Value Capture, Volume and Margins

2013 08 23 14 22 42

Coalitions in business are fascinating. 

They are fascinating because, often, while each player adds some needed value in each end-to-end transaction, there is inherent and constant tension in terms of who captures what percentage of value, one player becoming more powerful than the others, etc. (Google + Android + Samsung + Cell Phone Carriers, is a terrific example of one such coalition.)

The latest example comes via Joshua Brustein’s article on Seamless and online ordering, in a recent issue of  Businessweek. 

For customers, there is little not to like about Seamless. You pull up a website or an app, find a restaurant nearby, and pick out a few dishes to have delivered. Your credit card gets charged and you don’t have to speak a single word into the phone.

Pedro Muñoz sees things different. The founder and owner of Luz, a trendy Latin American restaurant serving lobster guacamole, pupusas, and Peruvian-style chicken in Brooklyn, decided to cut ties with Seamless starting on Aug. 10. He’s been including a letter in all delivery orders explaining the decision and directing customers to the restaurant’s website for online orders. For Luz, Muñoz says, the extra business brought in by inclusion in online-ordering services wasn’t worth the high fees and other expensive strings that came with it. “It’s awesome if you’re a customer. It’s great,” he says. “But in all aspects it’s killing the restaurants. It’s a model that cannot be sustained.”

Seamless takes a 14 percent commission from every order at Luz, according to Munoz, and requires his restaurant to pay additional fees for advertising and credit-card transactions. Those rates rose along with the restaurant’s volume of orders. Seamless also holds funds for 40 days before distributing them, the restaurateur explains, meaning an increase in business through Seamless led to Luz having less cash on hand to keep running. At times, Muñoz says, he has been waiting for up to $20,000 from Seamless, an untenable situation for a business making its living on the thin margins of the restaurant industry. (A representative for Seamless says fees vary depending on the restaurant and payments are made every 30 days, but doesn’t otherwise dispute Muñoz’s claims.)

So will other restaurants ape Luz and opt out of the system?

Even if many restaurants will continue paying the fees, that doesn’t mean there isn’t widespread ambivalence about online-delivery services, according to James Versocki, counsel to the New York State Restaurant Association’s chapter in the city. Customers, especially in office-heavy neighborhoods, simply won’t order food that doesn’t come through Seamless. “You’re pushed out of the market for delivery if you don’t use them,” he says.

The merger with GrubHub will leave restaurants with even less leverage. Muñoz, for his part, knows that Luz will be taking fewer orders starting next week. But he hopes the tradeoff will benefit his business: “We are going to lose some,” he says, “but I’d rather have a positive cash-flow business with less volume than more volume with less earnings.”

Unfortunately for them, Seamless’ recent merger with GrubHub means that restaurants with large under 30 or under 40 clienteles in dense urban settings have little choice but to trade margin for volume.

Or, they have to create compelling differentiation (food quality / taste / variety / something else?) that can ensure their survival and profitability outside of the Seamless/GrubHub ecosystem. 

But what if a bunch of restaurants in places like New York, where their density is pretty high, got together to create an ordering + delivery service they owned that didn’t threaten their margins?

Artists Should Charge Fans More – So Everyone Benefits

That’s the argument behind another interesting article from Adam Davidson, who created NPR’s Planet Money.

Why? Because

(a) “Value” and “Price” are two very, very different things that are easily confused by most people and

(b) A lot of artists don’t want to appear too greedy by setting ticket Prices close to what fans Value them. 

But this just results in scalping, he writes:

… by leaving money on the table, Springsteen and his ilk might be doing their fans an inadvertent disservice. Jared Smith, the president of Ticketmaster North America, told me that the artists who charge the least tend to see the most scalping. Springsteen and others have angrily denounced scalping at their shows, but their prices are guaranteeing the very existence of that secondary market, which has become ever more sophisticated over the years. Many scalpers now use computer programs to monopolize ticket buying when seats go on sale, which forces many fans to buy from resellers. One of the surest ways to eliminate scalping, Smith told me, is to charge a more accurate price in the first place.

And what happens when artists charge more?

Generally speaking, Smith says, artists who charged a lot more for the best 1,000 or so seats would reduce the incentive for scalpers to buy these tickets; it would also allow artists to charge even less for the rest of the seats in the house. Kid Rock told me that on his forthcoming tour, he is planning on charging a lot more than usual for “platinum seating” so that all other seats — including those in the first two rows — can be around $20. “It’s a smart thing for me to do,” he said. “We’re going to make money; I’m going to make money. I want to prove there is a better way to do this.”

Smith, meanwhile, spends much of his time these days trying to persuade artists that increasing the price of their top tickets to near the point where supply meets demand is not greedy but equitable for their fans. “Every time I convince an act, we get three more artists to sign up,” he says. “There’s more and more acceptance.”

The impact is already being felt on the street. Outside the Petty show, one scalper told me that, back in the ’80s and ’90s, he made more than $70,000 a year reselling tickets. But now he is lucky to clear $30,000. “A $300 night is a home run now,” he said. His business has suffered tremendously since 2007, when New York State legalized ticket reselling and helped supply meet demand. “StubHub is killing us,” he said.

Want Quality Online Content? Pay Up.

2013 05 06 16 52 01

The Financial Times reported earlier this week that some YouTube channels may be going the paid subscription route soon.

The obvious question though is, will YouTube viewers pony up? 

That’s important because, while the amounts in question – $1.99, OK, $2 a month, $3 or $4 – don’t represent a lot of money in absolute terms on a monthly basis, YouTube customers aren’t used to paying for content and any attempts at changing that behavior may only be marginally effective. A company called J. C. Penney recently and famously found out how set consumers are in their ways…

At the same time, companies like Google are not dilettantes. They have enormous amounts of historical and research data, and some pretty clever models that must be telling them what their chances of success are with this move. Otherwise why would they bother going to the trouble of launching these new channels in the first place? We’ll find out in a few months just how good those models and their underlying assumptions are. 

Anyway, let me get back to the immutable truth that made me write this post: Quality costs money. Repeat after me, if you’re not already convinced. Quality. Costs. Money. And nowhere is this truer, than online. 

Consider these companies or services (what’s the difference if you’re a consumer?): Facebook, Twitter, Google Search, Gmail and YouTube.

The business model for the first four is based on content created by users, growth via network effects and various creative (and mostly ad-driven) monetization techniques. And that was true of YouTube also, as long as its content consisted mostly of user-made videos of babies, cats and exploding cans of Mountain Dew that didn’t cost much more than a few minutes of someone’s time. 

However, content on YouTube has been evolving over the last couple of years. Tens of YouTube channels have been drawing millions, or even tens of millions of viewers on a daily basis. In fact, one of the many things that the 290m+ views for Gangnam Style on YouTube illustrate is that quality entertainment draws immense audience interest online (or offline, for that matter). 

But…what good are millions of viewers if you can’t capture some portion of the value you are creating for them – and using those proceeds to in turn pay your employees, pay your bills and make a respectable amount of profits?

The Internet does many things. It dramatically lowers your distribution costs. It also significantly weakens the distributors and allows content creators to more directly connect with their consumers. Further, it helps with the content discovery issue. And finally, it meets the needs of the long-tail. 

What it doesn’t do, and cannot do, is to reduce all the other costs associated with creating quality content (original series, anyone?) – actors, writers, editors, AV crews, etc. This is as true of video entertainment as it is of quality journalism and writing, as many magazines and newspapers have also been discovering over the last year or two. 

Unfortunately, ad revenue can only subsidize that content to a certain degree. That’s because the online content market is highly fragmented (blame the long-tail) and the cost for online ads is steadily dropping as the number of online destinations increases much faster than the online population. 

Brian Robbins, the man behind AwesomenessTV, of the Dreamworks acquisition fame, admits as much:

“If we were building a business today solely on advertising revenue from YouTube, I’m not sure I’d be so bullish,” he said. “Eventually, yes. But the opportunity to create IP that’s valuable and that could be valuable downstream in all the other platforms that exist, that’s a big revenue stream.”

[As an aside, I couldn’t find a single article or post on AwesomenessTV’s profitability. Not saying it wasn’t profitable, but this little detail is strangely lacking in all the breathless articles describing its acquisition.]

So with neither broadcast TV’s re-transmission fees nor million-dollar TV-network style ads underwriting quality content, what’s left?

Subscription fees. 

Don’t want to, or can’t pay? There’s always LOLcats on YouTube. 

What’s Up With WhatsApp

2013 04 16 12 37 32

WhatsApp – a cross-platform messaging app – is in the news, mostly for its valuation (purportedly $1B) and for how quickly it has been growing:

CEO Jan Koum…did brag that his company has more monthly users than another prominent mobile company.

“We’re bigger than Twitter today,” he said at the Dive into Mobile conference. “More than 200 million active users monthly.”

Those people are also sending a lot of messages: WhatsApp users get 8 billion inbound messages per day and receive over 12 billion per day.

So who’s threatened?


Facebook’s New Home – The Threat To Google

2013 04 04 14 18 31

Facebook’s much-vaunted new “home” on Android turned out not be a new Facebook phone, at least from a hardware perspective. From a software perspective though, it is the closest Facebook can get to creating a Facebook phone without electronics and Gorilla glass.

As most tech followers know by now, the new Android “home” unveiled by Mark Zuckerberg turned out to be a “Facebook Operating System” that sits on top of Android.

For those that install it – mostly die-hard Facebook fans, and perhaps the curious, that may well turn into die-hard Facebook fans also based on how good, helpful and compelling this new App/OS turns out to be – it will probably be the first thing they see when they turn on the phone, and the last thing they see, before they turn off the phone. 

The “in-app” experience provides users with a number of things, as Alexandra Chang explains, on Wired:


Evernote Is A Threat To Google’s Business Model; Keep Is The Response

2013 03 21 22 14 02

In the days of yore, when print reigned supreme, one could have said that much ink is being spilled in mourning Google Reader’s upcoming demise. Much ink is also being spilled in castigating Google and hinting at a looming trust issue between users and Google. [Then again, if print was indeed reigning supreme, Reader wouldn’t have existed in the first place. But, anyway.]

Many of those indulging in that wanton spilling of ink have also told Google that it can just keep its new Keep product to itself.

As I argued recently, they are wrong to fault Google for deciding to kill Reader. And they are wrong to think that Reader (which was used mostly by media types and hard core news junkies that binge-read on a daily basis…I admit I was one of them, though I’m not a media type – yet!) sets a precedent for not trusting anything that Google makes.

To be clear, as Jack Shafer said on his Reuters blog, any software – paid, unpaid or sponsored, is subject to the immutable laws of creation and destruction. Yesterday it was Google Reader, tomorrow it could be Skype and some day it might very well be Instagram’s turn at the guillotine. 

But Google Keep, I think, might have strong legs and run for a very long time. And that’s not because it seems to be built decently well (albeit with room to improve). What it is about, is Google’s desire to be your constant companion when you are online and help you do whatever it is that you want to do, better, easier, faster – and find a way to monetize that moment. 

So if you look at how we use our online time, broadly, we spend it on search, email, Twitter, chat, Facebook, entertainment, news and career-related stuff.

All of these things, we used to do them on our PCs a lot. But now we do them on our PCs, Tablets and our SmartPhones. With Android though, Google is certainly a key part of enough people’s experience that it is not overly worried. Perhaps…since Google may want to be wary of Samsung, as I also argued recently.

Search, for a long time, was the online “killer app”. And Google’s core business is about monetizing that experience by providing one of the very best search engines out there. Google News, which can be thought of as “Search for News”, is an extension of that model, of sorts. 

Email came next. Same thing. Users spend time sending and receiving emails. So Gmail created a great way to enable that experience and make it better. And it monetized that experience. Google’s Chat client is somehow lumped with Gmail of course. 

Users were watching a lot of videos online. Google Video tried to fit in, couldn’t, because YouTube was better, so Google just bought YouTube and by all accounts, is increasingly successful in monetizing that experience. Check off the entertainment box…though streaming music and online radio are two things where Google doesn’t seem to (want to?) do much.

Social media was a big miss. Orkut, which originally launched in 2004 was successful in Brazil and India, for the most part, but never took off globally. And we all know how Facebook totally killed it in that space. Google Buzz came and went. And now we have Google+ which I still think may be part of a very interesting Google strategy. That still leaves Tweeting, which Google missed, and Twitter is so far ahead that it is likely nearly impossible to wage a 140 character war against it…and sadly, it’s one attempt to real-time search Tweets died in 2011.

LinkedIn, again, seems to have an increasingly strong lock on all-things-career. So Google will have to sit that one out. For now at least. 

And that brings us to hitherto unglamorous “note taking”.

What Evernote has shown to world is that this is indeed another “killer app” that syncs across various platforms and provides for a very sticky and useful experience. This is attested to by 50 million users around the world, of which nearly a third are in the US. With those numbers growing by 100,000 users a day, Evernote controls this market. 1.4 million of those are also paying customers (each of them pays either $5 a month or $45 a year). 

But, for Google, it’s not about the money (which is why I don’t think it will ever charge users for Keep or roll it into its Google Apps suite). Instead, for Google, it is about not being there, helping create and capture value – when users are creating data, archiving it and presumably returning to it repeatedly and throughout the day. And horror of horrors, searching through it!

OK, that was a bit dramatic…but the reason Google Keep is (should be) so important is because Evernote has captured a healthy marketshare, momentum and media attention in a recurring, high-importance online experience market .

And that early mover advantage means that as more and more of users’ data is stored within Evernote, the less they will be inclined to migrate away to another platform in the future. And Google realizes that. It realizes that it is a bit late to this game. So, many of those users are probably lost to it for the foreseeable future. But it also knows that better late than never is a good strategy too. 

So in a move that should remind everyone of Microsoft’s second or third-to-market + catchup strategy in the past, Google will also work very hard to catch up and slow down Evernote’s growth in the near term and try as hard as it can, to encourage Evernote user defections in the medium to long-term. We can certainly expect some serious enhancements and integrations with a variety of other Google services that already enjoy the first mover advantage, as Keep keeps evolving. 

Google can’t afford to do otherwise and let its’ users use yet another service for part of their online lives. 

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