The media powers "have this Internet thing all figured out"

Earlier today, at the Cable Show in Los Angeles, former FCC Chairman Michael Powell chaired a panel of media bigwigs (plus Marc Andreessen) to discuss content on the Internet. The other panelists were Brian Roberts of Comcast, Tom Rothman of Fox, Les Moonves of CBS and Jeffrey Bewkes of Time Warner. The consensus of the media executives is that they've got this Internet thing all figured out. Their content will be on whatever devices consumers want to use, so long as they (the content providers and distributors) get paid for it. By and large, it sounded like a bunch of guys sitting around using buzzwords that they've heard but don't quite understand.

The executives clearly want to maintain the status quo, just on a larger variety of delivery platforms. They still want release windows so that they can maximize revenues from each platform. They see new technology simply as an extension of their old technology. For example, Brian Roberts demonstrated an application that turns a $600 iPad into a glorified remote control for your ten-year-old cable box. It can show program schedules, allow you to browse VOD content and even invite your friends to watch, but you watch the content on your TV screen through your set-top box, not on the iPad that you have in front of you.

What disappointed but didn't surprise me about the panel is that there was really no "outside the box" thinking from anyone, even Andreessen. He pitched integrating Facebook and Twitter with the services that the big media companies already have in place, and talked about Zygna's model of free games with in-game transactions, but didn't really explain how the media companies could take advantage of that model. Comcast's Roberts pitched using an iPad as a peripheral to its set-top boxes, not as a legitimate delivery platform. Thar was about as far as the envelope got stretched.

The incumbent content and service providers will never fundamentally change the economics of content production, distribution and purchase. It runs counter to their business interests. It's up to a new generation of content producers and distributors to convince a critical mass of consumer/producers to get on board.

Jack Sprat and the semantics of startups

"Jack Sprat could eat no fat.
His wife could eat no lean.
And between the both of them, you see
They licked the platter clean."

It looks like we've got yet another semantic dustup going on in Startup City. A couple of weeks ago it was about ridding the world of the term "fail fast", and last week, a battle broke out between Lean and "fat" startups. The breaker-outer was Ben Horowitz of Andreessen Horowitz, who wrote an op-ed piece for the Wall Street Journal's All Things Digital website titled  "The Case For the Fat Startup." In his article, Horowitz reviewed the history of Loudcloud and Opsware, the companies that he and Marc Andreessen co-founded, and argued, in his words, 'The best companies can raise money even in this market. If you are one of those, you should consider raising enough to wipe out your competition."

Fred Wilson, a well-known New York-based VC, argued in his blog post titled "Being Fat Is Not Healthy" that "I have never been involved in a successful software-based web service that raised and spent boatloads of money before it found it's (sic) sweet spot." He points out that Loudcloud and Opsware raised $350MM in four rounds of financing, including an IPO, in the space of 15 months. The only reason that they were able to do that was because the companies had been co-founded by Marc Andreessen, and Netscape made a bunch of people rich.

If Loudcloud and Opsware had been founded by two different people, even if their resulting services and products were exactly the same, they would have had a dramatically different outcome, because they would have only been able to raise a fraction of the capital. In statistics, we call something that is so far outside the realm of normal occurence an "outlier". Loudcloud and Opsware were outliers, and using an outlier as proof of the validity of a concept is like saying "I won $10 million in the lottery, so anyone can do it." Technically, yes, "anyone" can do it, but the odds against it are astronomical.

Wilson argues that once you've got your product/market fit right and you're sure that you're pursuing a real market and not a mirage, then go ahead and raise all the money that you can. Loudcloud didn't do that. It raised and spent an enormous amount of money only to learn that it didn't have a good product/market fit. (Horowitz claims that Loudcloud had, in fact, found a viable product/market fit, but then why did he decide to sell it off and focus on software?) It could have learned that it had an insufficiently appealing product/market fit by spending only a fraction as much as it did, and then put its resources into the real market opportunity that it finally identified. And it's true that reaching a product/market fit isn't a binary decision; it takes time. However, I'd argue that you want to floor the accelerator when you've found the right fit, not the first fit.

I worked with Ben at Netscape, and I consider him a friend, but the approach he advocates smacks of both "Ready, Fire, Aim" thinking and the now-discredited "get big fast" philosophy of the dot-com boom. I'd argue that Loudcloud spent the money because it had access to the money. If it hadn't had access to so much money, it would have been run very differently.

When you know that what you're doing is right, by all means raise the money you need to "crush your competition." There are also businesses where the capital investment required to even figure out if you're going in the right direction is so high that there's no alternative to being a fat startup. But for most software companies, being fat won't be a winning strategy for either entrepreneurs or investors.

Burn the boats, and don't use the iPad as a life raft

An interview that Marc Andreessen gave to Erick Schonfeld of TechCrunch on Friday is causing much discomfort in the "old media" ranks. In essence, Marc said that the only way for newspapers and magazines to save their businesses is to fully commit to digital media, instead of taking halfway measures designed to protect their print businesses. It's the cannibalization argument--it's much better to cannibalize yourself than to allow competitors to do it for you.

Those thoughts were interpreted by some to mean that he was suggesting that publishers should get out of the print business, but what I believe he meant is that they should be prepared to give up their print businesses, once it becomes clear that those businesses are no longer sustainable. However, what Marc said about the iPad is even more interesting. Rather than paraphrase, I'll quote the article precisely (with my apologies to Mr. Schonfeld and TechCrunch for the length of the quote):

"With all the recent excitement in media quarters recently over Apple’s upcoming iPad and other tablet computers, and their potential to create a market for paid digital versions and subscriptions of newspapers and magazines, I wondered if Andreessen still felt the same way. Does he think the iPad will change anything?"

"Andreessen asked me if TechCrunch is working on an iPad app or planning on putting up a paywall. I gave him a blank stare. He laughed and noted that none of the newer Web publications (he’s an investor in the Business Insider) are either. 'All the new companies are not spending a nanosecond on the iPad or thinking of ways to charge for content. The older companies, that is all they are thinking about.'"

"But people pay for apps. Wouldn’t he pay for a beautiful touchscreen version of a magazine? Maybe, if it were something genuinely new that blew him away. It would have to be more than an article with video and graphics though. (I agree, otherwise it’s no better than a CD-ROM)."

"Oh, and he points out, that the iPad will have a 'fantastic browser.' No matter how many iPads the Apple sells, the Web will always be the bigger market. “There are 2 billion people on the Web,” he says.' The iPad will be a huge success if it sells 5 million units.'"

Last week, Penguin showed a number of iPad applications based on its books; only one of them looked like a conventional eBook. However, all but one of them could easily be written in Flash and run in any modern browser, and the one that required use of the compass and accelerometer could probably be customized to use those features without having to be a completely native app. The problem, of course, is that Flash doesn't run on the iPad and won't run in the future, not for any serious technical reason, but because Steve Jobs hates Flash.

Writing applications for the web allows them to be used just about anywhere, on any device; writing them for the iPhone/iPod touch/iPad means that they can only be used on those devices, in the Apple environment. Time will tell if Marc's prediction about iPad sales will pan out, but why would a publisher lock itself into a single platform from a company that has a history of dictating terms to its content partners?

If you talk to executives from the record companies, they would probably say that they turned Apple into an 800 pound gorilla in the media business by ceding pricing control. The book publishers have apparently just done the same thing, in part to attack Amazon's pricing model, but at the price of giving Apple pricing control at slightly higher levels.

My opinion is that the iPad is going to be successful, more for its applications and user interface than simply for media consumption. Nevertheless, Marc's comments are on target. Publishers should build their digital businesses sustainably rather than defensively, and they shouldn't depend on the iPad to save them.