Wave could be Google’s Microsoft Office

Wave-LogoThe blogosphere is buzzing about Google’s major announcement yesterday: Google Wave will be a new communications platform that integrates elements of e-mail, instant messaging, wikis, photo sharing, collaborative document editing and more.

Aside from all the technical niceties of this new platform (Open APIs! Instant content updates! Smart spell checking!), Wave could turn out to be one of Google’s smartest strategic moves in a long time.

Many critics say that Google is still a one-trick pony: The company makes huge amounts of money in its search advertising business, but all the many other Google products barely generate any revenue at all.

But if you apply the same standards, even Microsoft is just a two-trick pony: The Redmond empire generates most of its profits from Windows and Microsoft Office. Windows of course was the basis for the success of Office, but Microsoft leveraged this platform dominance in a particularly smart way: By bundling several formerly disparate productivity apps into an attractive suite that provided, thanks to Windows, a much nicer user interface than the competition (remember WordPerfect? Exactly my point).

In some ways, Google Wave is doing the same. It leverages many of Google’s particular platform advantages from its search business that no competitor can match: its huge server farms that guarantee instant responsiveness, the rich data from its billions of spidered web pages (how do you think they do their spell checking?), its rich cloud-oriented programming frameworks, its experience in browser-based GUIs (finally something to do for that fast JavaScript engine in Chrome) and so on.

And more than that, Wave pulls together elements of previously separated web-based applications. Even though some people already fear that the result could be bloatware, I think that this is a particularly smart move. The current ecosystem of web-based collaboration tools is way too complicated for the average user. Sure, theoretically all these independent applications could be pulled together with open APIs and some RSS magic, but in practice, that’s too complex for normal people. Most users would probably prefer a single, consistently structured place where they could do all this stuff.

Wave could be to web-based collaboration what Microsoft Office was to PC-based productivity apps: The product that unifies all this emerging functionality for the average user, under a trusted brand and leveraging an established platform. And in the process, Google could potentially find a second cash cow.

What Media Companies Could Learn From Microsoft: Smart Bundling

BundleThe media industry is desperately trying to find new business models for the online age. A lot of the current discussion revolves around micro payments: Is it possible to get users to pay small amounts for each newspaper article? The metaphor “iTunes for news” seems to become a favorite model of many media people, and major players such as News Corp. are already planning to roll out micro payments.

I think they couldn’t be more wrong about this. It’s actually amazing that traditional media companies seem to be largely blind to the factors that made their traditional business models successful.

One factor is the control of distribution channels (I blogged about this earlier). This is difficult to replicate in the digital world, because digital content is so easy to replicate and distribute.

But the second element is actually much easier to implement for digital content: Bundling.

When you buy a CD (if you are still old-fashioned enough to do that), you pay $15 or so for a collection of around 10 songs. Chances are that you are only interested in one or two of these songs. So why don’t you just buy the single? Mainly because the music industry since the 50s consciously pushed the album format, suggesting more value. Look, you only pay $1.50 per song on the album, but singles often cost $5 or more for just one song.

How about your newspaper (if you still read one)? How much would you be willing to pay for today’s front page story in the New York Times? How much for the top article in the business section or sports section? A dollar? A few cents? Nothing at all? This probably depends strongly on your interests. On any given day, there are probably a handful of articles in a newspaper that you would be willing to pay for specifically. Most of the rest are worth almost nothing to you. But you are willing to pay a couple of dollars for the whole thing.

This is bundling at work. It’s extremely difficult to set the right price for a piece of content, since different people will see very different value in it. Therefore, it’s often the most profitable solution to sell bundles of content items at a relatively low total price to extract the maximum value from customers.

A great example for this from another industry is Microsoft Office. This suite of productivity programs today completely dominates the market. Most people would probably agree that that’s not because Microsoft had the best programs –some people still have nostalgic feelings for WordPerfect and Lotus 1-2-3. It’s because Microsoft sold the most attractive bundle of adequate programs at a very nice total price.

Here’s a simplified example that explains why this is smart: Let’s assume that User A wants to do a lot of word processing. He’s willing to pay $250 for a good word processor. He also wants a spreadsheet program, but is only willing to pay $50 for it.

User B is a finance guy and needs a good spreadsheet, for which he is willing to pay $350. He has no use for a word processor, but will pay $50 for a presentation program. And User C, a consultant, is willing to pay $200 for a presentation program, $100 for a word processor and $50 for a spreadsheet.

So, if you’re a spreadsheet vendor, what’s your ideal price? You could charge $350 and only sell to User B. You could charge $50 and sell to all three users, but that would leave money on the table. It’s really difficult to set the right price.

The best solution for this is to sell a bundle of a word processor, spreadsheet and presentation program and charge $300 for it. At this price point, all our fictional users will buy the whole package and will be very happy, because they get a solution at a price they are willing to pay, but with much more overall functionality. The vendor could only make more money if he were able to charge each user an individual price (what economists call perfect price discrimination), but in most markets, that’s impossible.

Microsoft is great at coming up with bundled editions of its software. There are five different versions of Microsoft Office, all with different elements and at different price points, but of course all based on the same code base. Of course, it’s dangerous to overdo this. The seven different versions of Windows Vista were just confusing.

Obviously, bundling works for software. It also works for most forms of content, and it can work particularly well for digital content, because it’s so easy to build bundles of digital content at almost no additional cost.

Unfortunately, the music business largely missed the boat on this. By allowing Apple to sell individual songs through iTunes, the music industry broke the album model, and there’s probably no way to get it back. The new subscription models that some record labels are experimenting with are of course nothing but another form of bundling, although at a much lower average price point.

Newspaper publishers don’t seem to get bundling at all. That’s probably because in the world of the physical paper, they can only sell a very limited number of different bundles (maybe a local and a national edition). Even the only two newspapers that successfully charge for online editions, the Wall Street Journal and the Financial Times, only sell one or two different online bundles. That’s simply stupid. Why isn’t there an expensive Pro version of the FT with full access to all market data, maybe even bundled with additional data sources? A cheap student version? A standard version just with the news and opinion columns? A version for people who want to read the FT primarily on their mobile device and just want the most important headlines? This kind of creative price differentiation would certainly extend the number of subscribers dramatically.

And the same applies to other parts of the media industry: Why doesn’t Hulu (or iTunes) sell an attractively priced subscription for its most popular shows, for instance a bundle that gives you The Office, Family Guy and Saturday Night Live, but also throws in a number of less well-known shows? If that’s the easiest way to get these shows, many people will sign up. The TV industry seems to believe that many people are going to pay $2 or more per episode on iTunes, they are almost certainly wrong. Nobody does that in traditional media. People pay for a satellite or cable subscription, which is a classic bundle. Deciding for each show individually if it is worth $2 is simply too much work. Pay-per-view only works for big-ticket items, and there’s no reason why this should be different in online media.

It’s really remarkable how little media companies seem to get the basic rules of bundling: Sell a bundle of products that have different value to different people at a price that seems really, really attractive when compared to the prices of the individual items. Make sure that you offer different editions that appeal to different target markets. That’s all. Just ask Bill Gates.

(Picture: My aim is true, CC license)

Is the Party Over? The Flattening S-Curve of IT Innovation

OK, maybe it’s just the recession. But many people who have worked in IT for some time seem to feel a sense of disappointment these days. Somehow, the IT industry — including the Internet sector — doesn’t feel as interesting as it used to. Not as dynamic. Not as fascinating. Is this just a negative perception shaped by the current crisis, or is it possible that there’s more behind it?

Like most waves of innovation, the adoption of IT seems to follow an S-curve. The early computers had only very few users, mainly big corporations. IT adoption really exploded with the PC, gained speed with user-friendly GUIs and hit its maximum velocity when the World Wide Web was invented. Now it might be slowing down.

A very simplified graphical representation of long-term IT innovation could maybe look like this:

Itinnovation

There are many signs that the IT sector is losing steam. A few examples:

1. PCs haven’t changed much in a decade. Sure, my current machine is much faster than the high-end Compaq workstation I was using in 1999, but I don’t do anything fundamentally different with it. Most of the innovation happened in the decade before that. In 1989, very few people edited photos, accessed global data networks or were even using a mouse.

What’s more, the innovation in operating systems and basic PC applications has stalled. Users don’t see a good reason to upgrade from Windows XP to Vista, for example. Innovation in PCs is now merely incremental. The market has found its “dominant design” and doesn’t seem to be willing to change much about it — except prices, which are falling dramatically. My new $300 Asus netbook basically has the same capabilities as my $3000 subnotebook five years ago.

2. The enterprise software market is consolidating. Enterprise software companies are increasingly living off their maintenance fees and service revenues from their installed base. There’s less and less new license revenue because big-ticket IT projects are largely a thing of the past. Corporations are very reluctant to repeat the costly mistakes of the late 90s, when huge ERP and CRM projects were all the rage. The prototypical software company of this new era is Oracle, which is following a strategy of aggressive consolidation of smaller rivals.

3. SaaS is not taking off as expected. The new generation of web-based “Software as a Service” (SaaS) products like Salesforce.com is great and potentially disruptive, but most of these companies are still far away from real profitability (let alone huge margins like those achieved by the leading enterprise software players). Even though subscription-based SaaS has been around for well over a decade, the business model doesn’t seem to hold up very well. What a contrast to the early days of Microsoft or Oracle, both of which were profitable almost from day one.

4. Web 2.0 has all the hype of a real bubble with none of the money. OK, so Facebook now has more than 200 million users. That’s great, but unfortunately, revenues are not growing at the same speed, and profits are still elusive. Youtube is apparently losing hundreds of millions of dollars a year, and Twitter has not even started to look for a business model.

Web 2.0 is a huge success in terms of user adoption (although it’s really only a shift of existing web users to newer sites — actually a small step), but commercially, it’s a huge disappointment so far. Maybe it’s all a question of time, maybe things will look better after the recession. But perhaps the bleak reality is that these sites simply don’t add enough value for users (and advertisers) to justify the commercial success of Web 1.0 giants like Google or Amazon.

Of course, there are some bright spots: The mobile web is finally taking off, thanks to Apple’s iPhone, the BlackBerry and other new smartphones. Media consumption — newspapers, video, now even books — is shifting into the digital realm, hopefully pulling advertising spending with it eventually. And on the horizon, there’s the promise of the Semantic Web (although it has been on the horizon for a long time without getting much closer…).

But overall, the wild days of IT innovation seem to be largely over for now. Things have been slowing down considerably for several years, and that’s not just because the economy is in trouble. It’s a typical pattern for fundamental innovations (like railroads, the telephone, the automobile) that there’s a phase of rapid evolution and dramatic changes that can last several decades. But once the technology has reached a certain level of maturity and most of the infrastructure is in place, growth and the speed of innovation slow down a lot. All the signs suggest that this is currently happening to the IT industry.

Obviously, it would be a huge mistake to think that there will be no further major innovation in IT. Just remember all the quotes by famous people that were wrong about the magnitude of future technological change (although many of these quotes are actually incorrect). However, unless a technology enters a second major wave of innovation — like digital and mobile telephony — the big changes are few and far between.

Assuming that this theory is right and IT is now really becoming a mature market: What are the best entrepreneurial opportunities under these new circumstances? This will be the topic of my next blog post. Watch this space.

“Attention Economy” is the Wrong Metaphor. It’s All About Persuasion.

The concept of the “attention economy” has been around for a few decades now. And many people think that Web 2.0 is the first real-world manifestation of this economic theory.

Briefly explained, the concept assumes that in our modern world — with its constant information overflow — human attention has become a scarce good. Since scarcity creates economic value, attention becomes valuable. Some even think that attention can be traded like commodities.

The conventional way to monetize attention is to sell advertising against it. Media companies publish content that grabs people’s attention, and they resell a part of that attention to advertisers. (Here’s a great article by Dharmesh Shah that explains the difference to what he calls the “wallet economy” where people pay you directly for a product).

Sounds simple enough. But the problem is that the theory doesn’t really explain the commercial nature of attention.

From the point of view of somebody who receives attention, there are two possible value components to it:

1) The intrinsic reputation value of attention, i.e. social status. Example: A programmer who contributes to an open source package doesn’t do this because he expects to make money, but in order to get a higher reputation with his peers.

2) The value of possible persuasion that needs attention as a starting point. An advertiser is not interested in your pure attention as such, he’s interested in selling you something. That’s only possible if he gets your attention first. But the real value is only created if the subsequent persuasion process is successful.

While the first component (reputation) might become more important in advanced societies where people already own most material goods that they could possibly want, the second component (persuasion) is the only one that can really be monetized.

The problem with the oversimplified view of attention is that attention is not uniform, particularly not if it’s supposed to be used for persuasion. You know this from real life: When you go to the mall on a Saturday, you are easily persuaded to buy more stuff. You are already in a buying mood, your attention is tuned to consumption. Not so if a telemarketing firm calls you in the evening during your favorite TV show. They will get your attention, but they won’t persuade you. You’ll probably hang up on them.

The same difference exists in the online world, and it is the reason why Google makes a ton of money, but social networks don’t.

Google probably makes most of its money from searches where people are actively looking for certain products or solutions to problems. The users are in a buying mood — think of the mall on a Saturday afternoon. A relevant ad delivered at this moment is highly effective, and a click is worth a lot of money, because it’s a great starting point for successful persuasion.

Just check a few AdWord prices, and you’ll see this immediately. A click on “Britney Spears” (high attention, consistently in the top 10 search terms every year) costs $0.30. A click on “life insurance” costs $15.80. The Britney-related ads actually receive twice as many clicks per day as the insurance ads, but they’re worth a fraction.

Why do smart advertisers who want to sell to a teen/tween audience not simply buy Britney Spears-related clicks (=attention) and then use the traffic to sell something else that appeals to this target demographic? Because it doesn’t work. If somebody clicks on a specific keyword, they are not in the mood to be persuaded to buy something completely different. Attention doesn’t equal persuasion potential.

Unfortunately, this is the fundamental challenge for advertising on social networks and many other Web 2.0 sites. You go to Facebook to catch up with friends or share stuff, not to be persuaded to buy something. Metaphorically speaking, you’re not in a mall, you’re at a dinner party. And somebody who’s trying to sell you something at a dinner party will likely not be invited next time.

Obviously, there’s an opportunity here. The trick is to catch users when they are in a buying mood or at least in an online environment that is tuned towards consumption. The ad industry is however very far away from really understanding this, because in traditional media, an eyeball is an eyeball.

But at some point, advertisers will start to understand that smart micro-targeting delivers far more relevant forms of attention than having a generic product page on Facebook or slapping an ad on MySpace’s homepage. The rule is clear: Follow the money. And the money is where people can be persuaded.

(Picture: hansol, CC license)