Can the music industry learn from the cellphone industry? September 8, 2007Posted by jeremyliew in business models, economics.
1 comment so far
Techdirt, referencing Bob Lefsetz, draws an interesting parallel between the music and cellphone business models.
He [Lefsetz] also highlights how the idiotic focus on getting more per song, just as everything else about music and technology gets cheaper, is hurting the record labels much more than it helps them. He compares the situation to how expensive it was to use mobile phones a dozen years ago. People were scared to use mobile phones because the charges were ridiculously high. You only used it in special circumstances. Today, however, the rates are much, much lower and that’s massively grown the market for mobile services. Do you think the mobile operators would prefer to go back to $1/minute charges? Yet, why does the recording industry insist on $1/song charges when the infrastructure can support an entirely different model. Instead, make the music cheap and easily accessible.
As a general rule, in a competitive market, prices drop towards marginal cost. But if demand is elastic, then industry revenues and profits can still benefit from this.
Lefsetz makes the point with far more capital letters, exclamation points and indignation in his original post.
Naming your startup September 6, 2007Posted by jeremyliew in start-up, startups.
New Internet companies are being baptized daily with handles that sound like a blend of toddlerspeak, scat singing and what the aliens will greet us with when they land.
Most Internet company names make little sense, and they roll around the mouth like a marble.
“Old-school ideas about sounding trustworthy or sounding big are not as important as they used to be,” said Burt Alper, co-founder of Catchword Branding in Oakland, Calif., which has helped companies pick such names as Vudu (makes a device for watching videos) and Promptu (creates voice-recognition products). “Now it’s about sounding different and standing out from the crowd.”
Maybe I’m showing my age, but I’m not a fan of dropped vowels or unconventional use of high scoring Scrabble letters in company names. I think company names (or at least URLs) need to pass three tests:
1. Can people say it?
2. Can people remember it?
3. Can people spell it?
Word of mouth is a great, free user acquisition channel. But if a happy user tells a friend to check you out, you only need to fail one of these three tests to lose the shot at a new user. Remember how Universal Tube and Rollerform Equipment Corp’s website, utube.com, got a lot of traffic intended for Youtube? Word of mouth can be like playing the Telephone Game. The wrong name risks that happy user’s referral getting lost in the translation…
Corporate invesments; the view from the entrepreneur’s side September 5, 2007Posted by jeremyliew in corporate investing, start-up, startups, strategic investment, VC, Venture Capital.
Businessweek has an article about Google’s venture capital investments. It notes that corporate venture investing has been on the upswing recently, calling out Intel, Cisco and Motorola (in addition to Google) as other active corporate investors.
Companies that aren’t full-time investors pumped $1.3 billion into 390 venture capital deals in the first half of 2007, up 30% from the $1 billion invested in about 350 deals a year earlier, according to an Aug. 30 report by PricewaterhouseCoopers and the National Venture Capital Assn. (NVCA), based on data from Thompson Financial (TOC). That’s the most invested since 2001, just before the bottom fell out of the tech industry.
As Paid Content notes:
Aside from increasing their presence in growing markets, corporate VC activity gives companies like Google another advantage: by funding early stage companies, corporate VCs tend to buy these companies outright for a cheaper price than they would otherwise pay regular VCs down the road.
This is certainly consistent with my experience. When I was VP of Strategic Planning at IAC earlier this decade, when we invested in a startup we would always think about a “path to control”. We always asked for a call option to buy the rest of the company at a certain date and price in the future so that we knew that we could own the company outright in the future.
An entrepreneur should bear in mind the implications of accepting an investment from a strategic investor, especially understanding the motivations as laid out above. A financial investor (whether angel or VC) is looking for a maximum return on their investment. A strategic investor may be looking for a way to buy companies for less than they otherwise would.
Often strategic investments start out as business development discussions between the two companies. At some point, the big company (BigCo) says that by doing a biz dev deal with the startup(LittleCo), it will meaningfully increasing the value of LittleCo. BigCo would like to share in the value that it is helping to create. This is a perfectly reasonable position.
For LittleCo, the key is to make sure that BigCo does not end up owning so much of LittleCo that it becomes the only logical acquirer. It’s hard to get full price at an auction if there is only one bidder.
One way to think about BigCo’s ownership stake is as a discount if/when they want to acquire a LittleCo. Since BigCo already owns x% of LittleCo, BigCo will essentially be paying x% less than another acquirer (OtherCo) would have to pay.
If x is large, then OtherCo may not bother bidding. OtherCo’s corporate development team is busy, and doesn’t have the time to waste on potential acquisitions that they are not going to win. OtherCo will realize that BigCo can outbid them because of the implicit discount that BigCo gets from already owning x% of LittleCo, so OtherCo doesn’t bid at all. This can lead to lower exit valuations for LittleCo*.
The less that BigCo owns of LittleCo, the more likely OtherCo will be to bid. If OtherCo thinks that it can bring more synergy to LittleCo than BigCo can, and that LittleCo is more valuable to it than LittleCo is to BigCo, then OtherCo may still believe that they can win the auction, even with BigCo’s x% discount. In the extreme case, (x=0), all potential buyers line up at the table and all make their best bids, and exit valuations are maximized.
The implication of all of this is that entrepreneurs should be careful. When they take strategic investments from corporate venture arms, they should not give up so much ownership that they discourage other potential acquirers from bidding in a future sale process. They should keep x small. Since early stage investors usually get more ownership than later stage investors, taking strategic investment tends to make more sense in a later round of funding.
* As an aside, similar logic applies to giving anyone (whether a strategic investor or a biz dev partner) “right of first refusal” to a sale of your company. A potential bidder won’t want to do all the work to get to a deal, only to see it matched by the party with a right of first refusal. As a result, they often don’t bother bidding. With less bidders, once again, exit valuations are not maximized.
Why do gamers game? September 4, 2007Posted by jeremyliew in game mechanics, gaming, mmorpg.
In a post about how virtual worlds can engender real emotions, I mentioned Nick Yee’s paper The Demographics, Motivations, and Derived Experiences of Users of Massively Multi-User Online Graphical Environments. In it Nick extends on Bartle’s categorization of the four player types.
In 1989-90, Bartle hypothesized that there were four player types, summarizing an active discussion thread among power users of a particular UK MUD (Multi-User Dungeon, text based precursors to MMORPGs). His long but amusing summary is below:
…labelling the four player types abstracted, we get: achievers, explorers, socialisers and killers…
i) Achievers regard points-gathering and rising in levels as their main goal, and all is ultimately subserviant to this. Exploration is necessary only to find new sources of treasure, or improved ways of wringing points from it. Socialising is a relaxing method of discovering what other players know about the business of accumulating points, that their knowledge can be applied to the task of gaining riches. Killing is only necessary to eliminate rivals or people who get in the way, or to gain vast amounts of points (if points are awarded for killing other players).
Achievers say things like:
“Sure, I’ll help you. What do I get?”
“So how do YOU kill the dragon, then?”
“Only 4211 points to go!”
ii) Explorers delight in having the game expose its internal machinations to them. They try progressively esoteric actions in wild, out-of-the-way places, looking for interesting features (ie. bugs) and figuring out how things work. Scoring points may be necessary to enter some next phase of exploration, but it’s tedious, and anyone with half a brain can do it. Killing is quicker, and might be a constructive exercise in its own right, but it causes too much hassle in the long run if the deceased return to seek retribution. Socialising can be informative as a source of new ideas to try out, but most of what people say is irrelevant or old hat. The real fun comes only from discovery, and making the most complete set of maps in existence.
Explorers say things like:
“You mean you don’t know the shortest route from to ?”
“I haven’t tried that one, what’s it do?”
“Why is it that if you carry the uranium you get radiation
sickness, and if you put it in a bag you still get it, but if
you put it in a bag and drop it then wait 20 seconds and pick it
up again, you don’t?”
iii) Socialisers are interested in people, and what they have to say. The game is merely a backdrop, a common ground where things happen to players. Inter-player relationships are important: empathising with people, sympathising, joking, entertaining, listening; even merely observing people play can be rewarding – seeing them grow as individuals, maturing over time. Some exploration may be necessary so as to understand what everyone else is talking about, and points-scoring could be required to gain access to neat communicative spells available only to higher levels (as well as to obtain a certain status in the community). Killing, however, is something only ever to be excused if it’s a futile, impulsive act of revenge, perpetrated upon someone who has caused intolerable pain to a dear friend. The only ultimately fulfilling thing is not how to rise levels or kill hapless drips; it’s getting to know people, to undertand them, and to form beautiful, lasting relationships.
Socialisers say things like:
“Yeah, well, I’m having trouble with my boyfriend.”
“What happened? I missed it, I was talking.”
“Really? Oh no! Gee, that’s terrible! Are you sure? Awful, just
iv) Killers get their kicks from imposing themselves on others. This may be “nice”, ie. busybody do-gooding, but few people practice such an approach because the rewards (a warm, cosy inner glow, apparently) aren’t very substantial. Much more commonly, people attack other players with a view to killing off their personae (hence the name for this style of play). The more massive the distress caused, the greater the killer’s joy at having caused it. Normal points-scoring is usually required so as to become powerful enough to begin causing havoc in earnest, and exploration of a kind is necessary to discover new and ingenious ways to kill people. Even socialising is sometimes worthwhile beyond taunting a recent victim, for example in finding out someone’s playing habits, or discussing tactics with fellow killers. They’re all just means to an end, though; only in the knowledge that a real person, somewhere, is very upset by what you’ve just done, yet can themselves do nothing about it, is there any true adrenalin-shooting, juicy fun.
Killers says things like:
“Die! Die! Die!”
(Killers are people of few words).
Bartle notes that like all stereotypes, these categories don’t necessarily apply exactly to all individuals, but still have predictive power. He goes on to suggest some specific game mechanics that game designers can employ to encourage one class of player over another.
Yee tested this anecdotal hypothesis by polling 6675 MMORPG players with a list of 40 statements (e.g. “I like to feel powerful in the game”, “I like to be immersed in a fantasy world” etc). After grouping the responses and eliminating non-predictive factors, he found five key motivations:
Achievement: The desire to become powerful in the conteext of the virtual environment
Immersion: The enjoyment of being in a fantasy world and being “someone else”
Escapism: Using the virtual world to temporarily avoid, forget about and escape from real life stress and problems
Relationship: The desire to interact with other users, and to form meaningful relationships that are supportive in nature
Manipulation: Inclination to objectify other users and manipulate them for personal gain and satisfaction. Enjoy deceiving, scamming, taunting and dominating other users.
It’s interesting to note how closely Yee’s motivations map to Bartle’s player types – with almost 1:1 maps from Achievers to the Achievement motivation, Socialisers to the Relationship motivation and Killers to the Manipulation motivation.
Entrepreneurs building new MMORPGs, social media sites and casual immersive worlds would be welll served to read the original articles.