Sunday, February 19, 2017

The Internet: Where hundreds of millions of users does not equal a business model

The subject of how the world of the Internet differs from the ‘real’ world is one of much erudite discussion. There is, of course, a lot to know, and a lot to consider that challenges conventional thinking about markets, economics, and customers/consumer/users.

Anil Dash recently penned a stinging critique of the 'fake markets' of the tech world, which is well worth your while, but I’ll go with a simpler thesis for now. On the Internet we use things without knowing how they work. Or maybe even wanting to know how they work. Where the money comes from, where it goes, and the machinery that lies in the middle could be described as a black box meets a hornet’s nest that mystifies many who have worked at the more traditional end of industries such as publishing, advertising, and marketing. Content has become unbundled, so that the site of production and the site of consumption are now separate (i.e. you don't have to buy the New York Times to read a New York Times article), we leave digital trails everywhere we go, with demographic and psychographic information contained within, and in the process what were once aggregate clumps known as 'audiences' have become micro-markets, but made up of millions. If that sounds challenging from the market and customer angles, it's because it is.

When news broke earlier in the week about SoundCloud’s serious financial difficulties, I was confronted, once again, with the reality of digital markets. SoundCloud with its 200 million users being fiscally-challenged, Twitter with its well over 300 million users being in similar dire straits.  And there’s Spotify, the undisputed leader in music streaming with 100 million users of which about 40% are paying subscribers – a huge proportion for a freemium service – and the company, say some, is on the brink of bankruptcy, or acquisition, which in Internet economics can actually co-exist. 

The big difference between SoundCloud's financial challenges and Spotify's is that in the case of the latter, on average, between 55% and 70% of revenues are paid to the music labels. These payments come to about $1.5 million per day and over 1 billion dollars in 2016.

Trying to figure out the SoundCloud riddle I used Facebook to turn to a friend who is a former major label VP for additional perspective.

He said he would put some pensiveness on the question and get back to me. He did.

This is definitely a reasonable theory. However, on SoundCloud hit and non-hit material exist side by side, with known acts such as Gucci Mane, Migos, and Drake using the site to upload, alongside the completely unknown. It’s still a ‘go to’ destination, with its own version of a star system. In fact, it’s one of the ones that catapulted Chance the Rapper, the now Grammy-winning artist who, to date, has made none of music available for sale, to stardom.

The SoundCloud Top Ten 2/19/17
Click to enlarge

And in the adjacent world of publishing there’s Wattpad, the social reading site that has 40 million monthly users and over 100 million uploads. Anyone can post to the platform and it has produced bona fide stars, such as Anna Todd, whose fan fiction based on boy band One Direction netted her a publishing deal and a movie deal with Paramount.

Which of these becomes a real market vs. a fake market in Dashian terms is TBA. But are any of these easy markets? Absolutely not. Are they new markets with new logics still being figured out? Yes. I'm reminded of the sharp comment uttered across the table in the lawyer's office by the Mark Zuckerberg character to the Winklevi characters in The Social Network: “If you guys are the inventors of Facebook, you would have invented Facebook.”

Wednesday, January 18, 2017

The digital future...and how it happened

“We blew it with television”, said Jeffrey Cole of USC Annenberg’s Center for the Digital Future

It was an arresting way to open a keynote at a digital media conference held earlier this week in Toronto. What Cole meant was that television, the mid 20th century revolution that not only brought together sound and pictures in a domestic technology but also ushered in new genres of entertainment and information programming, was a missed opportunity in getting to know its users/viewers on any sort of 1-to-1 basis. It wouldn’t have necessarily been easy as it was a non-digital technology for several decades, and as such tracking would have been costly and difficult. Doable, but not easily achieved, as is the case in the world of personal computing devices and the web, where technologies such as cookies and mobile fingerprinting serve as unique identifiers.

Not wanting to repeat this particular mistake of television’s Cole started the World Internet Project in 2000, with the aim of tracking trends and changes in online consumption behaviour. Over the years Cole and his team have been able to tease out a number of themes in this regard, one of which is that legacy means more to industry than it does to people. While studying early usage of Amazon, for example, his team found that even though could purchase the same products -- primarily books at the time -- for the same product and/or shipping price from a known retailer such as Barnes & Noble, they somehow felt that ordering from Amazon was ‘cooler’, and a taste of a future that hadn’t yet arrived but almost certainly would in the years to come.

Cole sees a similar situation with banking today. “People delight when they can tell their bank to @#$% off”. And increasingly they can do just that, as other, more consumer-friendly and less expensive banking and financing options  are starting to proliferate thanks to innovations such as fintech and blockchain.

A recurring theme Cole has encountered is that legacy organizations cling to existing business models with great tenacity. This makes sense at first. Why abanadon the cash cow. But then, over time, this attitude can make a heck of a lot less sense, as a competitor arises, seemingly out of nowhere, with a better, cheaper, or just more fun product or service.

Uber and AirBnB are among the first examples that spring to mind but Cole points to Kodak, a company that he worked with on what the future of photography might look like. “When you looked at the attributes of film”, he explained, “you had to find it, then buy it, then take multiple pictures, not sure which would turn out, they you had to get the film processed, and wait, then pay again, and then find something to do with those pictures, which usually was put them in a box.” Compare analog photography with digital photography – let alone apps that pair a high quality mobile phone camera with instant upload to social platforms – and it’s obvious that the old way of doing things was not long for this world. But Kodak was reluctant to change. Why? Because they were making too much money selling film, film processing services and products, and hardware.

And of course there’s the music industry, discussed many times over the years on this blog. One could characterize its business model as ‘hostile bundles’, as people were forced to pay somewhere between about $10 and $18 for an album of which they often only really liked 1 or 2 songs. Shifting from that model of the form factor of the album and the supply chain of studios, labels, warehouses, trucks, and retailers, was not an attractive option, and so, what happened was that the album got unbundled on its own, first on the black market, via peer to peer file-sharing and later via Apple’s iTunes, which brought with it the iPod, then the iPhone, and in turn a whole new set of norms for the music business.

But why did Apple get this win? A company that had a 3% market share until the introduction of the iPod? The answer is in the question. The music industry was willing to enter into this dance with Apple precisely because they only had 3% market share. In the early 2000s Apple was a niche hardware company, and the last firm to be considered a threat to an industry worth tens of billions. Some in the industry even thought Apple could do the experimental grunt work for the industry and the legacy players could then swoop in and cash in. But that’s not what happened.

Instead, companies such as Sony, with a huge music catalogue and what should have been formidable leverage of having pioneered mobile music consumption with the Walkman ended up losing not once, but twice. The first loss was the music revenue going to the iTunes store; the second loss was the Walkman becoming a footnote. Sure they tried for years with efforts like the Walkman phone, but by that time, 2006, it was too late. The iPhone, not the iPod, was about to change everything.

Sony Ericsson Walkman Phone, c. 2006

But let’s move away from the historical and look at today, a world dominated by just a handful of companies; some call them GAFA, an acronym for Google, Amazon, Facebook, Apple, sometimes it’s FANG, for Facebook, Amazon, Netflix, and Google. Whichever the combination of companies they are the undeniable dominant forces not only in their original fields, but in adjacent areas of endeavour. Facebook with its forays into messaging, bots, virtual reality, and photography (Instagram), Amazon with its evolution from book store to everything store, as well as physical stores, enterprise cloud services, and original content, Google with a product range encompassing search, web browser, mobile operating system, email, maps, video (YouTube), driverless cars, and dozens of other applications.

In Cole’s words what these companies have in common is that don’t care about boundaries. The idea that a company should do one thing and do it well is a conventional wisdom challenged by these digital goliath.

And speaking of the digital economy, the report on which I have been working for about the past 8 months, will be released in the coming weeks. It is the third in a series of studies on the economic impact of the Internet on the U.S. economy. (Hint: it’s pretty big). 

Details from my actual project notebooks and scraps of paper

The results of months of scribbling, spreadsheeting, forehead slapping, and tea spilling to be revealed shortly.

Watch this space.

Wednesday, December 28, 2016

Best of this blog 2016

It’s the holiday season and therefore time for the unavoidable ‘best of’ lists. Same deal here at the Demassed blog. In this year of virulent hacks, ransomware, digital ad fraud, and an epidemic of fake news, there were still other stories significance in the digital universe, and this post is dedicated to the Top 5 most clicked on stories on this blog in 2016.

The top two posts were on blockchain, a decentralized ledger of digital transactions that “brings security structures and incentives in line with the way we share information in the 21st century.”

One of the posts was about the vision for a new foundation of the music industry, based on direct artist to fan communication and payment, and that story can be found here.

The other blockchain post was about the great cryptocurency hack of 2016, reported to have removed between $50 million and $80 million of funds from the Ethereum blockchain. Read the full post here.

Some of the stolen funds have since been located, and despite the hack and the many unknowns associated with the blockchain it is already in use by several major banks and is forecast to be used by 15% of financial institutions in 2017.

The third most popular post of the year was a series of tweets from a talk given back in January on Marshall McLuhan in the age of social media. I wasn’t able to attend the talk but I was able to follow the discussion by way of the hashtag and captured those nuggets here.

Coming in at number four for the year was on a talk given by media and cultural theorist Douglas Rushkoff who has been thinking about and writing on the social and politic realities brought about the Internet for over 20 years. That post can be read here.

Rounding out the list, at number 5, is a post that looks at one of the most contested topics of life online, and that’s the preponderance of free, or more accurately ‘free’ content, the quotes referencing the fact that very little is ever free, it just appears to be.

What you receive for ‘free’ online is in fact traded for information about you as a consumer, and it’s a transaction all of us partake in dozens of time daily. Could the economy of free be shifting from just the way things are online to being one of a handful of possible business models? This post offers exhibits A, B, C, and D and lets you decide for yourself.

Thanks for reading and sharing the blog this year. I'm now up to 160,000 lifetime views, and even though as much as half of all Internet traffic is reported to be bot-generated, I'm still pretty happy.

Friday, December 16, 2016

The accidental industry of YouTube

2016, the year many cannot wait for the end of also had a few non-traumatic moments, such as the introduction of the term ‘YouTuber’ into the new version of the Oxford English Dictionary. And for those who don’t necessarily indulge in the delights of video by the people and for the people, a YouTuber is a person who creates video content and uploads to the video-sharing site. 

Now that YouTube itself is into its teen years we have seen YouTubers morph from hobbyists or one-off video uploaders to micro-celebrities and even stars in their own right, with tens of thousands YouTubers globally now making a living showing their wares on the site.

How did the random uploaders became hobbyists, then amateurs, and then a new type of media professional? And what is the difference between an amateur and a professional anyway? Is it intention, or is it outcome? Is it getting paid, and if so, how much? Is it the ability to attract thousands to millions of views? Or is this the future in which everyone is famous to fifteen people, a dictum issued all the way back in 2005, around the same time as the hybrid designation “pro-am” (for combination professional amateur) was explored at book length.

Whereas YouTube – and other open uploading platforms, e.g. SoundCloud, MixCloud, assorted mixtape sites – once existed in a parallel and necessarily separate universe from this thing we think of as ‘the industry’, the platforms are increasingly becoming intertwined with industry. And in ways not necessarily planned or imagined. For example, YouTube has become the new radio, with 1 in 4 music streaming hours spent on the site, which I’m pretty sure was not part of the original vision.

The same goes for the emergence of new entertainment genres, and this is isn’t an overstatement as the numbers don’t lie. Billions of views are being racked up by videos of people unboxing mattresses, of kids doing toy reviews, and in perhaps the most unanticipated category of new genre of media, YouTube videos of people reacting to other YouTube videos. (Ed. Note: Repeated use of 'wtf bro' ahead)

YouTube has also become an important second window for television, with clips from such shows as Jimmy Fallon, John Oliver, SNL, and that carpool karaoke guy (okay, James Corden, but to me he’s the carpool karaoke guy) pulling in millions of additional views by being posted and shared online. Whether or not I watch the shows (and generally I don’t) I can still play catch up by having them appear in my Facebook feed or having them pushed to me as suggested or popular videos when I open YouTube. Just as the music industry saw an unbundling of songs from albums, now television has an unbundling, from both format (the 30 or 60 minute program) and distribution channel, in this case moving from the world of the television schedule to on-demand, atomized viewing.

Sunday, November 6, 2016

Piracy is as good as dead. Now What?

It’s been 17 years since Napster came onto the scene, bringing with it the combination innovation/major threat of peer-to-peer (P2P) file-sharing. What began as an outlaw activity of uploading MP3s and making them available to anyone with a desire to hear the song and a decent Internet connection ended up providing a beatdown to the music industry that lasted well over a decade, with the carnage only settling down recently. And even now the music industry is, in many ways, still up for grabs.

You may have seen the headlines proclaiming that 2016 was the first year in which streaming revenues were the largest revenue source for music, eclipsing digital downloads for the first time, and taking a big lead over physical sales of all other physical formats combined. The pie below shows the respective shares for the U.S. market. To put things into additional context it's worth considering that the global music industry peaked in 1999 with revenues of about $30 billion, which, by 2005 had shrunk to $20 billion, and now hover just under $15 billion


It doesn’t take Nostradamus to see that the blue piece of the pie is only going to get bigger, while the red and green slices shrink. (The diet yellow slice, marked “synch”, refers to music synchronization, which are the revenues that come from licensing fees when songs are used in commercials, movies, TV shows, videogames, etc. I have no view on whether or not this chunk will grow though I understand it’s a valuable source of income for musicians both well-known and up and coming).

What we can extrapolate from these developments in the music industry is that piracy is more or less dead. Which is not to say that it doesn’t exist. Of course it does. But it’s dead in the sense that it is considered to be public enemy #1 of the industry. When pretty much any music you want to hear is available on demand -- whether via legit sources or unsanctioned ones -- the location of value shifts irrevocably, whether we like it or not. Where did it go? To the new intermediaries,  in this case the platforms that enable us to hear anything we want to, whenever we want to.

So what happens now? This discussion got underway at a Music Tech Meetup I attended at the end of the summer, at which the featured speakers were Steven Ehrlick and Noah Schwartz, both from Ryerson University’s Music Den, a music and tech incubator that brings creators together with technologists, in the hope of building apps, systems, or platforms, that identify, and hopefully propose a solution to, addressable problems in a new environment of possibility. Ehrlick and Schwartz shared their thinking around the experience of being a musician in the 21st century, the reality of which, in their view, is that you have to a digital media specialist in addition to being a performer and/or writer. 

But what does that mean?  We so often hear people with titles such as Chief Digital Officer tell the troops at organizations that were not ‘born digital’ that everyone’s thinking needs to be re-jigged.  Phrases such as ‘from now on the company will think like a digital company”, or “starting today we’re a digital first organization”. Erhlich & Schwartz see it this way: There are two kinds of companies: Tech companies that get into music and music companies that get into tech.

An example of the former:

Bandcamp: A music discovery platform that, as of Fall 2016, has paid close to $200 million directly to artists since its inception.

Examples of the latter:

MusicNet (b. 2001, d. 2005)  and PressPlay (b. 2001, d. 2003), services started by the music labels that tried to replicate the analog industry in the digital world. 

Why did they do that? Because that’s the business they knew well. Contrast with what Steve Jobs did with iTunes: unbundled the album, established a price point of 99 cents that was low enough to move people from Limewire, Kazaa, Gnutella, and created an ecosystem of beautiful hardware and easy to use software which for many became a way of life, not just music or gadgets, and resulted in Apple becoming (if only intermittently) the world’s most valuable company.

The enterpreneurial trick is this: Ask yourself "what is the problem you're trying to solve?" Apparently the investment community, particularly in Silicon Valley, wants to hear things expressed as verbs, not nouns. It’s about what people will do with what you’re making, not what it is.  Think Twitter, Snapchat, even Pinterest – hard to rationalize if you’re only describing what it is; easier to rationalize as a vision for a new way in which people communicate and connect.

Erhlich and Schwartz suggested that a company allows you to solve musicians’ problems e.g. where to play, where to stay, how to do your digital distribution. And you can start small and do so on a small budget and scale up, moving from local to global, with the costs of working globally being a fraction of what they were in the world of physical things and physical places.

They point to this example: DistroKid, where for twenty dollars per year musicians get the ability to do unlimited uploads to digital services such as iTunes and Spotify (and no, it’s not free to get your music onto those sites.)

As we approach two decades since peer-to-peer technologies effectively detonated the music industry,  some pieces are falling into place while others are still trying to find a way for the peg to fit the slot (Heck, Spotify, with its 100 million users of which about 40 million are premium users is still not profitable in 2016). But it's not all bad news, which is the rallying cry of this blog if there is one. I am reminded of the words of Clay Shirky when asked how the rapidly declining revenues of the newspaper industry might be stemmed. His response: What will work? Nothing. But everything might. 

Tuesday, October 18, 2016

Where Credit Is Due: Max Levchin and Banking For A New World

HVF is his motto. And the name of the umbrella company that arches over his many undertakings. He is Max Levchin, one of the founders of PayPal, and therefore member in good standing of the PayPal mafiawith personal investments in over 100 startups, the most recent of which are a fintech company and a women’s reproductive health company

The HVF part stands for hard valuable fun, which is how Levchin decides which projects to take onThe hard part refers to something that is challenging, something that is a problem to be solved. If it was easy, anyone would do it. The valuable may be something on a global scale, such as a shortage of clean drinking water or it may be something of a more everyday nature, such as simplifying banking. And the fun, that’s where personal obsessions and passions come into the picture. If you love what you’re doing, it’s fun. It may not be Tommy Lee’s idea of fun, but we’ll leave the drumming on a roller coaster to him and the real HVF to others.

Levchin’s latest project is Affirm, which seeks to solve the problem of banking in a world which has changed. Whereas people used to get into professions in their mid 20s and stay in them until the arrival of the gold watch several decades later. As he put it during a recent conference keynote interview: “banking doesn’t have to be an industry that helps you shoot yourself in the foot”, referring to the fact that the banks’ objectives – of charging as many fees to customers as possible – and individuals’ objectives – of paying as few fees as possible while hopefully being able to squirrel away a few dollars here and there and earn a bit of interest – are generally at cross-purposes with each other. 

Max Levchin, interviewed by Kara Swisher in Boston, October 15, 2016

Does it have to be this way? Levchin doesn’t think so. “It’s possible not to charge 5 to 7% overhead, as most banks do, and it’s possible not to have 100 disparate software systems, which is what you find in a typical bank”, Levchin told the crowd. 

“I think the bank of the future is more like an app that works in real time, linking your decisions and behaviors to your financial goals and overall fiscal health”. In other words, if you say you’re saving up for a vacation, or a car, or a pricey jacket, then maybe visiting Starbucks twice a day isn’t in your best interest, and the app could help with reminders that nudge you in a more productive direction. And when it comes to determining creditworthiness, the Fico score has been the accepted standard since 1989. 

Lenders are in the business of risk assessment....i.e. are you a reasonably good candidate for credit? What recourse does the bank have if you default on your loan or mortgage, or if you overextend your credit? This doesn't sound at all unreasonable but, as Levchin is quick to point out, the Fico score system does not reflect today’s world of fairly frequent job hopping, of startups and creative endeavours funded on credit cards, of flexible work and the gig economy, or of rising student debt loads. The Fico system effectively penalizes people that don’t fit into neat little boxes of creditworthiness assessment, and that’s where Levchin sees the opportunity. 

After all, according to a recent McKinsey study, as many as 162 million people, representing 20 to 30% of the working age population, are said to participate in the economy of flexible work. This does not, by definition, make them irresponsible or poor candidates for loans; it just makes them people who don’t fall into the existing buckets of the Fico measurement system.

And this is where digital, networked systems -- whether they are deployed for fairly mundane functions such as dating or providing alternate accommodation options or for more serious enterprises such matching organ donors with those in need or identifying scientific, technical, or socio-political problems and providing monetary incentives for their solution -- are fascinating to both observe and participate in, manifesting new ways of operating that in no way resemble the rationales of the previous era.

For more thinking on this topic, here's Max Levchin speaking at SXSW 2016 about what he sees as the unstoppable trends in our midst.

Saturday, October 8, 2016

Discoverability: Audiences in a time of endless choice

One way to think about today's media landscape is as the 'attention olympics'.

It's not always the best or even the first that 'wins', but the players that are able to grab the most attention. I recently saw this line: "On the Internet the reptilian brain gets served first", and while it's not true across the board, there is certainly some truth in the statement.

That which is refreshing about the Internet is also that which is threatening to some. The authentic and the contraband flow throw the same pipes, which means the traditional big players often find themselves vying with the smaller ones online. Competition now comes from all corners. Competition for screen space, and competition for viewers', listeners', and readers' attention.

Search and Search Engine Optimization (SEO) used to be the primary ways things rose to the surface online. Then came curation and aggregation. Social added another dimension to an already complex model of production and distribution.

So how do audiences navigate through the maze? 

The term being used in some circles to refer to the challenges inherent in a saturated media environment is Discoverability. A report I worked on released earlier this week offers some perspectives. 

Click here to read the full report, entitled "Discoverability: Toward A Common Frame Of Reference, Part 2 The Audience Journey".