The Blog of Burgher Jon

YouTube (owned by Google) announced yesterday that they would be backing their most promising video creators financially (NYT).  Essentially, if you’ve been working in your spare time to build videos and people (as well as advertisers) have liked these videos, then YouTube might be willing to finance your next movie.  One interesting note is that according to the NY Times the grants will range in size from a few thousand to a few hundred thousand dollars.  This means that they’re not talking about buying a new flip camera for the guy who broke his when he wrecked his skateboard in to it; they’re talking about letting the guy who does skits with his friends lease a studio and hire a couple other actors.

Last week I wrote fairly disparagingly about Twitter’s @EarlyBird account.  My central contention with @EarlyBird is that Twitter is attempting to profit as a user of their own service.  This will hurt their service because it will destroy (since Twitter won’t allow it) a competitive landscape that might have yielded more intelligent ways to place advertisements.  So, when I thought about Google’s investment in YouTube auteurs, I asked myself, “is this the same thing?  Isn’t Google messing with the product that sits on the platform instead of restraining itself to the platform?”  The answer, in short, is no.

By way of an explanation, I’d like to use an analogy.  As I mentioned, both Twitter and YouTube have become valuable because they create platforms.  They are infrastructure, and others provide the content that leverages that infrastructure.  If they’re infrastructure, let’s make them the Pennsylvania Turnpike for the sake of this analogy.

What Twitter did by starting @EarlyBird and other such advertising users that will sit on their platform is open up a trucking company and disallow other trucking companies on the turnpike.  This sounds like a logical decision and in the short-term it may be very profitable.  It’s not a good idea though, imagine what will happen in the long run: Innovative new shipping concepts won’t be applied on the turnpike, people seeking to leverage these techniques will build a competing transportation method, business with the turnpike’s shipping company will decline until they would have been making more money with just tolls.  It will be too late at that point though; the alternative transportation that’s been set up will be superior to the reopened turnpike.

What YouTube is doing by funding content creators is opening up new roads.  YouTube is looking at the exits on the turnpike that are most used by truckers and saying, “What’s out there?  Would our customers benefit from creating an extension out in that direction?”  While this is not quite as bad as what Twitter is doing it still carries its dangers.  It’s still getting the infrastructure company in to the content creation business; YouTube will have to pick the content creators that get grants rather than letting the market do it.  I don’t think Google should do this unless they feel that YouTube as a platform is perfect and there are no additional infrastructure investments that need to be made.  This way, if the plan fails it won’t do so at the expense of other YouTube customers.

My theoretical response to this question comes in two parts, first you need to look at the way people are using the internet and identify some of the obvious next steps.  Looking back to 2003, I would say there were at least two of these obvious next steps.  First, people would begin using the internet for personal email more (most people only had their school or work account).  Second, people would all have their own website.  I think these were pretty widely understood truths and, smelling potential profits, companies hurled themselves at them.   The first problem got solutions from Hotmail, Gmail, Yahoo! Mail and ISPs.  The second problem got solutions from Macromedia and Microsoft (Front Page).

The first problem got solved quickly, soon Hotmail and Gmail had exploded.  AOL opened up everyone’s old email addresses (I actually still have access to my Jonyisgood@AOL.com email, not that I ever check it) and everyone who wanted personal email had it.  The second problem, faced much stiffer odds.  I remember that in my college, they tried to teach everyone how to use Dreamweaver to create their own webpage.  The results were disastrous.  I’m pretty crappy at design and I can tell you that mine personally, was never going to be my face for the web.  It wasn’t the worst one though, and it was distanced from the worst ones by a long shot.  One thing was clear, too small a part of the world at the time had the knowledge and skill to create attractive websites.  Another problem facing this concept of the individual website was how to let others know that it existed and tell them when it was updated.  Most of these websites at my school got created for class and never touched again (not by the author or visitors).   There was no central catalog of all my friends’ websites and no standard way to read them quickly.

These difficulties made this second problem one with the potential to spawn a billion dollar company or two.  Why?  There was an obvious, logical truth about where the Internet needed to go and it was suffering from serious road blocks.  The rapid incremental innovations that were being applied to DreamWeaver and FrontPage were not enough to help/motivate people to go build their new sites (they only partly solved the need to know HTML and they didn’t solve the linking/updating/directory problem at all).  What the world needed was a disruptive innovation that solved the problems and made the obvious truth of personal websites a reality.

Friendster then MySpace then Facebook solved these problems with the disruptive innovation of a single website that allowed everyone to build their own page and neatly keep track of their friends.  While they (especially Facebook) have done much more since, the reason they grew in to giants was this concept.  My theory is that this shouldn’t have been surprising since there was a logical truth to what was coming next and they provided a solution.

One other thing that I think is critical to note in this space is that identifying billion dollar companies requires first looking at the truth you think will drive disruptive innovation then looking at EVERY new company through that lens.  If you were an investor who had identified personal webpages as one of those truths, you might have been rummaging through “web design tools” and not taken notice of this new University-Based service for keeping track of friends.  However, if you had taken the time to look closely you would have seen exactly the innovation you were looking for.

So that leads to the next logical question, what are the obvious, logical truths that are suffering from major road blocks?  I’m going to come back to this topic, but I’d love to see some thoughts in the comments.

Some companies have become famous for innovating (think 3M), while others derive their reputation from operational efficiency (think Honda).  I’ve long been a proponent of innovation.  In a paper for my MBA program I was asked to defend this decision and setup a structure with in a fictitious organization that would convert the culture from operationally focused to innovation focused.  The question made me think for a little while, but I ended up posing the following solution (excerpts and paraphrasing are written as a memo to my boss explaining my next steps):

In order to establish an innovative culture within my new division, I will be following two critical steps.  I will first determine the most critical areas of innovation that are required; establishing these critical areas as the goals for innovation within the division.  Then, I will identify organizational constructs, processes and controls that will allow us to achieve these goals.

…

We need to establish an innovative culture that revolves around three primary goals:

1. Locating and pursuing the appropriate markets for our new product.
2. Identifying threats and opportunities brought on by disruptive innovations in our industry.
3. Ensuring that our division leverages and contributes to communities of innovation in our industry and our supply chain.
4. Maintaining a commitment to carrying innovative products.  << I didn’t focus on this one, because a solid R&D process was already in place at the company >>

…

The first three of these items will be implemented by setting up a series of innovation focused virtual teams.  These virtual teams will be composed of executives, managers and line workers from many existing teams as well as dedicated business analysts.  Their job will be to review the fruits of our new innovation suggestion process (a web submission process designed to transform water cooler complaints in to helpful innovations).  They will analyze the feasibility and priority of each of these suggestions.  Membership on these teams will rotate so that all employees gain exposure to the innovation process and gain an active role in selecting and refining innovations.  Additionally, employees will be measured moving forward, in-part, based on their innovative recommendations.

This is a rather harsh chopping of a 6 page paper that went in to the theory behind each of these points.  I’ll get a chance to get a grade on the theory from my professor; I placed these words on this blog because I’d like to hear your thoughts.  My guess, based on the people who read the blog that I’ve interacted with, is that one or two of you have actually faced this challenge in the real world and I’d be interested to know how you tackled such a problem.  Also if you agree with my four general areas of corporate innovation.

I noticed this chart on Pingdom this evening and had to pass it along.  A couple of thoughts:

• I don’t believe this is sustainable for Google.  I think companies spend too much time trying to maintain these numbers, and its exactly what kills them.  When I get news like this out of Google I start to think that they’re stifling ideas to maintain profits and that will kill you every time.
• Apple is riding huge margins.  How long can the amount of profit produced outpace the amount of value produced?
• I’m impressed with Oracle and Cisco, both are doing better then I would have guessed.
• I’m disappointed in Amazon and Dell, both aren’t doing all they could.
• Love them or hate them or both, it’s hard to imagine any technology company will ever be as consistently successful as Microsoft has been the last 25 years.
• Twitter would be negative.
• I saw a link to this chart from 37Signals, what do you think there number is?  I’m thinking it has 7 digits.

Source: http://www.slideshare.net/reed2002/netflix-business-opportunity#40

There has been much press about the fall of newspapers and book publishing in this country.  Truth be told, I feel no sympathy for either one.  The writing was on the wall and they did nothing.  I hope they find a way to succeed, because I think they serve a valuable purpose, but if they don’t they’ll have no one to blame but themselves.

I’ve said this for a long time, but today I ran across a story that shows a solid case in point.  Look at what Netflix, a publicly traded company, says is going to happen to their bread and butter business (mailing DVDs to customers).  I’m sure Netflix executives don’t hope that their stock goes down in the short term, but they also are aware that unless they’re honest about what’s going to happen in their industry, they won’t be able to survive the next 5 years.  Is this what publishing companies and newspapers were doing in 2000?  No, but it’s what they should have been doing.