Moving On From Red Envelopes

Two years ago, in one of my first posts on this blog, I wrote that Netflix was moving from a Blockbuster model to a HBO model.

That same year, I summarized why this move was necessary:

HBO is an appropriate role model for Netflix, and it appears that Netflix has molded itself in that way.  Selling a service for $10-20/monthly both distributing non-original content and producing groundbreaking original content has proven to be incredibly profitable.  HBO is sui generis, but the advantage that Netflix potentially has is that HBO is “tied to the cord” and is hurt by the constantly escalating prices of basic packages which consumers are increasingly unable to pay, since consumers cannot access HBO without buying the bloated basic package.  As the Economist put it, “imagine a supermarket where, in order to buy the item you really want, you first have to buy almost everything else in the shop. Now imagine the price of all those other items is constantly rising.”  In contrast, Netflix can position itself as a cable alternative.  There is tremendous opportunity in this model and positioning.

This month, the Chief Content Officer of Netflix defined the mission statement of Netflix as:

“The goal is to become HBO faster than HBO can become us.”

The Second Half of the Chessboard

The Economist last week tackles the question of the Peter-Thiel style argument regarding the importance of recent innovation.  It’s an overall so-so job but there are some complex, but fascinating metaphors and arguments on how innovation’s benefits might circulate through the economy over time.  Here is one:

And information innovation is still in its infancy. Ray Kurzweil, a pioneer of computer science and a devotee of exponential technological extrapolation, likes to talk of “the second half of the chess board”. There is an old fable in which a gullible king is tricked into paying an obligation in grains of rice, one on the first square of a chessboard, two on the second, four on the third, the payment doubling with every square. Along the first row, the obligation is minuscule. With half the chessboard covered, the king is out only about 100 tonnes of rice. But a square before reaching the end of the seventh row he has laid out 500m tonnes in total—the whole world’s annual rice production. He will have to put more or less the same amount again on the next square. And there will still be a row to go.

Erik Brynjolfsson and Andrew McAfee of MIT make use of this image in their e-book “Race Against the Machine”. By the measure known as Moore’s law, the ability to get calculations out of a piece of silicon doubles every 18 months. That growth rate will not last for ever; but other aspects of computation, such as the capacity of algorithms to handle data, are also growing exponentially. When such a capacity is low, that doubling does not matter. As soon as it matters at all, though, it can quickly start to matter a lot. On the second half of the chessboard not only has the cumulative effect of innovations become large, but each new iteration of innovation delivers a technological jolt as powerful as all previous rounds combined.

Flow Then Fish

A series of comments this week focus in on two important aspects of peer to peer marketplaces — working on creating a flow of transactions, and then helping users find where in that flow is best for them to fish in given their needs.

This was my comment from a discussion of peer-to-peer networks:

The nice thing about the business of being a peer-to-peer market rather than being a retailer or a proprietary supplier is that you make money from the flow of the business rather than taking positions that put your capital at risk.

To make a comparison to Wall Street, it is why being a pure market-maker is a safer position for banks to be rather than taking positions in markets such as by holding onto a bunch of bad mortgage debt.

This was my further comment in that discussion:

Something that follows from thinking about it as the flow of business is that as the peer-to-peer network, your job is to work to increase that flow of business.

A big part of that for me is not only making sure that customers are finding good product and experiences but also that you are empowering suppliers and drawing them into the market, many of whom wouldn’t otherwise be suppliers.

That latter part makes these businesses IMHO even more rewarding.

This was from a discussion later that week on “Explore” functions on peer to peer networks.

To mix metaphors, the “explore” tells the user where it’s good fishing in the flow that you have enabled with your peer to peer network.

Still a lot of opportunity with these explore filters. I think generally speaking we are much better at enabling the flow than surfacing the good and personally relevant stuff for an user

This is an excerpt from someone else’s comment from that discussion, which provides some thoughts to think about the Explore function, especially for the anonymous or first-time user:

Explore is a really difficult feature to get right. Maybe one of the most difficult.

There are two different classes of explore: one for anonymous users on which you have no meta-data and one for users on which you have some sort of data to personalize your recommendations. This is often logged-in vs logged-out but not always (cookies, etc).

The anonymous user explore is the homepage of many websites. In this case I think the best thing to do is to make the homepage look nice without caring too much about the relevancy of the content. Etsy does a good job of this. They might choose a collection of handmade items that are all blue for example. A person won’t buy a bunch of stuff just because it’s blue but it makes the homepage look nice and then you can search or browse for what you want.

If I tend to buy clothing on Etsy or steampunk gear (http://www.etsy.com/listing/11… ) you can show me better options on the homepage the next time I log in.

With Fred’s examples, Foursquare has far and away the best explore feature in my opinion, because they know where you’re standing and they know the kind of places you like to visit (not the kind of places you say you visit, but the kind of places you actually visit). This makes the explore feature very relevant to the user and it’s both temporally and geographical relevant which is something few other services can touch.

Conjuring Bridges (To Leap Off)

Storytelling is the tool to bridge the chasm of risk between vision, on one side, and reality, on the other side, as Professor Eisenmann suggests below:

“Storytelling” by entrepreneurs—conjuring a vision of a better world that could be brought about by their venture—can encourage resource owners to downplay risks and in the process commit more resources than they would if they had not been inspired. Steve Jobs, for example, was famous for his mesmerizing “reality distortion field,” through which he impelled employees, partners, and investors to go to extraordinary lengths to help fulfill his dreams.

Reality-distortion is, perhaps, making people see that the bridge exists.

Mediocrity Attracts Mediocrity

The simplest articulation of why networks trump institutions (i.e, the central exploration of this blog) just occurred to me.

In institutional-based talent elevation, the following self-reinforcing dynamic usually takes over:

Mediocrity is attracted to Mediocrity.

Many verbs can replace the verb above: reinforces, elevates, supports, produces, recognizes…

But the central point is that it is a loop that is self-reinforcing and hard to get out of.

In contrasts, networks elevate, support and reinforce authentic talent.

Everyone Is Good At Something

My comment on AVC today:

“Everyone is good at something”

Yes!

So many great platforms for folks out there to find out what that is and nurture it: blogging, etsy, Youtube, kickstarter, kaggle, sidetour, and on and on.

In a word, networks…

That is, tools that continue to move away from the world in which used to live in where non-networked institutions have the ability (on top of their continuing incentive) to thwart the supply of individual talent to generate market power for themselves.

Talent elevation and opportunity platforms!

Giving Credit

In a world where central bank policy has been top of the fold news for five years now, it’s important to understand how credit is created and where it can go after created.

As explained in this excerpt from Richard Werner on qfinance, private banks create the bulk of credit, and it can be allocated in three ways — for growth (GDP growth or goods and service), for consumption (depending on the slack in the economy, either real GDP growth or CPI when too much chasing too few goods or services), or for asset inflation (non-GDP growth).

The lesson from recent history is that we don’t pay enough attention to how it is allocated, particularly when it is allocated for the non-GDP growth, stoking and allocating bubbles in the economy.

[I]nterest rates are far less important in the economy than is generally claimed. Instead, the quantity of credit is the most important variable determining growth, asset prices, and exchange rates.

The most important institutional reality that has been neglected by theoretical equilibrium economics is   the key function banks perform: they create between 95% and 98% of the money supply. The first and most important form of privatization that has swept the world has been the privatization of the creation and allocation of money, which is implemented by privately-owned commercial banks…

Banks do not lend money. “Lending” refers to transferring control of the lent object to the borrower. If I lend you my car, I can’t drive it at the same time. That’s not what banks do when they issue a “bank loan.” Instead, they are allowed by the current regulatory framework to create new money out of nothing—which is called “credit creation.” The collective decisions of commercial bank staff thus determine how much money is created, who gets the newly created money and to what use it is put.The collective decisions of commercial bank staff thus determine how much money is created, who gets the newly created money and to what use it is put…

There are some simple rules for sound banking and sound economics that need to be followed. Whenever credit is created and used to increase the amount of goods and services provided, it will result in noninflationary growth; more money comes about, but also more goods and services. Whenever credit is created and used for unproductive purposes, inflation comes about; more money chases limited goods or assets. The unproductive credit creation can take two forms. When credit is extended for consumption, it will result in consumer price inflation. When credit is extended for non-GDP transactions (which means mainly financial and real estate transactions), there will be asset inflation. Both cases are unsustainable and, if sufficiently large, result in banking and economic crises.

The Stoic Entrepreneur School

This view on pursuing and achieving a vision comes from an essay by Oliver Burkeman in the WSJ recently:

He rediscovered a key insight of the Stoic philosophers of ancient Greece and Rome: that sometimes the best way to address an uncertain future is to focus not on the best-case scenario but on the worst.

Seneca the Stoic was a radical on this matter. If you feared losing your wealth, he once advised, “set aside a certain number of days, during which you shall be content with the scantiest and cheapest fare, with coarse and rough dress, saying to yourself the while: ‘Is this the condition that I feared?’ ”

…

Research by Saras Sarasvathy, an associate professor of business administration at the University of Virginia, suggests that learning to accommodate feelings of uncertainty is not just the key to a more balanced life but often leads to prosperity as well. For one project, she interviewed 45 successful entrepreneurs, all of whom had taken at least one business public. Almost none embraced the idea of writing comprehensive business plans or conducting extensive market research.

They practiced instead what Prof. Sarasvathy calls “effectuation.” Rather than choosing a goal and then making a plan to achieve it, they took stock of the means and materials at their disposal, then imagined the possible ends. Effectuation also includes what she calls the “affordable loss principle.” Instead of focusing on the possibility of spectacular rewards from a venture, ask how great the loss would be if it failed. If the potential loss seems tolerable, take the next step.

Conviction

Excellent thoughts by Eric Paley about sharing the process of conviction — identifying the correct ratio of instinct and early validation of instinct with customer data — with an investor:

I don’t think the investor process to get to conviction is that different than the entrepreneur process to get to conviction; the challenge is at the pitch stage, when VC and founder are at vastly different points in the conviction process.  I advise entrepreneurs to take investors through their own process of getting to conviction.  What made them want to drop everything to build this business? Hopefully that process was a good combination of instincts and various forms of customer validation of those instincts.  Entrepreneurs driven completely by instincts will typically struggle to find an investor who equally shares conviction purely based on the same instincts, unless they share similar experiences that shape how they think about the opportunity.  It’s way more effective to frame instincts as hypotheses and then show interesting early customer development data that helps validate the hypotheses.

On Wrong and Proportionality

Lessig today about the prosecution about Aaron Swartz:

That person is gone today, driven to the edge by what a decent society would only call bullying. I get wrong. But I also get proportionality. And if you don’t get both, you don’t deserve to have the power of the United States government behind you.