I am out in the Bay area the next couple of days but unfortunately will not be at Web 2.0. That being said, I suggest staying up-to-date on next-generation web applications and services through Emily Chang’s eHub. It is great to see all of the innovation out there but we must remember while it takes much less to build an application and get it out to the masses, the barriers to entry are much lower. All it takes is one to two smart programmers to get a rich product in the market and as you dig into eHub it is quite obvious that there are several categories with 3 or 4 players in them already (not including what Yahoo, Google, and others are doing).
There has been lots of discussion about Tim O’Reilly’s Web2MemeMap.
This is a nice graphical representation of what is happening in this next wave of the Internet. As an add-on to this, I thought I would compare and contrast some differences, all quite obvious, with the first euphoric Internet wave. I have shared many of these thoughts in earlier posts like "The web-based platform" last October and "Web-based businesses circa 2004."
|Web 1999/2000||Web 2005|
|GoToMarket Philosophy||If you build it, they will come||Release early and release often|
Sun, Oracle, EMC= Big $$$
|LAMP, open source, Intel, clusters, JBOD|
|Philosophy||Closed||Open, APIs and data sharing|
|Customer acquisition||Spend $$$, advertising||Spend nothing, word of mouth rules|
|Milestone for VC Funding||No users, great idea||Lots of users and rich interaction|
|$ used for||Building product, marketing $ to acquire users||Scaling back end, adding more features/functionality|
|First Round Funding||VC – $5-10mm||Angels – $0-2mm|
|Second Round Funding||VC – $10-20mm||VC – $5 or trade sale|
So as you can see, there are more sophisticated users, it costs significantly less to launch a new service/product, and many of the business models are proven to reach profitability. In other words, these business models are quite capital efficient. It is no wonder why VCs are quite excited about next generation web companies. All that being said, I, like others, worry about believing all of our own hype, and moving ourselves to another bubble. As you see from Tim’s map and my table above, if it costs less to build and launch a company, then the barriers to entry must be lower as well. What this really means is that building a sustainable competitive advantage in this new open world means leveraging network effects to foster loyalty, community, and collaboration. In most cases this will be enough to create lots of value. In other cases like Friendster vs.MySpace it shows that this network effect can also be fleeting.
One other point to consider with all of this is the significant changes ahead in the enterprise. Many of the points in the map above fit consumer-facing services. With the proliferation of broadband and the thought that the consumer is also an enterprise user, we must be cognizant of the many opportunities for web-based services to be brought into the corporation from the ground-up. Everything we did in Windows and Office and other enterprise apps 5 years ago can be done through a browser/web with Salesforce.com, Skype, and web-based email and calendaring. We are clearly not there yet, but this will happen. In addition, as enterprises move to a world where they must support multiple users and devices on-demand, they will need to buy new software and infrastructure to manage this new complexity. So as you can tell, I am quite excited about the opportunities as the web becomes a more robust platform and a gateway to deliver rich applications, but at the same time I express caution because I do not want to want to make the same mistakes we did in years past.
From day one, I got into blogging not knowing what to expect and figuring out the best way to learn about a market is to dive into it and become a user. So I did that 18 months ago assuming that the time I spent as a blogger would either help me find compelling investment opportunities or provide me with in depth knowledge to help existing portfolio companies leverage this new opportunity. Since becoming an avid blogger and reader, it is clear to me that embedded ads in RSS feeds will be a key way for content owners to monetize their assets. First, the fact of consuming RSS feeds will typically reduce traffic at many publishers’ websites giving them less opportunity to monetize their assets. Ads in RSS will help publishers overcome the lower traffic to their sites while still providing their users with up to date content. Secondly, ads embedded in RSS feed gives great targeting opportunities for advertisers and publishers. Hopefully this will allow for greater clickthrough rates. Given these factors and the fact that users want free content, I believe ads embedded in RSS will become a defacto way for publishers to monetize their assets and for users to continue to consume content for free. I also believe that as we morph into podcating and vlogs that publishers will find ways to monetize their content through automated embedded audio and video ads. Give this some time as there is not enough content out there, but I see a world where a new service is created which will allow rich media publishers to automatically embed audio and video ads as simply as contextual based text ads.
Given this backdrop, I am excited that Morever Technologies (a portfolio company) and Kanoodle recently launched a partnership called FeedDirect RSS Ads. Quite simply, FeedDirect will allow content owners to not only monetize their assets with content-targeted sponsored links via Kanoodle but also get maximum distribution through the Moreover network. All it takes is a few clicks to sign up and begin generating revenue. As a VC, one of the cliches we often talk about is eating your own dog food. In other words, entrepreneurs and VCs, where applicable, should be users of products or services they create or in which they invest. To that end, I am changing my RSS feed to incorporate the FeedDirect service. From a transparency perspective, I plan on sharing some of my data with you as my RSS feeds get converted. To subscribe and test out the FeedDirect service, please change my feed to this link. If these ads annoy you or if you have thoughts on improving this, please let me know.
A number of companies are developing software and sytems which rely on packet processing at high speeds to deliver their respective functionality. This includes companies in the networking and security space. The debate over custom ASICs versus off-the-shelf components has raged on over the years. Over the last five years a new class of chip has arrived on the scene called the network processor. It is supposed to give the engineer the speed of ASICs with the flexibility of software. If you are interested in learning more about NPUs and the debate over the merits of NPUs versus ASICs, I suggest reading this article by Douglas Comer in the Internet Protocol Journal (link via Martin Tobias). Douglas sums up the debate as follows:
Although the demand for speed pushed engineers to use ASIC hardware in third-generation designs, the results were disappointing. First, building an ASIC costs approximately US$1 million. Second, it takes 18 to 22 months to generate a working ASIC chip. Third, although engineers can use software simulators to test ASIC designs before chips are manufactured, networking tasks are so complex that simulators cannot handle the thousands of packet sequences needed to verify the functionality. Fourth, and most important, ASICs are inflexible.
The inflexibility of ASICs impacts network systems design in two ways. First, changes during construction can cause substantial delay because a small change in requirements can require massive changes in the chip layout. Second, adapting an ASIC for use in another product or the next version of the current project can introduce high cost and long delays. Typically, a silicon respin takes an additional 18 to 20 months.
Given the need for flexibility and speed to market (particularly in the security space), a number of companies I have seen over the last few years have taken advantage of NPUs to deliver product with good enough performance with more up-to-date functionality than their ASIC brethren. As we move on, I expect to see further improvements in NPUs in terms of speed and programmability as we all continue to recognize that the value is in the software.
There is obviously lots of innovation happening in the search space. Luckily, I have 2 portfolio companies that I respectively invested in during 1999 and 2000 which survived the nuclear winter and are having an opportunity to contribute to this innovation by helping make search better and easier for users. One is Gurunet which delivers a better search by giving users answers instead of links via desktop tools or through its website at Answers.com. See Fred Wilson’s post for more information on Gurunet and Answers, as this week was a big one for the company. First, Walt Mossberg wrote a nice review on Thursday and yesterday Search Engine Watch announced that Google is using Answers.com as its definition link at the top of every results page.
Another portfolio company, Moreover Technologies, has a real time information management platform that delivers breaking news from the web and blogs. As an early pioneer in RSS, Morever did a great job repositioning its business during the downturn and selling its information feeds into the enterprise and powering other search engines with news feeds. Recently, Microsoft announced that it was going to allow users to add RSS feeds to its MyMSN service powered by Moreover. You can read more about it here. You can also get Moreover’s feeds through a number of RSS readers like Pluck, Feeddemon, and Newsgator. As it relates to 3 RSS readers just mentioned, Moreover plans to monetize this distribution by delivering ads through RSS. As a blogger, I have definitely looked at a variety of business models in the space and am a believer that RSS ads is one way to go. There has been lots of conversation about how much more valuable a subscriber is vs. a visitor in terms of relationship building, and I hope that the ads will not turn away end users from valuable content. Either way, it is great to see Moreover helping bring news and RSS to the masses via these deals.
To both companies, I want to say congratulations for sticking though the tough times. Your hard work is beginning to pay off now.
Full disclosure – I am an investor and on the boards of both companies.
A number of my readers alerted me to the fact that Fast Company has a survey on the best VC blogs. Considering that VCs can be quite competitive and my cohorts Brad and Jeff are already stuffing the ballot box, please take a moment and cast your vote for me. All kidding aside, since this is not a zero-sum game and if you haven’t already, I suggest getting to know some of the other VC blogs that I enjoy reading. These include Jeff Nolan, Fred Wilson, Brad Feld, Steve Hall, Steve Brotman, and Ventureblog. I enjoy participating in the conversation with these guys and I expect to see many more VCs join the ranks helping make our industry more transparent and less mysterious. Educating entrepreneurs, sharing ideas, learning about the next hot technologies, and meeting other plugged-in people make this an enjoyable and rewarding pastime. Thanks for the support and keep voting.
Fred Wilson and John Battelle have some interesting posts on the future of television and advertising. Fred and John both seem to believe that the concept of paid search will eventually work its way into television advertising. I suggest reading their posts if you have an interest in this space and learning how it will change as PVRs, VOD, and HDTV further penetrate the market. While one can look at how the success of Internet advertising will work its way into the television especially as the two markets converge, I like to look at the $60 billion spent on cable and television advertising another way. Rather than assume it will all go away in the future, why not do something to make it more effective today? What if you could change and personalize the actual commercials to turn television and cable advertising from a mass market media to a one-to-one relationship? Recently, Businss 2.0 (sorry registration required-hey Business 2, when are you going to open yourself up for bloggers to generate traffic for you?) had a nice article about one of my portfolio companies, Visible World, which has the technology that allows advertisers to do just that. As per the article,
Instead of making a single ad, the agency can now create its 30 second stories as a sequence of swappable components using Visible World software. The file is then sent to servers, already installed at Comcast’s cable centers, which instantly assembles hundreds or even thousands of different versions of the ad and send them to particular groups of viewers. The ads can be updated or modified automatically, just like a website. “In the winter, an airline ad could say, “It’s 52 degrees warmer in Miami today, ” Haberman tells the group, “Or an ad for a limited-editiion Volkswagen Beetle could say there are only 392 cars left, creating a sense of urgency.
I encourage you to try the demo to customize a few ads on your own. Username is Business2 and password is visibleworld. The bet is that a more effective and more personalized advertisement will stop some viewers from hitting the fast forward button on their PVR remote. The good news is that Visible World has already worked with some blue-chip companies like Bank of America, Ford, and United Airliness. In addition, via deals with cable companies like Comcast, Visible World will be able to reach 30 million households by the end of 2004.
Comcast says it can direct ads to narrow zones of 1,000 to 20,000 homes in a growing number of cities, including Boston, Chicago, Dallas, Detroit, Miami, and Phildelphia. But to Haberman, that’s just the beginning. Within the next 2 years, he hopes to offer advertisers the ultimate prize: targeting ads to individual households based on criteria such as age, marital status, favorite leisure activities, preferred airlines, and credit cards–though understandably, this very notion raises delicate privacy issues that have yet to be negotiated.
The cool part of this comes when the Internet and television actually do merge to create true interactive television and direct response fulfillment. Imagine its winter and you see the same customized airline ad about Miami, it’s 52 degrees warmer there, and you can take advantage of a special vacation package by clicking a URL and purchasing the plan through your television? We are clearly not there yet, but the potential exists. And before the $60 billion of television and cable advertising moves somewhere else, I hope advertisers give Visible World a shot to make the medium more effective.
Here is an interesting article from Business Week about why Microsoft is not so scary anymore. While I do not necessarily buy the argument that a company with billions of dollars of cash on its balance sheet is not scary, the article does raise some interesting questions about Microsoft’s growth, particularly on the enterprise side. A quote from Merrill Lynch software analyst, Jason Maynard, sums it up:
“Microsoft still has the critical mass and the franchise of Windows and Office, but there are fundamental changes going on in how we computer and how businesses get value out of IT,” says Merrill’s Maynard. He further points out that many of these trends, including the rise of on-demand computing models, and software as a service, putting more computing power into the networks, are somewhat antithetical to the Microsoft model.”
That quote definitely resonates with me. In fact, I recently had lunch with a friend who is heading up the Enterprise Architecture group for one of the largest health companies. His goal is to move the company to a service oriented architecture in the next 4-5 years. At the end of the day for him and his organization it is all about having better capacity utilization. Instead of having to roll out a new server with a new database and new storage for every new application, his company wants to deploy the app in a grid and increase the capacity utilization from 30% to 80%. During this 2 hour conversation about architecture and technology, Microsoft was never mentioned until I brought it up. When I prodded him further about this he mentioned that he recently spent time with Microsoft and was less than convinced of how Microsoft was going to help him realize his goal. He said the products are nice, tell a good story, but it still seems disjointed. In addition they are not moving fast enough for him. Just look at the delays in getting the monolithic Longhorn out as an example. Increasingly his organization is relying more and more on an open source, commodity stack, which, by the way, is delivering product on a much more rapid pace. In his view, Microsoft cannot tell the same story that an IBM or HP can in helping his company move to a service-oriented world. While this is one data point, I do believe that there will be challenges ahead for Microsoft in the enterprise. The commoditization of technology is definitely a strong force.
Unfortunately I could not make it to the west coast for the Vortex or Web 2.0 conferences. However, I have been following Vortex via Jeff Nolan and Web 2.0 through a variety of bloggers. As I read through Jeff Nolan’s notes on the enterprise and thoughts from the gorillas in the market, Cisco, Microsoft, Oracle, HP, etc., it is clear that they are all pointed in the same direction, and the vendors are aggressively pushing towards a service-oriented world where you have management software that allocates resources on the fly and componentized software consumed as services on demand. The major disruption will be how we get there. This is in line with an earlier post I made about opportunities for enterprise software investments. As you hear from the horses’ mouths via Jeff’s notes, Cisco will try to creep in from the network (it does not want to be a dumb router) and embed intelligence on the edge and move into the enterprise (security, voip apps, etc). Microsoft is trying to move from the desktop to the edge (btw, I still think that if Microsoft wants to get security right it not only needs to fix its OS but also needs to either partner or aquire someone that can help lock down the perimeter). In the software stack itself, SAP on the enterprise app side does not want to give the plumbing away to Microsoft or BEA and has gone off and built its own platform, Netweaver. Then you have IBM wrapping services around its middleware stack. With this disruption and dislocation in the enterprise market, the great news is that all of these gorillas are aggressively out there looking to acquire companies that help push their trademarked vision of a service-oriented world. The only issue with all of this is that enterprises still don’t seem that willing to spend right now so maybe this vendor-led revolution will take a lot longer.
Despite my interest level in the enterprise, it is clear that the speed of innovation in the web world is happening at a much faster pace. There are lots of great speakers and content at the Web 2.0 conference so I encourage you to stay updated through the RSS feeds on the news page. As I read through all of the notes from the conferences, it is clear that one of the unifying themes is the proliferation of XML and the way people are using it (RSS, common APIs, componentized software, assembly of services to create composite applications, etc). For more on XML, I suggest reading Bill Burnham’s excellent post from the other day.
There has been lots of discussion about the web as the new platform so none of what I am saying is new. However, I recently came across Adam Bosworth’s take on this which is quite interesting given his experience at Microsoft, BEA, and now Google.
The platform of this decade isn’t going to be around controlling hardware resources and rich UI. Nor do I think you’re going to be able to charge for the platform per se. Instead, it is going to be around access to community, collaboration, and content. And it is going to be mass market in the way that the web is mass market, in the way that the iPod is mass market, in the way that a TV is mass market. Which means I think that it is going to be around services, not around boxes. I postulate, still, that 95% of the UI required for this world will be delivered over the browser for the same reason that we all still use a steering wheel in a car or have stayed with << < | > >> for so long. Everybody gets it. But this will, by definition, be an open platform because the main value it has is in delivering information and communication. Notice that the big players, Amazon, eBay, and Google have already opened up their information through Web API’s. It is Open Data coupled with Open Communication built on top of Open Source that will drive the future, not Longhorn.
The Microsoft/Google wars will be a great one to watch over the years. I, for one, being a big fan of the ASP and hosted software model, like the browser based-platform. It makes so much sense and will continue to do so as we get even more bandwidth and more devices from which to access web-based services. As GBrowser rolls out, I wonder how long it will be before Google, leveraging open source, rolls out GOffice and GCollaboration (web-ex like functionality) to really go after Microsoft. Maybe Salesforce.com and Google get together at some point in the distant, distant future?