Wednesday, January 28, 2004

Telirati Newsletter #42

I predcited in 1999 that Microsoft would start to sort out the winners and losers from their Internet ventures. As with many other things that look like an action plan for a year, maybe two, at most, this process continues to drag on, and Microsoft is, still, part owner of an also-ran cable TV channel portal hybrid, among other oddments.

Telirati Newsletter #42: Species of Internet Ventures

There is no one kind of Internet startup, and it is a multidimensional space in which they exist. But at least one axis of this space can be mapped out, and it is to our benefit to do so since we can then place Internet ventures along this axis to see what type they are. And, more usefully, if they appear not to be in the right place, it can tell us which way they ought to be going.

At one end of this axis are companies that have business models enabled by the Internet. These include Ebay, PriceLine, and every company taking a new whack at direct sales based on the prospect of the Internet changing the rules of direct selling. Some of these companies will find that novel business models, like PriceLine's, will, in fact, change the world and build for themselves a defensible position over the long term. For these companies, the Internet truly is an enabling medium, before which their ideas were not possible or practical. Some, like many of the direct marketers, will find that the Internet did not change the rules so completely that products that had been far outside the scope of direct marketing before the Internet are now viable businesses on the Internet.

It is the companies with the novel business models that have attracted most of the attention. This is in part deserved, because some of these companies will be new giants. An idea, a new medium, and relatively little technology, are all it takes to change the world in a big way. Investing early in a winner of this type is what every investor dreams of. But happy endings to these dreams will be inevitably rare, and difficult to discern at a distance. More often the result will be that the Internet did not work magic, or that the idea itself was not a winner.

Below is a diagram of the spectrum under discussion:

--technologies enabled by the Internet-------------business plans enabled by the Internet--

At the other end of this spectrum: Businesses that hinge on technologies enabled by the Internet. Like most geek pursuits, these kinds of Internet ventures get short shrift in the coverage of the Internet economy. Indeed, the coverage this kind of venture gets has also been marred by the recent fashion of Microsoft bashing: trade publication coverage on the trend toward plug-ins that support enhanced interactivity have been slanted toward pointing out that Windows is a beneficiary of finally waking up to the fact that the Internet is a network of computers, not of browsers. But it is only a fact of life and of market share that when servers and clients on the Internet start to talk in any language more expressive than HTML it is likely to be a Windows-specific from of communication.

There are good reasons to pay attention to pay attention to those geekier companies at the more technology intensive end of the spectrum, and for companies at the other end of the spectrum to begin to move toward the middle.

Among the reasons to look at technologies enabled by the Internet is that Microsoft is waking up to these possibilities. Microsoft spent several years now trying to be a PC software maker and a constellation of Internet ventures. Some of these Internet ventures have been quite successful. Others, however, are also-rans. Is there a way for Microsoft to succeed more reliably in Internet opportunities. The answer is yes, if they pick opportunities that are linked to the needs of Windows users.

It seems simple, but the reason Microsoft is involved in, among the odder pursuits, a hybrid of a cable TV news channel and Internet portal, is that when the Internet hit big, it made people panic and worry that computers, operating systems, application software, and other mundanes of that nature would no longer excite. Now, with the confidence that Microsoft can make and sell world-beating Internet software and incorporate it into the development plan for Windows in a meaningful way, Microsoft has a collectively clearer vision of what the Internet is for: It is for making Microsoft customers happy.

Sit down you Linux users! Put away the pitchfork and torch. What's the matter? Birkenstocks too tight? Beard itchy today? The Internet is a computer network, not a hierarchy of browsers and HTTP servers. And this fact applies to all pursuits on the Internet, Windows-related or otherwise. Examples of Internet ventures based on a technology enabled by the Internet include streaming media technology providers, Internet-based off-site backup services, and some really innovative ventures like FusionOne, a service that enables synchronization of files, databases, and other aspects of one's computing environment.

It isn't just Microsoft that will benefit from the realization that the Internet does not begin and end with a small set of standard protocols and applications. Tight integration with the user's environment, the ability to reach into contact management databases, messaging interfaces, and user interface mechanisms in general will expand the horizons of the Internet. Which is all well and good, but how does this expansion of horizons affect which ventures will succeed or fail?

Here is why this matters: New business structures are exceedingly rare. Existing business structures translated onto the Internet may or may not benefit from the characteristics of the Internet. But if you have a useful software capability enabled by, or that has capabilities that are amplified by the Internet, you have something of value. These types of Internet ventures carry a far lower risk than attempts to create a novel entity in the economy as a whole. Moreover, there is a shortage of creative thinking in the area of how to amplify the power of individual computers by connecting them. The answer does not lie in the direction of technologies that reduce the user experience to the lowest common denominator. Rather, Windows PCs will find parts of the Internet serving the unique needs and capabilities of such systems, while other parts will be inaccessible to anyone not playing a game on a Playstation.

There are, of course, ways of going about the technology-intensive end of the Web business spectrum the wrong way. The Palm VII is likely to become an example of this. Instead of projecting the capabilities of the Palm OS out over the Internet, one is expected to find value in a constriction and limitation of Internet-based information for the sole purpose of making it possible to implement a wireless connectivity scheme with limited and immature technology with the wrong pricing model.

In general, however, one is more likely to succeed by treating the whole computer as the medium, not just the browser. This holds true even for business models enabled by the Internet. As competition moves in where it can (and often these business model-centric ventures have little or no barrier to entry) even the most innovative basic thinkers in business models will find they must enhance the sites that express their lovely ideas with more and more technology. Auction sites will become the sources of rich media content to make up for the lack of touch, taste, and smell. Internet direct marketers will apply community communications technology to make their constituency feel as if they have a common cause. Meanwhile, the entire idea of software will morph into something where the extent to which the Internet is brought to bear on users' needs will be the single most important distinguishing characteristic.

Copyright 1999 Zigurd Mednieks.