Inside Facebook
Our students have had the good fortune to visit Facebook’s new Menlo Park campus twice this year, and now Fortune offers a peek for everyone else in their cover story, “Inside Facebook”.  Facebook’s new headquarters are the former Sun Microsystems digs (earlier TechTrek courses had been to this location several times for master-classes with then Sun boss, Scott McNealy).

Facebook currently has 2,000 of 3,200 total employees at the new HQ, but the campus can hold (and will almost certainly eventually staff) about 10,000. The road around Facebook’s new campus is named “Hacker Way”, concrete letters are being poured into a central courtyard, spelling the word “HACK” (BC trivia – a former student & his family construction biz is doing this work). There are two free-food cafeterias (a few of these are former Google gourmets), and the campus sports a bar called “The Shady Lady”. Graffiti-laden walls underscore that Facebook is a creative and edgy place, and slogans like “Done is Better than Perfect” and “Move Fast, Break Things” are cultural signposts that direct staff to keep an eye on what has helped make the firm successful.  This is, after all, a business built on network effects, and in Facebook’s world, it’s either be quick or be dead. Side note: in 2005, Facebook’s graffiti artist took equity for payment and stands to make $200 million at IPO.

Coding at Facebook can be an exhilarating white-knuckle ride.  Says one engineer, “it’s terrifying to ship code to Facebook and realize that there are a billion people out there using the service.”  Engineers can be “geek vampires” participating in occasionally mandated all-nighters. At Facebook, “code wins arguments” and dissent is encouraged. Facebooker’s regularly claim that Zuck is happy to be proven wrong, but Zuckerberg-thinking is also at the center of the firm’s future.  Facebook holds boot camps to teach staff to “Think like Zuck”. Every new employee also takes the Clifton StrengthsFinder test to uncover hidden talents. To keep the creativity flowing, staff are often forced to switch projects midstream.  Every 18 months employees are required to leave their teams and work on something different for at least a month. Getting people into new groups helps the firm’s geniuses more broadly share their knowledge, generates idea-flow, and prevents managers from developing fiefdoms. The firm also runs legendary hackathons, all night sessions with one key rule: no one is allowed to work on what they normally do. Engineers blue-sky innovate on something new and show it to Zuckerberg and a senior staff brain trust, who then decide which projects go forward. Zuck also holds hour-long chats each Friday, engaging in deep Q&A with staff.  The anti-social loaner depicted in “The Social Network” is, in fact, radically different from the real guy who’s piloting the tech industry’s biggest IPO ever. Faculty, be nice to your brightest students.  Zuck’s former Harvard TA is now a Director of Engineering and stands to clean up when the firm goes public. Of course, for Zuckerberg it’s never been about the coin. The firm’s mantra is “we don’t build services to make money, we make money to build services.”

Zuck’s business-side foil is Sheryl Sandberg, the firm’s Chief Operating Officer, soon-to-be billionaire, and one of the most powerful women in business. Sandberg, who built Google’s ad biz before being wooed by Zuckerberg, is also co-chair of the “ultra-powerful meetup”, the Davos World Economic Forum, she has become a leading spokesperson for a “new generation of women in the workplace” (her powerful TED Talk on ‘why we have too few women leaders’ is a must watch) and she is often thought to have deeper, post-Facebook, political ambitions (her pre-Google career included time as Chief of Staff of the U.S. Dept. of Treasury under Larry Summers). And tech is all in her family – husband David Goldberg is CEO of SurveyMonkey. Fortune credits Sandberg with creating the business-focus that drove Facebook to $1 billion in pre-IPO profits, and in fostering much-needed staff stability.  The piece notes that while Google lost virtually none of its senior staff until after its IPO, Facebook lost one president, two CFOs, a COO, and all of Zuckerberg’s cofounders. Facebook senior management style under Sandberg is described as having “more coaches than bosses, more facilitators than gatekeepers.” Fortune also profiled Facebook’s CFO David Ebersman, who has a pretty amazing bag of tricks. He was Genentech’s head of product development, he ran the biotech giant’s manufacturing, and he was CFO during the acquisition of the world’s largest biotech firm by Roche (he also worked under Genentech CEO Art Levinson, who himself has been a board member at both Apple and Google).

Commentary: Two tech firms with radically different corporate cultures and wildly successful recent histories are within a short drive of one-another: Apple and Facebook.  Infinite Loop is perfectionist and secretive. Hacker Way is free-wheeling and open.  Management strategists will spend years picking apart these highly successful and divergent innovation models, hoping to figure out which one ‘works best,’ and under what conditions.  Here are some thoughts: Apple’s hardware products can’t fail at launch. Massive hardware ‘fixes’ typically can’t be pushed out through ‘the cloud’, so the firm must be perfect. But Facebook can hit a reset & make any updates instantly available to its entire user-base (or a testable sub-set).  Facebook’s speed-focus is understandable.  Theirs is a space others could have won but lost because they were slow with features (‘true’ user identity, feeds, an open apps platform, ‘like’, the open graph). As a result, users flocked to Zuck, tipping the bulwark, winner-take-all, strategic assets of  network effects and switching costs to craft a Goliath now used by one in eight of the planet’s citizens (and remember, China-blocked Facebook isn’t even allowed in the world’s biggest nation).  MySpace, Friendster, what you could have been had you paid attention and had a bit of hacker ethic at the top! This is a pattern we’ve seen before when Google blew past Yahoo!  Weaker thinking interprets this as there being no first mover advantage but that’s not it at all. Instead the early movers FAILED to match superior products that they COULD have copied. Facebook and Google aren’t houses built on patents (despite Yahoo’s recent claims) – instead these new rivals had a time lead on better, unmatched efforts that created durable advantages that currently seem insurmountable.

The innovation/culture question will be fascinating to watch.  Fortune asks, “Can Facebook keep this edge, or will it get soft with the relentless pressure of quarterly earnings, sheer size, sudden wealth, and mounting legal concerns as it becomes a big, rich target for everything from patent litigation to zealous lawmakers and privacy advocates.”  Stay tuned for the status update!

Twitter: The Startup That Wouldn’t Die:
Now that Facebook is going public, Silicon Valley job-hoppers seeking an IPO payday are orbiting Twitter. About 10% of the firm’s 900 employees are former Googlers. Twitter’s prospects are looking good, as it tries to grow into the $8 billion valuation pegged following the past summer’s investment by “Russian moneybags” DST.  A host of new ad products has attracted A-list advertisers and has the firm on pace to earn $260 million in 2012.

Twitter hashtags (keywords following the ‘#’ classification symbol) are now becoming a key part of the marketer playbook, right up there with URLs,  Facebook ‘Like’, and SEO/SEM.  The White House released a transcript of the most recent State of the Union speech full of hashtag annotation. And this year’s Super Bowl television ads boasted hastags in eight of the 42 commercials (last year only Audi showed a hashtag).

Like many social media services, corporations can contribute content along with other users, free of charge.  That creates a bit of a ‘free rider’ problem, where firms benefit from a platform without directly paying for the resources they use.  But corporate use can make Twitter more valuable to users who opt-in to ‘follow’ brands in their Twitter feed.  And Twitter-hooked advertisers can pay to more prominently feature their messages. “Promoted Tweets” are ads that appear on top of the user’s feed. Advertisers pay only when a user “engages” the tweet by retweeting or clicking a link.  Like Google’s AdWords, Promoted Tweet appearance is performance-driven – the more clicks an ad receives the more it’ll show up. Engagement stats are strong – averaging  3%  to 5% vs. less than 0.5 percent for banner ads. Promoted Tweets appear in the browser as well as desktop clients like Twitter-owned TweetDeck, and they’re rolling out on mobile devices, as well (pushing Twitter ahead of Facebook with a mobile advertising product). Political ads have come to Twitter, too.  As part of the Feb. GOP debate in Arizona, Gingrich campaign bought a promoted tweet with a link to a petition that occurred any time a user searched for either “Newt Gingrich” or “Mitt Romney.” A Gingrich consultant says the Twitter ads are “the best rapid-response tool that exists in politics right now.”

There are also “Promoted Trends” that appear on trending topics lists (avg. cost for a US run? About $120,000 for a day).  Use example: Disney bought a Promoted Trend as part of the Toy Story 3 premiere. Twitter also sells “Promoted Accounts” to anyone that wants their Twitter handle featured as a recommendation to for users to follow (a move advertisers can use to announce they’re on Twitter & potentially pump up their follower count).

Advertisers are still learning the ins and outs of the Twitter free-for-all.  Among the tips you’ll find in the social media slides I share with my class, Twitter works well for: real-time promotions, time-sensitive information, firms with ‘enthusiast’ customers, and firms that can and should have a conversation online.  It can be important to think through how a campaign might be received by everyone online.  A January attempt by McDonalds to encourage users to share #McDStories saw the hashtag raided by critics and pranksters tweeting about “food poisoning, weight gain, and poor employee hygiene.” Yikes!

Twitter lacks the kind of accurate profile information of a Facebook, which often knows your name, gender, relationship status, musical tastes, and more.  But Twitter’s CEO describes the firm as targeting the “interest graph – the set of characteristics that can be gleaned from users’ followers and what they click on. “ Twitter is much smaller than Facebook (100 million active users vs. 840 million on Facebook), but BusinessWeek quips that Twitter has “become the pulse of a planet-wide news organism, hosting the dialogue about everything from the Arab Spring to celebrity deaths.” Use has shot up following tighter integration with Apple’s iOS, and links with Macs are on the way with the recently announced “Mountain Lion” OS X upgrade (Twitter CFO is Ali Rowghani, who was previously CFO for the late Steve Jobs at Pixar). Twitter CEO has also received coaching from former BC Football Coach, Apple board member & Intuit Chair, Bill Campbell. Another BC connection? The firm received funding from Spark Capital’s Bijan Sabet, a Boston College alum!

Seeing Red – Vanity Fair Profile of Netflix
The second half of 2011 was costly for Netflix.  Vanity Fair calls the split of a unified product into higher-priced DVD and streaming products  and the subsequent Qwikster debacle “one of the worst self-inflicted corporate disasters in recent memory”, a series of events that wiped out over $12 billion in firm value. Netflix CEO Reed Hastings saw his salary cut by $1.5 million and has been contrite, admitting that he “slid into arrogance.” The firm also recently raised $400 million in cash, $200 million in a secondary offering at $70 a share, and $200 million from longtime investor TCV. Doubtless it’d have been nicer for Hastings to have done this a few months earlier when the firm’s stock price was a nosebleed-high $300+.

But with all the outrage and ridicule (did you see the SNL apology parody and another featuring a bogus Hastings with Zuck and Arianna Huffington?), Netflix remains a darling of the movie studios because it is a paying distribution channel that can milk the otherwise idle asset of a firm’s back-catalog of films.  CBS CEO Les Moonves, says Hastings and Netflix Chief Content Officer Ted Sarandos “are two of the smartest people in the industry”. “We welcomed Netflix into the marketplace… they’re paying us in a brand-new way that opens up many horizons for the future.” CBS might even start producing original content that appears first on Netflix.  The CEO of Viacom, Philippe Dauman, says They continue to be a good partner for us… When you have the resources they have and the reach that they have—we’re all looking for new revenue streams—they’re the newest and most exciting, and biggest.”  Ron Meyer, the head of Universal Studios, says “On a scale of 1 to 10, they’re a 10.”

Critics also gripe that Netflix is propping up profitability with “accounting gimmicks” that more slowly amortize the cost of streaming licensing, while doubling its account payable period.  But Netflix has fired back against these arguments and posted the best comeback of all, a better-than-expected Q4 2011 in which it announced a profit of $52 million and over 220,000 new streaming-only customers.

The next year will be tough.  As detailed in a chart in the Netflix Chapter of my book, the streaming business has vastly different economics and competitive dynamics than subscription discs via mail.  Amazon, Hulu, and Blockbuster (through its parent Dish Network) have all launched Web video subscription services, but none has created what can be considered a credible rival, offering the selection and price of Hastings’ offering. AllThingsD says that even Comcast Streampix, called a ‘Netflix Killer” by some, isn’t.  Comcast execs refuse to offer the streaming service outside the firm’s customer base, claiming they can’t profitably do it for $8 a month and can’t understand how Netflix can, either.

How Target Figured Out A Teen Girl Was Pregnant Before Her Father Did
A data-mining expert from the retail giant Target told a New York Times reporter “Just wait. We’ll be sending you coupons for things you want before you even know you want them.” No waiting required, it seems the firm has found a way to “data mine its way into the womb”.

It turns out, an irate father recently stormed into a Minnesota Target, demanding to see the store manager, and clutching coupons that had been sent to his daughter. The coupons contained ads for maternity clothing, nursery furniture and pictures of smiling babies. “My daughter got this in the mail!” said the dad, “She’s still in high school, and you’re sending her coupons for baby clothes and cribs? Are you trying to encourage her to get pregnant?” The manager apologized and phoned a few days later to reiterate. But by then the father had a bit of his own intelligence that, it appears, Target was able to glean in advance from analyzing purchasing habits. Said dad, “I had a talk with my daughter. It turns out there’s been some activities in my house I haven’t been completely aware of. She’s due in August. I owe you an apology.”

How did Target know?  It turns out that some habits can be gleaned from women on the baby registry that also apply to those who haven’t signed up: for example, moms-to-be load up on unscented lotion at the beginning of their second trimester. Another data run showed that about 20 weeks into their pregnancy, women up their vitamin supplements. A switch to scent-free soap and extra-big bags of cotton balls is another sign there’s likely a little-one on the way.

Those engaged in ‘predictive analytics’ are keen to pay attention to pregnancy because, as one researcher put it, there are “brief periods in a person’s life when old routines fall apart and buying habits are suddenly in flux.” During these times (and pregnancy and the arrival of a new baby is one of them) “shopping patterns and brand loyalties are up for grabs.” Opt-in registry signup may be later than some firms want to wait. Says one marketer “if we could identify them in their second trimester, there’s a good chance we could capture them for years.” But step over the unclear line where a firm shows that it has learned a bit too much about customers, and you get a major privacy creep-out.

Target tends to be conservative in complying with privacy laws, but they also realize they need to back off to avoid the creep-out factor. Says one exec “we learned that some women react badly. Then we started mixing in all these ads for things we knew pregnant women would never buy, so the baby ads looked random. We’d put an ad for a lawn mower next to diapers. We’d put a coupon for wineglasses next to infant clothes. That way, it looked like all the products were chosen by chance… We found out that as long as a pregnant woman thinks she hasn’t been spied on, she’ll use the coupons. She just assumes that everyone else on her block got the same mailer for diapers and cribs. As long as we don’t spook her, it works.”

The Times piece reveals that Target tries to assign customers a unique “Guest ID number,” and links this to things like credit card use, trackable coupons, surveys, mail-in refunds, phone calls to the firm’s help line, web use, and e-mail promotion response.  Demographic info is also linked to the Guest ID: age, marital status, whether or not you have kids, which part of town you live in, distance from the store, estimated income, whether you’ve moved, credit cards used, and some web information.  And while the Times didn’t confirm that Target looks at this, there are third-party databases that can be purchased and linked to existing customer information, including: ethnicity, job history, magazine subscriptions, catalog buying history, financial history (bankruptcy, home purchase and foreclosure), college, brand preference, political leanings, charitable giving, auto ownership, and more.  Yup – you’re for sale and there’s big bucks in building a targetable, digital-you!  Math geeks interested in working as data-miners are in huge demand.  Says a former Amazon Chief Scientist: “Mathematicians are suddenly sexy.”

The longer New York Times piece about the events above, titled “How Companies Learn Your Secrets”, is a highly-recommended read for faculty teaching data mining, and great discussion fodder for class conversations on possibilities, ethics, best practices, and the implications of technology use.

◆     ◆     ◆

And a quick thanks to all who continue to support my Textbook project.  The book “Information Systems: A Manager’s Guide to Harnessing Technology” has won a 2012 “Textbook Excellence Award” (known as the “Texty”) from the Text and Academic Authors Association.  My publisher, Flat World Knowledge, my students, and all of the adopting faculty and friends of the project have been wonderfully helpful in the book’s continued and sustained impact on our field.  thanks so much for your support and for sharing information about the project with others!

So how do Facebook & Google compare? Facebook is going public as an 8 year-old – Google went public after 5 yrs. Pre-IPO Facebook revenues are $3.7 billion, about 2.5x the $1.5 billion in revenues of pre-IPO Google. Facebook brought in $1 billion in profits last year, about 10x Google’s pre-IPO profit of $106 million. And Facebook’s post-IPO market cap is currently estimated to be between $85-$100 billion, around 4x Google’s post-IPO value of $23 billion. But the comparison isn’t Apples-to-Apples (no pun intended). Roll the clock back & 5 year old Facebook (roughly the age of GOOG at IPO) actually lost $56 million on revenues of just $272 million. Google as an eight year old brought in $10.6 billion in revenue and $3.5 billion in profits, and sported a market cap of over $150 billion. The 8-year old comparison also isn’t quite a fair one since capital raised during the IPO & a secondary offering helped fuel Google growth over those three years, but still, 8 yr. old Google made about as much profit as 8 year old Facebook did in revenue. As TechCrunch points out the 5-year compound annual growth rate for each firm’s revenue during comparable periods (2002-2006 for Google, and 2007-2011 for Facebook) was almost exactly the same: 89% a year. I put together the table below for easy side-by-side comparison:

If you’ve been working for Zuck for a couple of years or more, then you’re probably golden (or about to be). Facebook’s IPO is expected to create between 500 and 1,000 millionaires – roughly 1/3 the firm’s workforce. Among the Facebook investors that will cash out – Bono. The rocker/activist is a partner in VC firm Elevation Partners and his share of the firm’s take from a public Facebook may earn him well north of what he’s made during his entire career as U2’s front man. However, if Elevation is like most VCs, it’ll give 80% of its Facebook stake upside back to limited partners (the institutions it raised its fund from), and it’ll then split up the remaining 20% among Elevation’s team. That means Bono’s take is almost certainly quite a bit less than the widely reported $1 billion.

COMMENTARY: So is Facebook worth it? Advertisers in the United States alone spent $36 billion to reach online audiences in 2011, up from $26 billion in 2010. Facebook currently brings in about $4.39 per user (useful acronym – ARPU for ‘average revenue per user). For comparison, Google’s ARPU is above $30 (there’s also a nice ARPU comparison chart in the Facebook chapter of my book that I’ve recreated below). 85% of Facebook revenue comes from advertising, about 15% from online payments, and just one firm, Zynga, is responsible for about 12% of Facebook’s revenue (Zynga CEO Mark Pincus owns about .5% of Facebook – not a bad post-IPO haul after taking ZNGA public last year). Facebook keeps 30 cents of every dollar users spend on Facebook credits, and game firms like Zynga have to use Facebook’s currency.

Facebook nation has swollen to 845 million monthly users. More than half visit each day, spending about 20 minutes a day on Zuckerberg’s site. Mobile is a huge growth area, with 425 million people using Facebook’s mobile app on all major smartphone systems. But it’s also currently a major challenge since, according to Facebook’s filing, the firm “has not yet developed any meaningful stream of revenue from mobile advertising or other mobile products”. Here’s more concern: new growth in emerging economies is far less valuable than past growth. Consider that Indonesia is a “Top 3” nation by Facebook use, but most of these consumers access via mobile (many via text-based non-smartphones). That means this massive customer base earns the firm almost no money. Moore’s Law will make phones more robust & open up more revenue opportunity, but lifetime customer value for high-income nations doesn’t necessarily mean the same can be expected in the short-term from Facebook’s emerging markets march. Also – China (about 1/5^th of the world’s population) still remains out of Zuck’s grasp.

Bechmark VC Bill Gurley offers a compelling argument as to “Why Facebook Belongs in the 10x Revenue Club”. The underlying strategic factors are covered in depth in the Facebook chapter of my book. But surprising in discussions of Facebook’s value – few mention the potential of two items: An ad network and Facebook TV. An ad network seems obvious given that ads outside of Google-owned sites generate 30% of Google revenue. Advertisers should like Facebook’s ad-targeting rifle-scope. Consider that a Facebook campaign aimed at adults between the ages of 25 and 49 “had a 95% accuracy, compared to the industry average of 72%.” More accurate ads should be a magnet for both advertisers, as well as content sites that are often paid based on ad performance (e.g. PPC, targeted impressions served). Longer term, what about Facebook TV? Netflix CEO Reed Hastings is on Facebook’s board – imagine a Facebook social platform being baked into hundreds of consumer electronics products just as Netflix is today. There could be a “Like” from your remote with the potential for Facebook to: deliver targeted video ads, offer up questionnaires, become a middleman for living room media consumption, generate revenue from on-demand streaming, act as a subscription gate keeper, gather massive amounts of targeting data, and more.

As my TechTrek students know, those visiting Facebook’s new digs (the firm’s third new HQ in three years) will see a sign that says “this journey is 1% finished.” Look for an exciting 99% in the years ahead.

All Hail Emperor Zuckerberg
Mark Zuckerberg initially controlled 3 of 5 board seats. He could do this because he could demand the terms – his firm grew fast (network effects), the demographic of Facebook users was hugely attractive, and he didn’t need that much capital to get started (big chunks of Facebook are based on open-source software). All that meant he could demand more favorable terms from the VCs that fell over themselves to fund subsequent rounds of private investment. Now it seems even publicly traded Facebook will have Zuckerberg’s authority firmly cemented. Slate states: “When it goes public, Facebook will be conducting an experiment in corporate dictatorship nearly without precedent for such a large and high-profile company.”

Mark Zuckerberg will own 28% of post-IPO Facebook. That’s a huge chunk when you consider that the largest shareholder in Exxon Mobile (mutual fund giant Vanguard) holds only 4.19% of that firm. But Facebook also has two shares of stock – Class A shares, and Class B shares. The latter have 10 times the voting rights of the former. Zuck’s Class B shares (along with proxies he controls) give him voting rights that amount to 57% of firm control. Bill Gates had less than 50% of post-IPO Microsoft, and Apple’s five largest shareholders aren’t the Jobs Estate, they’re institutions (mutual funds and hedge funds). The deal isn’t entirely without precedent. Together Sergey and Larry control the majority of Google voting rights, but the Google Duo claim they’ll cede majority rights by 2014.

Zuck’s control may actually increase over time. This is because if the relatively few owners of non-Zuckerberg Class B shares sell their stock, they transform into Class A shares with 1/10^th the voting rights. Class B insiders cash out? Zuck’s degree of control goes up! There’s even an estate planning clause where Zuckerberg’s Class B shares can be transferred to a person or entity designated as his successor. As Slate says “absolutely nothing—up to and including death—is going to dislodge Zuckerberg from control of his firm.”

Amazon’s Performance: A Mixed Bag
There is a stellar new infographic on Amazon’s massive growth and impact. (example, Amazon has 5x the unique user traffic as eBay, with web sales that are 5x Wal-Mart.com, Target.com, and Buy.com COMBINED). Amazon’s Q4 revenue rose to $17.43 billion, up 35%. That’s killer growth for a retailer in a down economy, but about a billion (with a ‘b’) short of what analysts were hoping for. Profits were down sharply from a year ago, too (the money-losing Kindle no-doubt contributing), but unlike the revenue shortfall, the profit drop was less steep than expected. Lower performance aside, that still puts Amazon’s annual growth at a staggering 47% vs. the still respectable 15% for all of U.S. e-commerce. Again we see Internet dynamics in ways that seem to defy the rule of large numbers – the big get bigger, faster! Amazon also warned that it might lose $100 mil to $200 mil in the current quarter. That guidance hurts, but the firm is still trading at a lofty P/E that hovers near 135.

E-commerce only makes up about 5% of all U.S. retail spending, so Amazon expects lots of growth and is building accordingly. The firm currently has 69 warehouses worldwide, and it added eleven new fulfillment centers in 2011. Nomura Securities estimates that Amazon will add the equivalent of 450 Costco stores from 2011 to 2016. To put that in perspective, Costco, itself has just 592 stores worldwide.

The only specifics on the Kindle shared by Amazon stated Q4 sales were up 177% over the prior year. Analysts estimate as many as six million Kindle Fires plus “millions more” traditional Kindles were sold. For comparison, Apple’s quarterly freak-show-of-growth claimed 15 million iPads sold over the holiday quarter. More perspective – Amazon’s operating margins are 1.3% while Apple’s are about 30%. One last curiosity in the most recent Amazon financials – the daily deals site & Groupon competitor LivingSocial lost $558 million on revenues of $245 million in 2011 (AMZN owns 31% of LivingSocial).

Amazon Wants to Burn the Book Business
BusinessWeek serves up a provocative cover story chock full of tasty nuggets of disruption (a great class read & great fodder as I write an Amazon chapter for the next edition of my book). Consider that overall U.S, sales of paperbacks and hardcovers fell 18% between 2010 and 2011, the former #2 chain, Borders, is gone, and most remaining booksellers are struggling. Amazon, however, is still the clear leading player in both e-books and print, and today sells 105 e-books for every 100 dead-tree titles. Nearly 30% of all Americans claim to own at least one digital reading device – a market where the Kindle is king. Amazon is a sales juggernaut, but now Amazon might also be an unstoppable competitor to big publishing houses. Amazon’s success may be good for many; Slate recently ran a provocative story that stated “Buying books on Amazon is better for authors, better for the economy, and better for you.”

Think like a strategist – what does the move to become a publisher get Amazon? Exclusive content, the ability to capture middleman (publisher) revenue that it can pass on to authors as higher royalties and customers as lower book prices. Plus no other retailer manages inventory as efficiently as Bezos – cutting out much of the loss in unsold shelf-stock that is the bane of both publisher & bookseller operating costs.

Forrester estimates that traditional publishers offer authors roughly 20% royalties (on avg. publishers take 50%, booksellers 30%). With Amazon Publishing authors will get 45-50% of the selling price. And with “almost infinitely deep pockets for spending on advances to top authors,” expect Amazon to pony up for content. As an example, Amazon’s publishing arm recently spent $800,000 for the rights to the memoir of actress/director Penny Marshall. As one insider put it, “Publishers are selling drinks on the Titanic. They are doing so much to protect their paper industry that they are disregarding the needs of customers and are treating authors poorly.” Another quoted in PandoDaily is even more blunt: “Long-term there’s no future in printed books”.

Publishing is an industry that’s already an oligopoly, with the majority of bestsellers controlled by the “Big Six”- Random House, Simon & Schuster, HarperCollins, Penguin, Hachette, and Macmillan). And five of the “Big Six” are currently being investigated for eBook price-fixing. Look for more tensions among “frenemies” that are both partners and rivals. Barnes and Noble and other chains are refusing to carry print versions of titles from Amazon Publishing. Barnes and Noble also pulled 100 DC Comics graphic novels after DC offered Amazon an exclusive for its comics, bypassing the Nook. Several publishers are refusing to participate in library e-book lending programs, prompting protests from the American Library Association. Amazon offers customers of its Amazon Prime two-day-shipping service a one-book-at-a-time free lending download, and initial feedback suggests the program actually increases not just buzz, but overall sales of participating titles (yet another benefit to authors). One last shocker – Amazon seems to be preparing to open its first-ever physical store in Seattle. Suspect something more akin to a Kindle-centric Apple Store clone than a Costco-sized big box.

Let the Robot Drive
I can’t drive (poor vision), and while it’s still unclear if I’ll have a robo-chauffer during my lifetime, Wired’s cover story on self-driving cars offers hope to all. Driving is dangerous and it takes up time. Human errors are implicated in 93% of automobile crashes and the average American commutes 52 minutes each day. Those are huge improvement opportunities to target. Says Anthony Levandowski of Google’s self-driving-car project “The fact that you’re still driving is a bug, not a feature”.

Fears of catastrophic software crashes, four-wheel viruses, and other nightmare scenarios will likely make it quite some time before we can let go of the wheel and grab the Kindle and coffee, but the building blocks of self-driving cars are already being baked into the devices in showrooms and garages. Today’s premium-class automobiles run 100 million lines of computer code, more than Boeing’s new 787 Dreamliner. Mainstream commercial motor vehicles can parallel park themselves, drive under cruise control, warn drivers when they’re at risk for collision, take control of braking, among other things (all that tech also means that auto-industry IP lawsuits are on the rise, too).

The self-driving car is really about big-data. It’s “hack-driving”. The car constantly gathers inputs, mines the dataset that is the road & its environment, and algorithms perform AI-based machine-learning to constantly improve performance. Google isn’t so much “teaching” its computers how to drive as it is letting the patterns reveal themselves as cars drive 200,000 road miles (and climbing). Mercedes is building pedestrian-recognition software based on over 1.5 million samples of real and “virtual” people. Going global also requires cultural tweaks. In Germany, a Mercedes can alert drivers to the presence of speed limit signs contained within a quite-detectable red circle. In U.S., however, square signs can look a lot like billboards or buildings, generating all sorts of false positives. We’ll also have to re-write the law. In 2011, Google helped Nevada draft the first legislation to allow autonomous cars to hit the state’s roads. But in most states it’s not clear who’d get the ticket for any robo-driving mishaps.

The “connected car” can also lead to new and creative revenue models. If airbnb can turn any house or apartment into a rentable property (5 million nights booked so far), RelayRides will allow you to “pull an Avis” and turn your car into a cash-generating rental asset. Sound farfetched? GM has inked a partnership with RelayRides. The firm’s OnStar system can even be used to allow customers to unlock vehicles and eliminate the need to exchange keys. See the Wired article above for cool video, photos, & interactive graphics.

OpenTable’s rise and fall is a cautionary tale
Fortune’s coverage of online reservation firm OpenTable’s 2011 performance is a good read for b-school students, covering several issues including industry competitiveness and market expectations. OpenTable went public in May 2009 and consistently delivered, beating analyst estimates by a wide margin, quarter after quarter. The stock hit $118 in April of last year, and as a Net stock with post-IPO performance & upward momentum, it likely helped contribute to demand for many of last year’s Internet IPOs including LinkedIn, Pandora, Groupon, and Zynga. But over the next 8 months OPEN gave back about 2/3 of its value – trading around $39 when this Fortune piece was written. As the magazine points out, when a stock loses two-thirds of its value that quickly it’s usually a sign of a terrible misstep, scandal, or financial collapse. That’s not the case here. OpenTable is still in heavy growth mode – revenue is expected to swell 40% in 2012, and operating margins are a healthy 17%.

So what happened? In part, we saw a correction. Momentum investors pushed the stock to the point where it was trading at a PE well above 100 (compared with the historical market overall average PE of around 15 – about where Apple trades today). Side note: while many cite Netflix’s summer-to-fall missteps as the primary reason NFLX dropped, it’s also important to note that this summer, Netflix was also sporting a nosebleed triple-digit PE before the pricing fumble. Stocks priced for perfection risk a looming reality – nobody’s perfect.

The May departure of OpenTables CEO for VC firm Andreessen Horowitz likely contributed to the stock slide. Another concern for OpenTable is competition from credible rivals. Europe’s Eveve online reservation system claims to have nabbed 20% of OpenTable’s bookings during a four-month Minnesota-invasion. Europe’s Livebookings also smells opportunities in the U.S., and offers free reservations along with premium analytics & e-mail marketing. OpenTable may still have a great business. Network effects, brand, and the switching costs all created by its early-mover status may give it a sustainable edge. But the future is uncertain enough to have smacked the “momo” cheerleaders back to a reasonably priced reality. Key lessons to remember as market improvements and new IPOs seem likely.

The Cloud Goes Hollywood
DVD sales peaked at $15.5 billion in 2004, but they’ve been cratering ever since, down roughly 20% during the first half of last year. Meanwhile streaming and kiosk sales were up over 40% in the same period. And the takedown of Megaupload shows piracy lingers, even on a celebrity-endorsed site.

In an effort to extend the lucrative DVD buying window, Warner Bros is doubling the time that Netflix and Redbox need to wait to receive DVDs from 28 days after discs go on sale to 56 days. Redbox says it’ll fight back, acquiring Warner DVDs via ‘alternate means’. HBO has also said it will stop selling discount discs to Netflix DVD-by-mail business, and it continues to refuse to provide its original titles to Netflix or other streaming sites. Hollywood realizes its future is in access-anywhere digital, so it has finally stepped into the cloud, but in a way that encourages higher revenue ‘ownership’ rather than subscription streaming or rentals. UltraViolet is a standard that stores purchased content on remote servers that can then be streamed to different devices as long as you can verify your purchase. Many new DVD and Blu-ray titles come with Ultraviolet digital rights, and some 750,000 households in the U.S. and Britain have already set up UltraViolet accounts. With Fox expected to announce UltraViolet support, soon, that’d leave Disney as the lone big-studio holdout. Disney backs its own effort called KeyChest, and the studio’s ties with Apple also remain tight. The Steve Jobs estate remains Disney’s largest shareholder, a result of the firm’s purchase of Jobs’ Pixar.

In its current form, UltraViolet lacks polish. Customers first create an UltraViolet account. To watch movies they then need to log into Flixster, a movie site operated by Warner Bros. But expect UltraViolet bundling to become standard, soon. Blu-ray is almost certainly the last physical media format used for mass-market sales. Viva la Cloud!

Netflix Bounces Back, but Says Amazon is Coming
Analysts expected Netflix to earn 54 cents a share last quarter – the firm actually came in at 73 cents a share. Subscribers were also up 600k for the quarter. The firm ended the year with 24.4 million U.S. subscribers, up 25% from the previous year. Not bad despite the Qwikster debacle. The current subscriber breakdown is as follows:

• Domestic streaming: 22 million subscribers
• Domestic DVD: 11.17 million subscribers
• International: 1.86 million subscribers

Still, the firm warned it may lose money in 2012 as streaming costs soar. Netflix is also seeing stepped up competition. Amazon cut a deal with Viacom so that Amazon Prime customers will now be able to stream shows from Viacom networks MTV, Comedy Central, Nickelodeon, TV Land, Spike, VH1, BET, CMT and Logo. Amazon says it now offers some 15,000 streaming titles vs. about 20,000 that stream over Netflix. Verizon and kiosk-firm Redbox also plan a streaming venture later this year.

WePay Grows Revenue 10x in 2011, Plans Mobile App
Kudos to my former student Bill Clerico and his BC co-founder Rich Aberman on completing a killer year. The duo was named to BusinessWeek’s “Best Young Tech Entrepreneurs” list, and their online payments firm, WePay (the ‘banker’ for Occupy Wall Street and now cited as a legitimate PayPal competitor) grew ten fold last year, and is now processing several million dollars in payments each month. The firm’s API allows the WePay engine to power payments beneath the hood on other sites (like GoFundMe, which replaced PayPal with WePay last year), and new WePay services like ticket sales and stores have greatly expanded on the firm’s original peer-to-peer payments base. While the firm’s compound monthly growth rate of 30% is impressive, look for even more revenue rocket fuel as the firm expands into mobile payments this year. The photos below show Clerico lecturing to my students at the firm’s Palo Alto HQ on January’s TechTrek, and Aberman speaking at the BC Presidential Scholars dinner earlier this month. WePay’s brain trust also includes two other former TechTrek students of mine – Clerico’s classmate, Tyler Gaffney (a GE vet and sales god), and Sophie Monroe (a brainiac who could have graduated in just 3 years, yet decamped before earning her sheepskin to build the firm’s widely praised service team). Keep at it, folks, we’re hugely proud of you!

The Other Side of Open Textbooks (A Conversation with a Bald Man)
Apple is all-in on textbooks and the effort will be spectacular for iPad-only environments. MIT is also offering a free online course, and Rice is in the game, too. But it’s nice to see our efforts get a little bit of coverage (we’ve been sharing content online for well over a decade, and my free-in-browser open text is in its fifth edition). I hope this interview is useful for anyone considering either writing or adopting an open-source textbook. Continued thanks to all for helping spread the word about my text. Also thanks to MBAPrograms.org for naming me one of the “Top 50 Business School Professors to Follow on Twitter“.

Now Every Company is a Software Company
David Kirkpatrick, author of the Facebook Effect, writes in Forbes: “The era of separating traditional industries and technology industries is over—and those who fail to adapt right now will soon find themselves obsolete… Regardless of industry, your company is now a software company, and pretending that it’s not spells serious peril.”

As an example, Kirkpatrick (who also runs the excellent Techconomy conference – video excerpts here) cites Venkatesh Prasad, a senior technical leader at Ford who increasingly sees the auto giant as a firm that produces “sophisticated computers-on-wheels.” Today’s Ford cars are mobile Wi-Fi hotspots.  Software manages fuel efficiency and safety systems.  Sensors and software combine to automate parallel parking. Tech runs systems from navigation to entertainment. And data from smart vehicles not only feeds actionable performance data in real-time (tire pressure, breaking, and more), data fed from cars back to Ford also provides direction for engineers designing improvements for new models.  Still have doubts about that ‘computer-on-wheels’ analogy?  Ford is mailing out a quarter-million USB devices containing a new interface upgrade for vehincles.  Now think beyond Prasad’s statements – what does this mean for today’s manager?  All of a sudden issues of security, privacy, the implications of technology failure, the ability to digitally partner with others, and opportunities to create platforms for new industries – all enter the modern executive playbook.  The manager who can’t think in these terms is ill-equipped for leadership in today’s environment – period.

Kenya Has Mobile Health App Fever
50% of all Kenyan banking is done on mobile phones, and many Kenyans enjoy pay-by-mobile services unavailable to most Americans.  During an August visit to Nairobi I noticed that it was common to see everyone from shop keepers to cabbies swapping virtual cash via SMS text messages over the M-Pesa system offered by billion—dollar local telecom provider, Safaricom (while in Nairobi I was extremely fortunate to have had an opportunity to keynote a conference that also featured Safaricom CEO, Bob Collymore, and I’m a huge admirer of the firm).

But Kenya-tech isn’t just about banking – Technology Review points out that Kenya is paving the way in other areas, including potentially high-impact mobile health apps. MedAfrica from Nairobi-based Shimba Technologies (co-founder Steve Mutinda Kyalo is pictured) offers critical tools to a nation where only 7,000 doctors serve a population of 40 million. The MedAfrica platform offers up real-time health information, aggregating multiple sources such as first-aid treatment and health alerts from local hospitals. The firm also plans to tap into data from NGOs and the national Ministry of Health to support coverage of disease outbreaks and exposing counterfeit drugs. And customers can use the app to find medical practitioners in their area. MedAfrica hopes to keep services free and ad supported, with for-fee premium services offered in the future.  The app is currently being downloaded at a rate of about 1,000 new users each day, with 60% reporting active use.  And a partnership with Safaricom, Kenya’s leading mobile provider, will help bring the effort to the nation’s 25 million mobile phone subscribers.

Safaricom is also working with the startup Call-a-Doc, which allows the telecom firm’s 18 million mobile subscribers to make advice calls to ­doctors for about two cents a minute.  Another effort, Mpedigree, is rolling out an SMS-based service at health-care centers to provide a way to check serial numbers on drugs so that counterfeit meds aren’t used. And don’t forget Boston-based Sproxil (where one of my former students works), also a key player in combating drug counterfeiting. Beyond Kenya, Africa Aid offers MDNet – a system that has logged over a million free voice calls (texting is also supported) linking patients with a network of 1,900 physicians in Ghana. Moore’s Law fuels cheap cell phones and just might extend life spans by providing the equivalent of a doc in the pocket of millions that are currently under-served.

Facebook vs. Google
Social networking is now the world’s No. 1 online activity, occupying 20% of online time.  Four years ago, that figure was just 6%. And the war over social is fodder for a recent Fortune cover story on Facebook vs. Google (bonus at link above: scroll for video of Google exec Marissa Mayer on privacy, & Facebook’s Mark Zuckerberg topping the ’40 under 40’). Both firms are surging, and each is building a rock-solid set of strategic assets.  Says Fortune “rarely has there been a battle as competitive as the raging war between the web’s wonder twins.”

The overwhelming majority of profits from both firms come from ad dollars. Google is a behemoth- taking in some 41% of the U.S. online ad market.  Facebook’s estimated $4.3 billion in ’11 revenues are less than half the $9.6 billion Google brought in last quarter, and Larry Page’s firm is estimated to snare $38 billion in ‘11.  But Facebook’s revenues more than doubled in size in 2011, while Google’s should grow by 30%.  That’s slower growth, but in dollar terms, Google is still growing by adding more than an entire Facebook’s-worth of revenues in 2011.  These are remarkable numbers given the horrendous global recession, but at some point all markets mature and as one analyst says, it’s highly unlikely that either firm “could grow by the billions that investors expect… without engaging directly and stealing market share from the other.”

Google search is a rifle-scope targeting ads when you’re on the hunt for information.  But Facebook is a microscope exposing who you are and what you’re up to. If we opt into Facebook’s deep integration with other apps, we tell Facebook what we’re doing – listening to tracks on Spotify, watching videos on Netflix, using RunKeeper to train for that 10k – and all of that is advertising gold.  Even worse for Google – most of the content on Facebook is in the ‘dark web’, un-crawlable by Google’s search spiders because it lies protected behind a Facebook login. Developers dig how Facebook helps spread the viral love of their new offerings, and with each new adoption, it’s an opportunity for Facebook to reveal even more of you under that microscope.  It’s worth noting that Facebook’s login credentials are becoming a real catalyst for web innovation.  One might bail on a new site if it required a new password, but might try a site if it accepts the Facebook login.

The importance of social isn’t a new realization for Google – but nearly all of the firm’s prior efforts were dismal failures. You’ve likely never used (or perhaps even heard of) Google’s Orkut unless you were in Iran or Brazil – two of the only places where it dominated.  Google Buzz was a poorly-tested, privacy-exposing failure that prompted an FTC investigation.  And the much-touted Google Wave bombed – pulled within months of launch.

But the June launch of Google+ is described by Fortune as “a network that cloned much of what people like about Facebook and eliminated much of what they hate about [it]”. Google+ users get profile pages, games, photos, status updates, and a +1 that mimics Facebook’s “like”. But Google also offered features to manage privacy & share updates only with “circles” of contacts that you curate (e.g. posts for groups like friends, family, co-workers, or the public).  And while Facebook charges app developers 30% of revenue, the Google vig is just 5%.

Google’s approach to innovation has been widely criticized, but Larry Page sought to lead the effort top-down, and create accountability for social. “Page moved his office and much of the executive suite to the building where the Google+ team was sequestered”, and he tied a significant portion of employee bonuses to metrics tracking the success of social.  Page even made demands on design – pushing simplicity like one-button photo uploads.  Says Google’s other co-founder Sergey Brin, the firm still wants to be flexible enough that a thousand flowers can bloom, but “once they do bloom, you want to put together a coherent bouquet.”  Google+ has been growing like gangbusters.  Already at 60+ million one bullish report suggests it’ll be at 400 million users by next year if the firm can keep up with the current pace of adding 625,000 users a day.

Facebook didn’t stand still. Shortly after the debut of Google+, Zuckerberg flicked a switch on the pink neon “lockdown” sign at Facebook’s HQ, signaling the troops to “work around the clock” pushing Facebook’s rollout forward and cutting off some of the edge some saw in Google+.  By September, Facebook had rolled out a group-curation tool to counter Google Circles, plus a whole slew of enhancements designed to embed Facebook at the center of the social web.  This shows the challenge of competition on the social front – technology can be easily matched, so unless it comes with a way to create or counteract advantages of user base (e.g. network effects, data) then upstarts will struggle to displace incumbents.  Google has a vast ad network serving ads from sites ranging from BusinessWeek to small-time blogs, lots of cash, and killer platforms for integrating & distributing social (search, Gmail, YouTube, Android, and more). Whether or not this is enough to create an enduring reason to spend more time outside the Facebook social monopoly remains to be seen.  But Google may not need to win outright –a strong second-place showing in social could still mean more data for better ad targeting and improved services throughout the firm’s properties.

The battle is also playing out in a talent war.  Over 10% of Facebook employees are so-called xooglers (ex-Google employees), including four of Facebook’s top eleven executives, as well as the Google engineer considered the father of Google+’s Circles feature.  Still, Google remains one of the most sought-after employers, and the firm has added nearly as many employees in the recent quarter (2,600) as Facebook has on its entire staff.  Facebook will soon lose a key weapon in the talent war – the chance to get a slice of pre-IPO equity and the possibility of liquidity-event coin. Once Facebook goes public, the firm’s stock price will be subject to market whims just like Google (which, incidentally, is up about 7.5 fold in the seven and a half years since going public). Hot-money heat-seekers may follow the next big IPO candidate (Twitter? Xooglers are about 13% of their workforce).

Facebook vs. Google is a very fun place to research and write about. Those interested in diving in with more details can see the January 2012 release of the Facebook and Google chapters in my textbook.

Why Netflix Customers Who Haven’t Bailed Probably Won’t
For those thinking Netflix has backed off plans on its full-steam-ahead streaming future, check out CEO Reed Hasting’s comments from last month’s UBS Media Conference: “We’re going to try to not hurt [the DVD-by-mail business], but we’re not putting a lot of time and energy into doing anything particular around it… We’re focused on, how do we take advantage of this incredible global streaming opportunity.” Even if you used to get both DVDs and streaming videos from Netflix, the company will only tell you about its streaming plan in its “come back!” emails, as far as Netflix marketing goes, it’s as if the DVD biz doesn’t exist. And the firm no longer allows you to ‘gift’ someone a DVD subscription – gifts are streaming-only. Hastings has even called DVDs “Old fogey discs”.  Sure DVDs are a billion-dollar-a-year business servicing millions of subscribers, but its days are numbered.

It’s been a tough year for Netflix.  The firm’s stock price plummeted from $300 to below $80, and it’s customer service rank (which regularly topped leading surveys) has plummeted.  The most recent Forsee index ranked rival Amazon as number one (although it’s worth noting the survey compares a firm’s entire e-commerce offering, so it’s not just a streaming-to-streaming comparison). Some 900,000 Netflix customers bailed the prior quarter.  Those numbers are grim, but a Citigroup survey of customers remaining with the firm suggests most will stay and that growth should be looking up.

57% of current customers reported they were either “extremely satisfied” or “very satisfied” with Netflix.  ‘Extremely satisfied’ customers are down to 18%, from 50% in May. But the survey also reveals that most of the firm’s customers don’t see many other decent options.  Only 15% of Netflix customers report using Hulu to view movies or TV shows – no other site cracks 10%.  These results echo a similar study by PC World showing that even with the price hike, Netflix was still the best value in both video streaming and DVD-by-mail.

That latter stat also made it into the January ’11 update of the Netflix chapter in my book.  The update also includes a chart comparing the DVD-by-mail and streaming businesses – I hope you find it to be a good teaching aid for fueling class discussion around atoms-to-bits shifts and technology disruption.

Bonus: those following Netflix will likely find talks by the firm’s engineering honcho (who tweets at @adrianco) to be fascinating.  The blog post “How Netflix gets out of the way of innovation”, offers a number of gems below – they’d likely generate useful class discussion as well as insights for the entrepreneur.   Nuggets from the blog post cover “how did we keep making big strategic moves, from DVD to streaming, from Datacenter to Public Cloud, from USA only to International, all in very short timescales with a fairly small team of engineers.”  Other highlights:

• “Netflix is now one of the largest sites that runs almost entirely on public cloud infrastructure. We have become a poster child for how to build an architecture that takes full advantage of the Amazon Web Services cloud.” Recent problems are blamed on ‘Roman Riding’ – still having a foot in old data-center architecture while migrating to the cloud.
• “It’s the things you don’t do that make the difference. You don’t add innovation to a company culture, you get out of its way.”
• “Who has junior engineers, graduate hires and interns writing code? We don’t. We find that engineers who cost twice as much are far more than twice as productive, and need much less management overhead.”
• “Reducing management overhead is a key enabler for an innovative culture. Engineers who don’t need to be managed are worth paying extra for.”
• The firm doesn’t have an architecture review board or centralized coding standards.  Instead, engineers are free and responsible for figuring it out for themselves. Peer pressure helps keep quality high.
• On the cloud “AWS takes about 5 minutes to allocate 100 servers, it takes longer than that just to boot Linux on them.”
• “We don’t pay bonuses. We don’t have grades other than senior engineer, manager, director, VP. We don’t count the hours or the vacation days, we say “take some”. Once a year we revise everyone’s salary to their peers and current market rate – based on what we are paying now to hire the best people we can find.”
• “We also have what sounds like a crazy stock option plan that grants options every month, vests the same day, and they last 10 years even if you leave Netflix.”

Those interested in engineering and public cloud topics might also hunt out Adrian’s talks on on YouTube.

Last bit of Netflix news (of particular interest to my students who are visiting with our alumni connections in the Xbox group next week), a new version of streaming over Xbox 360 allows users to use voice and gestures to control the app.

Big Numbers, Questions Surround Latest Facebook IPO talk

• For comparison, Google’s 2004 IPO raised $1.9 billion, valuing the firm at $23 billion.
• There have only been 13 IPOs that have raised at least $10 billion.  The list includes Visa, GM and AT&T Wireless Services & none from a 7 year old firm started by a 19 year old.
• Facebook’s projected 2011 revenues of $4.27 billion are already bigger than Yahoo’s and growing at a much faster rate.
• A $100 billion valuation is 23 times Facebook’s projected ’11 revenues. For comparison: Google comes in at 6.5 times revenues, Apple at 2.6 times, and Microsoft at 2.8.
• This valuation would make Facebook worth more than all but four Silicon Valley tech firms: Apple (worth $350 billion), Google ($190 billion), Oracle ($152 billion), and Intel ($121.2 billion).  More perspective: HP is valued at $54.5 billion & Cisco at $96.9 billion, and Seattle’s Microsoft and Amazon are worth $213 billion and $89 billion respectively.
• If these numbers hold up, Zuck would be worth about $24 billion.  That compares to about $20 billion for Sergei and Larry of Google, $39.5 billion for Oracle’s Larry Ellison, and $56 billion for Bill Gates.

Click the image below for a neat WSJ interactive graphic comparing prominent tech IPO market capitalization growth.

Going public is a near certainty for Facebook next year.  Since Facebook will cross the 500-shareholder limit later this year, it’ll be forced to make its financials public by April.  And there’s little incentive to “open the kimono” to disclose financials to potential competitors without also using public markets to raise cheap capital and fuel expansion.

How will markets treat Facebook after the IPO?  It’s tough to say.  Facebook has potential in yet-to-be created businesses. As this blog has pointed out before, unlike Google, Facebook doesn’t yet have an ad network, and the appointment of Netflix CEO Reed Hastings to Facebook’s board was likely done as the firm considers baking Facebook into all sorts of consumer electronics, perhaps lucratively bringing social and ad targeting to television.

But this year’s tech IPOs haven’t done well after issue. Groupon was down 42% in the five days after it went public, and LinkedIn, whose stock doubled the first day of trading, has fallen 36% since then. Zynga, you’re up next, and Yelp will likely follow close behind.

On another note, Facebook recently settled with the FTC, agreeing to 20 years of privacy-related auditing.

The Empire Strikes Back – Big Firms Get Disruptive
Being big can be brutal.  In the past 10 years, 40% of the Fortune 50 have changed.  Implosions have been dramatic and often tragic (think Sun, K-Mart, Enron). The list of stumbling giants rocked by technology disruption is a long one (Borders, Blockbuster, Nokia, Sony, RIM, the newspaper industry, the music business, and more). While their earlier research showed that smaller firms were most likely to disrupt giants, Scott Anthony and Clay Christensen (the Innosight team consulting team behind the latest books on “Innovator’s Dilemma”) are finding trends showing that an increasing number of big firms are learning to be disruptive, too.

The team finds that while during the 1980s and 1990s, only about 25% of disruptive innovations came from big incumbents, during the last decade that number jumped to 35%. Anthony & Christensen offer several examples of the new incumbent innovators, including: GE’s undercutting its own high-end EKG equipment and developing low-end products for emerging markets. GM & Nissan developing affordable electric cars, potentially disrupting the business of oil companies. Dow Corning disrupting its own commission-based sales force by developing Xiameter, a self-service, Web-based distribution channel. While some of the examples might not fit exactly with the original Christensen definition of disruptive tech (lower performing products that become good enough to invade established markets), trends seem to show that giants recognize they need to continually innovate or risk extinction.

The search to enter developing markets that may value lower performing but far cheaper offerings, is one reason why big firms are thinking disruptively.  Those wanting growth need to be willing to undercut their high-priced, over-featured mature-market offerings (e.g. the GE emerging market EKG). Authors cite three other factors seen among large firms that successfully transform through disruptive innovation: 1) Pushing beyond core competencies (think Amazon moving from e-commerce retail to develop an eBook reader, cultivate the eBook market, and become a leader in cloud computing). 2) Embracing business-model innovation (Apple, with iTunes, App Store, and Apple Retail as a poster child for success). And 3) Managing the old and the new differently (IBM evaluates Emerging Business Opportunities teams largely on whether managers learn from failure and respond with adjustments).

Palantir: The War on Terror’s Secret Weapon
“It’s like plugging into the Matrix… The first time I saw it, I was like, ‘Holy crap. Holy crap. Holy crap.’ ” That was the reaction of an Afghanistan-based U.S. Special Forces operative when using software from Palo Alto-based Palantir (BusinessWeek once asked if the firm is “The Next Google?”).  Based in the former digs of Facebook, and funded by In-Q-Tel (the CIA’s VC), Palantir has become the darling of intelligence agencies, law enforcement groups, and banks.  The firm’s big trick is making sense of “Big Data” – offering tools that connect & mine the oceans of data produced by disparate and unconnected information technology. Says a Gartner analyst, ” The company’s software pulls off one of the great computer science feats of the era: It combs through all available databases, identifying related pieces of information, and puts everything together in one place.”

The firm’s customer list includes the U.S. Defense Dept., CIA, FBI, Army, Marines, Air Force, the police departments of New York and Los Angeles.   The CEO of the National Center for Missing and Exploited Children says  Palantir “gives us the ability to do the kind of link-and-pattern analysis we need to build cases, identify perpetrators, and rescue children.” Financial institutions are using the firm’s tools to ferret out bank fraud and shut down organized crime networks.  The CIO of JPMorgan Chase says the firm’s technology turns “data landfills into gold mines.” The BusinessWeek cover story linked above offers a fictional national security example to illustrate Palantir’s abilities where a speeding ticket triggers an alert, allowing a name to be connected to fingerprint and DNA evidence gathered by CIA operatives, surveillance video from an ATM, shots of a rental truck’s license plate at a tollbooth, phone records, and map pinpointing suspect movements across the globe, all displayed on a “Mission Impossible”-style graphical display.

Anyone who’s worked at integrating databases knows how challenging it can be to link disparate systems, but Palantir claims they can be “up and running in a bank in eight weeks… instead of waiting two to three years with our competitors.” Palantir certainly is different from the Beltway Bandits that typically serve government agencies.  The firm’s offices include murals of CareBears, teams of geeks wearing My Little Pony t-shirts, and CEO Alex Karp has a Ph.D. in Philosophy and studied under one of Europe’s leading neo-Marxists.  Contrast this with the firm’s security staff, whose black gloves and Secret Service-style earpieces make “downtown Palo Alto feel, at times, a bit like Langley.”

Most clients are mum about specifics of their Palantir implementations, however the firm’s revenues have grown three fold a year, suggesting clients are impressed with what they’re getting.  A typical deal ($5-$100 million) is paid for 20% upfront, the rest delivered only after the customer is satisfied.

This kind of access is a godsend to some, and creeps out others.  Palantir tries to ease concerns, claiming its software creates audit trails, detailing who has seen certain pieces of information and what they’ve done with it, and that it has a permission system to make sure that staff can access only the data that their clearance levels allow. Still, it’s yet another example of technology advancing faster than law is able to balance issues of public safety and civil rights (for more on that topic see the recent broadcast of NPR’s Fresh Air on “Interpreting the Constitution in the Digital Era”

The Big Data Boom is the Innovation Story of Our Time
MIT’s Erik Brynjolfsson & Andrew McAfee say that breakthroughs in innovation often rely on breakthroughs in measurement.  And increasingly we’re measuring just about everything – web monitoring, app analytics, inventory hops via RFID, and more. But “Big Data” becomes valuable when it’s turned into “Big Information”.  And tools like Palantir (above), the cloud, and the like are putting data crunching capabilities in the hands of the masses.

The results are huge  As Microsoft’s Ron Kohavi puts it “objective, fine-grained data are replacing HiPPOs (Highest Paid Person’s Opinions) as the basis for decision-making at more and more companies.”  Firms aren’t just analyzing data they receive, they’re running A-B experiments to collect real-time insights for constant improvement.  Our TechTrek students have heard this from Amazon’s P13N (personalization) team members. Says one Amazon exec: “To find high impact experiments, you need to try a lot of things. Genius is born from a thousand failures. In each failed test, you learn something that helps you find something that will work. Constant, continuous, ubiquitous experimentation is the most important thing.”  Google (another TechTrek host) runs some 100-200 A-B-style experiments a day, trying out new products and services, tweaking algorithms and tinkering with designs.

Brynjolfsson & McAfee are also authors of the book Race Against the Machine, and were recently featured on a segment of NPR’s OnPoint Radio.  Folks interested in a primer on data, analytics, and brief case studies on how firms like Tesco, Caesar’s Entertainment (formerly Harrah’s), and Wal-Mart use “Big Data” can also see the chapter “The Data Asset: Databases, Business Intelligence, and Competitive Advantage” from my book.

Inside P&G’s Digital Revolution
Robert McDonald, Proctor & Gamble’s CEO, wants to make his firm “the most technologically enabled business in the world.” His interview in McKinsey Quarterly offers several examples.  P&G employees help design their own operational “cockpit” interface.  When metrics move outside acceptable tolerances an alarm goes off. Managers can then drill down, find out what’s going on, and make decisions based on this real-time data. The firm has a “baseline digital-skills inventory that’s tailored to every level of advancement in the organization.” Says the CEO, “we’ve got to have the standards for everyone because otherwise we’ll dumb the organization down to the lowest common denominator.” A believer in assessing the “consumer pulse” via social media, P&G managers also use monitoring tools to scan online mentions and puts relevant brand references front & center in real time.

P&G is also pioneering new financial systems, with McDonald stating “accounting systems aren’t designed today for operations—they tend to look backward.” But new efforts will link real-time operational systems to financial tools to allow managers to see product costs in real time, enabling more nimble decision-making.  As one of the nation’s top trucking users, P&G also leverages data analysis to optimize its fleet, reducing so-called “deadhead” movement (empty or under-filled trucks) by roughly 15%.

When a study found that 70% of orders between retailers and suppliers had errors, P&G developed a common, sharable data warehouse that reduced ordering errors to “virtually zero” and saving millions of dollars.  In order to ensure security and privacy when working with partners the firm establishes “very clear firewalls between one retailer and another and strict policies”, including an employee “cooling off” period in between projects with different retailers.  Partner tools are adapting to emerging economy technology.  For example, in nations like the Philippines, where smaller retail operators are more likely to use mobile phones than PCs, P&G has deployed mobile phone systems that allow retailers to order.  Phone systems also make recommendations on store layout, with data-driven suggestions on how retailers can rearrange inventory to optimize their sales.  Even the suds get the geek treatment. The firm’s R&D chemists have used computer modeling to predict how moisture would excite various fragrance molecules to deliver specific fragrance notes at specific stages in the washing cycle. This isn’t conventional lab work, it happens entirely in computer simulations.  From all ends of the firm’s value chain, P&G is leveraging and embedding technology to drive results.

SANERGY TALK POSTPONED: But David will be back next semester – stay tuned:
Social Entrepreneurship Standout Sanergy On Campus

Anyone interested in social entrepreneurship & how business principles can create sustainable good will want to hear David Auerbach speak at BC in Gasson 305 at 4;30pm on Dec. 7th.. Auerbach is co-founder of Sanergy, a firm that improves health conditions and quality of life by providing innovative toilets to desperately poor urban areas that lack plumbing.  The ‘waste’ from their devices is turned into biogas & fertilizer that is then sold, with profits generating funds for more toilets.  The firm has already deployed in slum areas of Nairobi Kenya.  Come hear David’s compelling story.  Sanergy is the winner of the prestigious MIT $100K and Mass Challenge $100K Diamond award.  The firm also received a significant funding commitment from USAID.

The event is brought to you by BCSEED – The BCVC sub-group on social entrepreneurship. To learn more about BCSEED, the social entrepreneurship track of BCVC, & to get on the group’s mailing list, e-mail PlantChange@gmail.com and follow them on Twitter @bcseed.

◆     ◆     ◆     ◆

More Student Press
The BC community may be interested in recent press coverage of several firms started by current and former students of mine…

• Boston Herald on BCVC ’11 Winners Jebbit.com: “Startup helps brands get more bang on Web.” Follow the team on Twitter: @jebbitinc @petercasinelli @tomcoburn1 @Jebthomas
• Boston Business Journal on Applied Power Innovations: “Class Act: Product monitors energy usage by the dashboard light“. You can see Rich & CJ (BCVC exec committee & TechTrek ’12) in this year’s Boston College PSA, and can follow the team on Twitter: @apinnovations @CJ_Reim @richrines
• CNet covers Bill Clerico (TechTrek Alum & BCVC co-founder) & Rich Aberman’s WePay “WePay planning…” an astonishing, break out year. Follow @WePay @billclerico @richaberman
• BostInnovation covers TechTrek alum Phil Dumontet: “Dash Deliveries: Bringing Boston’s Best Food To Your Doorstep in 45 Minutes or Less“. Dash is expanding to 6th city this month, all without raising any venture capital! Follow Phil on Twitter: @PhilipDumontet

Keep at it, Eagle Entrepreneurs & be sure to visit http://bcvc.org & follow @BostonCollegeVC.

And as an extra bonus for folks interested in campus activities, check out BC Chronicle coverage of the new BCTalks series – TED-like lectures by our undergrads; and see BostInnovation press & BC Heights coverage of the latest BC Splash, where over 150 BC students designed and taught weekend lectures for over 800 visiting high school students.  I’m hugely honored to be faculty advisor to both efforts. For more info see the web pages for BC Splash and BCTalks.

◆     ◆     ◆     ◆

Aniphon: Coming Soon!
For the past few weeks two of my kids (Ian, age 11, and Maya, age 6) have been beta-testing a new iOS game called Aniphon created by Moglo Apps. And every day since we’ve got the super-secret beta, the kids have woken me up each morning, asking to play this game.  Some of you may know Moglo as a finalist in last year’s Boston College Venture Competition.  Matt Ricketson, ’13, a lifelong Apple fanboy, skipped a dream internship on Apple’s mobile development team, opting instead to work on Aniphon (that’s commitment & belief in what you’re building).  John Bacon, ’12, wrote his first Android app while in high school & gave a recent BC Talks lecture on entrepreneurship. Spencer Frazier ’11, is now a Comp. Sci. Ph.D. student at USC. The team has chops (Matt & John are also TechTrek alums).  If you’ve got an iOS device, you’re a gamer, or know someone who is, sign up for release info at http://aniphon.com.  You can also follow the team on Twitter: @aniphon, @ricketsm, @JohnABacon, & @spencerfrazier. The team will let you know as soon as the app is approved by Apple & available in the App Store.  Until then, I remain mum even as I struggle to regain control of my phone from my Aniphon-fanatic kids.

◆     ◆     ◆     ◆

NOTE: Faculty using my book – version 1.3 of “Information Systems: A Manager’s Guide to Harnessing Technology” will be available in December, ready to ship to bookstores for the start of the Spring 2012 semester. The new version will include a significantly updated Netflix chapter, covering the rise & fall of Qwikster and detailing the differences between the atoms & bits based businesses.  The Google chapter will also include coverage of the Motorola acquisition and Google+. Contact your FlatWorldKnowlege sales rep for details.  The text will continue to remain free online, and I’ll be sure to share links as soon as updates are online. Feel free to check out v. 1.2 in the meantime, and please share information about the project with your colleagues.  Thanks!

These four horsemen of twenty first century consumer tech go toe to toe, or at least have begun to rub elbows, in all sorts of overlapping terrain. Consider that:

• All four firms now offer apps marketplaces where third parties enhance their ecosystems.
• All sell advertising and aggressively collect and leverage data to tailor offerings, services, and keep you tied to their clouds.
• All integrate with the post PC devices. All but Facebook sell them.
• All will recommend and sell you movies and TV programming.
• Music? They’re all there.
• Games? Ditto.
• Delivery and recommendation of news and magazines? Yup.
• All but Amazon have a videophone service. Put a lens on the Kindle Fire and Bezos’ll get there, too.

And they all want to tap into your wallet and perhaps someday be your bank. Earlier this year Apple announced iTunes has over 200 million accounts – making it the biggest credit card hub on the web. Amazon has 121 million customers. Facebook has turned its credits payment system into a nearly half-billion dollar a year business. And Google Wallet is the first of the big four with an NFC mobile payment platform. Purveyors of plastic cash, be worried. While the big four use credit cards today, it’s a simple tech trick to link directly to a customer’s bank account, cutting out fees consumers have learned to hate.

A quick look at the lineup offers eye-popping numbers:

• Apple currently jostles with Exxon-Mobile to be the most valuable firm in the world, but growth favors Cupertino. Exclude desktops and in every major category it competes in, Apple enjoys double-digit growth and margins, and it’s creating new categories. In less than a year the iPad sold enough product that if it were a stand-alone firm it’d land at about the mid-point of the Fortune 500. Some in the press yawned when the iPhone 4S was introduced, but Apple sold a record breaking four million units in the first three days, double the rate of any prior phone launch. It’ll earn an estimated $368 on each iPhone (they’re carrier-subsidized). Apple is by far the most profitable retailer in the US on sales/square foot basis, performing nearly 2x greater than #2, Tiffany. Apple defies the law of large numbers – the biggest is getting bigger faster than less profitable, smaller rivals. And the firm’s cash horde is an insanely-huge $81 billion. No dividends- this coin’s ready for battle.
• If user attention and data are arms in the new race, Facebook sits on an arsenal no-one can touch. More than one in ten world citizens has a Facebook account – astonishing when you think the world population includes China (that doesn’t have Facebook), babies, and others who aren’t realistically online. More than half these users visit each day. While Google has been built on indexing the public Internet, Facebook’s data cache is out of the reach of Larry & Sergey’s spiders. Facebook’s $4 billion+ in estimated revenue this year is tiny, but the firm hasn’t even begun to turn data value valve yet. It has no external advertising network (no “Ads by Facebook” to rival the “Ads by Google” you’ll find everywhere from the NY Times to smalltime blog sites). Facebook collects two billion “likes” a day – that taste making is ready to become a commerce engine. Reed Hastings of Netflix is now on Facebook’s board. Why not bake a Facebook platform into consumer electronics like Netflix did – a “like” button on the remote control? Of course, when that happens, who needs the networks, Netflix, Nielsen, or any other media middleman? Facebook can send you the stuff your friends, and its algorithms, say you’ll love.
• Google gushes cash. Its ad business has grown about 30 percent this year despite the global recession. And despite Microsoft’s constant attempts to chip at its edges, Google still holds down about a 65 percent share of search. Larry Page has shown great ambition since becoming CEO earlier this year. He’s launched Google+ (far behind Facebook, but with bragging rights as the fastest growing social network in history), he’s killed 28 laggard products, and this year Google has made 57 acquisitions so far this year. The biggest was buying Motorola Mobility. That makes Google a handset manufacturer (a risky bet), but it also puts Google on the set top of millions (look at your cable box – if it says Motorola, that’ll mean Google if the deal clears). The $12.5 billion for Motorola also brings in 17,000 patents – a potentially vital resource. Apple has shut down Samsung in Germany and Australia this year, and Cupertino may come knocking, claiming Android is a knock-off of the heavily patented iPhone. Patents give Google a counterpunch. And while the free Android only delivers about $10/user to Google (all in the form of increased mobile ad sales from increased usage), that’s adding up to a billion-dollar business – a vital opportunity should PC search advertising mature.
  
• Amazon threw down in September, offering up a quartet of Kindles from the $79 base model to the $199 color, video playing, web browsing 7” Kindle Fire. At half the price of the iPad it’s smaller and does less, but Amazon competes with a different playbook – it’s willing to take a loss on Kindle (estimated at between $10 and $50 per unit) to get it in the hands of millions. The reason is simple. For Amazon the Kindle isn’t just an eReader or media playing ‘post PC’ device. It’s the store. And Amazon cannot afford to give up the store since the store is the business. Amazon Prime, the firm’s $79 program offering unlimited two-day shipping, shows the impact of lubricating commerce. The year before a customer joins Prime they spend $400. This number jumps to $900 the first year in Prime. And Prime subscribers are growing at a 50% annual clip (students, remember you can get in on Prime for free). Prime subscribers also get to stream thousands of free television and movie titles (the firm paid CBS $100 million for 18 months streaming rights that include Star Trek). In another four years analysts think Amazon will hit $100 billion in revenue, passing the mark faster than any firm in history, and a full thirteen years faster than Wal-Mart’s pace. Amazon has bought up competitors that get to the edge of threatening it (Zappos, Diapers.com), and has done so thus far without justice department scrutiny. And it’s influence is way beyond retail and media. The Amazon cloud is the IS infrastructure for firms ranging from startups to Netflix (FastCompany claims that “even Apple relies in part on Amazon’s cloud infrastructure”).

As tech gets cheaper look for trends to continue. A couple of stats for our Moore’s Law fueled world – Amazon introduced the Kindle in 2007 at $399. Today it offers a base model at $79. Apple recently celebrated the 10^th birthday of the original iPod, a $399 device with 5GB of storage. Today Apple’ll give you 5GB for free in iCloud. As we say in class, Moore’s Law means the impossible becomes possible and it leads to a new kind of price elasticity where whole new markets open up.

Why Software is Eating the World
This article appeared in August and was recommended by many colleagues and former students but I’ve just gotten around to putting it in the WiG. It’s well worth the read! Marc Andreesen (the baldest guy at the right – click for interview video), current venture capitalist and the co-founder of two multi-billion dollar firms (Netscape and OpsWare/LoudCloud), writes in the Wall Street Journal that “every company I work with is absolutely starved for talent. Qualified software engineers, managers, marketers and salespeople in Silicon Valley can rack up dozens of high-paying, high-upside job offers any time they want, while national unemployment and underemployment is sky high. This problem is even worse than it looks because many workers in existing industries will be stranded on the wrong side of software-based disruption and may never be able to work in their fields again. There’s no way through this problem other than education, and we have a long way to go.” [note to those firms looking for a role-model program – at Boston College we’ve quadrupled the number of students studying technology & business in just four years].

Geek up – the trends are clear. In a decade broadband access has grown from 50 million to roughly 2 billion people worldwide. In the next decade five billion people will own always-on pocket computers – smartphones. In a decade, we’ve seen the cost of hosting Internet applications fall by a factor of 100 thanks to the power of the cloud. Firms that failed to see how software-driven businesses enable fundamentally different cost structures and competitive assets have failed miserably – witness Borders and Blockbuster, among many others.

Music is now software with record labels existing only to provide “software companies with content… Music industry revenue from digital channels totaled $4.6 billion in 2010, growing to 29% of total revenue from 2% in 2004.” Pixar was a software company – Disney was forced to buy it to stay relevant in the world of animated movies.

The highly controversial Groupon, which uses software to power and distribute local coupons, generated over $700 million in revenue in 2010, after being in business for only two years.

The trends can swamp even technology firms. While video game revenues are have doubled to $60 billion in five years, traditional firms such as EA and Nintendo suffer, while new revolutionaries Zynga ($235 million in Q1 revenues this year), Angry Birds parent Rovio ($100 million in revenue this year), and Apple (maker of the largest game platform in the world despite not offering a conventinoal ‘gaming device’) have redefined game content, delivery, and consumption.

And as our students study, Wal-Mart, FedEx, the airline industry, biotech, and financial services are all built on a bed of modern software. Oil and gas exploration happens because of data visualization and supercomputer analysis. Satellite imagery and math power modern agriculture. And as we’ve seen with drones and other defense initiatives, the modern soldier is increasingly a robot.

Not only does the manager need to think strategically about technology, they also need to think deeply about broader implications – privacy, security, and the downside if this technology guesses wrong or funnels behavior and activities in narrowly defined ways. But that doesn’t mean we should use less of this or even stop it. It does mean that if we’re to use it properly, all of us need to learn more about the role technology plays in our current world. Ignore it and you ignore our future.

The Science Behind Viral Marketing
We often talk about the value of viral marketing, but David Skok, a successful venture capitalist at Matrix Partners, gives the concept depth with this great slide deck (above), and accompanying post on “Understanding the Key Variables in Viral Marketing”. It’s a fantastic resource for anyone seeking to understand how to leverage virality to grow a business and potentially jumpstart network effects. We’ve been fortunate to have had David speak at a past Boston College Technology Council event, and he’s also scheduled to speak as part of a Boston College Venture Competition program. All are invited out to hear David talk on “Business Models 2.0: How the web is changing sales and marketing, and creating new business models”, at 6:30pm on Nov. 30^th. Location TBA, but stay tuned at bcvc.org and follow @BostonCollegeVC on Twitter for details. Also – those in the Eagle Startup Tribe also likely want to hear BC alum John Prendergast, leader of Boston’s Lean Startup Circle, talk about Lean Startups on November 9. 7 p.m. (location TBA).

Ready, Set, Pitch: A Recap of the BCVC Elevator Pitch Competition
Speaking of BCVC – 36 teams entered this year’s Boston College Venture Competition Elevator Pitch Competition. Judges included Bijan Sabet (BC alum and Spark Capital investor in Twitter, Tumblr, Foursquare, and many others), Katie Rae (Managing Director of TechStars Boston), and Greg Dracon (Partner at .406 Ventures). This year saw the first-ever awarding of a BC SEED track prize for social entrepreneurship. The track record of prior BCVC EPC participants is pretty strong – last year’s teams went on to win the Mobile Track in the Exec Summary Competition of the MIT$100K, place as a finalist in Mass Challenge, and win a slot in Highland Capital Partner’s elite and highly competitive Summer@Highland program. Lauren Landry of BostInnovation covered the event. Want to participate or attend future BCVC events? See http://bcvc.org.

Africa: Turning the World Upside Down
Many of you have written to say you’ve enjoyed the examples of “Tech for Good” that I’ve been including in recent “Week in Geek” postings. You may also enjoy this recap and overview of mobile technology in sub-Saharan Africa. Several locally-grown technologies are having wide and impactful use, including:

• M-Pesa, the text message payment service by Kenya’s Safaricom which supports about $1 billion a month in funds transfers.
• Ushahidi, a crowdsourcing visualization and mapping effort used for everything from exposing corruption to tracking issues in the aftermath of natural disaster. The platform now has over 20,000 deployments in 132 countries.
• Mxit, a South African mobile chat platform that has 3x the number of Facebook users in that country, and over 25 million users worldwide.

Also be sure to check out the great slide deck “Mobile Trends 2020 Africa” – chock full of stats, graphs, and lovely images.

Some Press
It’s always nice when our work gets attention. A few noteworthy items this past month include:

• Being named (along with my colleague Jerry Kane) to the BostInnovation list of “Top Boston-area Professors, Deans, and Presidents to Follow on Twitter”
• Quoted in the NY Time story “Apple’s Lower Prices Are All Part of the Plan”
• Quoted in the Boston Globe story “Investors in Startups Score Big Despite Slump”

Finally, like many of you, I was moved by the passing of Steve Jobs. I’d shared a personal reflection the next day and was honored to learn that a member of Apple’s AcademiX effort had shared it with the rest of their Education Team. It was simply a small way to honor not only the legacy of Steve Jobs, but also the hard working people at Apple who have created products that empower and inspire so many. We remain grateful for your work.

Facebook As Tastemaker
The chart below shows that Facebook is a juggernaut. There is no other social network. Across all websites (not just social), users spend more time on Facebook than the four next most popular websites combined! 800 million users are on Facebook. Half a billion check in every day. The site is, in just seven years, a species-level eco-system sprung from the dorm room of a college sophomore.

Despite the many challenges of social advertising, Facebook should see revenue double this year to more than $4.25 billion. This week saw massive changes announced that promise to plant the firm at the center of a whole new digital nervous system. Facebook will become more powerful by making sharing easier and also by filtering this information more finely – to bring the most valuable stuff to the surface, help you find the old stuff, and allow you to dive deeper when you’re in the mood to explore what your friends are up to. And with each activity, you embed more of your life into Zuck’s machine. With these changes Facebook is fast becoming the fabric of the Internet, the nervous system of future commerce.

Facebook has split the old ‘News Feed’ into groups, now categorized as “Top Stories” and “Recent News”. Facebook will try its best to guess what you’ll find important, but you can click on an item and promote, demote, or hide it. Mashable offers a nice slideshow tour of the changes. Friend lists allow you to create groups so you can quickly see groups of posts (e.g. ‘Family’, ‘Co-Workers’, ‘Close Friends’), and you can easily post status updates just for groups. You can also ‘mute’ updates from friends that overshare. (Facebook explains this in a blog post w/pics & video). And a subscribe option makes Facebook more “Twitter-like”, allowing you to easily follow users who don’t friend you back, and to post updates for everyone to see.

“Lightweight” information (music, games, location updates, shared links) now goes into a new right-side bar called the “Ticker” that appears on each page. And a brilliant new extension of Facebook’s Open Graph API allows firms to create “Lifestyle Apps” that plug into the Ticker feed, making sharing instant if you agree (no “like” button required). Spotify’s CEO showed how you can click to instantly listen to songs your friends are streaming. Netflix and Hulu titles can also be automatically shared (in every country but the US, where the 80s-era “Bork Law” needs to be lifted before video’s viewed can be made public). Yahoo, The Washington Post, and Newscorp’s The Daily are among the news firms plugging in to the Ticker. Cooking apps, workout apps, games, and more can all integrate into Ticker sharing. Check out Facebook’s video demo of the “new class of social apps” below and you’ll get a sense of how, as Zuckerberg puts it, social apps will allow firms to “rethink some industries”. For cases where automatic sharing doesn’t fit, the Facebook Gestures effort rolls out a whole new set of verb buttons (“watched”, “listened”, “read”) to go along with “like”. Oh, and that embarrassing “poke” feature has been buried – no room for that undergrad cheekiness in the new landscape of social screen real estate.

Facebook’s beautiful new “Timeline” lets users curate photos, posts and video, creating a sort of digital scrapbook of their lives. It looks like something Apple could have designed (see the video below). Timeline will roll out slowly, but it is possible to get the feature today with a few extra steps. Technology Review has a nice piece on Nicholas Feltron of Feltron Reports who’s now at Facebook & is responsible for much of the implementation and design of this new hyper-sharing. Lifehackers and quantified life geeks, the new Facebook is your catnip.

COMMENTARY: One of the biggest challenges Facebook faces is balancing the goals of 1) encouraging users to share more, 2) surfacing the good stuff (signal) without frustrating users who receive too many valueless posts (noise), and 3) allowing users to be instantly social without jumping to another web location (the “hunt vs. hike” problem). The new multi-tier newsfeed looks like it hits the trifecta sweet spot balancing these goals with well thought out design.

For years we’ve seen advertisers build detailed guesses based on tracking cookies and other techniques of monitoring online behavior. These targeting techniques have been extraordinarily lucrative, but imperfect at best – tough to aggregate across devices (mobile, web), machines (work, home), and more. But on Facebook *you* tell the site *exactly* who you are, what you’re interested in, and who else might be interested in the same thing. This is a far more powerful game.

We shouldn’t be naive – there is a downside. As the “Are You Paying Attention” blog poses: “When will the first horror stories start coming out about engagement ring purchases, personal health issues and sexual orientations being inappropriately revealed due to auto-sharing?”. Is this just a new version of an opt-in Facebook Beacon? One that reaches deeper and wider? Is it just that we’ve become more accepting of this level of sharing? Has Facebook gotten better at framing benefits and putting users in charge?

For many, Facebook is a Borg-like hybrid – an electronic plug into their lifestream. And now the bioimplants run even deeper. It’s scary to some and several will say they’ll leave Facebook. The firm is likely to screw up again as it pushes the privacy envelope and fails to see pitfalls in the cascade of sharing (early reports suggested new features could reveal who “unfriended” you, an act previously thought private). But to me “Facebook Boycott” sounds an awful lot like “iPod killer” did in the prior decade. There was no iPod killer – the only firm killing the iPod is Apple – no one ever left and there was never an acceptable replacement. Zuckerberg has you locked into a network of your friends that most will never ever leave. The keys are network effects & data-driven switching costs – perhaps the two strongest barriers to entry that technology can create. And with the changes above, Facebook is well on its way to strapping a massive cash register onto those assets, too. As the New York Times puts it “everywhere on the site, users will be able to more precisely signal what they are reading, watching, hearing or eating. This will let Facebook reap even more valuable data than it does now about its users’ habits and desires, which in turn can be used to sell more fine-tuned advertising.”

Just look at how many services Facebook has been able to envelop simply by turning on features – photo sharing (sorry Flickr), link sharing (goodbye Digg). The new Facebook incorporates features of Google+, Twitter, Tumblr, and About.me. And does Netflix have to worry, too? Granted, Reed Hastings is on the Facebook board, but studios are offering product directly through Facebook. At f8, Hastings himself has detailed how he found Facebook’s social features to be more persuasive than Netflix Cinematch. If Zuckerberg can aggregate audience and make effective recommendations with Facebook data, then what value does Netflix offer studios? It wasn’t announced today and it’s likely still quite a bit away, but it doesn’t take much imagination to see where this is going – Facebook integration into the television – deep advertiser links, television apps, content recommendations, commerce. There’s a cut in there for cable providers, television stations, a promise of pay-per-performance advertising, targeted advertising, commerce-from-the-couch, and more. If Facebook can crack the privacy nut and put the user firmly in control, they could become a trusted partner for all in the a new commercial value chain, brokering efficiency and taking a cut along the way. Time to “rethink industries”, indeed.

Netflix to Split DVD & Streaming Businesses
Reed Hastings isn’t some lucky guy who stumbled into an opportunity and rode it to success, he’s a seasoned entrepreneur and admired visionary. Before founding Netflix, Reed Hastings built and sold one of the 50 largest public software companies in the U.S. After repeatedly being doubted by Wall Street analysts, Hastings had proven his chops again and again. So much so that Fortune named him 2010’s Businessperson of the Year, and both Microsoft (the nation’s fourth most profitable firm in any industry), and Facebook named him to their respective boards of directors. Under Hastings, Netflix drove Blockbuster into bankruptcy, repelled Wal-Mart’s DVD-by-mail entry, built a firm that had regularly topped customer satisfaction ratings by Nielsen, Foresee, and the American Customer Satisfaction Index, and enjoyed subscriber, revenue, and profit numbers that consistently and repeatedly tracked up and to the right… until about two months ago.

This summer Netflix announced it was effectively turning the company into two firms under the Netflix brand, and that its two services – subscription DVD-by-mail and subscription streaming – would be two distinct plans, each billed starting at $8 a pop. That represented a 60% price increase for customers who were previously paying $10 for unlimited streaming + one DVD-at-a-time. Customers complained and Netflix predicted it’d lose 1 million total subscribers in the next quarter. Then Netflix did something unexpected – it made customers even more angry. In an oddly timed Sunday morning blog post and video, Hastings announced the two separate services would now run on two separate websites – Netflix for streaming and a newly named Qwikster for DVD-by-mail (Qwikster will also offer video games for an added fee). Ratings entered on one site wouldn’t carry over to the other. Two bills would appear on a customer’s credit card statement. Although the announcement came with an apology for how the firm handled the transition, the announcement didn’t fix anger over prices or separate plans. In fact, it made the aggregate firms that trade under the ticker symbol NFLX more difficult for consumers to use together – shocking for a firm that had so successfully built its brand through customer experience. Adding to the pain is the embarrassment of the re-branding launch. While Netflix secured the domain Qwikster.com, the Twitter handle @Qwikster was owned by a guy whose avatar was cartoon of a pot smoking Elmo from Sesame Street. It’s hard to fathom that no one checked this in advance or that the rebranding was so urgent it couldn’t wait for the fix. Netflix has lost more than half its value since breaking $300 a share earlier this July.

Despite the trauma, many have argued that Hastings is doing what has to be done at some time – he’s separating out a business that’s inevitably going to wither, and public markets are unforgiving to firms that shrink over a long and protracted period. As TechCrunch put it, “Netflix is effectively hastening the death of its DVD business by making it inconvenient to manage both services”. We’ve seen firms kill popular features in their product line before – Apple killed the 3.5” drive and is hastening the demise of computer DVDs and Flash – but I can’t ever recall such a bold and dramatic move from a company that had been so successful.

Hastings has always known this day would come – he just didn’t know when. He knew the market for the DVD-by-mail business would shrink, and the asset he’d built through a 58 site coast-to-coast fulfillment network would begin to lose value. On several occasions he’s said “We named the company Netflix, not Mailflix or DVD-by-mail-flix.”

The problem is that streaming is different from the DVD business in just about every way: costs, content availability, infrastructure & distribution, competitors, innovation possibilities, opportunities for expansion & global reach (here’s a table I put together to outline the issues). DVD content is a fixed cost and any disc Netflix can buy it can then rent thanks to the 1908 “First Sale Doctrine” Supreme Court ruling. This ruling doesn’t apply to streaming and broadcast. Instead, streaming rights have to be acquired from content owners or firms that have a right to re-license work, and those costs are 1) skyrocketing while 2) much of the content isn’t available. As an example, consider that three years ago Netflix paid $30 million to license content from Starz, the nation’s #4 pay TV channel, giving the firm temporary access to premium titles from Disney and other major studios. This contract is up next year and Starz turned down $300 million for renewal – a 10 fold increase in license fees in less time than it takes my students to complete an undergrad degree! HBO is also one of many content owners that won’t license its content for streaming. The cable channel worries a Netflix that offers a larger selection and lower price than HBO will kill pay channel subscriptions. Instead, HBO offers it’s own HBO GO service for subscribers that want to stream. Streaming competitors are also more formidable than the DVD-rivals – many are well capitalized and motivated to win (Amazon, Apple, Google… even Wal-Mart is back). And consider streaming infrastructure. The $300 million it cost to build a DVD distribution network was a barrier that kept many new entrants out. But in streaming Netflix uses Amazon’s cloud – meaning other firms can ‘rent’ their way into the same infrastructure, too.

There is a potential upside – streaming allows the firm to go international without a physical infrastructure. And Technology Review suggests it’s shortsighted to assume streaming is just about the content you could get on DVD. A streaming future could be far more social. Premium events could include chats with writers/directors/actors. We haven’t begun to grok what premium content in a streaming world might look like.

And nothing says Hastings is limited to a single monthly subscription for all of its offerings. A streaming-only firm could create a targeted-ad business, streaming free or discount content to users who endure ads, respond to surveys, etc. Video-on-demand or other tiers are all a possibility – none of which are available in the single-subscription DVD-by-mail world.

Hastings clearly sees the big transition he faces. Moving from one industry to another, radically different one, is path that has killed once-dominant firms in the past. Writing in a blog post, Hastings states “Most companies that are great at something—like AOL dialup or Borders bookstores—do not become great at new things people want (streaming for us).“

As for the timing of the transition, also consider this: Netflix was and remains a very richly valued stock. Could it be that Hastings knew the share price of NFLX was destined to fall in the short-to-mid term, and he figured timing this with the pain of separating the firms would be better than a two-step pullback – a price correction followed by a subsequent decline from separating the business? Yes, the stock price is falling, but look at the firm’s P/E ratio. When Netflix hit $300/share it was in nosebleed territory. Even at the value as of this writing, the NFLX P/E ratio is 32. Apple (a firm that grew revenues over 70 percent last year and shows no signs this is going to let up) has a P/E of 16. Google’s is 18. Microsoft’s is just above 9.

NFLX management realizes the inevitable – the killer assets they’ve built in DVD-by-mail don’t all translate into streaming. Margins for DVD-by-mail may drop as subscribers find more of this content conveniently offered online, and US postal service troubles means the quality of the DVD-by-mail service will decline (slower delivery, no Sat. delivery) while postal rates inevitably will go up. So if 1) the stock is overvalued and due for a decline and 2) the existing asset value has peaked, let’s rip off the Band-Aid quickly – endure rapid pain, but then start the process of strengthening the only business for the future – streaming. There may have also been pressure to make Netflix fit nicely into the click-to-stream future that Hastings presented on stage at f8 just a few days after the Qwikster split was announced.

There are a lot of unanswered questions. One of Netflix key assets is customer data (remember the Netflix Prize?). But with two separate websites, reviews are collected separately. Will this data be integrated? Will Cinematch be developed jointly? Will NFLX split into two stocks, one for streaming, one for Qwikster. Is either part of NFLX acquisition bait? How are customer data and other technical assets divided up now and in the future? And if someone buys the firm, what do they really get? Subscribers, data, technology, management and staff, any durability to licensing deals or goodwill with studios and other partners?

It’s right to criticize Netflix for a botched customer outreach during the transition. Hastings has apologized even if the apology and follow-up could have been handled better. But it’s hard to see alternatives that don’t require NFLX to eventually become two firms – one that’s allowed to die and one that’s nurtured to try to grow quickly enough to snatch competitive assets ahead of rivals. The reality for managers is that oftentimes there isn’t simply a good and bad path to take. Sometimes the choices faced are: 1) a painful path and 2) a more painful path. Hastings was the hero-victor at the close of the firm’s first act, but whether the film ends a triumph or tragedy has yet to be seen.

Why the Dish/Blockbuster Streaming Service Won’t Wound Netflix
It looked bad when Dish Network, which purchased Blockbuster’s assets last April for $230 million, announced a rival streaming effort just days after the Qwikster debacle. The new effort would offer one DVD-at-a-time and streaming for the old Netflix price of $10. But Peter Kafka at the WSJ’s AllThingsD picks apart the hype. The service is only available to a subset of existing Dish customers who have the right tech connected to their sets. The Blockbuster effort would offer 3,000 movies available for streaming to TVs, and 4,000 for streaming to PCs, vs. 20,000 on Netflix. Blockbuster does include video games and $10 is better than $16, but it’s worse than $8 Netflix for more choices in streaming only. Also note that earlier this summer PC World compared the $16 Netflix plan to rivals and came to the conclusion that Netflix still offered the best value.

TechTrek in Entrepreneur Magazine
It was wonderful to see TechTrek get a full page of coverage in Entrepreneur Magazine, but even better seeing that so many of our students and alumni were profiled. Greg Nemeth of Y-Combinator’s WakeMate, Shahbano Imran of LocalOn, Patrick Allen (who, as a sophomore won the MIT$100K ESC Mobile track & made the finals of the MassChallenge), Bill Clerico of WePay (one of BusinessWeek’s Young Tech Entrepreneurs of the Year), and Eagle mentor extraordinaire – Peter Bell of Highland Capital Partners – all got mention. A gratuitous (c’mon, I’m a dumpy bald man) two-page photo spread showed me along side two extraordinary faculty from other schools – a distinguished group with both being chaired full professors running established centers. Nice to see our hard work is getting noticed.

During a recent trip to Nairobi I was able to see the service in mainstream use throughout the beautiful and modern downtown area.  Citizens use mobile phones to pay for just about everything including cab rides, groceries, utility bills, and school fees.  Some employers even distribute salaries via M-Pesa. But while middle-class Kenyans have a technology many of us in the States would love to have, too – it’s the impact on the poor that’s most astonishing.  Not only does M-Pesa help secure cash that would otherwise be vulnerably stashed under the proverbial mattress, it’s also a conduit for city-dwelling migrants to instantly send cash back to their villages – no more “bus trip money transfers” or risky mailed envelopes filled with cash. More than ¾ of the service’s customers use M-Pesa to save. Safaricom execs say they’ll make the service ‘bigger than cash’. $20 (and falling) mobile phones are an economic lubricant empowering millions. And by 2012, 1.7 billion of the unbanked poor worldwide will have a mobile phone.

Here’s how M-Pesa works – just go to one of nearly 30,000 M-Pesa agents to perform an initial cash deposit.  To spend money – text a published account # along with the payment amount.  You’ll get a text message receipt back and your account will be deducted.  Want to receive money? It works the same way – you’ve got an account number you can share with others. Here’s a year old, but still very good video documentary of M-Pesa that faculty may want to share with class.  And another longer video produced by Safaricom.

Personal note: It was my huge honor to speak at the recent AIBUMA conference in Nairobi, where Safaricom CEO Bob Collymore also gave an address.  It’s important for those in the US and other mature economies to know that while we often see images of poverty in Kenya – slums and the rural poor – there is a vibrant, emerging economy taking root and a solid and growing middle class (African images that sadly, are still rarely seen in the west). In fact, downtown Nairobi, with its palm trees and modern buildings, looks at first glance like it might be part of downtown Los Angeles, and many of Nairobi’s modern shopping malls wouldn’t be out of place in any major US city.  I also had an opportunity to talk with students at the University of Nairobi Business School campus in the bucolic Kabete area.  There’s tremendous interest in entrepreneurship and I hastily put together a resource list of a small sampling of tech activity happening in the city. Investors  note – a July/August visit would allow you not only to check out the exciting, emerging tech scene, but also take in a Safari during “The Great Migration” – about a five hour drive away.  Combine the justifiable business expense with a family vacation!  For the curious, I’ve posted my own pics as a Google Plus photo album (I was in the Mara two nights & three days – despite the refugee crisis on the north border, there is thankfully no drought anywhere near the Mara or Kenya’s capital).  Nothing’s certain yet, but I do hope to work to create a Boston College “Tech in Emerging Markets” field study to bring our students to Nairobi, perhaps in the summer of 2013.

HomePlus Subway Virtual Store
Speaking of global tech innovation, now let’s visit S. Korea. Tesco’s S. Korean brand, HomePlus, looked to compete with much larger E-Mart without increasing the number of stores.  The solution is ruthlessly cool, as this video shows.  The firm posted virtual displays in Korean subway stations – billboards that show actual merchandise. Users shop on their way through the station, scanning QR codes with their mobile phones.  Online purchases are then scheduled for delivery when shoppers arrive home.  Mobile phones and m-commerce mean the billboard can be the store. HomePlus online sales are up 130% in three months, registered users are up 76%, and the firm snagging the top spot in online sales and narrowing the overall gap with E-Mart.

How Social Media Affects Content Relevance in Search
Google’s PageRank search results ranking algorithm is largely based on inbound links – the more websites that link to a web page, the higher that page will appear in Google rankings.  But now social media is fueling ranking, as well.  While marketers have had to scramble to master SEO this past decade, they’d best beef up social skills, too, otherwise their brands may fall off the search engine radar.  Web users now share 30 billion pieces of content on Facebook and tweet 5 billion times a month.  And about a quarter of that includes links to other content.  Although the major search engines remain secretive about the inner workings of their search rankings, the two largest search engines – Google and Bing, now fess up that search results are positively affected by social signals such as tweets, Facebook Likes, and Google +1’s. One recent study of Google results showed that “tweets and Google+ shares dramatically affected the rank of new, previously unindexed content. The results in most cases were nearly instant.”

The developments don’t just mean that marketers need a new skill – they also underscore the strategic importance of social media to Google.  Earlier this year Google was skewered in the press for having less relevant search results that were increasingly polluted by so-called “content farms” like about.com – firms that create ad-filled pages with weak content but that are optimized to rank highly in Google searches.  But social can potentially counteract those that try to game the system – likes from verifiable social media accounts and especially from your friends or those with a similar surfing profile – could help surface the links you’re likely to want most – all while bypassing the “content farm spammers”.  That’s why Google needs G+ to be successful, and why Facebook and Twitter may hold valuable trump cards in the evolution of search. Oh yes, and kindly “like” Gallaugher.com at the top of the home page, and do consider +1-ing it in Google search.

Social Power and the Coming Corporate Revolution
On a somewhat related note, David Kirkpatrick makes many points in Forbes that I share with my students (and uses many of the same examples) – Social (combined with mobile) will charge the current generation of managers to be more honest, show more humility, behave with a higher ethical bar, show greater attention to customer service, and focus more on employee satisfaction than their predecessors. And on top of that they do so with a vastly more complex business environment – one with far flung global partners, markets, and rivals. The senior manager that doesn’t understand the freight train that is mobile and social will almost certainly be steamrolled.

In A Tough Labor Market, Software Developers Wanted
“Everyone in the room wanted to talk to me”. So says a recent tech grad at a university career fair in this Curt Nickisch WBUR broadcast.  Despite the down economy, the Boston-area, and many other US cities, don’t have enough technologists to go around.  And just about every other major discipline demands more tech skills.  Marketers need to know SEO, social media, CRM, and “big data” analytics, finance folks bound for Wall Street need to understand tech to value M&A deals & IPOs, accounting firms are beefing up their tech hiring, operations can’t be rewired without tech, LinkedIn and other social media skills are the new HR toolkit, and the geeks are clearly at the strategist table.  Geek up new college student.  Your future demands it!

United’s iPad Deployment Lets Pilots Shed Excess Baggage
United Airlines, will give iPads to some 11,000 pilots.  The move allows the firm to replace the roughly 38 pounds of manuals, charts and logbooks on each flight with a single 1.5 pound tablet. Trees rejoice – the move will save nearly 16 million sheets of paper.  Even more significantly the reduced rate will also shave some 326,000 gallons from United’s yearly jet fuel bill.

March of the Tencent Penguins
Shenzhen-based Tencent may have a cute, winky penguin as a mascot, but the firm is a Goliath. Publicly traded Tencent is the largest Internet firm in China.  It has a user base about as big as Facebook’s (in the 700 million range) and a market cap approaching $50 billion (Forbes says the firm’s co-founder & CEO Pony Ma is China’s 9^th richest person).  Tencent did $3 billion+ in revenue in ’10, and earned $1.2 billion in profit. The stock is also up 5,000% since it’s IPO in 2004. Flush with cash, they’re on the hunt.  Acquisitions include a $400 million bounty paid for LA-based Riot Games (maker of the online game “League of Legends”), and they’re in greater-Boston, too (the Concord-based Tencent office even nabbed one of my former TechTrekkers as an intern). Last year Tencent invested $300 million in Russian investment firm Digital Sky Technologies, a company that has holdings in Zynga, Groupon, Facebook, and Twitter. Groupon is partnering with Tencent, Zynga is bringing its games to Tencent’s networks, and celebrities endorsing Tencent services include Chicago Bulls point guard Derrick Rose. Says Sequoia Capital’s Michael Moritz “If you are a Silicon Valley guy and you don’t have Tencent on your radar, you have to be deaf, dumb, and blind… They are extraordinarily thirsty and aggressive.”

The firm’s 11,400 employees oversee a stable of properties that include China’s popular QQ chat service, a host of games, the Q Coins virtual currency, a search engine, an e-commerce marketplace, a Twitter-like service (Tencent Weibo – pronounced “way-baw”) that has 200 million users (about Twitter’s numbers), and two social networks that combine for half a billion members – pengyou.com (Mandarin for friend) and youth-focused Qzone. Those are a lot of properties, but the bulk of earnings come from the sale of virtual goods.

Tencent rivals grumble that the firm doesn’t innovate, it just bullies its way into lucrative markets after others pioneer and show promise (“says one account, Tencent is never the first to “eat crab”—a localism meaning “try new things”). But Tencent’s success speaks for itself. Obvious success wasn’t always the case.  In 2001, South African media group Naspers bought out Tencent investments made by IDG and the son of a Hong Kong billionaire.  The $32 billion Naspers put in for a 47% share of Tencent is now worth over $16 billion,” making it one of the most profitable private equity investments of all time.” Another fun fact, many of the firm’s employees have adopted English nicknames.  BusinessWeek states the company’s internal message boards are filled with posts from the likes of “Thunder”, “Fruity”, and “Neo”.  If you find these handles online, be nice.  They might soon be your boss.

Nathan Eagle: Global Mobile Workforce
Check out this video of the PopTech talk by MIT Prof. Nathan Eagle.  Eagle is founder & CEO of txtEagle, a system that can compensate users for their input by offering them free mobile phone credits. The potential is big-impact powerful – one of Eagle’s test examples was soliciting real-time updates on blood supplies from field nurses in rural African hospitals.  Initially there wasn’t much of an incentive – nurses were effectively taxed for texting blood bank status because their personal phone accounts were charged for airtime (and this can represent a sizable chunk of a rural nurse’s income). But Eagle’s system offered modest cell phone usage credits in exchange for nurse input, and the result was a huge spike in the response rate – Tech for Good in action! txtEagle has since built a compensation platform that’s integrated into the billing systems of 220 mobile phone operators in 80 countries, providing access to roughly 2.1 billion mobile phone users. Among the ideas is pay-per-survey market research that can help brands understand their next 2 billion consumers.  Says Eagle, “This is a massive hammer & I’m still looking for nails.”  Seems the venture community thinks those nails are out there – Eagle raised $8.5 million for the effort earlier this year.

Eagle’s talk also offers examples of how mobile phone data can inform development. For example, geotargeting usage patterns reveals how a previously silent population lives, and can inform things like the placement of sanitation infrastructure, schools, clinics, the organization of labor markets, and more. And as phones get smarter and cheaper, look for richer opportunities. There are 2x more people online in the so-called developing world than in industrialized nations, and cheap Android phones grease the wheels of commerce & opportunity.  While it’s great that my students have Eagle in their own backyard, some of the most exciting innovation happening in emerging markets is led by locals.  Forbes chronicles how mobile phones are transforming commerce in Africa (led by Kenya’s Safaricom and the M-Pesa effort), and Visa decided it needed some S. African innovation, plunking down $110 million for mobile financial services infrastructure provider, Fundamo.  In roughly the last half decade or so, I’ve seen my American-born students go to work for Asian giants like India’s Infosys or China’s Tencent.  It’s only a matter of time before firms from sub-Saharan Africa start recruiting on The Heights. I’ve got a lot to learn but am thrilled I’ll have a chance to learn more as I travel to Nairobi later this month.

When Patents Attack
This podcast from NPR’s This American Life exploring absurdities in the U.S. Patent system is fascinating, entertaining, and downright scary.  Some background: most folks understand why we have patents.  Inventors who come up with a “useful, novel, and non obvious” innovation should be able to protect their creation from being copied by a larger, better resourced giant that can steal an idea before the little guy can make a market. This kind of protection should be a catalyst for innovation.  But drawing the line between something that should be protected and something that shouldn’t is up for big-time debate.  I often share with my students some examples of the more ridiculous ideas that have previously received U.S. patents, including: a method for exercising a cat with a laser pointer, a method for swinging on a swing (awarded to a five year old), and a method for a comb-over (as a bald man myself I’d like to see them try to enforce that one). There’s even a patent on toast (U.S. Patent No. 6080436 – a thermal “Bread Refreshing Method”). But beyond cases of patent craziness, should business methods be patentable? For example, should Amazon.com have been awarded a patent for the one-click ordering method (portions of which have now been overturned)? Should software be patentable? Is it ‘just math’, or a resource-intense invention akin to biotech that needs legal protection to incentivize innovators?

This American Life’s broadcast takes us to the offices of Intellectual Ventures (IV), run by former Microsoft Chief Technical Officer Nathan Myhrvold (whose side projects include the high-tech $625 “Modern Cuisine” cookbook). Myhrvold’s firm has been accused of being a ‘patent troll’ – a firm that buys up patents, then exploits these rights not by innovating, but by demanding payment from others.  Intellectual Ventures claims it helps foster innovation by protecting and providing value to the small-time innovator.  But in tracking one of the ‘success stories’ IV pointed reporters to, This American Life uncovered some 1,300 shell companies owned by Intellectual Ventures, many of which were involved in aggressive patent litigation.  The TAL reporters take us to a corridor of empty offices in East Texas (an area favorable to defenders in patent cases) where many of these shells are “headquartered”.

One of the problems with the current patent system is that issued patents seem to cover just about anything.  As TAL says, if you’re a firm doing something online – you’re probably violating someone’s patents.  So today many “tech companies use software patents as offensive and defensive tools to battle one another, or to make money, or both.” Is this defense of the little guy?  A few months of patent litigation can sink a startup.

Moves involving some of the world’s largest tech firms underscore the amount of money brought to the patent war arms race.  A recent auction of Nortel patents fetched some $4.5 billion – double what many were expecting.  The winners were a consortium that included Apple, Microsoft, RIM, Sony, and Ericsson.  An opposing bidder – Google. That $4.5 billion is a sunk cost that doesn’t make your product any better.  Google may have missed out on Nortel’s patents, but it recently bought more than 1,000 patents from IBM, covering things such as systems and methods for Web-based querying, and ranking and retrieving documents. Google is also rumored to be in the hunt for InterDigital, a firm that holds many mobile patents (some $3-$10 of the cost of an iPhone goes to the firm), and which some speculate might fetch in excess of $5 billion.

And in an interesting back and forth (that shows the role social media is playing in legal battles), execs at Microsoft and Google have sparred over their patent bidding.  Google claims the consortium is ganging up against the Android-powered powerhouse.  But Microsoft execs have tweeted & blogged that the firm wasn’t excluded at all – it actually invited Google to be part of the consortium! Daring Fireball’s John Gruber asks: “How is Google’s argument here different than simply demanding that Apple, Microsoft, Oracle, et al should simply sit back and let Google do whatever it wants with Android, regardless of the patents they hold?” TechTrek friend Andy Kessler lists patent reform as one of the things the government can do to jump start job growth. Does congress have the will and ability to tackle reform? The health of our startup culture may depend on it.

Portrait of an Incubated Summer
It’s great to see the co-winner of the 2011 Boston College Venture Competition get some coverage from Inc. Magazine! As readers of the Week in Geek may already know, the venture formerly known as AddItUpp went on to gain admission to the fiercely competitive Highland Capital Partners program, Summer@Highland.  Now renamed Jebbit, the pay-for-attention ad effort is the youngest team in Highland’s coast-to-coast mentorship effort (some Jebbit members were admitted to the program while just sophomores – the technical lead was a freshman).  The teams in Summer@Highland get killer coaching, from rock-star partners (two are BC alums), execs in the firm’s A-list portfolio firms (we’ve got Eagles there, too), and others.  If you’re an entrepreneur, be sure that Summer@Highland 2012 is on your radar.

Social Media History – The New Job Hurdle
A must read for students and employers! Students, beware what you post! A year-old start-up, Social Intelligence, scrapes the Internet for everything prospective employees may have said or done online in the past seven years.  It’ll scout out your upside – honors and good deeds, but also hunt for the bad stuff: racist remarks, drug references, sexually inappropriate posts, and identifiable violent activity including displays of weapons or bombs (yikes!). Social Intelligence reports have gotten past initial FTC concerns. Job candidates must consent to the background check, and are notified of any adverse information found. Reports also remove references to a person’s religion, race, marital status, disability and other information protected under federal employment laws. But those doing the hiring should be careful, too!  Warns one EEO Commission manager “Things that you can’t ask in an interview are the same things you can’t research,” such as information on a person’s age, gender, religion, disability, national origin and race.”

Commentary: This is a key issue – we warn students about employer searches all the time, but who’s warning the employers that social search done poorly could prompt a lawsuit? And screening is happening – 75% of recruiters are required by their firms to research candidates online, and 70% of U.S. recruiters report they’ve rejected candidates because of what was found online.

For job seekers, if you’re not responsible online, then fear your Facebook.  But there is an upside in a world where social media is the new resume – you can distinguish yourself as someone who’s smart, knowledgeable, curious, has something of value to say, and can attract a following. In fact, in some fields you can be screened out if you’re not active on social media. One VC recently told me that the firm wouldn’t seek out interns through college recruiters.  If someone didn’t catch the recruiting announcement on Twitter, then they weren’t working hard enough to become an industry player.  This isn’t all that new.  When I was in industry I’d regularly ask technical candidates ‘how do you learn?’ In those days alpha-geeks used Compuserve (yes, I’m old) or similar resources to vault a learning curve and avoid reinventing the wheel. Today technical recruiters should expect deft applicant use of Stack Overflow, Quora, and kin.   Also be smart and consider that your future coworkers will likely spend more time with you than their spouse & family. If a portion of what you share online is snarky gossip or grumbling, hyper-partisan political diatribe, or blowhard prognostication, then your social-self is recruiter repellant.  You may be really nice ‘in person’, but social media is the modern first impression.  Don’t blow the show.

Why Netflix Raised Its Prices
One of the cases in my book is on Netflix, and big changes are afoot!  Reed Hastings has essentially recast Netflix into two businesses – DVD-by-mail and streaming over the Internet, each operating with a distinct management team and subscription plan, but both under the Hastings-led Netflix umbrella.  DVD-by-mail is still wildly popular, but earlier this year the splash screen at Netflix.com dropped all mention of discs.  The flagship product is now unlimited streaming (priced at $7.95).  Want a disc-at-a-time subscription plan with that? It’ll cost you another $7.95.  A single subscription for the combined service used to cost customers just under $10, so the change prompted many to flame the firm. Overnight the Netflix Facebook page was bombarded with 44,000 angry posts, Twitter trended with the #DearNetflix hash tag, and the New York Times’ David Pogue called the move “a 60 percent overnight price increase — that gives you nothing new in return.” It’s a risky transition, but Hastings has framed it as a cost issue, claiming that if people are going to use both DVD-by-mail and video streaming services, then Netflix will need more money to support the very different costs associated with both businesses. Gripesters take note – PC World pointed out that even with the price hike, Netflix still represented a far greater value than any of the available alternatives. And Netflix is a firm that regularly models customer churn and has almost certainly run numbers on the risks and benefits of the pricing change.

There are pros & cons in this atoms-to-bits shift.  Mail charges drop (the firm represents 20% of U.S. first-class “flats” and 1.7% of all first-class mail revenue).  And eventually Netflix may be able to close some of its 50+ distribution centers. But the firm’s long-tail DVD inventory has a much shorter streaming tail that lacks many first-run titles (could be a boom for Redbox). DVD acquisition is also largely a fixed-cost proposition (the Supreme Court ruling known as the “First Sale Doctrine” allows any firm to rent out physical discs it purchases), but “First Sale” doesn’t allow for digital streaming. This leaves Netflix vulnerable as streaming licenses continue to rise.  Netflix gained access to Sony and Disney titles through a deal with the Starz cable network, but analysts think the renewal of the Starz deal may cost Netflix 10x the original price.  And licensing has all sorts of inconsistent provisions.  Sony titles were pulled when a viewing cap on streaming Starz content was exceeded, and some titles are pulled when cable networks bid for exclusive ‘viewing windows’. Others (notably HBO) refuse to share their content. And while in the atoms world a failure at one distribution center allows the others to pick up the slack, the bits-only side of Netflix has seen repeated failures in its bits streaming infrastructure, resulting in multiple service outages. The skeptic sees Netflix straddled between two businesses without getting the full efficiencies of a pure-play.  The Netflix-bull sees the firm’s size and ecosystem (you can now stream Netflix on over 200 consumer electronics devices) as insurmountable competitive advantages.  And look for Netflix to try to grow that scale even more.  The firm has announced plans to expand to an additional 43 countries (streaming only, of course).  And for those teaching the Netflix case, there’s one more tidbit you might want to mention to your students – Reed Hastings is now on the board of Facebook (a nice addition to the role he already enjoys on the Microsoft board).

Google+’s Circular Logic
There’s also big news relevant to Google (another case in my book), too.  Google’s success in social media has been mixed.  Its two biggest successes – YouTube and Blogger – were both acquisitions.  Internally-developed Orkut has for years ranked as the top social network in Brazil but has limited success in only a few other nations; and Google-hatched Buzz and Wave were both dismal failures.  But with Google+ the firm may have finally created a hit (says one manager of the launch ‘This could scarcely have gone better“).

The multifaceted service rolled out as an integrated collection of social products associated with a user’s Google profile (here’s my profile – feel free to follow). Stream is a newsfeed, Sparks is a recommendation engine, Hangouts is a video chat service that can support groups, Huddle offers group texting, Circles helps manage sharing contacts (so you can share a given item with just ‘friends’, ‘business contacts’, or any other sharing circles you want to create) and Photos is an image sharing service that leverages the firm’s Picasa offering.  Novel features are layered on top of elements similar to those found in Facebook, Twitter, Tumblr, Skype, and Group.me.  And initial Google+ features are just a start – the firm has promised to add Games, Questions, services that allow businesses to get in on the socializing, and more. Mashable offers a Complete Guide to Google+, with links to ‘how to’ videos.

Learning from earlier failure, Google+ got a lot of things right.  The interface design was praised (Andy Hertzfeld, a member of the original Macintosh design team, was behind design efforts), and the new features were tightly integrated with other Google products.  A toolbar that runs on top of most Google services means that Google+ is just a click away (but bad, if that creates a ‘bundling’ concern that Google favors its own products over rivals – think Windows/IE/Media Player anti-trust rulings).  Circles were easily built from Gmail contacts. The big upside is control that makes Google+ “as good for a whisper as it is for a shout”. Circles potentially gives you the best of Facebook & Twitter – sharing isn’t reciprocal (when you post you specify whether it’s viewable by the public, or only by select circles), you can follow whoever you want, and you’re not limited to the 140 Tweet limit. The downside? Fragmenting the market. I already post to Twitter, Facebook, and LinkedIn.  Unless a service like TweetDeck comes along that adds easy G+ posts side-by-side with these others, then there’s gonna be a shakeout.  Google+ will need to build its user base fast if it wants to last – a tough task but the rollout promised a contender.  Despite being launched only in invitation-only beta, Google+ attracted some 10 million members in just its first two weeks, making it the fastest growing social network of all time. Michael Dell has hosted over 22 Hangout video chats, Mark Cuban is a Google+ posting fiend, and even Mark Zuckerberg has a G+ account!  That’s a great start, although still far behind Facebook and Twitter.

Look for Google to recruit friends to build the platform.  It’ll offer social game firms more favorable rates than Facebook, which takes 30% of sales and has a cushy relationship with Zynga (Google’s in-app payments ask for only a 5% cut, although it isn’t clear if this’ll be the G+ rate). Google will also host games, allowing game makers to save on infrastructure costs. Oh yeah, and while Facebook & Zynga are close? Google is also a major Zynga investor. If Google+ is a hit, the firm could gain an opportunity to serve more ads, grow additional premium services (a game currency, fees for increased photo storage), and gain additional data and insight that can be used to help in search, content recommendations, and ad targeting. Competing in winner-take-most markets where network effects dominate will be tough, but Google brings a number of assets to the table (think size, scale, brand – hundreds of millions of people with Google user names and passwords, an army of Android smartphone users) and seems committed to growing the effort. Earlier this year CEO Larry Page stated that Google will tie employee bonuses to the success of the firm’s social efforts. For an insider’s look at the making of Google+, see this piece from Wired by “In the Plex” author Steve Levy, who researched his book but remained mum during the service’s development.

Apple Blows Past Estimates
In the days before the iPhone launch, Boston College alumnus Phil Schiller gave my students a master class in Apple marketing, then days later invited the group to VIP seating for Steve Jobs’ keynote.  That day we watched tech-industry history unfold.  The iPhone business is now half the revenue of the second most valuable company in America (see chart). The iOS-based iPad, not yet two years old, is a $6 billion business, that’s not just bigger than the Mac at $5 billion, it’s at a run rate that last year would have put just the iPad business at the edge of the Fortune 100. Mac sales (already growing far faster than the industry) were up 14% over a year ago. Revenue is up 82%, and profits up 125%. The firm’s cash balance of $76 billion is greater than the market cap of more than 40 of 2010′s Fortune 100 companies. The once left-for-dead firm is not only huge, it’s growing faster than most rivals – something the law of large numbers says shouldn’t happen.

The innovation continues.  Apple launched new products this week (a refreshed MacMini and Macbook Air), and OS X Lion.  The operating system was disc-less – it could ONLY be purchased online.  Apple sold a million copies in the first 24 hours. Between Apple and Netflix it’s clear that plastic discs are dead.  Accounting students may be interested to note that Apple has deferred some revenue related to software/feature upgrades so that it can legally roll these out without having to charge users (that’s accounting to fuel tech feature adoption).  And one bit of wacky news.  While Chinese firms are notorious for counterfeiting Apple products, it seems they’re now counterfeiting Apple stores, too!

Cyber Weapons: The New Arms Race
A slideshow in BusinessWeek’s cyber warfare cover story seems designed to make you lose sleep (sample: researchers hack into a moving car’s standard onboard systems to disable brakes, stop the engine, and control other functions). The perps in recent actual cyber attacks vary but its becoming increasingly clear that cyberwarfare is escalating worldwide. The feel good story of the year (mentioned in the last Week in Geek) involves Britain’s MI6 replaced an Al-Qaeda bomb-making recipe with one for granny’s cupcakes.  But the real watershed is Stuxnet (see this excellent Stuxnet video primer, and check out the Stuxnet crib-sheet).  Called ‘the most sophisticated cyber-weapon to date’, Stuxnet (allegedly launched via a U.S. and Israeli initiative, but never confirmed) infiltrated the Iranian nuclear program, instructing centrifuges to spin until they destroyed themselves.  Alarm systems were re-programmed and monitoring systems were sent messages that everything was OK, even as hundreds of pieces of physical equipment were breaking up.  To be clear, this wasn’t the familiar bits-only damage that most virus victims are familiar with – Stuxnet destroyed real, physical systems.  Expect more. The U.S. is building up the Fort Meade CyberCommand, and Obama has signed executive orders giving a military all-clear to use cyber weapons for a range of tasks from espionage to (with a further presidential directive) the crippling of an enemy’s electrical grid.

We might feel good that a nuclear threat was set back, especially when the alternative shut-down option would have been open-conflict, heavy bombing, and almost certainly human casualty.  But there’s now a fast-growing, venture-funded economy of cyber arms-merchants peddling offensive tech.  E-mails from the shadowy Atlanta-based firm, Endgame, were uncovered when the hacker group anonymous hacked a prospective client.  The e-mails detail a price list for offensive cyber tools and suggests that a menu of push-button hack attacks are now being peddled to customers other than Uncle Sam. “A government or other entity could launch sophisticated attacks against just about any adversary anywhere in the world for a grand total of $6 million. Ease of use is a premium. It’s cyber warfare in a box.”

The cyber arms merchant business is a wild west with unclear rules and frightening dynamics.  The ‘weapons’ are digital goods with no marginal cost – meaning an infiltrated ‘armory’ can be duplicated (perhaps without detection), and ‘deployment’ happens online. Got a PC, skills, and a broken moral compass? You could be an arms merchant and munitions factory all in one. Of course, the weapons themselves are considered to be ‘brittle’, since countermeasures can often be developed quickly once exploits are discovered (Stuxnet used at least four “zero-day” exploits that had been previously unknown and indefensible).

The past few months have shown worldwide vulnerability of even some of the most sophisticated organizations. The Pentagon was hacked this summer.  The attacks perpetrated against Google (dubbed “Operation Aurora” by McAfee) are ‘conservatively’ estimated to have infiltrated an additional 2,000 firms including Adobe, Juniper Networks, and Morgan Stanley.  The hacking raid on security firm RSA (also mentioned in the last WiG) nabbed code from SecureID tokens (a product used by U.S. government agencies, defense contractors, and major banks). BusinessWeek describes the hit as the equivalent of “breaking into a heavily guarded locksmith and stealing the master combination that opened every vault in every casino on the Las Vegas Strip.” There was also a 10-day attack on S. Korean computers in March took out thousands of machines (North Korea is suspected as the source).  Cyber security is clearly every employee’s priority.  See our security chapter for a primer on vulnerability and an overview of security measures (and look for an update, soon).

Millennials Make Millions
Faculty, here’s some inspiration to share with your students.  A few years ago Catherine Cook spoke to my undergraduate Computers in Management core class (Cook is also mentioned in the first chapter of my book).  I invited her to speak because she founded the successful social networking site, myYearbook.com, when she was just a sophomore… in high school! By 2008, myYearbook had grown to become the 15 most popular websites in the country, sporting more page-views than ESPN or Amazon. This summer myYearbook was sold to Quepasa, a social network targeted primarily to latinos  The price? $100 million.  That’s roughly three times what Newscorp got when liquidating MySpace.  Not bad for a woman who just graduated from college herself.  Congrats, Catherine!

WePay: BusinessWeek’s Best Young Tech Entrepreneurs
Pardon me for a prof’s point of pride, but it’s a real thrill to share the success of my former students.  I hope it inspires others! It’s been a pretty great summer for TechTrek alum Bill Clerico and his BC classmate Rich Aberman.  The duo were named to the prestigious BusinessWeek Best Young Tech Entrepreneurs list, TechCrunch crowed about their continued growth, and they’ve staffed up (they’re now 33 employees strong). The firm continues to offer a slick solution for groups to collect and spend money (nag deadbeats, collect funds in an FDIC ensured account, handle payouts, and expose a fraud-busting audit trail). But they’ve also moved into donation collection, ticket sales, and now store fronts.  Launch day included coverage from Forbes, Mashable, TechCrunch, Fast Company, VentureBeat, and they were the lead story on my favorite tech news digest site Good Morning Silicon Valley. The new service looks like a winner, charging a straightforward 3.5% fee , compared with: Yahoo Stores (cheapest plan: $40 per month + 1.5% fee + 2.9% paypal fee + .30), Shopify (cheapest plan: $29 per month + 2% fee + 2.9% paypal fee + .30) , and Etsy (3.5% fee + 2.9% paypal fee + .30)  (plus a 10 cent listing fee for every item). We remain hugely proud of Bill, who has gone from student to one of TechTrek’s hosting CEOs in less time than it takes most students to finish an undergrad degree. And co-founder Rich Aberman wowed BC TechCouncil West (and my undergrad students) during our May Palo Alto meeting.  Congrats to Bill and Rich on their continued success!

Why Not All Earnings are Equal – Microsoft has Wal-Mart Disease
Here’s an insightful article highlighting the perils of stalled growth, a concept we introduce to our freshmen in their first course in management (see the strategy section at the end of the Google Case).  Citing a Conference Board study, Adam Hartung in Forbes writes: “When a company hits a growth stall, 93% of the time it will be unable to maintain even a 2% growth rate. 75% of the time we can expect it will fall into a no growth, or declining, revenue environment.  And 70% of the time it will lose at least half its market capitalization.” Ouch! And Hartung argues that Microsoft is struggling to find any reliable growth prospects to move the stock needle north.  To be sure, the firm is wildly profitable and mints cash.  It has $29 billion in just its offshore accounts. But all that cash with lackluster growth caused the firm to begin issuing dividends last decade (pretty much unheard of for growth-oriented tech firms).

Commentary: In its quest for new, multi-billion dollar markets Microsoft has found one in entertainment.  Fueled by the Kinect (the best selling consumer electronics product of all time), the entertainment division had a nearly $2 billion Q3.  But look at Bing and the results are grisly. BusinessInsider claims that Bing spends $3 for every $1 it brings in, and that losses are on a $3 billion a year run rate. Bing and Facebook have strengthened ties, with Facebook content and friends now influencing Bing results.  This could be a significant alliance (Google doesn’t have access to the ‘dark web’ of content hidden behind a Facebook login, but now Microsoft does).  However its unknown if adding Facebook’s punch to Bing will be enough to get users to kick the Google habit.

Microsoft’s recent purchase of Skype has lots of potential synergy. Merging Skype with Kinect would make home TV-based video calls a reality.  Skype is a nice branded feature to bake into the struggling Windows Phone platform (which will soon show up on all Nokia smartphones soon, a move that cost Microsoft $1 billion).  And keeping Skype’s 663 million accounts out of the hands of Google, or another rival, may also prove a savvy chess move (the prospect of a Google-owned Skype linked to Android, Gmail, and search ads may have been too much for Microsoft to stomach). Neat synergies, but profits are uncertain. Skype brought in about $860 million in revenue last year, but no profits.  And Ballmer’s shop plunked down serious coin in what is now Redmond’s largest acquisition ever -  $8.5 billion, about 3 times what Skype was valued at when it was spun out of eBay just 18 months earlier. With Skype inside Microsoft, the world’s largest software firm becomes the world’s largest international long distance phone company (by usage). Whether these moves are enough to help the King of the PC grow in a post-PC world remains to be seen.

Not All Revenue is Created Equal: Key to the 10x Revenue Club

Revenue analysis was a hot topic recently and this is also a really great read.  Benchmark’s Bill Gurley offers a great, example-filled listing of the key factors contributing to justifiably high valuations.  I’ve also got to admit a bit of pride that so many of these themes are covered in our intro course and textbook, including factors for sustained competitive advantage, network effects, switching costs / lock-in, churn, capex, viral customer acquisition, SaaS’s revenue model & business impact, scalabilty and margins and more. While b-school bashing is often in vogue, our students should feel really good about our focus, breadth, and the validation our programs regularly receive when positively compared against what thought-leaders find important.

The Internet Bubble
The Atlantic sums up an excellent infographic put out by G+, calling out a bunch of factors that suggest we’re in another bubble.  The 3x accrual in Skype’s valuation over 18 months was mentioned above, but also consider LinkedIn’s brief flirtation with a $10 billion valuation despite yearly profits of $12 million (PE as of this writing – above 1800 vs. the historical 15!).  The PE for Pandora (not on the infographic) is non-existent – no profits.  But it had a post-IPO value of $2.6 billion. Profitless two-year-old Groupon is planning an IPO that may value the firm at $25 billion. The deals site turned down Google’s $6 billion offer earlier this year.  And the site violates one of the growth tenants mentioned in the earlier article – it requires lots of human capital to scale.  Groupon will soon have an editorial staff bigger than the Chicago Tribune (or any Midwest newspaper), and it’s staff of 8,000 employees (half of them sales) is several times larger than profitable and revenue-rich Facebook. A recent NY Times profile of the photo-sharing app Color paints it as a sort of Webvan-esque failure, raising a shocking $41 million in Series A funding. Color’s 38 employees inhabit a space sized for 120 that includes a custom-built half-pipe skateboard ramp. Most see Color as a failure (should have read our Network Effects chapter before the launch).  By contrast, the far-more-successful Instagram raised just a bit more in total funding than Color spent on just the domain names Color.com and Colour.com, and runs with a staff of just four full timers.  Anyone who lived through the dot-com bust (one of the Computer.com guys, of 2000 SuperBowl fame, was one of my students) can recognize the signs. For a laugh be sure to check out Scott Kirsner’s “Bubble? What Bubble?” look back from Jan. 2013!

Commentary: But another side of this market shows valuations below historical averages, or that are not at all reflective of growth.  Microsoft (despite concerns mentioned above) has recently traded at a paltry 9 PE.  That’s about where Intel is, too.  Now, Intel has threats with rivals’ power-sipping ARM-based server chips threatening its high-margin big-iron business.  But both of these firms gush cash and are solidly and consistently profitable.  But the most shocking is Apple – a firm that grew revenues and earnings by over 70% last year, but which is still only slightly above the historical PE of 15.  Does the market really think (as one analyst puts it) that Apple won’t grow any more? So what we’ve got in the tech sector is a real anomaly.  It looks like a mottled market with big patches of both bubble and value.  Buckle up – tech can be wildly cyclical and it looks like we’re in the midst of the market equivalent of the Tacoma Narrows Bridge footage.

Why Content Isn’t King (and Netflix Rules)
Great piece in The Atlantic that complements why we teach Netflix as one of our first strategy cases.  Sure the stock is likely overvalued now, but the real point is that many predicted the firm would fail, yet Netflix has built real, durable assets for competitive advantage. “The dirty little secret of the media industry” is that content aggregators, not creators, create the most value.  Think cable channels: they simply aggregate old movies, cartoons, or television but put up margins several times greater than the studios that created the content.  How come? Distribution scales (fixed costs spread across multiple customers), customers have switching costs (with Netflix it’s queue, Cinematch, learning comfort, and habit-forming use).  Now think about studios.  Aside from sequels, do you really feel compelled to return to a Fox movie after watching one Fox hit? And what if the studio creates a superstar from their talent? A bidding war ensures that actually raises costs for the next risky, hoped-for blockbuster.  No – making movies is not a good business.

But the case for Netflix as distributor is even better.  While cable channels serve customers through cable providers, Netflix has a direct customer relationship, which it uses to gain feedback, tailor results, and serve with award-winning service.  While cable firms rank 18^th of 19 industries ranked by J.D. Power, Netflix is tops in customer service and recently even beat Apple in the 528 firms listed in Brand Keys’ survey of customer loyalty.

The author of the piece, Jonathan Knee, an iBanker and Media Program director at Columbia’s B-School, echoes key points we’ve taught our students for years: “Netflix’s ability to spread the fixed costs of content, marketing, and technology across a subscriber base vastly larger than any other competitor’s is continually reinforced by superior customer service, a powerful recommendation engine, and a great, habit-forming product.” Shockingly, so many don’t see the underlying strategic dynamic.  The investor Whitney Tilson wrote a “7,000 word” piece arguing for his huge bet against Netflix, and then scrambled to cover his short position after NFLX reached another new high. Wedbush analyst Michael Pachter once called the firm a “worthless piece of crap” and  put a price target of $3 on NFLX (at the time trading around $11).   A poster with Pachter’s photo and the “piece of crap” comment now hangs outside a kitchen at Netflix, and as of this writing NFLX trades above $250. Let’s repeat, the stock (with a PE above 70) is expensive and it’s likely that it will come down. And there are many hurdles to overcome.  Cable companies are trying to throttle streaming (Netflix is now the single largest source of Internet data traffic in North America and that telcos want to meter that traffic).  And negotiation for streaming content is a tough business, with some cable channels locking out Netflix during distribution windows, and others (HBO) refusing to play at all (look for even more coverage in our updated Netflix case due by August)  But here’s another scenario to consider: Fortune recently argued that Microsoft should buy Netflix and make Reed Hastings the firm’s CEO.  Hastings is already a Microsoft board member, Microsoft needs to strengthen its media strategy, and prior to Netflix, Hastings had already built and sold one of the 50 largest software firms. Netflix has a market cap of $13 billion and Microsoft would need to pay a premium, but Redmond is one of the few firms with the coin to pull that off.  Keep that scenario in your queue.

Hackers & Thieves, A Growing Web Menace
The Privacy Clearinghouse says that in 2011 we’ve had over 251 reported computer breaches involving the theft of personal information as of June, up from 234 in the same period last year. But given the headlines, you’d think the problem was much worse. Citigroup recently reported that the credit card numbers of some 200,000 customers had been compromised. A hack of Sony’s Playstation network exposed the personal records (and in some cases the credit card numbers) of about 100 million account holders. A subsequent Sony hack led to the posting of 54 megabytes of Sony’s developer source code and internal network maps of Sony BMG. Earlier this year a breach at database marketer Epsilon exposed the e-mail accounts of millions.  If you were a customer of Chase, Bank of America, Best Buy, TiVo, or a handful of other firms them you almost certainly got a warning message about this last spring.  Infected computers in the Massachusetts Executive Office of Labor and Workforce Development have put at risk the personal information of some 210,000 state residents.  Some hacks do get a laugh – like the bogus posting on the compromised PBS Newshour site that Tupac and Biggie Smalls were alive & living in New Zealand.  Others are far more serious. In March one of the most respected names in security technology, RSA (a division of EMC) was hacked.  Stolen data allowed the bad guys to spoof the firm’s SecureID login systems and infiltrate RSA clients that included defense contractors Lockheed Martin, Northrop Grumman, and telecom firm L-3. In an unrelated event, what was described as a “very major breach”, the International Monetary Fund was infiltrated, with private e-mails and documents compromised. Google also went public this spring with yet another accusation of major hacking initiative within China which was apparently targeted at opponents of the Chinese government.  Expect more.  Says a member of the House Committee on Intelligence, the current attacks will “look like amateur hour compared to what’s coming in the next decade… We’re not moving fast enough to close the vulnerability.”

So who’s doing this hacking?  A diverse group of actors.  The Sony breach allegedly came from members of a hacking group that is said to be motivated more out of protest and mischief than theft-for-profit (a 19 year old was among those arrested in the case). The Boston Globe suggests that gangsters are also moving on from credit card theft to markets for stolen corporate secrets, given that widespread hacks have flooded the market with credit card numbers, causing a hundredfold drop in the street value of a stolen card. In Google’s case, it may very well be that China that went after the firm’s account holders (China has confirmed it has a cyber warfare unit but says it’s for defense only). The West hacks, too – from Stuxnet’s takedown of the Iranian enrichment program to (my personal favorite) Britain’s MI6 replacing of an Al-Qaeda bomb-making recipe with one for granny’s cupcakes. And it doesn’t help that systems are becoming more connected, more complex, and increasing the opportunities for sloppiness to slip through.  For example, are you one of the 25 million Dropbox users?  Well, TechCrunch reports that your files were exposed to the world “passwords optional’ for about four hours on a recent Sunday.  Managers – learn the issues associated with security and make them a priority.  Here’s an accessible primer – the security chapter in our textbook.

The Startup Genome
An interesting, if controversial, attempt by the team behind the business accelerator BlackBox attempts to identify factors associated with successful startups.  The hope is that a “Startup Genome” can be mapped in ways similar to Pandora’s mapping of the music genome.  Key findings from the team’s first 67 page report are summarized in the TechCrunch post above, the full report is at http://startupgenome.cc/, complete with the requisite infographic.

Making Boston More Awesome for Young Entrepreneurs
The Boston Globe recently ran a collection of pieces anchored by The Road To Awesome, which examined the factors that make a region attractive to the young & talented.  Curiously, the often-cited costs and government efforts seem not to have much of an impact.  The piece includes a collection of essays by the young and tech-savvy with exposure to ‘tech hip’ locales in Silicon Valley & NYC, and it’s loaded with Boston College connections.  The Globe’s Scott Kirsner mentions WePay and thredUp (both Bay-area ventures started by BC alumni).  And the essays include contributions from BCVC ’10 winners Shahbano Imran & David Tolioupov (who also founded LocalOn in San Francisco), BC MBA ’11 Student Courtney Scrib (who attended BC’s TechTrek West & TechTrek NYC), and recent grad Andrew Boni, who helped lead BC’s IS Academy, was a participant in Valley-based TEC, and is headed to Google’s Mountain View HQ). All were former students of mine. Be sure to check out the slideshow featuring many of our alums!

I also offered my own thoughts on ‘Making Boston Awesome’ in a blog post.  I can’t take credit for it, but one of my recommendations was for Boston Magazine to celebrate one young entrepreneur, in particular, and it was nice to see a Boston Magazine story on SCVNGR’s Seth Priebatsch appear a few weeks later.  Now if we can just get those other requests I made come true…

Video: BC Minute – The Boston College Venture Competition
For those interested in the Boston College Venture Competition, here’s a brief & very slick “BC Minute” video. And here’s a Deeper Look at the 2011 Boston College Venture Competition Finalists from Bostinnovation. Particular congrats to AddItUpp, which won an additional $10k grant as part of the selection to participate in Highland Capital Partner’s ultra-competitive Summer@Highland program, to MogloApps, which has launched their location-based game in Apple’s App Store, and to LeaseDash, which is a finalist in the MassChallenge (as a testiment to their entrepreneurial chops, know that members of this team also took the MIT $100K Executive Summary Competition with a previous idea called CityPenguin – since discontinued due to changes in the Twitter API).

Apple’s AcademiX Conference 2011
I was hugely honored to have been asked to give one of the 8 presentations at Apple’s AcademiX 2011 conference.  Apple’s “TED for Ed.” was held in four locations and simulcast to an audience of 2,000.  Speakers a med school dean, a law school dean, and a former ambassador – all talking about how tech has impacted their work.  If you’re interested in the role of social & mobile in higher-ed, my talk was titled “Mobile & Social: Higher Ed Rocket Fuel”, and it can be streamed via the above link.  It was great to see BC’s efforts given exposure!

●     ●     ●     ●

Oh yeah – and I’m headed to Nairobi to give a keynote talk in late August.  I’d love to hear from anyone with experience / advice for a first-time Kenya traveler.  I’m also very interested in researching what we at BC call “Tech for Good”, the use of information technology to empower developing regions, and want to keep this in mind as I travel, too. Any thoughts / suggestions / comments are most welcome.  Thanks!