It's Not Who You Like - But Who's Like You

Right now I have 111 Facebook friends, 387 Linkedin connections, 48 people on IM, something like 20 twitter followers, a few less that follow me on Foursquare, and a small number of blog subscribers.

I don't know where this puts me in the grand pantheon of social media - probably somewhat average for someone of my age - but certainly not hyper social - I don't live on any of these services.

Whenever I am faced with a company that is looking at social search or social recommendation, almost all of them start with the premise that those closest to you via these social services are going to be the ones who represent the best fit in terms of recommendations. My guess is that this is the default position due to the difficulty of really solving the problem - and the fact that all social services have pretty robust API's that allow you to connect the dots pretty easily.

As I say in the title - I don't think this is the answer:

It's not who you like (or follow) - it's people who are like you when it comes to the dimension you are looking for a recommendation on.

Now that's a much harder problem to solve. And I would posit that the further you get from your home base (where a lot more of your friends are likely to be experts at all things in your home town) the harder it gets to solve.

For example: I love to snorkel - and so does the rest of my family. Whenever we go on a beach vacation the number one criteria tends to be proximity to great snorkeling - followed by a host of other criteria - but we will likely stay in a hotel that might not otherwise get a second look, if it happens to be within walking distance of a great snorkeling spot off a beach.

So tell me, how do we get recommendations that match this criteria? Where do I turn to? If I put that out into most social search engines - they will ping my self defined social circle to get an answer and chances are it will not be successful.

What I really want is to find people who are passionate about snorkeling - then narrow them down to people who do this in the Caribbean (being east coast based this makes for the easiest trips), then try and understand how many of them have a range of knowledge (not just living on one island and never having been able to compare it to another), then understand what the current dynamics are in the location (has there been a lot of rain and you are getting bad visibility due to run-off into the bay? has a hurricaine recently passed through and the seas are choppy?).

Now if I can get an answer to all of these questions, then I can see if there are hotels nearby and available for the times I am looking at, flights available etc...

Where's the next great social network that allows me to connect with people like me - not necessarily on a permanent basis - but on an ever changing and ever morphing basis depending on where we are in time and space.

Now that would be interesting. People who are like me - as I am now - because guess what? In 15 minutes I might be looking to plan my next great hiking adventure or I might be figuring out whether I should buy an iPad today - or wait till the iPad 2 comes out or where I should go for dinner tonight in Stamford CT.

My guess is that people are of such a complex nature that the friends they self select are not necessarily the best people to talk to about all of their recommendation needs. You need people like you.

An Open Letter To Jeff Bewkes, Chase Carey, Brian Roberts, et al. re Netflix

The following quote comes from Reed Hastings, (here) CEO of Netflix to Whitney Tilson of T2 Partners - who has been short Netflix stock - and has recently become both open and vocal (here) about his heretofore losing position:

"Another competitive threat is TV Everywhere. If MVPDs (multichannel video programming distributors) are successful at getting their subscribers (which is practically everyone) to use TV Everywhere, which is free, instead of Netflix, for streaming video, then the market opportunity for supplemental services like Netflix and Hulu Plus will be much smaller. There is no additional profit for MVPDs in TV Everywhere, but they are motivated to slow the growth of supplemental services because of the fear that someday the combination of ESPN3, Netflix, CNN.com, Hulu, YouTube, and others could be an effective MVPD substitute over the internet. The TV Everywhere threat will grow over time, but is unlikely to bite in 2011 in a short-satisfying manner."

Let's face it - Netflix competes directly with any existing video service out there - and does so at a very affordable price. Content creators doing deals with Netflix have generally taken their money, under some sort of restriction, but ultimately given them their valuable content on the assumption that Netflix is a long tailed service - and is really additive to the overall video pie - and not competitive with it. Thus, any payments from Netflix were simply margin enhancing and represented a whole new front in content monetization.

Recently, you have started to hear the drumbeats from people who are in the position to know. Jeff Bewkes has come out against Netflix and their streaming service (here) - probably realizing that $8 per month for tons of long tailed content (and some more recent stuff) is a pretty good deal relative to HBO - which charges consumers $10 per month for very little current content (and if you are willing to watch DVD's - older content). You are essentially paying $10 per month for HBO's original programming - which may or may not appeal to you. Time Warner has seen HBO subs decline for 2 years running - and there just might be something to the argument that cutting off HBO to add Netflix is a pretty good deal - unless you absolutely need to watch HBO original programming the night it airs. After all, as soon as the DVD's come out - you can watch them on Netflix anyway.

All of the major content creators have their own dog in the fight - and none of them seem to agree. CBS isn't on Hulu. Fox and CBS are blocking Google TV. Different content guys give Netflix different windows for streaming - and different windows for DVD rentals. Ask 6 studios what their deal with Redbox is, and you will get 6 different answers. What content is available on Hulu? On Hulu Plus? And in what window? The truth is that no one knows.

So here's a solution for the media world:

Adopt TV Everywhere. With a twist.

Jeff Bewkes is absolutely right in his viewpoint here. But he doesn't go far enough.

What the cable and content guys should do is exactly what they have always done - which is to protect their existing business model. Sure they fight over retrans, and sure they argue over the value of some content - but all in all they are trading nickels around the edge.

Also, the consumer has spoken fairly clearly in that they want the 4 any's as Glenn Britt of Time Warner Cable puts it: any content, any time, any place, and on any device. That's what a winning service should look like.

So - here's what I would do.

I would absolutely get everyone on board with TV Everywhere. If you pay a cable or satellite company for delivery to your house - you get the access to the same programming on any IP device you want. In addition, you get it anywhere you have internet service - and based on the programming - time shifting of one sort or another should be enabled.

But I wouldn't stop there.

The cable business particularly, is filled with tremendously bad UI experiences - and while the new Comcast (check out what Brian Roberts thinks of Netflix here) , Time Warner Cable and Directv UI's on the iPad look great - I would make it simpler for the industry.

I would do a deal with Hulu and adopt it as the standard for TV everywhere. If you have a cable subscription, you would have a Hulu subscription. Consumers have already voted and like the Hulu experience - so why not make it easy for the consumer.

But I wouldn't end there.

Right now, the cable operators are the number one customers for Time Warner and Disney etc... and could easily replicate the NEtflix experience online. So that's exactly what I would do - and I would call it Hulu Plus (simple eh, it already exists). Hulu Plus would go from a reasonable programming service to a Netflix killer - allowing consumers to access all sorts of long tailed programming that is not being well monetized currently - except by guys like Netflix.

That's it plain and simple.

You continue to keep the economics of the existing model - you give consumers what they want - and you offer consumers more of what they would like - and you head off a competitor.

Why these guys can't see this is beyond me - but hey - this is what they get paid the big bucks for.

Sure they might goose earnings by $0.01 by breaking ranks and taking a little more from Netflix - but in the long run Reed Hastings has almost 20M subscribers by giving consumers what they want. He's a pretty smart guy - so why not take his advice. It's working fine for him!

It all comes down to this: Netflix is in the aggregation of content and distribution business - just like the cable MSO's. Unlike them, however, they have no physical plant (and to add insult to injury they deliver their content increasingly over the infrastructure of the guys they are competing with) and unlike them they are growing rapidly. Content guys need to realize this and treat them the same as any other MSO. If they want a specific window - they should be charged similarly. Thus, Neflix should be able to get ESPN - at $4.50 per sub per month!

Is Groupon Crazy? Has Groupon Solved Local? I Don't Think So X2!

Over the past week we have seen a ton of the "will they, won't they" reports on Groupon and its potential nuptials to Google.

Rumors of price have been as high as $6B for the company - a price so high that most assumed that it would be irresistible to turn down - and yet Google has seemingly been left at the alter by a runaway bride - who, as it turns out had a larger dowry than expected (courtesy of about $135M of secondary stock sales.)

So is Groupon and its investors crazy to turn down this sort of money?

I don't think so.

Here's why:

It is rumored that Groupon has about $1B in revenue. Now there model is simplicity itself. They pay out 50% of that to their partners who offer the discounts - and the remainder of the company cost is in sales. If you look at a typical media company at scale - they tend to run about 20% of sales as costs (incremental margins on the extra $ of revenue is over 80% often) - so on $1B of revenue you have $200M of costs. Since most of the Groupon employees are either sellers or administrative people writing copy for the deals and there is not a ton of hard technology nor is there a ton of database necessities or server needs - one can assume that the cost structure is not going to get too far beyond the SGA line.

My guess is that Groupon is doing $1B in revenue - $500M in Cost of Good Sold, $200M in SGA and perhaps another $50M in miscellaneous costs (real estate - exec salaries, the cost of ramping up ahead of revenue etc...) - for a total of $250M in EBITDA.

So Google offers $6B for $250M in EBITDA - 24X which seems like a large number - but if EBITDA is scalable and growing extremely fast (over 100% per year right now) - then the 24X becomes 12X in a year and 6X in 2 years - which seems like a pretty good deal for Google - and is probably one of the reasons why Groupon decided to remain private.

So is Groupon Crazy? I don't think so.

Now in order to reach that conclusion, you also have to believe that Groupon will continue to take an increasing share of the local advertising market - particularly the promotional budgets and marketing budgets of the local advertisers.

It has been written that Groupon has cracked the local problem - and that all of the $100B per year or more that is spent locally is open to them. Perhaps, but I think it is instructive to disaggregate that market a little bit and see just who is using Groupon.

As a store owner - if I choose to use Groupon, I am offering a 50% discount generally - and Groupon is taking 50% of the offer price - so in essence, my net is 25% of the retail price. The question is, who can afford to offer 75% off on a regular basis?

The answer falls into two buckets:

1. Companies with extremely fixed costs, high marginal profit levels, perishable inventory and incremental capacity. Say you own a spa. The overhead is completely fixed and you are paying the workers to be there - so incremental margins are high. You can imagine that the margins on cupcakes are very high. If you own a school or provide a service where you already have staff being paid for who are sitting around part of the day. I live in Fairfield County - and today's deal is $10 for $20 of Michelle's Pies. Now Michelle makes some fantastic pies - my family had an apple crumb pie last night from there - so I can attest to the quality, but this is a perfect example of an ideal Groupon deal. Baked goods have tremendously high margins - it is a volume buiness. Michelle has a storefront (paid for), bakers on staff (salaried employees), very high margins (cost of goods on a $20 pie can't be more than $3), a perishable inventory (how long is that pie going to keep before you have to replace it?), and slack capacity (when's the last time you went to the baker only to find all the pies sold out?)

2. Companies looking to lose money in order to convert customers into regular paying customers. Businesses willing to spend money to acquire users. In most media businesses this is called SAC (subscriber acquisition costs) or CPGA (cost per gross add). The issue with these costs are that you have to know very well what the lifetime value of the customer is in order to price these properly. If I go to a store on a Groupon deal and never return - it was a terrible idea for the store to offer me the discount. If my regulars use the coupon, it is also a terrible idea. My guess is that most local businesses couldn't even begin to think about understanding the concept of lifetime value at the customer level.

Now let's look at the local advertising market. If you take a look at the revenues of typical local advertisers it consists of car dealers, chain restaurants, bars and grills, retail stores, electronics chains, supermarkets, etc... What you realize looking at the list is that most of these businesses operate in extremely competitive environments with margins that are razor thin at best. Car dealers are in no position to use Groupon - nor are clothing stores, electronics chains, supermarkets etc... The margins for these businesses are too low - and they already spend a lot of marketing dollars branding themselves. You think Best Buy is really going to offer 75% off some product to drive traffic? Which coimputer savvy shopper has never heard of Best Buy - or hasn't shopped there recently? There's just no reason for them to become customers.

And that's why I don't think Groupon has solved local. Because it's appeal is to a small subset of local businesses.

Now that is still an enormous and wonderful business and I'm in awe of the job they have done building the business - but it doesn't obviate the need for local marketing the way that Craigslist obviated the need for newspaper classifieds. And it isn't necessarily useful to everyone.

Whether it develops a nation of coupon clippers who only show up for deals and never shop full retail is yet another question - and one that is beyond my scope - but if those cupcake offers drove a ton of business the first time around - I hope that the bakers were smart enough to track the buyers and see if they became repeat customers - or just deal junkies looking for their next cheap sugar high.

Why Cable Is Out Of Touch With Reality

I got this headline from a friend of mine this morning

Charter Starts Itemizing Retrans Bucks In Taxes/Fees Portion Of Cable Bills

The full article is here

This is a complete asshat move by a company out of touch with its consumers.

Nobody likes higher rates: not consumers, and certainly not middlemen - and the cable companies are middlemen pure and simple. They are necessary middlemen, but make no mistake about it - they produce nothing with their cable plant and they have competitors - so they could be disintermediated.

Television networks have traditionally been free to those getting their signals with rabbit ears - and the cable networks have passed along their signals without compensating the networks. Recently, as the proliferation of cable channels has abated, the networks and local broadcasters have started asking the cable channels to provide compensation for the programming that drives the majority of the viewing on the system - particularly when some cable systems (most notably the satellite companies) have been charging directly for these signals.

The cable companies, who see programming expenses eating up between 30% and 40% of their video revenue, have pushed back hard - but can't really win the fight - as consumers care only about the programming - and not the cable providers margins.

By starting to itemize these retrans fees, Charter is heading down a slippery slope - opening itself up to questions it doesn't want to answer.

For example - if you are making 40% margins on your video business, why, as a consumer, should I be supportive of your fight against the networks? Are you entitled to a 40% margin by divine right? Why shouldn't you have much lower margins like everyone else in the world - and make up the difference in lower prices to me?

If you are going to itemize, why not go the whole distance - and start showing line item by line item what you pay for each and every channel on the dial. Maybe people don't know that they are paying over $4 per month to have ESPN. Or almost $1 per month for TBS, TNT and Fox News. In fact, as a consumer, you are paying a lot per month for programming you have no interest in watching.

Everyone argues that ala carte pricing in cable would be a disaster for programming diversity - and it might - but why should I have to subsidize any programming I don't want to watch. Particularly in these days of IP Video (think Hulu, YouTube, TV.com etc...) - programming can find a niche audience anywhere, anytime. Perhaps people are just worried that most of the programming is not what people want to watch.

Cable could go even further and explain why they make 85% margins on broadband - amazing considering that the US broadband product is generally considered far inferior to most of the rest of the world.

Or they can explain the 95% margins on VOIP telephony.

Charter can demonize the networks all they want - but at their best networks make something like a 20% margin  - and never consistently - as shows go in and out of favor. CBS, which is pretty much the best network in the US and has been for a while will likely make an 11.5% margin this year (including syndication of its hit shows). Of course a lot of retrans $'s go to the station group - so if I include this number in the total - the margin rises to 17.5% including high margin radio stations (they are grouped together) and about 15% without these.

In my opinion, Charter should keep its bills simple - instead of opening itself up to questions that it doesn't want to answer.

Apple TV - Why Much Of The Blogosphere Has Got It Wrong

It was no great secret - and much of the info was out there already - but when Steve Jobs unveiled the new Apple TV yesterday - much of the blogosphere lit up decrying it as not so interesting  - and a minor update to the "hobby" that has been around since 2006.

Venture Beat downplayed it here and Forrester analyst James McQuivey was less than excited here.

There were others out there - all of whom focused on the same two things:

1. The new Apple TV was launching with less than all the networks content and

2. There is no huge support for open source architecture allowing services like Boxee to run on the the new box

While both of these issues might put off some people you have to remember that  Apple is a very large company selling to the mainstream across the world. By bundling Netflix in with the Apple Store at $99 - you make the device worthwhile for the vast number of iPod, iPhone and iPad owners who want to stream content from their handheld devices to the TV easily. Sure, many TV's are now equipped with widgets giving you access to Netflix, Pandora and other services, and so the new Apple TV is, in reality, just catching up to my TV - but the excellent UI that Apple provides across all of its devices more than makes up for this. I'd much rather go through Apple's menu system than Sony's, or Pioneer's or Samsung's - heck I'm already using it on all sorts of other devices - so it feels native to me.

As for the the lack of Boxee support or other video support from the web, I'm solidly with Steve Jobs on this one. When I turn on the TV, I want professional content not squirrels surfing (BTW: the Apple TV does support You Tube - so if I want the surfing squirrel, I can see him - although I can assure you he will look like crap on my 50 inch plasma display). More importantly, the one thing I would like to use my 50 inch plasma display for is pictures - and that will be handled well.

Sure 2 of the networks and some of the cable channels are missing from the line-up on day 1 - but is that a real deterrent. As someone wrote yesterday, this device is not meant to replace cable (yet) - it is an input 2 device - and so I am more than happy to watch Dexter on my DVR if CBS decides not to participate in any way into the future. But guess what - all content guys go where the audience is - and if Apple ultimately sells a lot of Apple TV boxes - the content guys will be there ready to sell $0.99 downloads of their latest TV show. Remember, the average prime time television series costs between $1M and $2M to produce. Imagine a world where Apple sells 10M Apple TV boxes (maybe aggressive - but sooner or later?) If the networks could start defraying a good bit of their production costs through the rental of these shows - to a small population of real fans - the economics of the business start to work in their favor - and that is what will drive the move ultimately to these type of services.

The blogosphere is in love with Google TV - they want a television OS - and they want to cut the cord on cable's video service (they never seem to write about where they are going to get their massive bandwidth to run all the video they want in HD to their TV sets - but that's another post). Apple TV does nothing to further that ambition - and Apple is correct to pursue this path. Ultimately they are a consumer facing company - taking technology and making it available to the masses. Google is in the other camp - they are an engineering facing company - taking technology and asking the masses to come to it. Their big product - search - was and is like an apple product - clean and simple - doing a massive amount of work in the background and returning massively useful information in under a second. Contrast that to g-mails contact program - which only a Google engineer with a 160 IQ could love.

In front of a computer, I might put up with the Google view of the world - but on my TV, kicking back in my lounge chair - give me the Apple device.