton and loyalty? It is, but it's not easy. Uber especially will have a hard time with this since transportation is a complete commodity (while a meal at a restaurant is arguably less so). Clearly, Uber will do all it can to have the best app, the best customer service, the best-known brand, etc. But in the end, it is trivial to have two different apps on my phone and to launch the one that gives me the best rates - and this is what most smart consumers will do.

This leads us to the crucial sell-side (merchants/drivers). It is here where the strongest differentiation and barriers to entry can be put into place. This is where, I believe, Groupon failed to create huge and long term value. And, as far as I can see, Uber is not yet fulfilling its potential. Let me explain.

Back in 2010/11, local merchants everywhere were hearing about this brand new marketing ploy called a "Groupon" and were intrigued by it. It promised to bring them lots of new customers for no up-front cost. So a lot of them, including many very high quality ones, tried it. The problem was that the long-term economics weren't great, and that there was another company (LivingSocial) quickly calling them up and offering to do the same thing but with a slightly lower share of revenue. So what did merchants do? First, they tried Groupon. If they liked the results (or thought they liked the results since the economics did not always become apparent until months later), then many would just try LivingSocial and play them off each other. If they didn't like the results, they were out of the market for these types of deals. And Groupon did absolutely nothing to either improve the long term economics for merchants, or to actually add enough differentiated value that a merchant would choose to stick with only Groupon long term.

Why was it key to differentiate/add value to the sell-side? Because merchants are busy and have limited bandwidth (especially when overloaded with a bunch of Groupon-carrying customers). If Groupon had offered the merchants a set of valuable ongoing services to complement (and improve) the "daily deal", merchants could have been long-term Groupon customers, without the need or ability to go to LivingSocial. This is different from the consumer side, where it is trivial to receive two email newsletters. A merchant, in contrast, can only have one provider of loyalty, CRM, payment processing or [fill in your preferred ongoing service]. Groupon was in a tremendous position to offer some of these services at cost (or even free), as long as a merchant stuck with them long term and did a periodic Groupon deal to bring in new customers. But they didn't - they were too busy growing like crazy. Eventually the craze cooled off: merchants saw the economics of daily deals were not favorable, LivingSocial forced margins down and the company ended up semi-pivoting to selling overstock/discount goods. While it's still a valuable company ($4B market cap in early June 2014), it is worth just a fraction of what investors/management were expecting when they invested $1B and rejected a $6B acquisition offer from Google in early 2011. I could write much more about this, but this post is primarily about Uber, not Groupon.

So how does this concern Uber? Well, every single time I have used Uber (or even just taken a taxi) here in San Francisco, I see that the driver has 2-3 different phones on his dashboard - one from Uber and one from a competitor. Understandably, the driver will take riders from either service and will probably favor the service that gives him the better economics (and, by the way, Lyft is said to be taking 0% share at the moment). But a driver is busy, wants to use his/her time as effectively as possible and would prefer to stick with a single service if it fulfills all his needs. And presumably a driver also needs additional complementary services (e.g., holistic routing, car leasing, car servicing, accounting/tax services, etc.) where it doesn't make sense to have more than one provider. Uber, sooner rather than later, needs to start giving drivers these additional services (at cost or even free) and making their lives as easy as possible. The "uber-goal" should be to make a driver decide to just stick with a single service and not play them against each other since it's not worth his time to do so. Is this possible? I think it is, although it seems less straightforward for Uber than it would have been for Groupon. After all, it's pretty easy to have two phones on your dashboard, but it was a very bad idea to run simultaneous (or even overlapping) Groupon and LivingSocial deals.

Summing up

So where does this leave us? I think Groupon offers Uber a very relevant and recent cautionary tale. Uber seems to be doing many things right, especially around city-to-city scaling and fund-raising -- just like Groupon did in 2010/11. But Uber runs the very clear risk of focusing too much on growth and not on building long-term defensibility/differentiation. And the only way to build this defensibility is by locking in their drivers by whatever means possible and offering them long term, sustained value. Not just a higher revenue share - rather highly complementary services that make their lives easier and businesses better.

If they execute well on this, I can see Uber being worth hundreds of billions in a few years. If they don't, then they may end up like Groupon - worth "just" a few billion dollars. While that is nothing to sneeze at (how many people build billion dollar businesses?), it is very, very far from what it could have been.

Another startup gives mobile payments a shot

Just saw this blog post on Bling Nation, a startup working on mobile payments in bricks and mortar scenarios. I wish these guys luck, but other companies have tried alternatives to cash/credit cards in bricks and mortar POS (point of sale) in the US and there has been little success. I don't see what will be different this time around.

First, a quick and rough rundown of what has been tried:

• At one extreme are alternative schemes like Pay By Touch. PBT was a spectacular flameout, partly because of a flawed model, partly because of mismanagement and potential fraud. PBT allowed people to pay at the POS by using their fingerprints.
• There are also the efforts led by the credit card companies (e.g., Mastercard PayPass) that are distributing credit cards with RFID chips to consumers and RFID readers to merchants. 
• Finally there are assorted startups that are equipping cell phones with RFID chips (either embedded or via a stamp) and encouraging consumers to use them at merchants with RFID readers. They may or may not be piggybacking on the rollout of RFID readers pushed by the credit card companies.

At best, these have gained limited acceptance. At worst, they have been disasters.

I think the reasons are as follows:

1) Consumer value proposition - Simply put, there is none. Today I can take out my credit card, swipe it, maybe press a button and sign in less than 30 seconds. Or I can take out my credit card, give it to an attendant and sign, also in a few seconds. It just isn't that inconvenient to pay with a card. Cash is also simple (although you can argue it's a hassle to carry around). Compare that to the alternatives being pushed by the schemes above:

• Register for and learn a complete new process as in Pay By Touch's example (fingerprint payment). This is clearly more complicated initially, equally complicated from then on.
• Wave my credit card in front of an RFID reader, instead of swiping it. This may be slightly simpler, but I think it's about the same. Plus, I believe you may still have to swipe today for charges over $25 - but I may be wrong on that.
• Register my phone (if it has an embedded chip) or my stamp (which I stick on my phone), then wave my phone in front of a reader and probably press a button or two on the phone and/or on the reader. This is definitely more complicated initially (even worse if I also have to install some sort of client/app on the phone), at least as complicated from then on.

So I just don't see consumers adopting this en masse, unless they are aggressively pushed through other means (e.g., very expensive marketing or rewards).

2) Merchant value proposition - Some of these schemes (but not all) promise lower processing fees for the merchant. That sounds good, but it depends on the savings - they may or may not be compelling. Also, very importantly, someone needs to pay for the RFID reader. Not many small merchants will agree to buy a reader which will be lightly used. Not many large merchants will make big investments in readers which will be lightly used. And if the payment provider (e.g., Bling Nation) pays, they will need a LOT of money (see the amount of money Pay By Touch spent on readers).

3) Bank value proposition - It's been a while since I looked at the payments ecosystem, so this is a little fuzzy. But issuer banks get a cut of credit card transactions. For a bank to get involved in a new scheme, and actively push it to account holders, they would need to see some upside in leaving the Visa/Mastercard ecosystem (or at least risk angering them). This may or may not be there.

4) Distribution and network effects - Finally, you need to quickly and effectively get the different pieces out there. Consumers need the chips/stamps and merchants need the readers. Until you get a critical mass on both sides, the system is ineffective and at risk of just grinding to a halt. You can try to bootstrap it through incentives on both sides, but that will be very expensive. A startup will need to raise tens (if not hundreds) of millions, or a big company (like Mastercard) will have to make a significant investment. Bling Nation seems to be partnering with small community banks - this seems to me like a hard way to get to any scale quickly.

These are the reasons why I think these efforts are destined to fail. It's not inconceivable that one could work. But it will be very hard. Why do people keep on trying?

1) Perceived big (huge) rewards - Payments is a big, big pie. "Disrupting" the status quo and taking a small share of the market is attractive to entrepreneurs and VCs who back them

2) The Europe/Asia example - People see mobile payments taking place elsewhere, so why can't they work in the US? This is sort of true. But you have to look at the overall context, ecosystem and development of these industries in each place. There are several significant differences - for example, credit cards are much less common in Asia than in the US (the same is true of Europe although to a lesser degree) and so the mobile payment schemes faced less obstacles. Also, mobile phone usage was higher earlier in the development of these industries, again presenting mobile payment schemes less obstacles as they developed.

3) Success in other flavors of mobile payments - Mobile payments are working (sort of) in other scenarios, why not in bricks and mortar/POS? By other scenarios I mean person to person payments (see TextPayMe (now Amazon), and Obopay) and mobile payments for virtual goods (see Boku and Zong). But success in these scenarios means nothing for POS.

4) The unbanked and people without credit cards - This is a legitimate (and also large) market that could benefit from some form of mobile payments. But the main opportunity here is outside the US. In addition, many of the forms of POS mobile payments being tried (e.g., Bling Nation through community banks) by definition seem to require a bank account - so they aren't really going after the unbanked.

So these are the reason why I think efforts like these are destined for failure in the US. I may be wrong, and I clearly do not know the Bling Nation model in detail. It's possible there are nuances that get around my objections.

Could this ever work here? Perhaps. The best scenario I see is someone like Apple shipping its phones with an integrated RFID chip and bulletproof "it just works" software. This would seed one side of the market. They could partner with a big bank and/or one of the associations (Visa/Mastercard) for the necessary investment on the merchant side. That would be pretty interesting, and importantly would be an improvement to today's system (that as mentioned above, works fairly well), rather than a true disruption. But I don't think it will happen anytime soon.

   

"Back door" into the Olympics

I just read this article in the NYT and I think its a great story. It's about Roberto Carcelen, a Peruvian national living in Seattle, that wants to qualify for the upcoming winter Olympics in cross-country skiing. Not only that, but he is 38 and just started skiing 3 years ago! Obviously he will have no shot of actually winning a medal once there - but I think just the effort to get there and the experience once there would be invaluable.

The reason I find this fascinating is that ~4 years ago (also when i had just moved to Seattle) I thought seriously about trying to make it into the Olympics somehow. I call it the "back door": not being a world-class athlete, you have to be from a country that is not particularly good at a sport that you also happen to be good at - and then try to make it in. Many have done this over the years - Eric Moussambani and Mexico's Prince Hubertus von Hohenlohe (this guy is quite a character) are good examples. Some people think doing this detracts from the Olympic spirit somehow, but I completely disagree. As long as you play by the rules, why not try to make it in?

In my case my dream was to make it into the table tennis competition representing Mexico (not to take anything away from Mexican table tennis players - but we clearly are not known as a world table tennis power). I've played a fair amount and got to be reasonably good a few years ago. Not even close to real Olympic material, but perhaps close enough to place in the Latin American qualifier. Unfortunately, I didn't get around to seriously undertaking the necessary training. But it's always bothered me that I didn't even try. Perhaps this is the year to seriously start playing again and give the back door a shot for the 2012 Olympics...

In any case, best of luck to Roberto Carcelen. I hope he makes it into Vancouver and has a blast.  

International advertising on the NYT

I am in Mexico for a few days and this morning, while reading a few articles on the New York Times website, was struck by some interesting ad behavior on their site:

1) Several of the pages had normal english language ads. One example was a big sidebar for UPS which was just like any ad you would expect on a normal day.

2) Then I noticed some spanish language ads. This surprised me as I had not seen that before on the NYT. Perhaps I haven't paid attention in the past, but maybe the NYT recently started serving ads through international ad networks (or a network manager like Rubicon Project that can hand off inventory to international ad networks - although I doubt they are doing anything in Latin America yet).

Some of these ads were decent (e.g., one for an english as a second language school), but most of the ads being served were not particularly good and showed bad targeting. This is an example:

    

It's an ad for an MMOG-type game from a German company with some questionable spanish localization. Not really an ad you would consider a good fit for the site I was on.

3) Then I noticed a bunch of pages with blank ad slots. I take this to mean that there were no ads for this inventory, but perhaps there were some connection erros given my decent but not great internet connection.

4) Finally, some pages started defaulting to Google AdSense. This resulted in some great advertising:

While the ad is contextually targeted (sort of...) I doubt that it's the one the NYT would have liked next to this story.

Anyway, the whole point is that it's clear that online advertising in international/non-english scenarios is still very much an unsolved problem.

First, there are probably very few ads that can fill available inventory, mainly because online advertising spend in spanish and/or in places like Latin America is still small.

Second, the infrastructure to support a good experience still isnt there. Instead of the ads I listed above, the right ads in this case would have been in English for products/services available in Mexico. This wouldn't be that hard to do - I was logged into the NYT, and they therefore know I am a regular reader with a US address (as far as they know, I may not even speak Spanish) and they clearly know I am in Mexico because of my IP address. Instead I was served a normal UPS ad (probably the best second choice), no ads, some sub-optimal spanish language ads, and finally some extremely sub-optimal English language Russian bride ads.

Whatever the economic situation around the world today, and the fluctuations in advertising spend over the near term, it's clear there is a lot of opportunity over the mid/long term for this to improve greatly. In 5-7 years this experience will be much, much better.

Truphone does allow iPhone transactions

Following up on my last post - I now do know of at least 1 app that got into the App Store and takes payments post-initial purchase: Truphone. This is doubly surprising. Not only do many people think Apple isn't allowing these transactions yet, but the whole concept of Truphone (a VOIP phone) is one that you would think would not be allowed by both Apple and AT&T. This further points to the confusion around the App Store black box approval process.

Apple app store and enabling payments

This post on GigaOm by Narendra Rocherolle talks exactly about what Apple needs to do soon with its SDK and the App Store. I've been playing around with a lot of apps, as well as my own ideas for apps, and this is something I've also been thinking is sorely needed for several reasons:

1) Getting small developers to develop a billing infrastructure for their apps is unrealistic. Today, and for the foreseeable future, the majority of apps will come from small developers

2) There are only 2 ways to make money off apps today: an up-front payment or advertising. A payments API would allow subscriptions and ad-hoc charging for services/content, giving developers much more flexibility in how they build and charge for their apps.

3) Even larger ISVs that can afford to build out a way to charge today face uncertainty around whether or not Apple will allow their app into the App Store. To date, I have not seen an app that charges for service/content post purchase and, frankly, I wouldn't be surprised if Apple shuts down those who do (which brings up a bunch of other issues...).

Apple should do this ASAP if they want to turn the iPhone a market-leading platform.

Chicago Humanities Festival

Over the last week or two I've been to several of the Chicago Humanities Festival's lectures. This is really a great event. Strangely, I found out about it initially by pure chance this year and have seen very little marketing for it. I never heard about it when I previously lived in Chicago. But many of the events are very well attended, so people know about it. Not sure how they find out... But regardless, some of these lectures have been excellent. Here are some of the better ones I've been to:

- Gary Becker keynote - Any lecture by Gary Becker is worth attending. This time he talked about the unintended consequences of technology, the current financial crisis and other topics.

- Olympism and the Modern Olympiad - This was a great lecture by University of Chicago prof. John MacAloon. He talked about the origins of the Olympic movement, how it developed and also some of the issues around Chicago's bid for the 2016 games.

- Jeffrey Sachs - Sachs gave a great lecture, spending the first ~20 minutes on the current financial crisis and then talking about 4 other "bubbles" that could severely impact mankind within our lifetimes (based on his work at the Earth Institute): climate change, poverty, population and inequality (specifically in societies like the US). Very thought provoking.   

- Lawrence Lessig - Lessig, on the same day as Sachs, also gave an excellent lecture. He used his characteristic fast-paced, multi-slide presentation style to talk about what is wrong with the current system of lobbying, corruption and politics in Washington.

- Tall, Taller, Tallest - This was also a great lecture by Antony Wood, director of the Council on Tall Buildings. He talked about current trends in tall/super-tall buildings (big surge lately, being built in Asia/Middle East predominantly, now seen as national/city icons instead of corporate icons, etc.) and some of his opinions on what architects should be aiming for when building them (distinctiveness, sustainability).

Unfortunately I've missed a few other good ones, including Lisa Randall's lecture on string theory. But there are a few more lectures that I'm looking forward to, including one on time travel. As I said above, it's a great event and I highly recommend it.                   

 

Apple growing pains

This post at GigaOm made me think about a couple of issues related to Apple, and by extension Microsoft. Clearly Apple is having issues with MobileMe, and GigaOm seems to think they stem from a lack of online infrastructure expertise. This may or may not be true, as Apple has clearly handled iTunes well so far and doesn't seem to have scaling problems there. But it is possible that as they roll out more ambitious, and complex, online services they will run into problems like they have with MobileMe.

So two thoughts on this:

1) For companies whose main business has been PC-centric (e.g., Apple, Microsoft) it obviously isn't easy to switch to an online/service-centric mindset, like that of a newer, online-only company (e.g, Yahoo, Google). I think Microsoft has not been given the credit it deserves in successfully delivering services that, if nothing else, have scaled well and rarely had delivery issues. Microsoft, with Google and perhaps Amazon, is at the forefront in building out massive data centers and online infrastructure.

2) Apple, with its recent success, will now start to face issues it hasn't before. First, the will need to start buiding out their infrastructure in order to offer more online services at scale. They are just starting and their first effort (again, ignoring iTunes which probably isn't fair) is not good. Second, with its growing PC market share, it's just a matter of time before they start dealing with issues MS has been battling for years (e.g., viruses, malware).

I'm not rooting against Apple at all. Quite the opposite. I recently switched to a Mac at work and, after getting used to its quirks, like it. I also really like my iPhone and think it has changed the phone market.

But I do think that Microsoft is rarely given the credit it deserves, especially when you see competitors stumble in doing things that MS has relatively quickly become a leader in.

Paul Otlet and the web

I was blown away by this article in the NYT about Paul Otlet, his plans for cataloging all the world's books and his ideas for a system that easily connected all these documents, complete with details on their relationships and a way to query them. Of course, this sounds exactly like today's web, search engines and efforts to make all information "universally accessible and useful".

Sadly he ran into some problems:
1) The technologies he was using (index cards) were infinitely less scalable than what we have today
2) WWII

This just goes to show how ideas, no matter how grand, are rarely original. You need two things to make them a reality. First you need good execution (as VCs are fond of saying). Second, and just as important, you need good timing.

Yahoo basically gives up

This press release is unbelievable. Trying to spin this agreement as something positive is pretty amazing. Especially this part:

The agreement will enhance Yahoo!'s ability to achieve its goal to grow operating cash flow significantly, while at the same time providing flexibility to continue to invest in ongoing initiatives such as algorithmic search innovation and search and display advertising platforms. It gives Yahoo! complete flexibility to continue to use its Panama paid search results.

This makes zero sense. Yahoo, in theory, is doing this to make more money (up to $800M according to the release), but instead of choosing a clear strategy and, say, focusing on their other properties/assets (e.g., communications) they may still keep on investing on their advertising platforms. Meanwhile Google benefits from the added scale/data of the ads they serve. Yahoo is choosing the worst of all worlds.

Had this been a good agreement, you would expect their stock price to react positively (given the "unexpected" new cash coming in). However the market clearly sees that this is a negative. If Yahoo keeps this agreement long term, their ad strategy is dead and the company won't even reap the full benefit of a well-thought out and focused strategy. If Yahoo decides this was a bad idea in the not too distant future (what I think will happen), they will have impaired some of their assets, lost their credibility and strengthened their primary competitor. It's a lose/lose situation. Whoever is running this company is seriously messing things up.

As I wrote a few weeks ago. Whatever the outcome of this whole mess, Google is the winner.

Oh, and one more thing... there is a $250M termination fee (subject to some reductions) in case the agreement is terminated as a result of a change in control. Amazing! Carl Icahn must be going nuts right now. I wonder if he will come out stronger than ever and really shake things up or will just see this as a lost cause and give up. I am betting on the latter, but the former would be great to see.

Facebook Connect and Identity

Facebook just announced Facebook Connect. This is potentially huge - I think this is what could truly make them into an indispensable Internet infrastructure layer: the main provider of Identity. If executed well, they could entrench themselves into the online fabric and become the best way for applications to authenticate users and gain access to their personal and social information.

This has obviously been tried before. Microsoft (Passport/Live ID), Yahoo (BBAuth) and Google all have APIs that allow developers to leverage (to slightly different degrees) the large number of user accounts they already have. There are also more open efforts like OpenID that have similar developer-facing goals while trying to decentralize the control of identities. All these efforts have had very limited traction, probably for one or more of the following reasons:

1) Not enough value for the developer - Sure, they will save some coding time, but there is a perception that they will lose control over their users and it is someone else that will ultimately own that relationship. Plus, there isn't much use for these accounts beyond authentication. This is definitely the case with MS/Yahoo/Google.

2) No critical mass - There is little reason for a developer to use such a system if he won't benefit from a pre-existing critical mass of user accounts. This may not be the case for the big guys, but it definitely is for OpenID.

3) Bad UX - Unless the authentication process, and getting the ID in the first place, is easy and seamless, most developers won't risk requiring their users to get such an ID. So far, none of the above have hit on both counts. As far as I know, using systems like Live ID is not completely seamless. And getting an OpenID is not something that ordinary users know how to do. 

So we are left with each application out there coding their own identity system, requiring users to memorize new IDs/passwords and re-enter their personal/social information. Facebook, however, has a real shot at changing this. Until now Facebook was just another app/walled-garden running the risk of losing its buzz and seeing users leave for the next fad. But Connect can change the game they are playing completely. Why could it work? Addressing the same three points as above:

1) Value to developers - Facebook has more explicit info on their users than almost anyone else (you could argue Google knows almost as much - but it is mostly implicit). They know their names, locations, work history, education history, likes and dislikes. Importantly, they also know who their friends are. There is enough value here that I think many developers will think twice about not leveraging this information.

2) Critical mass - Facebook may not have as many user accounts as Yahoo or Microsoft (roughly 500M vs.100M?), but they are within striking distance. Furthermore, it's likely that a much greater percentage of Facebook accounts are active and actually represent real people and have real information associated with them. I don't think critical mass is a concern.

3) UX - This is where they could stumble. They need to come up with an elegant and seamless way for developers to weave Facebook identities into their apps. My guess is they can do this.

How would this change the game for Facebook? By turning into an app infrastructure layer, they would not have to worry as much about driving page views on Facebook.com. Most innovation on the Internet is going to happen off Facebook anyway and they can't stay on top forever. With Connect they could just focus on having the best identity system out there. This is probably composed of two parts:

1) The set of APIs that let developers leverage Facebook IDs and all the information they contain

2) Tools for end users to create those identities and populate them with their personal and social information (essentially what Facebook.com is today)

Now for the hard question: how do they monetize this? They are already having trouble monetizing their own page views... how are they going to monetize something that end users don't actually see even if it becomes wildly successful?

The first, obvious way is to continue to rely on ads on Facebook.com. They are going to keep on working at this and may actually figure out a way to bring eCPMs up (perhaps by monetizing influence - I've written a post on this before). But there is nothing new with this option and is in fact a bit of a cop out since I wrote above that FB could stop worrying about driving Facebook.com page views.

The second way is to monetize third party inventory (the same post also talks about this). This makes even more sense in scenarios where Facebook is providing the identity infrastructure for a site. Why couldn't Facebook require developers using Connect to also use "Facebook AdSense"? It complicates things a little bit and not all developers may be willing to do this. How about a freemium identity system? Developers get access to more info if they place Facebook ads on their site... It's worth a try. Again, I really think Facebook needs its version of AdSense.

Third, there will probably be other ways to monetize this that I can't think of right now (talk about a cop out...). But I am confident that, one way or another, an Internet-wide identity provider would be very valuable. And I think Facebook has a shot at becoming this provider with Connect.

Finally - I have to squeeze this in here. I think it's somewhat sad that Microsoft (my ex-employer) didn't do this ages ago. They had the vision - hell, they came out with Passport ages ago. They also had a lot of personal information (through sign-up requirements and other properties) and social information (through Hotmail and Messenger). It's unfortunate they haven't been able to capitalize on this.

Wigix

Lots of buzz the last day around the new eBay competitor Wigix. They have an interesting take on the marketplace, and you can't blame them for trying - its well known that the two "general marketplace" leaders (eBay and Craigslist) have done very little innovation in the last few years (Craigslist by design, eBay has no excuse).

Wigix' site looks ok, and the vision is interesting and ambitious (see this post by Bill Burnham for more). But at first pass I see a couple of potential issues:

1) Unlike with stocks and commodities, where all shares of MSFT or bushels of corn are the same, "stuff" is not always the same. People customize their cars, scratch their phones, etc. etc. In the current Wigix SKU pages I don't really see the ability for people to completely/richly describe their items for sale. eBay allows people to fully describe their items (including arbitrary text and pictures) - something that makes each item almost a one-off (which is sort of true), but something that also makes searching highly annoying. Wigix wants to get around this by moving closer to an idea of a commodity - but I don't know if this works. I would be wary of buying an iPod unless I am pretty sure I know what condition it's in and have seen pictures (unless I'm being told it is brand new). Wigix can probably fix this relatively easily - but it could be a challenge to do it within their commodity-like framework.

2) Wigix' vision includes people using their site as a place to keep track of all their stuff, as well as a marketplace to sell/buy that stuff. That's interesting and does make sense in a way. But I don't know if people will think about it that way. I'm willing to bet most people want a place to buy and sell, period (especially dedicated businesses - which I believe make up a big % of eBay's sellers). So it feels like the "this is my stuff" aspect of Wigix will just be superflous at best and distracting/off-putting at worst. Other "stuff trackers" have been made and have gotten limited traction. But maybe I am wrong - its possible that the stuff tracker/marketplace model is the right combination and will get big adoption.

3) Finally, I don't see a rating mechanism yet. And interestingly, the personal profile page has fields for a user's eBay ID and password so that Wigix can get to their eBay rating. This is a nice try at leveraging eBay ratings (arguably one of the most valuable pieces of eBay and built up over many years), but I have to believe eBay will shut this down VERY quickly.

In conclusion, its a pretty interesting effort. Only good things can come out of someone thinking hard about marketplaces and innovating on them.

Playcafe

Earlier today I participated in Playcafe's online game show with Ken Jennings. I had been meaning to try it, and being a little bit of a Jeopardy fan, it finally caught my attention enough to log on for the live show. The show still needs some work - they had a few technical issues, the site could be more streamlined and the game itself could improve. But they have obviously done some good work getting their technology this far, the idea/concept is great and it was fun for ~30 minutes (it would be interesting to see data on number of users and their drop-off rates).

Playcafe sits between social online games (which are hot right now on Facebook and elsewhere) and TV game shows/programming. They will do well if they can hit the right mix of scheduled/hosted real-time interaction and anytime social gaming.

They have a static Facebook page today, but it seems like they could really benefit from more aggresively leveraging a social network:

1) People adding their application (whatever form it takes) and the news feed would help them get new users/viewers. I think today's show only had ~350 viewers - at least that's the number I saw on the player (but I may well be wrong about this) - which is fairly low.

2) Leveraging the underlying social network to invite people, see who is online during the live show and form teams and/or compete with people you know would significantly improve the experience.

In any case, it's a great idea and they seem to be moving in the right direction. It will be interesting to see how the show evolves (and, without a doubt, the soon to emerge flood of competitors).

Online financial management services

As often happens, the last 6-12 months have seen a wave of new companies providing the same type of service - in this case online financial management. Basically Quicken/MS Money on the web. The best known ones are Mint and Wesabe, but there are others like Geezeo and Expensr.

First of all, I think its an area that was begging to be put on the web. After years of using MS Money in fits and starts and never being completely satisfied with the experience, I now find myself a satisfied Mint user and getting more out of it than I ever got out of Money.

But the interesting point for now is around the different routes Mint and Wesabe have taken over the last few months and the apparent results (of course, its still very early and things could change). I've used both of them and I have taken two lessons out of seeing their development:

1) Good UX trumps privacy concerns (within reason) - I started using Wesabe early on and had a reasonably good experience. But the fact that they wouldn't directly connect to banks to get transaction information always seemed like an unnecessary inconvenience - they had all my transaction info anyway and, while it not being able to connect directly to the bank should make me feel safer, the reality is that I am not concerned (I would catch fraudulent transactions and most banks would let you off the hook if notified quickly enough). Mint, on the other hand, from the beginning connected directly to banks, making usage simpler and more streamlined. Interestingly, and belatedly, Wesabe just announced direct upload of transactions from banks.

This wasn't the only reason I switched though. In fact, I gave Mint a try when it opened up to the public, didn't like it and stayed with Wesabe. However this brings me to the next point.

2) Rapid improvement/iteration is (obviously) a must - As mentioned above, I initially tried Mint, didn't like it enough to switch and stayed with Wesabe. However several months passed and I noticed very little improvement in Wesabe - tagging was still flaky/annoying, there was no way to easily track spend across categories/time, etc. Early this year I logged back into Mint for the heck of it and was actually blown away - the things I remembered as annoying/lacking were gone. And I found that it had features (like the Trends tab) that blew away anything Wesabe had. So I have now fully switched to Mint and am a happy user - its a really good service (with a few minor annoyances).

Based on conversations and imperfect stats, it seems that Mint is clearly the leader in usage now. I attribute this lead to the two points above. For 1), the fact is that privacy, in my opinion, is just not that big a deal anymore. As long as the company is not a fly-by-night outfit and has reasonable safeguards, I think most people are over, or soon will be, their privacy concerns. Scott McNealy had it right 9 years ago. Point 2) is just common sense.

As a final note, I haven't used any of the other services out there. If anyone thinks they are better than Mint, I'd love to hear about it. Of course, one of the great (for the providers) and scary (for users) things about these services is that they are very, very sticky. I have so much data in there already that an alternative would have to be A LOT better for me to consider switching.

Alien life and "great filters"

I found this article in the MIT Tech Review, by Nick Bostrom, fascinating. I enjoy counterintuitive/contrarian thinking, and this is a great example.

Basically, Bostrom postulates that it would be bad news if we were to find signs of life on Mars (or anywhere in our galaxy for that matter). But not because he wouldn't like to see it - in fact I think many people, and certainly most scientists, would welcome such a finding. Rather, he says that
finding signs of life could instead be a very bad sign for our future outlook. Why is this?

Given the vastness of the universe, and the length of time available for other civilizations to develop, one would assume that there is expansive life out there. However we have seen no evidence of it (see: Fermi Paradox). So either something fishy is going on (e.g., we cannot detect alien life) or there simply isn't that much life out there. The latter is much more likely. Bostrom then talks about "great filters" - evolutionary transitions that occur with very low probability. Most life forms die off when they encounter a great filter.

That leaves us with two possibilities:
1) We (humans) have already gone through a great filter, likely one at a very early stage (well before we were humans), and survived. It follows that there will be very few signs of life to encounter since most will have not survived the filter.

2) We have not yet encountered a great filter, but will relatively soon. When we encounter that filter we will likely die off. In this scenario it follows that getting to our current stage is relatively easy (since we haven't passed a filter) and life similar to us should be common.

Therefore, if we were to find signs of life on Mars (or somewhere else nearby), it could be an indicator that we are in scenario 2). After all, having life evolve on 2 planets on the same solar system would indicate that it is something pretty common. And the more developed these life forms are/were, the more likely that we have not yet passed any sort of great filter. That is why the longer it takes us to encounter alien life, the better a chance we have at being in scenario 1). We would be (mostly) alone, but with a (hopefully) bright future in front of us.

Unless there are multiple Great Filters....

Anyway - its a great article and I've probably done a terrible job of explaining it. Just read it.

VC in China

The numbers talked about in this VentureBeat post really caught my eye:

IDG Ventures was the first VC firm to begin investing in China back in 1993. Since then, it has plowed $450 million into 180 companies... By 2020, IDG’s money for early-stage investments will grow to $3 billion, up from around $950 million now

And on the performance of some IDG investments:

... [IDG] paid $2 million for a 20 percent stake in Tencent, which is now worth $1.2 billion. It invested in search engine Baidu at $2 a share, and it is now $350 a share. It invested in Sohu at 22 cents; it’s now $45. He invested $6 million into Ctrip, and got a $800 million profit.

There is also some discussion on IDG getting favorable tax treatment in China and the possibility of this significantly increasing the overall flow of money into China (if other firms manage to get it as well).

Thinking about this led me to some thoughts on current Chinese successes and to future startups. First, current successes:

1) So far, the big Chinese success stories have started as copies of western companies (Baidu/Google, CTrip/Expedia, Tencent/ICQ, Taobao/eBay, etc.). But, to be fair, they have done a very good job of adjusting the concepts to their own markets and soundly beating western competitors.

2) The next test for these big Chinese players will be to continue growing by expanding internationally. The Chinese market is big enough that they will have their hands full just focusing domestically for the next 3-5 years - but then things will get interesting. World-class western companies (e.g., MS, GOOG, EBAY) have a large % of revenue coming from non-US markets now (Google just hit 51%). My guess is that Chinese companies will find it relatively much harder to grow organically outside of China.

3) This leads me to think that some of these Chinese companies will become acquisitive in the US and Europe. US and European startups have been acquired by MS/Google/Yahoo and a few other smaller guys - but I bet that in 3-5 years we will see Baidu/Tencent/etc come out aggressively and become exit alternatives for western startups. I would think that seeing first-hand how western companies failed in their market the first time around, they will be smart about how they enter western markets (e.g., by not trying to impose their vision on acquisitions).

As for future startups in China:

1) Those IDG performance numbers are obviously great and they are a real testament to IDG's foresight in entering the China market early. But it will be extremely tough to replicate them. Just like in any other market, the inflow of so much money will drive up valuations and reduce returns

2) It will be interesting to see if China will start producing their own set of innovative startups or will just keep on churning out Chinese versions of western success stories. The future will obviously be brighter if they do the former. I bet they will, but they are not there yet.

3) While I am a big believer in China, I am very wary of projections that have their GDP growing at 10% for another 10-15 years. I think that pace of growth will become unsustainable, especially if commodity prices keep rising and China starts having to spend more money to fix their environmental issues. Both these issues together could be a real downer for their economy and slow things down for a few years, further reducing returns.

In any case, what happens over the next few years in China will be fascinating. I spent half of last year in Beijing, and the energy there is amazing. I hope they can keep their momentum going.

Microsoft/Yahoo/AOL/News Corp/Google

Turns out that Yahoo is now in talks with AOL about merging, while at the same time starting a test to use Google AdSense on their search results. Google of course also happens to serve AOL's search ads and owns 5% of the company. At the same time, Microsoft is talking with News Corp. to jointly bid on Yahoo and potentially combine MSN, Yahoo and MySpace.

This whole situation is pretty crazy. But whichever way things shake out in the end, my opinion is that the winner will be Google:

1) If Yahoo somehow stays independent, they will be forced to do something drastic to improve performance and will likely outsource search ads to Google. Even though Yahoo would keep the bulk of the revenue, Google would benefit from the additional scale and data. Meanwhile Microsoft would be in the same position it is today - lacking ad platform scale and falling further behind Google.

2) If Microsoft buys Yahoo, I believe the regulatory issues will be such a drag on timing and integration issues will be such a drag on performance, that Google will have 1-2 years to further increase their lead on the combined MS/Yahoo. If MS screws up the integration, their problems will be amplified.

3) Yahoo and AOL merging is just a repeat of 1), but with added complexity for Yahoo management. Combining a struggling #2 and #4 is not a recipe for success.

4) Microsoft and News Corp. buying Yahoo and throwing MySpace into the mix is a repeat of 2), but with added complexity for Microsoft management. News Corp. would own a small but significant percentage of the new entity and would have a say in how things are run. Bad news all around, except for Google.

Honestly, Google can't lose. They end up serving ads for Yahoo or Yahoo/AOL (which is great for them) or they watch MS/Yahoo or MS/Yahoo/MySpace struggle with integration for a couple of years (great for them) or they deal with the status quo (which has been great for them). In the meantime they will throw as many wrenches as they can into the process, creating more uncertainty for everyone else and increasing their lead.

Macro issues notwithstanding, Google stock will be much higher (especially compared to YHOO and MSFT) over the next 2-3 years.

Riots in Tibet

This article from this week's Economist is an excellent day-by-day re-cap of what happened in Lhasa last week. It also discusses some of the issues that make the situation, in my opinion, so intractable. On one side, the Tibetans feel that the upcoming Olympics give them an opportunity to be heard. By the same token, the Chinese are very sensitive to anything that could affect the Olympics. The Tibetans feel that the influx of Chinese into Tibet is undermining their culture. The Chinese feel they are bringing economic development to a backward province. Tough situation...

My wife and I were there last year in June - it is a beautiful city and part of the world - and it's surreal and sad to now see pictures of places we went to marred by the damage caused by the riots.

Weather modification

I had heard about China's weather modification efforts before, but this article has more detail than I had seen. Beijing is spending significant resources on this, especially as they get ready to rid the Olympics in August of unwanted rain. The problem, of course, is that it is very hard to prove it really works. Still, a fascinating effort.

"...the state-run news agency Xinhua claims that between 1999 and 2007, the office rendered 470,000 square kilometers of land hail-free and created more than 250 billion tons of rain--an amount sufficient to fill the Yellow River, China's second largest, four times over."

My wife and I are headed to Beijing in August - I look forward to seeing if they really manage to stop the rain.

Everyblock

A few weeks ago I contacted and had lunch with Adrian Holovaty. He is well known in tech circles as the developer of chicagocrime.org and now as the guy behind Everyblock. Adrian and his team are doing some great work at Everyblock and it was great to meet him and understand how he sees the project today and in the future.

I am still trying to get my head around the ways in which Everyblock could evolve. But even now, at its very early stages, it's a very interesting project. I subscribed to the RSS feed for my block here in Chicago and I now look forward to checking it every couple of days to see reviews for local restaurants, crime reports and all sorts of other things happening nearby. And, in addition to this destination/personal usage scenario, I see Everyblock as becoming a platform that:

1) Surfaces/aggregates/disseminates local data at different granularities (city->neighborhood->block)
2) In the process of 1), makes previously unavailable and/or unstructured public data available in a structured manner

As such, it could become very valuable as an underlying layer to both news-focused services and social-focused services (for more on this social surfacing/aggregating/disseminating, see my previous post).

Finally, check out this interview of Adrian by John Udell (of Microsoft). It's interesting and worth listening to. I just came across it and it reminded me to finally write this post on Everyblock.

Adrian and team are doing a great job and I look forward to seeing how Everyblock keeps on developing.

More on feeds

Josh Kopelman has an interesting post on his blog (that is related to my previous post) on feed aggregators and what they can do next.

I think that there are 3 important pieces to the functionality these guys can provide:

1) First is the basic aggregation across news/activity feeds. This is on its way to being accomplished, at least for activity streams that are exposed through APIs or in a structured fashion.

2) Second is smart filtering/alerting on that aggregated feed. This is in terms of both what you allow others to see about yourself and what you choose to see about others. This is where privacy comes in. This seems like a relatively short step from where we are today, but it will be hard to get exactly right.

3) Third is re-packaging the aggregated feed for consumption by services elsewhere. In a way, this is like a FeedBurner for your personal activity stream. It may format the feed in a certain way for certain services, it may restrict what gets sent in that particular feed (although this is more part 2) and it may add new information as necessary.

As an example of part 3), you could allow Amazon to receive your feed. You would send them the feed in a format they can process (standardized or handled automatically by your personal FeedBurner), you would only send them information that is useful and that you are comfortable with (e.g., what movies I've seen, where I am going on vacation, what I've bought at Buy.com) and you would bundle it with other useful info (e.g., Amazon Associate #).

Amazon could use this information to:
- Get to know you better and make timely offers based on your interests and activities (e.g., 10% off a guidebook for your vacation destination, a lens for the camera you bought elsewhere)
- Make offers to your friends/people you influence and give you some credit (hence the associate #). This would work best in combination with a Beacon-like service (see this past post for some discussion on this).

Anyway, this example is a bit weak and contrived. But to Josh's point, there is a lot of potential in taking all these feeds and aggregating/filtering/repackaging them. FriendFeed and the other 1st generation aggregators may get there, but there are probably a bunch of other startups with similar ideas.

Capturing value by aggregating and abstracting

This Techcrunch post brings up an interesting point by comparing Friendfeed to Meebo. Meebo's first step was to aggregate the IM networks on its site, offering convenience to consumers. Now it is trying to capture a lot of the value (away from the original IM networks) by moving users to its own IM network and by adding other complementary services that will keep them there. In theory they will then monetize them and justify their valuation. But that's another story.

Friendfeed is pursuing a similar strategy. First they are aggregating activities across a bunch of web services. At the same time, they are adding new functionality: in this case an underlying social network, conversations, search and I assume filtering/personalization will come soon. These will keep people coming back to Friendfeed (as opposed, in many cases, to the services themselves). Their upcoming API will allow people to do more interesting things with this information, but more relevant to this post, may also allow people to post things/interact with all those web services that are being aggregated (without actually going to their sites). In this way they will abstract users away from all those services and capture a pretty big chunk of their value.

Some of the underlying services won't be happy about this, but they can't do much about it (other than shutting down access and really ticking people off). This aggregation/abstraction dynamic is a fascinating by-product of the nature of web services today.

Big Dog robot

This video is unbelievable. I couldn't stop watching.

Silverlight and Deep Zoom

I hate to say it, but just 3 days ago I put up a post about PicLens and how Microsoft has been slow to put out new compelling experiences based on certain technologies - and referred specifically to SeaDragon. Well, it turns out that just a few days earlier they had shown the new Deep Zoom technology that comes in Silverlight 2.0. Deep Zoom is based on Sea Dragon.

So there you go. I spoke too soon (and late). It did take a while though.

By putting it out there as part of Silverlight they are taking the usual MS platform route and enabling anyone to build their own experiences on top of it. Unfortunately  they have a hard battle ahead of them against Flash and in getting enough end-users to install the runtime to make it compelling for developers (while almost everyone already has Flash installed).

21M??

This blows me away. From this article:

ShareThis plans to announce Thursday that it's raised $15 million from Draper Fisher Jurvetson, Reservoir Venture Partners, RPM Ventures, and Blue Chip Venture in a second round of funding. Since it was founded in June 2005, the company has drawn a total of $21 million.

That's a total of $21M for the maker, so far, of a sharing widget and toolbar. That seems a bit crazy. They must have something really big planned. I can see the usefulness of the widget and that it results in valuable data - what people are interested and who they share it with. But building up enough users to reach critical mass and then justifying that huge round is going to be tough.