apples to apples
Facebook turned 5 years old last week, and a couple of commentators took the opportunity to compare the company’s progress unfavorably to Google’s.
I understand the compulsion to compare every hot startup to the current media darling that literally put its name next to the definition of “Zeitgeist” – but still, I don’t believe there is any practical value in that exercise. A meaningful comparison compares things of like kind, and comparing every company to the once-in-a-decade champion is not apples to apples. Take a look at this list of companies, which I’d say are all the same kind of apple (of course one of them is literally an Apple):
| Company | Year Founded | Year IPO | Feb 09 Market Cap |
|---|---|---|---|
| HP | 1939 | 1957 | $87 B |
| Intel | 1968 | 1971 | $83 B |
| MSFT | 1975 | 1986 | $173 B |
| Apple | 1976 | 1984 | $91 B |
| Oracle | 1977 | 1986 | $91 B |
| Cisco | 1984 | 1990 | $99 B |
| 1998 | 2004 | $119 B |
These are the true giants of Silicon Valley (plus our favorite giant from up north), all companies that have spent a goodly amount of time with a market cap over $100 billion. Comparing any private company to these monsters is a fool’s game; it’s like comparing a college basketball player to Michael Jordan. Actually it’s worse than that – projecting athletic talent is considerably easier than projecting $100+ billion success for a company, because there are orders of magnitude more points in a company where externalities and luck play a tremendous factor. (I always like to recall that Intel and Microsoft were initially made giants not by their own strategy, but by the strategic decision made by IBM when it chose to outsource production of its PC microprocessor and operating system.) These true giants are Black Swans, by definition nearly impossible to predict, and useless as comparative points except when holding both points in retrospect.
If you must make comparisons, it’s more realistic to compare to the next tier, for example:
| Company | Year Founded | Year IPO | Feb 09 Market Cap |
|---|---|---|---|
| Sun | 1982 | 1986 | $4 B |
| Amazon | 1994 | 1997 | $44 B |
| Yahoo | 1995 | 1996 | $19 B |
| eBay | 1995 | 1998 | $18 B |
I could put a dozen more on that list, but I’ll let you pick your own peer group. Any one of those companies (yes, even that one that you think is irrelevant/dying/dead) could still take the multi-decade journey to giant-hood. But even if they never do, they’ve accomplished something extraordinary in growing up from a tiny Silicon Valley startup (with one favorite from up north) to an independent company, a true a difference-maker in technology and the daily lives of millions upon millions of people. Because they haven’t had such outstanding externalities and luck in their favor, they are a better basis for comparison.
still misunderstanding micropayments
Please, Shirky, don’t hurt me.
See, in the past Clay Shirky has expressed some healthy, justifiable skepticism about Second Life, or rather, the hype around SL in 2006-07. And on a scale of one to infinity, he knows about a googol (old skool usage) more about the future of Internet and new media than I do. So I’m loathe to disagree with him on any topic. But I’ve got to chime in about micropayments.
The quick recap: Shirky says that publishers are grasping at straws if they think that micropayments will save their dying business models. Matthew Gertner hopes that publishers might still find that magic blend of quality and scarcity that allows them to charge micropayments for content. I think both misunderstand the demonstrably successful business models for micropayments.
Shirky’s right when he says that “users don’t like being nickel-and-dimed” for content. But that’s not what happens in the successful models, not from the users’ point of view. Users are making small payments, but they’re not paying nickels and dimes, they’re paying significant amounts of dollars over relatively short periods of time. They are paying for the convenience of not making micropayments while making micropayments. Huh?
If “micropayments” means anything anymore, on a pragmatic definition it means “payment of an amount that is typically too small to justify its own transaction costs.” Depending on volume, merchant fees and chargeback rates, the $0.99 price of a song is probably not large enough to justify transaction costs on a transaction-by-transaction basis – but that’s not how iTunes does it. iTunes aggregates charges and only incurs transaction costs when the aggregate charge supports the costs. This is a seamless experience for the user, and together with the presentation of a broad catalog, a pleasant user interface, and smart search and recommendations, this service is well worth paying for.
Shirky believes that iTunes demonstrates that “the only real lesson of small payment systems generally . . . is that if you want something that doesn’t survive contact with the market, you can’t let it have contact with the market.” Ironically, the internal contradiction of this statement is that it assumes that the value is in the content. But the value is not in the content, as many people, including Shirky, have pointed out.
The point is even clearer in Shirky’s other example, Cyworld, a Korean social networking site where users can buy each other “virtual gifts.” Facebook introduced the same feature in 2007, quickly giving birth to a virtual economy that some estimate at $100 million a year. Shirky says these kinds of services are a “monopoly within the environment” that “prevent[s] competition for pricing of digital goods.”
What?! Think about it, how can there be competition for pricing on goods that are worthless? Those little virtual gifts that sell for a buck a piece – the flowers, hearts, puppies, etc. – there ain’t no monopoly on them, it’s not a closed environment as far as those goods are concerned. I can take them wherever I want (notwithstanding copyright claims, which aren’t the point here). You see, there they are, 21 virtual items right next to this paragraph. Did I just steal $21 from Facebook (or worse, from Susan G. Komen)?
Nope, I didn’t. Because nobody gives a damn about those items here on my blog. (Well, maybe someone will make a copyright claim that I’m not making fair use of them, as I think I am, but again that’s not the point.) People don’t pay for those little bits of clip art, and I certainly wouldn’t be interested in paying to display them here. People who buy virtual goods are paying to have those bits of content show up on the service of Facebook, of Cyworld, etc. They are paying to have it show up on the profile of a friend, they are paying for the social graph, they are paying for all of the reliability, usability, network effects and ego-fulfillment of those services. And they’re making micropayments, and the services are again aggregating the micropayments in a way that is part of a convenient and seamless user experience. The content in Facebook is not “trapped” in some kind of monopoly – the service of Facebook is in full and open competition with every other social service out there.
So that’s all I have to say about that, but I have to end with a little disclaimorama: Second Life may have had a “virtual economy” of over $360 million last year, but that’s not necessarily where my thinking comes from on this. I’ve been looking at things like Cyworld since I was a VC at a Korean shop, long before I joined Linden. Disclaimer necessary because there’s whole reams of thought about whether the content on SL has value off of SL, which I am not getting into and not taking any position on here.
