Disruption, Illustrated

I came across a two very neat examples of disruption over the past few weeks. The first is from Digital Music News and graphically depicts music distribution by medium since 1981, it's fascinating to watch cassettes and CDs grow exponentially and then disappear just as quickly.  Depending on your browser you may need to slide your mouse over the image to turn it on.

The second is from Chris Dixon's blog and illustrates recent disruption in the video game market.  Below are images of the instructions to play Angry Birds versus the most recent version of John Madden Football, arguably the most successful video game for the last ten years.

Over time the incumbent often builds complexity into its product to satisfy customers, to give them more.  But at the same time that complexity can leave new customers behind.  This creates the opportunity for a new entrant like Angry Birds to swoop in and provide a far more easy to use product for the majority of consumers.  At last check Angry Birds had sold more than 200 million downloads.

Angry Birds

Madden NFL 12

The Long Tail In Action

My favorite band, Micky and the Motorcars, is releasing a new album tomorrow titled, Raise My Glass. I'm pretty excited about it. I think I first discovered the band through Pandora -- they have a similar sound to many bands that I listen to.  I liked what I heard and bought a couple of albums and am now a huge fan.  I was finally able to see them live at the Bowery Ballroom here in New York last month.

Without the internet, I'm certain I never would've come across their music.  They're a little known "alternative country" band that doesn't get played on the radio even in Texas.  They currently have less than 9,000 Facebook fans (contrast that with U2's 10 million or Dave Matthews Band's 2.4 million).

I was thinking about buying their album and I realized that the purchase will be a perfect example of the "Long Tail" theory in action.  I built the graph below to help make my point.

The graph shows album sales for Michael Jackson's Thriller versus Micky and the Motorcars album that comes out tomorrow.  Thriller has sold more than 50 million copies whereas Raise My Glass will probably only sell several thousand. Marketers used to think that they had to find the next Thriller, the next huge album, if they wanted to make money. So they virtually ignored acts that wouldn't deliver an enormous fan base.  But the Long Tail theory tells us that there's actually more revenue to be had in the yellow section of the graph (the tail); that is, relatively low sales volumes of millions of different albums.; i.e. albums from bands like Micky and the Motorcars.

Because of distribution and marketing limitations, it was impossible to execute on the Long Tail theory 20 years ago.  But with technology, specifically the digitalization of music, the Long Tail is now no longer just a theory, it's a reality, and I'm happy to be part of it.

Leading Metrics

A couple weeks ago Techcrunch had a post titled, Don't Be Fooled By Vanity Metrics. In it, Eric Schonfeld calls out the difference between what he calls "vanity metrics" and "actionable metrics".

Vanity metrics are things like registered users, downloads and raw page views. These metrics, he says, are easily manipulated and don't necessarily tie to the metrics that really matter. Actionable metrics are the ones that matter. These are things like active users, engagement, revenue, profits, etc. He argues that startups should publish the actionable metrics from the start, instead of trying to fool the press and others with impressive, less meaningful numbers.

I'm always very, very careful about trusting any metrics that come from a startup and are published on a technology blog, vanity or otherwise. Entrepreneurs are very good at stretching or morphing the truth to tell the right story (they're probably not being written about in Techcrunch if they're not good at this). And in an interview with a tech blogger there's little fear of consequences from not telling the truth and big upside from stretching it. That said, if the metrics are accurate and honest, I think both vanity and actionable metrics are critical for any startup to track and manage to.

Instead of vanity and actionable, I've always referred to these metrics as leading and lagging. Leading metrics are indicators that have a strong correlation to more important lagging metrics. The simplest example of this is to apply leading and lagging metrics to a salesperson. For a telemarketer, number of dials is a leading metric for the lagging metric sales. If it takes 50 dials to get a sale, you can track the number of dials a salesperson is making to have a good sense of what sales will look like in a given period. If your salespeople aren't making enough dials or some of them aren't converting at 50:1, then you can make changes quickly. In web startups, leading metrics can be things like: registered users, unique users, emails sent, email response rates. Lagging metrics are closer to $$$ -- things like transactions, revenue driving clicks, number of revenue driving users, and ultimately, revenue.

Determining the right leading metrics to track is critical for any company. It helps management get a sense of how individuals, groups and the company as a whole is performing in real time, allowing for far more intelligent strategic decision making and tactical management.

Brown M&Ms

I've always loved the story of the brown M&Ms and Van Halen.  Chris Dixon posted it on his blog this morning and I thought I would do the same.

The background is that in every contract with every venue they would play in they required the venue to have a bowl of M&M's backstage with all of the brown ones removed.  From Chris' blog. 

That way, the band could simply enter the arena and look for a bowl of M&Ms in the backstage area. No brown M&Ms? Someone read the contract fully, so there were probably no major mistakes with the equipment. A bowl of M&Ms with the brown candies? No bowl of M&Ms at all? Stop everyone and check every single thing, because someone didn’t bother to read the contract. Roth himself said:

“So, when I would walk backstage, if I saw a brown M&M in that bowl . . . well, line-check the entire production. Guaranteed you’re going to arrive at a technical error. They didn’t read the contract. Guaranteed you’d run into a problem. Sometimes it would threaten to just destroy the whole show. Something like, literally, life-threatening."

Blog Comments

I've started commenting on blogs a lot more often and I'm finding it to be really fun.   Many times the comments section of a blog post is more interesting and insightful than the blog post itself.   And interacting with the blogger and other readers allows you to engage much more into the topic.

There's a web service called Disqus that runs the comments section of many popular blogs.   Initially the idea of a web service for blog comments seemed silly to me but it's actually pretty cool (except that it doesn't work well on an iPad or mobile device).  You can setup a Disqus account or simply log-in with Twitter or Facebook.    Once your account is setup, you can build a profile and an 'about me' page and the service will track all of the comments you make across blogs that use Disqus.   You can even "follow" commenters that interest you and be alerted whenever they comment.   You can see my profile here.

Disqus is brilliant in that has formalized the interactions we have on blogs. It allows us to learn about the people we interact with and easily stay in touch with them over time.  In many ways, it's really another social network...not that I needed to join another.

I could see Disqus being very useful for recruiting employees, consultants and partners.  A blog community that focuses on your industry is a great place to find people that can help your organization.   And Disqus allows you to interact with them, watch them communicate, understand how they think, learn more about them and get in touch.  

The Debt Ceiling and Politics

I’m certainly not a political or economic expert, but the debt ceiling debate in Washington seems to be much more about politics than it is about the viability of the economy. A few facts to consider:

•  Congress put the debt ceiling into place in 1917
• The purpose was to cap the President’s ability to borrow and spend money so it wouldn’t get out of control
• This was necessary back then because at the time Congress had little control over our budget
• That has changed
• Since the 70’s Congress has direct control over the budget each year (taxes and spending)
• The ceiling, which is now at $14.3 trillion, has been raised nearly 100 times since 1917

From what I've read, most agree that raising the ceiling would have little material effect on the economy, good or bad.  Though it would be an important, high profile, symbolic event reminding all of us that the U.S. needs to quickly get its spending in check.  I think we’re all for that.

But most also agree that not raising the ceiling could be catastrophic for the economy (though there's no precedent for it as it's never happened).  We’d default on our debt payments, raising interest rates and damaging the credit rating of the United States.  The economy would almost certainly fall back into recession.

So why all the support for not raising the ceiling?  Why not just raise it one more time?  What’s the big deal?

The answer is simply politics.  This symbolic event is a fantastic opportunity to make the President look economically incompetent.  Putting up a big fight puts a huge amount of attention on the fact that our national debt is out of control and makes the President look bad as he ramps up his re-election efforts.

While I recognize the need for political posturing, not raising the ceiling makes no sense given the fragility of this economy.  It would be a classic case of the punishment not fitting the crime (only we’d be punishing ourselves).

As James Surowiecki writes in this week’s New Yorker, it’d be akin to "shooting yourself in the head for failing to follow your diet."  Let's hope Congress puts politics aside and sees it that way too.

Personalization Doesn't Work...Yet

Most of us know that a huge trend in e-commerce is the personalization of websites and email content.  You'll log-in into a site and you'll only see the things that you want.  You'll receive emails that are personalized to your interests, you'll only see the things that matter to you.

While this sounds wonderful, it simply doesn't work well right now.  By "well" I mean it isn't profitable.

Here's a perfect example.  iTunes knows literally EVERYTHING about my taste in music.  They know my favorite songs and artists and my least favorite songs and artists.  They know the artists and albums and videos I've purchased.  And those that I've viewed, but chosen not to buy.  They know enough to have give me the most personalized music shopping experience on earth.  

But what do I see when I log-in to iTunes?  Huge display ads for albums from Lady Gaga, Katy Perry and Pitbull -- three artists I've never dreamed of buying.

Same thing with Amazon.  They know everything about my online shopping habits but all I can see on the homepage is a huge display ad for the new Kindle.

The reason for this is simply that personalization doesn't work in the short term.  And marketing managers that decide what goes on the homepage need to hit their numbers this week and this month and this quarter.

I can almost imagine the conversation at Apple:

CEO: Hey, we know so much about our users, why don't we show them albums that are relevant to them on the homepage?  Won't they convert better?

iTunes Marketing Manager: Well yes, they'll convert better but the incremental revenue from the better conversion doesn't even come close to the incremental revenue we get in fixed marketing fees for putting Lady Gaga on the homepage.  In addition, Lady Gaga's label pays us a larger revenue share per album.  Also, if we sell 50,000 Lady Gaga albums this week, we get a $1 million bounty from her label.  So while our homepage to purchase conversion may increase with personalization, it simply won't make up for the marketing revenue we're getting by broadcasting her album to all of our users.

CEO: But won't this turn some users off?  Won't they go somewhere else if we don't show them what they want right away?

iTunes Marketing Manager: I suppose that's true, but hey, I have a big goal this month that I need to hit.  I can't worry about that now.

Of course I'm completely making up the facts and numbers in this conversation, but this is the logic that's driving decision making for many web services that can personalize but choose not to.  It simply isn't profitable yet.  And most companies aren't willing to make the short term sacrifice to provide a better shopping experience in the long run.

That said, I do believe at some point the large web services' personalization tools will get smart enough where the increases in conversions from personalizing a site will outweigh their fixed marketing revenue.  But it's pretty clear to me that that reality is pretty far off.

Songkick

I like to say that there are two things that motivate customers: fear and greed. 

Songkick, a web service founded in 2007, addresses a very simple and common fear: not knowing when one of your favorite bands comes to town.

I signed up for the service a few weeks ago and I love it.  It has a very slick and simple UI/UX.  You simply “track” your favorite bands and the site builds your own personal calendar of events.  It then makes recommendations for similar acts that you should track.  You can also import your favorite artists from Pandora, Last.fm and iTunes.  One thing I’d like to see them add soon is a second calendar that’s full of recommendations that you haven’t yet chosen to track.  That would be great for nights when you just want to see some live music but one of your favorites isn’t performing. 

Once you’ve setup your profile and created your own calendar, the system will send you an email when a show from one of your favorite bands gets scheduled in your area (I've already received a few of these emails and it's pretty exciting when you see one in your inbox).

In short, Songkick has executed very well on an awesome idea.  If you like live music, you should definitely take a few minutes to sign up.

Linking Credit Cards to Deal Sites

Fred Wilson had a good post yesterday titled, Syncing Up Your Credit Cards.  In it he makes the case that there’s tremendous value coming from linking our credit cards with innovative web services.  He uses BillGuard and Foursquare as examples. I posted a comment on the post that triggered a pretty interesting discussion.  My comment points out how I believe that linking credit cards back to deal sites creates an enormous market opportunity for better ‘deal making’ and better merchant marketing.

Rather than reiterate the comment, I’ve posted a screenshot of it below.  I’d encourage you to go back to Fred’s post as there’s some very interesting discussion happening in the comments section.

Jobs and Young People

I was talking to  a friend the other day about the value of children starting to work at an early age.  I think it’s a critical part of building and shaping a young person’s work ethic and eventual ability to create value.  As a young person working, you get to see the correlation between effort and return, understand the spectrum of hardworking people that produce and lazy people that don’t.  You build relationships, learn how to manage up, learn how to add value and how to get what you want from work relationships. Personally, my parents strongly encouraged me to work and work hard at a very early age.  While I’m sure I didn’t like it at the time, I know I can thank those experiences for the work ethic and ability to produce results I have today.

For fun, I took a couple of minutes to jot down some of the jobs I’ve had over the years (I tried to put them in somewhat of a chronological order).  I'm sure I forgot some so I'll add them as I think of them.  Regardless, I can't even begin to count the number of important lessons I've taken from each of the jobs on this list.

1. Newspaper Deliverer
2. Playground Supervisor
3. Altar Boy
4. Camp Counselor at a Baseball Camp
5. Dishwasher at a Private School
6. Babysitter
7. Dogsitter
8. Basketball Referee
9. Baseball Umpire
10. Landscaper
11. Mover
12. Snowplower/Shoveler
13. Waiter at a Nursing Home
14. Golf Accessories Salesperson
15. Dishwasher at a Seafood Restaurant
16. Lifeguard at a Lake
17. Parking Attendant
18. Swimming Instructor
19. Lifeguard at a Pool
20. Lifeguard at the Ocean
21. Fitness Center Supervisor
22. Certified Personal Trainer
23. Entrepreneur – Accounting/Bookkeeping Business
24. Office Manager
25. Advertising Salesperson
26. Marketing Director
27. Business Manager
28. Nonprofit Co-Founder
29. Director – Business Development
30. Senior Director – Business Development

3 Elements of a Marketing Email

Here are three very simple things that should be included in every marketing email you send.

1. Value Proposition (why should I care?)
2. Call to Action (why should I click?)
3. Urgency (why should I click right now?)

Ideally, they’d appear in that order.

Scaling an Internet Business

I built the chart below to illustrate a few points about internet businesses.

1. The chart shows the virtuous cycle that comes from sites with user generated content.  YouTube's and Facebook's products are their users.  Their users generate videos and photos that make the site more valuable.  More value, more users, more value, more users.
2. This cycle doesn't exist as cleanly for deal sites.  Their product is deals that come from salespeople.  If they want more deals, they need more salespeople.  That's expensive (they have 4,000 of them).  Certainly, more users make their salespeoples' pitch better, but that cycle doesn't happen neatly.
3. Groupon has a a huge advantage when it comes to conversions.  People come to Groupon to shop; their deals (i.e. ads) are their product.   Conversely, people do not come to Youtube and Facebook to shop.  Their ads are a distraction.  Because Facebook and Youtube make money by distracting people from what they want to do on their sites, Groupon arguably has a more sustainable model.
4. Because Facebook's and Youtube's products are their users and Groupon's product is their salespeople, it's interesting to think about how much incremental value their engineers are adding.  Youtube and Facebook are mostly made up of engineers.

When you build a consumer internet business, don't assume that it's going to happen like it happened for YouTube and Facebook.  Think through whether your value will build on itself or if you need to buld it incrementally, the old fashioned way.  It's also crtical to think through where your scale is going to come from: users, salespeople, or engineers.  The answer isn't always clear.