The Binary Stars of High Tech

The following is an excerpt from Wikipedia:

A binary star is a stellar system consisting of two stars orbiting around their center of mass. For each star, the other is its companion star…The components of binary star systems can exchange mass, bringing their evolution to stages that single stars cannot attain.

Microsoft and Apple. Cisco and Juniper. Intel and AMD. IBM and HP.

The universe of high-tech has many binary stars. Sometimes the binary stars form a duopoly, where the pair account for most of the revenue in the market. Even when they do not, the defining characteristic of the binary pair is that they focus on each other as the main competition. This produces a curiously beneficial result as the two spur each other to improve their offerings and keep prices in check.

This may seem counter-intuitive. Duopolies have often been guilty of tacit price fixing, sometimes dividing up customer segments between them. But in high-tech that just does not work because the binary pair are always threatened by the prospect of some upstart coming into the market with a better value proposition should they stop innovating and improving price-performance.

It seems that a company that perceives that it has but one major competitor tends to develop a healthy hatred of the enemy. This antipathy drives it to compete ever more fiercely, and its binary partner reciprocates. This focus is highly motivating for an organization. When there are several perceived major competitors, focus is diffused among them and you do not get the same competitive fervor.

There also seems to be a preference in some markets to focus on a binary pair of market leaders. We understand head-to-head competition, enjoy picking a favorite, become a fan and root for our team. It is easier to choose between two clear rivals than among a bunch of them. Multi-star systems are inherently unstable, thus a multi-vendor market may trend towards natural duopoly as economies of scale develop and promote consolidation. On the other hand, when a monopoly forms, some markets seem to naturally spawn a challenger to restore the binary equilibrium.

I believe that high-tech binary star systems, much like their astronomical cousins, evolve in ways that a single star in a market cannot. We should all encourage them to "exchange mass" and compete ferociously.

HP and Dell. Microsoft and Sony. Oracle and SAP. And on and on…

Copyright © 2006 Philip Bookman

Technorati: software strategy, web strategy

Google Answers Its Question

Google yesterday announced that it is closing down Google Answers. This four year old service provided online access to researchers who developed answers to questions for a fee. It appears that the demand for such a service was low, even at bargain rates (you could get a question answered for as little as $2.50). With no scalable revenue model, there was no business case for continuing the service.

CNET notes that "Bloggers wondered whether the move was a rare misstep by the search engine giant, or a sign that Google was trying to focus more energy on its core business, and stop futzing around with test projects." Neither of these ideas seems right to me. True, Google is trying to tighten the focus of its experimental projects and rationalize its seemingly perpetual beta offerings, but shuttering Google Answers is nothing more than ending a completed experiment.

The purpose of an experiment often seems to mystify many in the business press. The fundamental purpose of any experiment is to do something and observe what happens. Ask a question, get an answer. Sometimes there is an hypothosis to test, but even then the overarching design is simply to do something and see what happens. There is no wrong result of an experiment. There is only accurate observation of what happens under a known set of conditions.

Businesses do experiments all the time. They often strive to keep them under the radar of the business press precisely because of the goofy reporting that occurs. Google for one is refreshingly honest about its experiments, though it creates some confusion with its proliferation of beta services. Perhaps it would be better served if it made a clear distinction between an experiment and a beta offering, where the latter was reserved to mean "early release for those who like to fool around with something before it is made generally available." Trouble is, it is hard to get people to participate in an experiment but easy to get them to try a beta offering.

The reason Google Answers is closing is that the experiment is over. Google gave it enough time to find out what happened. Now it knows. It got its answer.

Copyright © 2006 Philip Bookman

Technorati: software strategy, web strategy, Google

AGLOCO Launches Web 22 Site

A few weeks ago in a post entitled Web 22 - Where Everybody Has A Share, I said that "In the next web era, which I call Web 22, we will pay people to visit web sites, pay them more to click on ads, and pay more again if they then actually buy something." It did not take long for Silicon Valley start-up AGLOCO to run with this idea. Last Monday, they launched their Web 22 site that embodies the Web 22 mantra, "Where everybody has a share."

AGLOCO stands for "A Global Community" that the home page says is "entirely owned by its users" and where you can "get your share of the Internet." Here is how it works. You register and provide personal information like name, email address, age, city, state and zip code. You also must agree to allow AGLOCO access to your browsing history and install the AGLOCO viewbar in your browser. The viewbar displays ads targeted to you based on the web page you are viewing and what AGLOCO knows about your browsing history and demographics. You get shares in AGLOCO for surfing the web. You also get shares for referring people to AGLOCO and for their surfing activity. Yes, everybody has a share.

Shares, shares, shares! AGLOCO is owned by it members. It makes money by signing deals with companies that give it a cut of the purchases you make when those targeted AGLOCO ads direct you to their sites. You share that revenue for each such purchase with AGLOCO. And, as a shareholder, you share AGLOCO's profits that come from its cut of all member generated revenue, less, of course, expenses. Everybody has a share.

Milo would love this.

Copyright © 2006 Philip Bookman

Technorati: software strategy, web strategy, AGLOCO

Peanut Butter Portals

A few days ago the Wall Street Journal published "An internal document by Brad Garlinghouse, a Yahoo senior vice president, [that] says Yahoo is spreading its resources too thinly, like peanut butter on a slice of bread." This memo presents a mixture of operational and strategic problems and solutions. If you remove just a few very Yahoo specific words, much of it could apply to a vast number of bureaucratic companies lacking effective operational leadership and strategic focus, regrettably common problems. What I would like to focus on is the specific strategic issue facing Yahoo and its rivals: attempting to be an Internet portal is the root cause of the peanut butter problem.

The portal concept is an anachronism from the pre-web days when AOL, Compuserve, Prodigy and others pioneered the online era. Lacking a common protocol to link content, they had no choice but to create self-contained online destinations accessed with proprietary software that captured the user within their online world. The advent of the web and its underlying protocols signaled the end to that era. The portal concept, embodied by Yahoo, MSN and AOL, somehow lives on, fighting a losing battle to the forces of extinction.

The very word portal gives us a clue to the problem. A portal is a doorway. In today's online world, that doorway is the web browser. The current generation of browsers organizes bookmarks and history, tabs and feeds, and provide direct access to powerful search engines. The online doorway is wide open and easy to use.

The portal concept has been hijacked and its meaning morphed from online doorway into "a place where we try to capture the user and hang on to them for dear life by offering a dizzying array of services and content. We then try to monetize them through advertising, premium services and such." This is of course sabotaged by the lead service offered by the major portals, web search, which takes the user out of the portal. It is as if you walk into Nordstrom and the greeter asks, "May I direct you to another store?"

Google knows this and has not tried to be a peanut butter portal. It is all about search monetized through advertising. The Google home page is clean, simple and useful. True, Google has yet to figure out how to do anything but dabble in any other offerings. This leads us to the solution to the peanut butter problem. You have to think product, not portal. If you have multiple products, then run your company that way. Google knows this but has thus far chosen to pay attention only to search. YouTube will force this to change and then perhaps Google will take the next step and start capitalizing on some of the other offerings it has thus far only dabbled with.

Think of a web site as a product with appropriate features and functions to satisfy a specific customer need. What the portal players have instead are a set of products mashed together into a Swiss army knife, with its attendant problems of being bulky, confusing and cumbersome. The prescription for the peanut butter portals is to learn from product companies. Separate and segregate the offerings, package and brand them, and give them their own top-level domains. Treat each as a line of business and align the organization to that principal. Get serious about product line P&L.

I like my peanut butter chunky.

Copyright © 2006 Philip Bookman

Technorati: software strategy, web strategy

Apple Computer Strategy Rx

In recent posts, I've suggested two strategic moves for Apple Computer. Today I add the third leg of the strategy to move Apple from its perpetual niche as an interestingly different but second-tier player in the computer industry to the ranks of the super-heavyweights: acquire Nintendo.

The first leg of this strategy, detailed in Apple, Lose The Hardware, Free The Software, is for Apple to get out of the business of manufacturing computers and free the Macintosh operating systems, OS X, to compete head-to-head with Windows on all Intel compatible PCs. Now that Mac's operating system has been ported to Apple's Mac-specific Intel platform, this last step should be a fairly simple task. Apple would then sell OS X like Microsoft sells Windows, with the initial price hidden for most customers in the price of PCs delivered with it. Brand the operating system with the Mac name. Make moving (of course, call it upgrading) from Windows to Mac easy. Expand Apple's software business beyond this, focusing on categories where Apple's customer savvy and design prowess can add value and differentiation. Major manufacturers like Dell and HP would benefit as well, offering Windows or Mac PCs (same hardware, different pre-installed OS). Add virtualization and the options become even more intriguing.

The second leg is for Apple to acquire Adobe Systems (Apple Should Acquire Adobe). Adobe's offerings would give Apple, the premier design-focused technology company, an unmatched array of content design and delivery tools. Apple and Adobe already have large, committed followings of web site and graphic designers, and both of their respective camps should feel at home with the combined company. Apple would then propel the web to a new standard of rich, entertaining content authored by anyone and everyone.

Leg three completes the picture of an entertainment technology powerhouse with the acquisition of Nintendo. This brings Apple the game platform it needs. The Apple-Nintendo combination would make the game console race with Sony and Microsoft much more interesting and could move Nintendo to the head of the pack.

Apple's high-flying stock and iPod-pumped revenue give it the currency and comparative valuation it needs to do these deals. This is a window of opportunity that could close.

These three strategic moves, added to the iPod/iTunes empire, would pave the way for Apple, the entertainment technology company, to move into the $50 billion dollar club and beyond.

Copyright © 2006 Philip Bookman

Technorati: Apple Computer, Mac, software strategy, Nintendo, Adobe Systems

Zune And Universal Make Friends

Microsoft and Universal Music Group today announced an agreement under which Microsoft will pay Universal $1 for every Zune music player sold. In return, Microsoft gets to sell Universal's music library at its Zune Marketplace online music store. I've read several commentators who see this deal as a desperate Microsoft caving in to a greedy music company. I think they have it wrong on all counts.

Let's start with Universal. It has a 30%-35% share of the worldwide market for music sales. A recent study revealed that Apple sells 20 songs per iPod. The rest of the music on iPods, at least 95% percent, are songs customers say they have copied from previously purchased CDs. Anecdotal evidences suggests that those "previously purchased CDs" are often "borrowed" from a "friend." At iTunes prices, neither Apple nor the music companies are making much from iTunes sales, even with the large sales of iPod's. Apple makes its money from the razors, not the blades. In the long run, it is better business for Universal to get revenue from music player sales and lighten up on worrying about digital rights management. Universal's position is sensible and forward looking.

For Microsoft, we must remember Why Microsoft Needs Zune. Zune serves Microsoft two purposes. First, it is a weapon Microsoft uses to attack iPod/iTunes and divert Apple resource away from unleashing OS X against Windows on PCs. Second, it is a long term investment in a new growth line of business. Microsoft does not need Zune to be a great success right away. It can wait three, five or more years for Zune to become a true iPod competitor. Remember the history of Xbox (Why Microsoft Needs Xbox). Microsoft is patient, willing to invest for the long term, and relentless.

What Microsoft needs now are friends in the music industry, where Apple has tense relations and uses its iPod success as a club. The new, improved Steve Ballmer sees Microsoft's future better served by cooperation and trust than the less admirable traits Microsoft was known for as it rose to dominate the software industry. He has made peace with Sun, entered an alliance with Novell, settled numerous lawsuits, accommodated regulators, and on and on.

As Abe Lincoln said: "The best way to destroy an enemy is to make him a friend."

Copyright © 2006 Philip Bookman

Technorati: Zune, Microsoft

Who Will Take Linux To The Prom?

Like a couple of adolescent boys who suddenly discover that ugly duckling, 15 year-old, redheaded Susan Linux, known to her friends as "Suse" or "Red," has turned overnight into a swan, Oracle and Microsoft have suddenly discovered that Linux has sex appeal. Those boys are falling all over themselves trying to be the one to take her to the prom.

Larry Ellison, CEO of Oracle, made the first cool move about two weeks ago, when he announced support for the gal he prefers to call Red, and his intentions of making her his own. Red, blushing furiously, has been all aflutter ever since. Such attention from such a rich, good-looking boy! As her friends warned her, he has a bad, playboy reputation, and her stock has gone down. No one believes her when she says she will retain her virtue now that Larry is in the picture.

Then last week Microsoft CEO Steve Ballmer announced his intentions towards the young lady, who he a bit more formally, but still familiarly, calls Suse. Steve has been working hard to change his reputation for being an overbearing bully to that of a mature, slightly geeky, good guy who may be a bit clumsy but wants to get along with everyone. He told Suse he just wants to get to know her better and work together on building a proper relationship. The sensible side of Ms. Linux finds that very attractive. And he's rich too! Oh my!

Meanwhile, all of her girlfriends are very upset. They fear that the old Suse they knew seems to be gone forever. Sweet, playful, easygoing Red is growing up, and they don't like it. They don't know what her future will look like, but they know they are losing influence to the big boys. Ms. Linux is becoming a grown up woman and leaving her girlhood behind. What, they ask apprehensively, will the future bring?

Copyright © 2006 Philip Bookman

Technorati: SUSE, Novell, Microsoft, Oracle, Linux, Red Hat, software strategy

Web 22 - Where Everybody Has A Share

There is a trend among analysts, consultants and commentators to advise Web 2.0 Startups in Wonderland to focus on attracting Tribble Traffic and worry about monitizing it later. Whatever you offer on your site, they say, make lots of people want to use it frequently, preferably for free. "Don’t worry, be happy" goes the refrain, "a business model is sure to emerge sooner or later."

It is time to get beyond the limitations of "free." Here in Silicon Valley, we know how to motivate lots of people to work their butts off for virtual money. We were just warming up during the Web 1.0 days by letting stock option flow like water so that nearly everyone in the Valley was a paper millionaire at one point or another. In the next web era, which I call Web 22, we will pay people to visit web sites, pay them more to click on ads, and pay more again if they then actually buy something.

Venture capital will be used by Web 22 startups to fund the visitor payments. The VCs will raise their funds from the companies that might become advertisers. Advertisers will pay the web sites for the clicks, who will share that revenue with the clickers. Advertisers will also offer rebates to clickers who actually make purchases. This will all work because everyone involved in the process will have a share!

This business model was actually perfected in World War II and documented by Joseph Heller in Catch-22. Milo Minderbinder, whose Nobel Prize in Economics is long overdue, is the genius behind this business model. This is how he explains it to Yossarian, who is puzzled about why Milo buys eggs in Malta for seven cents and sells them to the mess hall for five cents:

"I do it to make a profit."

"But how can you make a profit? You lose two cents an egg."

"But I make a profit of three and a quarter cents an egg by selling them at four and a quarter cents an egg to the people in Malta I buy them from for seven cents an egg. Of course, I don't make the profit. The syndicate makes the profit. And everybody has a share."

Yossarian felt he was beginning to understand. "And the people you sell the eggs to at four and a quarter cents a piece make a profit of two and three quarter cents a piece when they sell them back to you at seven cents a piece. Is that right? Why don't you sell the eggs directly to you and eliminate the people you buy them from?"

"Because I am the people I buy them from," Milo explained. "I make a profit of three and a quarter cents a piece when I sell them to me and a profit of two and three quarter cents apiece when I buy them back from me. That's a total profit of six cents an egg. I lose only two cents an egg when I sell them to the mess halls at five cents apiece, and that's how I can make a profit buying eggs for seven cents apiece and selling them for five cents apiece. I pay only one cent a piece at the hen when I buy them in Sicily."

"In Malta," Yossarian corrected. "You buy your eggs in Malta, not Sicily."

Milo chortled proudly. "I don't buy eggs from Malta," he confessed... "I buy them in Sicily at one cent apiece and transfer them to Malta secretly at four and a half cents apiece in order to get the price of eggs up to seven cents when people come to Malta looking for them."

In Web 22, no one will get any real money, which will be derisively referred to as "old money." All payments will be made to a virtual account. The unit of currency will be the milo. Milos will be usable in any part of the Web 22 economy.

Where everybody has a share.

Copyright © 2006 Philip Bookman

Technorati: software strategy venture capital web strategy

Second Life Tribble Trouble

Tribble trouble is coming to Second Life, the "online society within a 3D world, where users can explore, build, socialize, and participate in their own economy." You play in this world by adopting an avatar, a virtual identity complete with three dimensional body. Playing is free, but owning land is not. Second Life's owner, Linden Labs, primarily makes money by selling and then charging monthly maintenance fees for virtual property.

Second Life just announced a substantial price increase for some virtual land, the so-called "private islands." These islands are more desirable than property on the "mainland." The site has become very popular, with over 1.2 million users, and big companies like IBM, Starwood and GM have gotten into the game as private island owners. The new fee structure comes on the heels of a new $9.95 charge for users who add accounts. Second Life has also publicly floated the idea of charging for technical support.

All of this has started to make some Second Life players, landowners and those who provide them with services (it is quite a complex virtual world) nervous. While the fee increases for private island owners are a kind of "tax-the rich" ploy that mainly hits those with deep pockets, the "community" is correctly concerned about what may happen as Linden Labs furthers its efforts to increase its revenues and profits. What is happening is that Linden Labs and the Second Life community are facing the problem I described in Tribble Traffic.

When the entrepreneurs who build these companies finally figure out how to monetize their ideas, they often find they are trapped by tribble traffic. They discover that they can build a viable business model around only a subset of their users. The problem is that they cannot just beam the rest of the traffic into space. They cannot segment the valued traffic without alienating most all of their users. They similarly cannot capture enough demographic information to segment their traffic for advertisers without user rebellion. The tribble traffic is increasingly costly to serve due to diseconomies of scale. They must often finally sell to a big, well established concern, which can afford to dump the tribbles, reframe the proven concept and reap its value.

As Second Life's new CFO, John Zdanowski, said, "I'm not sure we know yet how it [the fee increase] will affect resident behavior and growth patterns, and I think anybody who thinks they can doesn't understand how complex the system that the in-world economy is."

It isn't easy being a tribble. As Captain Kirk discovered, hosting them can be tricky too.

Copyright © 2006 Philip Bookman

Technorati: Second Life software strategy venture capital web strategy