7 ms·

"The lesson instead is: build something whose very nature makes it a cannibalistic cash flow hit for a BigCo so that their shareholders resist competing, but wh

"The lesson instead is: build something whose very nature makes it a cannibalistic cash flow hit for a BigCo so that their shareholders resist competing, but which their users love." Can anyone explain more what he means by that? How can something that is a cash flow hit for a BigCo not be a cash flow hit for anyone else?

paulsutter 14y ago
Quantcast's free audience reports couldn't be copied by the incumbents (Comscore and Nielsen), because selling similar reports was their core business. They hated us, but we never spent a moment worrying about them. In fact we were always open to working with them, but they were bound up in a knot over our model. Southwest undercut united and American by avoiding business and first class, flying only one model of plane (737), which lowered maintenance costs and allowed easier substitution of planes among flights. They skipped the hub and spoke model and flew out of peripheral airports that were cheaper, and boarded like buses with no reserved seats to shorten the idle time a the gate, etc. no long flights meant no meal service. There was no possible way for United and American to match them on price. They were afraid to adopt any of these changes because it might tarnish their brand. They were too focused on competing with each other. Dell offered lower costs than their competitors by charging up front for the computer before buying the parts (which were steadily falling in price). The competition were stuck with a channel model where they shipped finished computers to channel partners for stocking in inventory, so they not only had to buy parts far in advance but had to give a cut to channel partners and retailers, making their prices higher and profit lower. Netscape had a dozen competitors to their browser. Netscspe offered free downloads to anyone, and with a wink asked for a licensing fee. No individuals paid it, but corporations did because they wanted to be in legal compliance. Best of both worlds (free for individuals and paid by corporations, but only after achieving critical mass within the corporation). They crushed their competitors with this model, who were charging license fees to all customers from the beginning, as competitors didnt get the benefit of rogue employee groundswell to achieve critical mass in corporations. Hilariously, Microsoft in turn crushed Netscspe by goong a step further, making Internet Exploror completely free, no wink needed. Netscspe browser revenue dried up as corporations stopped paying for Netscape because they already had a free license to ie. This was funny to me, as it led to all sorts of crybaby behavior by Netscape screaming "antitrust!", when all Microsoft did was tweak the strategy used by Netscape themselves to crush the others. All of these cases are "strategy", which is defined by Michael Porter as the way that you are different from your competitors. Ideally, in a way they cannot copy. Notice how a strategy allows you to avoid competing, because you're playing a different game altogether.
- scottrafer 14y ago
  I suspect that the Facebook App Center is different than the iTunes App Store in an analogous way and will do nicely competing against it once Facebook chooses to do so.
- slurgfest 14y ago
  IE's inclusion in Windows (which dominated the market) had a lot to do with Microsoft crushing Netscape - it wasn't just that IE was free and Netscape wasn't.
  - paulsutter 14y ago
    Free seemed to work fine for Chrome and Firefox. The real key here is that corporations stopped paying for Netscspe, which was their main revenue stream. Microsoft definitely got a big advantage from bundling the browser, but how can it make sense in an Internet era for an OS to ship without a browser? How could it possibly benefit consumers if they were forced to download a browser separately? Nobody is screaming antitrust when Apple bundles Safari.
    - rhizome 14y ago
      That's entirely because Apple doesn't have a monopoly.
      - paulsutter 14y ago
        You really think that Microsoft should be prevented from bundling a browser with windows? And that consumers would benefit from this?
        rhizome 14y ago
        You may misunderstand the case that you're referring to. They bundled for free that which cost money otherwise, as well as using undocumented APIs. When they were found to be a monopoly, their actions, which would in many other cases be perfectly legal, were a problem.
rhizome 14y ago
I think it means to build something that the shareholders wouldn't want to expend internal resources to duplicate, but it's hard to tell for sure.
- fusiongyro 14y ago
  I think he's going further than that and saying, build something that shareholders wouldn't allow because it will eat into the existing revenue sources.
  - scottrafer 14y ago
    Exactly. Normal cannibalization. New businesses are built all the time by giving away what the incumbent charges for. Skype's an easy one. They don't charge all for normal calls, only for certain premiums. Innovator's Dilemma, etc., etc. If @daltonc's app.net doesn't massively undercut FB's App Center revenue plan (or overwhelm it's distribution plan) somehow, what's the point?
    - fusiongyro 14y ago
      I think the point is that Twitter can't afford to remove ads or broaden their terms of use. The idea seems to be that a for-pay Twitter with broad terms of use and no ads could become a valuable development platform. The gamble is, how valuable and will people pay. I think your cannibalization concept is brilliant, but I don't think app.net is completely vulnerable to it. Caldwell's made it clear that he's not trying to find success of Twitter and FB's magnitude, that sustainable profitability is more important for this venture than unbounded growth and huge winnings, and he's not trying to steal Twitter's customers, whatever that would mean. But unless Twitter becomes wildly profitable I don't see them giving away ad-free unrestricted API access just to eliminate a small gadfly. I think your concept has a lot of merit, but I'm not sure it applies in this case.
      - scottrafer 14y ago
        I'm applying it differently, and to the business before his pivot. I'm talking about his conversation with Facebook and his accusation that Facebook was underhanded. He didn't do a proper job of disrupting FB's economics, distribution, or organizational limitations, so he's got no grounds to complain that they 'bullied' him. That should have been his expectation.
michaelbuckbee 14y ago
An example: Rapportive was a browser plugin that put social information (from FB, LinkedIn, Twitter, etc.) directly in your Gmail. This was great from a user perspective (puts a picture with an email so you recognize that this is 'Bill' who you met at the hackerspace even though his email is cypherdog26@crytomesh.org). However it was NOT so great for Gmail: 1. Rapportive overwrote the section of gmail where they display ads. 2. It further entrenched Google's social competitors. There is no way that Google was going to launch a set of Rapportive equivalent features in Gmail. However, Rapportive was beloved by users and exited to LinkedIn.
- drivebyacct2 14y ago
  Except Gmail does that now via G+ data.
  - jamesaguilar 14y ago
    Which is not nearly as useful since the G+ network is not as important as LinkedIn or Facebook.
austenallred 14y ago
It means build something that big companies have thought about or maybe even could build, but have not built because they're afraid they'll lose money in doing so. Facebook and Instagram was a perfect example. Facebook has money, time, and resources to build an Instagram competitor. But they didn't, because they still don't know how to monetize their mobile traffic (which should answer the question, "Why is Facebook's mobile app so awful?") They tried last minute to build Facebook camera, and when that had no traction because Instagram had already captured that market they had to cut their losses and buy it. My guess is Instagram realized that Facebook was basically forced to buy them and made them pay for it ($1B). So I work on a startup in the news/journalism industry. If we're to follow the argument (which I believe is spot on), our goal is to build something that the New York Times or Washington Post wouldn't dare build, because it would destroy the revenue from their newspaper sales (yes, we have to compete against the likes of the Huffington Post too, but it's easier to illustrate it against the background of business models that haven't changed since the 1950's). What Steve Jobs always preached was true - if you're not willing to cannibalize yourself, someone else will cannibalize you. As a startup, one strategy is to find those companies not willing to cannibalize themselves and help them out a little bit. But in doing so you run a risk; if you don't generate traction quickly enough and they see that it's inevitable, they'll just build it on their own and leave you hanging out to dry.
- klawed 14y ago
  One would think that Facebook will aggressively avoid finding themselves in a position where they have to spend $1b on a product they could build themselves. IOW, the next app that appears to be on a path to getting as much momemtum and traction that Instagram had will likely find FB competing much sooner. Who knows, maybe that's what was going on with Dalton...
  - austenallred 14y ago
    Possibly. The difference with Instagram is that Instagram didn't have to rely on Facebook as a platform, where as it sounds like Dalton did. Hence the Dalton frustration; Facebook has total control, and Dalton has no recourse to do anything about it, yet they encouraged him to keep building.

paulsutter 14y ago

Quantcast's free audience reports couldn't be copied by the incumbents (Comscore and Nielsen), because selling similar reports was their core business. They hated us, but we never spent a moment worrying about them. In fact we were always open to working with them, but they were bound up in a knot over our model. Southwest undercut united and American by avoiding business and first class, flying only one model of plane (737), which lowered maintenance costs and allowed easier substitution of planes among flights. They skipped the hub and spoke model and flew out of peripheral airports that were cheaper, and boarded like buses with no reserved seats to shorten the idle time a the gate, etc. no long flights meant no meal service. There was no possible way for United and American to match them on price. They were afraid to adopt any of these changes because it might tarnish their brand. They were too focused on competing with each other. Dell offered lower costs than their competitors by charging up front for the computer before buying the parts (which were steadily falling in price). The competition were stuck with a channel model where they shipped finished computers to channel partners for stocking in inventory, so they not only had to buy parts far in advance but had to give a cut to channel partners and retailers, making their prices higher and profit lower. Netscape had a dozen competitors to their browser. Netscspe offered free downloads to anyone, and with a wink asked for a licensing fee. No individuals paid it, but corporations did because they wanted to be in legal compliance. Best of both worlds (free for individuals and paid by corporations, but only after achieving critical mass within the corporation). They crushed their competitors with this model, who were charging license fees to all customers from the beginning, as competitors didnt get the benefit of rogue employee groundswell to achieve critical mass in corporations. Hilariously, Microsoft in turn crushed Netscspe by goong a step further, making Internet Exploror completely free, no wink needed. Netscspe browser revenue dried up as corporations stopped paying for Netscape because they already had a free license to ie. This was funny to me, as it led to all sorts of crybaby behavior by Netscape screaming "antitrust!", when all Microsoft did was tweak the strategy used by Netscape themselves to crush the others. All of these cases are "strategy", which is defined by Michael Porter as the way that you are different from your competitors. Ideally, in a way they cannot copy. Notice how a strategy allows you to avoid competing, because you're playing a different game altogether.

scottrafer 14y ago
I suspect that the Facebook App Center is different than the iTunes App Store in an analogous way and will do nicely competing against it once Facebook chooses to do so.
slurgfest 14y ago
IE's inclusion in Windows (which dominated the market) had a lot to do with Microsoft crushing Netscape - it wasn't just that IE was free and Netscape wasn't.
- paulsutter 14y ago
  Free seemed to work fine for Chrome and Firefox. The real key here is that corporations stopped paying for Netscspe, which was their main revenue stream. Microsoft definitely got a big advantage from bundling the browser, but how can it make sense in an Internet era for an OS to ship without a browser? How could it possibly benefit consumers if they were forced to download a browser separately? Nobody is screaming antitrust when Apple bundles Safari.
  - rhizome 14y ago
    That's entirely because Apple doesn't have a monopoly.
    - paulsutter 14y ago
      You really think that Microsoft should be prevented from bundling a browser with windows? And that consumers would benefit from this?
      - rhizome 14y ago
        You may misunderstand the case that you're referring to. They bundled for free that which cost money otherwise, as well as using undocumented APIs. When they were found to be a monopoly, their actions, which would in many other cases be perfectly legal, were a problem.

rhizome 14y ago

I think it means to build something that the shareholders wouldn't want to expend internal resources to duplicate, but it's hard to tell for sure.

fusiongyro 14y ago
I think he's going further than that and saying, build something that shareholders wouldn't allow because it will eat into the existing revenue sources.
- scottrafer 14y ago
  Exactly. Normal cannibalization. New businesses are built all the time by giving away what the incumbent charges for. Skype's an easy one. They don't charge all for normal calls, only for certain premiums. Innovator's Dilemma, etc., etc. If @daltonc's app.net doesn't massively undercut FB's App Center revenue plan (or overwhelm it's distribution plan) somehow, what's the point?
  - fusiongyro 14y ago
    I think the point is that Twitter can't afford to remove ads or broaden their terms of use. The idea seems to be that a for-pay Twitter with broad terms of use and no ads could become a valuable development platform. The gamble is, how valuable and will people pay. I think your cannibalization concept is brilliant, but I don't think app.net is completely vulnerable to it. Caldwell's made it clear that he's not trying to find success of Twitter and FB's magnitude, that sustainable profitability is more important for this venture than unbounded growth and huge winnings, and he's not trying to steal Twitter's customers, whatever that would mean. But unless Twitter becomes wildly profitable I don't see them giving away ad-free unrestricted API access just to eliminate a small gadfly. I think your concept has a lot of merit, but I'm not sure it applies in this case.
    - scottrafer 14y ago
      I'm applying it differently, and to the business before his pivot. I'm talking about his conversation with Facebook and his accusation that Facebook was underhanded. He didn't do a proper job of disrupting FB's economics, distribution, or organizational limitations, so he's got no grounds to complain that they 'bullied' him. That should have been his expectation.

michaelbuckbee 14y ago

An example: Rapportive was a browser plugin that put social information (from FB, LinkedIn, Twitter, etc.) directly in your Gmail. This was great from a user perspective (puts a picture with an email so you recognize that this is 'Bill' who you met at the hackerspace even though his email is cypherdog26@crytomesh.org). However it was NOT so great for Gmail: 1. Rapportive overwrote the section of gmail where they display ads. 2. It further entrenched Google's social competitors. There is no way that Google was going to launch a set of Rapportive equivalent features in Gmail. However, Rapportive was beloved by users and exited to LinkedIn.

drivebyacct2 14y ago
Except Gmail does that now via G+ data.
- jamesaguilar 14y ago
  Which is not nearly as useful since the G+ network is not as important as LinkedIn or Facebook.

austenallred 14y ago

It means build something that big companies have thought about or maybe even could build, but have not built because they're afraid they'll lose money in doing so. Facebook and Instagram was a perfect example. Facebook has money, time, and resources to build an Instagram competitor. But they didn't, because they still don't know how to monetize their mobile traffic (which should answer the question, "Why is Facebook's mobile app so awful?") They tried last minute to build Facebook camera, and when that had no traction because Instagram had already captured that market they had to cut their losses and buy it. My guess is Instagram realized that Facebook was basically forced to buy them and made them pay for it ($1B). So I work on a startup in the news/journalism industry. If we're to follow the argument (which I believe is spot on), our goal is to build something that the New York Times or Washington Post wouldn't dare build, because it would destroy the revenue from their newspaper sales (yes, we have to compete against the likes of the Huffington Post too, but it's easier to illustrate it against the background of business models that haven't changed since the 1950's). What Steve Jobs always preached was true - if you're not willing to cannibalize yourself, someone else will cannibalize you. As a startup, one strategy is to find those companies not willing to cannibalize themselves and help them out a little bit. But in doing so you run a risk; if you don't generate traction quickly enough and they see that it's inevitable, they'll just build it on their own and leave you hanging out to dry.

klawed 14y ago
One would think that Facebook will aggressively avoid finding themselves in a position where they have to spend $1b on a product they could build themselves. IOW, the next app that appears to be on a path to getting as much momemtum and traction that Instagram had will likely find FB competing much sooner. Who knows, maybe that's what was going on with Dalton...
- austenallred 14y ago
  Possibly. The difference with Instagram is that Instagram didn't have to rely on Facebook as a platform, where as it sounds like Dalton did. Hence the Dalton frustration; Facebook has total control, and Dalton has no recourse to do anything about it, yet they encouraged him to keep building.