The Other Side Of Open | TechCrunch

The link above leads to a post by TechCrunch’s MG Siegler about the perils of the open Android OS to Google: major competitors will hijack Android by building their own version, and then lock Google’s services out. MG observes that Amazon is starting to do this: the Kindle Fire redirects attempts to go to Google’s Android Market to the Amazon App Store. Facebook is rumored to be working on an Android-based Facebook phone. Both Amazon and Facebook have search ambitions. And, MG points out that Windows, to which Android is frequently compared (e.g., by me), was never open: it was completely controlled by Microsoft and could notbe hijacked or otherwise copied.

Photo via: Tech Crunch

Android really is much more open than Windows, although not 100% open: key Google services for Android, including the Android Market, Maps, and Nav, are part of an additional package called Google Mobile Services that Google licenses at its discretion. And Google held back the open source for the v3.x “Honeycomb” OS release for nine months. But, Android is open enough that competitors are taking the ball and running with it. IMHO, that is the acid test of “open”.

The openness of Android is creating real competition at the platform level, similar to SQL or TCP/IP. That’s exciting, and those comparisons suggest that a truly open standard does not necessarily prevent a strong market leader. It does indicate that the rate of investment and innovation in the Android platform will be very high, and competitors will explore different strategies. That will make the ecosystem as a whole bigger and more powerful. Google will lose some share and control, but the slice they keep will be from a bigger pie, and the chance for any other platform to succeed, like Windows, will be much smaller. And even if it is not wired in to every version of Android, Google can compete for opportunity on (most of) the Android platform, by offering better products and services, just as it has done successfully with its Chrome browser (this post is written on a Mac using Chrome).

The story of Android tablets in 2011 illustrates this. Google did a Microsoft: it closed Android temporarily and worked with a half-dozen favored OEMs to develop a tablet OS that would contend with the iPad. It was only partially successful: Apple will sell about 39 million iPads in 2011 versus 7-8 million tablets using the new Android tablet OS (v3.x). Amazon and B&N ran with Google’s ball and developed low-price tablets based on Android 2.x; they will sell about 6-7 million this year, and Amazon’s Kindle Fire looks to be the Android best-seller. And, a host of less known companies will sell about 10 million Android tablets, many/most low-priced ($100-$250 retail) units based on Android 2.x. Amazon/B&N have opened a new segment of the market, and lots of other competitors are flooding in. Next year, with Android 4 (Ice Cream Sandwich) openly available and new CPUs and Chinese ODMs entering the market, this segment is set to explode. Amazon may lock Google out, but the other Android competitors will be delighted to have Google services on their products. The open ecosystem delivered success even as Google’s own product strategy sputtered.

I am not sure on what day last year this occurred, but the smart phone went from luxury to social necessity.  Has the smart phone eclipsed the television in our hierarchy of needs?  Since we now can watch video on tablets and laptops, I would say the TV is still way up there, but the smartphone has edged it out.  Smartphones have become our navigator, communicator, educator, entertainer, health monitor, discovery device and status symbol.   And this has all come about since the first iPhone went on sale June 29, 2007.  At NAV, we look for companies that can weave their smartphone service into the everyday lives of their customers, and provide unique and sustainable value.  ScoutMob and Stitcher are two examples of companies we have backed that can only exist in a smartphone world.

Smartphone ubiquity has far reaching implications for entrepreneurs.  With an iPhone and Android app you have instant distribution to the entire developed world, and increasingly the undeveloped world as well.   If that isn’t a jaw dropping reality I don’t know what is.  These are amazing times.

My Top 5 things-to-be-excited-about in 2012 :

1. Smartphone Ubiquity. The smartphone is now a social necessity.
2. Cloud Simplicity. AWS has made it low-cost and quick to launch a business.
3. Cost-aware Healthcare. Consumers are empowered to reduce costs.
4. Startup Liquidity. The Facebook IPO will have some long coattails.
5. Offline business marketing is moving online. Here comes local ad spend.

Each of these on its own is well understood and amply hyped. But when taken together and viewed through the lens through which I look at the world, they constitute one of the greatest moments of entrepreneurial opportunity ever in history. So entrepreneurs in the US, and throughout the world, should be licking their chops!

I will flesh out my thoughts on all five of these individually in subsequent posts.

I have been incensed at some of the ridiculous comments made by some of the financially illiterate talking heads on TV.  One of the pundits asked if ” would like to have a president who managed a investment group where 20% of the companies failed.”  I don’t know the facts around how many of Bain’s investments are successful, but that would actually be a good loss ratio.

But first, let’s clarify something.  Most of the comments about Romney and Bain have been centered around investments the company made in mature businesses that are not growing as fast.  Usually, the goal in those investments is to reduce expenses and streamline the businesses to make them more profitable.  In the financial community, that is referred to as private equity, not venture capital.  Venture capital, which is the business model of our firm, has to do with taking minority non-controlling equity positions in high risk growth business that are primarily focused on the products and services of the future. In contrast, private equity is about buying controlling ownership interests in companies addressing mature markets.  To an outsider that might not seem like an important distinction, but it is.  The skillsets, risks, operating practices and investor-management relationships are very different in those two models.  As a result most investment firms are pursuing either one or the other.  Bain is a rare specimen of a company that pursues both private equity and venture capital investments.  I have never worked in such an investment group, but I think private equity has an important role to play in a dynamic economy like in the US. Our fund has been in the venture business since 1999 and I have something to say about comments targeted at our business.

Venture capital is an important reason why the US is still on top of the global innovation game.  Our venture capital industry has been the most successful in the world.  And it is a large exporting business.  Half of the investors in our fund come of outside the United States.  In essence, we are exporting investment services to foreign investors by attracting capital and fees to the US.  That capital is in turn used to enable young startups and young entrepreneurs to realize their dreams and build big businesses.  Instead of using venture capital as a talking point and political pun, we should be embracing it and designing policy to encourage more of it.  Rick Perry, the now-former ill-advised presidential candidate from Texas used the term “vulture capital” as a soundbite in accusing Romney of doing something inappropriate.  Perhaps Perry can be excused since smart policy was never his strong suit.  Gingrich, however, doesn’t have an excuse.

Our business is risky.  In our business plan, we assume that close to 40% of the businesses we invest in will fail and we will lose all our funds.  Of course, if we do our job well, those losses, in capital and jobs, are more than made up by the big successes in the business and make it and strive.  We should all be disappointed in the reporting of politically-driven journalists and pundits that criticize business failure out of context.  There is nothing wrong with failing.  It is OK.  In fact, the acceptance of failure and risk-taking is what has made our country’s venture industry so successful.  And it is also what has lead to millions of new jobs at cutting edge technology industries.  Even though venture capital accounts for a very small portion of total annual investment dollars, the National Venture Capital Association estimates that venture backed companies account for 14% of all private sector employment and 21% of all US GDP.  So it’s a business we should all be cheering for and not trying to bring it down.

My friend Jack Biddle, co-founder of VC firm Novak Biddle, and an early pioneer in online education companies (Blackboard, 2Tor, Fidelis and others) puts it this way:

“Since WW II, GDP has grown at 3% per year but health care and education have and continue to grow at 7%. They are now on a path to reach 50% of GDP. For that to continue, it means that EVERYTHING else that people consume has to shrink by 4% per year. That is simply not going to happen. Herb Stein’s law says that that which is unsustainable, shall stop, and this is unsustainable.”

The Internet has brought efficiency and cost-reduction to so many industries over the last fifteen years: retailing, financial services, advertising, music, news, movies, books, and gaming. The $1 Trillion Education market is next.

Education hasn’t changed much since the days of Plato and the first Academy which he founded in 387 BC in Athens – where the wise teacher filled the brains of his students with his wisdom and knowledge. With 16 million students at 2,400 US Colleges today, that same “wise teacher” paradigm is used in hundreds of thousands of college classrooms and lecture halls each and every day.

Yet the world has changed. Today, across the Internet, more knowledge exists online about any given topic than does in the mind of any one professor at any one school. With access to the Internet, students collectively are wiser than their professors. Companies like Koofers, which helps students prepare for tests in virtual study halls, whether on the same campus taking the same course, or at completely different schools but taking the same course type (Introduction to Economics) are harnessing this collective wisdom.

Salman Khan, who started posting YouTube videos for his family, to help them better understand math being taught in school, is turning education upside down. The Khan Academy suggests that learning should be done online, and classroom time reserved for teachers to help students better understand material they have learned, but perhaps not yet mastered.

2Tor is helping brand-name universities extend their programs online, to reach students around the world. Those online students graduate with the same degrees as their counterparts who attend brick and mortar classes.

The revolution is upon us.

I see four rich veins for entrepreneurs to mine in the higher education space. A lot of wealth will be created here in the next twenty years.

First and foremost is international. The rise of the middle class in India and China alone is creating a college-eligible audience larger than the 16 million college students in the US today. Validating the credentials of these students, helping to match them with US Colleges, preparing them for college from a language or culture standpoint, and educating many of them online represents an industry perhaps as large as the entire US education market today. A new $1 Trillion market.

Second is brand extension by the top US Universities. For most, admission into college is not hard. Only 2% of US Universities are ultra-selective, accepting fewer than 25% of their applicants. These 53 out of 2,041 Universities have brands that are recognized worldwide. It might be more difficult to expand branded undergraduate offerings online, because of the breadth of the curriculum and the socialization needs of the students at that age. But brand expansion, online, for graduate programs can be a very big business. 2Tor is attacking this space dead on.

Third is what I call an “On-Campus Virtual College.” I believe that students go to college for three primary reasons. First is the social experience of college. Making friends for life, having fun, going to parties, and learning how to live and act independently from your parents. Second is to get an education and a degree that is valuable to employers in their field of choice. Third is to find a job upon graduation. Academics only comes to play in the second instance. The other two are much more pragmatic. And nothing says that the three functions can’t be split.

I foresee a day where students will go off to a campus with classrooms, teaching assistants, dorms, sports teams and cafeterias – but with no professors. Students will go to class together and watch a lecture from the best teaching professors in the world. Teaching assistants or adjunct professors will guide the students through the material. But they will learn, online, from the best teachers, unlike today, where at many schools, professors teach because they have to – and conduct research because they want to. By separating the cost of the social experience + the career planning and placement from the cost of teaching, we can fundamentally change the cost of education. This is an ideal setting for the 84% of students who attend schools that accept 50% or more of their applicants.

Fourth is transfer students. A little known secret is that 1 in 3 students transfer at some point during their college life. They graduate from a different college than they enrolled in right out of high school. This process is inefficient today and will benefit from innovations entrepreneurs will pursue. Innovations I foresee include taking the top 10% of community college students, honors candidates, putting them in an online program from a 4-year school, and preparing them to transfer to one of many 4-year schools after learning online for two years. Another idea: Creating a transfer marketplace for college students looking to upgrade the brand name on their diploma. After all, employers care about the school from which you graduated – not the one you initially went to out of high school. Top colleges would love more applicants, with a year or two of college under their belts, with a record of academic achievement from second tier schools. Helping to make that market is a big opportunity.

At New Atlantic Ventures, we are big believers in how the Internet will transform higher education. We have backed two companies in this space so far (Koofers and Wiggio,) are about to close an investment in a third company, and are looking for more!

Follow me on Twitter @jcbackus

Image via Lipitor.com

Lipitor brought Pfizer $5.3 billion the the U.S. in 2010, almost all of it profit. The price of Lipitor before patent expiration was about $165 for 30 20mg tablets, a typical 1 month prescription. A similar statin that has been in high volume generic production for years, simvastatin, costs about 50¢ at wholesale for an equivalent dose. I make that 99.7% gross profit.

Pfizer, the developer of Lipitor, is fighting hard to maintain value. There seem to be three main tactics:

1. Pfizer has reached agreements with some of the major pharmacy benefit managers (“PBMs”: companies that administer prescription benefits for big health plan sponsors) causing the PBMs to offer only Lipitor to their plan members. Details here are murky (see press coverage). Clearly a deal has been cut, and observers quoted in the article speculate that this is a good deal for Pfizer and the PBMs, and maybe not a good deal for plan sponsors and members. My gut says that too.

2. It turns out that patent expiration does not quickly result in real competition. Ending patent protection usually requires a law suit, because the patent owner files follow-on patents of lesser merit to extend the patent period, and a court has to decide at what point the incremental patents are invalid. U.S. law rewards the “first filer” (the generic company that funds the litigation) with a six month monopoly on generic manufacture, so until May 1, 2012, there are only two manufacturers of atorvastatin: Pfizer and Ranbaxy, a major Indian producer of generic drugs. Industry observers expect that the price will fall only 20%-30% during this period. I found an offer of 30 20mg tablets of atorvastatin for $99 on the web (excluding the illegal offshore pharmacies). That brings the gross margin down to 99.5%.

3. Pfizer plans to leverage the brand value of Lipitor after the patent expiration. The company says its research shows that many patients would prefer to continue to take the Pfizer-produced drug. It has launched a variety of programs to keep patients on Lipitor post patent, and industry observers speculate that it may even launch an over-the-counter version of Lipitor, which could be marketed more aggressively than a prescription drug.

The “brand” strategy strikes me as perfectly legitimate. It’s a fact that people prefer products they know and trust and commonly choose to pay a bit more for that value. It’s true for detergents and cars, why not for life-saving drugs?

The rest of this, however, is a series of strategies to preserve extraordinary margins after the legal monopoly is gone. It’s fair game for competitive attack. There are a number of ways customers can push back:

1. Go around the PBMs. A $10 generic co-pay seems like a good deal. Actually, it is not: for a product that costs 50 cents at wholesale, a $10 co-pay is a rip-off. There are several low-cost sources of major generic drugs outside of the insurance/PBM system. Wal-Mart and CostCo sell many generics for $4/month in their stores, and legitimate on-line pharmacies are emerging that sell major generic drugs more conveniently at even better prices, foremost among them Healthwarehouse.com (a NAV portfolio company). Avoid the non-U.S. pharmacies: they are and illegal and unregulated. You can identify legitimate on-line pharmacies by looking for the VIPPS certification from the National Association of Boards of Pharmacy.

2. Accelerate real competition. The price of atorvastatin (generic lipitor) will drop from $99 to $10 or less when there is real supplier competition. There are plenty of good, up-and-coming generic pharmaceutical companies. Major payers for pharmacy benefits could offer them volume guarantees and up-front money to incent them to commit capacity and work through the FDA approval process. That way, in May 2012, the price will quickly get to competitive levels.

3. Make the economics transparent. The economics of drug distribution are remarkably murky, as the article cited above suggests. If plan sponsors demand the same transparency and accountability from PBMs that they routinely demand from other strategic suppliers, they will see many opportunities to get more bang from their health care buck. Truveris (also a NAV portfolio company) is in the business of making drug payments transparent by providing plan sponsors and drug retailers the ability to audit PBM charges and payments in near-real time. Check them out.

Students, Colleges and the Federal Government need to each take action to reign in spiraling college costs. On top of these three groups, I expect Adam Smith’s invisible hand of the private sector to play a major role in transforming this industry in the next 25 years.

The revolution has begun. Just look at a few recent headlines:

January 10, 2012: UC Salary Criticisms Fuel Student Protests

January 10, 2012: California State Universities Offer up Lame Excuses for High Salaries

November 21, 2011: Debt by Degrees

November 14, 2011: Some UNC Chapel Hill Students Outraged by Another Tuition Increase

What can (or should) students, the Federal Government, and colleges and universities do to fix this problem? Some practical suggestions:

For students:

Before you enroll at a 4-year college, ask yourself if you are ready. Do you know what you want to do after college? Are you going to college to be with friends, because your parents expect you to go, because you really don’t want to start working full time, or because you have a plan and college is the first step of that plan?

Start by taking some accountability for your program of studies. If you really want to be an Art History major and pursue your passion at college, don’t complain if your first job is outside the field of Art History, has a lower starting salary than other jobs, and may be harder to find than jobs for graduates with different degrees. Know the market for the skills you are acquiring at school. Ask your career placement office. Who is hiring people with degrees you aspire to, and for what positions and at what salaries. And take some STEM courses, even though they are probably hard for you and may lower your GPA.

Think about the cost of college. Not only to your parents, but also the student loan debt you will graduate with. Do everything you can to graduate in 4 years. Not 5 or 6. Take some AP classes in high school and place out of some required courses your freshman year. Take a community class or two during the summer before your senior year to add a few more credits to your transcript. Consider State 2+2 programs, which let you start at a community college and then, with good grades, get a guaranteed transfer to a top State school.

For Colleges and Universities:

Offer your curriculum online. Encourage students to take one year of classes online, perhaps living off campus and saving on room and board. Offer them a discount for going to school online. It costs you less. Plus you can backfill that slot with another on-campus student.

Broaden your distribution requirements to require students to graduate with greater technical proficiency. Make computer programming courses, advanced math, and engineering a much part of the required curriculum. Consider requiring that everyone not majoring in a STEM degree have a minor or at the very least a concentration in a STEM program.

Agree to cap any further increases in college costs to the rate of inflation. You can do it. Commit to it and make the hard choices.

Reduce the tuition cost for students who graduate in more than four years. Sure, maybe they were immature and failed a few courses. But you also failed them by not keeping them on track. Consider offering half or all of that 5th year tuition free – just charge for room and board. Students and Colleges succeed and fail together. Own up to your failures.

For the Federal Government:

You control the purse strings for every College and University in the United States through student loans, tax policy, and Research and Development grant money. You can effect change immediately. Failing to make hard choices is a failure to lead. A few ideas, all of which University Presidents will hate – but which will force them to be accountable for 35 years of cost and price mismanagement:

Restrict the amount of student aid available to students attending schools where tuition plus room and board rises faster than the rate of inflation. Federal student loans are important. Colleges will hate the message you are sending, but they will abide by your demands.

Make Colleges share in the cost of student loan defaults. Perhaps have them bear the burden of 25% of the costs of loans taken out. This would be great for taxpayers. It might also make colleges focus more on career placement, and appropriate coursework upon graduate so that students can land jobs that will help them pay back their loans.

Force colleges to help kids graduate in four years. Let them know that the federal government will only provide loans for the first four years of college (for a bachelors degree.) And for colleges to participate in the federal student loan program, the colleges themselves must agree to provide an equal amount of loan money to students requiring a fifth year or more to graduate.

Many schools have nice endowments, and they are focusing on growing them. Lets make sure that Colleges first use at least 5% of their endowments each year to fund operating expenses, including student aid (not new buildings.) If Colleges fail to make annual 5% distributions, then their income should be subject to federal taxes just as it would be for any other foundation-like entity.

Think like a business. You are giving hundreds of billions of dollars each year to US Colleges and Universities for research. Yet when that research is commercialized, the university receives all of the royalties. Shouldn’t the Federal Government earn a rate of return on the research dollars given to the Universities? 25% – 50% of the royalties perhaps? As a taxpayer, I want a return on this money.

Finally, use student loan forgiveness to encourage more STEM graduates. The student loan program now rewards (through debt forgiveness) college graduates who join the Military, the Peace Corps or other lower paying, non-profit jobs. Why not also encourage people to become STEM graduates and offer them the same debt forgiveness incentives?

Follow me on Twitter @jcbackus

Over the last thirty years, health care costs have risen at almost twice the rate of inflation. $100 in groceries from 1978 will cost you $300 today. A $100 doctor’s visit from 1978 will cost you $575 today. All across America, we are up in arms about the ability of our health care system to control costs. The national debate about health care these past few years resulted in sweeping Federal legislation aimed at lowering the cost of health care.

Yet there is a more sinister problem out there – an industry where costs are spiraling out of control faster than health care – college costs. That same $100 spent on a college education in 1978 will cost you almost $900 today. You read that right. College costs have increased three times faster than inflation for more than a generation. And that have increased almost twice as fast as health care costs. The chart below is worth 1000 words:

While disorganized as a movement, and lacking a cohesive message, the Occupy Wall Street protesters may be on to something here. Let me help them out with their message: College costs too much, and something needs to be done about it!

At a record $750 Billion, student loan debt now exceeds total credit card debt in America. 2010 college graduates faced a record $25,350 in student loan debt each, against a 9.1% unemployment rate. It should be no surprise that student loan defaults jumped 25% in the last year (from 7% to 8.8%.)

President Obama summoned a dozen college presidents to the White House in December for an urgent meeting on this topic. It is rapidly becoming a political problem. Unfortunately, I don’t sense any desire on behalf of educators or legislators to seriously address this issue. Beyond some waving of hands and empty promises – much as we received from health care reform, don’t expect the rising cost of college to slow down any time soon. To truly “bend the cost curve,” we need to actually change the way we educate our children at college. And I don’t expect that change to come from within today’s College Cartel. Fundamental change almost always happens from the outside.

Lets look at part of the problem. According to the College Board, from their 2011 Trends in College Pricing study:

In 2008, only 2% of four-year degree-granting colleges and universities in the U.S. (53 out of 2,401) accepted less than 25% of their applicants. Almost half of all four-year institutions (1,144 out of 2,401) were open admission or accepted at least 75% of their applicants.

Most kids going to College do so because it is “what comes after high school.” As parents, we see a college education as the path to prosperity. And facts back this up. In 2010, median family income for those with a bachelor’s degree was $99,716 vs $48,332 for those with only a high school diploma. We want our kids to go to college – and as parents we will do anything to give them a leg up. We have turned a blind eye to rising college costs, because we are buying “hope” for our children and their future.

Yet with the rise in importance of the technology economy in the United States, 95% of our college graduates continue to be Liberal Arts majors. They are graduating with degrees in History. Economics. Philosophy. Political Science. Communications. But that is decreasingly interesting to employers, who need workers to be facile with technology, beyond knowing how to make a post on someone’s Facebook Wall.

Astonishingly, our colleges can’t seem to graduate more students with STEM (Science, Technology, Engineering, Math) degrees. As a country, our College Cartel has been stuck at awarding around 5% of our college graduates with STEM degrees. Yet this is where the jobs are. Especially the high paying jobs.

So, while Colleges have expanded costly tenure programs, bid up salaries for top research professors by competing with each other, and begun expansive building programs to add new facilities to their campuses, we continue to graduate students with the same basic education as they had 100 years ago. And we teach them the same way Socrates once did.

Imagine the beginning of Fall Semester. At 2,401 colleges, millions of students are sitting in lecture halls seating 100 – 1000 of our kids, all learning Introduction to Economics, or American History 101, or any number of introductory courses. Most of these courses chose from a very small number of very expensive textbooks, and students learn the same material no matter the school. All that varies is the professor, the classroom and the fellow students.

And what do our kids really take away from 4-5 years of college – at a $250,000 “retail price” for the best private schools? Let me be provocative and suggest four things:
1. They grow up and learn to become independent, especially if living away from home. A 22 year old is much more emotionally mature than an 18 year old.
2. They learn how to learn. Since most of the 95% of Liberal Arts graduates are not becoming economists or political scientists or historians or philosophers, they are clearly using the skills they learned to earn their degrees much more than the content of the degrees themselves
3. They meet a cohort of classmates, many of whom they will stay in touch with for life. The “better” the college, the higher the likelihood that these peers will help each other out across their careers.
4. They receive a diploma with a brand. This diploma means a lot if it is from one of the 53 selective schools. It means much less if from one of the other 2,348 schools.

There must be a better way. And there is. In my next installment I will offer some provocative things that students, colleges, and the Federal Government should do to fundamentally improve education.

The opening decade of the new millennium brought us the death of retail: version 1.0 – when virtual goods sold online replaced physical goods sold in brick and mortar stores.

Digital music replaced CDs. Remember Tower Records and the Virgin Megastore? They were part of an endless parade of high-profile retail music casualties. Amazon streamlined the process of buying physical books online, and then brought us the Kindle and pioneered digital books. Brick and mortar book retailers such as Borders and its affiliate Walden Books crumbled, with Barnes and Noble not far behind, likely leaving its Nook spinoff as its surviving legacy. Netflix helped Blockbuster close thousands of stores and enter Chapter 11 to be bought by Dish Network. Digital cameras crushed 4,000 Fotomat stores and brought Kodak to the edge of Chapter 11. All the while Amazon and Apple became the new digital mega-stores for music, movies, TV shows, books, magazines and newspapers. For Christmas, our stockings had gift cards and our family bought most of our gifts at the last minute, online, instead of at the mall like we did ten years ago.

This decade will usher in the second chapter, when a veritable parade of consumer electronics gear disappears off the shelves of retailers, resulting in the collapse of specialty stores including Best Buy, Fry’s, hhgregg, Comp USA, Microcenter, Radio Shack, Ritz Camera and dozens of other similar companies. Staples and Office Depot will not be far behind.

The death of retail version 2.0 is a result of three trends – substitution, unbundling, and integration – trends that have been building steam for years, but that are now intersecting with a deadly multiplier effect.

1. Substitution: We are now substituting digital goods for physical goods – music, movies, books, newspapers and magazines. Substitution has peaked, reshaping retail forever. This is why the growth of digital media and mobile devices is so important and why we were early investors in companies like AppTap, SnappCloud, Stitcher and Tap ‘n Tap.

2. Unbundling: Why buy the album when you only want the song? Music is now unbundled. Why buy the movie when you can stream it? An increasing catalog is available for streaming at a flat monthly fee. Later releases are available to rent. Why subscribe to a cable bundle when you only watch a few shows? Most television shows are now available a-la-carte, and cable will soon be unbundled as I predicted earlier on Huffington Post.

3. Integration: Digital cameras, camcorders, car GPS systems, car DVD players, satellite radios, stand-alone stereo systems, DVD players, scanners, e-book readers, television screens (smaller sizes), digital picture frames and video game consoles are all dying product categories. The core functionality of each of these once-upon-a-time standalone devices has been integrated into new smartphones and tablets. As an example, we long ago replaced our home stereo system with iPods, and have music streaming to most of our common areas via iTunes and Pandora.

So what about Best Buy? Why did their sales drop this holiday season? This still-$8B-market-value-company is dying for serious and not-fixable reasons. Best Buy CEO Brian Dunn misses the point in his most recent blog. This company is the poster child of this second chapter of retail so let’s take a closer look.

For Black Friday 2011, Gannett prepared a map of a Best Buy store and it gives us a great starting point. What do you see?

Let me tell you what I see. I see a store that is dying from the core out. The core of a Best Buy store, the inner part of the store, is comprised of DVDs, CDs, digital cameras, digital camcorders, MP3 players, mobile phones and accessories, and gadgets. Of these items, most have gone digital-downloadable, or been built into smart phones. And is Best Buy really the place you want to go to buy your next phone?

But the outer ring of Best Buy is dying as well. Lets take a clockwise tour. Appliances are here to stay, but are not a frequent purchase. Video games are moving into the cloud. Home theatre is stagnant. Television has been redefined from the television set, to the content that used to be only available on the television set. We may continue to upgrade our main television screen at home every 3-5 years, but more and more we will consume movies and television on our desktops, tablets, and phones. So sales of second and third TVs are dying quickly. In-car electronics, standalone GPS, satellite radio, seatback DVD players and HD radio will quickly disappear, replaced only by the smartphone powering a dumb screen on the dashboard. And then there is computing. Tablets are quickly replacing netbooks, and tablets are eating in to desktop computers as well. I can see the day in the near future where I no longer buy a desktop computer for my home. We may need one printer at home, and the smart phone camera is quickly becoming a great scanner.

Yes, Best Buy is dying, from the core of the store out. But it is not alone. Welcome to the new world of retailing, the death of retail 2.0. Look for this to repeat across the country over the next three years.

Who will pick up the pieces? Integrated online merchants like Apple and Amazon, specialty merchants serving well-defined niche markets, delivery services like UPS and FedEx and broad-spectrum retailers like Target and Walmart will be the pillars of the new retail ecosystem. Entrepreneurs that build businesses within this new construct will ride this next wave.

First published on The Huffington Post January 9, 2012 by John Backus (@jcbackus)

I saw some data recently from the work of one of our portfolio companies that surprised me on this subject.  The company is called Koofers and it offers services exclusively to college students.  I, maybe like you, thought that students don’t care about privacy.  They grew up with facebook, accustomed to putting everything online. Who cares what the world sees? Right? Wrong.

Koofers did an A/B test on their new user registration page, where under A: users only had the option of signing up using their facebook credential, and under B: they had the option of either using their facebook credentials or joining directly on Koofers and entering their data afresh.  What they found is that under B, they get a 46% lift on new user registrations.  Although it decreased the total number of new users choosing to login with facebook by 17%, it increased the overall number of new registrants significantly.  Students were surprisingly conscious about allowing a third party app to access the trove of information on their facobook account.  {Note to entrepreneurs: this is significant and speaks to tactics around user acquisition}.

In a further test of the sensitivity to privacy, Koofers tested whether there was a difference in new registrations in response to different privacy settings within the group that had facebook only as an option.  When a third party app asks a user to log in using facebook, they have choices as to what permissions to request from the user.  Koofers found a 3.5% dropoff in registrations when they included the right to post on the user’s wall among other permissions, which means a number of users are really paying attention to the permissions requested.

They are right to be concerned.  A couple of months ago we were pitched by a startup that could use facebook permissions in conjunction with publicly available data to create data sets with surprising information.  I immediately went to my facebook account and checked all my settings.  Clearly privacy is still very important.  And implementing new online services needs to carefully consider it.