"The lesson instead is: build something whose very nature makes it a cannibalistic cash flow hit for a BigCo so that their shareholders resist competing, but which their users love."
Can anyone explain more what he means by that? How can something that is a cash flow hit for a BigCo not be a cash flow hit for anyone else?
Quantcast's free audience reports couldn't be copied by the incumbents (Comscore and Nielsen), because selling similar reports was their core business. They hated us, but we never spent a moment worrying about them. In fact we were always open to working with them, but they were bound up in a knot over our model.
Southwest undercut united and American by avoiding business and first class, flying only one model of plane (737), which lowered maintenance costs and allowed easier substitution of planes among flights. They skipped the hub and spoke model and flew out of peripheral airports that were cheaper, and boarded like buses with no reserved seats to shorten the idle time a the gate, etc. no long flights meant no meal service. There was no possible way for United and American to match them on price. They were afraid to adopt any of these changes because it might tarnish their brand. They were too focused on competing with each other.
Dell offered lower costs than their competitors by charging up front for the computer before buying the parts (which were steadily falling in price). The competition were stuck with a channel model where they shipped finished computers to channel partners for stocking in inventory, so they not only had to buy parts far in advance but had to give a cut to channel partners and retailers, making their prices higher and profit lower.
Netscape had a dozen competitors to their browser. Netscspe offered free downloads to anyone, and with a wink asked for a licensing fee. No individuals paid it, but corporations did because they wanted to be in legal compliance. Best of both worlds (free for individuals and paid by corporations, but only after achieving critical mass within the corporation). They crushed their competitors with this model, who were charging license fees to all customers from the beginning, as competitors didnt get the benefit of rogue employee groundswell to achieve critical mass in corporations.
Hilariously, Microsoft in turn crushed Netscspe by goong a step further, making Internet Exploror completely free, no wink needed. Netscspe browser revenue dried up as corporations stopped paying for Netscape because they already had a free license to ie.
This was funny to me, as it led to all sorts of crybaby behavior by Netscape screaming "antitrust!", when all Microsoft did was tweak the strategy used by Netscape themselves to crush the others.
All of these cases are "strategy", which is defined by Michael Porter as the way that you are different from your competitors. Ideally, in a way they cannot copy. Notice how a strategy allows you to avoid competing, because you're playing a different game altogether.
Great examples. How do you think this would apply in Dalton's case though, where the very mechanism of building on Facebook/Twitter's platform can be shut down by Facebook/Twitter?
I don't know. But unless you have a strategy, don't start a company. Without a strategy you're just picking up nickles in front of a steamroller.
I'm sure that strategies exist on any platform. Zynga doesn't seem worried that Facebook will copy its games (even if they do hate paying the platform tax). Many products are pretty safe from Facebook. For example, build an app for dentists, or personal trainers, or pregnant women.
Like any other resource or dependency that you build into your business, using a platform requires an ROI calculation of some sort. The distribution advantage needs to be worth the risk.
True. The point however is to understand how to quantify the risk. The complicating factor in this case is surely the fact that he had received explicit assurances that his development was welcome and would be supported. The thing I don't understand is how you would go about assessing the 'distribution advantage' given the fact that the risk is evidently so hard to evaluate. DC has evidently now come to the conclusion that it is too risky for him no matter what the advantage. I am curious to better understand your thinking on how to weigh advantage against risk.
Treat the 'explicit assurances' like politicians' campaign promises. If they lose, the promises are irrelevant. If they win, those promises had better align with the new incumbent's larger aims or they were just marketing.
The risk is not very hard to assess. It's pretty binary per startup opportunity. Do the relevant incumbents' revenue models, distribution models, or inherent cultural limitations prevent them from competing with you. @paulsutter covered the first two well early in this discussion. For the last, Apple has great difficulty with social, Facebook hasn't figured out Touch, Google is excessively focused on those two competitors, etc.
These are indeed all great examples of a differentiated strategy. But I am at a loss to understand quite how they help us parse the OP's para re a cannabilistic cash flow.
In every single example I gave, entrenched competitors were unable to copy a strategy without eroding their cashflow. For example, United is afraid to fly all their flights out of Long Beach instead of LAX, because they fear that American will have the perceived higher ground and customers will switch over. The other examples should be more obvious.
I understand. My bad. On my original reading I thought he was suggesting the startup should have cannabilistic cash flow. Whereas he is indeed meaning that to competitively respond the incumbent will have to cannabilize his own cash flow.
I suspect that the Facebook App Center is different than the iTunes App Store in an analogous way and will do nicely competing against it once Facebook chooses to do so.
IE's inclusion in Windows (which dominated the market) had a lot to do with Microsoft crushing Netscape - it wasn't just that IE was free and Netscape wasn't.
Free seemed to work fine for Chrome and Firefox. The real key here is that corporations stopped paying for Netscspe, which was their main revenue stream. Microsoft definitely got a big advantage from bundling the browser, but how can it make sense in an Internet era for an OS to ship without a browser? How could it possibly benefit consumers if they were forced to download a browser separately? Nobody is screaming antitrust when Apple bundles Safari.
No, the real key here is that IE was included with copies of Windows. You absolutely cannot account for the rise of IE without this. It is pure revisionism to try.
Apple's position with respect to Safari is nothing like Microsoft's position at that time. For starters, Apple doesn't even approach a monopoly in the desktop PC market. And Chrome and Firefox got big in a different era, years after Netscape was buried.
You seem greatly concerned to say that Netscape was "whining" and "screaming" and that it wouldn't "make sense" for Microsoft to have done otherwise. I am only concerned with the accuracy of the account of how IE got popular. If that impedes your Netscape bashing, that is only incidental to me and I don't even understand why you would still have any kind of interest in the subject given how long Netscape has been buried.
Downloading Netscape back in the day wasn't the same as downloading Chrome or Firefox today. We're talking about 1997-8, when most people had 56k modems at best.
You may misunderstand the case that you're referring to. They bundled for free that which cost money otherwise, as well as using undocumented APIs. When they were found to be a monopoly, their actions, which would in many other cases be perfectly legal, were a problem.
An example: Rapportive was a browser plugin that put social information (from FB, LinkedIn, Twitter, etc.) directly in your Gmail.
This was great from a user perspective (puts a picture with an email so you recognize that this is 'Bill' who you met at the hackerspace even though his email is cypherdog26@crytomesh.org).
However it was NOT so great for Gmail:
1. Rapportive overwrote the section of gmail where they display ads.
2. It further entrenched Google's social competitors.
There is no way that Google was going to launch a set of Rapportive equivalent features in Gmail. However, Rapportive was beloved by users and exited to LinkedIn.
It means build something that big companies have thought about or maybe even could build, but have not built because they're afraid they'll lose money in doing so.
Facebook and Instagram was a perfect example. Facebook has money, time, and resources to build an Instagram competitor. But they didn't, because they still don't know how to monetize their mobile traffic (which should answer the question, "Why is Facebook's mobile app so awful?") They tried last minute to build Facebook camera, and when that had no traction because Instagram had already captured that market they had to cut their losses and buy it. My guess is Instagram realized that Facebook was basically forced to buy them and made them pay for it ($1B).
So I work on a startup in the news/journalism industry. If we're to follow the argument (which I believe is spot on), our goal is to build something that the New York Times or Washington Post wouldn't dare build, because it would destroy the revenue from their newspaper sales (yes, we have to compete against the likes of the Huffington Post too, but it's easier to illustrate it against the background of business models that haven't changed since the 1950's).
What Steve Jobs always preached was true - if you're not willing to cannibalize yourself, someone else will cannibalize you. As a startup, one strategy is to find those companies not willing to cannibalize themselves and help them out a little bit. But in doing so you run a risk; if you don't generate traction quickly enough and they see that it's inevitable, they'll just build it on their own and leave you hanging out to dry.
One would think that Facebook will aggressively avoid finding themselves in a position where they have to spend $1b on a product they could build themselves. IOW, the next app that appears to be on a path to getting as much momemtum and traction that Instagram had will likely find FB competing much sooner. Who knows, maybe that's what was going on with Dalton...
Possibly. The difference with Instagram is that Instagram didn't have to rely on Facebook as a platform, where as it sounds like Dalton did. Hence the Dalton frustration; Facebook has total control, and Dalton has no recourse to do anything about it, yet they encouraged him to keep building.
IMO $1B for that kind of risk-free traction isn't significantly expensive to FB. Especially as FB desperately needed a volume of photos available outside the social graph in order to stay competitive.
I think he's going further than that and saying, build something that shareholders wouldn't allow because it will eat into the existing revenue sources.
Exactly. Normal cannibalization. New businesses are built all the time by giving away what the incumbent charges for. Skype's an easy one. They don't charge all for normal calls, only for certain premiums. Innovator's Dilemma, etc., etc.
If @daltonc's app.net doesn't massively undercut FB's App Center revenue plan (or overwhelm it's distribution plan) somehow, what's the point?
I think the point is that Twitter can't afford to remove ads or broaden their terms of use. The idea seems to be that a for-pay Twitter with broad terms of use and no ads could become a valuable development platform. The gamble is, how valuable and will people pay.
I think your cannibalization concept is brilliant, but I don't think app.net is completely vulnerable to it. Caldwell's made it clear that he's not trying to find success of Twitter and FB's magnitude, that sustainable profitability is more important for this venture than unbounded growth and huge winnings, and he's not trying to steal Twitter's customers, whatever that would mean. But unless Twitter becomes wildly profitable I don't see them giving away ad-free unrestricted API access just to eliminate a small gadfly.
I think your concept has a lot of merit, but I'm not sure it applies in this case.
I'm applying it differently, and to the business before his pivot. I'm talking about his conversation with Facebook and his accusation that Facebook was underhanded. He didn't do a proper job of disrupting FB's economics, distribution, or organizational limitations, so he's got no grounds to complain that they 'bullied' him. That should have been his expectation.
Scott if I read you correctly I think this is a profound misunderstanding of how to potentially build a viable business on a platform. Let's examine two extremes.
a) dev builds software on the platform that doesn't disrupt the platforms economics, distribution, or organizational limitations.
b) dev builds software on the platform that does disrupt the platforms economics, distribution, or organizational limitations.
You seem to be saying that if he had done a 'proper job' he would have pursued strategy b. But surely that is precisely the case where you can expect to be bullied. It is strategy a. where you develop software that does none of those things, but adds value to the platform by adding value to the users of the platform where you are least likely to be bullied. In these circumstances you are no threat and you are complementing the platform.
Strategy a can only be pursued when you are not dependent on the platform and hence are much harder to bully.
I mentioned elsewhere that, personal opinion only, of course, that this expectation is the sign of bad mindedness. Think of the logical implications of this point.
It was lazy of me to inherit Dalton's term 'bully.' It should have been his expectation to only be compensated for EVA (http://en.wikipedia.org/wiki/Economic_value_added) and not count on Facebook's stewardship of its developers.
And, when I don't like the tone of a meeting, I politely leave. Facebook's offices are physically difficult to enter, not leave.
Comments
"The lesson instead is: build something whose very nature makes it a cannibalistic cash flow hit for a BigCo so that their shareholders resist competing, but which their users love."
Can anyone explain more what he means by that? How can something that is a cash flow hit for a BigCo not be a cash flow hit for anyone else?
Quantcast's free audience reports couldn't be copied by the incumbents (Comscore and Nielsen), because selling similar reports was their core business. They hated us, but we never spent a moment worrying about them. In fact we were always open to working with them, but they were bound up in a knot over our model.
Southwest undercut united and American by avoiding business and first class, flying only one model of plane (737), which lowered maintenance costs and allowed easier substitution of planes among flights. They skipped the hub and spoke model and flew out of peripheral airports that were cheaper, and boarded like buses with no reserved seats to shorten the idle time a the gate, etc. no long flights meant no meal service. There was no possible way for United and American to match them on price. They were afraid to adopt any of these changes because it might tarnish their brand. They were too focused on competing with each other.
Dell offered lower costs than their competitors by charging up front for the computer before buying the parts (which were steadily falling in price). The competition were stuck with a channel model where they shipped finished computers to channel partners for stocking in inventory, so they not only had to buy parts far in advance but had to give a cut to channel partners and retailers, making their prices higher and profit lower.
Netscape had a dozen competitors to their browser. Netscspe offered free downloads to anyone, and with a wink asked for a licensing fee. No individuals paid it, but corporations did because they wanted to be in legal compliance. Best of both worlds (free for individuals and paid by corporations, but only after achieving critical mass within the corporation). They crushed their competitors with this model, who were charging license fees to all customers from the beginning, as competitors didnt get the benefit of rogue employee groundswell to achieve critical mass in corporations.
Hilariously, Microsoft in turn crushed Netscspe by goong a step further, making Internet Exploror completely free, no wink needed. Netscspe browser revenue dried up as corporations stopped paying for Netscape because they already had a free license to ie.
This was funny to me, as it led to all sorts of crybaby behavior by Netscape screaming "antitrust!", when all Microsoft did was tweak the strategy used by Netscape themselves to crush the others.
All of these cases are "strategy", which is defined by Michael Porter as the way that you are different from your competitors. Ideally, in a way they cannot copy. Notice how a strategy allows you to avoid competing, because you're playing a different game altogether.
Great examples. How do you think this would apply in Dalton's case though, where the very mechanism of building on Facebook/Twitter's platform can be shut down by Facebook/Twitter?
I don't know. But unless you have a strategy, don't start a company. Without a strategy you're just picking up nickles in front of a steamroller.
I'm sure that strategies exist on any platform. Zynga doesn't seem worried that Facebook will copy its games (even if they do hate paying the platform tax). Many products are pretty safe from Facebook. For example, build an app for dentists, or personal trainers, or pregnant women.
There only is one sure strategy for avoiding the potential steamroller of the platform company. Don't build on the platform.
Like any other resource or dependency that you build into your business, using a platform requires an ROI calculation of some sort. The distribution advantage needs to be worth the risk.
True. The point however is to understand how to quantify the risk. The complicating factor in this case is surely the fact that he had received explicit assurances that his development was welcome and would be supported. The thing I don't understand is how you would go about assessing the 'distribution advantage' given the fact that the risk is evidently so hard to evaluate. DC has evidently now come to the conclusion that it is too risky for him no matter what the advantage. I am curious to better understand your thinking on how to weigh advantage against risk.
Treat the 'explicit assurances' like politicians' campaign promises. If they lose, the promises are irrelevant. If they win, those promises had better align with the new incumbent's larger aims or they were just marketing.
The risk is not very hard to assess. It's pretty binary per startup opportunity. Do the relevant incumbents' revenue models, distribution models, or inherent cultural limitations prevent them from competing with you. @paulsutter covered the first two well early in this discussion. For the last, Apple has great difficulty with social, Facebook hasn't figured out Touch, Google is excessively focused on those two competitors, etc.
Please also see these two comments: http://news.ycombinator.com/item?id=4336783 http://rafer.net/post/28638883246/mark-i-know-for-a-fact-tha...,
These are indeed all great examples of a differentiated strategy. But I am at a loss to understand quite how they help us parse the OP's para re a cannabilistic cash flow.
In every single example I gave, entrenched competitors were unable to copy a strategy without eroding their cashflow. For example, United is afraid to fly all their flights out of Long Beach instead of LAX, because they fear that American will have the perceived higher ground and customers will switch over. The other examples should be more obvious.
I understand. My bad. On my original reading I thought he was suggesting the startup should have cannabilistic cash flow. Whereas he is indeed meaning that to competitively respond the incumbent will have to cannabilize his own cash flow.
I suspect that the Facebook App Center is different than the iTunes App Store in an analogous way and will do nicely competing against it once Facebook chooses to do so.
IE's inclusion in Windows (which dominated the market) had a lot to do with Microsoft crushing Netscape - it wasn't just that IE was free and Netscape wasn't.
Free seemed to work fine for Chrome and Firefox. The real key here is that corporations stopped paying for Netscspe, which was their main revenue stream. Microsoft definitely got a big advantage from bundling the browser, but how can it make sense in an Internet era for an OS to ship without a browser? How could it possibly benefit consumers if they were forced to download a browser separately? Nobody is screaming antitrust when Apple bundles Safari.
No, the real key here is that IE was included with copies of Windows. You absolutely cannot account for the rise of IE without this. It is pure revisionism to try.
Apple's position with respect to Safari is nothing like Microsoft's position at that time. For starters, Apple doesn't even approach a monopoly in the desktop PC market. And Chrome and Firefox got big in a different era, years after Netscape was buried.
You seem greatly concerned to say that Netscape was "whining" and "screaming" and that it wouldn't "make sense" for Microsoft to have done otherwise. I am only concerned with the accuracy of the account of how IE got popular. If that impedes your Netscape bashing, that is only incidental to me and I don't even understand why you would still have any kind of interest in the subject given how long Netscape has been buried.
>Free seemed to work fine for Chrome and Firefox.
Downloading Netscape back in the day wasn't the same as downloading Chrome or Firefox today. We're talking about 1997-8, when most people had 56k modems at best.
That's entirely because Apple doesn't have a monopoly.
You really think that Microsoft should be prevented from bundling a browser with windows? And that consumers would benefit from this?
You may misunderstand the case that you're referring to. They bundled for free that which cost money otherwise, as well as using undocumented APIs. When they were found to be a monopoly, their actions, which would in many other cases be perfectly legal, were a problem.
An example: Rapportive was a browser plugin that put social information (from FB, LinkedIn, Twitter, etc.) directly in your Gmail.
This was great from a user perspective (puts a picture with an email so you recognize that this is 'Bill' who you met at the hackerspace even though his email is cypherdog26@crytomesh.org).
However it was NOT so great for Gmail:
1. Rapportive overwrote the section of gmail where they display ads.
2. It further entrenched Google's social competitors.
There is no way that Google was going to launch a set of Rapportive equivalent features in Gmail. However, Rapportive was beloved by users and exited to LinkedIn.
Except Gmail does that now via G+ data.
Which is not nearly as useful since the G+ network is not as important as LinkedIn or Facebook.
It means build something that big companies have thought about or maybe even could build, but have not built because they're afraid they'll lose money in doing so.
Facebook and Instagram was a perfect example. Facebook has money, time, and resources to build an Instagram competitor. But they didn't, because they still don't know how to monetize their mobile traffic (which should answer the question, "Why is Facebook's mobile app so awful?") They tried last minute to build Facebook camera, and when that had no traction because Instagram had already captured that market they had to cut their losses and buy it. My guess is Instagram realized that Facebook was basically forced to buy them and made them pay for it ($1B).
So I work on a startup in the news/journalism industry. If we're to follow the argument (which I believe is spot on), our goal is to build something that the New York Times or Washington Post wouldn't dare build, because it would destroy the revenue from their newspaper sales (yes, we have to compete against the likes of the Huffington Post too, but it's easier to illustrate it against the background of business models that haven't changed since the 1950's).
What Steve Jobs always preached was true - if you're not willing to cannibalize yourself, someone else will cannibalize you. As a startup, one strategy is to find those companies not willing to cannibalize themselves and help them out a little bit. But in doing so you run a risk; if you don't generate traction quickly enough and they see that it's inevitable, they'll just build it on their own and leave you hanging out to dry.
One would think that Facebook will aggressively avoid finding themselves in a position where they have to spend $1b on a product they could build themselves. IOW, the next app that appears to be on a path to getting as much momemtum and traction that Instagram had will likely find FB competing much sooner. Who knows, maybe that's what was going on with Dalton...
Possibly. The difference with Instagram is that Instagram didn't have to rely on Facebook as a platform, where as it sounds like Dalton did. Hence the Dalton frustration; Facebook has total control, and Dalton has no recourse to do anything about it, yet they encouraged him to keep building.
IMO $1B for that kind of risk-free traction isn't significantly expensive to FB. Especially as FB desperately needed a volume of photos available outside the social graph in order to stay competitive.
I think it means to build something that the shareholders wouldn't want to expend internal resources to duplicate, but it's hard to tell for sure.
I think he's going further than that and saying, build something that shareholders wouldn't allow because it will eat into the existing revenue sources.
Exactly. Normal cannibalization. New businesses are built all the time by giving away what the incumbent charges for. Skype's an easy one. They don't charge all for normal calls, only for certain premiums. Innovator's Dilemma, etc., etc.
If @daltonc's app.net doesn't massively undercut FB's App Center revenue plan (or overwhelm it's distribution plan) somehow, what's the point?
I think the point is that Twitter can't afford to remove ads or broaden their terms of use. The idea seems to be that a for-pay Twitter with broad terms of use and no ads could become a valuable development platform. The gamble is, how valuable and will people pay.
I think your cannibalization concept is brilliant, but I don't think app.net is completely vulnerable to it. Caldwell's made it clear that he's not trying to find success of Twitter and FB's magnitude, that sustainable profitability is more important for this venture than unbounded growth and huge winnings, and he's not trying to steal Twitter's customers, whatever that would mean. But unless Twitter becomes wildly profitable I don't see them giving away ad-free unrestricted API access just to eliminate a small gadfly.
I think your concept has a lot of merit, but I'm not sure it applies in this case.
I'm applying it differently, and to the business before his pivot. I'm talking about his conversation with Facebook and his accusation that Facebook was underhanded. He didn't do a proper job of disrupting FB's economics, distribution, or organizational limitations, so he's got no grounds to complain that they 'bullied' him. That should have been his expectation.
Scott if I read you correctly I think this is a profound misunderstanding of how to potentially build a viable business on a platform. Let's examine two extremes.
a) dev builds software on the platform that doesn't disrupt the platforms economics, distribution, or organizational limitations. b) dev builds software on the platform that does disrupt the platforms economics, distribution, or organizational limitations.
You seem to be saying that if he had done a 'proper job' he would have pursued strategy b. But surely that is precisely the case where you can expect to be bullied. It is strategy a. where you develop software that does none of those things, but adds value to the platform by adding value to the users of the platform where you are least likely to be bullied. In these circumstances you are no threat and you are complementing the platform.
Strategy a can only be pursued when you are not dependent on the platform and hence are much harder to bully.
In case A, what's stopping the platform from re-doing themselves whatever it is you've done?
+1 That's why Case A doesn't work for me.
That should have been his expectation.
I mentioned elsewhere that, personal opinion only, of course, that this expectation is the sign of bad mindedness. Think of the logical implications of this point.
It was lazy of me to inherit Dalton's term 'bully.' It should have been his expectation to only be compensated for EVA (http://en.wikipedia.org/wiki/Economic_value_added) and not count on Facebook's stewardship of its developers.
And, when I don't like the tone of a meeting, I politely leave. Facebook's offices are physically difficult to enter, not leave.
D'oh! :)