The fundamental flaws of "Swapping Networks" (most of them anyway)

It became clear to me a few years ago that I wanted to get involved in start-ups. In the long run I knew I wanted to start my own company, but in the short run I was open to cutting my teeth at a start-up in progress. Last November / December I began a long process of thinking through three really important things:

1) What types of businesses excited me
2) What types of businesses have a proven track record of big time success
3) What opportunities were at the intersection of 1 & 2 that had yet to be built

I quickly found the intersection of my interests and a key success factor... it was all about Network Effect for me. A network effect business is a business whose value to end users is directly related to the number of other users using the service / product. The classic example of a network effect is the Fax Machine... not all that useful if you are the only owner of a fax machine... more useful when there is another owner, and incredibly useful if there are millions out in the world. More recent examples are products like Instant Messaging, PayPal, YouTube, and eBay. (note that 2 of these examples are eBay business...which is why last September I stated that eBay was actually in the "Network Effect Management" business)

Ok, so now I knew I wanted to get into the "Network Effect" business... but many of the "obvious" network effect opportunities were already being built out:

Communications - Done (IM, Skype, etc.)
Payments - Done (PayPal)
General Purpose Marketplace - Done (eBay)
Social Network - Done (MySpace)
Job Network - Done (LinkedIn)

Yet, despite this situation I really wanted to find a network effect business to build, and I felt as though eBay's General market place could be attacked potentially by "niche" community sites focused on creating a marketplace for goods. Around this time two things happened:

1) I started brainstorming ideas with my friend Josh Hug
2) I discovered Peerflix, which is the DVD trading marketplace.

At first I thought Peerflix was a GREAT idea and thought about ways to go after similar markets (such as CDs, Video Games, etc.)... but Josh & I quickly realized two things:

1) Product specific swapping sites were bound to become CROWDED markets.

We figured there would be 2 or 3 CD swapping sites and at least 2 or 3 video game swapping sites popping up. This analysis was pretty close to dead on... LaLa.com (CD trading) launched earlier this year, and Swaptree (a generalized trading platform for CDs, DVDs, Books, Video Games) has launched in closed beta.

2) All of these sites suffer from a number of fundamental Economics 101 flaws:

- Supply won't meet demand and you will end up with market failure: When a new product hits the market there simply won't be enough supply of this product (DVD, CD, etc.) to meet the demand of the users.

- Consumer are collectors of content they like and traders of the content they don't like:

People love to collect the books they read and put them on their bookshelf for their friends to see. Even though they are likely to never read the book again, they aren't all that interested in parting with the book if they liked it and believe that by displaying the book it says something about who they are.

Movies, unlike books, are often consumed more than once. I must have watched the movie Caddie Shack 100 times in college. If you really like a movie, you are holding onto it.

Now because you can basically "copy" a CD by ripping it, and then burning the content onto a CD, this specific issue is less of a problem for CDs.

3) Another problem of swapping networks is setting "Fair Market Value". Does my Ferris Bueller DVD really have equal value to The man who cried as Peerflix would have you believe (each are worth 2 peerbucks). In the Swaptree world it gets even harder to figure out fair market value because I could send out my Ferris Bueller CD to someone and get in return the best selling book Freakonomics. Is this a fair trade? I don't think consumers are going consistently feel like they are getting fair market value for their goods.

Here is the last fundamental flaw for trading sites... there is already a trading site that exists that solves ALL the problems listed above, it is called eBay! But wait you say... eBay isn't a trading site, it is a marketplace where goods are SOLD, not swapped. I believe that PayPal accounts have turned eBay into a trading site, where you get Fair Market Value for all your products (because you have a critical mass of buyers and sellers) and you take that value and dump it into your PayPal account. Then you use that same PayPal account to "purchase" a new item, like a book, DVD, CD, or whatever you want.

So for those people looking to get rid of the books, DVDs, CDs, and video games that they don't want... there is already a perfect trading site... eBay.

All this analysis brought Josh and I around to a different idea. That idea is Shelfari. We believe that Shelfari will meet the needs of an under served market, and of course, but product has numerous network effects.

Over the coming weeks I will be posting more about Shelfari, and why we think it is a great product that consumers will love. We are rapidly approaching our closed beta period, so if you are really interested and want to test it out let me know. Email me at Mark @ Shelfari.com.

I should also note that Kevin Beukelman joined Josh and I in our brainstorming and was instrumental in process of thinking through the idea.

Shelfari is coming

The company I co-founded is getting ready to launch. The name of the site is Shelfari and can be found at http://www.shelfari.com

We are entering a closed beta period, and then will launch in beta soon after. If you are interested in learning more shoot me an email at Mark AT Shelfari.com

My new life...

I haven't posted since last January for a reason... I have been incredibly busy! So what has happened, well here it all is:

- I quit my job working on Rhapsody (the subscription music service)
- I took a new job at down in the Bay Area (more on this later)
- This new job resulted in my family moving down to the SF Bay Area
- I co-founded a start-up, where I am now on the Board of Directors and a strategic advisor

So while I have been radio silent for a while, expect a little pickup in my postings in the coming weeks as we get ready to launch our new service.

Something is in the air!

Last year I posted about how I was disappointed in CES. There is "something in the air" this year before CES that makes me think it is going to be a BIG show. I simply have this feeling that 2 years from now we are going to look back on CES 2006 as a landmark event that fundamentally changed the consumer technology landscape.... I am not yet sure how or why... but there is something in the air.

Technorati Tags: CES, CES2006, Innovation, ConsumerElectronics

Holiday Break... finally time to explore

The last few months at work have been so busy I haven't had a chance to spend enough time with my family much less blog. This holiday I finally got the chance to play with a number of technologies / services that I have intended to check out since the late summer. I have been playing with GreaseMonkey scripts, numerous social networking sites applications, new FireFox extensions, etc. I haven't really had a chance to organize my thoughts, but I can say that I have been impressed by the new world we are living in. For those willing to explore and play around with new products services, there are numerous new expereinces available on the net that simply weren't around 6 months ago.

At the same time I am profoundly disappointed by how difficult computers and the internet are to use for the average person. I have spent numerous days recently providing "tech support" for my family around issues like wireless network setup, browser setting issues (text size), SPAM, anti virus issues, etc. Companies like McAfee who are trying to make things easier sometimes make things harder because they have too many settings / programs prompting people for information (Spam blocker, virus detector, privacy protector, etc., etc.).... can someone please fix this?


P.S. - I have written this post using a new FireFox plugin called "Performancing"... this extension has serious potential. It does a great job of integrating the blogging experience inside the browser. I am also interested to see if the technorati tags work.


Technorati Tags: techsupport, performancing,

Technorati Tags: techsupport, performancing,

Flock posting #2... w/ Flickr Pic

This is the second test post using Flock. I am using the Flickr topbar to pull into pictures from my flickr account.

The picture above was taken from the window of my apartment last fall... not a bad sunset!

Technorati Tags: seattle sunset, Flock Test Post

this is a test blog w/ flock

This is a test blog using FLOCK... a new browser everyone who reads this blog certainly knows about.

This is an edit test

Technorati Tags: test post

Testing feed ads

I am testing adding adsense ads to my feeds. Not trying to make money, just trying to understand how google is trying to bring together their various products...

New look

Just testing out a new look for the old blog. I will get around to customizing what ever template I finally select... but for now I am just trying out some of the standard templates to see how they integrate with adsense.

eBay - "Network Effect Managers"

There are about 1 zillion articles on the Skype / eBay merger. Rather than pick apart the deal from a strategic, operational or valuation perspective, I want to make a point about eBay the company.

It is clear that for eBay to succeed they need to do one thing better than anyone else in the world, and that is manage network effect businesses. Each of their three businesses (eBay, PayPal, Skype) are built on network effects that drive growth... but the scary thing about network effects is that as easily as they build up, they can collapse (see Friendster). It won't be enough to simply manage each network effect independently, to be truly successful eBay must find ways for each network to feed the other networks of the business... creating synergies where 1 + 1 + 1 = 6. This won't be an easy task... anyone familiar with network effect businesses will tell you they are complex systems which must be analyzed quantitatively as well as nurtured (remember the backlash when eBay raised fees). Now imagine managing 3 interconnected network effect businesses!

I almost wonder if every employee at eBay should be given a secondary job title of "Network Effect Manager"

Platform Wars Are On!!!!

I used to run a program called "Google Desktop Search"... now I am running a program called "Google Desktop"... The word SEARCH removed.

Yes, here it is ladies & gentlemen... Google has launched their first platform product, called "Google Desktop". Running the application in "Sidebar Mode" provides me a dashboard into my digital life... everything from news, to pictures, to email (gmail), to weather, etc. is supported in the dashboard. And the PLATFORM is open to developers! I have written numerous posts about the impending platform war and it is good to see that the war is finally on. Imagine writing plug-ins for the platform that leverage the MASSIVE computing power Google has at it's disposal!

Nobody has ever beaten MSFT in a platform war, so this is going to get interesting.

Kicking it w/ the Flockers

About 6 or 7 months ago, two good friends of mine started down the startup path. I was certain they were going to come up with something cool... and they didn't disappoint. They are both key members of a company called Flock.... who is building a "social browser". I can't say much about it, but I will say that so far I am excited by the potential, and for the first time since downloading FireFox about 2 years ago I can imagine using a different browser!

New Job...

About 2 months ago I moved into our digital music organization to work on an exciting new product. Our music organization is responsible for our kick ass music subscription product, Rhapsody. If you haven't had a chance to try Rhapsody, you should check it out... there is a free version of the product called "Rhapsody 25" that allows you to listen to 25 streams a month for free...

Anyway... I can't wait to talk about the product I am working on... and when the time comes I will be sure to post more about it.

New life at commodity prices?

Apple computer PCs have always been at the high end of the market when it comes to price. Years ago, being 20% more expensive meant that a Mac cost $400 more than your standard $2,000 PC. $400 is A LOT of money to your average American.

Computer prices drop FAST... and today you can get a low-end desktop PC from Dell for less than $300! And prices are going to keep dropping over time... no doubt about it. So what does that 20% Apple premium cost now if the standard desktop is $400... well that is $80 bucks. Hence you see the Mac Mini at only $499.

So what is the point you may ask.... my point is that as PC prices drop the option to get a Mac is increasingly becoming a real possiblity for the average consumer. Sooner or later the price of a PC simply won't be the issue, it will come down to how easy the PC is to use, how well it performs the mundane tasks of email & web surfing, managing photos & short digital videos, while also interacting with CE devices around the home. Clearly Apple has an advantage in usability over Microsoft... it also has consumers snapping up iPods and getting exposed to their CE products and broader product line.

Dell, Intel, Microsoft.... 3 companies that have benefited from PC adoption driven by price declines. That dynamic is about to end, and each company needs to determine how they will survive in a fundamentally different world. I think Intel provided a partial answer last week... now it is time for MSFT & Dell to answer.

The power of brand

People often underestimate the power of brand.... here are two examples of how brand can take commodity products and turn them into winners:

iPod Shuffle = product from 1999 = 58% flash marketshare

"My Google" = product from 1996 = Buzz all over the blogsphere

Any questions?

Infinite storage... the lock-in game

One of the few areas of interest to me that I can write freely about is the webmail space. I have posted a lot about Gmail, Yahoo!, MSN, and the competition for consumer inboxes. I haven't had a chance to write since Google announced the always growing storage capacity for Gmail. I have seen a lot written about this but I have not seen anyone write about what I consider to be THE critical aspect.. switching costs.

In the long run, the marginal cost per GB of storage for someone like Google rounds to zero. Yet, the value of an email consumer certainly doesn't round to zero over time, in theory, it actually grows as advertisers are willing to spend more and more on adwords. Google doesn't need you to actually click on ads from within Gmail to make money off Gmail, they simply need you to EITHER click on these ads or perform additional searches with Google because you have a gmail account. Additional searches means incremental advertising inventory to be monetized. So if you were Google and you knew over the long run that your marginal cost for storage rounded to zero but that consumers with Gmail accounts were likely to search more on Google, what would you do? You would try and lock-in existing consumers and new consumers by raising switching costs.

With a GB or two of email, photos, videos on my Gmail account how likely am I now to ditch Gmail and move to another service? Not gonna happen! Google architected for this dynamic (or they were lucky and fell into it) by telling consumers to never trash email... just "archive it". This is all about raising switching costs and creating consumer lock-in. Now Google has taken certain steps, like enabling POP email access, that lower switching costs, but ask the AVERAGE consumer what POP access is and they will look at you like you are crazy. Yet, the average consumer knows they don't want to move thousands of emails to a new service.

With Yahoo! and Hotmail all raising storage capacity I don't expect too many consumers switching services if they have over 100 MB of email in an account... that is unless one of these competitors gets smart and builds what I asked them to a while back... an application whose sole purpose is to remove email account switching costs. This application would extract all your contacts, load them into your new account, email all these contacts with your new email address, extract all your email with organizational metadata and load them into your new account.

Help save the life of a baby!

Below is a message I sent to all my family & friends... Please consider donating:

Family & Friends,

Roughly one year ago I had the scariest moment of my life. I was on a flight from Boston to D.C. and Tara went into labor 13 weeks early. When I landed and learned of her situation I ran and got on a flight back to Boston more scared than I thought humanly possible. Tara & I were blessed that doctors were able to stop her labor and Abbie came only 5 weeks early but every day thousands of people are not as fortunate. The worst part of all this is that doctors simply don’t know what causes premature labor, and therefore there is really no way to prevent this situation.

The March of Dimes has kicked off a 5 year Preventing Prematurity campaign to help stop the increasing problem of premature labor. May 1st is the March of Dimes Walk America, a walk to help raise funds for this cause. Our family has been very involved with this campaign because we were able to see first hand what a horrible problem this is - and we want to help stop it. We are a mission family for the March of Dimes, and we have our own family team for Walk America this year. We are "The Williamson Family Team" and are walking in honor of Abbie and for every baby that is born too soon.

I am asking you to please sponsor me for the walk this year. Our Family Team goal is to raise $8,000, and I am hoping we can make it. To make it even more exciting, Tara and I have a bet going on which one of us can raise the most money. The loser has to do the other person's chores for a month so I am really hoping to win. As my friends and family, this should give you extra incentive to sponsor me:)

You can sponsor me directly online at http://www.walkamerica.org/mwillmsn

Thanks for your support,

Mark

MyTinyHands.com up and running

I am proud of my wife today... MyTinyHands.com has launched! My wife and I had our first child last July 4th, and she came 5 weeks early. Given how early she was our doctors urged us to make sure everyone washed their hands before touching her... we thought it would be easy to accomplish this, but we were shocked at how many strangers would just walk up to our stroller and reach in to touch Abbie. My wife wanted to put an end to this so she created a sign that asked people not to touch her without washing their hands. We were happy that it worked, litterally people would walk up to the stroller and stop to read the sign, then not touch her. What we were surprised about was how many other parents asked us where we bought the sign, because they had the same problem.

Over the last few months my wife has worked hard to launch this business and I am incredibly proud of her. The baby signs are great and will really protect your newborn. Check out the pictures below of Abbie with the sign on her stroller:

"Adverse Blogger Selection"?

Does the blogsphere suffer from "adverse blogger selection"? A tendency for those with real expertise in an area sit on the sidelines reading blogs but not writing since they are actually in the action... leaving only those with limited expertise to blog on a topic.

Does this theory help explain why the best blogs are often written by those in the analyst or venture capital community, where they are essentially marketing themselves and their services by demonstrating a strong understanding of various industries?

I have a strong feeling that "adverse blogger selection" is at work... and that the majority of blog readers haven't even thought about this issue.

BitTorrent & The Long Tail

I first found BitTorrent about 2 years ago when I missed an episode of Alias, the TV show on ABC which has a bit of a cult following. Like most that have used the P2P application, I found the networks efficiency at dealing with huge files astonishing. My first impression was that BitTorrent would take over the P2P world for large popular files, but that it would never be very good for "the long tail" of content. The reason is that you need someone always "seeding" content in the BitTorrent world, and I believed content that didn't have mass market appeal wouldn't be able to maintain trackers.

Well BitTorrent, like most disruptive technologies, evolved to meet the needs of users with long tail content needs. Applications like Azureus and others make it easier to seed content and gather content via RSS feeds. Today there is content like sporting events, TV shows for kids, 80s TV content, etc. all over the net. Missed the last Illinois basketball game??? you can find it on a site that hosts the most recent games as well as classic games from the '89 team.

What does this mean for content providers? With the shut down of centralized tracker sites like Suprnova, it means that hundreds of micro content hosting sites will emerge with out much fanfare... like they have been for the last few months. Content providers will think things are under control, but it will be too late... the masses will have adopted BitTorrent as their portal to the long tail, and once your unmet content needs are fulfilled by a service, it is hard to turn back.