Andreas Goeldi

A worrying trend is becoming increasingly obvious: Many of the very best and most interesting bloggers are writing less and less.

Some examples: Nick Carr is down to maybe a couple of posts per month, and there’s a similar pattern on the blogs of Dharmesh Shah and the always controversial Andrew Keen. Jason Calacanis recently decided to send out his more substantial pieces through his e-mail list only, and his former blog is now just a photo stream. Marc Andreessen and John Hagel seem to have disappeared entirely. And online PR guru Steve Rubel just officially gave up blogging and instead wants us to read his “lifestream” on Posterous — which is nice, but hardly a replacement for his deeper analytical posts.

It’s a striking pattern that particularly well-known tech bloggers (i.e. real thought leaders) who specialize in longer analytical pieces (i.e. real substance) are pulling back. It feels like well thought-out content is increasingly replaced by noisy, relatively random short bursts of information on Twitter, FriendFeed, Tumblr and similar platforms.

What’s going on here? Based on my own experience as a much less important blogger, I think there are three main reasons for this trend:

1. Blogging is hard work. Twittering is not.
Let’s be honest: I can easily reach about three times as many people on Twitter (and, through a feed, on Facebook) as with this blog post. And the ratio is probably even more dramatic for A list bloggers. Writing a smart Tweet that will grab people’s attention takes seconds, writing a good blog post takes hours. And the difference in the level of attention and positive feedback you’re getting might not be large. Twittering and lifestreaming are simply a more efficient way to get attention. And yes, people do blog to get attention.

2. The quality of feedback on blogs decreases with audience size.
One of the most motivating things about blogging are the comments and resulting discussions with the really smart people who read your blog. When you have a couple of hundred readers, the quality of this interaction tends to be very high. Unfortunately, it always seems to decrease as you get more readers. Suddenly “trolls” show up, you get more and more spam, and in many cases people simply seem to comment because they want to get some attention for their own blog, not because they have something to contribute. This kills one of the most important reasons for blogging.

3. You don’t necessarily get rewarded for quality.
I still remember what a thrill it was to get my first blog comments or get linked on other blogs. On Rivva.de, the German equivalent to Techmeme, I was for a while in the Top 15 most influential blogs and news sources, with a higher ranking than some well-known mainstream news outlets. How cool is that? Blogging can be very rewarding. I guess most people feel the same, even if they’re well-known authors. Traditional media doesn’t offer the same kind of instant gratification feedback loop that blogging provides.

But, you know, it gets old. And what’s even worse, the positive feedback doesn’t necessarily increase with the quality of your output. Commercial blog publishers (one of which I’m a co-founder of) know that the pure posting frequency is often more important for success than the quality of your posts. And most bloggers probably have experienced that a really strong post that they put a lot of work in hardly got any feedback, while sometimes the more fluffy pieces get picked up like crazy.

So it’s not surprising that quality-oriented bloggers in particular are looking for the next mountain to climb, the next reward curve, the next shiny new toy. And that’s not necessarily just in social media. Several popular bloggers have published books recently, are working on their speaking careers or are focusing on their startup projects.

For a while, blogs were probably the best source for breakthrough thinking about technology and entrepreneurship issues. I think this short era is coming to an end, at least for some time.

Social media, and maybe online media in general, is currently in the cambrian explosion phase. We see new concepts and channels almost every day, and the market is changing very rapidly. It probably will need a few years to settle down, for the winners to emerge, for more constant structures to evolve.

People who contribute substantial content to any medium don’t just do that because it’s fun, but because they can expect certain rewards, either in money or status. The reward equation in social media is currently changing too rapidly. That’s fine for some experimentation, but in order to create long-term incentives for deep thinkers, the ecosystem has to cool down quite a bit. In the meantime, read a good book.

agoeldi Media

(This post is a translated version of an article that I wrote for netzwertig.com, the leading German tech blog)

The media industry is in the middle of a deep transformation, and nobody knows what the successful business models of the future will look like. Sometimes it’s useful to look at this kind of situation from the perspective of good old-fashioned economic laws, because they apply even in the digital age.

The current discussion about the future of media is shaped to a large part by ideology and wishful thinking instead of rational analysis. There seems to be little common ground between Internet prophets (“Information wants to be free”) and traditionalists (“Good journalism deserves good money”). Some online pundits seem to think that media companies should never, ever charge for their products again, while many managers of traditional media businesses would love to see the Internet shut down altogether.

Unfortunately, this whole discussion typically doesn’t address the heart of the matter. The future of media business models will not be decided by ideology and idealistic visions, but by simple market laws. And to understand these, a bit of economic analysis typically works much better than idealism.

Obviously, most traditional media companies, newspapers in particular, currently have a revenue problem. Print circulations (and ad sales) are falling rapidly, and users seem to be unwilling to pay for online media.

Broadly speaking, this trend reflects a change in the supply situation. To use a bit of Economics 101: The price that can be achieved for a certain product is a result of the relationship between supply and demand. Economists like to illustrate this with supply and demand curves:

The supply curve S shows that suppliers will produce more units of a product (x) if prices (p) are higher. On the opposite site, customers will buy more of a product if prices are lower. The demand curve D therefore is sloped in the opposite direction. Since we’re talking about media here, the demand curve is pretty steep. This reflects the fact that people can’t consume much more media even if prices fall. There are only so many hours in a day, and attention is limited. The point where the supply and demand curve intersect is the market equilibrium that determines the market price and the volume of product sold.

The increasing popularity of the Internet as a news medium has pretty severe consequences for this equilibrium. Since Internet-based media have a much lower cost of distribution, suppliers can provide much more of their product at the same price. The supply curve shifts down (from S to S2). As a result, the volume of media products sold increases a bit, but prices fall pretty dramatically. That’s exactly what we’re currently experiencing in reality, although reality is of course more complex than this very simple model.

Now for the important question: Is this new position of the supply curve (and therefore the much lower price level) sustainable, i.e. can it remain at this point in the long run? That’s not obvious, because supply behavior often overshoots a sustainable point in technological revolutions — just think back to the dot com era. Business models need some time to find a stable new point.

But the way to a new long-term equilibrium is not linear and depends on a lot of factors, not least of all the interaction with traditional market segment. In news media, it is currently rational behavior for newspaper companies to offer their content on the web for free. But that’s only true as long as the traditional print business is healthy. Let’s play a bit with some numbers to show the idea behind this claim.

Each supplier obviously has to consider at which price he wants to offer a certain amount of his product. Without going into theoretical details: roughly speaking, the supplier has to consider his marginal costs, i.e. the costs that are caused by producing another unit of a product, and the average costs that in the end have to be covered by revenue.

And now we see the fundamental difference between traditional media that are bound to physical distribution, and the digital world: Each information product initially creates costs for the production of the actual content (for instance, salaries for journalists). But when it comes to the costs per unit — the marginal costs — analog and digital media are fundamentally different. The costs for the production and distribution of a printed newspaper are substantial. But serving an additional reader on a newspaper website costs almost nothing.
Now let’s look at a simplified model case for a hypothetical newspaper company. Let’s assume that the production of content costs $250,000 every day (not unrealistic for a major newspaper). Let’s further assume that the printing and distribution of a newspaper costs 50 cents per copy, but serving another reader on the newspaper’s website costs only 5 cents (caused by the need for additional bandwidth and server capacity).

If we look at average costs for different audience sizes, we’ll see the following picture:

The first unit of a newspaper is incredibly expensive, but the more copies you produce, the better initial content production costs are distributed over all readers. The more circulation grows, the more the average costs per print copy (red curve) approaches marginal costs.

But what happens if the company publishes the same content both in print and on the web? Since the additional costs for the web channel are low, the total average costs for both media taken together (green curve) rise only slightly. If we assume that revenue from the print business already covers the costs of the newspaper, the Internet can potentially be very profitable for the media company. Even if online ad sales are relatively low, they can easily cover the small additional costs, and the rest is pure profit.

But: If the print business starts to fail — because readers migrate to the online edition — and the web channel has to carry initial costs alone (blue curve), we get a different picture:

Of course, costs for a pure web offering are much lower, but they are way higher than zero, particularly if the number of readers is relatively small. As soon as the cross-subsidy from the print side falls, the Internet channel has to provide much higher revenue to finance the initial costs of content production. And in many cases, it could be difficult to achieve this from ad sales alone.

Some Internet prophets seem to think that media companies should never again charge for content. That’s a pretty naive view. This approach only works as long as there is a healthy traditional (print) business. And obviously, this traditional business is eroding.

So what can be expected if the print business fails altogether? The harsh reality is that many media companies will not survive it. That’s why overall supply of news will start to decrease, and prices for news will rise.

More specifically: The phase in the development of the news business that we are currently experiencing is not sustainable. I’m convinced that the era of a huge oversupply of free news will come to an end sooner or later.

Media companies with a well differentiated product will start to charge for their content again, and users will pay if they can’t get the same quality content elsewhere — and that will increasingly be the case with shrinking supply. Online news subscriptions will be much cheaper than their paper equivalent, but they will cost something, probably around 10-40% of a newspaper subscription.

The economic characteristics of online media have another important consequence: The big players will have a huge advantage, since it’s economically crucial to distribute initial costs over as many readers as possible. Print media experience scalability problems at some point due to their physical production. But the Internet is largely free of these concerns.

The world of digital news will almost certainly be bi-polar. On one side there will be a few giant media conglomerates that will produce news for global markets. Almost certainly, they will offer their products in different versions for different price points. The freemium model, which is already popular in the software market, could very well be the model of the future in media. And these media conglomerates will make sure that the oversupply of news will be kept in check.

Next to this, there will be plenty of space for small, often semi-professional providers that can publish their content for free, thanks to low production costs. Advertising will be the typical business model, driven by an increased selectiveness of advertisers who want to reach certain interesting target groups in focused way. There will be a few segments where small media companies can established paid content franchises, but this will be a niche phenomenon.

The situation will be tough for the group in between: The medium-sized publishers that have to carry a substantial cost base from the print era, but don’t have the scale to reach a huge audience. Realistically, the model of the medium sized regional publishing house will very likely vanish. The economic structure of digital media doesn’t leave much room for this type of company.

Again: The current situation of the media industry is an anomaly that is not sustainable in the long run. This conclusion is not about ideology, but about market forces. We all will have to get used to paying for high quality news, probably pretty soon. It will be cheaper than the good old newspaper, but not free forever.

agoeldi Media, Technology

The 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.

agoeldi Technology

The 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)

agoeldi Economy, Technology

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:

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.

agoeldi Technology

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)

agoeldi Economy, Technology

Times are tough for media companies. One newspaper after the other slides into bankruptcy, and most other sectors of the media industry are suffering too. This recession seems to hit media companies harder than expected as consumers migrate to the Internet and advertisers are cutting their budgets more than ever.
Most media companies still hope that revenues from their new digital channels will replace much of the lost sales volume in their traditional businesses. But so far, digital revenues have stayed far below expectations. It looks like “digital pennies” are replacing “analog dollars”, as NBC CEO Jeff Zucker recently put it.

Why is there still no really viable business model for content on the Internet? All the big Internet success stories — Google, Amazon, eBay, Facebook … — are based either on commercial transactions or on context-creating technologies, i.e. services that help users make sense of the vast jungle of information on the web. There are a few somewhat successful web-only content plays — the Huffington Post comes to mind — but their size and profitability is very modest compared to the kings of the Internet.

I think the biggest misconception in this discussion is that traditional media companies are all about content. They’re not.

The most important (and expensive) asset that a media company has is its distribution channel(s). It costs hundreds of millions to build and run the production and distribution infrastructure of a major newspaper. TV networks are even more expensive, and even somewhat simpler media like radio require very large investments.

It’s actually interesting to talk to owners of regional newspapers after a glass of wine or two. Many still see their companies primarily as a printing business. Their newspaper is just a monetization strategy, and the content they distribute is just an input factor they need to attract advertising. But the core of the business and the real pride of its owner is typically the printing press and the capability to bring printed matter into every household in their area.
The huge capital outlay for distribution is the main barrier to entry in the media industry and the reason why so many traditional media companies enjoy a cushy oligopoly or even a regional monopoly. Of course there are some companies that produce content independently of a distribution network — independent movie producers or record labels for instance. But these smaller companies often struggle to survive or have to enter into agreements with a big distributor.

In other words: For traditional media companies, content is just the bait. The real, defendable and profitable business is in distribution.

The Internet is fundamentally different. There are no comparable barriers to entry for content producers. Content distribution on the Internet is almost free. Sure, the infrastructure in the background still costs many billions, but this cost is shared by so many participants that access to the net is affordable for everybody. Every Internet user is not only a consumer, but can be a producer of content, even if it’s just one Tweet at a time.

The result is a huge abundance of readily available content. Of course, much of it is of terrible quality, as you can immediately tell from a brief visit to Youtube. But there’s more great stuff out there — literally just one mouse click away — than a single human being could possibly ever consume.

Since distribution is not a barrier anymore in the digital age, the only way for a media company to differentiate itself is through the superior quality of its content (and maybe through its brand, but that’s secondary). Unfortunately, that’s not necessarily the core competence of old media. Let’s be honest: How much of the stuff that you get on TV or read in a newspaper is really, truly great? Exactly. Not that much. The main reason we put up with inferior content in old media is because it’s more complicated or expensive to get to the really good stuff. That’s not the case anymore on the web.

But even for producers of really great online content, it’s difficult to stand out and get compensated for their work. For several reasons, both cultural and technical, it’s difficult to charge people directly for web content. And the volume of Internet advertising still hasn’t reached the level it would deserve given today’s consumer behavior. There’s another simple reason for this: Advertising agencies (in particular their media arms) don’t have a real incentive to sell Internet advertising. They make far more money pushing TV and newspaper ads.

Media agencies are a bit like financial advisors: Theoretically, they only have the best interest of their clients in mind, but in reality they will of course always prefer to sell the products that give them the highest commission. At some point, online advertising could grow to a point where it can finance many more content sites, but it will take a lot of time to overcome the ad industry’s inertia.

Until then, the way to profitability will be to try to control content distribution even under the particularly difficult circumstances of the digital world. Interestingly, a technology company (not a media conglomerate) has managed to do this for music: Apple with its iTunes store. And another tech company is trying the same for e-books: Amazon with its Kindle e-book reader. Both companies are following a similar strategy: Control the whole chain from content licensing to the end-user device — not the content itself, but its distribution. Old media companies have failed with similar projects because rivaling conglomerates were never able to agree on a common platform. Old rivalries sometimes destroy new opportunities.

To summarize: The Internet doesn’t have a business model for content because the world of old media didn’t have one either. The media industry has always extracted its profits from the control of distribution channels, not content itself. And it’s unfortunately not clear yet what will replace this model on the open Internet.

agoeldi Economy, Technology

As a Swiss entrepreneur who lives in the United States, I often get asked about the differences between Europe and the U.S. for entrepreneurs. Or more specifically, why the U.S. seems to produce so many successful technology startups, while Europe still lags badly.

Hint: It’s not about technology parks or labor laws or tax incentives for investors — the stuff that politicians tend to discuss most frequently.

I think the many differences boil down to two aspects: Market size and the value system of society. And both are unfortunately hard or impossible to copy.

Market size is easy to explain: The U.S. is the only country in the world that has a domestic market of over 300 million people who speak the same language, use the same currency, follow the same legal system and typically have a middle class income. Europe on contrast is very fragmented by its many languages and cultures. India and China, while significantly larger than the U.S., are still relatively poor. The result is that the U.S. market alone represents consistently about 40-50% of the global market for most advanced technologies. So it’s simply a great (although very competitive) place to start a tech company because you can immediately access so many domestic customers.

The second aspect, the value system of each society is probably even more imporant and certainly more complex to analyze.

In each society, the smartest and most ambitious people tend to be attracted by the occupations and careers that are most highly regarded by society. I think that’s fairly obvious from history and our current world. In medieval Europe, being a high-ranking member of the clergy was a great career that brought access to power (and in many cases even wealth). In the old dynasties of China, a smart person probably wanted to be a mandarin at the court of the emperor.

In today’s modern, open societies these preferences are not quite so clear, but obviously there are still occupations that enjoy a much higher status than others. There is a connection to material rewards too, but it’s not a perfect correlation. It’s really all about what society holds in high esteem.

Psychological research has found out that money — or to be more precise, the power of money to buy material things — is only a motivating force up to a certain point. After that, acquiring more money mainly provides advantages in terms of social status. Let’s be honest: nobody really needs a fancy sports car, and getting from A to B in a Ferrari might even be less comfortable (though probably more interesting) than in a Toyota Corolla. Most material status symbols have only one single purpose: To impress others.

What we seek in the end is social status. The question therefore is of course how societies differ in their value system to assign status to certain occupations, and in particular to entrepreneurship. We hear all the time from politicians that we need more entrepreneurs to get us out of the economic slump that the financial services industry got us into. So which societies are best prepared to encourage entrepreneurs?

From observing the countries that I know relatively well (Switzerland, Germany, the U.S.), I think I can say that none has a value system that perfectly favors entrepreneurial activity over other, maybe less productive activities. But there are clearly huge differences.

The United States of course seems to have almost a cult of entrepreneurship. It’s difficult to find an American who has never considered starting his or her own business. Entrepreneurs are generally admired. The pioneering spirit is clearly alive and well in this nation of immigrants.

But there is also dark side to this American ambition: Making money seems to be more important than making useful stuff that really adds long-term value to society. Of course people admire Bill Gates or Steve Jobs, but just as much they admire Warren Buffet who — let’s face it — is more of a speculator than an entrepreneur. The current financial crisis was only possible because the smartest people were attracted by financial services firms that don’t really add value to society, but simply trade it. Somebody who made his money by building a company, inventing things, and creating jobs does not necessarily enjoy a higher status in American society than somebody who just buys and sells assets.

This could be a fundamental problem in the long run, and it probably already is. Over the last two decades, U.S. companies have systematically outsourced not only many manufacturing jobs, but also the engineering and design of many advanced products. Almost all of the work that goes into the production of a HP or Apple notebook is now done in Taiwan and mainland China. Sure, the U.S. companies still provide their brilliant marketing, but is that really enough? It’s not terribly surprising that the latest wave in PCs, the cheap laptops referred to as “netbooks”, was started and is completely dominated by Taiwanese companies under their own brands. The outsourcers are already eating their customers’ lunch.

I don’t think a society can survive just by providing financial services, bold marketing ideas and pure speculation. But that’s what American society rewards. Hopefully the current recession will help to change this.

In German-speaking Europe on the other hand, high-quality engineering and the creation of jobs still enjoy the highest status, often at the expense of financial success. When a German entrepreneur wants to boast about his success, you are more likely to hear about the number of jobs he created or the outstanding quality of his company’s products than about things like net worth, market value or profitability.

These are useful priorities up to a certain point. It’s not surprising that European companies dominate many high-tech niches. The famous German “Mittelstand” companies — medium-sized, typically family owned corporations — often have a 80%+ market share in their particular narrow niche. Germany is the largest exporter in the world, and Switzerland and Austria have very high export quotas relative to the size of their economies. The most important industries all make high value-added products such as luxury cars, pharmaceuticals or high-tech machinery.

The problem with the European mentality is that it promotes risk aversion and a radical focus on quality at the expense of agility and aggressive marketing. Many of the building blocks of the Internet — the Web itself, MP3, Linux, MySQL, Skype, and so on — were invented by Europeans, but commercialized by American companies. Europeans seem to be very reluctant to bring anything to market that is not yet perfect. That’s why they often miss the best opportunities.

But the biggest obstacle for European entrepreneurs is probably the stigma that is still associated with failure. The failure of a company is often seen as a catastrophic event, not (as in the U.S.) an unfortunate, but ultimately useful learning experience. The concept of serial entrepreneurship — starting multiple companies over the course of career, some of which succeed and some of which fail — is completely alien to most Europeans. Many European entrepreneurs have a dynastic view of company creation: A company is something that you start, that you control for the rest of your life and that you want to pass on to your children. That’s great for certain types of companies, but not helpful in rapidly moving markets.

Europeans also have a very inconsistent attitude towards wealth: In most countries, there’s an equivalent to the Forbes 400 list of the richest people, and Europeans are no less fascinated by these lists than Americans. But at the same time, openly displayed wealth is frowned upon.

This puts successful European enterpreneurs in a difficult balancing position: They enjoy a high status in society if they continue to be successful and are a “good boss” who creates a lot of jobs. But if their company becomes too profitable or if their lifestyle seems too frivolous, they can rapidly lose support. And if they take large risks and fail, they can be sure to get mocked. It’s not a coincidence that “schadenfreude” is a German word.

It’s therefore not very surprising that many European entrepreneurs and managers try to copy American values and behavior patterns — in the hope of moving their own countries’ cultures into a more entrepreneurial direction. Unfortunately, this often ends in disaster. The latest example: European banks and the real estate markets in some countries are suffering much more from the financial crisis than their American counterparts. Why? Because European companies tried to imitate aggressive American business concepts, without really understanding them. But a bad copy often ends up with a far worse outcome than the already bad original.

OK, so obviously no country has a really perfect environment for entrepreneurs that also sets the right incentives for “useful” companies. But I think the good thing that could come out of the current recession is that people on both sides of the Atlantic rediscover what made Western societies so wealthy in the first place: A healthy, open attitude towards risk taking and entrepreneurship, but also a focus on the creation of real value. Maybe even a bit of nostalgia is in order: the 1950s and 1960s were probably the times when Western societies really created the foundation for their wealth. Sometimes a crisis helps to dust off the best aspects of some solid, old values.

agoeldi Economy

The last few months brought a trend into the mainstream that has been developing for quite a while: The real-time web. Twitter, the new Facebook, FriendFeed, Google, push services on your mobile device … the web is speeding up wherever you look.

Remember the good old times when Google’s index was updated only every few weeks? It could take months to get a new page into the major search engines. This leisurely pace is gone forever. You will find this blog article on Google only minutes after I published it.

Oh, and if you’re like most people, you got here because you saw a link to this article on your Twitter or Facebook feed. By the time you read the article to the end (which I hope you’ll do), the message that brought you here probably will have disappeared from the first page of updates on either of these services. That’s the pace of the real-time web. So much to see, so little mental bandwidth.
The web was originally designed as a digital library, a system where scientists could exchange their research papers in a more efficient way. Almost by definition, progress was measured in weeks or months, not days or hours. Even during the wild days of the dot-com bubble, most people dialed into the Internet a few times a day at most. Connecting to the web was something you did consciously, and the rhythm of all updates was restricted by this. E-mail was the natural medium of that era.

The always-on availability of broadband and the mobile Internet on our BlackBerries and iPhones have changed this forever. Most of us now have almost constant, immediate access to the Internet, and that’s the key enabler for a much higher speed of interaction. A service like Twitter can only exist under these conditions. Social networking sites like Facebook or Myspace only make real sense in a broadband world. Only when you’re constanly connected can you really enjoy the many little emotional kicks of getting updates about what your friends are doing just now. No wonder that many social network users are literally spending hours per day on these sites.

The most extreme example of the real-time web is probably Twitter’s search function. Theoretically, it helps you to search for relevant tweets about a certain topic. But for most popular topics, it’s actually more of a firehose of information — or, to be more precise, of unfiltered utterings from random invidivuals. Just try following Twitter Search’s constantly updated feed during the airing of any popular TV show. There are typically dozens of new tweets per minute about that show. You can either watch the show or follow all the tweets about it, doing both at the same time is almost impossible. But the tweets are typically more entertaining.

Like every new medium — and the real-time web is a new medium, not just a faster version of the old web — this rapid stream of information shapes the perception and behavior patterns of its users. Scientists are already worrying (like with every new medium in history) about the negative consequences this might have. And most users I know still somehow feel that Twitter, Facebook etc. are actually a waste of time. Why would you suspect yourself to this constant stream of mundane details about other people’s lifes? OK, occcasionally there might be a witty insight or interesting piece of information, but does that really justify having to deal with all this noise?

If you look at the growth rates that these services are currently experiencing, the answer seems to be yes. That’s not really surprising. Humans have always been hungry for information and entertaining distractions, and like with tasty food, most people can’t seem to get enough of it.

The result from eating too much is obesity. But we still don’t really know what consequences we face from too much fast information. Twitter is to information what potato chips are to food: It’s a snack that’s probably unhealthy, but it’s very difficult to stop once you started consuming it. People who are not on Twitter probably are instead addicted to e-mail or texting or Facebook or real-time stock quotes. Most people I know have some kind of real-time information addiction. We are all very impatient, and the real-time web in its many forms accommodates the craving for instant gratification through information.

So the real-time web is definitely a reality. It will need some time to develop further, to mature and to conquer even more users, but it’s clearly here to stay. The big question is of course: What’s next after the real-time web? It’s somehow hard to imagine that the stream of information can get any more abundant and flow any faster.

I think there are two possible directions this could take: Maybe we will see a major backlash against all this information overload. Maybe people will suddenly start questioning if all this noise really makes their life better. It would certainly resonate with the recession-driven sense of weariness that many people are feeling. Several authors — Timothy Ferris of “Four Hour Workweek” fame is an example –recently became popular by promoting a “low information diet” and a general slowdown. Ironically, most of these authors of course promote their ideas through books, blogs, videos, and, yes, on Twitter.

The other possible (and, I suspect, more probable) direction is that the torrent of information will find new ways to its consumers. The boom in the smartphone market is a first sign of what this may look like: The traditional computer screen has probably reached a point of saturation as an information channel, but other devices still have room for growth. BlackBerry user were the pioneers of mobile information overflow, and all the new buyers of iPhones and similar products are now following suit. And there’s of course the living room and its underutilized big screen: LG recently introduced a TV set that can show information from the Internet in the form of on-screen widgets. It’s probably just a question of time before many other TVs and set-top boxes will offer something similar.

Although there have been occasional backlashes in the history of media, people in the end always opted for more and faster information. When a new medium with higher information density appears, it takes people a while to get used to it , but after some time, there’s appetite for even more information. And most probably, the real-time web is just another milestone in this long-term trend.

(Picture: NathanFromDeVryEET, CC)

agoeldi Technology

The news that software giant Oracle will buy Sun Microsystems came as a surprise to most industry observers. Apparently, Oracle made its first offer on Thursday and had a signed deal by Sunday night. Larry Ellison and his team are clearly the masters of IT M&A.

This deal clearly has the potential to re-shape the IT industry. Or maybe it’s more accurate to say that it will complete a trend that has been going on for several years. Oracle is now the third conglomerate next to IBM and HP that can offer a complete technology stack, from server hardware to client software, plus implementation services.

On top of that, Oracle has a rich portfolio of application software and of course its market-leading database. It competes not only against IBM and HP, but also against SAP and Microsoft. No other company comes even close to these top 5 of the IT world. In just a decade, the IT industry has morphed from the innovation explosion of the dot-com era into an oligopolistic structure that is typical for mature industries.

But maybe more importantly, Oracle’s acquisition of Sun probably marks the end of Open Source Software (OSS) as a business model. Sun was one of the most active promoters of OSS and saw this focus as a strategic advantage to gain credibility in the tech scene. The company not only open-sourced its Java programming language three years ago, but also acquired several stars of the OSS industry, including office suite OpenOffice and most recently the world’s dominant free database (and thorn in Oracle’s side), MySQL.

Contrary to the romantic Robin Hood-type image that the OSS movement still has, most really complex OSS packages are not predominately developed by independent programmers in their basement, but sponsored (with money and human resources) by actual companies. MySQL was mostly developed by MySQL AB, a Swedish company that made money from support services and commercial licenses for enterprise customers. Without this cross-subsidy, it would probably be very hard for hobbyists to maintain and support such a complex software package.

MySQL AB was acquired by Sun for $1 billion a few months ago and will now become part of Oracle — which is not exactly one of the OSS movement’s favorite companies. You don’t have to be a fan of conspiracy theories to expect that Oracle will certainly not go out of its way to keep MySQL well supported as a free OSS product. I don’t think that Oracle will kill MySQL, but it will probably pressure its current users to buy enterprise support contracts and, you know, just maybe look at a really cheap upgrade to a full Oracle database product.

So finally the by far most successful OSS database ended up in the huge product portfolio of the very company that MySQL primarily tried to compete with. Facebook, Twitter, Yahoo and many other Internet companies are now suddenly proud owners of technical architectures that are based to a large part on the latest Oracle product…

Pretty much the only major independent open source software company left standing is Red Hat, the dominant provider of commerical Linux versions. There have been rumours that Oracle is interested in buying this company too, and at Red Hat’s current market valuation of $3.3 billion, Oracle could easily afford it.

It’s by now unfortunately fairly obvious that commercial open source has largely failed as a stand-alone business model. There are still some smaller OSS companies — e.g. SugarCRM, Alfresco, Pentaho, WordPress — that have a respectable position and could develop into profitable growth companies. But most complex high-profile OSS packages are now part of huge companies, often used as bait to sell hardware, services or commercial software products.

And for the IT industry in general, it looks like we’re going back to a vertically integrated model that we last saw in the 1970s. Customers can now — and many will — buy most of their IT components from one single vendor. It will be interesting to see how Microsoft and SAP will react to this. And another potential competitor, Cisco, is already extending its portfolio from networking to servers and software.

Where will innovation come from in this new world of vertical integration and huge IT conglomerates? Clearly, Internet-based software companies (such as Salesforce.com, 37signals) are the potential disruptors: They currently offer products that are far inferior to the large-scale solutions that Oracle and friends can provide, but they satisfy the needs of a certain customer group at a very low price point. We will see if that’s enough to keep innovation alive and compete against the giants.

agoeldi Technology