StraussBlog

This struck me as so weirdly incestuous/small-worldly I had to post it. I just came upon a song featuring vocals by Sandra Possing, who happened to be the bartender at Delaney’s when I first met with Todd to discuss what is now awe.sm (she even tweeted about it!). Not only that, but I found the track through friend and former co-worker Lucas Gonze, and it’s being hosted on a site built by another former co-worker, Ethan Diamond.

The social media singularity is officially upon us people! Enjoy the music:

First of all, my life does not suck. Last night I was hanging at TechStars (and having my company mistaken for one of theirs ), this afternoon I was having lunch with the Gnip team in beautiful Boulder, and tonight I was filming a concert by one of my favorite new bands.

I’ve now seen Edward Sharpe and the Magnetic Zeros 5 times in the month since Ty and I first saw them at La Cita. And thanks to Dave at LittleRadio, I was invited to be part of the crew that filmed their three show residency at the Regent which ended tonight. That footage is in the capable hands of the Artificial Army crew, but here’s some stuff I shot at last week’s show with my G7. I’m primarily putting this up for Ryan, who has been at every one of the 5 shows I’ve attended

Like many investors right now, I’m spending a lot of time trying to figure out whether the stock market has actually hit a stable ‘bottom’ or whether it still has further to fall. My dad and I had a long discussion last night about different methodologies for calculating what  equity prices *should* be based on historical market behavior and the dynamics of the current situation. The two main factors that have driven the slide from the heights of October 2007 (DJIA @ 14,279.96 and S&P 500 @ 1,576.09) are the sudden de-leveraging of the financial markets (i.e. some major investors being forced to liquidate >75% of their positions) and the macroeconomic effects of a recessionary cycle (i.e. higher unemployment, lower consumer spending, deflation).

While theoretically possible, I believe modeling the impact of these two factors is a practical impossibility because they are so intertwined — de-leveraging sparked the recession and the recession is driving further de-leveraging. You could also do a technical analysis where you try to match current market behavior to past patterns and extrapolate what happens next based on what happened before. But that method requires making a bet on which past patterns to match against, i.e. is our current situation more similar to the Great Depression or all the recessions since. And that’s a big bet.

So, I propose a different (and much simpler) approach: assume a realistically sustainable growth rate over a long enough period and figure out where we would be if the market had grown at that pace. I picked 20 years as the period and charted the monthly percent change of the Dow Jones Industrial Average (DJIA) from 2,342.32 at the end of January 1989 to 8,131.33 at Friday’s close. The actual percent change is the blue line, and I plotted 3 other lines against it: 10% annualized growth in green; 6% annualized growth in orange; and 2% annualized growth in red.

 Here’s what that period looks like in annual percent change for the DJIA and S&P 500:

And here’s the annualized rate of return for both the S&P 500 and the DJIA since 1989:

Over the course of this 20 year period, there were only 6 years in which the market declined *at all* (one of which, 2005, was basically break-even) and there were 10 years in which the market gained *more than 10%* and in 7 of those it gained *more than 20%*. Even after the tech bubble “burst” taking the market from 11,497.12 at the end of 1999 to 8,341.63 at the end of 2002 (a 27.4% decline in 3 years), the market would still have delivered a *10.1%* annualized rate of return over the prior 12 years. From where we sit today, it’s no wonder the DJIA declined 33.85% in 2008 (taking us to a still very respectable annualized rate of return since 1989 of 7.24%). But that doesn’t answer the question of how much further down it needs to go before we can consider the value of the equity markets stable. 

That’s where the annual growth rate analysis comes in. It is still highly subjective — depending on what one believes to be a representative sample period and sustainable annualized growth over that period. But I like it because it helps me think about the broader market in terms I feel more comfortable making assumptions about, like what do I think is a reasonable rate of value creation for the economy as a whole over a given period. In the case of the 20 years since 1989, do I believe there’s a reason that the equity markets should have averaged ~10% annual growth while our Real GNP achieved only 2.76% annual growth over the same period? No, and obviously neither does the market at this point.

So, what is a reasonable expectation for a bottom? Your guess on the underlying assumptions is as good as mine. But if one believes technical advancements over the last 20 year period enabled us to double efficiency (i.e. extract twice as much profit from the same revenues), then the markets *should* have grown at around twice the rate of Real GNP. In that case, we would be expecting 5.51% annualized growth in the markets since 1989 as of the end of 2008. Starting from 1989 closing prices of 2,753 on the DJIA and 353.4 on the S&P 500, 19 years of organic equity growth pegged at 2x GNP growth should have closed 2008 at 7,634.38 and 979.95, respectively (actuals were 8,766.39 and 903.25).

Update: Dad accurately points out that GNP is a trailing indicator and equity prices are leading indicators. So, this analysis shouldn’t be considered anything other than directional. I find it helpful as one factor in my overall assessment of the current situation, but as Howard reminds us no one really has all the answers.

This final chart shows the actual level of the DJIA (blue) compared to what it would be if it was pegged at 1x GNP Growth (red), 2x GNP Growth (orange), and 3x GNP Growth (green). It is essentially the same as the chart at the top but now instead of arbitrarily picking annual growth rates, we have pegged them as multiples of Real GNP (i.e. ratios of business efficiency). As you can see, for most of the last 20 years the markets were assuming >300% improvements in business efficiency.

All the above charts and underlying analysis can be found in this spreadsheet.

My new favorite live band hands-down is Edward Sharpe and the Magnetic Zeros. I saw them twice in 5 days and would go see them again tonight (and tomorrow night, and the night after that) if I could. They’re apparently starting a ‘residency’ at the Regent Theater in downtown LA on April 30, and I’ve already asked Dave at LittleRadio if my cousin Ben and I can shoot a proper concert video one of the nights.

In the meantime, here’s some footage I shot of their show at The Echo on Monday night (YouTube HD doesn’t quite do the 1080p footage from Kelly’s Canon 5D Mark II, aka my dream camera, justice):

And here are the photos:

Kelly (and her camera) had to leave a couple of songs into the Edward Sharpe set (I had told her they went on at 10pm and they didn’t end up starting until 12:30am). So, what you see here is just them getting started — to give you a sense of where it ended up, Alex, the lead singer (formerly of IMA Robot), spent a good deal of the show shirtless in the audience. I’m actually kinda glad I didn’t have the option of documenting the rest of their set, because I got to go crazy with the rest of the crowd instead. But I’d gladly give up a night of rocking out in order to have the opportunity to properly document this incredible spectacle. Dave, call me!

P.S. I first discovered Edward Sharpe and the Magnetic Zeros through the most excellent NPR All Songs Considered Live Concerts podcast (originally via Ian, of course).

Update: Here’s some video of the opener, Fool’s Gold:

I have 1 more Edward Sharpe video, but it’s just barely over YouTube’s 1GB upload cap. So, I guess I’m gonna keep it to myself for now.

Dear Digg,

I think you’re missing the point of the uproar over the DiggBar. It isn’t about SEO or search engine ‘juice’ or 3rd-party traffic stats or even about the structure of the web, it’s about control. Publishers like to know they at least have the option to be in control of how a visitor interacts with their site, and you have ignored that need.

Personally, I feel you’re perfectly within your rights as a driver of traffic to do whatever you want with your outbound links. And publishers, like John Gruber, are perfectly within their rights to do whatever they want to visitors from your pages. But, why do you guys have to fight about it? Do you hear any similar outcry over Facebook’s ‘action bar’, which arguably intercepts a lot more overall traffic than the DiggBar ever will? I haven’t, and I think it’s simply because from the start they have given publishers a simple way to opt-out.

From the Facebook Share Partners page (click ‘What is the blue bar that appears over my webpage? Is there a way to prevent it from appearing?’):

When someone clicks on your shared item, they are redirected to your page, and a small action bar is added above your site. The action bar promotes further sharing so that more people can see your content If you would like to disable this feature, simply add this code to your web page:

  <script type=”text/javascript”>
    if (top.location != location) {
     top.location.href = document.location.href;
    }
  </script>

Is anyone actually using this? Probably not. Would most publishers want to block the DiggBar? I highly doubt it. As TechCrunch implies, traffic is still king for most publishers:

If the Diggbar can [drive a 20% boost in traffic] consistently going forward, nobody is going to be complaining about it anymore—even if URL shorteners are still evil.

Those publishers who have different priorities, as is their right, *will* find ways to block the DiggBar, which in this case results in a crappy experience for visitors coming from your site. But if you were to officially support opt-out on a per site basis (a la Facebook), publishers could could control their sites as they wish without the end-user experience having to suffer for the sake of an argument most of them don’t understand or care about.

Love,
-jonathan

Disclosure: I run a publisher services company building a product that happens to shorten URLs. For the record, I don’t think URL shorteners are evil, just misunderstood

I first heard the idea for (un)classes a little under 13 days ago when Rahmin pitched it to Todd, John, and me at the Lair on Presidents’ Day. So, what’s an (un)class? It’s exactly what it sounds like: a way to explore your interests without the formal structures of an educational organization; or what we have come to call casual learning. From the brand new (un)classes blog:

(Un)classes are to continuing education what BarCamps are to conferences — a lightweight, low-pressure, and most of all fun way to explore topics that interest you without having to make a big up-front commitment. 

Rahmin is one of those guys with a million ideas, and there’s something to almost all of them, but this one struck a chord with me. It was a product *I* really wanted, which is always a good sign. So, I started to think about why I wanted it and I came up with two fundamental themes that I think are resonant with a growing number of people.

Diversified Living

When I left Yahoo! a little over a year ago, I had spent nearly 4 years as close to singularly focused on work as humanly possible. Over those four years, I invested all of my life capital (i.e. time) in my career, which I thought was a sure-fire investment that would have a much higher rate of return than conventional instruments like hobbies and relationships — those only paid incremental quotidian returns, this could pay exponential life-changing ones. But then I was hit by a Black Swan in the form of Yahoo!’s well-documented struggles. And all of a sudden, a good portion of the capital I had accrued from my investment was in the form of influence within a company at which I was no longer interested in working.

So when I left, I vowed not to make that mistake again. I was not going to put all my capital into one life investment vehicle that could unexpectedly lose its value, I was going to diversify. I realized that life experience (i.e. travel, hobbies, etc) may not have a sexy upside, but it’s safe and pays a solid dividend. Whatever was to come next career-wise would never be a singular focus at the absolute expense of life experience.

However, I’m more than a little OCD (in the annoying perfectionist way, not the need to lock the door 7 times and spin around way) and I throw myself fully into what I do because I don’t know any other way. So, this new goal of life diversification would have to take forms that didn’t require an abundance of free time. But, there aren’t too many meaningful things you can do with a relatively small amount of sporadic spare time beyond read a novel or paint. You definitely can’t learn a new skill or study a subject that interests you, at least not through any conventional educational offerings of which I’m aware. And that’s where (un)classes fills a market void for me, it’s micro-education (Rahmin’s term) — a learning format with smaller basic units that fit my crazy lifestyle.

Weaponization of Hobbies

(First of all, credit to Raza for the term.) If micro-education is a format, then casual learning is a category within that format. What sets casual learning apart from other potential categories of micro-education is the inherent lack of competition, which appeals to my desire for my extra-curricular activities to be enjoyable and stress-free.

Don’t get me wrong, I’m a competitive guy. But, I think it’s somewhat ridiculous that you can go pro and/or compete in pretty much anything nowadays. Stuff that was meant to be fun has now been turned competitive at the highest levels, and I would argue that has trickled down to permeate every level of a given hobby to some degree. There is a certain expectation that by taking classes you are (at least in theory) fully committed to one day becoming an expert in that subject. And by not pursuing the next level once you get there, you are quitting. This implicit expectation can be very daunting for novices or dabblers and serves to keep people from even trying. What if I just care enough to only ever be a beginner?

And then there are the other students. Haven’t we all been there in the beginners’ sailing class with the guy who brought his own life-vest and keeps trying to complete the instructor’s sentences or in the introductory rock-climbing class with the guy who keeps volunteering how he’s only trying to get back in the swing of things after taking a few years off? I don’t want to spend my precious free time dealing with these people! Like I said, I’m competitive. So even if I’m not there to compete, I’ll end up taking it seriously just to shut that douchebag up.

Casual Learning FTW!

I believe both these themes, diversified living and a rebellion against the weaponization of hobbies, appeal to a lot of people who may not even know it yet or are just beginning to realize it.

The current recession has made diversified living not just something the growing ranks of the white-collar unemployed may see as a silver-lining until they find their next job, but a core value that will stay with them for the rest of their lives. The macro-economic Black Swan of the credit crisis is trickling down to become millions of personal Black Swans just like mine. Our generation that was trained to sacrifice everything short-term for our careers and the long-term benefits of professional success is seeing the foundational assumptions of that philosophy spectacularly undermined before our eyes. If all of a sudden I don’t reasonably believe that I’ll be able to make $10M by the age of 40, is the way I’ve been living my life worth the opportunity costs?

As for the weaponization of hobbies, everyone hates douchebags. ‘Nuff said.

Casual learning is unique in that it is purely learning for fun. By its very nature it can’t help you with professional training or becoming an expert at anything. And so, you end up with a self-selecting group of participants who are all there for the same reasons. What makes casual learning special is the community of intellectually curious individuals who want to pursue the joy of learning without having to make a substantive commitment to do so. (Un)classes fill the gap between nothing and full commitment to a subject matter and do so within a supportive and non-competitive group of like-minded individuals. 

(un)classes.com

We’re trying to launch the first version of (un)classes.com in time for LaidOffCamp this Tuesday. Rahmin and I are working on product and marketing, Marcus is helping out with design, the fantastic guys at Cloudspace – Corey, Michael, and Tim (who also happen to be the guys behind awe.sm) — are doing the development heavy lifting, and Todd has even offered to chip in on some CSS work. It’s a side-project for everyone involved that basically kicked off Thursday night, and it will be nothing short of a miracle if we pull it off (and I promise to write about the process if we do). But we’re all really passionate about the possibilities of the idea and the community it can create, and we want to start using this product ourselves.

If you made it this far, there’s a high likelihood you’re digging on the idea of (un)classes as much as we are, and you’re wishing there was a way to get involved right now. Well, today is your lucky day! Even though the site isn’t up yet, Rahmin setup a way for you to submit ideas for things you wanna learn and things you wanna teach. When the site goes live, your submissions will be the first classes in there and you will get an email with your account info. Of course, you can also follow (un)classes on Twitter and/or subscribe to the (un)classes blog.

My dad and I had a long conversation over lunch today (at In-N-Out ) about my most recent blog post. He mentioned that the studios are keeping a close eye on what is happening in the music industry as a preview of their own potential future 5 years down the road, and that they are taking preventative measures based on what they see. I replied with two reasons why I don’t think that’s something to brag about. First of all, that 5 years is more like 2 years (if that) and it’s shrinking every day. The pace of technological progress has only accelerated since it first began to disrupt the music industry, and it ain’t slowing down. Secondly, the film industry’s approach to understanding the data has been merely to plot historical events and interpolate a trajectory. They have made no attempt to understand the underlying equation and thus extrapolate the end-result. In high-school trigonometry terms, they are plotting points on the left half of a parabola without understanding that they are part of the graph of y=x^2. How do I know this? Because you can see it in their actions, they are clearly trying to treat a growing number of symptoms with no clue about the nature of the underlying disease.

My dad agreed with me and then said there’s a lot of money to be made by the guy who can show them what the future really holds. Being the giving person that I am, I hereby offer it to them free of charge (and with charts, no less!):

First of all, your audience is moving from conventional offline distribution channels to new online ones. You may think you have the control to slow this, but you don’t! At this point, you must consider it *axiomatic* that every genie will get out of every bottle. There are over a billion people on the Internet, and it just takes one to put your content on BitTorrent and all your anti-piracy efforts are rendered moot. Content consumption is moving from offline to online whether you like it or not. So, you have a choice: get on-board by giving consumers what they want and keep some of them as customers, or drive them away entirely by ignoring their needs. If you choose the latter, you probably won’t ever be able to win those lost customers back. And even if you choose the former, you will most likely never be able to aggregate the same size audience for a given piece of mass-market content online as you could offline. Mainstream media (or ‘head’) content is a first-class citizen offline, where there is artificial scarcity and so being first in line counts for something. But, there is an (effectively infinite) abundance of content online and what matters most is finding what is most interesting to me.

That’s the bad news. Here’s the good news, by moving online you can build deeper relationships with that smaller audience and explore variable pricing options to increase the average value of each individual fan (again I reference Josh Freese, who illustrates this point not without irony). However in order to fully engage your most passionate fans and get them to give you more money, you can’t continue to just sit back and pump out passive entertainment experiences with some snazzy marketing around it. You will need to invest in turning your content into 360° entertainment and change your mentality about selling it as a packaged good.

Yes, I know that sounds expensive. It definitely won’t be cheap and will require you to build out new competencies you don’t have today. But you’ll be able to pay for it (and then some) with all the money you save by getting out of the very expensive mass-market content and offline distribution businesses.

So if you’re willing to become an online-first media company, I think I can promise you’ll return to profitability in 5-10 years depending on how quickly you move to jettison your legacy offline businesses. Now, your shareholders may not be so keen on all these restructuring costs and write-downs, not to mention all the money you’re going to be leaving on the offline distribution table by focusing on getting into the online business while you still can. But, that’s ok because they value the long-term survival of the company over short-term profits. Right?

Mass-market content and offline distribution are declining businesses, but they are still quite profitable. Especially compared to niche content and online distribution, which are clearly ascendent but still a rounding error to the bottom-line of these major media companies (not to mention the corporations that own them). I believe the decline of the former is going to be a lot  quicker than the entertainment industry thinks (because they believe they can control it and they don’t understand the exponential acceleration of technological progress) while the rise of the latter will be retarded by a lack of investment in developing the infrastructure to make it a profitable business. The film industry obsessively spends hundreds of millions of dollars to build the biggest anti-piracy stick they can while watering the online video carrot with an eyedropper. If they were to put meaningful time and money into figuring out how to make legal online content consumption compelling and profitable, it would be more effective than spending a hundred times that on anti-piracy efforts. But they won’t, instead they will continue to do everything they can to prop up dying (but profitable) revenue streams, including stifling the growth of the emerging revenue streams that could one day take their place. And so, the studios will one day (soon) find themselves with not enough offline money and not enough online audience from which to try to make money.

If I were the head of a studio, I would stop trying to figure out how to grow the buggy whip business by keeping down the automobile. I would also recognize that transforming my profitable if shrinking buggy whip business into a money-losing automobile business making it up in volume is probably not in the best economic interest of my shareholders. So instead of throwing good money after bad trying to keep the overall buggy whip market from shrinking, I would focus on getting as much share as possible while all my competitors spent their time futilely worrying about the cars. I would ruthlessly cut costs to maintain profitability in the face of shrinking demand. And, I would put all those profits into a dividend so my shareholders would stop pressuring me for growth that isn’t there. Finally, when it’s time to close my buggy whip factory’s doors, I would take all that dividend money I earned and put it into the best automobile company I could find (and then I would be sure to sell that ~80 years later ).

[Cross-posted from my company blog.]

I just got back from a really fun (and delicious) lunch with Peter of Pantless Knights, who is in LA working on a hilarious new video, and one of the main things we discussed was the idea of Entertainment-as-a-Service. The term is a reference to the concept of Software-as-a-Service (SaaS), which is a business model generally contrasted with the conventional packaged or ’shrinkwrap’ software model. Essentially, SaaS is a subscription business and packaged software is a retail business.

The entertainment industry is a retail business. Books, movies, tv shows, music are almost universally sold as one-off purchases. But, those things are just the packaging and the people selling them to you are just middle-men. The business of entertainment (not to be confused with the entertainment *industry*) is fundamentally a marketplace of attention between fans and content creators — fans have a finite supply of attention for which content creators are competing. So, then what is the entertainment industry? To use a very relevant analogy, it is the collection of intermediary businesses (i.e. publishers, studios, networks, labels) that have been acting like investment bankers, taking the raw materials of talent and creativity and packaging them up in a form they know how to sell (i.e. retail) and commanding a big slice of profit along the way. Entertainment doesn’t want to be a retail business, and that is the fundamental essence of the disruption the Internet has unleashed on the entertainment industry.

[Clarification: For the sake of this discussion, I'm using the term 'content creator' to represent those who add unique creative talent to the production process. As my dad pointed out, content creation is rarely a solo effort (most notably in film production, which can involve hundreds of individual contributors) to which studios, networks, labels, and publishers often contribute substantial value. But as those contributions are opaque and thus interchangeable as far as the consumer is concerned, I am excluding those who make them from the class I refer to as 'content creators' in this post. Otherwise said, even though the sound engineer plays a crucial role in creating the album, no one buys it based on *who* the sound engineer was.]

When you think about what elements of the entertainment business technology has really undermined, it’s nothing more than the packaging — the time slots and release dates and viewing windows and region codes that are artificial constructs of these middle-men trying to slice-and-dice the content into as many tranches as possible to squeeze out every last cent of profit. Just like the investment bankers and their CDOs fragmented and obscured the connections between investors and their investments, so have the studios, networks, publishers, and labels introduced complexity into the connections between content creators and their audiences. While that complexity, and the companies who created it, may have been a necessity in an era of technologically inferior marketing and distribution systems, they are simply market inefficiencies in the Internet age.

So, what is the difference between retail and subscription when it comes to entertainment? In a recent post on my personal blog about SaaS vs shrinkwrap software, I wrote:

The business model of packaged software invites feature bloat, because it’s upgrade driven and you need to continually find ways to justify why Thingamajig 2009 Pro Edition™ is so much better than Thingamajig 2008 Pro Edition™. Software as a Service businesses have a much different (and arguably greater) challenge, they need to continue to create value for their customers month after month….So, you end up with a much more customer-centric product…and a vendor who is truly interested in addressing your customer needs.

The first priority of a retail business is to maximize sales, building brand loyalty and repeat business may be means to that end but they always take a back-seat to whatever else will drive more sales. Whereas in a subscription business, customer retention (and thus customer satisfaction) is always top priority, even above new customer acquisition. So if a studio believes they can get a lot of people to see a crappy movie by spending more on marketing and less on quality, they will (and do, again, and again, and again…). Because all you’re buying from them is the packaging, they know you aren’t really paying attention to whether it’s a Fox or Warner Brothers or Paramount film (do you buy your cereal based on who made the box it comes in?). But, a director would rather disown a bad film than endorse the studio releasing something that doesn’t meet his standards and his fans’ expectations. This is because the director knows that his relationship with his fans is a subscription business, and if he disappoints them he will be unable to continue exchanging his content for their attention in the future. The studios understand this too — they don’t give Tom Cruise $25M (plus a cut of the gross) per movie because his acting skills bring $25M of quality to the screen, they do it because he has more than $25M in ticket, DVD, and merchandise sales worth of fans.

Entertainment is naturally a subscription business, and the Internet returns it to its natural state. The content creators who thrive online are those who understand this and focus on the ongoing satisfaction of their customers (see Ze Frank, Michael Buckley, Chris Leavins). The level of customer satisfaction these creators deliver is really only possible on the Internet because they can go direct-to-consumer without need of the middle-men and their packaging. These creators publish in all forms — video, photos, blogging, micro-blogging, music. They do not see themselves constrained by the legacy dividing lines of the entertainment industry, their goal is to entertain their audience by any and all means available. There is no distinction for them between primary and ancillary content, they are 360° entertainment brands. The other thing that has made these creators so successful online is their direct interaction with their customers. The best your most engaged fans can do offline is give you their personal attention (and the money that comes with it) and try to recruit others to do so as well. But online, they can interact with you and become part of the show. Empowering your customers is the surest way to make them even more engaged. As I wrote in another recent post on my personal blog:

Bringing your customers into the product development process has the dual benefits of helping you build better and more customer-centric products and making your customers your most passionate sales people (because after all, it’s their product too).

So, the Internet enables these creators to spend more time listening to their fans and creating new content they’ll enjoy while outsourcing the marketing to the community for free. This is the exact opposite of the offline retail model in which the studio takes money out of production budgets to put it into marketing campaigns. The ability to establish deeper relationships with their fans also allows online content creators to attain higher average attention per customer (ARPU) than is possible in the retail world, thereby making it easier to build more value by going deeper with a smaller audience.

To be clear, I’m not trying to say the only business model for content on the Internet is a recurring subscription fee. The ’subscription business’ to which I’m referring is more the theoretical exchange of value between content creators and their fans, which can and will take many forms — including selling packaged goods. I’m also not saying that the online entertainment market is solely the domain of Internet-only content creators. In fact, I believe the Internet is most powerful as an entertainment marketplace when the quality and reputation of a historically offline content creator is freed of the constraints of the legacy packaged goods business model. Take for example Josh Freese, who gets extra points for using this freedom precisely to illustrate the absurdity of the conventional retail approach.

And now, I leave you with the profound product of the coming entertainment revolution:

P.S. Hat tips to Ian Rogers for the marketplace of attention thinking and Umair Haque for the marketing vs quality dichotomy.

A little under two weeks ago in a comment on a GigaOM post about Boxee, I wrote:

I think [Boxee's] current differentiation is based primarily on giving users the features and content they want in the form they want it, which is mostly a function of Boxee not being encumbered by the legacy business models of the incumbents.

Well, today those legacy business models came knocking on Boxee’s door in the form of Hulu pulling its content from Boxee at the request of its conventional media incumbent content partners. Though the very diplomatic (but still genuine, which is a hard line to walk) blog post from Hulu CEO Jason Kilar doesn’t say why, I agree entirely with TechCrunch’s assessment that the content partners weren’t so keen to see Boxee getting all this great press for doing an end-around the legacy value chain these guys are fighting tooth and nail to prop up. Boxee was a stand-out at CES in early January and I don’t think it’s any coincidence that Boxee first heard from Hulu on this matter just 2 weeks after the NY Times ran a very high-profile and positive article on how Boxee was so awesome for delivering major media content to the tv in the way consumers want (which also happens to be exactly what the major media companies have been fighting against). When you think about it, this timeline pretty much matches what it would take for the content companies to read the NY Times article, bitch about it to each other, decide to go to Hulu, get push-back from Hulu, and then steam-roll them.

Steve Raymond has a great post on why this is such a short-sighted move by the content providers, with which I totally agree. So, I won’t rehash it here. But, I will say that this issue is only the tip of the iceberg threatening Boxee. Though they have effectively found an un-endorsed end-around to the legacy living room value chain, this shows how dependent they still are on the goodwill (or at least ignorance) of the incumbents. They have poked the bear and it is now awake. The networks obviously don’t want to lose the high CPMs and concentrated audiences they get from broadcast tv, which can arguably be replaced by online ads at some point in the future. But, what can’t be replaced is the increasingly valuable fixed revenue stream from the carriage fees paid by cable and satellite operators (NBC and Fox, the primary content providers to Hulu, both own ~10 widely carried cable networks). A product like Boxee is a direct threat to cable and satellite operators because it eliminates their positions as programming gatekeepers and turns them into dumb data-delivery pipes. So, I wouldn’t be surprised if this move was driven more by the cable and satellite companies than the content providers.

In my original comment, I predicted if Boxee succeeded in pioneering this space they were likely to end up like TiVo. Now I think they’ll be lucky to get that far.

While eating lunch today, I started to think about the growing complexity of my company’s expenses and decided it might be a good time to start looking at accounting solutions. The fact that my research began with a tweet is indication enough that I probably don’t fit anyone’s average consumer mold. But, I think some of the insights that came out of my experience are pretty fundamental and potentially extend beyond the ‘early adopter’ echo chamber.

First, I started down the conventional route by checking out market (and marketing) leader QuickBooks. Through some quick web searching, I found a few authoritative sounding comparisons that pegged QuickBooks as the best value for basic users (we’re just at the lower bound of even needing this stuff) — with the notable exception of the Mac version, which apparently gets less product development love than the Windows one. At $180, QuickBooks wasn’t really that daunting on the financial cost front. But, I was already starting to cringe on the usability/time cost side.

What I found myself really wanting was a web app (like Mint or Wesabe) for business accounting — something with a lightweight interface for connecting and organizing data from my financial services providers all in one place. And while I was researching products that might fit this bill, I started to think about why I had this innate preference for a web app (SaaS) over shrinkwrapped software. The business model of packaged software invites feature bloat, because it’s upgrade driven and you need to continually find ways to justify why Thingamajig 2009 Pro Edition™ is so much better than Thingamajig 2008 Pro Edition™. Software as a Service businesses have a much different (and arguably greater) challenge, they need to continue to create value for their customers month after month. Sometimes that value comes in the form of new features, but it doesn’t *have* to. So, you end up with a much more customer-centric product (what customers *know* they want after using it, not what they *think* they want before buying it — as humans are notoriously bad predictors of our own happiness) and a vendor who is truly interested in addressing your customer needs. So, unless there is an element of the problem a given software product is trying to solve that inherently benefits from the advantages of the desktop (i.e. local storage, access to the file system/peripherals, superior performance), I’d rather have the SaaS version.

The other thing that was on my mind when doing this evaluation was my incredibly positive recent experience on Twitter with the CEO’s of iPlotz and Balsamiq, both of which happen to be SaaS products. I realized that it really spoiled me and there’s no way I’m ever going back to the old regime of captive audiences and passive customers. So, my new rule is “never trust a company not on Twitter.” Now, that’s a bit reductionist — and, in Intuit’s defense, they are actually on Twitter (hi Alison ). The real point is that today’s customer service equation needs to include how responsive the company is to your new product requirements and feature requests, not just how quickly they fix something when it’s broken or answer a question when you’re too lazy to read the instructions. As much as I appreciate Intuit’s presence on Twitter, I highly doubt Alison is able to change Intuit’s release schedule to get that new feature I want out to me sooner. By virtue of the packaged software business model, she is not adequately empowered to address my customer needs.

Through my research and a very handy post on my friend Leonard’s blog (thanks for the tip Carrie), I found two SaaS solutions for small business accounting: LessAccounting and Xero. They’re both about the same price ($~25/month), and Xero seems to have a slightly superior feature set (automatic syncing with your online accounts is a biggie). But, LessAccounting clearly had the edge in customer interaction. LessAccounting has a very active corporate Twitter account and both founders have personal accounts, they use Get Satisfaction and there are 4 topics on their Get Satisfaction page that have been updated in the last 24 hrs (I also checked out the activity on the Get Satisfaction accounts of both founders), and, last but not least, they have a sense of humor (be it a slightly mean one ). Xero has a very active corporate blog and they seem to be quite responsive to their customers’ comments. But as a prospective customer, I would really like to have some better ways to interact with Xero than sending them an email or leaving a comment on their blog. (Update: Phillip from Xero responded in the comments that they do in fact have a Twitter account and an in-product feedback mechanism.) Get Satisfaction and User Voice are both great names, because when you use their products as a company that’s exactly what you do: give your customers a voice and the satisfaction that it’s being heard.

When shopping for SaaS, you’re choosing a partner in innovation. So, the future direction of a product is maybe an even more important consideration than the current feature set. And while LessAccounting can surely replicate Xero’s features, can Xero replicate LessAccounting’s customer-centricity? They both offer 30 day free trials, so I’m going to try both and make a decision in a month. And who knows, at $180 for QuickBooks Pro I may decide shrinkwrapped software is the more sensible way to go this time around (but, that doesn’t mean I have to like it ).

Update: Wow! This is starting to freak me out. I write these things to capture the distillation of the things I see out on the interwebs that I like and dislike, mostly for my personal benefit in thinking about my own business. I don’t do so really anticipating to hear back from the companies about whom I’m writing, but I guess I’ll just have to get used to this whole blogging thing .

Thanks to Phillip from Xero and Allan from LessAccounting for your responses in the comments and for engaging in the conversation. Phillip corrected me that Xero does have a Twitter account, which I updated in situ above.