Gustav’s Mindshare

Having had the fortune of having Danah Boyd spend two full days in Sweden a few years back, sharing her extensive knowledge on Social Network history and usage with me and som colleagues, attending and following Jyri Engestrom’s talks about his social objects theory, of which I’m a big fan, and meeting with Cameron Marlow while at Yahoo, I’ve gradually started to develop some simple models of my own on how to evaluate and categorize different social networks.

One of the models I use when looking at social networks and trying to figure out if one social network has more or less potential value than another, and where that value lies (as in “what could/should you monetize?”), is what I call the ”3 assets model”.

In my opinion, ALL social networks have these three distinct assets, from Match.com to MySpace, Flickr, Facebook , LinkedIn and Twitter. The value of (potential to monetize) the different assets differ greatly between them though.

Communication – Who has the most valuable communication asset?

That’s easy, dating is really the only type of social network that manages to monetize the communication asset, examples are Match.com. People pay to communicate on these sites. This makes perfect sense since, per definition, Match.com enables communication between two people who have no other means of communicating with each other. As a couple grow more confident with each other, they exchange contact details for other free or cheaper communication channels and churn off the service.

Monetizing the communications asset directly using ads just doesn’t work that well IMO. Random communication does not reveal intention very well, so the value will always be low. Even if you’re not working with intention based advertising, but more brand/awareness advertising, that type of advertising needs to be fairly interruptive to be valuable to buyers, which works fine for one-way services like TV, Radio etc where content can be paused during interruption, but does not rhyme well with communication and productivity tools.

There MAY be another, rather unexpected way (for me at least) to monetize the communications asset of a social network, and that is if the communication is COMPLETELY public, i.e. very much on the opposite end of the specturm from the dating site’s communication which is totally private. I’m ofcourse thinking of Twitter search. Once enough people communicate publicallly about random and temporarily popular topics, all of a sudden the sum of that creates a value for people who search through the communicaton to see what is happening on a certain topic in absolute real time, days before Google’s indexing bots find it. Search DOES reveal intention, so it could work. It remains to be seen if and how monetizable these intentions are though. I expect there to be few purchase intention searches, and lots of  breaking news topic/live event searches.

Information – Who has the most valuable information asset?

In my mind, Business and professional networks like LinkedIn have the most valuable static information asset of the social networks because they are so structured on things like area of work, position (which translates to income) etc, that is is actually useful as targeting information for other sites when showing their ads, something LinkedIn is trying with NY Times. The structured information asset is also valuable to recruiters etc. I don’t know HOW valuable it will turn out to be, but it seems like the most valuable asset of the business networks to me. The communication between people on these sites is hard to monetize. XING is trying this though, with it’s premium package where you can pay to contact non-connections. But unlike a dating site, where both ppl want to be contacted by strangers, this is not true for LinkedIn and Xing, where I think the whole point is that your network works as a human filter to unsolicited messages from sales guys 🙂 Nor do I think the social graph is highly monetizable as it only contains a small vertical segment of my real life connections (i.e professional connections) which doesn’t greatly reflect who influences my purchase decisions for different products etc.

Relations – Who has the most valuable relations asset?

I definitely think Facebook’s greatest asset is it’s extensive social graph of REAL people, using their REAL identities. Unlike most of the earlier social networks where people used fake identities, that they later grow out of, Facebook is not really targeted at a specific age segment, stage of life or interest/vertical. You will be yourself your entire life, so you will not grow out of your Facebook identity. The social graph is general and represents my real life connections very well, meaning that it reflects who influences my purchase decisions in almost all different areas. Mark Zuckerberg clearly realizes this and Facebook Beacon was an unfortunate, but IMHO brilliant attempt at monetizing this social graph of influence by offering e-retailers like Amazon.com the chance spread purchase information from a user across his social graph to people who that person influences.

It should be said that Twitters social graph asset may also be valuable as it is clearly people who influence me. But I would say there is a lot more noise in this graph and a big mix between close friends and professional publishers/bloggers etc.

I know, old subject and long post. But I keep hearing this from so many people, VC, bloggers etc still, that I need to get it off my chest.

Ok, so first of all, you probably interpret the headline of this post to somehow be negative towards Skype, in the sense that being disruptive is widely regarded as a good thing in tech, so not being disruptive would be a bad thing right?

Well, I don’t think so, I’m an avid user and fan of Skype and love the application, but I don’t think it is disruptive. In fact, if Skype was truly disrupting the traditional Telecom model it would go bankrupt.

There are two things we need to define:

1. So what is Skype…REALLY?

Well, according to me, Skype is actually a very traditional network operator (really Virtual Network Operator – VNO) who makes it’s money by charging for voice minutes in the fixed telephony network, thea same model as any mobile or non-mobile operator.

Skype’s paid business (Skype in/out) is a traditional VNO business, with a small to mid sized userbase, targeting long distance callers with a price proposition (which,  together with pure arbitrage semi-VoIP players like Rebtel etc, HAS indeed put price pressure on the rest of the industry,). There is no difference here from any other traditional operator who competes on price.

But what about the rest of the userbase, who can make free calls (PC to PC) within the Skype network?

Well, unlimited”on-network calls” is actually nothing new either, many (especially mobile) operators have had this as a user acquisition strategy to make whole groups of friends move over from a competing operator, as well as reduce churn of existing users. Now, they may not have been totally free (in the sense that you may pay some kind of monthly fixed fee, and it may be limited to a certain set of friends etc), but the strategy is very similar – inside your own infrastructure, an operator can choose to price dump, eating the cost of the user using the network, and make it up somewhere else.

The true difference between Skype and traditional operators is that Skype’s ”unlimited on-network calls” userbase, i.e. their user acquisition funnel, is HUGE, because it is NOT geographically limited by a physical network and has DRASTICALLY lower underlying cost per user to Skype (i.e. servers and bandwidth cost) than for a traditional fixed operator.

The point is that the absolute majority of the user base, the so-called PC-PC business, which people consider the core business, is not really a business at all, it is rather one of the world’s largest user acquisition/conversion funnels into the traditional VNO business, financed by that business. If the conversion ratio of this funnel would drop below a certain point, the paid business won’t be able to finance the cost of the acquisition funnel (servers and bandwidth) and they will have to shut the free service down.

Caveat: Skype may be able to fund the free business stand alone with some type of adsystem, but there is little evidence that this works (if there was, they would have). Monetizing comms with ads is just very hard because it doesn’t reveal intentions very well, and comms is often used for productivity which means inserting ads is usually very annoying (subject for separate blog post though).

So to answer the question of what Skype really is, I would say:

– Skype is a tradtional VNO, with a non-traditional user aquisition funnel.

The customers are acquired in the ”new” world (i.e. on the Internet), but the money is made in the ”old” world (fixed PSTN). So if they indeed disrupt that old world, their revenue approaches zero.

In general, as ubiquitious, flat rate, mobile Internet access does happen, (e.g via 3G or WIFI) and if the operators and manufacturers allow unlimited VoIP, shifting to just making money off of bigger data packs (as ISPs did), Skype’s current revenue model will approach zero as there would be no need for Skype in/out. The ”emium” of Skype’s Freemium model will disappear….. So in that sense, Internet could kill Skype (or rather it’s current business).

I’m very excited to see what it will mean for Skype to get increasingly integrated into handsets such as the very popular INQ ”Skype” phone and the Nokia N97 announced at MWC this year.

The only way forward in that scenario is to get a cut somewhere else in the vertical value chain, i.e. either :

1. The device sales – because Skype increase the value of the handset, just as a manufacturer pay to license Adobe Flash on a device, or

2. The monthly flat rate the operator charges – because Skype increases demand for their data flat rate packages

Both of these ”vertical revenue shares” are very hard to get  (Apple got it from ATT though), and I don’t know if they exist at the moment for these devices (and if so the structure). I expect this is what Skype is trying to do or have done. Any comments from people more knowledgeable on this are welcome.

2. So what is disruptive…REALLY?

Well, what annoys me is that for several years I’ve gotten the impression that disruptive means killing an incumbent/existing business or business model using new technology”. That new technology usually being the Internet.

I don’t like that. To me, being truly disruptive means shifting revenue streams and spending for a certain service, such as retail, advertising, music etc , from one place/model , e.g. offline, to another place/model, e.g. online.

Internet advertising is truly disrupting tradtional offline advertising becuase the capabilities of the Internet such as interactive, measurable advertising,, direct purhcase and intention-revealing services such as search, are making the customers (the ad-buyers) shift their spending towards the Internet. But Google and Yahoo! and are not killing advertising as a business, they are just shifting the spending budget to online

In the same way, e-commerce is disrupting physical stores because features and benefits possible in electronic stores (“unlimited” inventory, recommnedations etc) are making customers shift their spend from offline to on-line stores, but Amazon is not killing retail as a business it is just shifting the spending budget to online!

VoIP however, is currently NOT shifting customer spend from traditional PSTN networks to the internet. All everyone talks about is simplyt that they will kill the traditional business, including the revenue and customer spend . And they eat cost and VC money to achieve that, for no apparent gain to themselves?…

Now, this is likely very good for human kind in the sense that it not only puts pressure on long distance call pricing, but more more importantly increases access to communication for more people, communication spurs innovation, peace etc. So it definitely speaks to me as a private person and a consumer! But from an investor point of view, that type of disruptive just doesn’t make any sense to me. On the contraty, I would stay away from companies who say ”Hey, we identified this lucrative business called communication, that people are evidentally prepared to pay for if it brings them value…..and we’re going to kill it!”

If I was a VC, I’d be looking for companies and business models that are, or at least have the potential of, shifting an existing, proven willigness to spend in some area into their product. I wouldn’t invest in a company who puts all my money towards killing an entire business for someone else….. What does that do for me? How do I get rich off of that?

A very common comment here is ”It took years for Google to find it’s model – so you have to make a bet”. Yes it took years, but Google’s value proposition was NEVER to simply kill some other existing business, it created entirely new value that didn’t exist before, and that’s always a good bet!

Now you might say that it turned out pretty ok for the Skype investors, and yes, I would’ve loved to be one of those 😉 But it is getting pretty clear that this was at the cost of Ebay, who are likely not going to be that well off as I think their sell price for Skype will be based on it’s paid VNO business – probably with some bonus for it’s amazing customer acquisition engine – but still, some sort of discounted cashflow estimate of the paid business.

A good friend of mine, Johan Gertéll, made the keen analogy to file sharing. File sharing is super successful as a service, and gives awesome user value! But it never managed to shift revenue and willingness to spend, and it’s consistently been a terrible investment for the VCs who went there…

Don’t get me wrong. As a end user, I want all this to happen! Free comms? Yes please! But I don’t want to be an investor in free comms…..