Monthly Archives: February 2011

Apple Charges Subscription Bounty, Dependency on Single Platforms, Part 2

The indefatigable @webwright posted some comments to my previous post Apple Charging Subscription Bounty, Evolution of Platforms, Free vs. Paid, Right vs. Wrong. @webwright brought up Pandora, who has tight margins and can’t give Apple 30% of its normal subscription fee without taking a loss on every subscription it gains through the app, via this new restriction.
I guess that I could naively say that Pandora should just raise its subscription fee to incorporate the 30% over and above its normal margin and just tell its user base that it had to do it because of Apple. But pricing is rarely so cut and dry.
I could also just say that Pandora should just give up the iOS platform and go Android, which is still a pretty big market and theoretically should make the company plenty of money. But giving up any market is a tough decision to make, especially when there are entrenched users.
And especially that Pandora is in the IPO line up for this year. In looking at their S-1, it unfortunately didn’t mention what the breakdown was in terms of iOS users versus other platforms. So I don’t know if punting on iOS would be a big deal for Pandora or a loss they could absorb with the growth of other listening platforms.
Still, all my supposed solutions are just the musings of a guy sitting outside of Pandora and not a guy who is in the trenches at a company trying to do its best to make money and ultimately go IPO.
I think my point, though, is this. Let’s say a company was singly dependent on iOS as a platform. I am sure we can point a number of companies like that. To me, this is a problem. That’s because when you build a business solely on one platform, you incur the risk of having that platform ultimately be able to jerk you around or even sink you.
Let’s go back to my example of the electric company in my preceding post. The platform on which that electric company depends is fuel. How much it charges for electricity is highly dependent on fuel costs. If oil prices go up, so does our electricity bill. But yet we all roll with the fact that this is true and we may grumble but we don’t go on Twitter and rage about how my heating bill is up a few bucks because those damn oil cartels in the Middle East raised prices again.
Still, at some point, oil prices might rise so much that we might do something. We might even refuse to use electricity from that company and get it elsewhere: home solar cells, energy from one of those other green utilities, etc. That company could go out of business because it was dependent on oil prices with which it has zero control.
Take a look at Facebook apps and the ecosystem it first created, which allowed a myriad of businesses to flourish. Then, they went and started closing down the viral mechanisms that allowed so many games and apps to gain users. Yes, it did do so to clamp down on bad practices, but it also affected legitimate companies and stifled their ability to grow. Many startups either left the app ecosystem or just outright died.
Nowhere else did dozens of companies feel the pain and death as a result of their dependence on a single platform.
Last year, Zynga almost left Facebook but had built enough value and power against the platform to leverage a 5 year deal. It also realized that its future could not depend on this platform, so it started to break away in a variety of ways, forging a partnership with Yahoo!, MSN Games, and also working on Zynga Live.
Zynga was fortunate enough to have grown so large and so quickly before the platform could entirely sink the company. They had gotten enough users who loved their games that they could now just take those users somewhere else. So Zynga shows that you can use a single platform as an early growth mechanism, but it also shows that you better hedge your bets against the day when the platform turns against you.
Apple’s iOS is a platform which has spawned a ton of new businesses. Many of these are thriving in the iOS platform. However, Apple did not create the platform so that other businesses could just flourish out of the goodness of their hearts; they created it so they could make a ton of money and benefit its users who would in turn buy more Apple products and services. It is easy to forget that and just feel entitled that the platform should just exist for the benefit of those working in it.
Therefore, businesses whose livelihood are dependent on one platform as at extreme risk of that livelihood being screwed with by the platform owner and as history has shown, they could even die by the machinations of the platform owner. Companies should be acutely aware of this and work to make their businesses immune to the manipulations of any one platform. If they can, they should strive to create their own platform and jerk other people around instead being jerked around themselves.
So if you were developing on iOS and dependent on subscription revenue, and then Apple comes in and says you gotta pay up 30% or we’ll drop you, you better have a back up plan and execute it fast if you can’t absorb the 30% cost somehow.
On the other hand, if the 30% bounty either kills off enough businesses or makes them leave, such that their users become dissatisfied enough to revolt and leave, then Apple will have to make changes because it needs those users. Facebook doesn’t have this problem – pretty much every user in the world is on Facebook. Users can leave, but where would they go? If they leave, their social graph is still back on Facebook…

Apple Charging Subscription Bounty, Evolution of Platforms, Free vs. Paid, Right vs. Wrong

My buddy, @LDrogen, tweeted recently:
@LDrogen: There’s nothing unfair about this arangement, it’s like complaining that a store owner on 5th ave has to pay rent, complete bull $AAPL
in reference to recent news about Apple formally announcing they were going to take a 30% cut of any content subscribed to through one of their iOS apps. I retweeted it, because I agreed with him.
But then, my buddy @bmull replied back:
@bmull: @LDrogen do you feel like apple should take 30% of anything (pandora, netflix) subscribed to on a MacBook? How is that different? @dshen
to which, @LDrogen replied:
@LDrogen: @bmull no, only content that is exclusively delivered through their platform and paid for in the store $AAPL
and @bmull then replied:
@bmull: @LDrogen so apps in the Mac app store? If pandora had an app in the Mac app store, they should be required to pay apple 30%? / cc @dshen
Apple’s announcement of the subscription bounty recently sparked some strong emotions and opinions on the net. Many were opposed to Apple charging 30% and felt it was unfair that Apple should force this on everyone. But yet, I was OK with it. I promised @LDrogen and @bmull a blog post on this topic and here it is!
Why I think this is OK crosses many dimensions. I’ll do my best to cover them here:
Evolution of Platforms
If you look throughout history at any kind of platform, there is a starting point from which things evolve. Picking that starting point is critical as it sets the evolution from that point onward.
When people got electricity delivered to their homes, a company was formed to create a big generator and maintain it, wire up the neighborhood and maintain that, and then bring that wire to the home. Somebody had to pay for that so that people could create all this and then continue this service to everyone. Since the dawning of electricity service to our homes, this hasn’t changed. They began charging and so we’re used to that and OK with it.
Had the service been provided by the government, then we might have perceived this service as “free” and then developed a sense of entitlement that the government should provide us with these services along with other services. I quote the word “free” because we really don’t get governmental services for free; we still pay taxes and that pays for these services which are seemingly for free (ie. police, fire, elected officials). But changing from that to making the people pay at some point would probably result in some uproar as all of a sudden, people were paying for these services out of some other part of their bank account at a different time, when they were paying for it all along (whether the government would lower taxes in response to this change would be a whole other discussion).
When Microsoft developed DOS and then Windows, they didn’t charge for the presence of software products and services which used their operating system. Not charging here set the tone for software on operating systems for decades to come. Because they did not charge in the beginning, I argue no other operating system could either or else they could not compete against the proliferation of Windows. However, their only two real competitors were Mac OS and versions of UNIX, and of those two, only Mac OS *could* have had the mission of charging as UNIX was a community driven product who probably never would have considered charging anyone to put software on it in the first place.
It’s pretty obvious, I think, that if Apple had charged a bounty to place products and services on their operating system, their ability to gain any kind of share relative to Microsoft over the years would have been hampered severely. Hence, their decision competitively was to not charge or else they would have died years ago.
But platforms evolve over time from their beginning points based on competitive forces and what people are willing to pay for.
Free vs. Paid
This is where free versus paid comes in, as an element for competition and a general desire of the people to not want to pay for anything.
The internet is infamous for taking something we paid for and giving it away for free, disrupting and pissing off older established businesses and creating a ton of new ones. For years, we paid for news in newspapers and magazines on newsstands and then all of a sudden we could get the same stuff for free (to the consumer)!! Wow!
Free then became a competitive tool for new startups and businesses to enter the market, forcing those before them who charged for products and services to go free or die…or at least find a new way to monetize. After all, who could survive by just giving everything away for free in perpetuity? Born was the word ‘freemium’ and strategies of using free to get customers, destroy your competitors (and potentially themselves in a nuclear fury of mutual free destruction), and maybe…just maybe monetizing your customers later., assuming you survived that long. This is the inherent problem of free, which is people who provide the product/service must eventually get paid to support themselves; very rare is the group of people who can provide time/effort into providing a product/service for free indefinitely.
Despite that, free is pretty effective at getting customers. This is because I believe that people in general are pretty darn cheap. Nobody wants to pay for anything. In a choice between getting something for free or paying for it, I would bet that free would be chosen near unanimously no matter what the consequences. We are indeed a selfish bunch; welcome to capitalism!
Coming back now to the exchange between @LDrogen and @bmull and Apple charging for subscription fees on its iOS platform:
Can Apple charge?
Yes, of course, they can. They have full control over the platform since they built it and have built controls into software/services which enter into the platform.
Am I OK with them charging?
Yes, I am. I am in the minority on this issue, but I believe that people should get paid for the products/services they provide, whether its software, news, music, or videos or whatever. If I enjoy these services, then I want them to get compensated for it to the level that they can survive and feel motivated and incentivized to produce the best of whatever it is that they are working on. I am totally OK with watching TV shows which I purchase through iTunes. I pay for music all the time. I still subscribe to physical magazines and also read news online that I do not pay out of my own pocket for.
But, I also want Apple to be motivated and incentivized to provide the best platform they can provide. To date, iOS and the hardware it runs on are clearly superior to that of any other platforms out there. Granted, if someone never encountered an iOS device, they would be totally OK with Android or some other similar touch based, app economy platform. They still get the majority of the benefits that was pioneered by iOS. But if you have the ability to experience both platforms side by side, you’ll notice that iOS is just better, sometimes so subtly superior that you may not be able to articulate why. That is the magic of Apple’s user experience and the care and attention they put into making their products not just good enough, but insanely great. And I want the people who create these insanely great products to keep doing it, and so I want to them to be paid and happy.
As long as Apple keeps putting out superior products, I’m OK with them charging.
If they falter, then I believe that people will vote with their feet and their wallets. Faltering can simply mean, “I don’t think you should charge so I’m going to Android, et al.” which is a choice and an opinion. Or someday, Apple will start to build mediocre or crappy products and then we’ll all bolt to someone else who is better. Or if the world evens up on its superiority until everyone is at some new baseline of mediocrity, then we’ll all choose on price since when all else is held equal, the only differentiator is price.
So if you disagree with Apple on this issue, it’s easy; vote with your feet and your wallet and go somewhere else. If enough people vote to go elsewhere, Apple will be forced to change. This also goes for businesses who want users to subscribe. If they don’t want to pay the bounty, then don’t be on the platform. Go somewhere else. You may add to the pressure put on Apple to charge or not charge.
What will the future bring on the charging on a platform issue?
If Apple decided never to charge a subscription bounty, I believe they will never be able to in the future. People get used to whatever cost environment they operate in and hate change, especially ones that impact their wallet negatively. That is why going from free to paid can be painful when you’ve trained a whole bunch of users to enjoy your products and services for free.
If the world votes with their feet and wallets to go somewhere else, whether through better products elsewhere or simply by their opinion, then Apple will be forced to change their strategy. It’s that simple.
To reverse the decision on apps through the Mac App Store will be a difficult one, given that Windows still dominates. While Mac OS is gaining on Windows and everyone universally hates Windows, I think the competitive landscape is still very unsure and Apple won’t be able to do that for a long time if they want to continue gaining share on Windows.
Perhaps at some point in the future, if they dominate, they may be able to impose a bounty on subscriptions. But that is far in the future. Or they may never be able to. Or they just might not. We’ll have to wait and see.
Right versus Wrong
So much in the commentary on the net is regarding right versus wrong. To me, being religious on this issue sparks of the entitlement that people feel, but also their bias on the issue relative to their own position in the ecosystem.
As I said before, people are basically cheap. They don’t want to pay more for anything. If Apple charges a bounty, this could raise prices.
A lot of people who oppose this issue are also are those trying to build businesses on top of Apple’s iOS. They want to make as money as possible and don’t want to pay bounties at all.
Everyone complains, but again the answer is easy. You don’t like this, then go somewhere else. There are other platforms to build for like Android. By some metrics, Android even leads iOS in sold devices.
There is no right or wrong; the shades of grey in business (and in life) permeate everywhere. Our own self interest and biases may be hidden but we have only our self gain to blame on whether we are OK with Apple charging or not.
Still the reality is that workers need to get paid and support themselves and I, for one, want to keep motivating them to do great work. I want to buy music so artists will continue to make awesome music. I want to buy TV shows to download so that I can enjoy the next great show. I am OK with paying for content because I want content creators to keep doing it. And I want Apple’s employees to stay motivated on making the best platform out there, even if prices are higher on Apple platforms than on others.
And by the way, today’s press release on Apple’s subscription bounty says:
“…when Apple brings a new subscriber to the app, Apple earns a 30 percent share; when the publisher brings an existing or new subscriber to the app, the publisher keeps 100 percent and Apple earns nothing.” – “Apple Launches Subscriptions on the App Store” – Business Wire
This little nuance is important – they do not take 30% on ALL subscriptions, only those they create. If the publisher does a better job than Apple at gaining subscribers, then they pay no bounty.
How do we feel about the subscription bounty now?

News Innovation: Still Haven’t Quite Gotten There Yet

Over the last few months, I have been actively giving feedback to my buddies at the team (see NYTimes: Betaworks and The Times Plan a Social News Service and Techcrunch: Exclusive: An Early Look At, The New York Times’ Answer To The Daily.
News is one of those things I worked on since the beginning of the internet when Yahoo released its first linked page of news back in 1995. I watched it grow, basically taking offline news and putting it online, into a huge powerhouse of traffic. Likewise, traditional outlets put all their news online launching both opportunity and destruction as users flocked to reading news online and heralding the slow death of physical newspaper business models.
But in the last few years, I’ve been thinking a lot about news, how I read it, consume it, and want to do things with news that I still can’t do. If you look out there on the web, news is still basically just pages of content. Only just in the last year have people started looking beyond just RSS readers and using the social/real time web to help with recommendations. But I still want more; Twitter is a big source of news for me, but it still doesn’t do everything.
I wrote this and sent this to the team, but I want the world to come up with something exponentially better, not just incrementally better. Here are my current issues with news and what I would love to see:
1. News front pages haven’t innovated in ages. They mostly look like their offline analogues. Seems like it’s time for an improvement.
2. Trust is a problem. Too many sources and no way to verify, or verification takes way too much time. You can always find someone who supports your viewpoint on the internet so it can be very difficult to tell who is lying and who is not. At one time we trusted journalists because they had ethical standards to uphold. That’s been destroyed. Everyone has biases and it’s starting to show more and more.
3. Every news source reports on the same news, with few exceptions (ie. local or vertical). If everyone is just re-reporting what comes off the wires, then what is the differentiator for news outlets? Brand? Voice? Opinion? Bias?
4. How to balance what I am interested in and what I want to read serendipitiously?
5. I want to pick sources I want to follow all the time but want to be introduced to new sources on occasion. There are too many sources to deal with.
6. I often drop into a topic later in time. I want to be able to easily navigate back in time to a topic’s start. I also want to see how the topic developed so i want to read all stories up to the present. I also want to navigate across sources for any given topic to see other opinions.
7. When I am interested in a topic, I want to somehow designate it to be tracked. I want to be able to undesignate it also, when I do not want to follow it any more.
8. News rolls with time. but there are often stories I don’t have time to read now. This is the problem with using Twitter as a newsfeed. It does great from a social recommendation standpoint, but the news rolls past so fast that I have to favorite or else it is gone forever.
This also applies to news front pages. The saving grace is the NYTimes email which snapshots the news for me and it is saved in my email.
9. Breaking news often comes from many places, and maybe from Twitter before anywhere else. How do we insert that into our news reading? Do I have to stare at my Twitter stream all day long just to catch the rare, elusive news event before anyone else does?
10. I want something to remember everything I read because I often want to find something that i read in the past. I want to be able to search everything I read and only that.
11. Ideally I want to pull up old stories I’ve read, or tagged, or saved. Hopefully I can easily tag/save into categories and pull them up by those groupings.
12. News must be both curated and algorithmically recommended. Either can’t do it all.
I really hope someone innovates news more than just putting a “news” layer on top of Twitter, or a prettier face on top of RSS feeds. Everyone seems to be working on a singular part of news but not the whole experience. I would love to see a startup take on the whole project of news rather than just little pieces of it. Might even be worth investing in…

Body Hacking Tim Ferriss Style

I’ve never met Tim Ferriss in person, but I think it’s pretty outstanding that he chose to hack his body, as described in his thick tome, The 4-Hour Body. In an unprecedented, data driven way, Tim experiments on himself with all sorts of supplements, exercise programs, and diets to see what works and what doesn’t. But he just doesn’t subject his body to the stress and ingredients; he also measures, using sophisticated but readily available devices, their effects on his body before and after trying them.
Being a triathlete and one that wanted to improve AND being a gadget lover, I felt that this was right up my alley. While my experiments with his methods on myself aren’t finished and I hope to publish some results on my training blog, I felt that some of the measurement methods are worth publishing here and highly relevant in my investing.
Prior to Tim’s book, I was already using technology in my training. I regularly run with a Garmin Forerunner 305 GPS watch and upload the results to my Mac. My old coach, Michael McCormack, had set me on using the Computrainer, a computerized bike trainer which allowed me to workout using repeatable and measurable power settings. On my bike, I use a Powertap power meter that is installed in the hub of my rear wheel. This allows me to record and examine my power profiles during training rides and competition. It also gives me a picture into exactly how much power I expended during a ride and, over time, whether I have improved or not.
Simply recording all this in an Excel spreadsheet meant that I could go back and examine my training, and figure out if I have truly improved season over season.
Recently, I have begun to use other tools to supplement my training. For example, I started swim training in Total Immersion which advocates frequent use of underwater video footage to give feedback on swimming technique. I use a GoPro video camera with suction cup to record my workouts for re-examination later. I also bought a Pulse Oximeter to check my resting heart rate every morning, which is important to track and see when you *aren’t* recovered from previous days of workouts and to know when it’s time to back off and rest. I do also record my heart rate during my bikes and runs, although I’m not a big fan of using heart rate as a training metric.
I also now run with the Runkeeper app on my iPhone 4, which finally has enough battery power to last through an entire marathon while broadcasting/recording my run. Runkeeper does things similar to my Garmin, but I feel that it’s displays are better than the Garmin software, although Garmin’s website implementation isn’t bad.
After diving into Tim’s book, I got a Omron Full Body Sensor Body Fat and Body Composition Monitor to start tracking my progress using Tim’s methods. To see not only my weight but my visceral fat decrease before my eyes has been enlightening! I had considered getting a Withings scale, but for now I needed the full body composition monitoring versus just weight measurement.
With the exception of the Computrainer and the Powertap, all of these are well within the budget of normal consumers. (NOTE: Even now, other manufacturers have come out with computerized bike trainers and power meters that cost significantly less than the Computrainer ($1650) and Powertap ($2000)). The pace of innovation and the movement of price to within the reach of normal consumers (versus prosumers/early adopters) has been accelerating year over year. Also, the availability of devices which can monitor our human condition day to day, minute by minute, and allow us to track our progress minutely is growing exponentially. Devices that were only found in doctors’ offices or hospitals, or big medical research centers are now available to the average person for a fraction of the cost.
When the average person can know the effects of eating a McDonalds hamburger or a healthy chicken salad in the short term, we can really do some wonders in our ability to know how are body is reacting to stimuli and what we should do about it.
What did we do before? We went to the doctor once a year, if that, and he would (maybe) run a battery of tests on you and tell you how you were doing. In between that time, all we had for feedback was a mirror, maybe a scale, and how we felt day to day. We would go back to our old habits of eating poorly, exercising without metrics or goals, and wonder why we kept gaining weight day over day, month over month. Or perhaps we drive ourselves into the high risk group for heart disease or worse. This sucks and is changing rapidly.
Exposing data about ourselves in real time (not doctor visit time) is the first step, giving insight on them is the next, and then lastly providing actionable advice on what to do next is the third step.
We are now in the next revolution of human analytics and I, for one, and diving full bore into it not only from a usage standpoint, but also from an investing standpoint.

The $100,000,000 Question

I’ve got a new favorite question to ask entrepreneurs during their pitches. The question is:
“How do you get to $100,000,000 in revenue per year?”
After they go through their entire pitch, I zing them with this question. I hear their plans, their projections, and what they want from me; then I take all that they just said and ask them if they were to take everything they were doing, how can they get to $100MM/year?
More than anything else, this is an interesting thought exercise.
Let’s say nothing substantially changes from their plans, which is highly unlikely given what we know about startups, but just for now let’s hold it all somewhat constant. We take that and generate some revenue assumptions per customer. Then we take $100MM and divide it by that number to figure out how many customers we need in a year.
This is where the interesting part begins.
Sometimes we’ll look at the number of customers per year and melt at the impossibility (ie. “We need every person on the internet to be on our service to get to $100MM/year”). Then we have to adjust something. It may even point to potential inevitable pivots.
Or we may adjust that number to some realistic number of customers per year (ie. “Well, we can’t the number of users that visit Facebook every year, so let’s say that it’s some percentage of that, and then we’ll take a percentage of that which we can monetize.”) Then we adjust upward the amount of money we need to generate per customer. We take a look at that number and see if that is achievable.
We continue to adjust a bunch of variables and see if somewhere there is some believable outcome from our fiddling.
With one entrepreneur I recently met, he had never done this thought exercise before. And the result actually surprised us; we came up with a number that didn’t look insurmountable at all! Wow!
Most of the time, though, we come up with some maximum potential revenue number that is less than $100MM. Sometimes it’s not bad, like above $10MM but less than $100MM. Sometimes, we just are struggling, trying to get to even $5-$10MM.
I think more entrepreneurs should go through this thought exercise with their projects. I believe that this is essential to creating a fundable startup and eventually a world dominating business. While there are many investors who are OK with someone working on experimental or feature level projects, or those that aim for smaller outcomes, I just don’t have the right resources to support a whole bunch of them, knowing that a ton of them will fail for me as an investor (by failure here, I mean that it will not give me a substantial return on my money; certainly success of the startup can mean a ton of other outcomes, like even a talent acquisition). So I must work with those startups which can get to some large size, like targeting $100MM/year in revenue.
So adding another item to my post, If We Meet, I Will Ask You…, I will begin asking each entrepreneur to go through the thought exercise with me on how they can take their projects and build a $100MM/year business.
If you go through the thought exercise, you maycome up with some seemingly impossible looking outcomes which can be discouraging. But sometimes, you may even surprise yourself in that it may even be in the realm of the achievable.