Twitter is not a social media company – like FourSquare, it is an “80/20” company

Twitter’s testing a new redesign – that makes it look more like Facebook. This comes on the heels of disappointing user growth that sent the stock plummeting as user growth is stalling at ~241M – compared to Facebook’s ~1.2 billion. Twitter has a long way to go to grow its audience and really generate value from its advertising and potential commerce products. Ostensibly the redesign is meant to deliver a more mainstream experience that will attract more users and drive higher engagement

 

But, in trying to be Facebook, is it chasing the wrong pot of gold?

 

Contrast Twitter to Foursquare…Foursquare continues to limp along, as far as big social products go, at 45M users worldwide (30MM as of 2012) while it repositions itself as a local recommendation engine – a crowded space dominated by Yelp.

 

But Foursquare may have realized something that Twitter has not, something that may be crucial to both companies’ survival: its real value may be in selling data to others, not in aggregating the biggest audiences possible and selling ads.

 

While Foursquare expects to 10x its revenue from 2012 to 2013, it is still only estimated at $20M. Without a larger, more engaged base of users, the ad/merchant deals segment of revenue isn’t likely to grow (in comparison, Yelp, the local recommendations leader, expects annual revenue at ~$224M on a user base of almost 3x Foursquare’s (~120M)).

 

So where is Foursquare’s growth engine? Selling the data that comes from its core users.

 

Foursquare recently inked a deal with Microsoft to provide deep integration into its tracking and location services for Microsoft devices. It seems that, in spite of its relative limited mass of users, those users allow Foursquare to collect a significant amount of explicit content (reviews) and data exhaust (location and movement patterns) that is actually valuable to a lot of other people. Beyond Microsoft, Twitter (Vine), Yahoo (Flickr) and Pinterest are all leveraging the data generated by Foursquare’s core users to earn revenue in ways other than simple advertising and merchant deals.

 

Foursquare is a great example of an “80/20” company which generates value via the Pareto principle – a network with a small core group of users (~20% of online population) that generates valuable content which can be monetized by presenting it to the other 80% of the population who do not necessarily use the product itself.

 

Twitter’s recent moves– looking to create a more mainstream-like experience, courting advertising, expanding into commerce – all presumes it is a business based on scale – huge audience, huge impressions, long engagement. But the reality is far from this as very few users actually tweet or interact. The relatively small set of Twitter users (which, remember, is one-fifth the size of Facebook) primarily are on Twitter to read the content and conversation that is generated by the even smaller set of highly active users. This use case does not support a move to a Facebook-like experience. Certainly Twitter has been building to this for quite some time, in particular by introducing photos and videos directly into its news feed, hoping to get Instagram-like engagement.

 

But as Foursquare shows, there is a lot of money left on the table if Twitter only chases Facebook. Certainly Twitter has forged media-driven relationships to feature Twitter content (notably with CNN and ESPN), and even hired Vivian Schiller (formerly of NPR and The New York Times) as its Head of News Partnerships – but they have huge opportunities with information companies who trade on trends – financial companies, advertisers, news outlets – that may suffer if they blindly chase user acquisition and advertising.

 

Instead, Twitter should take a portfolio approach similar to Foursquare, and ensure it has initiatives that:

• Make its power users happy. They are the ones making Twitter valuable. They are the ones they should be looking to super-serve (they obviously still need to pursue new users, just not at the expense of power users). How can Twitter build power users’ brands? How can Twitter help them monetize? 
• Build on its strength as the leader in real-time conversation to be the leader in real-time insight. Don’t surrender this to partners. Conversation will continue to drive acquisition, but being able to convert that into insight will accelerate the revenue opportunities. Acquire and hire the analytic and editorial talent to generate revenue from this rich data source.
• Monetize the news feed content via their API. Twitter has rightfully guarded access to their API given the riches it can generate. Building out their insights capabilities will require them to be even smarter about access to their API (and for many potential clients, insights will be even more valuable than the API). But…certain conversations in the news feed will be valuable to different partners. Twitter can respect customer privacy, insulate their insights business and still enable key content from the API to be monetized via partners.

 

At the end of the day, the pot of gold for Twitter is not in just chasing Facebook. In fact, blindly doing so could erode its biggest sources of value.

If it wants traction for Surface and Windows 8, Microsoft has to embrace how it got popular in the first place

The results are in, and they are not good: Microsoft took a $900M write-down on unsold Surface inventory, and the overall reception from consumers to Windows 8 in general has been lukewarm - to be generous.

For the record, I have a Windows 8 PC, and I’m a fan of the Metro interface. It’s visually slick and pretty intuitive after 1 minute of messing around with it if you enter with an open mind. But to get mindshare in a market where Android and Apple effectively have a duopoly, Microsoft has to be radical in order to breakthrough.

Here’s what I would do if I led MSFT: I would give away, for free, Surface tablets to any corporate customer who wants them.

Here’s why: Windows 8 is pretty much at parity with iOS and Android - if it lacks, it does so in the breadth of apps available. But it’s not orders of magnitude better. Given that it is simply at parity, and has a weaker app marketplace, there is absolutely no incentive to switch.

They have to get trial. Just give away the tablets that they’re planning to take a massive write-down on anyway.

Why focus on corporate customers? I think Microsoft is myopic as to how they got into every home PC in the 80s and 90s. They didn’t have the best product - Windows 95 was still leaps and bounds behind what Apple was doing years prior to that. What got consumers to buy Microsoft was that they used Microsoft at work, got used to it, then bought a computer with Microsoft’s OS for their home only after feeling comfortable and getting exposure through work.

I think this is the only way to get in the game for Microsoft. If they go directly at consumers, they’re likely only able to match Android and iOS on features, and their marketing certainly would never be creative enough to change their stodgy positioning. Instead, get corporate employees messing around with their free new tablet, and convert a proportion of those to people who use it in their personal lives, who may then be more inclined to get a Windows Phone the next time they upgrade....and try to gain momentum that way.

An alternative: Give away a Microsoft tablet to anyone who buys a Xbox One. I’m more bearish on this though because at least with corporate clients, there is a productivity angle with Microsoft Office that a corporate employee could immediately engage with, and the bar to “impress” a consumer is going to be much, much higher.....

How Apple can shift consumer search from Algorithmic to Apps

Apple’s hiring of Amazon’s William Stasior is big news. Stasior ran Amazon’s A9, the search and advertising unit for Amazon. Now he’ll be running the Apple’s Siri team, its voice-search / assistant product.

What might this signal from Apple? The obvious is its doubling-down on search and taking on Google, Microsoft, Amazon, Facebook and Twitter in the process.

Search is such a strong action-intent process, which is what makes it so valuable to advertisers, retailers, publishers – anyone looking to capture consumer attention. When searching, consumers are looking to learn (driving significant traffic to media sites), do (local search is critical for restaurants and bars) or buy. Google has been the starting point for most desktop searches for at least a decade. But now this starting point is shifting:

• AMZN now commands a third of online searches for products and is growing 73% YOY.
• Social Media (Facebook, Twitter) in some markets is driving almost 25% of news traffic
• Yelp is second only to Google for local search, with FourSquare and others entering the local search market  

Apple could begin to expand the footprint of its search with a very differentiated offer: it can provide incredibly relevant and deep vertical category search. Recipes, restaurants, photography, automobiles – anything. How? Via its App Store.

By last count, Apple’s App Store has over 650,000 apps, in every category imaginable. Integrating Siri across all of those apps to return search results in a way that isn’t solely algorithmic. Apps can be deeply category specific, powered by careful human curation (like astronomy app StarMap) or extensive crowd-sourcing (like Yelp).

Two critical implications:

• Significant threat to any existing search provider. For example, Siri can provide a direct entry point to retailer apps for product search rather than Amazon. The installed base of iPhone, and the greater ability to monetize iPhone users (higher income, higher likelihood to purchase) makes a particularly acute threat. 
• Radically new media, advertising and lead generation landscape. Though the battle between native mobile apps and mobile HTML5 experiences is early, the consumer is currently voting for apps. SEO falls apart when Apple is using voice initiated search threaded across its app ecosystem. Advertisers have an entirely new medium and set of relationships to develop – with app makers. Retailers will need to invest more in getting their app installed by fickle consumers more than ever, as well as partner with relevant category apps leaders to ensure they capture their fair share of intent-driven search consumers.

ebay’s platform transformation: friend to retailers, enemy to UPS

ebay has been a bit on a rebound of late, as The New York Times recently noted. In the article, it notes that its mobile strategy has been a key driver for turning the tide. But it doesn’t really say why – we know that much direct commerce isn’t moving to mobile (estimated $10 million in total sales –  though obviously mobile influenced shopping is growing much faster).

No, as this VC astutely observes, mobile helped reinvent the ebay experience. The desktop eBay website is a mess and difficult to navigate. However, on mobile, ebay reinvented the experience, made it super simple, and has gone deep into verticals (auto, fashion) to even better deliver a focused, simple, clean experience.

Now ebay beats AMZN to the punch by launching same day delivery in pilot in San Francisco. But 2 seconds of further digging reveals an interesting wrinkle: ebay is merely the platform and infrastructure for established retailers (Target, Best Buy, Macy’s, etc.). It’s not using power individual sellers (yet, anyway) to fulfill on these orders.

This is a HUGE move with big implications.

Certainly many retailers have liquidated excess inventory on ebay before, so the “frenemy” relationship has been in place for a while. However, if it scales this effort quickly, the most effective way to do this would be to launch with national retailers rather than individual sellers. Why?

• National retailers have a national geographic footprint to fulfill on deliveries – otherwise it requires painstaking partnership conversations with dozens of retailers in every geography eBay seeks to enter
• Non-core eBay consumers – incrementally acquired customers – will be way more likely to buy from an established retailer than via individual sellers

ebay is now starting to reap the fruits of the GSI commerce acquisition. It is becoming a “meta” retailer that basically is fueled by other retailers, leveraging assets from GSI.

While conceptually this is what ebay originated as – an online marketplace of individual sellers and buyers – the fact that it is aggregating retailers in this way makes it different. In the early days of ebay, individual sellers typically didn’t have any strong brand presence and relied on eBay for branding and traffic.

Now, we’re seeing established retail brands who already have direct consumer relationships share those relationships to eBay – which is huge.

What will happen is that either eBay over time is one of two things:

1. eBay becomes the go to provider consumers – using the retailers who have bought into the platform to fulfill and leaving all the messy inventory, logistics and store management to the retailers – effectively only supporting the variable costs involved in couriers, or
2. Retailers will revolt from eBay, but may not have other strategic options. There’s just no viable way for EVERY retailer to support same day delivery via the courier model. Instead, retailers will come under even more pressure (hard to imagine, but they will) to create incredible experiences on their own properties in order to attract consumers to the retailer experience, but then use eBay as a fulfillment method (i.e., options would include pick-up in-store, receive in 3-5 days via UPS or receive same day within two hours), but at least they’ll maintain the customer relationship directly.

Viewed this way, perhaps the real loser if eBay same day takes off is UPS…..what is the same day courier model for UPS?

Finally, note that ebay deliberately moved to simplify its experience on by reinventing itself via mobile, and now it seeks to leverage the physical infrastructure and brand assortments of established retailers - so while conceptually it still resembles a marketplace, ebay is straying far from its roots of an online flea market and becoming more of a retail aggregator.

Contrast this to Amazon, which is moving to selling more and more things itself and complementing its assortment with individual sellers. Each is moving in the other's direction as AMZN seeks to dominate the end-to-end retail value chain while ebay is looking to other retailers to reinvent its business model.

Startup Throwdown - Yelp vs. Square vs. Groupon vs. FourSquare

Four heavyweights – Yelp, Square, Groupon, FourSquare – have set their sights on what has been, over the last few decades, a tough nut to crack: the local business owner.

Each begun focusing on a specific problem:

• Yelp – crowd-sourced reviews to help consumers choose where to go
• Square – simple POS solution for merchants
• Groupon – ridiculously low-priced deals to give consumers value and help merchants acquire customers
• FourSquare – location based check-ins to meet/find friends and then help merchants identify and reward the most loyal

But now they’re collectively focused solving a broader range of problems for local businesses (reservations, bookkeeping, marketing), putting them on a collision course with each other. Three of these four have experienced flattening growth, which has driven them to look for these bigger opportunities. The one still growing? My bet for the winner: Square.

Why Square? The fundamental unit of survival for a small local merchant is getting paid. Square makes it dead simple and this is their core competency. Others can copy (as Groupon is) but these players all have relationship baggage with merchants:

• Yelp has on-going conflicts with establishments in asking (blackmailing?) merchants for advertising spend to show more positive reviews
• Merchants have a lot of backlash against Groupon as they’ve learned steep discounts directed to the most price-sensitive customers surprisingly doesn’t lead to loyalty
• lack of traction with mainstream America for FourSquare, where the lack of urban density and foot travel lead a lot of people to not “get” it. FourSquare has since pivoted into Yelp’s space and its mobile-first focus may help them gain ground, but they have a lot of it to make-up.

This gives Square a big head start. With this foothold, they have many degrees of freedom to extend other services to merchants – accounting and marketing/lead gen solutions being the next most difficult challenges for local businesses.

Two other players to watch in the small business space which could make more noise than Yelp, FourSquare or Groupon are Intuit and ThriveHive. Intuit already has a significant user base with its accounting solution for small businesses (they themselves are trying to rampup in thepayment processing business). ThriveHive seeks to be the digital marketing as asubscription solution.

What a powerful combination if Square were to buy ThriveHive. Or if Intuit were to simply buy both. Their purchase of Mint a while back shows they’re willing to acquire when someone has them beat – we’ll have to see.

ESPN's Disruption

First of all, if you remotely enjoy sports and haven't read Spencer Hall's Every Day Should be Saturday blog, stop what you're doing right now and go read it. Effing awesome.

It is the future of sports content - fun, entertainment-style-journalism that is commentary and snark - and one-half of the reason why ESPN is beginning to be disrupted.

Outkick the Coverage covered Yahoo! Sports' ascent in the online sports content world, which started to validate something that I've been thinking for a long time: If ESPN didn't air live sports, would it still be relevant?

I think the answer, sadly, is no. This is the second reason ESPN is starting to get disrupted.

This pains me because in the 90s, as ESPN became dominant, and I was in college and then a bachelor, many of my Saturdays and Sundays were spent hungover watching the same exact episode of SportsCenter over and over, for like four hours in a row. It makes me nostalgic for my 20s.

But the "content owners" - the sports leagues - have forward integrated into distributing their own product. The dual revenue model of The Worldwide Leader in Sports is hard to ignore and it has enticed professional leagues to make this move.

ESPN currently dominates the cable subscriber fee market - cable operators reportedly pay $4 per subscriber to carry its programming. They also drive significant revenue through advertising. This hasn't gone unnoticed by the major sports leagues....the NFL, MLB, the NBA, the Big Ten, even the NHL all have their own networks.

Beyond the subscriber fees, ESPN's live sports content in particular is extremely valuable to advertisers as well because (1) it is DVR-proof since it is primarily consumed live and (2) its audience skews male and young, a demo that is very difficult to efficiently reach in an advertising media buy.

Cutting out the middleman and taking more of that money for themselves is becoming too hard to ignore for the sports leagues. ESPN seems to be attempting to counter this move by "white labeling" its service to collegiate sports conferences and teams - see the SEC Network and the Longhorn Network of the University of Texas - where it basically runs the tv property on behalf of the partner.

So it seems inevitable that the Leagues will eventually just fully distribute the content themselves given the money on the table and the digital technology that enables them to do so. Case in point: MLB's At Bat is one of the highest selling apps of all time and they are connecting directly to the consumer with that relationship with no network and cable provider interfering.

Can the leagues generate enough content in their respective off-seasons to capture enough audience to command subscriber fees and ad revenue? Fantasy league advice, Draft coverage, archive games, minor league or D-league coverage, sport-related movies...there is a treasure trove of content which the leagues own or can access cheaply....and believe me, men will watch (see: ESPN Classic).

So technology will inevitably kill one of ESPN's key assets - exclusive rights to air live sports content.

Without exclusive content arrangements, what does ESPN have left?
1 - Recap content - highlights and recaps of live games
2 - High-end or investigative journalism
3 - Commentary or "entertainment journalism" (my totally made up term) that relies on audience interaction and "personalities" which riff their opinion on the sports happenings on a given day

Here's the problem: A lot of their content is in category #1 (careful* analysis suggests this is about 50-60% of their content (*not careful at all, but based totally on what I observe when I watch ESPN)). The thing is, recap content is a commodity. Everyone has it and many decent sports outlets have been able to adopt ESPN's snarky commentary in airing highlights. They do it well, but anyone can do it.

About 20% of their content is investigative content and 20% is Commentary (again, based on careful* analysis). But today, they're not winning in these areas online.

Here is sports.yahoo.com versus espn.go.com:



Not on the graph but at 20MM uniques / month (per their media kit) is sbnation.com. They've raised $23M in VC funding (also in the mix is Bleacher Report, with $18.5M in funding). SB Nation is already syndicating their content USA Today and CBS Sports.

Investigative and Commentary are differentiated content that is not a commodity and takes editorial talent to do well. Sure, ESPN can build up in this area quickly given its financial resources - and it's not like the newspaper business doesn't have a stockpile of experienced editorial talent from which to recruit. But for a growing number of sports fans, they are not the worldwide leader online for "entertainment journalism" that sports fans seem to crave.

So is ESPN doomed? No. But they suffer from a growing "Microsoft"-like sentiment from the audience that limits how loyal they will be if they lose live content. For example, their extension of the current BCS Bowl system by buying the rights through 2014, was met with a lot of backlash as the contract is perceived to be a roadblock towards a true college football playoff. Fans perceive their coverage of college football to be biased based on the contracts it has with certain conferences, like the SEC (home of the Florida Gators, who are awesome).

I look for parallels in the video game industry, in particular Zynga and EA. Video Game studios have unique creative talent. It is difficult to create content as a unique asset and scale it and develop it. Distribution - as a process - is commoditized. Anyone can publish (see this very horribly written blog you're reading). Aggregating an audience,however, is very hard to do. It requires technical competency as well as creative competency. Zynga and EA face these same challenges and they are making acquisitions to bring in creative talent. Both Zynga (primarily through Facebook but beginning to in other direct-to-consumer online channels) and EA (primarily through CPG-style retail relationships but beginning to build in online / direct-to-consumer) are good at distribution and aggregation, but have been acquiring to fill the gaps with creative acquisitions.

And so similarly, if it loses the live content, look for ESPN to do just that, with SB Nation in particular being an attractive asset for them to bring in.

But...realistically, they probably have at least another 10 years of being able to competitively bid for live content. In that time, SB Nation and others will get bigger, get more audience...and may not easily be purchased. And, if ESPN chooses to go big anyway and make an expensive acquisition then (rather than relatively cheaply now), audiences and creative talent are fickle. Just like how the Engadget team left AOL, there's nothing to say that even after an acquisition ESPN could retain the editorial talent it expensively purchased.

So ESPN is facing the classic disruption. Will it act now or pay a lot more later and still potentially lose?

Groupon's move into Loyalty Programs

Groupon takes a cut of each groupon sold - up to 50% of the coupon value. Most retailers (excluding high-end luxury retailers) achieve gross margins between 20 - 30%. They are high variable cost businesses for which consistent use of Groupon may not be sustainable.

Gap and Old Navy have done some national deals with Groupon of course. But these national players, by virtue of their size, have more leverage with Groupon, and probably don't have to shell out the full 50%. And, I would argue, that these are meant as infrequent awareness-driving promotions that the Gap won't frequently do.

The greater a businesses' reliance on variable costs, the more risk they incur with a Groupon. Sure it's an enormous vehicle to drive traffic and trial - but promotions don't always translate into loyal customers. It could just be a one time bump where the retailer effectively gives money away. Unless, of course, the business is such that its resources are idle when there's no customers coming through the door. That is, they have a lot of high fixed costs with low marginal costs.

Think of restaurants, spas and gyms. They have to manage capacity and spend to operate at 100% utilization, even if they are seeing only half of that. If they use Groupon to fill those empty seats at 50% less revenue, that is actually better than making no money at all.

Now, Groupon appears to be making a play for loyalty cards and helping to manage some of the promotional aspects of a grocer's existing loyalty program. If it can scale this capability, this is great news for Groupon. It gives them another offering that allows them to appeal to traditional retailers whose high variable cost structure may not allow them to normally do a deal (or do deals as frequently) on Groupon.

Is it worth $3 million just to grow a music download store?

Is it worth it for AMZN to run a promotion which costs $3 million to grow its Amazon MP3 Store + Cloud Player?

$3MM gets people aware and buying from Amazon MP3 for sure. And gets them trial of Cloud Player. Here's a hypothethical, very rough model of what they could hope to gain economically from this:



OK, not too shabby (totally appreciate that there a lot of assumptions about revenue per user, conversion to paid cloud drive, light versus heavy downloaders, and what the lifetime value of these folks may look like).

But that seems to be a lot to pay for if we're looking at this solely as a play for its Music business.

Not sure if this thinking is going on in Seattle, but this seems to be a bigger play for digital media and device ownership.

What does that mean?

With products like Cloud Player, AMZN Streaming Movies (bundled for free with Amazon Prime by the way), AMZN App Store…if they can own all of these media customers, they can deliver a rich ecosystem for Kindle and impending Amazon Tablets, that syncs across all your devices (like Apple already does).

And it all starts with Cloud Drive, which is the hub for movies, books, music, apps, magazines, etc. so there is a seamless, synchronized experience everywhere for the consumer.

This isn’t solely about music. It's AMZN play to own media sales – and the devices on which they are consumed – as we leave the physical world behind. It's a broad play to go after Apple, using Google's Android platform in the short run, and then possibly their Kindle platform as a general purpose device in the long-run.

In that context, $3MM is really not a big price to pay.

Now, everyone can invest in a startup

GSV Capital will begin offering a publicly traded fund that will invest in private companies which have "$100 million and $1 billion in valuation, with revenue growing at more than 40% annually"

Will this be competition with venture capital firms? Certainly, GSV will provide liquidity for entrepreneurs. Exchange Fund and SharesPost provide liquidity today, but not on the same scale, and not appealing to retail investors.

Might GSV drive valuations higher artificially? As a publicly traded company, they'll be subject to the scrutiny of Wall Street just like everyone else. They'll have to generate returns over a shorter timeline than venture capital firms. With that increased sense of urgency, there may be some bias to overpay to ensure it gets a stake in those fast growing companies.

They are already carefully positioning themselves as allies to venture capital firms, however. No taking board seats, and a willingness to partner for recruiting and deal sourcing.

For entrepreneurs, the ability to get at this additional capital should be a positive. While the allure of cash may lead to looser operating discipline (see "fat startup" risks), this will certainly enable more capital-intensive startups to scale (think green or biomedical startups).

As for the investor? How will GSV perform due diligence on privately held companies? They'll rely on their sister company NeXtup: "NeXtup Research does not have inside information but gathers data through its proprietary methods". Buyer beware indeed.....not comparing this to CDOs or other complex securities....but the more information asymmetry for the investor, the higher the risk.

Week 4 - Top 25

Here is my Week 4 Top 25.

This is based on three factors (equally weighted):
1 - Quality of Resume
2 - Eye test - how good they look playing
3 - My subjective judgment of how teams would perform against each other in a head-to-head matchup

1 Boise State WAC
2 Oklahoma Big 12
3 Ohio State Big 10
4 Oregon Pac 10
5 Alabama SEC
6 Stanford Pac 10
7 Auburn SEC
8 Arizona Pac 10
9 TCU Mountain West
10 Wisconsin Big 10
11 Florida SEC
12 NC State ACC
13 Oklahoma State Big 12
14 Miami ACC
15 Texas A+M Big 12
16 Oregon State Pac 10
18 Utah Mountain West
19 USC Pac 10
20 Iowa Big 10
21 South Carolina SEC
22 Nebraska Big 12
23 Michigan Big 10
24 Arkansas SEC
25 Nevada WAC