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Spotify, MOG demonstrate digital music flux March 26, 2012

Posted by David Card in Uncategorized.
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If the on-demand music streamer Spotify is worth $3 to $4 billion, why is MOG, a similar if much smaller service, reportedly being sold for $14 million? The digital music industry is in flux, but it’s showing positive signs of growth. Are those two players really so different?

Our recent GigaOM Pro digital music forecast described Disruption Vectors, market forces and trends that smart companies can use to gain revenue and market share in the near term. Our analysis rated Spotify as the company best positioned along several of the most important vectors: anywhere access, discovery and the highly disruptive rent vs. buy business model. But MOG scored well on those factors, too.

Network effect?

Would-be investors must think that Spotify can pull off a network effect based on its size and momentum, and on its efforts to establish itself as a technology platform for developers. Indeed, Spotify claims to have 10 million active users in comparison with MOG’s 500,000. But Spotify’s business model isn’t solidly established. Its contracts with rights holders will come up for renewal at some point, and there’s no telling what the labels well demand this time around. Rumor has it that the labels got upfront guaranteed payments. What more could they ask if Spotify raises even more money? The big labels already have equity positions in the company.

Meanwhile, Spotify’s platform strategy is smart, but limited. It is using APIs to attract apps that run within its own application. Recently, it has used this strategy to tap into another Disruption Vector: the changing role of record labels. Several labels, including Universal’s Def Jam, Warner Music and indies like Matador and Domino have built apps for Spotify. But Spotify should extend its APIs beyond its own application and become a streaming music and discovery provider for other companies’ sites and apps. That way, it would gain distribution and potential partner lock-in, both of which would maximize network effects toward a winner-take all outcome.

Closed loop

Meanwhile, MOG appears to be an acquisition target for the hot headphones manufacturer Beats Electronics. Beats, in turn, is majority owned by the big mobile phone handset maker HTC. HTC could be trying to put together a device-based, closed-loop system that could create a subsidized music service, another GigaOM Pro Disruption Vector. Although Nokia tried something similar and its program flopped, Deezer and Muve have had some success screening the cost of on-demand streaming by bundling it with voice and data services via carriers. But those efforts are carrier-driven rather than tied to hardware, which already has razor-thin margins for anyone but Apple.

It’s clear that, like all digital media, digital music services need to cultivate multiple revenue sources to thrive. That includes consumer fees, advertising and, perhaps, licensing. Both Spotify and MOG sell ads, but mostly to help subsidize free trials they hope to convert to paying customers. And that’s even though MOG has an ad network to sell inventory on other music sites. Audio ads are still a tough market, but video and display ads on apps might gain new momentum from tablets. MOG has a iPad app; Spotify does not.

Digital transition underway

Fees from consumers look attractive, but they’re hard to come by. Spotify doesn’t break out its numbers, though it has said it has 3 million paying subscribers worldwide. That would represent a phenomenally high conversion rate for digital content. GigaOM Pro’s Q1 consumer survey shows that only single digit percentages of music streamers (6 percent) have paid for a music service, although four times as many (25 percent) had bought a music download in the last three months.

There are strong hints of music listening substitution. Music streamers (27 percent of the U.S. online adult population) listen to local radio stations and CDs at the same rate as the rest of the population. But the subset of streamers whose primary listening mode is streaming  (8 percent of online adults) are lighter radio and CD listeners. Both groups are above-average users of music on their mobile phones.

The digital transition appears to be underway, but it’s likely to be a long slog. Players need multiple revenue streams and some means of staying power, whether that’s a sugar daddy parent company or tons of cash in the bank. Spotify has momentum, but I’d be wary of  overestimating its odds to be the sole survivor in streaming music.

Question of the week

How do you think music streaming will make money?

How to Rate Network Effects in Social Media May 23, 2011

Posted by David Card in Uncategorized.
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Part of the excitement driving LinkedIn’s IPO last week comes from investors associating social media with network effects. You know, the principle that the value of a network increases dramatically with the number of its participants. That’s the engine that drove Windows and eBay, not to mention the public telephone network. Markets with network effects tend to have explosive growth and can end up with winner-take-all market share.

But not all effects are equal, and assessing the valuations and competitive positions of social media companies depends on knowing which network effects are actually at work and how those could play out.

Types of Network Effects in Social Media

Pascal-Emmanuel Gobry wrote a thoughtful piece on network effects last week for Business Insider; it includes some analysis on how companies focused on market niches eat away at generalists who benefit from network effects. And as Matthew Ingram notes, network effects can work go ways: For example, Facebook supplanted MySpace, which supplanted Friendster.

Looking closer, there are several different types of network effects that work in social media:

  • Core network effect utility: There’s a difference between economies of scale and the magic of adding connections to a network. Groupon is building a user base, a sales force and relationships with thousands of merchants, but until it uses its sales data to offer personalization, targeting and other marketing programs to merchants, it won’t achieve much beyond scale. Even then, once critical mass is achieved, additional connections don’t add as much.
  • Viral growth: LinkedIn and Facebook initially grew their networks the old-fashioned way: Users invited other users to join. Viral pass-along is a key growth driver for social commerce and games, but now services and apps can hitch a ride on existing social networks, leveling what was once a steep playing field.
  • Business model that reinforces the effects: Gobry’s wrong about Google. While there are minimal network effects for its search users, there are huge ones for its advertising network. Google’s $25 billion in extremely profitable search advertising depends on attracting advertisers to its dominant search audience and insuring a liquid marketplace via bidding and enforced relevance to create an unbeatable paid search business. Plus Google lets developers using its services and APIs tap into that revenue stream with minimal effort.
  • Participant lock-in: Technology platforms create positive business opportunities for developers. But they can also achieve customer lock-in for their originator by making those same developers dependent on APIs. End users can be locked in, too, via familiarity (e.g., the QWERTY keyboard) and data storage (e.g., contact info, photos, message repositories) that raise switching costs for members.


Source: GigaOM Pro

As illustrated in the table above, here’s how network effects are shaping competition in selected social media markets:

  • Social graph: Though there are network effects aplenty, consumers tend to belong to multiple networks (Facebook, Twitter, Foursquare), meaning would-be data miners must target multiple data sources. And the industry is only just beginning to harness that collection of big data into reliable revenue streams.
  • Likes and log-in networks: Facebook was smart to hang Likes and Sign-ins off its Connect network, as each feature complements the others and assists in distribution; now LinkedIn and Google are trying to do the same. Bolting an ad network on top of those networks could provide missing revenue reinforcement.
  • Social commerce: As noted, most social commerce is more scalar than social. Without the additional services for consumers and merchants previously mentioned, single-market entry barriers and switching costs will remain low.
  • Unified communications: A cross-channel communications hub would sponsor habitual consumer usage. But so far, interoperability requirements have restrained the potential to lock in customers.
  • Social games: Many social games don’t depend on competition between users to be fun. Facebook’s distribution channel and cross-vendor virtual currency enforce interoperability — that’s good for growth but bad for Zynga’s or Playdom’s user lock-in.

Based on that framework, Facebook is well-positioned to build on its influence and add revenue streams. Its platform is a legitimate beneficiary of network effects, even in the face of competition from tech worthies (Google) and startups. LinkedIn has a solid business, but its platform aspirations remain just that: aspirations. Besides viral growth and some network utility, it’s not clear that other social networks (Twitter, Foursquare, Instagram) have network effects behind them.

Question of the week

Where are the real network effects in social media?

Why Browsers Don’t Matter Anymore November 15, 2010

Posted by David Card in Uncategorized.
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You might have heard, a company called RockMelt announced a browser last week, even calling it a “social browser.” Thanks in part to Marc Andreessen’s VC firm funding it (even though the funder should never be the story), the product got a lot of media attention.

Big deal. Browsers don’t matter anymore, and here’s why not.

Once They Coulda Been Contenders

Browsers used to matter a lot. Microsoft invested a ton of effort to kill off Netscape Navigator because it represented the first legitimate threat to Windows. (Remember, that was before Google, the iPhone and Facebook.) Microsoft built a great browser with Internet Explorer, integrated it tightly with Windows, and bundled the two for as long as that was legally allowed.

Just as important as its profitable revenues, Windows ruled as the desktop platform. That is, it delivered core technologies that created a successful ecosystem for both Microsoft and its developers, which, in turn, delivered the rich environment of applications and competitive hardware for users. The magic of Windows was that it delivered Microsoft’s APIs — which let it “control” developers — housed in a UI that effectively locked in users. This combination, along with Microsoft’s distribution through OEMs, developer support and programming tools, created a network effect that increased the overall value of the ecosystem, with winner-take-all marketshare for Microsoft.

Popular browsers offered the promise of a similar platform: an application that, with the rise of web apps and media, could act as a user’s primary UI. Browsers deployed core distributed computing technologies and APIs and acted as a distribution channel or launchpad for portals and search engines.

Today’s Platform Delivery Vehicles

But today’s platform is the web itself; key platform technology suppliers don’t depend on browsers to make or break their APIs and user interfaces:

  • Google has a browser, but Chrome isn’t necessary to feeding search, Gmail, Google Apps and distributed computing technologies. Google’s Android mobile OS appears to be the platform for tablets rather than Chrome running on some other OS. Google does its most important UI innovation in search.
  • Facebook hasn’t built a browser, nor an operating system for that matter. It uses its web site and mobile apps to establish and distribute its APIs and UI. Developers can tap into Facebook APIs like Facebook Connect across the web in a browser-independent fashion.
  • Apple too has a browser, but it relies on its desktop and mobile operating systems for API and UI implementation.

Other companies that deliver mass-market APIs for consumer apps, like eBay/PayPal, Amazon and Yahoo, don’t depend on specific browsers. Neither do enterprise suppliers like IBM, Oracle, SAP and Salesforce.com. Even Microsoft, which despite a lack of buzz still dominates browser market share, can’t depend on Internet Explorer to establish its standards or businesses. Silverlight and Bing underscore that fact. All that’s to say that the excitement about RockMelt arises from the potential of establishing a new browser, but it feels like that potential is based on an outdated model.

Where a New Browser Might Matter

OK, you may argue that I’m confusing cause and effect, i.e., because a couple of the platform companies’ browsers have lousy marketshare, they’ve had to rely on other means to spread their APIs. I can concede that, and admit that a browser can still be a platform hub, just not on a web desktop. A new browser could use that powerful API/UI combination on new devices:

  • Mobile. Conceivably, a browser could relieve some of the OS fragmentation across mobile phones. The mobile platforms of Microsoft, Google, and Apple are OS-based, while Facebook is building its mobile platform without either a browser or a mobile OS.
  • TV. Similarly, next-generation TV and gaming devices suffer from an OS fragmentation that’s slowing app development and deployment. This one feels like an OS war to me, as most of the middleware players are names that are unfamiliar to web or game developers. Google TV is built out of a combination of Android and Chrome.

Question of the week

What would it take to make a differentiated browser?