"The lesson instead is: build something whose very nature makes it a cannibalistic cash flow hit for a BigCo so that their shareholders resist competing, but which their users love."
Can anyone explain more what he means by that? How can something that is a cash flow hit for a BigCo not be a cash flow hit for anyone else?
An example: Rapportive was a browser plugin that put social information (from FB, LinkedIn, Twitter, etc.) directly in your Gmail.
This was great from a user perspective (puts a picture with an email so you recognize that this is 'Bill' who you met at the hackerspace even though his email is cypherdog26@crytomesh.org).
However it was NOT so great for Gmail:
1. Rapportive overwrote the section of gmail where they display ads.
2. It further entrenched Google's social competitors.
There is no way that Google was going to launch a set of Rapportive equivalent features in Gmail. However, Rapportive was beloved by users and exited to LinkedIn.
It means build something that big companies have thought about or maybe even could build, but have not built because they're afraid they'll lose money in doing so.
Facebook and Instagram was a perfect example. Facebook has money, time, and resources to build an Instagram competitor. But they didn't, because they still don't know how to monetize their mobile traffic (which should answer the question, "Why is Facebook's mobile app so awful?") They tried last minute to build Facebook camera, and when that had no traction because Instagram had already captured that market they had to cut their losses and buy it. My guess is Instagram realized that Facebook was basically forced to buy them and made them pay for it ($1B).
So I work on a startup in the news/journalism industry. If we're to follow the argument (which I believe is spot on), our goal is to build something that the New York Times or Washington Post wouldn't dare build, because it would destroy the revenue from their newspaper sales (yes, we have to compete against the likes of the Huffington Post too, but it's easier to illustrate it against the background of business models that haven't changed since the 1950's).
What Steve Jobs always preached was true - if you're not willing to cannibalize yourself, someone else will cannibalize you. As a startup, one strategy is to find those companies not willing to cannibalize themselves and help them out a little bit. But in doing so you run a risk; if you don't generate traction quickly enough and they see that it's inevitable, they'll just build it on their own and leave you hanging out to dry.
One would think that Facebook will aggressively avoid finding themselves in a position where they have to spend $1b on a product they could build themselves. IOW, the next app that appears to be on a path to getting as much momemtum and traction that Instagram had will likely find FB competing much sooner. Who knows, maybe that's what was going on with Dalton...
Possibly. The difference with Instagram is that Instagram didn't have to rely on Facebook as a platform, where as it sounds like Dalton did. Hence the Dalton frustration; Facebook has total control, and Dalton has no recourse to do anything about it, yet they encouraged him to keep building.
IMO $1B for that kind of risk-free traction isn't significantly expensive to FB. Especially as FB desperately needed a volume of photos available outside the social graph in order to stay competitive.
Quantcast's free audience reports couldn't be copied by the incumbents (Comscore and Nielsen), because selling similar reports was their core business. They hated us, but we never spent a moment worrying about them. In fact we were always open to working with them, but they were bound up in a knot over our model.
Southwest undercut united and American by avoiding business and first class, flying only one model of plane (737), which lowered maintenance costs and allowed easier substitution of planes among flights. They skipped the hub and spoke model and flew out of peripheral airports that were cheaper, and boarded like buses with no reserved seats to shorten the idle time a the gate, etc. no long flights meant no meal service. There was no possible way for United and American to match them on price. They were afraid to adopt any of these changes because it might tarnish their brand. They were too focused on competing with each other.
Dell offered lower costs than their competitors by charging up front for the computer before buying the parts (which were steadily falling in price). The competition were stuck with a channel model where they shipped finished computers to channel partners for stocking in inventory, so they not only had to buy parts far in advance but had to give a cut to channel partners and retailers, making their prices higher and profit lower.
Netscape had a dozen competitors to their browser. Netscspe offered free downloads to anyone, and with a wink asked for a licensing fee. No individuals paid it, but corporations did because they wanted to be in legal compliance. Best of both worlds (free for individuals and paid by corporations, but only after achieving critical mass within the corporation). They crushed their competitors with this model, who were charging license fees to all customers from the beginning, as competitors didnt get the benefit of rogue employee groundswell to achieve critical mass in corporations.
Hilariously, Microsoft in turn crushed Netscspe by goong a step further, making Internet Exploror completely free, no wink needed. Netscspe browser revenue dried up as corporations stopped paying for Netscape because they already had a free license to ie.
This was funny to me, as it led to all sorts of crybaby behavior by Netscape screaming "antitrust!", when all Microsoft did was tweak the strategy used by Netscape themselves to crush the others.
All of these cases are "strategy", which is defined by Michael Porter as the way that you are different from your competitors. Ideally, in a way they cannot copy. Notice how a strategy allows you to avoid competing, because you're playing a different game altogether.
Great examples. How do you think this would apply in Dalton's case though, where the very mechanism of building on Facebook/Twitter's platform can be shut down by Facebook/Twitter?
I don't know. But unless you have a strategy, don't start a company. Without a strategy you're just picking up nickles in front of a steamroller.
I'm sure that strategies exist on any platform. Zynga doesn't seem worried that Facebook will copy its games (even if they do hate paying the platform tax). Many products are pretty safe from Facebook. For example, build an app for dentists, or personal trainers, or pregnant women.
Like any other resource or dependency that you build into your business, using a platform requires an ROI calculation of some sort. The distribution advantage needs to be worth the risk.
True. The point however is to understand how to quantify the risk. The complicating factor in this case is surely the fact that he had received explicit assurances that his development was welcome and would be supported. The thing I don't understand is how you would go about assessing the 'distribution advantage' given the fact that the risk is evidently so hard to evaluate. DC has evidently now come to the conclusion that it is too risky for him no matter what the advantage. I am curious to better understand your thinking on how to weigh advantage against risk.
Treat the 'explicit assurances' like politicians' campaign promises. If they lose, the promises are irrelevant. If they win, those promises had better align with the new incumbent's larger aims or they were just marketing.
The risk is not very hard to assess. It's pretty binary per startup opportunity. Do the relevant incumbents' revenue models, distribution models, or inherent cultural limitations prevent them from competing with you. @paulsutter covered the first two well early in this discussion. For the last, Apple has great difficulty with social, Facebook hasn't figured out Touch, Google is excessively focused on those two competitors, etc.
These are indeed all great examples of a differentiated strategy. But I am at a loss to understand quite how they help us parse the OP's para re a cannabilistic cash flow.
In every single example I gave, entrenched competitors were unable to copy a strategy without eroding their cashflow. For example, United is afraid to fly all their flights out of Long Beach instead of LAX, because they fear that American will have the perceived higher ground and customers will switch over. The other examples should be more obvious.
I understand. My bad. On my original reading I thought he was suggesting the startup should have cannabilistic cash flow. Whereas he is indeed meaning that to competitively respond the incumbent will have to cannabilize his own cash flow.
I suspect that the Facebook App Center is different than the iTunes App Store in an analogous way and will do nicely competing against it once Facebook chooses to do so.
IE's inclusion in Windows (which dominated the market) had a lot to do with Microsoft crushing Netscape - it wasn't just that IE was free and Netscape wasn't.
Free seemed to work fine for Chrome and Firefox. The real key here is that corporations stopped paying for Netscspe, which was their main revenue stream. Microsoft definitely got a big advantage from bundling the browser, but how can it make sense in an Internet era for an OS to ship without a browser? How could it possibly benefit consumers if they were forced to download a browser separately? Nobody is screaming antitrust when Apple bundles Safari.
No, the real key here is that IE was included with copies of Windows. You absolutely cannot account for the rise of IE without this. It is pure revisionism to try.
Apple's position with respect to Safari is nothing like Microsoft's position at that time. For starters, Apple doesn't even approach a monopoly in the desktop PC market. And Chrome and Firefox got big in a different era, years after Netscape was buried.
You seem greatly concerned to say that Netscape was "whining" and "screaming" and that it wouldn't "make sense" for Microsoft to have done otherwise. I am only concerned with the accuracy of the account of how IE got popular. If that impedes your Netscape bashing, that is only incidental to me and I don't even understand why you would still have any kind of interest in the subject given how long Netscape has been buried.
Downloading Netscape back in the day wasn't the same as downloading Chrome or Firefox today. We're talking about 1997-8, when most people had 56k modems at best.
You may misunderstand the case that you're referring to. They bundled for free that which cost money otherwise, as well as using undocumented APIs. When they were found to be a monopoly, their actions, which would in many other cases be perfectly legal, were a problem.
I think he's going further than that and saying, build something that shareholders wouldn't allow because it will eat into the existing revenue sources.
Exactly. Normal cannibalization. New businesses are built all the time by giving away what the incumbent charges for. Skype's an easy one. They don't charge all for normal calls, only for certain premiums. Innovator's Dilemma, etc., etc.
If @daltonc's app.net doesn't massively undercut FB's App Center revenue plan (or overwhelm it's distribution plan) somehow, what's the point?
I think the point is that Twitter can't afford to remove ads or broaden their terms of use. The idea seems to be that a for-pay Twitter with broad terms of use and no ads could become a valuable development platform. The gamble is, how valuable and will people pay.
I think your cannibalization concept is brilliant, but I don't think app.net is completely vulnerable to it. Caldwell's made it clear that he's not trying to find success of Twitter and FB's magnitude, that sustainable profitability is more important for this venture than unbounded growth and huge winnings, and he's not trying to steal Twitter's customers, whatever that would mean. But unless Twitter becomes wildly profitable I don't see them giving away ad-free unrestricted API access just to eliminate a small gadfly.
I think your concept has a lot of merit, but I'm not sure it applies in this case.
I'm applying it differently, and to the business before his pivot. I'm talking about his conversation with Facebook and his accusation that Facebook was underhanded. He didn't do a proper job of disrupting FB's economics, distribution, or organizational limitations, so he's got no grounds to complain that they 'bullied' him. That should have been his expectation.
Scott if I read you correctly I think this is a profound misunderstanding of how to potentially build a viable business on a platform. Let's examine two extremes.
a) dev builds software on the platform that doesn't disrupt the platforms economics, distribution, or organizational limitations.
b) dev builds software on the platform that does disrupt the platforms economics, distribution, or organizational limitations.
You seem to be saying that if he had done a 'proper job' he would have pursued strategy b. But surely that is precisely the case where you can expect to be bullied. It is strategy a. where you develop software that does none of those things, but adds value to the platform by adding value to the users of the platform where you are least likely to be bullied. In these circumstances you are no threat and you are complementing the platform.
Strategy a can only be pursued when you are not dependent on the platform and hence are much harder to bully.
I mentioned elsewhere that, personal opinion only, of course, that this expectation is the sign of bad mindedness. Think of the logical implications of this point.
It was lazy of me to inherit Dalton's term 'bully.' It should have been his expectation to only be compensated for EVA (http://en.wikipedia.org/wiki/Economic_value_added) and not count on Facebook's stewardship of its developers.
And, when I don't like the tone of a meeting, I politely leave. Facebook's offices are physically difficult to enter, not leave.
Note that the 'textbook' examples of precommitment involve the burning-of-bridges or burning-of-ships-at-the-shore.
If there's any hope of an alternative to Facebook/Twitter at this point, given the incumbents' long head-starts, it's going to be a 'zag' to the incumbents' advertising-supported 'zig'. Caldwell might not have gone into his Facebook meeting fully intending that sort of confrontation... but by the time he left, the choices were stark.
I thus view Caldwell's anecdote not as a complaint, "boo-hoo I was wronged", but as him sharing a difficult lesson: that Facebook's model makes it impossible for Facebook to be a magnanimous platform steward. Perhaps Caldwell should have seen the writing on the wall earlier, but many exterior-platform shops are missing the same point, as evidenced by the surprise and indignation after each new consolidating move by the platform proprietors.
Perhaps Caldwell could have intuited the reality beforehand, and written about it in abstract terms. The anecdote illustrates the problem, in a way that far more independent developers will understand.
I fully understand breaking the rice pots and burning the boats, and I hope that you are right. However, his implementation doesn't create the developer education that you suggest. As they well should, young founders look up to guys like Dalton and may well take him at this word that Facebook's negotiating tactics are surprising. FB's stance on these issues are so ruthlessly consistent and well known that it's hard to even consider the specific tactics described as unethical.
I feel a responsibility to make it clear that such things are the norm and need to be accommodated in business planning and risk assessment from the beginning. Please note that I failed to do so the first time I dealt with Facebook, but that doesn't make it their fault -- rafer.net/post/168541483/lookeryupdate
Please also note, that I'd be damn excited for app.net's current iteration to take off and will go out of my way to use it if I can. I'd love a dev program that had ongoing stewardship built in, but no for-profit platform provider has ever made such a thing work over time.
I don't think that the key message is that FB's negotiating tactics are surprising. Whilst he was certainly surprised the point is surely that he was shocked because their behavior at the meeting was so at variance with what he had previously been led to believe. You say that FB's tactics are 'ruthlessly consistent' and 'well known' but this is surely a simplification. For example, the FB platform supports games but I am not aware of any instances in which FB has muscled in on a games dev.
I agree that it is helpful to point out that there are major risks when you develop for an alleged platform. But isn't that the point of his post?
I think the point of the app.net initiative is to create a platform that because of its different business model (subscription for infrastructure/service) will not suffer the conflicts that are inevitable when the business model is ads. And whilst this is indeed unusual lately, it is not long ago that such for-profit platforms were the norm. Older examples include, DOS, Windows, UNIX, Linux, X-Windows... More recently there is a profusion of companies providing commercial support for open source software or providing such software as a service.
Facebook has muscled in on literally everything but games, other than their ex poste facto 30% revenue share, and during their earnings report they intimated that they may get into games directly.
And, I'm shocked at your statement about the older platforms. I don't know if your entire background is on your LinkedIn page, but what you say is simply not true of Windows, DOS, the Mac, and is very tough to credit to Sun or SGI in their heydays. Those vendors cherry picked their ISVs all the time and with no more rhetorical consistency, stewardship, or charity than Dalton describes. They did so because they had market share in their segments and could.
That's why I specifically included this in my post: Playing naive to that reality went out the window in the mid-1980s with PC software and has been reproven by the platforms at least every 24 months since.
Everyone from RedHat to BeOS to Sega who behaved (somewhat) better did so because they needed their ecologies to grow. If they'd succeeded in building market share, I'm pretty sure I could predict their changes in policy.
pmarca has been a personal friend and mentor to me for over 2 years. I have learned a lot from him.
I know where he stands about all of this. I don't want to drag him into this fight any more than he already is, but I don't think you understand pmarca very well.
Scott - you say
"It’s incumbent on you (and certainly also me) to make sure that we’re starting businesses in segments that actually require a new entrant and can not be filled by aproduct line extension from an incumbent. Whether or not they fill holes as early as Twitter, large companies with developer programs all consolidate their segments — and do so a economically as possible. That means every third-party developer grows up, sells cheap, or dies."
But what does ‘require a new entrant’ mean here? Who requires it? There is surely only one meaningful answer - the consumer. Moving on... What sort of new entrant offering ‘can not be filled by a product line extension from an incumbent?’ I suggest in the context we should parse this to mean ‘... platform company cannot build a competitive offering.’ But of course, there is little that such well financed companies who control the platform can’t build. More to the point there is still less that can’t build if all they have to do is copy an existing product. So this is a very strong condition. Perhaps you mean - software the platform company doesn't want to build? One answer along these lines is to build software for a small segment the platform company cannot be bothered to address. But for an ambitious developer who wants to add significant value to millions of users I am not sure it is possible to develop such an offering - insulated from potential competition by the platform company - unless the platform company has a clear policy vis a vis developers and provides very clear signals with a very clear record to trustworthy behavior that gives a high degree of confidence it is safe to proceed. But of course developer is taking a risk that the platform company can bait and switch. I am unsure what ‘large companies with developer programs all consolidate their segments’ means. But if it means that such platform companies have an inbuilt drive to purchase their devs I can’t agree. The big platforms have so much software on them that even the wealthiest company couldn’t buy it all even if they wanted to. I don’t know what a cannabilistic cash flow is. This may be a term of art I am just unfamiliar with. But if it means a cash flow built on the back of the host platform, this surely refers to the cash flow of all apps built on a platform. So I am unclear this idea moves the ball forward. If on the other hand the idea is that it will cost the host money for no clear ROI then this is indeed always possible, but just as obviously if there is no clear monetization strategy the dev is taking a huge risk. It can work out but of course most times, not surprisingly, it doesn't. (Clay Christen makes much of this dynamic and the challenges of marginal rather than absolute costing when he discusses such cases as Blockbuster competing with Netflix. But the undiscussed part of his argument is the hindsight effect. Blockbuster were right to ignore most of the market entrants. Most never got any traction. With a thousand flowers trying to bloom, which one will see the sunlight?) So building software that doesn't seem to make financial sense will doubtless reduce the risk of the platform company competing, but you'd better have something up your sleeve. The Instagram example is indeed important. But it is important precisely because of the very different behavior of Apple and Facebook vis a vis their devs. Apple has had long experience of working with devs and a deeply wired understanding of how to foster and manage relations with their developers. iOS is a platform. Apple provides some core apps but other than that it is a free range and the overwhelming majority of devs can be confident Apple isn’t going to compete with them. It seems to me that the whole point of DCs argument is that Facebook declared itself a platform, provided APIs, provided assurances that his product was seen as valuable and would be welcomed and then, having given him the confidence to build it, turned on him threatened to cut off his access to the platform on which his app relied and then offered to buy him out. This is very different behavior.
So to be honest, I don’t find the argument very clear. I’m not sure we agree on what the responsibilities of a company that declares itself to be offering a platform are. I can’t extract a convincing strategy here for how you feel devs can best to develop on a platform. And whilst you seem to feel you have some sort of lesson for DC about how to work on a platform even if the company baits and switches, I can't fathom what that lesson is.
No really, I get the "cold-hearted businessman," thing. However, you're describing preparations for an unknowable situation: "you should have predicted the future better."
I don't see it as crystal ball reading. The question that needs to be asked is, "If my new new thing takes off, what prevents the platform from cloning me, turning me off, and/or buying me cheap?"
In Zynga's case for instance, FB was pretty darn dependent on the advertising $$ Zynga paid them (among other factors). In Instagram's case, I believe that Facebook wished to avoid pumping up mobile app traffic that quickly. Etc.
Obviously, YMMV. The strength of the answers varies wildly, and startups often lose the bet -- even when the bet was calculated well. C'est la vie, et c'est la guerre.
Can anyone explain more what he means by that? How can something that is a cash flow hit for a BigCo not be a cash flow hit for anyone else?