Due Diligence

Monday, July 7, 2003

Welcome, AOL. Seriously.

The imminent arrival of AOL and its users in the blogosphere has now been widely noted. Being late to the party due to blowing off for the long weekend, I'll just toss in a few observations from my past in the online services world:

Clay Shirky's post highlights the likelihood that AOL's implementation will lean toward the community, rather than light weight publishing, side of blogging. This makes sense for a couple of reasons:

Historically, what was originally QuantumLink and later America Online grew by attracting underserved, dispersed communities such as gays and seniors, and connecting them online. While this may have been deleted from the official genesis legend, these genes may still lurk in the DNA of the big media company of today.

Pragmatically, a community approach is more likely to create switching costs for AOL's blog users. Start with the hassle of moving a tightly knit group to another service. Consider what other features might be enabled if the users are all authenticated within the AOL network. Higher switching costs translate directly to lower churn numbers for AOL subscribers, which is becoming more important to the company as the market for Internet access and aggregation saturates.

One point of marketing dissonance appears in Jeff Jarvis' otherwise excellent discussion of the AOL entry:

But AOL -- and every other online business -- also has a strategic challenge to make sure that they stay ahead of where weblogs are headed.

Wrongo. AOL's subscribers are now mid- to late-adopters. AOL is now a market follower, not leader. Evidence, from Shirky:

For example, they are calling the product "Journal," as only 18% of their audience recognizes the word weblog.

The wider blogosphere will work out the nuances of the medium. AOL will copy what fits their business model and market.
4:08:45 PM

If the shoe doesn't fit, don't wear it - OR - I'm OK, You're OK

Joe Katzman at Winds of Change links to Joel Spolsky's month ago article on why he doesn't like the VC model. I missed commenting on it the first time, so here's my second chance:

First, if you look past some of the cant ("secretive world of VC"; "classic VC myopia"), we actually agree on a lot. Joel believes that VC is a bad fit for many software companies. I have suggested that many businesses don't fit the VC model, and specifically mentioned software businesses that don't have an organic need for a lot of capital as one class. I also describe a version of the 'make the deal bigger by throwing money at it' syndrome that Joel decries. Sometimes you can create barriers by aggressive spending; often you're just burning cash. A fund will have a 'VC crisis', if that is the only kind of deal it's doing.

Which gets on to another point of partial agreement. Joel points out that VCs are largely organized to say 'no' efficiently. Right on. I've made the same point here before. What Joel calls myopic just looks like smart business from this end, though his numbers are a bit off. It seems not to have occured to him that what we're doing may in fact be designed, in part, to reject the kind of companies that he thinks shouldn't take venture capital anyway. At least our scoresheet has several items that try to diagnose low capitalization, cash flow oriented, long or no exit companies.

Where Joel's likely off base is in some of his numbers. His counter to the aggressive growth scenario is this:

A Probability of Success 80%

B How rich I would get $100,000,000

C Expected Return (A x B) $80,000,000

Now assuming Joel thinks he'll own the whole company under this model, and it's worth 2x revenues when he finally liquidates (or that's the present value of the profit stream), then he's suggesting that there are number of minimum $50m revenue opportunities going begging for products. Let me suggest that unless the company in question has some extremely high entry barriers, like strong IP or market segment lock in, that it will shortly have more competitors than flies on sh**, and may not have enough marketing budget to avoid a market share game. Now there are undoubtedly many fine product opportunities out there, which will support companies that make both customers and producers happy, but this is an unrealistic picture of the upside of internally funded growth.

Blog authoring tools are a good example of this effect in operation. I have no reason to believe that CityDesk is anything but a fine product, since Den Beste is not an easy reviewer. However, it's already obviously locked into a market share game with MoveableType, blogger, Radio, and soon AOL and all of your favorite software vendors and service providers. This is typical in a category where the organic barrier to entry is low, and the first mover doesn't manage to 'kill the category'. If Dave had the largest role in defining the category, he certainly hasn't managed - or perhaps wanted - to dominate it. And as for inherent barrier: Come on. I don't care how many TLA defined feeds and outputs you hang onto it. At the end of the day, a blogging system is a light weight database with a presentation layer and perhaps some authoring policy. How many man-years is that really, even if you're foolish enough to build from the ground up? Here's my bet that blogging will end up being a feature that accretes onto existing products and services in the middle to long run, though good fun and hopefully some cash flow and profits will be had along the way. If that's where Joel is really getting, I'm there already.

(The title of this post, BTW, is to be read in the voice of Edward Everett Horton.)
2:52:07 PM