broadstuff

Two interesting pieces on influence in the last few days. Firstly, at the Web Expo 2.0 in Berlin, Nate Elliot of Jupiter did an interesting session on who really influences you in his talk The Future of Influence, from whence comes this matrix wot I made:



In essence, his argument is that we trust people like us a lot, and our friends most, especially when they respond to our Requests for Information. No real surprises there, its the current mantra (what his real angle was about is what marketers can do, which was focus on the "personal, unsolicited box" - illuminating in a sort of Beacon privacy worrying way). However, Nate's main talk was on New vs Classic influentials - the "Gladwellian Tipping Pointers" being the Classics, the "Wired Generation" being the New. Got a Blog, on Twitter, comment on forums? You are a New influencer.

But I must say I was a bit surprised that the Mantra was still being used, as in my experience I (and sundry oddball others) do tend to trust friends for some things, but not big things that we don't think they know a lot about. In that respect I do like the "Solicited, Broadcast" model - or even the "Unsolicited" model if it has people with expertise doing reviews - or just sheer numbers like on Amazon. That I am not alone has been brought out by an interesting piece of research by....Jupiter Research. I saw it on C:Net via Profy:

Facebook likes to trumpet the value of "trusted referrals"-- recommendations and ads with the endorsements of members of your friends list. But a new study from Jupiter Research, commissioned by analytics company BuzzLogic, says that consumer purchases are more likely to be influenced by what they read on a blog versus what their social-networking rosters recommend.

Half of all those surveyed who identify as "blog readers" (people who read more than one blog per month, a fifth of total survey respondents) say that blogs are important to them when it comes to making purchasing decisions. But they don't necessarily find them to be all that reliable: only 15 percent of blog readers, and five percent of all those surveyed said that in the past year they had trusted a blog to help them make a purchase decision.

That's still higher than the number of people who said they used social-network recommendations, though: ten percent of "blog readers," and four percent of all those surveyed.

Results of the survey are similar when it comes to advertising: a quarter of "blog readers" say they trust ads on blogs that they read (versus 43 percent on "familiar" or mainstream media sites), but a slightly lower 19 percent say they trust the ads on social networks.

Are these contradictory - at first I thought so, but then realised they were just starting to be very specific in niche categories. Bloggers who I read I begin to trust over time - and I interact with them, so they move slowly into the "Personal, Solicited" space. They get there by dint of the huge amount of information they give out about the person - after reading a blog a while, you know whether the writer/s are pimps or genuine, and you can see context up the wazoo. This is why they have a Right to Brand as New Influencers.

As to Social Nets, well there again "it depends". I think we do trust our friends and the People Like Us on a Social Net if we solicit the information we think they are competent to give us (restaurants, cameras etc). (question - is trust higher in an early adoption phase of a network - say Twitter - as we think more people are Like Us?).

But also, clearly, the Punters are ahead of the Marketers here in the big picture - Nate is saying the Marketers best play is to go "Personal, Unsolicited" - ie into SocNet land (think Beacon) - but the users have already sussed this and don't quite trust it so much anymore - even if you do dress it up as seeming to come "solicited" from their activity feeds.

Or maybe because of that.....

Last word to Svetlana Gladkova at Profy:

As a blogger I can’t help but be happy about such a rosy picture of the future with reliable bloggers working with the best advertisers to drive readers into making the right buying decisions.

Last night, one of the kids finally conquered and united Spain, with Byzantine help and despite French and Milanese interference- in Medieval Total War, that is. This led to a discussion about how it really happened, and of course about every boy's hero, Roderigo Diaz y Vivar - or El Cid.. The other was still putting down a revolt in Scotland while Harrying the North.

For those who would decry computer games as dumbing down a generation, I would say look again - watching mine, I can see the benefits compared to my era:

- A deep grasp of History - the kids know their Goths from their Lombards, can spot a Spartan at sixty leagues and are intimately familiar with Carthaginian strategic issues vs Rome. Does it matter? Not if your ambition is to be on Big Brother, but it must have an impact one day if you want to join the Knowledge Economy. (Mind you, watching a program last night on TV re Slebonomics, I wonder....)

- A deep grasp of Politics and Economics - I could barely run a pocket money account, the kids are running countries - balancing economics, strategy, diplomacy, social policy and military effort. That gives the sort of insights that I haven't seen even in business simulation games that I've run over the years.

- A scary grasp of human nature - the Sims is an abstraction of the way we are, but not that much - watching their understanding of people develop via Sims gaming has led to some uncomfortable conversations at home about what really drives people, and what actually works in life.

My own observation is that understanding something in a game leads to curiosity, and researching / reading about it elsewhere - I have been marched to Foyle's by a 10 year old to buy books on Parthians and Sassanids (Persian dynasties, if you must know). Even the shoot-em-ups have some value (reaction times, long discussions on alien technologies and Sci Fi ideas) but we do find we have to limit these, it makes them too aggressive after awhile and they have to let of steam with real world exercise.

I don't know what impact this will have going forward, but I think any kid who is comfortable with the entire panoply of history, can conquer and run a country, and has a scarily perceptive grasp of human frailty by 15 is on a better track than My Generation at that age.

Doubtless there are some things that may be lost. Overprotective parenting means they don't run around the 'burb so much, and are maybe less streetwise therefore - but it is still the role of parents to ensure they face the sort of tests that build self confidence and self reliance in the Real World, despite the abuses of Health & Safety regulations. Some kids lose the opportunity to do more exercise (I think that is also partly a school's role though - kids need to run around, team sports are good for physical and psychological development, and if they are at school all week thats where it needs to happen ). And yes they chat to their friends over social media as well as face to face - but they are chatting more than ever before.

But overall I think they are probably getting a better deal this way.

Microsoft has launched its long awaited Webservi...sorry Saa..sorry Cloud Service, Azure. I read it on Nick Carr's blog first but its now all over Techmeme. Sez Nick:

Microsoft will use the Azure platform to run its own web applications and will also open the platform to outside developers for building and running their own apps. Azure will compete with other cloud platforms, such as Amazon Web Services, Google App Engine, and Salesforce.com's force.com, and, given Microsoft's enormous scale and influence in the software industry, its launch marks a milestone in the history of utility computing. The cloud is now firmly in the mainstream. Or, as Microsoft puts it: "The truth is evident: Cloud computing is here."

We await with interest the first Microsoft services, and to see the economics and service reliability. Thats what will make it fly. Funnily enough, for the first time I'm hopeful about a supplier actually getting something serious going, as Ray Ozzie is the first purveyor of Cloudy Delights to pinpoint his key hurdle:

"Cloud computing is ultimately going to be, do you trust this provider to have more to lose than I have to lose as a company if they mess me up?"

The issue being if them going into outage costs thousands in lost revenue from you, but your going down costs you millions from your customers, then the Cloud player who steps up to take the most risk on board will win this one, and these guys seem to get that (and have the size to do it).

But more interestingly from a blogmeme point of view, and judging by the Cloud of Hype of the last few months, I wonder if its the New Web 2.0. Look at the Google Trend Index above, for example. I rather fear its the latest Shiny New Hype thing. The eventual decider will be where and who makes profits (In this most post of Bubble 2.0 worlds) but that is still under some debate

Good news though is hopefully no oddly named Cloud companies, we hope. No Niiimbus or Fogr or Gloopl or somesuch

Confusing post from eMarketer here - says that they are shortly to give their Online Ad forecasts another haircut (a mere 2 months from the last one), yet the piece talks of the situation not being bad for online marketers?. The numbers seem to be from the last haircut, not the impending one as well..

The piece does articulate Online Ads' advantages though:

Marketers should rightly ask, “What is behind the bullish projections for online ad spending, especially when most traditional media are taking the financial equivalent of body blows?” The seven reasons are as follows:

1. The Internet is inherently more measurable and accountable than are traditional channels.
2. The Internet allows for better, more-granular targeting than do other forms of media. That reduces media waste and can save marketing dollars.
3. The Internet is interactive, thereby allowing for a higher degree of engagement with consumer and business prospects and customers.
4. Particularly among younger consumers, the Internet is accounting for a larger and larger share of total media time; numerous studies demonstrate that teens, millennials and other younger cohorts are spending more time online per week than they are watching television.
5. The Internet plays into the consumer-in-control movement and therefore provides new opportunities for marketers to be a part of their conversations about interests, attitudes, shopping plans and even brands.
6. New Web 2.0 phenomena such as blogs, social networks and Twitter provide marketers with the potential to gain rich insights into consumer behavior and attitudes (the Internet is like a perpetual focus group on steroids).
7. The Internet, unlike any other medium or channel, allows marketers to reach prospects throughout the entire consumer buying cycle, from initial awareness through pre-information-gathering to sales and post-sale feedback and support.

But we all know the big issue is understanding the metrics, and without that being solved its a real barrier to growth.

Was reviewing the various presentations from the Web 2.0 Expo in Berlin, when I came across this response by Tim O'Reilly about Andrew Keen (from a question by Nancy Williams)


Tim O'Reilly on Andrew Keen from Adam Tinworth on Vimeo.

To refresh - the day before, Keen had written a piece predicting the death of the $0.00 business model - this is his basic argument:

In his best-selling book, Predictably Irrational, MIT behavorial economist Dan Ariely suggests that most of us are irrational when it comes to determining the value of our labor. I’m not sure. I may not have Ariely’s grasp of behavorial economics, but I’m pretty sure, if not certain, that the idea of free labor will suddenly become profoundly unpalatable to someone faced with their house being repossessed or their kids going hungry. Being paid to work is intuitive to the human condition; it represents our most elemental sense of justice.

So how will today's brutal economic climate change the Web 2.0 "free" economy? It will result in the rise of online media businesses that reward their contributors with cash; it will mean the success of Knol over Wikipedia, Mahalo over Google (Nasdaq: GOOG), TheAtlantic.com over the HuffingtonPost.com, iTunes over MySpace, Hulu over YouTube Inc. , Playboy.com over Voyeurweb.com, TechCrunch over the blogosphere, CNN’s professional journalism over CNN’s iReporter citizen-journalism... The hungry and cold unemployed masses aren’t going to continue giving away their intellectual labor on the Internet in the speculative hope that they might get some "back end" revenue. "Free" doesn’t fill anyone’s belly; it doesn’t warm anyone up.

In other words, a lot of the "free" work to date has been done by people making money elsewhere, and when they lose their jobs or benefits this will stop. (What Nick Carr calls "Digital Sharecropping" is currently being funded by benign employers or national social security systems)

I was also quite surprised that Tim called him out as "an idiot, and flat out wrong", as Tim said not that dissimilar things in his own presentation at the Expo event the night before - ie that startups will need to think of ways to make money, the funding for frivolity wasn't there, and value needed to be added. Not only that, he gave me the stage at the conference to point out things not dissimilar to what Keen was saying about the economics of $0.00 business models (see my talk here). In fact, I was talking at his conference at the same time as he was talking in the above clip. He also put the very sensible but possibly optimistic Martin Varsavsky on and took the devil's advocate position. In other words, Tim is doing more than his fair share to get the message out as well, and I think his recent posts pulling people back to the original meanings of Web 2.0 are a great step in the right direction - its was never all about social media esoterics, useless widgets and rivers of user generated cr*p.

So more to the point, whats going on when two guys seem to be diametrically opposed, yet in fact are saying much the same thing?

The quick take is that maybe both are parsing the credit crunch from their own positions and moving to a similar endpoint without realising it, like those movies where two protagonists are backing up and bump into each other, only to turn round and recognise the other - Aaaaargh!.

The longer take is no more subtle, but it is more brutal - its the race for the high ground going forward. To an extent, both needed the pre-Crunch world to hold the poles apart in the polemic. With bubblenomics gone though, the more silly excesses of Web 2.0 are going / gone, but so therefore is the ability to gain kudos by lampooning those same excesses, because the underlying Web trends are very real. What will the "During and Post" Crunch Tech Meme look like. Will Web 2.0 look like another spent force lying among the fallen dot.com daisies - or will Keen look like the sort of guy who called the falling sky with every breath, but now it has fallen people will say "OK now what have you got - is that it?"

It is at this time that new voices will emerge, as the Zeitgeist shifts, and this is the risk both sides' A list protagonists now face. I suspect that those who have been beating either too fluffy, or too pessimistic a drum, will both be seen to be part of "yesterdays story", their pages yellowing on the interwebs as people pass them by. (I think this was what Dennis Howlett was really getting at - the big picture has changed, but some people's narratives haven't)

But what shall replace these Old Tales then?

I have remarked a number of times on this blog on how hard it's been to hold an analytical middle ground in the last year or so - the hypemonkeys are so far off the planet ( heads up in the Cloud - don't get me started....) that just being realistic makes you look like you are a hopeless pessimists, while the pessimistic counterpointers have been able to scare the cyberchildren with their tales of the bogeymen in the digital woods. I hope the time for more reasoned council returns.

We need it.

(I do predict far fewer companies with silly names with 2 "oo"s in them going forward thank heavens - in fact my first recommendation to any VC is NameChange in these more sober times)

We more "Enterprise 2.0", PC using types don't go all gooey at the knees and want to shout out our emotions from the rooftops when we see new shiny toys (unlike those loud Apple lovin types ), we just succumb to good old lock jawed hardware lust - and this one deserves it. The Grauniad has a picture of the new Dell Inspiron 12" laptop.


Slashdot has a review that fits with our sense of decorum:

An anonymous reader points to what's claimed to be "the world's first look at Dell's 12.1" netbook," running at Australian Personal Computer Magazine. There's a bit of gushing at the beginning, but this is followed by some informative pictures, informal battery-life tests, and interesting background about the machine's components. Upshot: it's a well-made, decent-performing small laptop with a better keyboard than smaller netbooks and more wireless options than most. However, it's shorter on battery life (bigger screen, smaller battery) than Dell's smaller Mini 9, and less easily upgraded.

And it has a 60Gb onboard hard disk!

So - we were discussing just a week or so ago the upgrade of our current laptops (the 2004 version of Dell cute 12" screen ones) - we await with eager anticipation the downgrade to XP now.......

At the O'Reilly Web Expo in Berlin, there was an interesting session about women on the 'Net chaired by Suw Charman Andersen (Adam Tinworth covered it here). In the session Janet Parkinson showed some of the research she has been doing on the subject over the last few months. I'm familiar with some of this work as I've been collaborating with Janet on this - another useful byproduct of Lloyd Davis' (who was also on this session) Tuttle Club initiative.. These are Janet's notes:

Women represent a good half of the number of users of the web and even more on social networks.

They make over 80% of all real world consumer purchases and according to a recent survey conducted by Mastercard run across 7 countries recently, women now shop more online than men – though they spend less. Some of the reasons for this being security issues and bad website design.

As Justin Drummond notes in Brandrepublic ‘It is recognised that women, more so than men in the US and UK, are culturally encouraged to be more inclined to discuss their purchases with friends, recommending items they are pleased with and asking for advice from peers in decision-making; “they utilize the powerful marketing tool: word of mouth” (Source: www.alternet.org). This goes hand in hand with an expectance of openness to information about goods they wish to purchase, and makes them harder customers than men in many ways’.

The Web 1.0 online hard sell “Point-Click-Purchase” approach doesn’t always work, and given the choice women often prefer to browse, dig deep and get to understand our choices. Perhaps this is the reason for the success of sites like Etsy http://www.etsy.com/ which offer more of a shopping experience – with social networking at its core.

Social media is becoming more of an integral part of websites – and, as Business Week reports the use of social media is particularly attractive to women.

Web design and online marketing companies which are areas generally dominated by men are having to adapt to social marketing. Having more women involved with their eye for what women want can only be a good thing.

Moving on to advertising, Martha Barletta in her book ‘Marketing to Women’ comments that 91% of women say ‘advertisers don’t understand us’,and IPC Media reveals that within the ever growing market of women over 35, 36% feel that advertising aimed at them is patronising.

I must admit that I’m getting particularly fed up with the marketers and product designers assuming that the way to get me to buy some piece of tech is to make it in pink!

But there are a few glimmerings of hope with Dove, M&S and a few others having launched highly successful campaigns aimed at the older woman.

But my favourite to date has to be Harley Davidson which has added a section on its website dedicated to women motorcyclists. Women now buy 12% of all Harleys sold, and in an article in the New York Times, Jerry G. Wilke, Harley-Davidon’s vice president for customer relationships and product planning comments: “I think 12 percent is just the beginning…. The opportunities to cater to women are endless, and we will continue to do more.”

The video games industry is an area worth watching too with 40% of all gamers being women – though they represent just 12% of the industry.

This is still just the beginning though, and the money is starting to appear.
Advertising on, and traffic to, women-specific sites has increased rapidly and the big boys are starting to get in on the act:

Comcast recently bought the shopping and entertainment site DailyCandy for $125 million;
Peacock Equity and Venrock invested $5 million in BlogHer;
Yahoo created Shine http://shine.yahoo.com/ .

So where do we go from here? With the majority of internet shopping being done by women, and women also being the majority users of socical networks it’s odd that only 16% of women are involved in designing and building websites. And although roughly half of staff in advertising are women, men still monopolise the all important creative director roles which is odd considering that they are trying to influence women.

I would have thought that with these serious facts and figures behind us, now would be the right time for women to really start to make their mark.

In short, Janet's research indicates there is a big arbitrage opportunity in the Webspace - given that women are such big users, it would seem intuitive that if more women were involved in the supply side (as they are in many Brick World retail businesses) then the experience would be better - and more interestingly, "men only" UI/UE designers probably (i) wouldn't be able to build these attractive services and (ii) wouldn't be able to "grok" why women built ones worked better, giving those a competitive advantage for longer.

That this is not immediately obvious (I thought it was compelling, you see) was brought out for me at Web Expo - just before this session, I came into the speakers' lounge to see Janet in discussion with a very sceptical Ben Hammersley. I listened in for a bit, but as best I can gauge it, his argument consisted of the view that he didn't believe it, so it couldn't therefore be true (shades of Pythonesque "No it Isn't" reasoning I thought). For what its worth, the data re gender "convention" and "reality" is similar to that with respect to age. Rory Sutherland of Ogilvy made a similar point a few months ago when he showed that advertisers still target young people today, even though all the money is with the baby boomers who were young in the 1960's (where the "youth" practice started). Sutherland pointed out that this occurs because today the Ad world is full of young people who don't understand (and don't want to understand) old people, despite the underlying economic shift.

If a similar issue exists with Gender, then the arbitrage is probably even bigger than Janet imagines!

One of the joys of consultancy is that you can undo as well as do. This piece is a great guide for corporate un-development (we do this sort of work, but haven't for a few years now - looks like its coming back though). Some nuggets:

It’s really shocking.

“Shocking” is being polite. It’s earth-shattering. We’re back to one or two calls a day, which is translating into three of four new engagements a week. To put that into perspective, from 2002 through 2008, we were maybe getting five new deals a month. But now, all these calls are building up. We got a call yesterday to help a company and today, the request changed; it went from, “Can you help the company” to “we need you to close the company” because one of the investors is not going to ante up.

Have you seen other investors pulling out of deals?

We saw this years ago; it’s just starting now.

The role of PR:

Is PR cheaper than advertising? The answer is yes. Are you better to have a third party tell reporters how great your product is? The key is to negotiate. I’m not a believer in cutting public relations if the machine is well-oiled and people are reading about you. It takes three to six months to get public relations up and running. Why throw it away?

Now, do you need an inside marketing person? Probably not at $150,000 a year. Also, outside PR probably has a wider net.

And the lessons from experience?

Meaning you have to make all of your cuts at once? Can’t it be an iterative process?

I’ve been doing this for 30 years and if you do it strong and deep one time, everyone complains for a period of time, then gets over it. Also, I’ll be honest with you, I’ve terminated people and two weeks later, I’ve brought them back and apologized for cutting too deep. Usually, they come back. It’s acceptable to be human as long as you’re not a jerk.

I’m almost afraid to ask, but what kind of severance packages are startup employees getting?

Sadly, right now they’re minimal. Two weeks is a maybe.

The termination thing is different in UK/Europe by the way, its harder to get rid of people just like that - and bringing them back in 2 weeks is tantamount to getting a major lawsuit, so its far harder to overcut and make up.

Following a fairly entertaining discussion going on re Cloud computing, (Tim O'Reilly via Nick Carr's blog)...... To set the argument into sequence, initially Tim agrees with Larry by quoting Hugh:

A couple of months ago, Hugh Macleod created a bit of buzz with his blog post The Cloud's Best Kept Secret. Hugh's argument: that cloud computing will lead to a huge [and profitable] monopoly. Of course, a couple of weeks ago, Larry Ellison made the opposite point, arguing that salesforce.com is "barely profitable", and that no one will make much money in cloud computing.

The stage is set, and Tim writes that he thinks Larry is right, and Hugh is wrong (my thoughts on Hugh's post at the time over here):

First, let's take a look at Hugh Macleod's argument:

...nobody seems to be talking about Power Laws. Nobody's saying that one day a single company may possibly emerge to dominate The Cloud, the way Google came to dominate Search, the way Microsoft came to dominate Software.

Monopoly issues aside, could you imagine such a company? We wouldn't be talking about a multi-billion dollar business like today's Microsoft or Google. We're talking about something that could feasibly dwarf them. We're potentially talking about a multi-trillion dollar company. Possibly the largest company to have ever existed.

Tim disagrees with Hugh's analysis, as he feels Hugh is not distinguishing between economies of scale and network effects (ie confusing Moore's with Metcalfe's economics). (I have another view by the way, which is that you can have a monopoly and low profits, but more of that later) Anyway, on with the show...

The problem with this analysis is that it doesn't take into account what causes power laws in online activity. Understanding the dynamics of increasing returns on the web is the essence of what I called Web 2.0. Ultimately, on the network, applications win if they get better the more people use them. As I pointed out back in 2005, Google, Amazon, ebay, craigslist, wikipedia, and all other other Web 2.0 superstar applications have this in common.

Cloud computing, at least in the sense that Hugh seems to be using the term, as a synonym for the infrastructure level of the cloud as best exemplified by Amazon S3 and EC2, doesn't have this kind of dynamic. (More on different types of cloud computing later.)

Of course, it is true that the bigger players will have economies of scale in the cost of equipment, and especially in the cost of power, that are not available to smaller players. But there are quite a few big players -- Google, Microsoft, Amazon -- to name a few, that are already at that scale, with or without a cloud computing play. What's more, economies of scale are not the same as increasing returns from user network effects. They may be characteristic of a commoditizing marketplace that does not actually give outsize economic leverage to the winners.

So far, so good - now enter the irascible Nick Carr stage left, arguing that Tim in turn is confusing Network Effects with Good Olde Grabbing the Commons (and good olde cross subsidy too, I'd argue):

Let's stop here, and take a look at the big kahuna on the Net, Google, which O'Reilly lists as the first example of a business that has grown to dominance thanks to the network effect. Is the network effect really the main engine fueling Google's dominance of the search market? I would argue that it certainly is not. And in fact, if you look back at that 2005 O'Reilly article, What Is Web 2.0?, you'll find that O'Reilly makes a very different point about Google's success. Here's what he says, in a section of the article titled "Harnessing Collective Intelligence":

Google's breakthrough in search, which quickly made it the undisputed search market leader, was PageRank, a method of using the link structure of the web rather than just the characteristics of documents to provide better search results.

This has nothing to do with the network effect as O'Reilly defines it. What Google did was to successfully mine the "intelligence" that lies throughout the public web (not just within its own particular network or user group). The intelligence embedded in a link is equally valuable to Google whether the person who wrote the link is a Google user or not. In his new post, in other words, O'Reilly is confusing "harnessing collective intelligence" with "getting better the more people use them."

Yes, I hear you cry - but what about the Original Question? How many Clouds will there be, and will they make any money? One accumulated Cumulus or a whole Stratos of them?

My take - I think there are 3 separate questions here, and I think there is a danger they get conflated - viz:

(i) Will the Cloud/Grid/Hosting industry be composed of many or very few (one?) players

(ii) Will the Cloud etc be profitable?

(iii) Will value be captured by this layer, or will it move to the "Web 2.0" applications layer.

Taking these in turn:

Will Cloud / Grid be Many or Few companies?

I agree with Nick here - Sez he (expurgated by me):

Indeed, this new industry seems particularly well suited to a concentration of market power. Here are some of the reasons why:

1. Capital intensity - presents a big barrier to entry.

2. Scale advantages.

3. Diversity factor. One of the big advantages that accrue to utilities is their ability to make demand flatter and more predictable

4. Expertise advantages. Brilliant computer scientists and engineers are scarce.

5. Brand and marketing advantages. They still matter - a lot - and they probably matter most of all when it comes to the purchasing decisions of large, conservative companies.

6. Lock-in. Don't assume that "open" systems are attractive to mainstream buyers simply because of their openness.

These conditions all argue for a small number of players, but not necessarily for one. Telecoms and Web Hosting are similar example where a number of major players exist.


Will the Cloud be massively profitable?

Just because there is a concentration of market power does not imply there will be super-profits, and I'd argue this industry has the nature of a utility - a bit like Telecoms or Hosting - where in the early competition phase any surplus is competed away by the players trying to increase utilisation and win business from each other (especially if Google and Microsoft are involved, as they will cross subsidise the business).

Thus I would argue that there will initially be potentially good margins, but they will be rapidly competed away.

Will the "Web 2.0" Application Layer take up the surplus?

Tim is apparently in furious agreement that the industry will consolidate into a few large players, and low margin ones at that - but thinks that it will not be low margin at the software layer, for the reason he notes - the "The Law of Conservation of Attractive Profits"

A lot of my thinking about web 2.0 grew directly out of my thinking about open source. My argument in The Open Source Paradigm Shift was that what we learned from the history of the IBM personal computer -- a commodity platform built from off-the-shelf parts -- was that it drained value out of the hardware ecosystem, turning it into a low-margin business. But profits didn't go away. Instead, through something that Clayton Christensen calls "the law of conservation of attractive profits," value migrated elsewhere, from hardware to software, from IBM to Microsoft. Christensen:

When attractive profits disappear at one stage in the value chain because a product becomes modular and commoditized, the opportunity to earn attractive profits with proprietary products will usually emerge at an adjacent stage.

I believe strongly that open source and open internet standards are doing the same to traditional software. And value is migrating to a new kind of layer, which we now call Web 2.0, which consists of applications driven not just by software but by network-effects databases driven by explicit or implicit user contribution.

I think that while Tim is correct about where value is draining away from, it not clear to me that it will be accrued where he thinks it will. One point I'd make is that above analysis seems not to recall the main Microsoft advantage - monopoly ownership of the assets, vigorously enforced. Thus I would argue that unless Open Source has some form of ability to "corrall" the assets, value will leak away from this layer as well, just as it did from IBM.

To be fair to Tim, he defines a number of types of Cloud (my expurgation again):

1. Utility computing. Amazon's success in providing virtual machine instances, storage, and computation at pay-as-you-go utility pricing was the breakthrough in this category, and now everyone wants to play. Developers, not end-users, are the target of this kind of cloud computing.

This is the layer at which I don't presently see any strong network effect benefits (yet).

2. Platform as a Service. One step up from pure utility computing are platforms like Google AppEngine and Salesforce's force.com, which hide machine instances behind higher-level APIs. Porting an application from one of these platforms to another is more like porting from Mac to Windows than from one Linux distribution to another.

The key question at this level remains: are there advantages to developers in one of these platforms from other developers being on the same platform?

3. Cloud-based end-user applications. Any web application is a cloud application in the sense that it resides in the cloud. Google, Amazon, Facebook, twitter, flickr, and virtually every other Web 2.0 application is a cloud application in this sense. However, it seems to me that people use the term "cloud" more specifically in describing web applications that were formerly delivered locally on a PC, like spreadsheets, word processing, databases, and even email.

Point 1 is really describing utility level services. Point 2 describes more of a walled garden play, an approach to gain surplus by restricting user transfer options (aka good old proprietary plays). Point 3 reminds me of the dotcom world of ASP's (Application Service Providers), which I was involved with at the time and since. The issue is that anything easy to do (eg Office lookalike apps) has fairly low value (Open Office being free to user), and anything hard to do comes at a price that makes more traditional ways look more competitive. And the real value lies with the more sophisticated applications.

I return to my points at the time of Hugh's post - this is a bigger issue than which Cloud you sit on:

The issue quite simply is this - in my business, I am committed. The infrastructure partner is only involved.

Now, I hear you argue, Outsourcing has done very well - and it has - but it is instructive to look at what is usually outsourced and by whom. By and large its non core, non customer facing applications (we have in fact done a number of pieces of work re-insourcing customer facing services). So Email, HR, Sales Analysis and Order Management etc are outsourced, but core workflow far less so. Also (whisper this who dares) outsourcing is often a piece of financial, not technical, engineering. Smaller companies do tend to outsource more critical services, but its driven by their economic necessity (lower resource levels, lower cost plus trying to get a jump ahead of large players) rather than choice in many cases.

In other words, I think small companies will adopt the Cloud first, but they have b*gger-all money compared to Corporates. This the area where Web 2.0 technologies of today will excel, but the surplus is mainly being handed to the customer.

Now, where I do think Web 2.0 is different is the way it deals with the connection between people and data usage, but (having worked for 15 years or so with Enterprise systems and 4 or so with Web 2.0 ones) it is not yet "Enterprise Grade". But it will come. Question is though, how will they extract value? Now Tim notes that:

So when Larry Ellison says that cloud computing and open source won't produce many hugely profitable companies, he's right, but only if you look at the pure software layer. This is a lot like saying that the PC wouldn't produce many hugely profitable companies, and looking only at hardware vendors! First Microsoft, and now Google give the lie to Ellison's analysis. The big winners are those who best grasp the rules of the new platform.

This may be true, but in my view there is a big gap still to be crossed before these Web 2.0 services are properly Enterprise 2.0 ready, or can extract high margins. The value in web 2.0 will be extracted by whoever is taking the risks. Right now, these are the enterprises who implement them. Thus, until the Cloud apps' Service Level Agreements have real terms, with real penalty clauses, they will be unable to extract large surpluses and will be relegated to lower value areas. Which is really Larry Ellison's point.

In fact, I suspect the Cloud winner, as with Outsourcing, will be the one with a better financial rather than service package.

An interesting discussion, nonetheless....no doubt this is not the end of it!

Update - indeed not and end to it - there is a good post from Whimsley on the matter, this bit moves the discussion on:

What we need to do is not so much look at the sources of increasing returns to scale, which are many, but instead look for what factors might limit increasing returns and prevent the expected monopolies from forming. Any such factor will affect different digital industries in different ways. I'll just look at one factor to show what I mean.

According to the classical model of trade, industries should get very concentrated as each country focuses on its own area of comparative advantage. If Germany is good at making cars and Sweden is good at making bookcases then all the cars will be made in Germany and all the bookcases in Sweden - then they will trade cars for bookcases.

But in the real world both cars and bookcases are made in both Sweden and Germany and they each trade both cars and bookcases among themselves. Industry concentration is limited. How come?

One of the things Krugman used to explain this observation is the idea that as consumers we have a taste for variety. So MacDonald's may have economies of scale and sell a lot of burgers, but no one wants to eat MacDonald's all the time so there's a limit to how much of the restaurant industry MacDonald's can win over.

In addition to this point, most tech commentators forget about Transaction Costs (I did when I wrote this....) - they impact every system and they grow in a Metcalfeian way (ie exponentially). The issue being at some point the Metcalfe's law benefit tops out to you, but the Transaction costs keep on growing. Think Dunbar's number effect - a social net of several million people has transactions Cost of all those million links, but can only give the Benefit of 150 or so to any user. At some point the system is just too costly for the benefits it produces and finds its natural limit.

MG Siegler on VentureBeat seen on Techmeme re news of Twitter's death being somewhat exaggerated:

After all, this is the service that was basically unusable for a few months earlier this year, and came back stronger than ever. It’s also seen a number of challengers, ones that were arguably better and more feature-rich (Pownce, Plurk, etc) come along, but fail to match Twitter’s sustained popularity.

(Dave) Winer himself has been a huge proponent of one, Indeti.ca. But despite his and others best efforts, its growth (at least for its site) has not only stopped, it has basically fallen off a cliff the past few months.

.......

The problem with “Twitter killers” is that they don’t actually kill Twitter. Why is that?

It’s the users.

As in, Twitter has them. Sure, it can easily be argued that the so-called “early adopter” users aren’t all that important in the long run, but Twitter has been seeing some real traction among regular people outside the Silicon Valley echo bubble as well.

Actually, I think its more than just the users. I think its the structure of the Twitter comms networks itself. There is something about the unique combination of:

- Multimedia unified communications

- Asymmetric connections allowing it tp be used in a number of roles from broadcast to niche

- Limited message size

- (Just) enough IM and privacy functionality to move to 1-2-1 comms

- Exposing the API so that development of OTT services have kept up (and are appropriate to) user needs

That seems to make the service far more flexible than any of the others that have been touted as Twitter Killers, which are all built with more of a preconceived reason to exist. Twitter, in my view is more "pure comms", in that it makes no assumptions about the uses it gets put to. Personally, I think its emerging as the "2.0" equivalent to the old Telco holy grail, the Unified Comms System.

Update - as predicted, the death of Twitter was somewhat exaggerated - article in the WSJ suggests its on its way over the chasm, due mainly to its messaging flexibility:

But, like blogs and social-networking sites, Twitter is starting to cross into the mainstream, as a wide range of people find interesting uses for the brief notes.

Doctors are using Twitter to update patients about office hours. Local groups such as the Los Angeles Fire Department are using it to share details about service calls with interested residents, occasionally with graphic descriptions of the victims' conditions. And dozens of major companies, like computer maker Dell Inc., use Twitter to share deals and product news with people who sign up for the service.

(More on this in a later post, following some interesting discussions on Jabber and Transaction Messaging in general at Web 2.0 Expo)