Two things Apple could do right now to maximize revenue

One of the benefits of being on the outside of a major multinational corporation is that you can comment on what  needs to be done to make more money. You’re unaware of what is currently being worked on, what has been tried and shut down, or what just will not work with the current operational structure of the firm. One of the challenges of a large firm is implementing a new stream of revenue, which has to work across various lines of business, be localized, and be user friendly amongst many verticals. With all that being said, I look at Apple and it’s dominance in the iPod and now the iPhone, and to me, it appears that Apple can be the dominant technology company that everyone assumed Google would become.

Where is Apple now?

Apple is one of the few technology companies that can be in the software and hardware business at the same time. Google is primarily a web-based software company, with 99% of their revenue in the search business. Microsoft is primarily in the software space, with very little revenue being made over the web. Yahoo is a company looking for an identity, but despite everything is a web-based company. The Oracles, BEAs, and RedHats, and OEMs of the world are focused on one part of the value chain, whereas Apple is steadily increasing market share in multiple areas. Apple sells you computers, an operating system and software, and an ecosystem of applications and developers from the increasingly popular iPhone.

Over a billion iPhone apps have been downloaded. There are significant (and increasing) switching costs built on this platform! There is every use case imaginable, and from their recent commercials you can see that they are taking aim at a very potentially lucrative small business vertical. A recent Gartner report showed that Apple’s market share had risen from 5.3% of the smartphone market to 10.8% in the first quarter of 2009. In total unit sales, this is from 1.7 million total sales in the first quarter of 2008, to 3.9 million in the first quarter of 2009. These are staggering numbers considering the state of the U.S. economy in conjunction with the iPhone being restricted simply to a marginal carrier in AT&T, increased competition from competitors (i.e. Blackberry Bold), and limited international expansion. Nokia, the king of the hill in terms of being a cell phone producer, has seen their market share drop at a higher pace than the contraction in demand for cell phones because of the global economy.

Two areas that Apple can maximize revenue: An Apple Payment Gateway and the Amie Street model for the Apple Store.

The Payment Gateway

Recently, Facebook has been testing their own payment gateway for micropayments around their ecosystem of applications. Paypal is one of those companies that really missed the boat to become a massive, game changing company. Owned by eBay, they were more focused on generating revenue to make up for a flatlining (even declining) growth from their core business, auctions. Their Skype acquisition was a failure confirmed on their through a recent Skype charge off, and their StumpleUpon acquisition was a big time failure. So eBay kept raising fees for Paypal to try and smooth earnings to hide strategic business failures in their core business. They essentially priced themselves out of competing in other verticals, and could have made it an easy “build versus buy” decision for companies such as Facebook. It make much more sense to build your own payment gateway than utilizing Paypal and having to hand over the exorbitant fees.

Like Facebook, Apple should absolutely have its own payment gateway. With their apps and developer ecosystem, they could better integrate various payment options for consumers. Developers can play around with various business models, such as reoccurring billing. Although the apps are a guise for selling more handsets, which produces significantly more revenue, this should be a short-term priority.  By owning the gateway for these micropayments, they can earn or keep the fees that would have gone to another carrier. Although a billion apps have been downloaded, a majority are free apps, but as developers create more value with apps, these payments will be start to become more material and a long-term billion dollar opportunity. And you never know what other use cases can be created if it’s part of the Apple development toolkit.

Amie Street model for the Apple store

For those that aren’t familiar, Amie Street is one of those innovative companies that are using basic laws of economics to maximize revenue. Essentially, independent musicians post their tracks with a specified minimum price point. Based on the number of paid downloads, the price increases over time and fluctuates basically at the point for a particular demand and price point.

Why would this be important for Apple?

When reading the book The Long Tail, by Chris Anderson, which delves with the Power Law or “80-20” rule, Chris remarks about the fact [his research] that every song on iTunes is downloaded at least once over a year’s span. Recently, Apple has raised the prices of the more popular songs to $1.39 from the usual $0.99 mark for every song, delineating between a hit and an average song. But as I was looking for old music to put on my iPhone, I’d buy substantially more music for my phone if it was at a much lower price point for an old-school song, or a song that only I really liked that very few did. Will I pay 99 cents for it? Absolutely not. But would I at $0.39 or $0.19? I really would. My perception would change instantly.

If you look at the supply and demand curves to illustrate how this would work, it is essentially a shift upwards of the demand curve, with the revenue illustrated by the area below the line.

Essentially you are increasing the market opportunity by capturing the consumer surplus at all areas under the curve with third-degree price discrimination. Different consumer segments are purchasing at their maximum willingness to buy. Those that like getting the song as soon as it comes out are willing to pay a premium for access. Those that wait for the song to be mainstream pay a different price, and the Geoffrey Moore’s “laggards” will buy it after it’s been popular, but at a low price point because the song has lost it’s luster and are late to getting it (like my parents downloading a Kanye West track).

As a result, you are increasing the number of people that can and will download, by enabling them to reveal their preferences and price points, and let the market forces determine the price.

Apple is in the driver’s seat for being the major technology company out there catering to a strong, loyal installed base. It will be interesting to see how important it was for them to own the central platform that will operate our lives for many years to come: our phones.

KFC Grilled Chicken: Anatomy of a Marketing Disaster

I know that I am not the only one, but all the talk of KFC’s Grilled Chicken promotion was starting to irk me. You have to be living under a rock if you haven’t heard about Oprah’s partnership to give everyone in America who, during a two day period, could download a coupon for a free 2-piece grilled chicken meal. Every business’s dream is to make the Oprah show, because of the success stories, but there are just as many horror stories of brands that were unable to respond to the overwhelming demand for their products. There are countless stories of companies that went out of business because of being featured on Oprah. She is the Billy Mays of syndicated television, yet she remains shielded from mainstream negative sentiments over overt product placement, conflicts of interest, and any negative externalities of the products she promotes. Wasn’t Oprah honored by PETA not even a year ago? The same PETA that is aggressively against KFC’s treatment of animals?

I’ve read and heard myths, hearsay, urban legends, and conspiracy theories about this deal. I also never heard so much thanks and praise for Oprah, for enabling so many people to have two pieces of chicken, two sides, and a biscuit. For many, it’s like a dream come true: free food. Who doesn’t love free food? My older ex-colleagues at JPMorgan would remind me of the good ol’ days when the whole company received free Friday lunch. To me, standing in a line for over an hour for a market value of $3.99 doesn’t seem like the best use of time, but hey, I think my hour is worth more than four bucks. Maybe that’s the economist in me.

Initially, when KFC was rolling out their new product line, grilled chicken, they used the tag-line “Un-Think KFC”, to get consumers to forget that the F in KFC stood for fried, a tabu term in the days of low carb meals, eat fresh, organic/green food, and hydroxycut. From a brand standpoint, it is a stretch, a big stretch. It’s confusing and complicated to the consumer. The reason why this promotion was a brand crisis is that it strained relationships between consumers, the media, and the franchises themselves. In many ways, it reminded us of the McDonald’s Beanie Baby fiasco where mothers were buying the happy meals, throwing away the food, keeping the beanie babies, with McDonalds being unable to respond to the overwhelming demand for the toys.

KFC reported that over 10.5 million coupons were downloaded from the site, despite several site outages, slow response times, and crashes. I’d imagine that several orders of magnitude more were copied as well. KFC also reported that 4 million coupons were redeemed, but that would leave between 6-15 million more that weren’t redeemed! Talk about an inability to respond to market demand! KFC execs were forced to do additional commercials apologizing for the overwhelming market demand, and even prompted a visit on Oprah to apologize some more.

How could this all happen? Social media stepped in and showed a glimpse of it’s power.

Previously, e-mail chains would be used to send coupons, deals, and limited time offers. Now, I observed the URL being sent via Facebook and Twitter at a velocity I never thought was possible. This may have occurred with e-mail, but it was the fact that there were conversations built around the product, and shared conversations were taking place amongst friends, family, and strangers, amplifying the word of mouth. It is much more convenient and accessible to do it via these social media channels, and even if you’re not engaging in the conversation, you are reading the conversation, and passing that knowledge over to others.They were able to tap into new and infrequent customers, who may have never considered KFC as one of their options.

This is the era of the Real Time Web, and to me, this will be known as the crowning event that showcased the future of content, conversations, and corporate engagement. This can turn a successful media campaign to a crisis/disaster in a couple of hours. The one thing KFC did do well with this campaign is that everyone now knows KFC has grilled chicken. It will never be forgotten. Doing a Technorati search, over 447 blog posts have been written in regards to KFC grilled chicken and a Google Blog search yields over 62,375 results and a Twitter search yields new conversations about KFC grilled chicken every couple of minutes.

Here’s where they went wrong

Some KFC franchises didn’t participate in the promotion because they weren’t being reimbursed by the corporate headquarters. KFC’s corporate office said the franchises were reimbursed, but reports of the contrary are troubling. If this sounds familiar, it’s because Quizno’s failed with their franchises for the exact reason. For those that aren’t familiar, the franchises are encouraged to go along with promotions guided by the corporate offices and the challenges with the franchise model, is the sometimes turbulent relationship between the franchises and the franchisees. Most franchises, owned by individuals are under strict guidelines to be maintained as a franchise by the corporate offices. Much of the risk of owning a franchise is your ability to follow those guidelines, and be agile enough when promotions and special offers take place.

Consumers were confronted with long delays, frustrated with many KFCs inability to live up to market demand, and there are even some reports of riots and police involvement. Any time you don’t live up to the promises your promote, it’s a big time black eye for the brand.

What they could have done to turn the crisis into a competitive advantage

Any crisis management business school course will teach you that when you’re in a corporate crisis, not only do you have to provide transparency, and be honest about the shortcomings of the business, you have an opportunity to turn it into a competitive advantage. If it were me, as Monday morning quarterback, I’d let all customers get a raincheck, while we ramp up supply. In addition to that, to get a raincheck, everyone would have to fill out a quick online survey (optional) so that I can get some data on the demographics and psychographics of the consumers. Forget sending in your old coupon and hoping that many people don’t submit them (like companies expect with rebates). Give yourself a chance to get all the data you need, to better take over (or position yourself) within this market as a first-mover in the “fried chicken space”. You prevent others like Popeye’s from digging into your market share, and you know how to better target them in the future.

I don’t think anyone (especially the corporate guys) could have really anticipated this type of response. But with a  struggling economy, and everyone counting their dollars, and cents, you can create a great deal of demand by focusing on price. It appears that with the advent of the $5 dollar footlong at Subway and dollar meals at all your fast food spots, it appears that they are really going to bottom out their profit margins in hopes for volume of sales. It will be interesting to chart the net profit margins of franchises vs. franchisees in this economy on a month to month basis.

In my next blog post, I will try and do some back of the envelope math to try and figure out the cost and benefits of this type of promotion. One thing missing from this analysis is the social value created by this promotion such as from a health standpoint. I think if you evaluate the demographic of their core patrons, who frequent their locations many times, there are significant benefits to having the option of grilled chicken to replace fried chicken.

Where’s the Pareto efficiency in Illinois health care?

As a University of Chicago graduate in Economics, advocating increased regulation is almost a sin. You’re taught that free market economics trumps all, and the market will correct itself to some sort of homeostasis, which is better for everyone. Free markets produce Pareto efficiencies, in theory.  As we are seeing with the current financial crisis, extraordinary greed concentrated in the hands of a few people have made us all worse off. The same could be said about health care in Illinois.

I wrote previously about the need for non-profit hospitals, who gain significant benefits, mainly tax breaks from the state, to provide more programs and serve a  charitable mission to the surrounding community. What we’ve seen is that the charitable mission isn’t being served in many hospitals, especially Northwestern Memorial hospital. Many of these non-profit hospitals are serving very little charity care, while stockpiling significant cash reserves. In fact, Provena Covenant Medical Center, a Downstate nonprofit hospital, lost it’s non-profit status, because less than 1% of its total revenue went to charity care. This ruling is being challenged and headed to the Supreme Court of Illinois.

Looking at the charts of the charity care for each non-profit hospital in Illinois, you begin to see a consistency in the lack of quality charity care for the communities these non-profit hospitals are supposed to serve.  In the previous blog post I wrote about the topic, I proposed that there should be an organization set-up to be responsible for oversight over the non-profit hospitals, ensuring that services are being given to the local community, and serve as the innovative force to layer in some economies of scale by serving as an umbrella organization for bringing increased health care to the communities in the more destitute areas of the city.

Non-profits, like for-profits have to maximize revenue at some point to remain relevant and deliver services to their community. This is why I proposed something which is similar to a luxury tax agreement in professional sports, where the hospitals that are generating a great deal of cash after a finite point, are forced to contribute to the umbrella organization so that we can pool together those resources. No reason in having a struggling hospital, like Mount Sinai contribute the same amount as a Northwestern Memorial, if Mount Sinai has 4 days of cash on hand, and Northwestern Memorial has over 430 days of cash on hand.  The challenge in this mandate lies in how non-profit hospitals, like Northwestern Memorial hospital, will be incentivized to maximize revenue beyond that luxury tax strike point.

The current system isn’t working. In a recent article in the Chicago Tribune, hospitals like Stroger hospital are starting to get an influx of redirected patients, patients originally assigned for another hospital, but referred to another for one reason or another. This has contributed to why our state budget is hurting, and we are forced to make drastic moves, such as increase the sales tax, making taxpayers much worse off.  Non-profit hospitals in Cook County dedicated just 2 percent of total revenue to charity care in 2007, just one point higher than for profit hospitals! Some patients are referred from as far as Lake and Dupage counties, which can easily be an hour drive.

In an article today in the Chicago Tribune, over 32% of the redirected patients of the University of Chicago are poor. Over 7% of the patients that Mercy Hospital takes in from the University of Chicago Hospitals ( just the emergency room only) have no health insurance coverage. So what does any profit maximizing hospital do to outsource so many services to the poor? They create the Urban Health Initiative, which is essentially a partnership with about two dozen hospitals throughout the South Side. These patients go to these hospitals instead of the University of Chicago, and U of C gets to see less patients who are most likely not going to pay. The U of C states that it is a way to alleviate long waits and to give treatment at the appropriate location, but let’s call a spade for what it is, a spade. The U of C had to set up this partnership to ensure that everyone else takes on the burden of these patients, cutting into their profit margins. Let’s not mention the fact that the U of C has the best facilities and the best physicians.

What we need is more transparency behind why those patients were redirected from the University of Chicago Hospitals, with one in three being poor. What are the guidelines and policies? The public should be aware of this, because it’s their tax dollars that are making up for the difference. The minute we do this, the more we provide the Pareto improvements necessary to having a functioning state budget that isn’t nearly as wasteful as it is today.

Maybe the auto industry does need Steve Jobs

With the departure of General Motors CEO Rick Wagoner, and all the circus surrounding the Obama administration bailing out American car makers, it reminded me back to an open letter on Techcrunch, written by Todd Dagres. In his open letter, Todd contends that a new, innovative leadership needs to be installed, someone with the vision of a Steve Jobs. It is readily apparent to everyone that the U.S. auto industry needs an extreme makeover, and is not sustainable, long-term.

In his post, the comments thread went crazy saying everything from the fact that the article was ridiculous, Silicon Valley can’t fix everything and knows nothing, and that Todd has no concept of the macro-economic forces affecting the industry. The more I think about it, the more I realize that everyone is missing the point. Apple did not create the digital music player, they leveraged their strengths, created an ecosystem, and marketed the heck out of why it was superior, and continues to do so to this day. They made the digital music player sexy, and what’s lacking with U.S. autos? Being sexy. Does Apple have the cheapest phone or digital music player? Not even close. But they did create a more price inelastic product, in a space that is highly commoditized.

Doing my basic SWOT analysis, it appears that the U.S. has several strengths that has made itself a powerhouse: innovation, risk-taking culture, limitless access to capital (until recently), the American Dream, and every-present hype. Why shouldn’t the U.S. have sexy cars that the world demands? Let alone something that the American citizens want. Much of what’s being discussed to make the auto industry viable long-term is green this, green that, which is important. I’m afraid we don’t have that long to wait to perfect the system. We need to act now on short-term wins, while concurrently pursuing the long-term energy independence agenda.

Admittedly, I have a BMW, something I was attracted to because of the performance, prestige, and feature set. But more and more, I have come to realize how much better of an experience I could, and should have. In a post by Kristen Nicole, formerly of Mashable, now of AllFacebook, was able to experience Microsoft Sync in a test drive of the Ford Flex. In that experience, she noticed the deep integration between the car, the cell phone, and some compatibility with the Internet. In speaking with her about her experience, the car became just that, an experience. Some of the major barriers for having more Internet in your car include the potential distractions (public safety) and maintaining a consistent, strong signal while driving.

This is that opportunity for the auto industry to reinvent itself. Instead of minor attempts to integrate cars and social media, let’s open up the Apple development platform, allow the ecosystem of developers to create value, and let’s finally make the American car sexy again. Some of my current pet peeves is that if I am talking on the phone, enter the car, it doesn’t automatically shift to the bluetooth. If I look up something on Yelp, the directions don’t automatically pop up on my navigation system. I can’t assign addresses and locations on my car to specific people, and overall, there’s this big disjoint between the two systems. I need a more seamless experience.

Let’s integrate these platforms:the web, the car, the developer ecosystem, the home, and the mobile phone.  Let’s have the developer community contribute to a framework to create value for these cars as a platform that we use far more than we think. I don’t think that when the iPhone was about to be released, Apple had any idea of the magnitude of clever applications for so many different use cases. Imagine if we did that for the U.S. auto industry. Here, we’ve been talking about the connected home and the phone as the one platform that will be more important than the computer. Let’s connect them all. I think that with more access to capital for American consumers for American cars with a developmental platform, the American car may have a killer app to drive adoption and consumption in the near-term.

In many industries, new leadership that hasn’t had any experience in a particular space is brought in to shake things up, and lead the company in a new direction. With the auto industry against the ropes, in my opinion, this is the last chance. I think we need to give up on the idea of being one of the lowest cost providers. It doesn’t appear to be possible with our capital structure. Instead, let’s be the highest value provider.

Valuable companies come from companies that weren’t

One of the first-time entrepreneurial initiations is going around telling people about your new venture. You are filled with excitement, and hopeful that this is the opportunity that you’ve always dreamed about. This venture may make you financially independent one day, and you can retire your parents, long before they need to. You’ve been working secretly during odd hours of the day and night to build something of value, and you’re finally ready to tell the world.

Then comes reality.

You begin to encounter all the people who are chomping at the bits to tell you what you need to do, what you aren’t doing well, and why you won’t succeed. You hear about all the companies that are doing what you’re doing, and why the 800 lbs gorilla is just that. You meet the so-called “experts” who tell you the sad story about how they tried something like that a couple years ago and how there’s no market opportunity. Everyone quotes the latest BusinessWeek article, and points you to all the successful feel-good stories of someone’s magical ascent from bootstrapping entrepreneur, to mogul. The be like ______  chorus begins. What is never mentioned is that what makes you successful 3 years from now is completely different than what will make you successful today. Environments change, competition changes, and path to success changes.

The amazing part is very little of what you hear from others is reality. The only thing real is the precense of detractors.

I have recently had an opportunity to sit down and grab lunch with Mike Evans, co-founder of Grubhub. Grubhub just finished closing a $2 million Series B VC financing. If you read any of the sensational articles in BusinessWeek, you’d expect a company like GrubHub to have been founded eighteen months ago, and needed to raise $10 million, and burn through it in less than a year. The fact of the matter is that they grew the right way, with revenue, over five years ago, in the face of competition, without a huge bank account. This is the normal path of the entrepreneurial venture, not necessarily a made for TV story that the detractors like to quote when talking about building companies that matter.

Recently, Twitter just turned 3-years old. Media companies talk about it as if it was just recently conceived, but if you look at the first sketches, it is from 2000! There’s no way that Jack Dorsey knew that it was going to be one of the hottest distribution platforms created, but if you look at all of the comments about the launch, even from the pundits, you see that the initial reactions were much less than favorable.  If he would have stopped there and listened to the rants of the comments thread, Twitter would have never mattered. Instead, he created a valuable company from something that wasn’t valuable, which is the path of all start-ups.

If you’re starting a venture, stop listening to experts, and start evolving your strategy and continue to iterate your product or service. Nobody is going to know your market opportunity or how to attack it, and it’s not going to happen in day 1 or day 2000. I just finished reading Outliers by Malcolm Gladwell and one of the factors that he attributes to success is getting to the 10,000 hour mark. So get your startup to the 10,000 hour mark. Stop parading at every single conference listening to canned success stories, and instead, put your head down and do some real work. It takes time, patience, with very little fanfare.

In a good post on O’Reilly’s Radar,

Instead of focusing on hype and mega-growth, we can focus on building companies that serve customers in a fundamental way. That’s what matters.

Health Care 2.0: Where non-profit may mean no profit

In the Wall Street Journal today, there was an article today discussing the duality that exists in our health care system, maximizing revenue or serving the charitable mission. Interestingly enough, the article compares two non-profit hospitals in Chicago, Mount Sinai and Northwestern Memorial Hospital. This is especially important to me, because my parents began their medical careers at Mount Sinai, my mom working as a nurse in Recovery Room, and my father, as an Emergency Room resident physician. Additionally, when I have an ailment and need medical attention, outside of the care of my dad, I go to Northwestern Memorial hospital.

Mount Sinai, located on the west side of Chicago, is not in what most people would consider the best of areas. The Wall Street Journal says that Mount Sinai is “Located amid the blight of Chicago’s West Side“. In contrast, Northwestern Memorial hospital, located on the Gold Coast of Chicago, is in one of the wealthiest neighborhoods of Chicago. Both hospitals have the non-profit status, with one of the hospitals generating significant profits on a nice foundation of cash on hand and real estate assets, and the other hospital has barely over a week of cash on hand, with puny profits in comparison.

Guess which hospital is doing well?

Obviously, it’s Northwestern Memorial Hospital. To quote the figures, Northwestern Memorial hospital had a $140 million profit last year, whereas Mount Sinai had a $4.7 million profit last year. Given the size of these institutions, the Mount Sinai profit margin is much less than what you would think on first blush. Mount Sinai is sitting on $6.7 million of cash on hand, which amounts to about 8 days of operating income, with Northwestern Memorial hospital sitting on $1.8 billion amounting to 432 days of cash on hand!

I hope everyone is as shocked in the disparity as I am. One of the things I wish the article did was to show how many patients go through the doors of both facilities, making it more of an apples to apples comparison. Or even a comparison with the University of Chicago hospitals. Perhaps the facts are more skewed if Northwestern Memorial hospital takes on an order of magnitude more patients than Mount Sinai. Assuming that the patient throughput is approximately the same, as you’d imagine the reason for the disparity in profit margin is due to the fact that 70% of the patients at Northwestern Memorial have private insurance compared to 10% at Mount Sinai, 60% of patients at Mount Sinai are Medicaid compared to just 6% at Northwestern Memorial, and only 2% of patients at Northwestern Memorial have no insurance, compared to a staggering 12% at Mount Sinai.

Needless to say, this isn’t fair. Northwestern Memorial is a machine, and Illinois could sure use the tax dollars. The challenges with non-profits in general is that if you don’t run them like a profit-maximizing business, you significantly increase your chances of failing. At the same time, as a non-profit, there should be more initiatives to serve a charitable mission. With Northwestern Memorial hospital, according to the figures given by the WSJ, it appears as an outsider that they are doing very little to provide high quality medical care to those that may need it most. Perhaps they are doing quite a bit, but it would be better if the article addressed some of those initiatives. I look at the cash on hand, and I think of all the things that could be done to address the health care ills that Mount Sinai has a tough time fighting.

I know I am just starting my public policy Master’s degree program, but looking at this, there are some changes that need to be made. In my research on working on SavvyDoc, I’ve seen far too many non-profit hospitals with boatloads of cash, and no incentive to provide additional care and serve the charitable foundation they were founded upon.

Here’s what I propose for non-profit hospitals to retain their non-profit status:

Any hospital with over 180 (half of a year) days of cash on hand has to allocate the remaining amount to programming to serve the community and help with programs to provide health care services to blighted communities. They can also elect to do a luxury tax type of scenario that is used in professional sports, where the cash goes to the non-profit hospitals that aren’t making significant profit and are at risk of being eliminated by any external economic shock. Executive salaries can’t increase significantly from the previous year to prevent hospitals from giving higher salary and bonuses to their executives since they can’t keep the cash on hand.

The risk for this scenario is that you may have potentially removed all incentives for the hospital to see more patients, generate more revenue, etc. after the 180 mark has been reached. I’m not sure how to reconcile this fact.

What do you think? Does this seem reasonable?

Facebook schools us on what big companies need to do to stay on top

One of the most overused phrases for the startup trying to challenge the behemoth of an incumbent, is that the incumbent is too large, and that the startup can make quick decisions without the bureaucracy. I’ve used it in many meetings, and the more experienced I become, I realize how insignificant it is as a tactical advantage. Until you get to that point we call critical mass, you haven’t begun to become part of the conversation. But it’s interesting to see it play out with those companies that have hit the mainstream, and are within striking distance of potentially becoming king of the hill.

We’ve seen it with Wikipedia rendering Encyclopedia Britannica meaningless. We’ve also seen it with Google stealing the show as the gateway to the Internet, instead of Yahoo. We’ve also seen more recently Facebook taking the number 1 slot from MySpace, a company, that captured the throne from Friendster. It is certainly possible for the big companies to lose market share, especially in these days where we adopt new technology at an incredible pace. If you look at the adoption of the VCR versus the adoption rate of the DVD, you’ll see that we all adopt new technologies more rapidly than before. Moore’s Law seems to exist in the adoption of new technology. One of the things that irks me is when a company is crowned as the _________ killer because they are cool, and some early adopter techie wants to champion/evangelize it. Almost always, the so-called “killer” never pans out.

There are several commonalities that exist between all these guys that lost to the new rising star.

You have to be open…. to an extent

AOL was the prime example of what we called a “walled garden”. They forced anyone who wanted to consume anything AOL to pay the monthly subscriber fee. This was a cash cow for AOL. They received reoccurring revenue, if you wanted to connect to other folks, they had to subscribe as well (network effects), and AOL received great word of mouth marketing. It’s amazing. At the time, many people thought that the only way to get on the Internet was through AOL! Then, dial-up was supplanted by broadband, and everyone was able to have access to Internet Explorer, and get access to everything the Internet had to offer, for zero charge. I’d imagine that if AOL would have realized how the proliferation of broadband would have impacted their business and shift for the new Internet, they may have still been on top.

MySpace beat Friendster for several reason, one being the fact that Friendster had severe scaling issues, but I think the most important fact that everyone attributes to the initial success of MySpace was the first platform for the explosion of widgets, especially YouTube widgets that enabled everyone to take bits and pieces of the web and distribute it in so many ways. They were more open than Friendster, and MySpace enabled customization from an ecosystem of outside developers that created cool designs that enabled MySpace to become one of the first truly customizable sites out there. But MySpace was notorious for shutting down the competition, disabling widgets without warning, such as YouTube, Photobucket, and several others. It was a terrible PR move, and opened up the gates of opportunity for a rising star, Facebook, which blew the Internet open with the first open developmental platform for a social network. Facebook out-opened MySpace, and now we’re seeing right before our eyes, the crumble of MySpace. I can’t remember the last time I’ve heard of a major partnership with MySpace, and media outlets such as CNN are only mentioning Facebook partnerships and announcements.

Today, Techcrunch wrote about how the senior execs are leaving MySpace in droves, in a Yahoo-like fashion, and with the latest MySpace announcement being a co-branded credit card with a failing bank, Citibank.  I don’t have too much confidence MySpace can rebound, especially after a lukewarm response to MySpace music, which was supposed to set the Internet music space on fire.

You have to acknowledge your competitor and make tactical moves to disarm them at all costs

Right now, Facebook is doing something that I haven’t seen all too often from the big companies, acknowledge the fact that these startups are threats, and evolve the core strategy of the company to adjust to the new Internet trends. Currently, Twitter and Friendfeed are fast risers in the real-time web, a seemingly exploding part of what the web has now become. It used to be that just early adopters wanted news and information faster and quicker over several platforms, but now it seems like everyone has compelling reasons to need this type of access. Google’s CEO, Eric Schmidt seems to dismiss the potential threat of Twitter when he says that Twitter is a waste of time and a over-glorified e-mail system. Fred Wilson, VC blogger extraordinaire and investor in Twitter, believes that the value of Twitter is increasing with every day and that he believes that the real time search and information discovery is going to generate economic rents to Twitter that we will see in the near future.

But, as I stated before in my previous blog post, Facebook has made significant moves that will stunt Twitter’s future growth. The Status API release was a major release, even with Nick O’Neil of Allfacebook stating that this was a Twitter-killer. Not too long ago, Facebook made a $500 million acquisition offer (equity) to Twitter (with the $15 billion preferred stock valuation), and was unsuccessful, and since then, it seems like every release is positioning Facebook to become the leader in real-time search, people search, and become the backbone of the social web. They are making a hardline stance against Twitter, and today’s press conference about the new design and focus of Facebook indicates that they refuse to have an upstart take away their relevance and significance. All too often, people have said that Twitter and Facebook are addressing two different demographics, but it reminds me how pundits and researchers used to say that Facebook users and MySpace users were completely different. Today’s release brings brands closer to Facebook, and makes it easier for people to enable 1-way conversations so people, organizations, and brands can better broadcast themselves on the Internet.

All in all, Facebook is making every single necessary step to position themselves for the future. Most large companies are unable to move as quickly to respond to growing trends, and it’s apparent that although Facebook’s CEO has been criticized for not producing enough revenue and a couple of media flops, Facebook has maintained an innovative culture, despite it’s continued massive growth.

Somebody needs to create an eHarmony for business partners

Whether you are a first-time entrepreneur, taking your first business class, or reading your sensationalist business book on entrepreneurial success, one of the first things they stress is that you should work with great people, and team chemistry is so important, more important than the business idea itself. I’ve heard over and over that a VC would rather take an A team with a B idea over a B team with an A idea.

It makes perfect sense. The cliche about business partners being a marriage is so true. From my work with many talented people, I realized just how important they are to get something off the ground, and in a global economy, get it off the ground fast. I’ve also heard over and over again, don’t start a business with friends and family. What if they were the best people to begin with? Some mentors have even joked that the goal is to make enough money so you can pay them to be away from the business. But how can you possibly know who’s good for your business, or not good, until you are in the foxhole? One thing that I’ve learned about the startup process, and business in general, for that matter, is that whatever can go wrong will, so be prepare to engage every opportunity, with the downside risk in mind.

You learn a great deal about yourself and your business partners when you deal with the curveballs of business, but you only find out for the first time if you can work together, when things take a turn for the worse. Everything is perfect when things go well, just like when you hear about professional teams who have no controversy when they win every game, but let losing set in, all hell breaks loose.

That’s when I thought that an eHarmony for business partners may be interesting, or maybe it is just a really stupid idea that is gimmicky enough to work. Highly idealistic, but it would be interesting if you could assign an algorithm to business compatibility. I think before eHarmoney, many would have said it was implausible to think that a formula could determine if someone was marriage material for you, but looking at some of the biased stats that eHarmony puts out, maybe there is some truth to it. It would have been highly valuable to me to have potential business partners take a test to see how our business compatibility would score, and who knows, maybe some situations could have been avoided. I’m not saying that I’ve had anything out of the ordinary, but it takes that good team chemistry to take things to the next level.

The one thing to keep in mind is that no partnership is perfect, and will never be. Marriages end, and there is no way we’d know that just because they got married, that it was meant to be or a good situation. But reading about recommendation engines that are out there trying to determine the likelihood that a startup will suceed, I wonder if there was a way to quantify the likelihood that a successful partnership could be attained that would move the needle forward in increasing the chances that the startup would succeed.

So I decided to pursue a Master’s degree in Public Policy

Today I found out that I was accepted into Northwestern University’s Master’s program in Public Policy and I will be starting classes within a month. Many have wondered just why I would absorb the cost of another degree, and what were my plans with adding another degree to my war chest. I’ve always found an interest in policy decisions, the effects, and how it relates to business and economics. Working on several political campaigns, talking with many politicians, and serving on several exploratory committees, I have had many opportunities to add value and position myself as a resource within these discussions. Without a sound understanding of the policy implications, I felt I was leaving quite a bit of opportunities on the table.

I have also noticed a strong connection between community service organizations, public and private sector, and civic organizations. These institutions are all interconnected and I feel that it’s tough to be highly successful without understanding all sides of the interests of all parties. You learn in your basic negotiation course that understanding the other side is the key to any deal, and one aspect of business that I do not feel comfortable with is how potential policy decisions can impact my business. I also feel that the entrepreneurial spirit is needed in the public sector as well, with tremendous opportunities to take advantage of, even on a part-time basis.

Ultimately, I am doing this because I want to make a difference. I think it’s also advantageous to become part of the political process and serve as my own lobbyist, by being aware and involved.  I think that many people in positions of power do not have a holistic understanding of the issues that affect our communities. There our issues that I encounter on a regular basis as an entrepreneur, that I wish were better represented in the law/policy making process, especially with the current state of things.

With this pursuit of a degree,  I am not slowing down anything with regards to my professional pursuits. I am just managing a portfolio of opportunities, all with different life cycles and growth trajectories. I’ve recently learned the importance of listening and trusting myself, and that slow and steady wins the race, in regards to entrepreneurship. Everyone dreams of YouTube-like growth, but it’s a slow growth process to transform something from a working prototype, to a fully-fledged opportunity. I believe in the value of these endeavors and will continue to work diligently on a daily basis to move these things forward.

It’s just another thing to budget into the day, and I am thankful that I have the flexibility to be able to do this. Lately, I have received a tremendous amount of help and support on a daily basis from my family, as well as Kristen Nicole, Joseph Curalli, Jason Camp, David Burns, Jonathan Cambry, Gavin Tuckett, and Chip Dorsey, who I work with on a daily basis from a professional standpoint to make these opportunities happen. Without them, this would be too daunting of a task. I’m excited and I know I will emerge from this as a more prepared entrepreneur.

In the next couple of weeks, I have another set of cool professional updates, which will complement this announcement.

Update 3-21-09: I decided that I wanted to publish my personal statement for wanting to receive a Master’s degree in Public Policy.

Statement of Purpose

 

 

The economics of health care have always fascinated me, as the model has no parallel. The issues of equitable access to health care and the policies impacting various populations are of interest. The mission is more than utilitarian: demanding the most service, of the highest quality, at the least cost, for the largest population. The evolution of population based medicine has been a natural component of health care’s economic evolution. Policy plays a key role in the ability of organizations to manage their capital structure, within mandated constraints, in such a way as to be able to fulfill the mission of providing service to the greatest extent possible, with steadily shrinking resources. We are at a critical juncture in the history of the United States, and we need innovative, evidence-based strategies and intervention to facilitate the policy-making process, especially in health care.

 

I have a unique background that has enabled me to have a fairly holistic view of many of the issues, but lack the theoretical policy framework. I have participated in community service organizations that aim to address the health care crisis. I have worked in investment banking, in charge of many health care related corporations. My father is an Emergency Room physician and my mother is a Registered Nurse, which gives me insight into issues that impact one’s access to health care. I founded a company, SavvyDoc, which aims to eliminate many of the costs incurred in the health care operational model through technology. Completion of my MBA coursework at Kellogg School of Management, has given me invaluable insight into the business of health care. Personal inquiry and a sense of urgency about gaining understanding about fundamental policy issues, why they were created, and how it effects the institutions involved are the impetus for application to the graduate program in Public Policy.

Further confirmation Internet innovation will slow to a snail’s pace?

Today, Techcrunch announced their Techrunch 2008 Year in Review, a seemingly massive report on 2008 web technology with data from their highly successful brand extension, Crunchbase, a wikipedia for tech companies. In the executive summary posted on Techcrunch, they posted three charts that all point towards the downward trend in startups founded, venture capital raised, and M&A activity.

The one chart that really stood out in my mind is the number of startups founded. From the chart, you can see that in January 2008, there were 170 new companies founded, and in December of 2008, the number was all the way down to approximately 20. From August, it appears that the decline in new companies founded escalated. In August, there were 100 new companies founded, and in an almost straight-line fashion, every month brought about 20 fewer startups that were founded.

All in all, this is why it’s a great time to start a web company if you can weather the storm. As I said in my previous post,

• When money is tight, it forces you to establish a solid business model
• Would be competitors, especially those who need a great salary, benefits, and stability are going to take a wait-and-see approach, probably not leaving their corporate jobs
• Your potential competitors aren’t getting funded, especially copycat ideas
• The pace of development and innovation is slowed, enabling you to incrementally iterate, without worrying that too much money is flowing into your space, possibly crushing you or diluting your impact on the space
• Real estate prices will go down, as well as labor input costs
• Only those truly passionate about what they are doing and the value they are creating are going to stay in the game. Others, who may only be monetairly motivated, will drop out and do something “safer”

Right now it’s the beginning of the gut check of those that wanted to be or are entrepreneurs. It would be interesting to see how 2008 compared to 2007 with number of new companies founded, and it will be interesting to watch in 2009, as the US system continues to take body blows.

Mark Cuban said it best in his blog post,

“The nature of our country’s business infrastructure is that it is destined to be boom and bust. Booms are when the smart people sell. Busts are when rich people started on their path to wealth.”

The one aspect to see moving forward is the number of companies that consider themselves strictly iPhone and Blackberry application companies, rather than traditional web-based companies, since presumably, it would take less cash to start generating revenue since you have the ulitmate distribution platform. Maybe innovation could improve since platforms such as the iPhone enable developers to care less about the infrastructure and scaling, and moreso on the value add. If I were a betting man, I’d say that Internet innovation has come to a screeching halt, not to be picked back up until 2011.