Business Models

From the FT:

Royal Mail has increased the price of first and second-class stamps by 14p to record highs, after it was given freedom to set its own prices as it heads towards privatisation.

A first-class stamp will now cost 60p, with the slower second class service priced at 50p from April 30, the UK’s state-owned postal service announced on Tuesday.

Apparently without the price rise the service is "at risk"

Moya Greene, Royal Mail chief executive, said that without the price rise the service was “at risk”.

Nothing to do with a coming privatisation play* I suppose .

(As in, if this saves the service, then it could have been done earlier and thus wouldn't need to be privatised. )

I wonder if it was put to the Public as to whether they would prepared to subsidise rather than privatise (given the biggest risk, the pension funding, stays as a public taxpayers risk anyway) they would get a different steer.

But I also think they are putting the service at risk with such a huge (25% for first class) stamp price increase as well, as the "Ratchet of Doom" system dynamic model diagram above shows. The Inconvenient Truth of this ratchet is at some point there are just not enough customers who wish to use the service. One almost wonders if ths is in fact designed to break the service as a universal one.

The irony is that they are doing this just as Internet shopping is really taking off, so the opportunities for Royal Mail are huge. Perish the thought that the public profit from it.....

* The CEO, Moya Greene,was on BBC TV tonight arguing that the best sort of public ownership is the public buying shares in the Royal Mail IPO. There is something about being asked to pay again for something you already own, while still being stuck with the huge pension liabilities, that makes you look at this "deal" offered and suspect that Joe Public is about to be shafted. But then private benefit/public risk bailouts are so de rigeur these days.....

Another interesting talk at Design of Understanding conference was by artist Luis Rey. He draws and paints dinosaurs. Now, any talk by a Spanish Londoner who draws and paints dinosaurs is interesting to start with, but he told a fascinating story which is even more fascinating.

Luis is a Dinosaur Geek - he wasn't content to just draw them, he had to get it abolutely right so started getting into paleontology and corresponding with all the leading dinosaur experts. This was in the 80's/90's when dinosaur reserach took two great leaps forward:

- firstly, more modern research and computer modelling revealed that dinosaurs did not walk upright, tails dragging on the ground, with waddly crocodile gaits. The long tails were part of the spine and were used as counterweights to the front, so the spine was held straight, horizontally, end to end. The carnivores even ran, very fast, more like ostriches.

- secondly, it was becoming clearer and clearer that many later dinosaurs had proto feathers, not traditional lizard skin, and in the mid 90's perfect feather fossils were fouind in Yixiang, China

So Luis had started drawing dinosaurs with straight spines and feathers (see picture above). And guess what - no-one wanted to publish them - because everyone knows that is not what dinosaurs look like. They told him he was barking - even though he was taking advice from the best authorities in the field at the time. The Jurassic Park movies coming out at the time took the decison to run many of the dinosaurs in the traditional poses as that is what dinosaurs "should" look like. It took the BBC's "Walking With Dinosaurs" to really change perception, and it was a somewhat courageous decision for them to do it (I suspect they could take the risk at the time as they do not rely on commercial funding - another reason to keep the BBC funding model there IMO)

It has taken most of the 90's and 'noughties for attitudes to change, and for feathered, fast running dinosaurs to become socially acceptable.

What amused and intrigued me is the dinosaur attitude problem (ie belief in things because of traditional received wisdom rather than keeping up with a changing fact base) even existed for dinosaurs.

But the lesson is that it took about 20 years from research findings to acceptance. It made me redouble my belief that we are seeing other many other "dinosaurs" all around us. I mean, if we can't even see dinosaurs clearly......

Forbes:

Social network Path has a bit of a problem – they’ve been caught uploading user’s address books to their servers without explicit permission. While it might make finding friends easier for the user, the fact it was ‘hidden’ has not gone down well. They’ve started to roll out an opt-in feature to their photo sharing software on the Android Client, with a similar option due to appear in the iOS.

From the American point of view, it’s a PR issue that requires explaining and a clear message from the team, and to be fair to CEO Dave Morin, he has apologised and explained the next steps.

But there might be a bit more of a headache in the UK. On my reading, Path is in breach of the Data Protection Act. The usual internet caveat of “I am not a lawyer” is in effect, but the plain English notes on the Information Commissioners website on the ‘fair’ use of data stress that the end users must know what is happening. Which is not the case with Path.

Indeed not.

And what goes for Path goes for Facebook, in multuplicate. Getting to that $15 - 20 ARPU to justify the IPO valuation is going to be far harder than assumed I think.

One to watch....

How to make startups attractive to women according to Penelope Trunkwriting in VentureBeat. The argument is that startups are not for women,and women don't need start ups:

The problem is that the funding world is set up to reward behaviors of 22-year-old guys. Living on very little salary, working very long hours, making your whole life your company, traveling at the drop of a hat — these are things people do when they do not have families. It’s a life that guys who are not even in a startup choose because it’s fun for guys. Women don’t choose that kind of life.

......

The thing is, women in their late 20s are the happiest they will be in their whole life. They are very happy. So I don’t think they are walking around wishing they could do a startup. I don’t think they care.

To make it more attractive they suggest 3 points.

1. Pay more money at the beginning. Women want a good house, good clothes and a cushion for emergencies. This is not sexist, this is basic research, and yes there are exceptions, but we have to talk in generalizations if we are going to talk about women as a group. Women shop more than men; women get more pleasure from buying stuff than men do. Whatever. Who cares? Women earn more than men do, so it’s a moot point. Except in the VC world, where the entrepreneur has to “bootstrap.” Women don’t like that. So VCs would have to give up on the bootstrapping mentality if they want women to do startups.

2. VCs would need to give up on speed. They would need to decide that their rate of return on investment can be slower, and they would need to learn how to invest in companies that could go a little slower. Such companies would want to take short breaks during summer vacation, for example, when the kids are home. VCs would have to be more patient, with a family-friendly policy toward growth and exits.

3. VCs would need to raise their own funds differently. You say, “Slow and easy? Then it’s not a startup!” And that might be true. But if we are really missing so many opportunities because women’s ideas are not getting through to market, then the market is probably so desperate for these ideas that VCs can afford to let them develop more slowly. And if someone would get to the market faster, well, then we are not really missing out on having women’s ideas in the status quo, are we?

Women must find their own way:

And in the meantime, let’s stop pretending that the stuff of startups is the stuff that most women want for their lives. Women should use a more current blueprint for their lives—one that takes into account what is important to women rather than what is important to men.

Questions in my mind:

- VC's have not so far felt the need to worry about female VC's, what will tip them over?

- Is the 22 year old male entrepreneur the only fundable model?

Answers on a postcard.

I was about to write down my thoughts about what happens now that Mr Arrington is no longer with TechCrunch*, until I saw Fred Wilson had written down pretty much what I would say - and even stolen the title I would have used . So, why write anything myself when I can plagiarise use Fred's words:

The media has had a lot of fun over the past week watching AOL, Huffington Post, TechCrunch, and Mike Arrington figure out how to move on. I feel badly for the TechCrunch crew including MG, Erick, Sarah, and many others. They are awesome at what they do and I feel that they've been left dangling as this soap opera has played out.

I do not feel badly for Mike. He's a bigtime player in silicon valley and he will be fine. Contrary to what many in the media say, he does not need TechCrunch as a platform to be influential. He is influential becuase of who he is, not where he writes. His reputation is made and as long as he finds his next platform, be it a venture fund, a blog, or both (how can anyone have both a blog and a venture fund????), he will remain a hugely influential force in silicon valley and tech.

But TechCrunch is a big question mark. If AOL can keep the rest of the team together, then TechCrunch has a bright future. No company is so reliant on one person that they can't survive that person's departure. But if others move on, including the people I mentioned above, then TechCrunch could lose its swag, as my son would put it. Yes TechCrunch gets scoops. That happens because it has a huge audience of the right readers and people in tech choose to leak to TechCrunch to reach that audience. But TechCrunch also has a voice, a swagger, a "fuck you" attitude that comes from Mike. That can also live on without Mike if AOL allows it. They need to keep the remaining team, the voice, and that attitude if they want to remain at the top of the world of tech media.

I also wonder what will happen to the European assets in the business, I think TC UK has been a good force over here.

Fred also alludes to the thing I have always really liked about TechCrunch, and in my opinion is a real jewel in its crown - Crunchbase:

There's also a super awesome asset inside TechCrunch that doesn't get much attention. It is Crunchbase.....Crunchbase, which is free, almost open, almost peer produced like Wikipedia, is fantastic. Whatever happens to TechCrunch AOL, please don't mess up Crunchbase. It is the premier data asset on the tech/startup world and an incredible example of how free beats paid in the online world we live in.

I also feel it is incredibly valuable, and if correctly used is (IMO) longer term worth more than TechCrunch the Blog - as many have pointed out, there are so many others doing what it does now.

*At the moment. The lady has yet to sing the death aria......

GigaOm notes that firing Carol Bartz is not nearly the whole problem, its goes deeper than that:

There is one place Yahoo can easily finish first: the company with the worst and most ineffectual board with the spine of a centipede. I have not been a fan of Yahoo’s board for a long time and nothing really has changed my mind. Even before the firing of Carol Bartz, Yahoo’s board has been taking actions befitting a coalition government. Yahoo’s stock performance only proves that fact. From a high of $33 a share in October 2007, Yahoo is now down to $13.50 a share.

I agree...I think Bartz has been made the scapegoat (sure, it comes wuth CEO territory) but getting a new CEO is not going to fix the problems of a company stuck in the peanut butter. There 's lots of talk about M&A, new businesses, back to basics etc etc - but only a mass transfusion of new blood at the head will work now.

In my opinion, of course....

Update - seems to be Carol Bartz's view as well

Ousted Yahoo CEO Carol Bartz has given an exit interview with Fortune magazine’s Patti Sellars, in which she says about Yahoo’s board of directors: “These people f*#&ed me over.” She also called them “doofuses.”

This has been an entertaining week....

Two people were outed in Parliament for super-injuncted sex in the last few days, driven by the names being bandied about on Twitter and other social media sites. One was polishing the glass ceiling with a senior colleague while his bank, a major UK one, was crashing - and this potentially has all sorts of corporate malfeasance implications. The other is a premier league footballer polishing his street cred by bonking a "big brother" z-list sleb*.

The mainstream media of course has gone gaga over all this, virtuously citing freedom of the press. But if you look at what they are doing, the reason isn't freedom of the press. They have said virtually nothing about the banker's bonus bonks, and pursued the footballer relentlessly because - lets face it - most readers don't really understand the banking fiasco, but an on-the-ball footballer is far easier to grasp,and thus sell papers.

Also sadly amusing is the UK judiciary, who have been caught defending the rights of the rich red handed - NYT:

The Sun [Newspaper] then went to the High Court, asking it to lift the injunction on the grounds that there seemed to be few people left who did not know ........ was the man in question.

But Justice Michael Tugendhat turned The Sun down, saying the Twitter campaign had actually demonstrated the need for the injunction.

“The fact that tens of thousands of people have named the claimant on the Internet confirms the fact that the claimant and his family need protection from intrusion into their private and family life,” the judge said.

That these people like to use the media and judicial system to publicise the good and privatise the bad, and that this hypocrisy was the only reason why the social media stories carried so well, did not seem to enter the judge's head. The reason the law is an ass is that so many practitioners are clearly assholes.... campaign indeed!

Now, MSM, if we can just get back to bank malfeasance after this - that after all is the real role of a Free Press...... at the moment the only people going after Fred the Shred in any detail are on the blogs.

(* Personally I think "Premier League Footballer Does Not Bonk Z List Sleb" would be the Shock Horror news - I thought this sort of thing was in the job description)

Apparently Amazon is selling Lady Gaga's new album for $0.99,whreas iTunes wants to flog it for $11.99 - AllThings Digital.

It’s not free, but it’s close: Amazon is selling digital downloads of “Born This Way,” Lady Gaga’s newest album, for 99 cents.

That gets you 14 songs and a digital booklet. The same album goes for $11.99 at Apple’s iTunes, which seems more interested in pushing a 22-song special edition for $15.99–that’s the one currently featured on the retailer’s home page.

Back in the old days, when people used to buy CDs, it wasn’t unusual for Best Buy et al to mark down big albums from $16 to $10 as loss leaders less to get people in the doors: The retailers took a loss on the discs in the hopes you’d buy a stereo or a TV, too.

Here, it looks like Amazon is hoping to use the sale to push its cloud music locker. Promotional copy reminds shoppers that if they buy this or any other album, they can upgrade the 5 gigabytes of free storage the service offers to 20 gigs.

Well, at least its not a Freeconomic model. One also hopes Lady Gaga gets a share of all the other things digital (and otherwise) that Amazon is hoping to sell to the buyers of her music....

Let the eMusic Turf Wars begin. Apple. Ball. Court.

Very funny moment today on Techmeme - two articles, one below the other - first one is Dan Lyons on the Daily Beast and says "Facebook Busted by clumsy smear campaign":

The social network secretly hired a PR firm to plant negative stories about the search giant, The Daily Beast's Dan Lyons reveals—a caper that is blowing up in their face, and escalating their war.

For the past few days, a mystery has been unfolding in Silicon Valley. Somebody, it seems, hired Burson-Marsteller, a top public-relations firm, to pitch anti-Google stories to newspapers, urging them to investigate claims that Google was invading people’s privacy. Burson even offered to help an influential blogger write a Google-bashing op-ed, which it promised it could place in outlets like The Washington Post, Politico, and The Huffington Post.

The plot backfired when the blogger turned down Burson’s offer and posted the emails that Burson had sent him. It got worse when USA Today broke a story accusing Burson of spreading a “whisper campaign” about Google “on behalf of an unnamed client.”

Second one is Bloomberg and says "Why Facebook needs Sheryl Sandberg" - to quote:

Ever since Silicon Valley started turning out companies with beautiful growth charts, entrepreneurs and their investors have talked about the need for "adult supervision"—a seasoned executive who can take over a startup from its inexperienced founders, guide it through the hazards of hyperkinetic expansion, and convert a great idea or breakthrough technology into a bona fide business. Today, however, young founders generally want to remain at the helm of their companies, and there's a new shorthand for the kind of leader who's willing to serve as a second-in-command, complementing without overshadowing the wunderkind entrepreneur: a Sheryl Sandberg. As in, "we're growing, but God knows how we'll make money. What we really need is a Sheryl Sandberg."

That's a more traditional PR puff piece, but the juxtaposition is tres droll - talk about bad timing for a piece about excellent adult supervision!

Here is the top paragraph of the churnalism plant-piece:

I wanted to gauge your interest in authoring an op-ed this week for a top-tier media outlet on an important issue that I know you’re following closely.

The topic: Google’s sweeping violations of user privacy. Google, as you know, has a well-known history of infringing on the privacy rights of America’s Internet users. Not a year has gone by since the founding of the company where it has not been the focus of front-page news detailing its zealous approach to gathering information – in many cases private and identifiable information - about online users.

And this from Facebook of all people - I mean, whoddathunkit?

There is probably reams of stuff that could (will) be written about "why" and what it all signifies - but IMHO its in their DNA, end of. Quite where this leaves Burson Marsteller, the PR agency doing the smear....sorry, placement of differently-viewed narratives to educate consumers (what's that - you didn't know PR Agencies did this sort of stuff? Tsk. The PR Code of Ethics would make PT Barnum blush ) remains to be seen...... those that live by the PR sword etc

Update - Burson-Marsteller issued an apology, saying:

"The client requested that its name be withheld on the grounds that it was merely asking to bring publicly available information to light and such information could then be independently and easily replicated by any media. Any information brought to media attention raised fair questions, was in the public domain, and was in any event for the media to verify through independent sources.

Whatever the rationale, this was not at all standard operating procedure and is against our policies, and the assignment on those terms should have been declined. When talking to the media, we need to adhere to strict standards of transparency about clients, and this incident underscores the absolute importance of that principle.”

"Should have been declined"....aka they got caught PT Barnum is indeed blushing......

The discussion of Skype valuation has been largely a fact free zone (or at least there has been very little comparative data in the chat-o-sphere) so I decided to do my own, looking at their last SEC submission (shows total, connected and paying customers and revenue 2006 - 2010). I also looked at the reported data for 2005 (when eBay bought them) and what the Skype owners have told the press about early 2011 (c 6.5% paying customers, c 170m connected customers). The key data is set out above in the chart, explanation below.

The red line looks at ARPU/Connected user - total revenues have risen from c $75m in 2005 to reported revenues of 860m in 2010, and (on reported run rate) over $1bn for 2011 by May 2011. Total connected users have risen from c 10m users in 2005 to c 170m users. that means the ratio - ARPU/user - has declined from c $7 per connected user to c $6 per connected user - or from 100% of 2005 value to 85%, as shown on the chart.

(I used the 2005 basis set at 100% so you can see the relative shifts of different datasets to the same relative magnitude)

Similarly, you can do the same calculation for ARPU/paying users. In 2005 paying users were about 9% of all users, now they are c 6.5% (yellow line) - a decline from 100% to 72%. Fortunately they spend a little more each, up 18% from 2005 (maroon line).

As you can see, the data by and large is a slow slide to the worse, which is where the Microsoft valuation comes in. Microsoft paid c $8 bn (deducting Qik) for something that was valued at c $2.75bn about a year ago - a c 3-fold increase.

In fact, revenue jumped from c $620m in 2009 to $860m in 2010 (to a deduced c $1bn run rate now), a c 175% increase. Increase in users has been similar (yellow line shows fairly constant ratio 2009 - 2011).

Dividing a 3-fold increase in price with a c 175% increase in underlying revenue shows us that Microsoft is assuming that each user is roughly double the assumed value a short year or so ago. (To be fair, the 2005 eBay price had an assumed user value c 5 x the 2009 price - now that's overpayment!)

To which you then have to ask "what has this deal done that doubles the user value?" In fact its worse than that, as the last few years have seen a jump in use of video, which is increasing cost/user while revenue/user is at best static, and that is only going to get worse* - so this deal has to more than double value! By the ludicr...sorry, growth priced value/revenue multiples of Facebook (80x) a mere 8x sounds positively dull, but then you normally expect a company of Skype's age to be profitable.

Microsoft is clearly struggling with this same question, hence the suggestion today that "free" video will get advertising on it, which seemed to go down like a lead balloon. What this shows is that there is going to be a lot of pressure on Microsoft to make this perform economically, but without some very good execution skills, the relatively high privece (for what it is) makes it more likely to be a turkey than a high flyer than otherwise.

*Though as my colleague Paul Lancefield notes in the comments, owing to the P2P (Pay 2 Play ) nature it is a lot better off than "cloud" based video streaming servives