Technik

Rule of N Investment Strategies

The question of when to jump in to digital media investments is only partly answered by the Double Bubble analysis.  The way to play these opportunities is also related to the market structure and to the venture's leverage or market power.  Laid out in this post is one model that is a shorthand for the relative power of the industry structure vs. any particular venture.   The various industry types can be simplified to a Rule of N, meaning how many likely winners emerge after the war of attrition in the early going.  Like all such models, exceptions abound, but it does provide guidance for when to jump into a new venture based on likely resulting industry structure.

To summarize investment strategies:
Rule of 1 ventures: invest early, before the leader emerges.  Use marketing to create the leader.
Rule of 2 ventures: invest late, often very late.  Pick the leader.
Rule of 3 ventures: invest late.  Pick #1 or #2, or get out. 
Rule of 5 ventures: invest early, based on IP/hits and distribution scope. 
Rule of 8 ventures: don't bother

Double Bubble

The three rules of real estate are widely known: location, location, location.

The four rules of venture capital remain a mystery to most: too early, too early, too early, too late.

Case in point: digital media.  A number of funds were formed to do digital media deals a decade ago during the Info Superhighway craze that led to Big Telcos romancing Hollywood. As they say, a shotgun wedding. It ended badly, and these funds performed poorly. One wants to invest when the trend is clear, but before the herd drives value up.

Are we there yet with digital media?  The answer seems to be yes.  It will be seen as the second Internet Bubble, and should be fast and furious once underway, perhaps as soon as 2007-8.  To understand why, consider the Double Bubble phenomenon of technology innovations. 

Liberate From Sarbanes-Oxley!

Liberate Technologies, a one-time developer of interactive TV software and current clean-up project, announced today that it plans to go private in a reverse stock split. This is a technique recently perfected by thinly-traded Canadian stocks that has now taken hold in the US. The way it works is to reverse so massively - Liberate is doing a 250,000:1 reverse - that almost all shareholders are reduced to below one share of stock. Then corporate laws allow the company to pay the value of one share (now 250,000 times higher!), lower the number of shareholders, and take the company private.  (Companies with fewer than 300 shareholders need not comply with public reporting laws.) In this case, Liberate shareholders with fewer than 250,000 shares will be shrunk below one share, and receive about $4 million.

Why do this? Sarbanes-Oxley, which roughly doubles the cost of being a public company.

Those who think SOx is a good idea should take note. We always over-react to a stock market panic, and the cure is often worse than the illness. It took 60 years to repeal the bad laws after the 1929 crash. Senator Oxley himself thinks his law has been taken too far. Next we will see venture-backed companies going public overseas to avoid SOx. We hear the Tokyo exchange is particularly friendly!

Brian Roberts Comes to Sand Hill Road

The general view in the venture community is that it is very difficult to make money on cable technologies.  Brian Roberts, CEO of Comcast and son of its founder, came to the center of the venture capital business on Sand Hill Road to inspire venture investment in cable.  Brian is a very accomplished person and has managed Comcast to king of the cable hill.  The cable industry was created by true cowboys, a colorful lot who wheeled and dealed, bluffed and stuffed their way to sizable franchises.   Brian was the only guy in the room with a tie, which shows how the industry has matured.  He was quite engaging, albeit in some cases he gave with one hand then pulled back with the other.  His core message is that competition and consolidation have changed the prior dynamics of dealing with the cable cowboys.  Did he make his case? 

Blogging the Under the Radar event

The Under the Radar events are a reality show for entrepreneurs - MIT venture forum meets American Idol.  Entrepreneurs pitch their new venture to a panel of VCs.  They get 3 slides in 5 minutes or they get gonged.  The venture panel asks questions, then the audience, then the winner is picked. The venture panel gets to explain their reasoning, and on a good day can really have fun with the venture contestants. GONG!

This event was an all day affair with four sets of companies: search, social software, mobile apps and digital entertainment.  More info and notes are here. I was on a panel for the mobile apps sessions.

Stanford Symposium (4): Home Media Networking

Here are some further notes from today's Stanford Symposium on new networks and content models.  The Symposium was broken into four panels.  This is panel 4. 

Home Media Networking: The Battle for the Living Room

Bernd Girad of Stanford notes that the entire Netflix archive is 400TB, or 200TB compressed in mpeg4.  Since disk drives increase 10x in capacity every 4 year's (Shugart's Law is steeper than Moore's Law, except no disk company got an architectural lock, so the drive business is a doggie race to the bottom), a  normal $65 drive will be in that range within 10 years. Maybe then Tivo has a business model.

Moshe Lichtman of MSTV tried to explain why the company which lost $4B on xbox so far and invested $12B in cable/telco and lost at least half of that could make it up in volume. At least he spoke loudly. He was animated! He thinks IPTV will be big, really big! ... as big as b+w to color, radio to TV, as big as TV itself! And MS can make it better, by for example making the channel switch from 2 seconds (satellite) to under one second, or by giving access to new content like Bollywood movies. He demoed MSTV and the demo worked! He was able to switch instantaneously, which was pretty cool until he explained in a quieter voice that this was just for DVR content. But he did show some cool features, such as watching 4 baseball games at once, although his demo just showed four different skiing videos. Did he answer the initial question, how to make it up on volume? Usually the explanation for Microsoft's losing billions in set top boxes is to win the set top OS business and replicate the architectural lock of Windows on the PC.  His answer instead is that MSTV will move the center of gravity from STB back into the network. Huh?

Tony Aoki of Sony talked of the need for a STB standard - like an OS! Solving incompatibilities between file formats, DRM, carrier networks, and other devices. That was it from Sony. Clearly they lack any sense of what to do anymore.

Reed Hastings of Netflix framed this as a 20 year fight for who has control. If TV wins, we get subsidized set tops, and with it faster channel switching (applause), but they control what we see. New media will develop on the web, as the forces of freedom will spend more time on the PC. The alternative is an open platform where the laptop or equivalent is the remote, and you can chat etc. watching TV. Ironically, the champion of the open world is - Microsoft! They never have charged for access to their world. In the open world, the long tail is a proven model - that is Netflix's business. He gave an example of a new movie called Hustle filmed cheaply with $3000 HD cameras from Sony and marketed by Netflix. He proposes we stop calling broadband a dumb pipe, instead call it a profitable pipe! They could make an even higher profit charging $40 for the pipe and letting the forces of freedom offer content. He sat down to the wildest applause of the day.

Dan Rosenweig of Yahoo says he is for freedom, but he is part of the forces for the market. Originally access had premium pricing, but now it is commoditizing. Devices are commoditized and subsidized. Only the consumer cannot be commoditized. He noted that 68 billion photos are stuck on cellphones and can't get off since the forces of control are trying to force the consumer to go through their services. (How did he come up with that number?). But technology will find a way around the gatekeepers. In this new world content takes on a new meaning.  Search will let you find it without you having to remember where you put it.  Flickr started as your photos on the web, then your photos available to others, then communities forming around them, and finally communities enhancing your photos. Thus search, user-generated content, communities, and personalization is what new media is about.

Q&A: Moshe of Microsoft unintentionally dissed his telco partners by blaming their hunt for control as the reason the US is the most backward DSL country in the world. Reed defended crap long tail content by asking whether blogs have value? There is a market for both mass content and micro-market content. Dan made an impassioned case for why the open world will solve problems such as tying Flickr to Desperate Housewives whereas the control world would never bother to figure it out. He gave an example of a Yahoo user who found a way to tie Yahoo News to Flickr. Tony of Sony reiterated how CA/DRM is an impediment to mix and matching content in the home. Bernd of Stanford wondered whether wireless broadband may arrive before the home wireless problems are solved. Moshe was asked about DRM in MSTV - since MSTV was moving the center of gravity away from the STB to the network, would he support Sony's goal of third-party DRM in the STB?  Moshe tried to duck the question by saying MS supported interoperable DRM, but he left the clear implication that he is opposed to third party DRM. No surprise there, same old Microsoft I guess.  Too bad.  Moshe added that MS is working on a $15 chip about two years out which allows multiple services to a generic STB.  Reed explained why that is not the same as having multiple broadband providers, all open.  Moshe was pounded with more questions - if the center of gravity is moving into the network, where will it?  Seattle?  Naw, it will be in the super headend. 

Stanford Symposium (3): Mobile Media

Here are some further notes from today's Stanford Symposium on new networks and content models.  The Symposium was broken into four panels.  This is panel 3. 

Mobile Media: Can You Hear And See Me Now?

Bill Wolfe of Openwave opened with the operator view: voice is maturing, prices are eroding, how to make mobile media both higher ARPU and lower churn (sticky). Answer lies in customized handset ie. carrier defined UI, and services. On services, he misapplied an analogy to the Rule of 3, and his example lost the audience, but in essence said the goal is to offer voice+two other services to make it sticky, services that are not out of core industry, such as voice+banking or voice+media. Noted that VZ is about voice, Cingular and tmobile about cheaper voice+data, Sextel is advanced data, and DoCoMo is voice+advanced data+media. Says OpenWave is about mobile marketing+data/voice/video communication. If y'all are confused about how this fits together, so was the audience - coughing and rustling was beginning to drown out the speaker. He seems to be saying OpenWave is trying to do social networking on cellphones as a way to market content. His one example was multiplayer games.

Next Dr. Hara of TeliaSonera gave the carrier view direct from the source. With the restless audience and his pronounced accent the biggest challenge was following his argument. The audience quieted down and strained to hear his words, or tuned out and worked on their laptops. He said voice and messaging are dropping in revenues and the future is services and content. The examples were vertical apps - medical and similar. No killer app. Just multiple services. Not Hollywood - too bandwidth intensive until we get (a) cellular broadcast, which is coming, and (b) bigger screens, such as the rollable epaper from Philips. Bandwidth will be solved by WiFi and WiMAX for rich content. In the future you won't know or care about the access technology. I guess 4G won't be CDMA. Time to short Qualcomm? He also complained of "terminal diversity," which creates a challenge to ensure consistent service delivery across different types of mobile devices. He dissed open platforms for content as lacking sufficient assurance of consistent service quality.

Andrea Goldsmith, Stanford EE Prof, gave a talk on 'can you see me now?', nice riff on the VZ tagline. She just flew in from Korea (and as the joke goes, boy are her arms tired) and speculated that going the way we are going with 3G and 4G cell networks and WLANs, we might never get to where we want to be - like Korea I suppose.  Her answer: cross layer networks. Now, she noted the great advantage of the Internet was it separated the transport from the app layers, allowing parallel innovation. Now she wants to break that progress for mobile media over wireless networks, and go back to the future. Too much kimchee? Maybe.  Her first example is MIMO, which is not cross layer but within the link layer. Her next example is mesh networks. No argument there, but it can be done at link layer or MAC layer, or at the network layer, not cross layer. Her main point turns out to be to define app types like video vs voice and optimize the lower layers around the app.  Good idea - wireless MPLS?  A mesh can be designed with multiple states around which to optimize - latency, jitter, caching, battery drain, etc. - depending on the traffic. She ended by extolling cognitive radios to optimize cross spectrum.  She got her point a-cross. 

Greg Ballard of mobile game company Sorrent did his best to save this panel from terminal inanity.  Core problem of mobile media - how to merchandise on an extremely limited screen. Compare that to retail, where you are inundated with info, samples, etc and can be sold new items. Hence he believes the future of mobile media is to market it via multiple channels: cellphone/carrier, web, retail, handset OEMs. Will go from 95% carrier to 50% carrier.  (Already in Europe mobile content is sold 50% 'on deck' and 50% 'off deck', so likely he will be proven correct.) 

Every platform has been driven by a killer game that exploited the core improvements of the platform. Pong/Atari. Super Mario Bros/Nintendo. Sonic/Sega. Halo/Xbox.  Resident Evil/Playstation.  (Is he kidding? Better choices would have been Tekken or Ridge Racer on the PS1, Grand Theft Auto on PS2.  Sony may be an exception to his rule; the playstation won due to incredible 3D graphics rather than any one game.  Steve Race who set up the launch in the US made sure he had at least two 3D games in each of the five major game categories.)  We have not seen that killer game yet on mobile. He does not know what it will be. It is not from the consoles - been there, flopped. Not Snake. Not Pac-Man. Not Jamdat Bowling.  It will use unique aspects of the phone - Camera? Messaging? Mobility? Location-based?  Interesting is that the most obvious aspect, connectivity, he dismisses - he does not believe in multiplayer games.  Maybe short Sorrent on IPO.

Q&A: will the US ever catch the Koreans/Japanese? Inane answer by Bill from OpenWave that we drive more here.  General agreement that mobile media is not linear content - will be short snippets.  Greg gave insightful comment that we wouldn't play those vaunted Korean mobi games over here not because of culture but because the graphics suck. Implication is we already are eclipsing them. (When everything is built in China, we will still have Hollywood!). Greg got on a roll, dissed a long-tail new mobi media company emerging, dissed multiplayer games, and didn't really need a faster better network. Q&A ended with an MIT prof challenging the Stanford Prof on power consumption over UWB vs. WiFi vs.WiMAX. What this had to do about mobi media was completely lost, but the right coast prof was so animated he even moved seats to get his killer question in. Ah, the risks inherent in an academically-sponsored conference.

Stanford Symposium (2): New Media

Here are some further notes from today's Stanford Symposium on new networks and content models.  The Symposium was broken into four panels.  This is panel 2. 

New Media: Is Content Still King?

Rob Glaser of Real Networks pitched his new Rhapsody 25 service - 25 free samples of music per month. Cute. His demo failed. DRM, perhaps?

David Weinberg of Universal Music painted a good strategy for a music label - just 5 years too late!  He supports digital music everywhere, as long as he gets paid.  Seems that music is done for now, meaning the models are now largely known.

Best so far is Bob Greene of Starz. He pounded home how Starz and HBO own the VOD + payTV + basic/broadcast windows - they own the title from month 3 to year 10. So back off all ye little video bypass ventures! He also showed how subscription is worth much more than a pay-per-view model due to larger user base and recurring revenue model.  He also sees the value of the Long Tail, hence is trying to own the library for longer periods of time.  New initiatives: Starz on PC (looks pretty useful, done with Real, has 300 top run titles - remember he owns the rights!), and the biggee, Starz on PSPs and other portable devices. Lots of interest in the new personal media players.

Jeremy Allaire, CEO of Brightcove, one of the first of the budding group of "Flickr for Video" companies, pitched an open TV platform he calls Internet TV. The IPTV panel made a point that IPTV is not Internet TV. Right they are - Internet TV wants to bypass the distribution control by cable and telco, IPTV is the way they maintain control and yet adopt to the Internet.  He also calls it Long Tail TV but he defines the long tail differently than Starz.  Starz's Long Tail means the library of first run content; Brightcove's Long Tail means all the small or foreign stuff that is hard to find.  Maybe best to call the first one the long tail, and the second the broad tail, since is not focused on library but breadth.  Many obstacles to an Internet TV business model, including getting content rights and being dependent on the very broadband providers it is trying to bypass. It is conceivable that an open STB or equivalent could make this feasible, but better would be a third pipe into the home or into portable media players

Sean Parker, formerly of Napster and most recently of Plaxo, has founded a sleeper social network company, thefacebook.com.  Facebook is coming up the tailpipe of the leader in social networking, MySpace.  (Friendster has faded.)  Has 2.8M active registered users with 65% returning per day, 85% per week and 95% per months.  Billions of monthly page views.  Real names not fakesters due to tie in to colleges: 45% list their cellphone & even more post their real picture. Consequently, the Facebook social network matches the real world network, and the usage is for real world events and interactions.  Is this the next paypal? Or will users drop it after graduation? Enquiring minds wish to know.

His opening point: old media eats up margins - too much to cable, too much to labels/studios, etc. New media can have free content (generated by users), free distribution (piggyback on broadband) and cheap marketing (viral). He is on to something - he defines the long tail as user-generated content.  We could call this the How-to-get Tail, given the prime use of social networks, or maybe the Tail Tail, but perhaps better is to call this the Free Tail. We should not underestimate the value of user-generated content, as the interpersonal communications market (telephony) is much larger than the content market. The cost of delivering new media on the web is so cheap it can use an ad-supported model, including self-service ads (online ad placements, bought not sold).  The sleeper in here is the localization angle - local pizza ads for college kids, or Craig's List, as examples.

Q&A: is content still king? Rob makes the outstanding first point that the bypass models like mp3.com failed in music due lack of the social interaction required to promote new acts (touring, cross-promotion, taste-making by influencers). David agrees, and notes that the Internet is more useful for established acts. Labels are venture capital for artists, and the Internet does not substitute for it. Then the Starz guy began piling on new media.  He commented that crap is crap so having more content is not the answer, free or not.  Now the panel was getting interesting! The new media guys sat like couch potatoes when they should have grabbed the mike and asking the Starz guy what leads him to believe that the vast wasteland of TV is peddling anything beyond crap? Crap sells! 

They all agreed mobile content would be a big winner. Bono at a recent concert called for people to hold up their cellphones rather than lighters to call for an encore.

Blogging the Stanford / Accel Network Technology Symposium

Here are some notes from today's Stanford Symposium on new networks and content models.  The Symposium was broken into four panels, with come pretty impressive speakers and fairly robust Q&A sessions.  Overall, it came out to a bit of draw between the Forces of Freedom and the Forces of Control. 

IPTV: Will The Triple Play Be A Home Run?

Balan Nair, the CTO of Qwest, kicked things off with the business case as to why telcos need to build out a video capability to the home - video spreads the cost of fiber build.   (Seems a bit of a tautology, put like that ...) He thinks he can get 20% of cable fast by picking up those disgruntled with cable, and even if he loses the 20% of disgruntled voice customers to cable, he thinks he got the higher ARPU out of the swap.  What if they are the same 20% (disgruntled with both)?  They go to satellite and Vonage I suppose, and his business case begins to weaken.  Well, we all want them to *finally* build out, whatever the reason, so no one played spoiler and asked any tough questions. 

John Cioffi, a well-known Stanford Prof, lays out how DSL can get to gigabit speeds through MIMO and other techniques.  This means besides FTTP (fiber to the premise), FTTN (fiber to the neighborhood with DSL over copper to the premise) can also result in broadband with speeds over 100 mbps .  His techniques are based on bandwidth management across copper pairs to optimize throughput. 

Kenny Frank, CTO of Alcatel North America, sees the US bandwidth need at 20 mbps down / 1 mbps back.  Assumes 1 HD and 2 SD simultaneous unicasts. Requires more capable QOS in the switches than now for data networks. Video is multicast deep into network before switching off into unicast streams.  Lots of network elements need to work together, means what keeps the telco guys like Jeff Weber of SBC awake at night is integration. I wonder what Alcatel does?  Ah, he described Alcatel as SBC's preferred integrator, and MS as a partner for middleware due to their enhanced EPG experience for consumer. Lists 2wire, Thomson, Pace, Samsung as CPE brands.

Adam Tom, CEO of RGB Networks, who is a very clever guy (he was at GI when they set up their digicipher system for satellite distribution of encrypted video & at Imedia when they developed a multicast multiplexing algorithm for satellite that created a frenzy of interest), has invented a new network element: a switched digital video processor, which combines GigE switch with video processing such as grooming, encryption, splitting from multicast to unicast.

Q&A: most panelists believe telcos can win because switched video is more personal than broadcast, and breaks the need for the content aggregator. The lone pro-cable guy says they will push new content to on-demand tier and take it to broadcast if it becomes popular - point being the personalized MyChannel sounds great but promoting new shows and building an audience are still major needs- in other words, telcos don't understand video. Also their rollout is going to be slow - Qwest estimated only 10% of lines across all ILECs would be upgraded to 20 mbps+ speeds by end of 2006.

Funny moment: question about BitTorrent (which is now 35% or higher of all Internet traffic) and the panelists didn't seem to have heard of it.  Don't they keep up with the bloggers?

VCs Invade China

These days one finds more US venture capitalists in Shanghai hotels than on Sand Hill Road. Is it buy low, sell high? Or a new mania? Looking at how the public investors view the prospects for China going forward, this better be buy low, sell high ... this is worse performance than our Nasdaq post the bubble.

(Chart courtesy of EWI.)