Mike Masnick over at Techdirt posted an interesting observation about Rupert Murdoch’s MySpace earlier today3. And I’m glad he did because, coincidently, I was in the process of writing a piece on a related topic. While Mike questions the validity of MySpace’s popularity (in terms of pageviews), versus the revenues they are able to generate, my post will focus on the challenge that they face on the revenue side, regardless of pageviews and ad inventory.
Like all community sites that rely mostly on their users to author content, MySpace has had a very difficult time trying to secure high advertising rates. Historically, advertisers have held little trust in content that is not tightly controlled editorially and, therefore, the value they are willing to attach for ads placed next to such uncontrollable content has been very low. The result is clear… MySpace ranks higher than Google in terms of pageviews, but Google will gross $6 billion in revenues this year, while MySpace will generate about $30 million. The delta, which can be measured in orders of magnitude, is almost unbelievable. I realize the comparison is not directly apples to apples, but even so!
I bring this up because this is where Murdoch’s strategic opportunity lies… in eliminating that gap. Put another way, MySpace has a multi-billion dollar opportunity to exploit, which promises to break News Corp out of the media stock depression that it and all its fellow conglomerates have been suffering. Success on this front will demonstrate that News Corp can tap into the fastest growing segment of the advertising industry in a manner that befits Google and Yahoo!
But why would advertisers change their tune and all of a sudden attach higher value to community sites and user-authored content? One word… blogs. Blogs are proving themselves to be a powerful new medium, one that challenges traditional media for people’s time and attention. When an advertiser buys ads on Google and it gets distributed on the AdSense network, many of them are placed on blogs, without discrimination as to who authored the content. This dynamic is something new… advertisers gave up some control (where the ad is placed) in return for higher accountability. Put simply, Google changed the game, and now News Corp’s MySpace (and all other community services) can benefit.
I bring this up for another reason… with the recent news that MySpace is launching its own record label4 as well as the rumors that they will also start a film studio, I hope the MySpace guys aren’t getting too caught up in the bright Hollywood lights. As many know, in Hollywood, you’re either a somebody, a nobody, or you’re one of the King’s (Murdoch’s) men. It’s very easy to get blinded (e.g. worrying about a regular table at The Ivy or the studio lot commissary) and to lose focus on the fundamentals and strategic priorities. Wall Street is watching 5, and it is my belief that News Corp’s second entry into the Internet will be judged first and foremost on their ability to close the monetization gap between MySpace and Google, and less on their ability to venture into traditional Hollywood businesses.
Don’t get me wrong, I’m not saying that launching a label and studio is a bad thing, it’s just that such ventures won’t get the Internet multiples that the media giants are looking for.
(originally posted at http://gigaom.com/2005/11/03/my-space-part-deux/)
The thing that I find most compelling about the Internet, as a whole, is its power to turn well-rooted, traditional business norms upside down on its head. As a result, there is very high value in the ability to think about strategic matters in counterintuitive fashion (I attribute the success of Google to such abilities, as I wrote in my last piece). Jeff Jarvis summed it up nicely1…
Beware the big company that tries to venture into this, the small world owned by its individuals, without proper respect and perspective… The issue is that we, the people, believe we own this space — not just blogs, not just online, but anyplace where we put our effort and trust and money. And isn’t it modern corporate nirvana to be a “we company” instead of a “they company”? But you have to mean it.
For anyone who has had the opportunity to run a large web-based community, Jeff’s eloquent words will resonate deeply. There’s a certain level of what (for the lack of a better phrase) I will refer to as cognitive dissonance when you run a business based on community. And that’s that you quickly realize that the members of the community feel strongly that the service belongs to them, and the control that you, the corporation, think you have is actually, in large part, an illusion.
After all, a community, by definition generates its own content, its own style and culture… it’s all by the people, for the people. As a result, if you’re an executive at such a company, you oftentimes feel more like a politician than a businessperson. To do anything that would suggest that you, as the corporation, owns and controls the service (and in effect, the community) is, well, akin to heresy. This is something Rupert Murdoch will have to contend with, as the new owner of MySpace.
As the worlds of media and technology collide with a force that can split an atom, such cognitive dissonance is a natural by-product of the fact that more and more content (and code) is being produced by the people themselves. At the same time, with the increasing digitization of media, the definition of “distribution” is also changing from channels previously rooted in the physical world to one where people themselves become the new distribution channels via tightly and loosely-coupled social networks connected together by the universal language of IP and bits.
So as time goes by, the foundation of ownership and control for content and distribution is increasingly shifting from corporate entities to people and communities. A phenomenon that will cause countless sleepless nights for old media and old-line technology leaders who don’t fully comprehend the significance of the dynamics at hand.
This shift in the balance of power has immense strategic implications for traditional media conglomerates and technology vendors. It represents a classic disruption of markets and, of its many consequences, probably the single most important ramification is the impact that it has on the concept known as “switching costs”, a business model feature designed to extend competitive advantage. The most recent example of a company that executed almost flawlessly on the classic definition is actually a new media player, and one we’re all familiar with… AOL.
During Internet 1.0, AOL was the master of creating high switching costs. Using the email address as the cornerstone, they were able to lock-in their subscribers into a garden with very high walls. In fact, they locked up the gates so well that there are still 20+ million people who subscribe to AOL’s dial-up service (which, consequently, enables AOL to generate more annual revenues than either Yahoo! or Google, to this day). Even at a time when broadband access is oftentimes less expensive, their subscribers are hesitant to switch away from their AOL email addresses.
But in a world where people themselves are increasingly becoming the sources of content and the owners of distribution, any product development strategy that aims to proactively increase switching costs becomes antithetical to the gravitational pull of the market (as AOL is now painfully experiencing). In fact, in many markets, we are likely to see an inversion of control, where vendors will increasingly rely on their customers to provide them with their strategic and competitive advantages. Put another way, the tail will start wagging the dog.
So in such an open and unpredictable environment of consumer control, what happens to the notion of switching costs? The answer, on its surface, is actually quite simple. The importances of switching costs do not disappear. They will always remain a critical success factor for building market share and defending against competition. What does change, however, is who creates and controls it.
It won’t be the corporation that locks its customers into a walled garden any more; instead, it will be the people themselves who create their own high switching costs. For instance, if you are an eBay seller, your switching cost is not so much the relationship you’ve created with eBay itself and the store you set up, it’s the reputation and trust you spent years building with fellow members of the community. Similarly, if you are a member of MySpace, it’s not the web-page and blog you spent time constructing, it’s your social network of cyber-friends you’ve cultivated and accumulated over time.
At the end, the lesson is one of a paradox. As the power shifts increasingly towards community, the corporation loses its grip on the traditional means of control. Yet, by letting go of control, the corporation creates an environment where the community willingly creates its own switching costs. Such changing market behavior, which is structural and permanent for any industry being usurped by the Internet, must be met with a corresponding shift in corporate mindset. Otherwise, a “generation gap” will exist between the members of management themselves (old vs. new media), as well as the company and its market. In my view, if there is one company that seems to grok such dynamics better than anyone, and is in the process of executing superbly against these new set of challenges, it’s Yahoo!
(originally posted at http://gigaom.com/2005/09/08/inherent-truths-and-value-of-community/)
Google’s mission statement is “to organize the world’s information and make it universally accessible and useful”. At this stage, I think it should be more along the lines of Honda’s original mission statement, which was, “five Honda’s in every garage” (e.g. car, motorcycle, lawnmower, etc.). I say that because it certainly seems, with every new Google service that comes to market, my garage… er, desktop, is filling up with their stuff! So, what is Google’s master plan?4 These days, that’s the big question everyone seems to be asking (it used to be: “What’s the next killer app?”). Just to add more fuel to the fire, I’ll speculate alongside the rest of you. But before I provide my answer to the big question, allow me to digress a little to provide some background and perspective.
Over the years, I’ve noticed that Google’s success has largely been based on their ability to be highly counterintuitive. For instance, they started a search engine when everyone thought that game was over. They started to place ads in search results when everyone thought it was highly controversial. They introduced simple text ads when everyone was developing rich media ads. They designed an ad engine to rank the placement of ads by their effectiveness (click-through-rate) when everyone else was placing ads based on the CPM rates they were able to sell. Their performance-based ad model enabled them to initially build their business on “mom-n-pop” small business advertisers (generating billions of dollars in revenues from the long tail) when everyone else was chasing after Fortune 1000 brand advertisers.
More recently, Google has introduced services that clearly indicate their desire to build a comprehensive “platform1,” one that challenges Microsoft’s dominance in this area head on (Gmail, Desktop Search, now GD2, and Google Talk). So what is Google’s master plan? I believe they are once again going counterintuitive, but in a manner that hits Microsoft where it hurts most. Google will make Microsoft’s entire strategic plan and mission, which revolves around the continued proliferation and dominance of the desktop PC operating system, obsolete by making Google itself the operating system. The model they are pursuing is very similar to Sun Microsystems’ (Jonathan Schwartz’s5) vision of turning computing into a utility, like electricity. The only difference is that Google is already almost there.
To some extent, Google is bringing back the architecture of the mainframe to render Microsoft obsolete. In the future, all computing devices, whether it be the PC, mobile phone, TV, etc., will simply be terminals that “plug-in” to Google’s massive server grid and application services. With the increasing price/performance of CPUs, memory, bandwidth, and storage, Google’s strategic edge will be based on their advantageous cost of processing bits. And as long as users are comfortable sharing their private data and behavior with Google, all services will remain free (and supported by advertising).
It’s not too difficult for me to imagine a day, very soon, when I rely on Google for almost all my computing needs and I buy hardware devices based on such criteria. That’s the day Google will have become my operating system. We all know that the internet has a deflationary effect on the assets of every industry it touches, whether it be printing & publishing, media & entertainment, telephony, etc. If what I pose above is indeed true, Google is using the internet to systematically devalue Microsoft’s assets. Perhaps there will be a day on Wall Street sometime in the future that’ll be known as “Microsoft’s Black Monday.
(originally posted at http://gigaom.com/2005/08/26/google-the-ultimate-deflator/)
Rupert Murdoch realized long ago that owning content, in and of itself, yielded limited power. His frustrations when negotiating against cable czar John Malone taught him that owning distribution, in addition to content, was essential for market leverage. This is the reason why he pursued DirecTV for ten long years, finally acquiring control of the satellite TV operator in 2003. With DirecTV in hand, Murdoch gained substantial leverage, which he uses every time he needs to negotiate carriage deals for media properties with competitive media outlets like Time Warner and Comcast. Furthermore, owning distribution makes it a lot easier for him to launch new cable/satellite networks (one of reasons why I believe he will use his acquisition of MySpace to compete against MTV head on, as I speculated in my previous post here1 ).
By integrating content and distribution, Murdoch has built a media empire that is finely tuned to optimize market control and profits in a one-way broadcast world. But now, as the market reaches a tipping point with high-speed internet access, and with ad dollars rapidly flowing into the broadband web, Murdoch faces the challenge of transforming his conglomerate into one that is optimized for a two-way interactive world. Of course, he already tried once back in the ‘90’s, but now he’s back on the M&A trail with renewed vigor. Yet there is a critical question Murdoch needs to address during strategic planning sessions, and before he unloads billions of aggregate dollars into more deals: What is his strategic objective for distribution in an interactive world? Does he still want to own distribution, or does he not care?
The answer will dictate his strategic plan. For instance, if he wants to compete head-to-head with Yahoo!, his tried-and-true formula of owning both content and distribution will prove irrelevant, possibly even detrimental. On the other hand, if he wants to maintain his integration of content and distribution, then he should forget about buying search engines and portals, and focus instead on making DirecTV (and his other satellite TV ventures around the world) into bona fide two-way interactive platforms.
Simply put, because satellite TV is essentially a one-way distribution platform, DirecTV is actually a weakness as the center of gravity moves towards a new digital universe. If Murdoch wishes to maintain his integrated leverage into the 21st century, he must plug up this hole. Recent reports indicate that he is looking at WiMax2. Good move!
Makes perfect sense. Unlike Bell operating companies he does not need to create a video network. What he needs is an IP pipe. Given the size of the DirecTV antenna, and that there is a cable already running into the home, it is fairly easy to get the WiMAX-based system rolled out. A WiFi access point in the set-top box, can do the trick. Theoretically, the price/performance of such a network can be superior to existing cable nets and the forthcoming telco IPTV nets.
The best ally for Murdoch is Intel, the champion of WiMax. Intel envisions WiMax to be the third high-speed Internet access alternative, and therefore, they are becoming a natural enemy to cable broadband and telco DSL. What’s in it for Intel? Frankly a reason to sell more laptop chips. Just like nearly every laptop is now built-in with an Intel WiFi chips, they are looking forward to a future market where every conceivable computing device is WiMax-capable (including satellite dishes). Moreover, judging from their recent joint venture with actor Morgan Freeman, launching an online movie download service called ClickStar, Intel clearly has Hollywood aspirations (see press release3.)
While technical hurdles remain, the widespread deployment of WiMax is hindered largely by political and regulatory issues. Together, “Newstel” (in the spirit of Microsoft and Intel’s duopoly, aka “Wintel”) offers the political muscle and technical prowess to lobby Congress and the FCC. They also have the war chest of cash that’s likely to be needed to acquire low-frequency spectrum when they are reclaimed and auctioned off by the government. In fact, with the recent Supreme Court “Brand X” decision and subsequent FCC “line-sharing” ruling (allowing cable and telcos the ability to shut out competitive access to their networks), WiMax may be his only viable choice.
Having said all that, there are many (particularly Wall Street analysts) who believe the benefits of media consolidation are obsolete and the days of media conglomerates over. To the contrary, I believe Murdoch has a clear shot at being counterintuitive and proving them all wrong.
(originally posted at http://gigaom.com/2005/08/13/murdoch-wimax-and-the-two-way-web/)
There has been much speculation and analyses as to why Rupert Murdoch acquired MySpace. The prevailing consensus seems to be that News Corp’s motivation was to buy ad inventory targeted at the social network’s valuable young demographic (e.g. see John Battelle’s comments1.) That’s overtly simplistic. Moreover, it’s very difficult to justify a $580 million cash payment on that basis alone.
Although ad inventory was surely part of the equation, I believe there is larger strategic reason that motivated Murdoch to make such a bold move: He is planning to create a competitor to MTV.
Much like Viacom’s CBS decided to use the broadband web to bypass cable and compete against the 24-hour news networks like CNN and FoxNews (see PaidContent’s coverage here2), the acquisition of MySpace positions Murdoch to challenge the dominance of MTV in their category. I’m willing to bet that he will go even further by eventually extending the MySpace brand to include a dedicated cable & satellite network/channel. He is after all an old media guy. In fact, just a couple of weeks before News Corp. announced the deal, we all witnessed the web’s potential in this context when AOL’s webcasting audience for Live 8 outreached MTV and ABC’s ratings of the same event (details here3.) Such a data point can go a long way towards justifying a $580 million price tag.
In addition to live concerts, MySpace is an ideal platform to release music videos (which the major record labels are desperately trying to monetize), as well as other short-form reality programming (think Fox’s “American Idol”) that’s likely to attract the 22 million youngsters in the MySpace community… an audience that happens to also watch MTV.
No matter what you may think of Rupert Murdoch, he never overpays and you can’t underestimate his brilliance. After all, he challenged the 3 major TV broadcast networks by creating Fox, then he challenged CNN by launching FoxNews, and he’s currently revamping FX with a slate of edgy original programming to go against HBO. I believe he’s now going after MTV, and if indeed that was his reason for buying MySpace, not only was it another brilliant move by the media mogul, but the price he paid was a bargain.
(originally posted at http://gigaom.com/2005/08/06/why-murdoch-bought-myspace/)
What happens when you have 100 megabits per second connections on the edge of the network? In your homes, or in your pockets, or in your cars – an always-on 100 megabit per second pipe that wirelessly networks your life. No, we are not talking about fast pipes to the Internet, but simple easy networks all around you.
Starting next year (2006), millions of people will begin to equip themselves with computers and portable devices capable of swapping files at a speed of 100Mbps, all wirelessly (WiFi/802.11n and UWB). Think about that… 100Mbps!! That’s about a hundred times faster than what the average broadband user in the U.S. is accustomed to today.
More specifically, what I’m talking about here is short-range computer2computer, device2device connectivity directly between people in close proximity of one another (think: Rendezvous).
This is different than peer2peer that goes through the Internet… unfortunately, the “last mile” bottleneck will continue to limit such high bandwidth connectivity for any activity that requires an Internet gateway for at least a few more years. Even so, off the network, truly “on the edge” direct connections will start to emerge.
To make the picture more complete, let’s also include the next generation of mobile phones that will be capable of direct phone2phone connections via lower-bandwidth Bluetooth, as well as wireless home networks and consumer electronics (e.g. UWB-enabled plasma TVs) that are coming to market that allow people to easily transfer any digital media directly from one device to another.
So what does this all mean? Put another way, what are the implications when millions of people start creating ad-hoc wireless networks among themselves? Well, if you zoom out to look at the big picture, the most obvious implication is the rise of truly distributed peer2peer networks randomly and serendipitously popping up in meatspace that have absolutely no central points of control.
Imagine high school kids and college students all over the world sharing anything and everything that is digital every time they meet up, directly with one another. And as we know, whatever the kids do first is likely to be the future for the nearly billion others who will be similarly equipped.
What we’re talking about here is a bandwidth explosion on the edge, where the infrastructure will be funded and built by the people, for the people… all without any central planning or capital outlays by the Internet access duopoly of cable and telcos. And the realization of such bandwidth nirvana by way of grass-roots deployment will lead to “social computing” in the truest sense.
Until the Internet came along, PCs were not much more than isolated, glorified typewriters, calculators and filing cabinets. Then with the Internet, we turned our PCs into a portal connected to a vast new world of communications, communities, media, and shopping. Now, with the advent of people-powered wireless bandwidth on the horizon, our computers and electronic devices will open up to a new digital dimension of social interaction among groups of intimates, as well as strangers, but this time to facilitate us in our atom-based lives.
You see, to a large extent, individuals equipped with an abundance of bandwidth will “route around” the last-mile bottleneck perpetuated by the incumbents. So hang on to your hats (and copyrights), the ultimate “world of ends” is right around corner. Now, if you were an entrepreneur, how would you surf this monster wave?
(originally posted at http://gigaom.com/2005/03/22/100-megabits-at-the-edge/)
