Hey guys, thanks for all the comments below. There is clearly a lot of interest in more hands-on advice.

I need two things from you guys to do that most productively.

First, more concrete needs - what exactly would help the most?

Second, to open source it somehow. How can we all help each other more effectively? Would open threads here help?

Why 2.0 Sucks

Do you sense a growing frustration across the 2.0scape?

Good - it should very much be there.

Why? Because we're not solving real problems anymore. The economy has massive structural flaws. 2.0 can fix them.

But focusing on ad nets and minigames sure won't - and we'll just spiral into more and more navel-gazing, name-calling, and frustration.

Would it help if I did a post about industries that need to be revolutionized?

The Acceleration of the Edgeconomy

"...in the ten days since this post, we can see business-as-usual continues merrily on its way

except as a "amrketing concept", i think "edge economy" as espoused by umai haque is a paper tiger, with zero practical value

am i wrong?"

Ummm....how can I put this.

In the ten days since this post, apart from a major investment bank, well, collapsing, the entire global financial system has begun the process of systemic deconstruction - something not seen for the better part of half a century.

Needless to say, the edgeconomy is very, very real.

You can slam bubblegen all you like, disagree with the edge - that's fine. But you're living on another planet if you think the economic landscape these days is anything resembling business as usual.

We will be talking about more macropocalypse in great detail shortly.

NB - Gregory, it would do you good to stop trolling and start listening to the discussions a bit more.

The Fourth Horseman of the Macropocalypse, Redux

Guys, I'm going to write the Bear/macro situation in detail later. It's really too depressing to dwell on at the moment.

Here's the quick version. You will read a lot of complicated analyses today.
Some are very, very good. The real story is, I fear, pretty simple, and very scary.

As simply as I can put it: the Fed has just signalled with absolute certainty that it has absolutely no interest in helping disinfect the financial system.

The Fed just signalled, with absolutely certainty, that it will do anything and everything in it's power to help stave off the accounting that's long past due. And without that accounting, there is no incentive for new DNA.

Bailing out Bear comes, ultimately, at the expense of every security holder across the larger economy. Because the Fed just vaporized (again) the incentive for a true process of settlement and valuation of the infected assets to really begin.

Do you think JPM has different incentives than Bear? Of course not. The machine's just as broken as it was last week - there's just more grease in the gears.

That's the Japanese story: spending almost 20 years trying to avoid a recession by devaluing the economy into oblivion - because the truth of broken balance sheets and infected DNA was too painful to face.

Or, a little more darkly - because the cronyism between banks and central banks was intense enough to let both parties abdicate their fundamental responsibilities.

It's funny, isn't it - how the Fed's bailout makes no mention of Bear management. What a coincidence.

We are now entering dangerous waters - the kind where economies get blown up for decades.

I suggest you all spend a few hours thinking first about how to make sure Bernanke's shock and awe approach to policy doesn't end up...ummm...destroying you personally - and then we can chat about strategy, finance, etc, later tonight.

Edge Principles, FriendFeed Edition

Here's a textbook example of how not to think strategically.

Duncan looks at the numbers and concludes Friendfeed and Twitter are subsitutes. It should be pretty obvious - if you think about the dynamics - that they're complements.

Strategy isn't spreadsheets - and it sure ain't disconnected usage numbers.

The real point is: Friendfeed is a next-gen, open version of Facebook's social feed.

Funny - what was that we were discussing a few months ago? About competition for openness would ultimately begin to eviscerate Facebook's pseudo-platform; how the evil at the heart of Facebook would stop it from moving past last-gen games of domination?

Exactly.

That's an edge principle: good beats evil. It's not wishful thinking, it's not utopianism, it's not idealism - it's razor sharp strategy for a new economics.

Companies Are Not Pimps

Perhaps the biggest problem across the economy is that our thinking is permeated by yesterday's stale assumptions.

There's a conference at LBS today - called "Monetizing Social Networks".

Uggh.

These poor kids. Most MBAs come to B-school wanting to do cool things - and they get crushed into thinking business is about "product" and "monetization".

It was, at least a little bit - in the industrial era.

But that was yesterday.

If there's one single lesson you apply at the edge, let it be this: business models happen.

What that really means is: we don't "monetize" resources. We co-create and co-produce value.

And to do that, we have to experiment, deeply and intensely.

Monetize is an ugly word.

When you try and "monetize your users", you accept the almost obscene assumption that people are meant to be pimped out, sold to the highest bidder, resources to be slashed, burned, and exploited.

But that's not how the edgeconomy works. Businesses need what connected consumers have to give more than connected consumers need what businesses have to sell.

Let's put that a little more formally. Monetization is ugly because it blinds us to the truth that value must flow in many directions. That's the essence of edge strategy, in fact.

That's why businesses that aren't deeply, durably connected to people are already falling apart (hi, Facebook, Gap, and Microsoft).

Just ask yourself: how many firms industries has "monetization" already killed?

AOL + Bebo

I wish I could say this was important, but it's not. AOL is a company coming apart at the seams. Bebo is a company that long ago stopped itself from realizing it's full potential.

In that sense, it's a match made in heaven. Unfortunately, it's also a perfect example of orthodox strategy - growth/share thinking - at it's worst.

The Poseur

Mark Cuban bans blogs. Lulz. So did China, Iran, and the army. And we know how well that went.

So is this just noise?

Actually, it's like an unwritten Kafka novel about authoritarianism: when Wal-Mart is more 2.0 than a self-proclaimed revolutionary who keeps investing in industrial value chains (hi, HDnet), no less, it's (troublingly) ironic - and a sign of all that's going wrong in the Valley and in the mediascape.

Goople vs The World

Hi folks, this week at my HBS blog we're doing something a bit different. I haven't discussed next-gen strategy in depth for quite a while.

So that's what we're doing this week - with a focus on why it seems that, no matter how hard everyone else fights them, the next-gen media pie will seemingly be split between Apple and Google.

Check it out, leave a comment, discuss away there, etc.

A Wake Up Call For The Venturescape

Let me ask a question. Is SXSW fiddling while Rome burns?

We've been discussing Zuck, Sarah Lacy, Facebook's privacy controls, etc. But perhaps we don't have the luxury of that self-indulgence.

Why not? Because the global economy is about to get hammered. The signals the economy is sending are, to put it bluntly, very, very scary. As Lex notes:

"...Now, after a very nasty week in markets, the whispers are that it might even be the big one: the worst crisis since the 1930s. Signals of distress abound: Friday’s non-farm payroll data were awful, the US auction rate market is closed, banks’ shares are collapsing, interbank rates are back in the danger zone and debt spreads are ballooning."

From this perspective, Yahoo + Microsoft, Google + Digg, Zuck + Lacy - who cares? We're lost in the trivial. It's like happily painting your toenail - while Freddy Krueger closes in on slashing your jugular.

Let me put this to you another way. Most of us in the venturescape and mediascape think orthodox business - ie, working at a corpocracy - sucks.

Yes, big business sucks. We all know it. But the question is: what does our feeling really mean? Why do we feel that?

Because the DNA of the industrial era firm is sucking the life out of the economy. Once upon a time, industrial era firms were engines of value creation. Today, they're prisons, where trauma is institutionalized into everyone who comes into contact with them.

That feeling - like a dull toothache - is a massively powerful heuristic that something is deeply wrong; wrong with McJobs; wrong with $100m bonuses for value destruction; wrong with the evisceration of variety, choice, and happiness; wrong with the long slow death of culture and community; wrong with the sinking intuition that like you've signed away your life when you walk into that cube, all for a few bucks and free lattes.

So who reinvents the firm? We do.

The power of 2.0 isn't minigames and ad nets: it's the new DNA it brings to the table.

There are two paths ahead of us. First, a global crisis explodes, and the economy is reinvention via the new genetics of 2.0 is forced upon it slowly, over 5-6 years. Second, we take the initiative, and reinvent it fast, over 2-3 years.

As a naive and trivial example: no one loves Wal-Mart - but no one is helping Wal-Mart think about love.

Here's a better example. Big pharma's manipulation is lame and cheesy - but we're all complicit in it - except Google and a handful of startups, who are busy redesigning the pharma value chain.

That's the point. If the venturescape wants to remain relevant, it has to solve the problems that are causing the macropocalypse to accelerate.

That's always been it's job: to power renewal. Today's crop of VCs are nice guys - but fast being corporatized: comfortable in their myopia, highly risk-averse, cronied into each other, and, unfortunately, totally out of tune with the problems they should be solving.

Ad nets, social nets, and minigames won't change the DNA of the economic system. Radical new approaches to consumption and production across the industries that are broken will.

Let me put it more sharply. I think we have two choices. Help fix things, and get rich, or just get blown up along with everyone else.

Let me make that concrete.

-For venture guys, that means: most of you are going to have to develop new investment theses, centred on redefining industrial era DNA. What do next-gen value chains really look like? What do the economics of production and consumption look like tomorrow?

-For entrepreneurs, that means: forget about hot products/services (ads, games, etc) and tech. Think about DNA, and how it can reshape the markets and industries that are crying out for help. Where does business suck today, and how can you make it radically better?

-For corporates, that means: stop making acquisitions driven by growth/share thinking. That's easily dominated. Make acquisitions driven by DNA, and use it to suck the lameness out of your strategy - fast.

Lameness Is In the DNA

Sarah Lacy blows an interview with Zuck, bloggerati/twitterati go crazy.

There are lots of interesting perspectives about this, like Jarvis's.

I think the heart of the problem is different.

At a conference about radically democratizing media, is it any surprise that, well, a journalist questioning a CEO ended up being a waste of time?

Of course not.

See the irony yet? What happened on stage was a rigid, controlled, 1:1 interaction that's reminiscent of the industrial era.

It's exactly the wrong kind of DNA. Why are we organizing things industrially when we're building things that aren't industrial?

Now, sure. Sarah's interview was (really) lame. Other interviewers might have done a better job. But that's the point of DNA: it makes some outcomes much more likely than others.

I took a lot of heat for slamming TED's DNA. Take this as another example of the same. Orthodox conferences are nice, but they're not very productive.

Why not? Because their DNA makes productive outcomes are very (very) hard to achieve - because the DNA itself prevents the kind of interactions that lead to cool stuff.

Big Swinging Digg

So, another rumour making the rounds, a bidding war for Digg involving MS, Google, etc.

I'm a bit dubious. MS is maybe inept enough to get caught in a Digg bidding war. There's no money more desperate than MS money in today's mediascape (say thanks, Yahoo shareholders) - because there's no player with a more flawed understanding of next-gen industry economics and structure (evil, closed, etc).

But I have a hard time believing Google's involved in a bidding war for it.

Digg is nice, but it's strategic impact is zero. It should be profound, but Kevin and Jay have consciously made the decision to be geek-celebs instead of doing something cool. That's fine; but it's crippled the potential value a great idea like Digg can really create.

Hence, I'm not sure what exactly Google would be interested in. It's not as if Google's short of attention, geek-cred, psuedo-quant algorithms, minor-league celebs, code, advertisers, etc.

Bring a new value chain design or new market space to the table, and we're talking - but Digg has failed exactly and precisely to do anything on that more meaningful strategic level.

Blah, blah, the real point is: anyone who's willing to pay the multiples/price point mentioned - north of $200 mil for a player with little to no strategic impact is making a fairly serious strategic error. That, of course, includes Google - maybe TC is on the level, in which case it will be the first major error Google has made in a long (long) time.

Next Weds Tonight (Thursday :)

Hi folks, Next Weds is on tonight (Thursday the 6th).

We will be meeting at Detroit Bar on Earlham St in Coven Garden from 7pm, all are invited, bring a friend...

Next Weds Cancelled (Sorry...)

Hi guys, I am kind of slammed tonight with work, so let's try and do next Weds tomorrow night (Thursday).

I'm really sorry about this - I know quite a few of you were looking fwd to it.

If tomo works for you, leave a comment so I can get some idea if enough people can make it.

Can Facebook Survive F8?

Why does it feel more and more like Facebook is about to hit an inflection point - of the wrong kind, where growth flatlines, and then usage decays?

Simple. The reason, ultimately, is F8, which will be seen as a major error in the near future: because it's killing the value of the network.

There's an interesting discussion at VentureBeat about exactlythat; we discussed this ad nauseum quite some time ago.

The logic at VentureBeat is that F8 fragments the larger network into app-specific networks, kills networks effects, and destroys value.

That's exactly the converse of what we discussed: that F8 is a pseudo-platform, because there's no real hard lock-in present, because staying closed actually destroys value. So what we should see - and what do see - is endless numbers of apps competing for network effects, but failing to realize them; because the iron curtain of f8 minimizes the value of said network effects.

That's a tricky set of dynamics to really understand - just read this and it should be very intuitive.

If it ain't, leave a comment and we can discuss :)

The Future of Brands, Special Eisner Edition

"...Most recently, Tornante, which is Italian for "hairpin turn," paid $385 million for Topps, the longtime maker of trading cards and Bazooka bubble gum.

Mr. Eisner is keeping his ultimate playbook to himself, but drops a few hints.

"With Topps, I was interested in a company that could be a far bigger sports and entertainment media company," he said. Among his ideas are the digital delivery of trading cards and the creation of Topps-branded sports movies or sports channels on cable. As for Bazooka Joe, the gum mascot, he recently told a trade magazine that "it would be foolish of me not to try and build that character into something as much as or more than he ever was."

Wow. That's kind of awesome. Eisner wants to make Bazooka Joe 2.0.

I can see it now - Bazooka Joe 2.0 friends you on Habbo Hotel, pings you on Skype, he stalks you on every network/community you belong to, until you capitulate at last...and buy some gum.

We've been discussing - here and at my HBS blog - why brands are in decay, what next gen branding will look and feel like, etc.

If it's not intuitive yet, here's a great example of how not to do it.

That's more interesting than it seems, because the original Bazooka was a nascent example of branding done quite well - a comic that radically altered the experience of buying, well, gum.

Taking branding to the edge doesn't mean just making a "character" like Bazooka Joe or trading cards a la Topps "interactive". It means rethinking the economics of communication, the DNA which organizes it, etc, etc - to redefine value creation.

Weapons of Mass Destruction

Apparently, "Mass Interpersonal Persuasion is finally here".

No, it's not. That's called a umm...conversation.

Attempt manipulation all you like, but note - the costs far exceed the benefits.

Look, the other points on that list are quite good. But this one is a value-killer.

Why is evil the default state of thinking about business? It's just a stale leftover of the industrial economy. We don't have to think about business that way - and we shouldn't.

The New Economics of Brands

Hi everyone.

This week at my Harvard Digital blog, we're plunging further into the heart of the edgeconomy - getting very specific about what makes edge strategies different.

Last week, I noted a massive paradox: that Google has built the world's top brand - without advertising. But I didn't explain how.

The week before, we discussed why DNA - how companies organize and manage economic stuff - is so important. But again, we didn't discuss how - how does DNA impact strategy?

This week we're gonna tackle exactly those hows.

So if you're interested in following the discussion from the last couple of weeks to a preliminary conclusion, if you're interested in next-gen branding, strategy, advantage, etc - click over.

If you visit, make sure to read the comments - several of them are extremely insightful and add a huge amount to the discussion. Better yet, comment away, and I will try and get a video response up in the next couple of days.

Comment of the Month

From the TED thread:

"...Have you read the book Homo Sacer by Giorgio Agamben, an Italian philosopher? (I just finished it). While I find his style irritating and repetitive, I think he provides some deep thinking that supports your thesis here.

He writes about biopolitics (following Arendt and Foucault) but takes it further than them, identifying the root of Western political practice and its result, which he calls "the camp". (Read concentration camp, refugee camp, etc.)

Homo sacer (the sacred man) lives bare (naked) life - outside law, yet still in relation to it as exception. They are always in relation to a power that no longer recognizes them as having agency. They are men who can be killed without it being homicide, but cannot be sacrificed.

"In the final analysis...humanitarian organizations...can only grasp human life in the figure of bare or sacred life, and therefore, despite themselves, maintain a secret solidarity with the very powers they ought to fight." (133)

"...the camp is the new, hidden regulator of the inscription of life in the order--or, rather, the sign of the system's inability to function without being transformed into lethal machine." (175)

The book and its ideas require a great deal of thought, but when I read your post about TED it immediately resonated. In this reading, TED doesn't address biopolitical issues, and is, in fact, in a compliance with the very system that causes the problems to begin with.

This doesn't necessarily make TED a bad thing. Raising awareness of issues is helpful. And yet, it will get nowhere in creating real change, which requires an entirely new political system (acc. to Agamben).

Personally, I am not entirely sure where I stand yet on Agamben's ideas; I need to think and read more. But I thought I'd offer up the source, as I think it might help your argument."

Bolding's mine. An absolutely killer comment - reread it.

The bolded stuff has a deep resonance with one of the reasons why the DNA of the corporation (conferences, etc, etc) is in decay. It recognizes no agency but that of the boardroom.

In a world where the costs of doing business as usual are being revealed as well, the destruction of the world; in a world where power is shifting to connected consumers - these kinds of institutions are is in almost total decay.

Hey, Elizabeth - thanks. That was kind of awesome.

The Economics of the Macropocalypse

Sometimes, econ can be like crack. Look at a few numbers - hey, all's well with the world.

But it's not the numbers that matter. It's the relationships between the numbers that matter.

The Economist, for example, says:

"There is no denying that for some middle-class Americans, the past few years have indeed been a struggle. What is missing from Mr Obama's speeches is any hint that this is not the whole story: that globalisation brings down prices and increases consumer choice; that unemployment is low by historical standards; that American companies are still the world's most dynamic and creative; and that Americans still, on the whole, live lives of astonishing affluence."

This is yesterday's orthodox argument. And most serious economists take this story less and less seriously.

Why not? Because...ummm...the global economy is in a state of shock. If this story was true, we wouldn't be melting down.

A much more plausible story is this - one that forward-thinking economists are beginning to take very, very seriously.

Real wages have stagnated for decades. But corporate profits are at their highest. That means the net effect of global price competition is just to transfer wealth from the poorest to the richest.

China's exchange rate manipulation has flooded the US with artificially cheap goods. The real price of those goods is the ongoing implosion of the dollar, which, combined with the lack of growth in real wages, is, for most of the country, like being punched in the face - and then kicked in the gut.

Oh yeah - the other price of accepting China's gaming of exchange rates is a country of underemployment and gray market pseudo-employment.

Hey - welcome to your new McJob! We don't give a damn about you, we won't help you learn any productive skills - we just want to use you and throw you away. We all lose in the end, because innovation and productivity die, but at least we win for now (sucker).

Unemployment is also low because it's become chronic, and so a huge number of unemployed aren't counted at all - they've become invisible. We can only measure many of these guys indirectly - ie, 1% of the population spends time in prison, and is effectively excluded from making a productive contribution to the economy.

And that's not even getting into Chinese social costs - which is basically massive underinvestment in any kind of basic institution necessary for a nice life.

Meanwhile, because we've been loooking at superficial numbers that don't mean much - CPI, for example - while ignoring the obvious fact that exploding global demand is going to spike asset and commodity prices to levels never actually seen before.

The flipside of looking at superficial numbers is that we've been fooled by the boardroom into thinking that profit is a number that's economically meaningful. It 's not. And that means we're going to have to spend years trying to make sense of, well, the entire edifice of business of itself: another massive set of costs that we will all have to jointly bear.

That's mostly why America rarely still launches the world's most dynamic and interesting companies - it's just that many of the world's most interesting companies still choose to list in the States.

Ok. Deep breath. What does all that mean?

The economic equivalent of Freddy Krueger standing in the shadows: stagflation. It's just a word to many of you - but from an economic point of view, stagflation is a diagnosis just one step shy of terminal disease.

The Street has (finally) cottoned on to it now, we've been talking about it for months, it's almost inevitable at this point.

And it will probably feed back to our biggest creditor, China, probably cause them to revalue their currency, since their economy will break anyways - and then the real fireworks will begin.

Etsy/Google post - sorry guys. It's a longer post, and I've barely had time to breathe this week. Hopefully in the next few days.

The New Sources of Advantage

Interestingly, Fred talks about conviction as a trait that makes a great investor.

I think there's a deeper lesson. A deeply felt sense of conviction is something that makes a great company.

Unfortunately, it's something most companies, as they've become corpocracies, have lost. Most companies have nothing - nothing - they won't sell out.

In fact, being "corporate" has meant, for the last hundred years, exactly that: the willingness to compromise your conviction for cash.

That's nothing short of insane: it's a totalitarian kind of economic nihilism.

And so is it really any surprise that we're discovering that this kind of defective DNA creates little real, durable value?

In the edgeconomy, the game is very different. Anyone can sell out like that - in the blink of an eye. It's the ability to do the opposite that's a very real source of advantage.

Something we'll be discussing in detail at my HBS blog soonish.

With Friends Like This...

RWW guys - thanks for the discussion, kind of.

It's funny. Do you think there's a tiny contradiction in saying I'm "out there" - and then spending thousands of words discussing exactly the topic I raised?

Lulz.

Maybe it was the right question, and maybe what I'm talking about isn't very "out there" at all.

Anyways, Bernard's discussion is kind of fun. You guys should check it out.

The Long Tail of Gigantic Companies

So, there's an assumption floating around the b-sphere as a result of the Etsy discussion we kicked off that's a bit off the mark.

Here's how the 37Signals guys put it:

"...The true giants, like IBM, Microsoft, and Google, come to life so rarely that the chances of random company X being one of them is slim to the point that we might as well try to guess who’s going to be struck by lightning tomorrow or win the lottery."

In fact, it's the opposite.

Edgeconomy = turbulence + hypercompetition.
Turbulence + hypercompetition = lots of revolutionaries, lots of upsets, lots of volatility.
Lots of volatility = lots of new giants.

You can look at the numbers (hi, macro crisis). Or you can just look around. Where are they? Everywhere - literally. Mittal, Zara, Baidu, Embraer, etc, etc...

So nextism, if you like, is kind of important. Because it lets us understand what these guys have in common - if anything - that yesterday's incumbents don't.

Put another way, if you're trying to create new stuff, nextism is dangerous - it stops creative thinking. But if you're trying to understand stuff, nextism is an essential component of analysis.

BankrupTED

So, let me be a bit more blunt than I'd like to be. Do conferences like TED do more harm than good?

It's not just the fact that TED is just a wee bit pretentious.

The problem is simple. The underlying assumption is that we can help solve the world's big problems by putting a bunch of interesting people in a room and talking about stuff.

We can't.

In fact, exactly the opposite is true. The way we can solve the world's problems by involving the people who are suffering as an essential part of a living, evolving solution.

By making them part of the DNA.

That's not an argument: it's an economic fact. It's why guys like Muhammad Yunus change the world and win Nobel Prizes.

So TED - I think, just maybe, that what you're doing is even more damaging than mere elitism.

You're putting forth a new colonialism for the 21st century, a strange hybrid of techno-neo-hippie-colonialism.

But you've left out the most vital parts of those philosophies; the premises of your thinking are still the same: we're better than you, we can solve your problems, let us help you (instead of involve you).

Economic history, of course, has been a harsh judge of this approach. We know how it ends up: creating even more misery than went before. It's helping societies build the right DNA that fuels growth.

And that's exactly why, though TED is sexy, it's also kind of intellectually bankrupt: it's actively helping stop new DNA from happening.

Let me put it even more sharply. There have been gatherings like TED for hundreds of years. But the vast majority of the world continues to live in bone-crushing poverty, misery, and fear.

Think about that for a second.

That's an existence proof the size of the Milky Way that stuff like TED isn't part of the answer - it's part of the problem. It's a negative equilibrium: all that great thinking is directed to the place where it's least productive.

***

NB - Guys, I'm enjoying the debate, but note that I am not "bashing" TED. Nor do I think it's just wankery. I enjoy watching the talks. But I'm not sure it does more good than harm.

Let me put it another way. Conferences are one way to organize and manage stuff - a kind of DNA.

When the stakes are low - a conference for media deal-making or something - that's fine.

But when you get lots of brilliant people in one room, surely there's a way to organize it so more value is created than just lots of interesting talks. Surely there's a way to amplify the productivity of conferences like TED - because right now, it ain't too high.

Yes, there are pros to TED. But we have to measure more than pros and cons: we have to think about opportunity cost as well. That's what I mean by least productive.

The problem is that the very people whose problems desperately need solving the most - are always excluded by the DNA of orthodox conferences.

Next Wednesdays

Hey guys, I had a special request for a Next Weds tomorrow (Tuesday) night.

So, if you're around and interested, let's get together at Detroit on Earlham St in Covent Garden from 8pm.

Since I don't have a life, we will do both nights this week.

Is Etsy the Next Google?

So let's discuss a topic people seem to be quite interested in.

Is Etsy the next Google?

I think it just might be.

I'll save the reasons for tomorrow - suffice it to say that the amount of value Etsy can potentially unlock is absolutely world-changing. Those of you who've followed bubblegen for a while know it's been my favorite play for a very, very long time.

Just like Goog solved a Very Big Problem, so can Etsy...I'm just not sure the Etsy kru fully sees it yet. But then, neither did Google, from 1997-2002.

For now, fire away and let everyone know what you think.

NB -

Guys, if this post makes you angry, take a deep breath, ask someone for a hug, and chill out. There are way (way) more important things to get emotional about.

Here's Kottke, for example, spectacularly missing the point.

Kottke kind of absurdly suggests that there been only three revolutionary companies since 1960 anyways, so comparing Etsy to Google is meaningless. Actually, there have been hundreds of revolutonaries. Starbucks, LVMH, H&M;, MySQL...the list is enormous, and the value of the Dow/Nasdaq/etc vs something like the Ghana Stock Exchange Index confirms it.

Why so much heat/irrationality? Because I think a lot of you, like Kottke, are either new to bubblegen, and/or aren't actually seriously reading the post.

I'm not telling you Etsy is 100% for sure going to achieve Google's revenues 2 years from now. That's a superficial, not a serious, discussion; that's not what we discuss here.

Rather, I'm pointing out that Etsy has the potential to be as revolutionary as Google in terms of DNA, and that new DNA might just let it solve a Very Big Problem. That's the deeper discussion we are gonna have shortly.

It's economic causes - not finanical outcomes - that we want to discuss.

Thanks for all the comments so far, I think a couple of them have come kind of close.

2008 + The TechCrunch Effect

Mike A has mirrored this post anyways (with a few comments of his own, worth reading), so here it is again, esp for all of you who asked to see it.

Let me add something before it kicks off.

First, take a deep breath and relax. If you're here just to rubberneck, it's lame, and you should leave.

That said, I pulled it for two reasons.

First, because it was turning into a bit of a pissing match (with people I know and like, no less). That's distinctly not the point of Bubblegen - if people don't want to be discussed, it's their prerogative not to be.

Second, because the cost of criticizing TC is taking on the larger TC machine, now and in the future. You get almost instantly tag-teamed by several people at once - guys who can spend all day blogging about you and your post, no less.

It's not just a pain. I think that's fundamentally unfair. It's not a game that's worth playing. What should be debate feels suddenly more like minor-league intimidation.

Maybe that's why it feels like, as several commenters point out, there's an elephant glaring at everyone from the middle of the room; an elephant with a keen ear and a short fuse, whom everyone is afraid to look at, for fear of getting stomped.

Anyways, blah, blah, blah, here's the original post, enjoy (or not).

***

Admit it. You're getting just a wee bit tired of TechCrunch. Erick's posts are usually pretty cool, and TC UK is interesting. But otherwise...between Mike, Duncan, etc, it's a bit like mistakenly walking into a room filled with screaming harpies.

I'm gonna make a prediction. TechCrunch (etc) are peaking. Without investing in the community - instead of just endlessly playing the community against itself - further growth (real growth, not just beta) is going to be more and more costly.

I'm gonna call this set of dynamics the TechCrunch Effect. It's the opposite of building a community. Instead of making a set of people with similar interests better off, you wedge them and divide them.

Yes, you can get attention that way - by tapping the dynamics of competition. No, you can't sustain it - because the returns to competition are dominated by the returns to cooperation in a world where anyone can compete.

2007 was the year of networks. 2008 is going to be the year of communities.

If we're lucky, Etsy is gonna start emerging as the next Google. Microcommunities are going to explode. Etc. Why? Because at the edge, love is more powerful than hate - a lot more powerful.

NB - Mike B has a nice and funny response here, which you should read.

I have a feeling I'm gonna take maaajor heat for this post, so let me leave you with three thoughts.

1) When I say love in the context of communities, I don't mean just giving good reviews. I mean managing the community so everyone's better off, not arguing all the time.

2) If you wanna comment, no flames for either side please. Bubblegen and TC aren't competitors, there's no need for anyone to feel threatened, so let's focus on constructive criticism.

3) Yes, of course, I could just be wrong.

DNA and The Obama Endgame

Lots of interesting comments on the Obama Endgame post.

Let's talk for a sec about political DNA. A couple of people have pointed out that the prez - technically, at least - can't change the political DNA of Washington. That is, the DNA is hardcoded into the constitution.

I'm not so sure. Bush has radically changed Washington's DNA. True, he's subverted the constitution in many ways.

But if you look a little more closely, much of the DNA also lies outside the constitutionally ordained megastructure. Two parties, caucuses/primaries, funding rules, committee-led decision-making, how elected officials staff their offices, how the prez, ultimately, can softly restructure the rest of government via appointees, etc.

What do you guys think? It's funny - but the most intuitive example of DNA I think we can discuss ain't business, it's politics.

The Neverending Lameness of the Venturescape, Pt 28881

Ashkan has a long and interesting post about why most ad-supported startups will fail, but venture guys don't get it.

I think there's a simpler way to put it. Most ad-supported startups will fail simply because 1) ads suck, and destroy value, but 2) they're not creating new value by making said ads any better.

In fact, the less they all focus on making ads better, the worse each of these players is, because the mediascape just gets more polluted.

It's a classic example of a negative equilibrium.

How did we get here? Most venture guys, unfortunately, being almost as myopic as analysts, are more interested in revenue (yeah!! high-five!!!) than on creating real, durable, sustainable value by making ads that don't suck.

There's a universe of difference between the two. Think Facebook vs Google.

So: 1) lots of lame startups serving tons of crappy ads, soon to be followed by 2) lots of dead startups no longer polluting the mediascape with tons of crappy ads.

Macropocalypse, Special Welcome To Edition

oh hai. i'm stagflation. i'm in ur economy eatin ur growth.

The Obama Endgame

So. At last like the ten get-togethers I've been to, the big question has been the same: (when) will Barack Obama be assassinated?

Yes, it's an awful thing to discuss. But the argument's as simple as it is compelling (and admit it, you've discussed it lately too :)

At this point, his momentum is unstoppable. But he's as unstoppable as he is dangerous - to every vested interest in the universe, from lobbyists, to dictators, to corpocracies.

As Daniel Noriega recently said - Obama is leading what's essentially a revolutionary movement.

And that, for my money, makes assassination a distinctly likely event - from a strategic pov, more likely, in fact, than an Obama presidency.

If only there was an Intrade contract...

Now, please don't misread this to mean I want to see Obama get offed. Far from it - I think he's the closest thing we're ever gonna get to JFK meets MLK.

The parallels are striking. Those were the last two guys who wanted to revolutionize the country's DNA - who threatened multiple vested interests at once. And we know how - what a coincidence - both their stories tragically ended.

The Fourth Horseman of the Macropocalypse

What do Zimbabwe, the UK, and the USA have in common?

As it turns out, quite a bit - at least when it comes to broken DNA.

In Zimbabwe, it looks like this: a cadre of government thugs, eating what little fat is left on the bones of the country's decaying agricultural and industrial asset base.

In the UK and US, it looks like this: bankers cashing in million-dollar cash bonuses at the Ferrari dealership, while their deals go down in flames - and you foot the bill.

See the similarity yet? The underlying economic principle is exactly the same: without mincing words, it's theft; a transfer of wealth from the poorest to the richest.

Look. We can apply all sorts of rocket science to analyze this. And we will, at my HBS blog, in relatively short order.

But the reality is simple. It's not just that the guys who perpetuated the macropocalypse are laughing all the way to the bank. It's that if you don't know who the sucker is yet - that's because it's you. You are the pawn in this game.

Whether it's Bernanke slashing and burning the economy to a devaluation of Third World proportions, or Gordon Brown nationalizing the very real costs of greed and fear, the problem is the same: the DNA of the financial system is in near-total decay.

Economies that are run this way - to transfer value from poor to rich, rather than create value - end up in a single, bad, equilibrium: stagflation/hyperinflation.

Think Japan, or better yet, Zimbabwe.

Why? Think about it. In such an economy, the incentive for investment dies. And that kills any further productivity/efficiency/etc gains. And so the economy begins going into reverse, eating itself from the inside out.

So here - as plain as a sunny June day - is the fourth horseman of the macro crisis: instead of organizing and managing the financial system for value creation, the pliance and complicity of governing bodies in organizing and managing it so wealth is transferred from those who need it most, to those who need it least (and who are willing to abuse it most).

That sounds hyperbolic. Unfortunately, it's not a joke. It's an economic disgrace.

In fact, more than that - it's an economic act of violence: theft.

Edge Principles: Love > Fear

Found an interesting reponse to one of my points here -

"...

tja, true love is hard to find but definitely out there (apple, threadless, netflix, krispy kreme)

disagree."

Let's rewind and understand the relationship between love and ads: it's strongly negative. When consumers really do love stuff, those brands have to advertise less.

Why? Simple: because love isn't built by carpet-bombing people with costly ads.

On a deeper leve - as Threadless demonstrates - it's not the "brand" consumers love; and when people love stuff, they stop being "consumers".

We need a whole new vocabulary for these new dynamics.

But the point is: don't miss the forest for the trees. Yes, there are a handful of companies people love. But from an economic pov, those are the almost always guys that invest the least in advertising. They earn that love in more strategically meaningful ways.

The New Economics of Brands

Hi folks. This week at my HBS blog we're discussing the new economics of brands - as an example of how traditional sources of advantage are failing - in text and in video.

I've noted several examples of branding plays gone wrong here on Bubblegen (you know who they are) - but I haven't discussed the economics of brands, why brands are decaying, or what next-gen branding will look and feel like.

So if you're interested in a deep dive on brands, economics, and advantage, check it out. It was a fun post to write.

And, as always, please leave a comment there to let me know how you guys are enjoying the community/discussion/etc - I will try and get a video response going when you do.

Next Wednesdays

I don't know about you guys, but I'm jonesing for a Next Wednesday.

So let's get together this week. Same place as last time - Detroit Bar, Earlham St, Covent Garden, Wednesday night from 7pm onwards.

There's tons to discuss - if you wanna suggest a specific topic, comment away, email me, etc.

All are welcome, bring a friend, if you're really unlucky, I might shoot a video of you for my HBS blog.

En Direct

Hi folks - if you've never had the chance to hear me geek out in person, and you wanna do so, spend a sec to check out the video comment responses we're doing at my HBS blog.

I got a very interesting comment, and uploaded a longish video clip in response, discussing the changing nature of advantage.

It really does help bring the conversation to life.

I'm gonna try and do these regularly, so if you're interested, comment away there (unless it's about my incredibly nerdy sweater :)

Bubblegen 3.0

Hi everyone.

Let me take a few minutes to discuss some fairly significant changes to Bubblegen.

First, I am going to be creating a new kind of research institute: the Havas Media Lab.

Second, as some of you might have noticed, I am a discussion leader/blogger at HarvardBusiness.org, to help frame and introduce many of the ideas in my forthcoming book.

Let's take these one at a time.

Regarding the Media Lab, I've been working with the team involved for quite a while. They rock, and we all have a deeply felt interest in reinventing media, marketing, and brands.

The Lab happened because I don't think any of the standard models - venture funds, corporates, firms, etc - can really make it happen (or else it would be happening).

Hence, the need for a new kind of entity, which is focused on driving new ideas - but also focused on igniting experimentation and discovery.

I've talked to many of you about the Lab already. I'll be discussing the goals of the Lab both here and at the Lab's (currently nonexistent :) blog in depth over the coming weeks.

Next. As a discussion leader at HarvardBusiness.org, I'm gonna discuss big-picture issues about how strategy and advantage are evolving. The team at HBS Digital have assembled a group of some of the world's most serious business thinkers as discussion leaders, and it's a privilege to be added to that list.

I used to post a lot about bigger picture stuff at Bubblegen. But some of you have noticed that I've been holding back discussing exactly that here at Bubblegen for a while - now you know why.

So if you're interested, hit my HBS blog. The first post is a deeper discussion of something we've been talking a lot about here - DNA.

If you're a Bubblegen regular, let me know what you think by leaving a comment there - I could use the feedback, to help me understand how you guys can be members of both communities.

What does this mean for Bubblegen/advisory? I will continue to work with a small number of clients on advisory work, but the Lab's goal isn't strictly to be a consultancy.

What does that mean for Bubblegen/blog? Bubblegen is going to live on in much the same way it does now, discussing stuff in excruciating detail with lots of tedious jargon, just with a bit less frequency :)

I'm excited by all of this - and I hope you are too.

Edge Principles: Advantage is in the DNA, Yahoo + Microsoft Edition

So I've got a lot of comments and emails basically saying that you guys think that when I argue DNA will prevent Microsoft + Yahoo from creating value, I mean "culture".

That's inaccurate, so let me be (a lot) more precise - and skip to the end of this post if you've heard this part before.

DNA is how we organize production and consumption.

Corpocracies have a specific DNA: vertical integration, elaborate hierarchy, and lots of cronyism.

Open source communities have another: no bosses, always-on negotiation, and open but deeply interdependent production.

So let's try and recast the Yahoo + MS argument.

The point isn't culture. Rather, it's that Yahoo and MS are - and will be jointly even more so - unable to shift from core to edge leverage.

Consider the simple fact that despite a decade of countless billions spent trying, neither one has built a market, network, or community that ever really worked.

Why? Because they're already organized on a dying industrial paradigm. Yahoo is the ultimate siloed organization, where bureaucracy and fragmentation stifle radical innovation - perhaps the ultimate source of it's paralysis.

See the point? DNA is about how we manage - how we organize and manage production and consumption.

Google's Achilles heel is communities - but it's competence in assembling markets and networks is absolutely unparalleled. Again, the cause is DNA: Google manages consumption and production in radically different ways than almost anyone else in the economy, save Craigslist.

Google has a genetic makeup that lets it leverage the edge almost reflexively - but Microsoft and Yahoo have a genetic makeup that already organize production and consumption in a very specific way: according to the dying logic of an industrial massconomy.

Now, how does this affect strategy?

All the things everyone's ascribing to this deal - scale, etc - those are yesterday's sources of advantage.

The power of Google's DNA is that it lets Google tap entirely new sources of advantage.

A simple example. Even if Yahoo + MS combined had a larger market share than Google, who would be more likely to redefine brands? Of course - Google - because experimentation is hardwired into it's nervous system. The value of scale is constrained by DNA.

That's the point: in the edgeconomy, advantage is in the DNA.

Let's reverse that. Conversely, new DNA is yielding radically new sources of advantage, which dominate the network logic of a massconomy - and utterly eviscerate yesterday's sources of advantage, which are slowly dying in the ashes of the massconomy.

Victim of the Crime

You know, it's not often that we get to witness fatal errors. Strategic errors, sure.

But bona fide fatal - company-killing, firm-vaporizing errors - errors? Almost never - they're the strategic equivalent of meteor strikes.

Lucky us for, the heavens are raining fire today.

I hate to be so blunt, but I'm short of time today, so let me offer a guess: Yahoo + Microsoft isn't just a mistake - it's a double suicide; a fatal error.

Why? Neither company has the DNA to take on Google (let alone the massive number of startups waiting in the wings). Sure, they might collectively have the resources.

But DNA will always constrain YahooSoft from utilizing those resources in ways that create value.

Think Hotmail --> Yahoo Mail writ large. Think delicious --> nowhere. Think Microsoft hardball vs Google softball. Think of the near-total paralysis and groupthink in a YahooSoft boardroom.

The Street is thinking about this nascent industry in terms of "market share". That's shorthand for: "we have no real insight into competitive dynamics".

Competition in this space is - and has been - about edge competencies, redefining brands, and reshaping consumption.

Now look a bit further out. Microsoft is gonna blow it's entire cash pile on this deal.

That's not just a strategic error: it's going to be a fatal error.

Why? Combining bad DNA with bad doesn't yield good. It yields worse.

The challenge facing the media industry - the reason Google blew it's quarter - is to reinvent branding.

Do you think YahooSoft - a combined entity with even less empathy for connected consumption than each alone - really has any hope of doing so?

Not a chance.

I think - for what it's worth - that this is the end of Yahoo as we know it. Fine - the real Yahoo, sadly, suffocated a long time ago.

The real point is: this is the end of Microsoft as we know it. Yes, I know, finally, isn't it nice, etc - more to the point: the endgame will be to leave Google more firmly in the driver's seat than ever before.

The Macropocalypse is in the DNA

Finally, the realization is dawning.

It's not a liquidity crisis, or a solvency crisis - but a crisis of DNA (more).

The next stage of the crisis will be harder - because central banks don't have the levers to change the DNA of the financial system, or the economic system.

Their role is simply to target inflation (and/or unemployment). And that's increasingly part of the problem.

Rethinking the Corporation

A nice article from Businessweek exploring exactly what we've been talking about: the death of value creation.

Highly recommended.

The Worst Ideas of 2007, Or How Not to Revolutionize Marketing

For some reason, the media industry was gripped by a bizarre delusion in 2007 - that consumers (!!) love (!!) brands [insert boardroom high-fiving here].

Obviously, they don't - as Yahoo has discovered the hard way, Honeyshed/Coke/auto guys are learning, etc, etc.

Like I've pointed out many times - there's a simple existence proof that this proposition must be false: if consumers loved brands, brands wouldn't have to advertise.

The point is: media's central challenge in 2008 remains what was in 2007 - to rethink the essence of branding, and create new modes of communication consumers really do love.

What Infected DNA Looks Like

"Hey guys, we just lost $7 billion!! lulz!!!!111"

Ummm.

The fact that Socgen getting massively blown up doesn't inspire fear (or even loathing) - but a roasting and laughter should be a stunningly visceral example of the rot in the Street's DNA.

As a very simple example, there's almost zero incentive to manage (money, assets, etc) for long-run value creation, because near risk-free short-run compensation, like cash bonuses, massively outweighs risk-bearing long-run compensation. Etc...

This should make the larger point more intuitive: DNA is how we manage stuff. It's easy for this kru to laugh about blowing $7 billion, because managerially, it really is a joke to them - no one is really punished, their costs and benefits stay largely the same.

Google, The Macropocalypse, and Rethinking Strategy

We've discussed this particular principle - good beats evil - many times now.

Here's a visceral - and simple - example of the economics behind it, and, hopefully, if you can read between the lines a bit, why evil is driving the macropocalypse.

By doing good - killing domain tasting - Google takes a very real short run hit: but massively amplifies the long-run health and vibrance of the ecosystem.

Instead of resources staying frozen and monopolized, players in the ecosystem are more free to constantly probe for their most productive uses.

And so everyone's productivity is exploded - everyone is better off in the long run: Google, advertisers, publishers, and, of course, consumers.

That's razor-sharp next-gen strategy - a perfect, textbook example.

But let's think a bit bigger.

Imagine how different strategy - and the macro landscape would be - if players like the Gap, Ford, big pharma, and big food also thought this way.

The global economy would be a radically different place.

Bill Gates recently talked about capitalism failing the poor.

I think naive capitalism is increasingly failing us all - by forcing corporations to become corpocracies, and actually minimizing the total amount of value they can create.

Google killing domain tasting is, in it's own small, I hope, a powerful example of a very different kind of thinking about the origins of value.

Edge Principles: Open Beats Closed

You know, in 2008, we really should not be talking about Digg. At all.

That said...

Scott and Mathew think an open social network isn't viable. I'm not sure why, since Myspace (Mixi, blah, blah, blah) certainly is/are.

Here's an edge principle: open beats closed.

The converse is: you only have to close when your DNA isn't quite there yet; when the way you manage things still kind of sucks.

More to the point: closure is a sign of strategic failure in the edgeconomy.

Now, that doesn't mean everyone can do everything everywhere. Consider Wikipedia - it's remained open, anyone can edit stuff - though it manages edits very differently than ever before.

But Digg is different. The reason I don't think we should be talking about Digg is that it's frozen, paralyzed, as caught in strategy decay as Time Warner or Yahoo.

Kevin, Jay, and the kru haven't evolved the Digg concept at all (but for tiny, incremental tweaks to the same algorithm) in like 3 years.

More to the point, I'm not sure how serious they are about co-creating value with their community - Jay's comments are oddly reminiscent of the kind of waffling you hear from big media boardrooms ("it wasn't a revolt" --> "consumers love brands!!").

That's fine, they have their own reasons. But perhaps we would be better be discussing (really) revolutionary stuff.

The Ponzi Faceconomy, Pt 38881

Someone tell K@W that there is actually no "Facebook Economy" until the platform coordinator, aka Facebook, actually learns to create a proper, working ecosystem, where durable value is created.

Mini-games, zombies, and the bunker-buster known as Beacon do not an economy make - at least not a vibrant, sustainable, growing one.

Macbook Air: iPod or Newton?

Remember what the convential wisdom was regarding the iPod when it launched?

That it was pretty, but was easily outcompeted by other mp3 players offering better features - more memory, bigger screens, etc, etc - and so it was doomed to fail.

The iPod got slammed on it's release - because almost everyone failed to understand that Jobs wasn't playing an orthodox game of feature-based (aka price) competition.

Apple wasn't trying to incrementally improve a failing value proposition - but to blow it up entirely, and open up new strategic trajectories for an almost entirely moribund consumer electronics industry.

I think it would be wise to place the anti-hype surrounding the Macbook Air firmly in that context.

NYC

Folks, I will be in NYC late next week. If you wanna get together and chat, drop me a line...

Rethinking the Economic Institutions of Hypercapitalism

So...the last thing I ever expected was for me and Bill Gates to agree on the next big (big) thing - I've always seen him as more Vader than Yoda.

But that's the score; billg of all people, is essentially arguing the title of this post: that the naive capitalism system cannot allocate resources or capital efficiently in many more circumstances than we would like to admit.

This is exactly (the flipside of) what we were discussing a few weeks ago.

It's the conclusion I reached earlier this year, and why I chose thinking more seriously about hypercapitalism as the next big thing at bubblegen: capitalism fails too often, too flagrantly, and in exactly the wrong places, for me to be entirely comfortable with it as the edifice of a global economy.

So Bill has the problem exactly right - but not, I think, the solution.

Let's rewind. I've been talking a lot on bubblegen lately about the ability for 2.0 to massively solve exactly the problems Billg talks about - poverty, hunger, disease, etc.

Why?

Because the economic institutions of capitalism - firms and (financial) markets - alone can't solve these problems.

No matter how much money we throw into them, at them, through them - they are solutions for very different problems; economic problems dominated by equilibrium solutions and a limited number of homogeneous players.

The new economic institutions of hypercapitalism are different: (new kinds of) markets, networks, communities - and the radically different firms that power them.

The challenge, I think, for people who wanna really build the next economy, is making markets, networks, and communities become the glue holding the hypercapitalist economy together.

It's won't be easy. But that's always been the great opportunity for 2.0 - not more (retarded) Facebook clones, ad nets, etc.

I think it would be interesting to chat with Bill about this (which is the last thing I ever thought I'd say) - if someone can drop some this post his way, that would (maybe) be cool.

The Macropocalypse and the Perversity of Global Monetary Policy

A significant portion of the rotten DNA in the financial system is inside central banks.

There are many reasons, but to get to them, we've gotta connect the dots first.
What's really going on in terms of monetary policy?

The rot in the financial value chain is deepest in the States, where the seeds of the implosion were sown. And that's where the Fed slashed and burned rates like never before.

Across the pond, in Europe and the UK, where the rot isn't nearly as deep, and which received - rather than ignited - the virus, the ECB and BoE and refuse to cut rates.

That's a seriously perverse outcome.

If anything, monetary policy should be working exactly in reverse: tiny or no cuts in the States, to let the market punish transparency into the value chain and defeat the structural incentives for moral hazard; and significant cuts in Europe and the UK, to stabilize liquidity until said transparency does emerge.

This doesn't bode well for the immediate future. Central bankers have been, it seems, divided and conquered by the virus they should be working together to eradicate.

Next Wednesdays Tomorrow

Tomorrow, Jan 23, Detroit Bar , Earlham St, Covent Garden, from 7pm.

We will be discussing the macropocalypse, the Bernanke Put, why the 2.0 kru blew it in 2007, etc.

All are invited, bring a friend.

Why Marketing Sucks (For Dummies)

You know, strategy can often be deceptively simple.

Example. Ads (still) suck.

Explode the value proposition, make ads that don't suck, etc.

Please, someone - do it already.

The Davos Paradox and the Macropocalypse

You know, the irony of a "World Economic Forum" happening while the global economy melts down is a bit too rich for my palate.

And the fact that the topic is "collaboration" is like the icing on the cake.

Lulz.

But - unfortunately - it's not just a joke. Isn't there something (very) wrong with this picture?

Yup. It's just another example of the rot in the financial system's DNA.

How?

In a curious paradox, the very economic logic of Davos is itself toxic: that the people who we all benefit from discussing the most economy are CEOs and other assorted megacapitalists.

But the real problem isn't horizontal communication between CEOs - it's lateral communication; that shareholders aren't able to, can't, or won't influence the behaviour of said CEOs and the resources they marshal.

See the point?

What has, ultimately, brought the global economy to it's knees is that the firm itself, and the way it's managed, is in deep - perhaps terminal - decay. No amount of chit-chat between CEOs, superstar DJs, and even more CEOs is gonna fix that; it will just accelerate the spread of the virus.

The protestors, at least in this case, aren't far off the mark.

From a very real economic point of view, Davos is a facade, a prop helping the masquerade of value creation that is the massconomy wind down to it's inevitable implosion.

We don't need self-indulgences like Davos: what we need are better mechanisms to value, price, and allocate resources, and better techniques to manage and encourage economic actors to buy into them.

So forget Davos. Don't help prop up a broken machine built on toxic logic.

If you wanna see into the future, read this instead.

Or, better yet, start shorting evil - and going long good.

A User's Guide to the Macropocalypse

A deluge of email asking: what should I do/where should I invest?

It's an interesting question, and I have a fairly unorthodox answer.

Cash is a bad idea - the Bernanke Put means your dollars are going to be devalued, fast. Debt? lulz. Complex instruments, like derivatives? You must be kidding. Commodites, gold, oil? Maybe - if you have an appetite for near-total volatility and pain.

That leaves us with equity.

Here's a radical proposal.

I think there's a very simple way to profit deeply from the crisis.

Help fix the broken machine, and invest in companies that you believe create real, durable, sustainable value. Be a real shareholder (for a change). Don't just chase near-term profits, especially in cheesy, evil companies. Don't treat investing in a firm like a trip to the mall to buy disposable, generic, toxic "product".

Look, I'm not saying anything revolutionary. It's exactly what Warren Buffett has been saying like clockwork every year for half a decade.

People trivialize it by calling it "value" investing. Don't make the same mistake and fail to see the point. There's no other kind of investing, in the long run. The point of being a shareholder is to own the right to share in value creation.

In this crisis, there's a deeper logic at work to putting your money where your mouth is. Those players that survive will be the ones with better DNA.

So getting through the recession isn't about money - it's about being part of a larger economic system where the DNA isn't rotten. Of course, you have to play your part.

If you can't stomach a quarter of bad earnings, or all you're interested in is tomorrow's share price - you're the problem. I think the people that profit from this crisis will be part of the solution.

We'll talk about this in much greater depth over the coming weeks and months.

For now, leave your thoughts in the comments and let's discuss.

The Bernanke Put and the Macropocalypse

Lol, look, it's the (Godzilla-sized) Bernanke Put.

If you're not sure what just happened, let me spell it out.

By preventing the market from finding a bottom, the Fed just transferred risk from hedge funds, banks, and other people holding illiquid assets, to you - people holding liquid assets.

Bernanke is essentially inflating the US economy out of a debt crisis.

It will rally the markets in the near-term - but does nothing to change the rotten DNA in the medium-long run.

In fact, the problem with deflating your way out of a debt crisis isn't just that it destroys your credibility - it's that it destroys the market discipline, the incentive for value creation, etc.

Let me put it as simply as possible. Unless you're in on the fix, you just got taken to the cleaners.

Bush is gonna cut you a check for a few hundred bucks. The Street goes back to sipping Cris for a few weeks.

The dollar falls, the losses are still infecting the books, and Main Street spends even more money it doesn't have - at a steeper cost than ever before.

See the problem? The mortgaging of the American economy to dubious creditors continues; the rot infecting the financial body spreads - just at a more furious pace than before.

Despite superficial commentary like this, the Bernanke put won't have much of an effect. It's like treating cancer with Jack Daniels.

Yahoo, Please Don't Put Up a Fight

Viz.

Forget the nice market analysis - unfortunately, it's irrelevant. Yahoo's problem is DNA. And bad DNA means Yahoo can't - evar - make the right decisions; and that it must continue to be a deadweight loss to the mediaconomy.

Yahoo - You've held back thousands of very talented people for the last 5 years, and prevented them from making the fullest use of their talents and insights.

We would all be better off if these guys were freed from your shackles; keeping them inside your doors - working on dead-end projects and hamstrung by political infighting reminiscent of an industrial era monolith like GM - is by far the least productive use of their time.

It is, ultimately, because your management is lame.

You guys all let Terry Semel make the third fundamental error of strategy - to mistake deal-making for strategy. In the process, you sold out a deeper set of principles; you forgot that the job of a revolutionary is never to sell out, and the point of a strategy is fundamentally to create new value.

The fundamental assumptions behind your thinking are deeply in error, and so your strategy is in massive decay. So please, don't put up a fight - let these guys go build the cool startups and pioneer the radical innovation you've stifled and suffocated for the last half-decade.

Black Tuesday

You know, when I posted this morning, I didn't expect global markets to fall by 4-7%.

So was today the crash - or are the real fireworks still to come? Was today Black Monday, or will tomorrow be Black Tuesday, etc?

I think the worst is yet to come. On the simplest level, historic crashes are more on the order of 10-20%.

But let's think a bit harder about it, with a bit more perspective.

You know, I'm not a big markets guy. I almost never follow the vagaries of the various financial markets - because I think they're more noise than signal.

In fact, not so long ago, for my MBA internship, I was a trader (of CDO's and credit derivatives, irony of ironies). And I found it to be the most mind-numbing job evar - just fractal patterns of white noise and feedback flowing from trading screen to trading screen, zeroed out of any economic meaning.

But what's happening in the markets these days is different. It's very, very important.

Every day brings fresh signal - not noise. And the signal is a bad signal.

The not-so-secret secret on the Street is that what's going down in the markets is qualitatively different than before. Very different.

Last time the markets imploded, it was because a single (big) hedge fund blew up (LTCM, you know the story). The time before that, it was because a trading strategy (portfolio insurance) blew up.

But this time, it's because the viability of the very institutions at the heart of the financial system is in question.

See the difference?

It's a huge one. Purely quantitatively, the difference is orders of magnitude. This crisis is already on the order of hundreds of billions; the last crises were on the order of tens. But qualitatively - last time, the value chain itself wasn't coming apart: this time, it most certainly is.

So tomorrow is gonna be a critical day.

Is it going to be an extinction event? I'm not sure.

But the point is: every day that players forego new DNA, the probability of an extinction event continues to grow (something like exponentially).

So even if Black Tuesday doesn't happen tomorrow, the pressure for a black day will continue to mount every day - slowly but surely poisoning the global economy.

The reckoning - the readjustment of expectations downwards as the extent of the losses become less hazy, and growth implodes - isn't, after all, something that can be put off forever.

The Second Horseman of the Macropocalypse

Lots of talk about whether we're in a recession - all of it irrelevant.

Are we in a recession? Economists look at lagging indicators to gauge recessions.

In fact, when you look at leading indicators, we're way past the point of a simple, temporary recession.

The climate of fear across global financial markets is fast approaching hysteria.

The virus that was born on Wall St has now reached across the globe to the Bank of China, which has begun writing off subprime debt.

Merrill Lynch, in case you aren't keeping up, is actively - and furiously - being unbundled, in an attempt to keep it viable.

Here's a fun bit of analysis. My numbers indicate that the megabanks can endure about another 7-10 writeoffs of similar magnitude before the global financial system actually...ummm...breaks.

That might sound like a nice cushion.

But it's not. Because the fundamental problem still remains: no one has any idea of the actual magnitude of the losses.

Why not? Because the DNA of the Street is deeply, gangrenously rotten.

Today's Wall St and City of London exist to profit by "ripping your head off" - by doing deals where everyone else is worse off. That is, the hidden costs of capital have exploded.

The point is simple: an economy where the costs and risk of capital are increasingly costly in the long run cannot go on functioning.

Such an economy is a shell game; a masquerade - because the supply of value creation implodes in line with the cost of capital.

Just ask the small towns who got ripped off. Fooled me twice, etc. More to the point, take a look at Robert Mugabe - because Zimbabwe is the endgame of an economy where capital is prohibitively costly and securities & assets are dominated by total uncertainty.

So the cushion banks have can only hold the financial system together for so long - if the underlying problem of DNA isn't addressed, the centre cannot hold forever. The gears will grind to a creaking halt.

Despite sheikhs and "sovereign wealth funds" here and there pumping liquidity into the system - notwithstanding the fact that dumb money is perhaps a greater challenge a simple lack of liquidity - the deeper problem remains.

There's not enough dumb money in the world to keep this broken machine running indefinitely.

To mix metaphors - at the very least, we have to be able to diagnose the extent of the infection to be able to treat the disease. Until we can assess the damage done, arguments over whether we're in a recession are like fiddling while Rome burns - because the crisis will always and everywhere keep deepening and darkening.

NB - Got some heat for referring to SWFs as dumb money. Guys, that's not me being a jerk - unfortunately, it's reality.

SWF's don't deliver returns in line with risk. Even the stars, like Temasek, have consistently underperformed market indices, etc, etc. That shouldn't be a surprise - they don't face nearly the same discipline as other funds do etc, etc.

And that they're buying stakes in megabanks tells us just how deep the rot in the financial system really is; from an economic and strategic pov, the market is telling us that even these deeply inefficient institutions are more efficient allocators of capital than megabanks/institutional shareholders are.

Audience financed film

Shouldn't come as a surprise to b-genners, still thought it's worth noting it. It's quite a new media story : an independent, semi-broke artist creates animation and publishes on her blog. The art acquires cult following on the net, the artist gets encouraged to make more strips. Animation gets selected into a film festival, needs money to turn animation into 35 mm film, raises money from her current audience through donations on her blog.

When Sita Sang The Blues

The Strategic Bankruptcy of the Boardroom, Writers' Strike Edition

Wanna know why the writer's strike keeps dragging on...and on...and on? Ultimately, it's because boardrooms still don't have a clue about how or why media and consumer economics are in shock.

Media boardrooms, today, are like pathological versions of these guys.

You know what I'm talking about - the hobbyists that very elaborately re-enact old battles.

Except where for the hobbyists it's just, well, a hobby - media boardrooms are trapped in a fantasyland where they goose-step through yesterday's imaginary battles endlessly.

Of course, the only thing left on that battlefield today are the ghosts and shadows of a dead industrial past.

For example. I'm astounded (honestly) that in 2008, the general counsel of NBC can say:

"...Fair use in the digital age is the same as fair use in the non-digital age."

Oh, the epic, epic lulz.

Nothing could be further from the truth. Tim Wu, in the same debate, argues what I pointed out a depressingly long time ago: that in fact, the economics of copyright are deeply + irreversibly broken, because in an edgeconomy, people sharing/hacking/using/etc your goods can actually create massive amounts of value for you.

How massive?

Well, for example, MySQL just created $1 billion of value. That's an existence proof the size of Jupiter of the negative value of fair use.

Or you could just take a look at Google's market cap.

Look. There's a very powerful (exponential) correlation between mediacos who refuse to drop yesterday's tired and wrong assumptions, and the depth, intensity, and duration of strategy decay of said mediacos.

Put more simply: to craft strategy, you must have an accurate understanding of economics.

But when you've can't even understand the most basic economics of your business - when you've got the economics utterly ass-backwards - don't be surprised when connected consumers, shareholders, and radical innovators all kick you squarely in the face.

More concretely: we can't craft new solutions to old problems - like the strike - without understanding the next economics of media.

See the point? Guys like Rick Cotton are still arguing furiously about a world which no longer exists. Media boardrooms are stuck in fantasyland: they've totally - seemingly absolutely - lost the ability to think, reason, and judge with any validity or accuracy.

Ultimately, the rot is in the boardroom, and it's high time Google (etc) put these jokers out of their misery. They are, at the moment, a deadweight loss to the economy.

You know, Heroes is my favorite show. I luv it to bits. Or, at least I did - until the strike killed it dead.

So imagine how much better it would be - how much better off everyone would be, from an economic point of view - without these clowns in the loop.

The Death of the Modern Corporation, Special TWX Edition

Congratulations, TWX, you've just made the biggest strategic error of 2008 (so far :)

Why is this move is an error?

On the simplest level, it implodes the value proposition, destroys market space, and massively amplifies the incentives for innovators to capitalize on that slack demand. All this while deepening the competence trap TWX is already in - to which there's only one real solution: unbundling.

On a deeper level - does monopoly power give telcos the opportunity to end flat bandwidth prices?

In some areas, for a while, yes.

In the bigger picture - no.

Why not?

Simple: because they have no market power in the next value chain. Who does? Context guys - Google, etc.

Let me draw an analogy. It's like a cute little bunny rabbit on a moped trying to play a game of brinksmanship with the Millenium Falcon. Guess who's gonna lose?

But there's a deeper point, which is more important. Why do some firms seem stuck in an almost robotic cycle of strategic error? Why do they keep making bad decision, after bad decision, after bad decision?

After all, it's been almost 10 years of strategy decay for TimeWarner. That's a very long time.

The answer, of course is: it's in the DNA. It's not that TimeWarner made the wrong choice: rather, it's that its DNA prevents it from making anything but the wrong choice.

In this case, as a vertically integrated player with a totally obsolete set of managerial techniques, TimeWarner's ability to navigate strategy space isn't just limited - it's nonexistent.

Just ask yourself: is there any better way to commoditize yourself than failing to engage in strategic renewal, and instead playing elaborate pricing games?

Of course not. This move is bereft of insight or imagination - but, unfortunately, TimeWarner can make no other.

So, for TWX's sake, I hope that moped has like level 4 billion plasma shields - because the game it's playing isn't just dangerous, it's suicidal.

Why HD-DVD And Blu-Ray Are (Strategically) Obsolete

So...should you care about the so-called HD-DVD/Blu-ray standards war?

No.

Why not? Because it won't make a bit of difference to the larger outcomes players along the value chain realize - whether content, hardware, distribution, etc. In fact, it's just a waste of your time - though it's geekily sexy, from an economic pov, these competitive dynamics are already thoroughly obsolete.

Standards wars with heavy fixed costs and closed platforms are deeply dominated - and deeply toxic. Today's economics are vastly different - and it's exactly vaporizing closed platforms and fixed costs that's where the real value is.

If these guys were really interested in revolutionizing their creaking, industrial-era business designs, they'd be playing very different games; they'd be competing through openness and hyperefficiency, not coercion and control.

But they're not - they're just interested in propping up dead business models with marginal productivity gains from increasingly onerous capital investments. And that, of course, is a sucker's bet.

So until the game changes - ignore it. It's just noise, because even if it earns video players a few more years of marginal profitability, it certainly won't pull them out of deep, enduring strategy decay.

The Economics of Data, or Why Edge Principles Rock

So here's a particularly powerful mini case-study of competition at the edge - if you're interested in this stuff, you can use it to think about how the Edge Principles help guide and shape strategy.

Google + Facebook join the Data Portability Group.

Lulz. It's exactly what we were talking about last week.

At the risk of repeating myself...

"...Success isn't determined by how hard I can exclude you from scraping your data - but how effectively and efficiently I can help you share/use/reuse/hack/etc it.

Let me try and put it more simple. Data is inherently valueless in the edgeconomy, because it's infinitely replicable. Any structure seeking to limit access to data will simply be too radically inefficient for the market to bear in the medium-long run. So a massconomy strategy of "owning" a massive stock of data is destined to crash and burn."

Look. I've been trying to explain for a while (and taking a lot of heat for doing so) why openness (vs closure) and good (vs evil) were going to be, inevitably, the equilibrium points of this particular contest.

So here you go - voila.

But that's not really the point: the real point is that it was less a prediction than a simple extrapolation: these competitive dynamics are utterly and deterministically coded into the economics of data.

So this should be pretty strong evidence of the deeper lesson: you can't beat the economics. Fighting deep economics shifts is a certain path to strategic error.

No matter how lame and evil Facebook is, no matter how behind the curve Google is - these moves are written into the structure of the edgeconomy. Google and Facebook had to make them, and will continue to have to make them - there no real alternative.

Yeah, yeah - they just joined the group, nothing's really changed yet, etc. Don't miss the forest for the trees - there's a deeper economic logic at work here: my data is (far) more valuable when it can be remixed with yours.

The next step, of course, is to learn how these new economics lead to new sources of advantage...

Think about it this way: if either Facebook or Google had followed either of the Edge Principles we've been discussing in this case (good beats evil, open beats closed), how much better off would they be - and, consequently, how much better off would everyone be? A very, very large amount.

BGSL 2008-2010: Rethinking The Economic Institutions of Hypercapitalism

I usually make predictions at the beginning of the year. Not this time. I think 2008 is going to be an important year - and it's important for us all to kick it off with more depth.

What's gonna happen in 2008? The macropocalypse.

It's not a credit crunch, or a liquidity crisis. Unfortunately, it's a lot deeper than most of us think.

Let me try and explain what's really going on here.

The real problem is that the firm - the corporation, as the fundamental institution of production - is deeply and irrevocably broken. It's DNA is in shock. The corporation we've created is a monster; a form of organization growing more pathological by the day.

BGSL studies industries, markets, firms, and their economics. So those (really) are strong words.

But the evidence is, at this point, almost impossible to refute.

Is there much difference between banks ripping off small towns, and Wal-Mart's active exploitation of sweatshop labour?

No. They're symptoms of a deeper cause: the decay of the firm itself.

These are brushstrokes in a larger, darker picture: moral hazard is rife across the productionscape.

To be blunt: today, every industry across the larger economy is marked by deep, systemic moral hazard.

That's not just depressing: it's shocking.

I started bubblegen by studying the most flagrant example: record labels, the RIAA, and the MPAA.

But think about how food players have created an obesity epidemic. Or how pharma players have spent billions upon billions - to subvert and replace value creation in healthcare with push marketing. Or how Detroit spent continues to focus on coercing people, cities, states, and nations into consuming car afer car - instead of on durable, sustainable long-run productivity and efficiency gains.

The virus is rotting the system from inside. The hypercapitalist economy we've built isn't about deep, sustainable value creation. It's become about simply shifting value from one party to another.

Whether it's from small towns to Wall Street bonuses, or from Chinese migrant workers to Wal-Mart's income statement - what most firms are doing - what they are actively built to do - is exactly the same: actively and deliberately failing to create value.

But the game is fast coming to an end. The emperor has no clothes. The masquerade of value creation is can't go on forever. No economy can survive where value doesn't get created.

It's time.

The need for fundamental, systemic reinvention has never been greater and more pressing. Tomorrow's revolutionaries are going to face the task of reinventing the institutions of production - and they will unleash tidal waves of new value by doing so.

So forget predictions for 2008.

Take a long, hard look at the economy, at your industry, at your market - and what's wrong with it. And if you're a venture guy, an entrepreneur, a beancounter, a geek - whatever: start thinking about doing something about it now.

Because players who don't simply won't survive the next five years.

Thinking Strategically About Open Pricing

Trent Reznor's experiment with open pricing gets mixed results, blah blah blah, or so the discussion across the blogosphere goes.

Actually - no.

1) Reznor's experiment wasn't about open pricing. He fixed a $5 price. The point of open pricing, of course, is to price discriminate, and let people pay different prices according to value.

2) Before we go off on rants about how open pricing can't work, we'd be well advised to question the (wrong) assumption that open pricing = $billions.

Not every experiment with open pricing will be a "success". Why? For the very simple reason that the music in question might suck.

See the point? A successful open pricing experiment might yield little value if the music sucks. That, too, is efficiency - which, rather than cashflow, is the economic and strategic hypothesis these experiments are testing.

Wow. Om, dude, get better soon. Much love from London.

2008: Edge Principles - Think Bigger

OK.

Why else did almost no value get created in 2007?

A massive reason is that media players aren't thinking big. There's no scope of vision.

Consider one of my favorite lame plays - Honeyshed. A portal for branded entertainment.

Lulz. Are you kidding? Honestly - who cares?

The industry is crashing and burning, it's structural fabric has to be rebuilt, that means: new value propositions, new value chains, new market space, new industry boundaries, new revenue streams, etc.

And, instead, we keep getting stuff like Honeyshed: the same old lame thing.

It's kind of amazing.

Look. You can't be a revolutionary unless you're, well, revolutionizing something. Offering not just something new - but something audacious, big, sweeping, grand, epic.

The size of the things we're focusing on just don't cut it. Even if they're successful - so what? The marginal value they're gonna create is tiny.

Part of the problem is venture guys. They're so trapped in either glad-handing or spreadsheets, they seem to have forgotten what truly radical innovation looks like.

But a huge part of the problem is entrepreneurs. The current crop of entrepreneurs just isn't thinking big enough.

There are no shortage of massive problems next-gen media plays can help solve. Global hunger? Check. Healthcare? Check. Moral hazard across the financial system? Check. The loss of social cohesion? Check. The massive shift of global labour from town to megaslum? Check. Exploding demand for energy? Check.

Simple example. Subprime crisis, global mortgage meltdown, etc. But all Zillow's doing is pricing houses. That's now a knock on the Zillow guys - I think Zillow rocks. But I think the opportunities open to it are far vaster than the opportunities it's pursuing. How about fundamentally redesigning the way houses are bought and sold?

The point.

"Branded entertainment" - and all the other puny ideas we've had - are failing to create value because they solve no real economic problems.

In fact, they're non-ideas. Compared to the above - which are very real, very pressing economic problems - they're lame, nothing, nonexistent, tiny.

In 2008, everyone across the venturescape and mediascape, I think, would do well to think much (much) bigger.

In fact, there's a deeper economic principle at work here. In a discontinuous world, incrementalism is deeply toxic. It plunges us more and more deeply into competence traps, and leaves us more and more vulnerable to competitors who are busy revolutionizing industries, markets, products, services.

Data is a Commodity, or How Not to Revolutionize...

2007 was a non-event. Nothing much happened in the mediascape, and next-gen media plays were lame, lamer, and lamest.

Despite the hype, just think for a moment about the numbers. Facebook achieved a huge valuation - but created very little value. Google pioneered almost no new revenue streams. Yahoo went from ailing to terminally ill. And mass media, of course, continued it's long spiral into deeper and deeper strategy decay.

The challenges for media in 2008 remain the same as in 2007.

But there's a deeper question

Why the malaise?

Fundamentally, because decision-makers are failing to understand next-gen industry economics.

Here's a nice example. Everyone's discussing what seems to be a foregone conclusion: that data's the valuable thing, so who own the data? But no real insight seems to be generated by this discussion - because the premise is erroneous.

This is an old question. We discussed it at USV Sessions two years ago - I think it was phrased, "What's the value of data in an open world". And even then, little insight was generated.

It's the wrong question. Data isn't the valuable.

In fact, data's a commodity. We're drowning in data.

Think about it this way: the lower the cost of interaction, by definition, the more abundant data is - because every interaction creates reams of data. More data is created tomorrow than was created yesterday. And so on.

What is valuable are the things that create data: markets, networks, and communities.

Google isn't revolutionizing media because it "owns the data". Rather, it's because Google uses markets and networks to massively amplify the flow of data relative to competitors. Even when Google opens up more and more data - and make no mistake, it will - it will still realize an advantage because

When we look at things this way, the picture changes.

The way we're discussing media is still focused on exclusion - "it's their service, they own you". That's inaccurate. In fact, what's strategically critical aren't the costs of exclusion, but the costs of inclusion.

Success isn't determined by how hard I can exclude you from scraping your data - but how effectively and efficiently I can help you share/use/reuse/hack/etc it.

Let me try and put it more simple. Data is inherently valueless in the edgeconomy, because it's infinitely replicable. Any structure seeking to limit access to data will simply be too radically inefficient for the market to bear in the medium-long run. So a massconomy strategy of "owning" a massive stock of data is destined to crash and burn.

Rather, what is valuable is being plugged into (and plugging others into) the right flows of data. That's what Google does. You ask, I bid - flows. It's what Facebook refuses to do.

And it's a small example of why media - in 2007, even new media - sucks.

We can't reinvent industries if we don't think more deeply about their economics.

There are other reasons too - the most egregious being the tiny, slmost pitiably small scope of vision of today's so-called revolutionaries - which I'll discuss in turn.

"...Maybe Jeff Bezos does have a hit on its hands."

Lol, unintentional irony of the day to Valleywag.

The Economics of Evil

Nic asks - can evil still be successful?

Viz, danah:

"...Given what I’ve learned from interviewing teens and college students over the years, they have *no* idea that these changes are taking place (until an incident occurs)."

It's a good question.

Let me try and make the economics of evil crystal clear, by discussing Facebook (again :) .

Evil isn't (just) a PR issue.

That's only the most superficial cost of evil.

If you've been reading, you'll note I've said many times - evil isn't a problem because of the bad PR it generates.

Rather, evil is dominated in the edgeconomy because it destroys the potential for future value creation.

Because Facebook is evil, it created Beacon, which actually raises the costs to interaction, imploding the utility of the network.

So whether or not your average lame brainless Ivy League teen is aware of it - he/she will feel it's effects, and their behaviour will, in turn, begin indirectly to shift.

So there are two effects. One is an information effect. I know you're evil, so I won't directly interact with you. That's a weak effect.

The stronger effect is the second: when you're evil, all else equal - even if others interact with you - your ability to co-create value implodes: because you make moves which are focused on shifting costs and extracting value, rather than creating it.

But it takes two to dance the tango of co-creation.

Conversely: when you're evil, the only game you want to - or can play - is domination.

That's exactly Facebook's problem: because it's evil, it's massive network is a deadweight loss - Facebook is learning to co-create no value with it, just trying to extract value from it.

And that's deeply dominated. Transferring value (from consumers to advertisers) isn't anything resembling strategy: the value of the network either shrinks or stays flat - but it certainly doesn't grow.

And from a strategic point of view, that just opens massive market space for other players, by raising the costs of interacting on Facebook.

Now, yes - the initial effects will be slow. But they're, like most other things, in the edgeconomy, nonlinear. Once the inflection point is reached - bang.

These economics hold true at every level of the next economy. Whether it's Ford, P&G;, IBM, or CBS - good beats evil.

If you really wanna think about this stuff, reread this post.

Ignore All Rules

If you think there are immutable rules, you...ummm...kind of missed the point of the whole thing...

It's a nice illustration, though, of just how hard it is to stop getting people to follow rules. Even when they don't exist, we've been so conditioned by industrial DNA that we make them up...

Guys, if you're a decision-maker (investor, exec, whatever, you have skin in the macro game basically), I strongly urge you to go back over the last few days and read my macro posts.

When you put all the tea leaves in the same cup, there is something seriously wrong going on (way beyond what the markets have currently factored in).

I'm hardly one to get at all excited about the macro picture. I generally find it incredibly boring and lame - which is why I rarely write about it.

Today, though, rereading my macro posts, I actually feel a bit sick (seriously).

The First Horseman of the Macropocalypse

What - really - is the first horseman? After all, I've been talking about it for a few days now.

It's simple: the sheer inertia that prevents the machine from being dismantled slowly and piecemeal, meaning that it will have to fall totally into decay, before the incentives are great enough for a better financial system to be built are great enough.

Look. I know this stuff sounds a bit ott. But I'm not kidding around.

Consider (in the comments):

"...Full credit here goes to Brad Hintz. This is just a few paragraphs from a piece he put out the day before the TAF was announced.

The reason that funding tightens at calendar year-end is that as December 31 approaches, commercial banks begin to reduce their discretionary lending activities in order to "window dress" their balance sheets for year end. And as this large funding source disappears, the cost of funding over that short period near December 31 rises rapidly. For the fixed income divisions of the institutional brokerage firms, because their year end is November 301, this presents an earnings opportunity. The US brokerage firms increase their balance sheets and purchase assets that have been shed as part of this year-end window dressing by the commercial banks and provide funding at highly attractive rates2 through financing trades.

This bit of Wall Street trivia is important because the 2007 year end is going be much, MUCH more 'exciting' than normal because major commercial banks around the world, which have suffered losses in Q3 2007, are now in challenging capital positions. To shore up their Tier 1 capital ratios and to appear both liquid and financially strong when they print their 2007 year-end balance sheets, the only available solution is to reduce discretionary loans and shed assets prior to year end."

Bolding's mine. In other words, the Fed's plan is timed perfectly to let banks shore up balance sheets when exactly they need it most - and so the dance of simulation can go on for another few quarters.

But it's a short term plan - it doesn't fix any of the problems in the DNA of the system.

In fact, it amplifies then: by granting the banks access to cheap liquidity at exactly the critical juncture when they need it most, the Fed is actively, deeply, and durably destroying the incentives for reform.

Look: I used to call this the Wall Street Virus - the near-total moral hazard rife on the Street for the last...well...forever.

Now, the Fed is - astonishingly - letting the virus multiply.

That's inertia. The machine is malfunctioning, but it's being kept running: the costs, the Fed reckons, to the larger economy, are just too great.

So the old, creaking, decaying system is held together with a bit of glue and a prayer.

Of course, that just means - when the reckoning comes, it will be that much worse. The costs aren't going down - they are buried inside the system, eating it from the inside.

And the failure of regulators to address the real problem is going to let the viral load of moral hazard explode - until it totally rots and consumes the body of the financial system from within.

Look: that may sound extreme. But it's actually tame, compared to the massive implosion in future value that's taking place globally.

The Accleration of the Macropocalypse

Inflation fears explode.

The macropocalypse is descending, like a giant bird of prey, faster than anyone thought it might.

Let me spell out in painful but simple detail what's about to happen.

The macropocalypse isn't going to be just another recessionary period.

What the macropocalypse really means - and I've been remiss in not writing about it for a year or two now - is that nothing less than a fundamental redesign of the global financial system is necessary.

OK - honestly. That sounds a bit silly. I feel a bit retarded even writing it :)

But the reality is: the centre cannot hold - the current global financial system simply cannot allocate capital, assets, risk, or returns with any semblance of efficiency anymore.

And that means, in turn, that the ensuing period of instability is going to be - until the machine is reengineered - to put it bluntly, a time of global financial crisis.

The structural pressures are too great to bear, and there is a choice of discontinuities, each vying to be first to bring down a major global financial institution.

When that happens...

Unfortunately, it's the guys closest to the edit - the traders - that can feel this in their bones. With a few notable exceptions, like Stephen Roach and Nouriel Roubini, most economists - the guys that influence policy, etc - are missing the forest for the trees; focusing on orthodox ideas like simple liquidity crunches, instead of the fundamental rot in DNA that's causing liquidity to evaporate like water in the desert.

The Economics of Community, or How to pwn Google

Google Knol is (unfortunately) an error. It won't work.

First - note that Knol is nothing like wikipedia. If you think it is, you're really not thinking deeply about this stuff at all. Knol doesn't have any of the managerial DNA that Wikipedia does.

It's more like Squidoo - and we know how that story ended.

And so - you can reread my peer production ppt to think about why - the economics don't give it any advantage over Wikipedia. Knol doesn't have the potential to realize (hyper)specialization gains as deeply as Wikipedia.

There's a deeper point. Google is great at markets. But Google has always failed at networks and communities. That's kind of in it's (hyperquant) DNA.

I mean knol is being announced by Google's engineering vp. Lolz. That's telling of Google's DNA - and why that DNA always blocks Google from building true networks/communities.

Let me make it as simple as possible: communities need love to work - not math.

But Udi says:

"Knols will include strong community tools. People will be able to submit comments, questions, edits, additional content, and so on. Anyone will be able to rate a knol or write a review of it."

Lolz.

Udi, Larry, Sergey, Eric - uhhhh...communities aren't tools.

They're ways of organizing production. Just like Adwords isn't a tool, but a set of incentives and outcomes - so are communities.

That's why you guys are almost perfectly consistently unable to ever build a real network or community: you view them through the narrow lens of geeks.

Let me reiterate: communities need love, not math. Communities have sprung up in the unlikeliest of places, with minimal "tools" - because the organizers have discovered how to demonstrate their love for stuff, and surface it in others.

Let me make the point even sharper.

Udi thinks the problem is:

"...But not everything is written nor is everything well organized to make it easily discoverable."

Actually - that's the solution.

Because communities are deeply messy places: that's a deep part of how they create value. Denim lovers will never talk about, for example, their favorite jeans, in ways that will be "easily discoverable" - because the more you love something, the harder it is to fit your relationship with it into an algorithmically predetermined box.

In this messiness, funnily enough, they're not so different from markets. But where Google can harness the messiness of markets - it sees only disorder and chaos in communities.

That's unfortunate.

Because unless knol is a (true) market, network, or community - it stands absolutely no chance of competing with Wikipedia. It's economics are almost totally dominated - if not totally nonexistent.

The Macropocalypse and the Bernanke Put

So...this is another important post. Read carefully if you're following the markets.

As it turns out, there is a Bernanke put, after all.

It's just better disguised than a Greenspan put.

How cute.

Except it's far more pernicious:

"...http://www.frbdiscountwindow.org/discountmargins.pdf

If I've read the schedule correctly the "successful bidders" will be able to lodge toxic waste ABS as "collateral" for these loans. Triple A rated ABs, without verifiable market values, will receive 85 cents on the dollar. "Non AAA" ABS will receive 80 cents loan value on the dollar. This is many times what the ABX indices say this junk is worth.

Question. Is anyone aware of a bank failing to take back, i.e. re-purchase, securities they have lodged with the Fed? What a neat way of getting rid of your stuff that's maybe worth 25-35 cents on the dollar for 80 cents, just by pledging it as collateral and then failing to take it back at the expiry of the loan. A bailout in disguise???"

I've been hearing rumours of exactly this for a while now, so I'm fairly sure it's on the level.

Let me translate. The ABX indices (=the market) value the same (junk, subprime infected, etc) securities at (maybe) 30-40 cents on the dollar. But under Bernanke's plan, the Fed is willing to bid almost twice as much.

Don't get confused by the smoke and mirrors: that's a bailout by any other name.

But one of the most myopic kind - because it doesn't fix the essential problems deep in the DNA of the banking system.

In fact, it amplifies the incentives for moral hazard, adverse selection, and other assorted flavours of evil.

Think about it this way. Cutting rates - the Greenspan put - levels the playing field, and makes money cheaper for everyone. That's toxic enough.

But the Bernanke put is even more toxic: beacuse, it seems, it's reserved only for a special few. You or I can't offload our junk - but banks can.

In fact, it's you and me that the banks are offloading their moral hazard/junk onto. Who pays? You and me - the taxpayers. Unbelievably, we're bailing out the banks, and essentially retroactively paying the Street's bonuses.

Under the terms of the Bernanke put, Main St is subsidizing Wall St.

That's not just unfair - it's suicidally close to cronyism.

I don't know what the Fed was thinking when it cooked up this plan. But it really is, as I said yesterday, the first horseman of the macropocalypse.

The fix is in - and it's going to, once the details sink in, shatter faith in the Fed as a neutral lender/arbiter/etc of last resort.

I think it's gonna begin the long-needed deconstruction of a global financial machine which is struggling to create real value.

Why?

Simple: if you think things are bad now - with banks failing to trust each other - just watch the fireworks when private banks begin failing to trust central banks.

That game is fatal: it means either hyperinflation, hyperdeflation, or, quite possibly, both at once = stagflation.

And that's exactly where, unfortunately, the macropocalypse is going.

The First Horseman of the Macropocalypse

OK. This is an important post. I strongly suggest, if you're interested in what's gonna happen next, that you block out some time to read, think, and reflect (if you haven't already done so today).

What the Fed has just done - allying with other major central banks to inject liquidity into the banking system without regard for the underlying problems of adverse selection and moral hazard - is nothing short of economic madness.

It's essentially letting the Street off the hook for a decade of malfeasance, transferring risk from the wealthy to the poor, and, ultimately, sowing the seeds of the destruction of the American - and perhaps global - financial engine.

Remember - it's exactly this refusal to deal with basic financial malfeasance that ripped Japan's economy to shreds; which put Japan into an economic purgatory that lasts to this day; one which resists all efforts to shake or break it - because the underlying problems of bad loans and worse DNA still haven't been addressed. The risk and costs have just been swept under the carpet.

I'm not trying to be an alarmist, but the hammer of the macropocalypse is about to fall - the confluence of factors driving the global economic system to a point of irreversible crisis is almost too great to be believed.

Let me put it more simply: The Fed is treating this like it's a liquidity crisis. But it's not: the macropocalypse is a deeper problem. Liquidity is drying because the firm is rotting from the very core: the larger economic system is rife with adverse selection, moral hazard, and assorted other flavours of evil.

I pointed it out for media a long time ago (ie, my new econ of music paper). But it's just as true for banks. So throwing liquidity at rotten institution is perverse because it destroys the incentives for reform.

Imagine if we threw money at record labels, in the hopes that they'd publish better music. What do you think would happen?

Unfortunately, that's exactly what the Fed's doing with the financial system. But
throwing liquidity into a rotten system is just giving the virus new stuff to infect, consume, and decay.

How to Crash and Burn in the Edgeconomy, Bebo Mini Case Study

Here we go again...

I'm sure everyone will spend lots of time discussing this. So let me cut to the chase, and just discuss the endgame.

1) None of this really matters, because the marginal value of "apps" is almost zero, and will continue to stay zero, until we have social nets where connections are economically meaningful. That's why OpenSocial isn't a big deal to Google.

2) This game is competition for openness. The most open platform will win.

Let me try and put it another way

Facebook opens up - to a competitor. Lolz.

See the problem here yet?

It's simple: only a player as strategically inept as Bebo would seriously consider signing onto Facebook's (pseudo) platform a good thing.

Why? The marginal benefits for Bebo (joining Facebook) are tiny - and not durable. Short-run, and negligible, gains to usage, perhaps. But the opportunity cost is huge: Bebo fails to press for greater openness, and so Facebook will always and everywhere be able to exert market power against Bebo.

Anyone with the slightest inclination towards thinking strategically might note that it would be far wiser to sign up with a more neutral party (ie, Google), or, better yet, launch your own (open) platform, and essentially amplify the selection pressure on weaker players.

It's a strong signal that Bebo is about to get Friendstered, in fact. That's really the only interesting thing bit of this non-event.

Or, of course, you could just keep basically...ummm...drinking the kool-aid:

"...There is no word on whether or not the other social networks will be able to leverage the power of the Facebook social graph but if Facebook opens up the social graph, this will be the biggest thing ever and Facebook will indeed become the dominant player in social networking."

The biggest thing evar!!11!

Awesome. Last time I checked, there was this minor problem of the the global financial system melting down...

Apple, the Edgeconomy, and the Future of Consumption

Why do Apple customers care so much?

It's a good question.

But in fact, it's the wrong question to start thinking strategically about consumption.

The real question is the opposite: why don't most consumers care about most firms/products/services/brands?

Let me put it another way. Firms spend enormous (really, huge) amounts of money on trying to influence consumption. We don't often think about it, but marketing as a % of GDP is enormous - it's the second largest expense firms incur.

And yet, for the most part, consumers don't care.

Marketers think consumers are "loyal" to brands (like slavering animals).

But when you look a little more closely at the economics, the intensity of so-called loyalty consumers display even for their most-liked brands - apart from players like Apple - is laughably small. The marginal benefits to marketing are, in fact, tiny. For most brands, "loyalty" is about as intense as a tepid bath.

How do we know that? Well, there's a massive existence proof hidden in plain sight: the fact that Apple's, well Apple, and everyone else is pretty much not Apple. Or we think a little more deeply about it: firms wouldn't have to invest so much in marketing if the intensity of loyalty was greater.

Either way you cut it, there is deep strategic truth to note: most firms invest huge amounts in marketing, with very little in terms of strategically beneficial outcomes, to show for it.

Put another way: we can "measure" the "returns" to marketing all we like - but what we're measuring is largely superficial and almost totally strategically meaningless. From an economic point of view, "loyalty" and it's cousins are a joke.

Despite all the money we spend on earning the love and respect of consumers - we can't seem to achieve it.

There's very (very) wrong with that picture, most marketers feel. But they're not really seeing the picture yet - because the implication of these economics is: marketing is utterly dominated in the edgeconomy.

Luckily, a very big part of the answer's also hidden in plain sight.

We need to reboot. We need a blank canvas. Yesterday's concepts - loyalty, etc - are totally obsolete, stale; they get in the way of thinking truly strategically about a better economics of consumption.

They are, ultimately, artifacts of rusting, industrial DNA. And that's the problem:. The firm itself is in decay.

Boardrooms and marketing both need new DNA to live the truth of the mystery of the Cult of Apple.

Oh, look, the TV value chain's imploding.

It's a nice example of lots of things. But perhaps most importantly - when you put off facing reinvention for a long time, you expose yourself to sudden, massive discontinuities.

Twitter --> DNA

What's interesting about Twitter isn't what it is.

It's how and why it got to be that way.

Twitter happened because the Twitter kru isn't playing by yesterday's rules. From a relative point of view, Twitter is open, messy, plastic, the Twitter kru lets things happen, etc.

Twitter is interesting because it's what happens when new DNA reshapes the very essence of production - reshapes the decisions we make about why we're doing things in the first place.

Boardrooms can't make Twitters - suits kill Twitters dead. Massive existence proof: Ev has launched how many groundbreaking services now? While every boardroom under the sun continues to fiddle while Mediapolis burn.

That's a massive problem for the firm of the future.

Blah blah CNBC blah Yahoo...open beats closed is how this game will play out.

Edge Principles: Stuff Happens

You know, there's been a huge amount of discussion about the writers striking in Hollywood. But not a great deal of real insight as to what to do about it - how to fix the seemingly intractable problems they're arguing over.

Let me do a bit of a deeper post than usual, since this is a fun subject - which will illustrate a bit how we use Edge Principles in real-world sessions, to help boardrooms get to the economic truths that underpin real, durable strategies.

What does this particular principle - stuff happens - have to do with the strike? Everything.

The stuff, in this case, is a business model - YouTube is slowly but surely crafting a fundamental redefinition of how and why content creates value.

Brilliant - recommended reading. Not for what it is - the idea itself is fairly simple. Rather, because it makes us think about how and why Google is able to visit a seemingly infinite tsunami of disruption on a witless, hapless media industry.

It's because, instead of trying to force stuff into rigid, prdetermined, overplanned shapes and structures, Google lets stuff happen.

Think about it seriously.

While writers and networks have been crippling each other with a simplistic - and totally obsolete - game of mutually assured destruction, Google is slowly but surely reinventing a better way for content to create value: one which doesn't need exactly the rigid contractual lockstep writers and networks are squabbling over.

See the point? Google is solving exactly the problem that core-focused players are paralyzed by; that's suddenly brought the existing value chain to a crashing, creaking halt.

Like I said - brilliant. That's true mastery of edge strategy.

Think about it in a more intuitive way.

Stuff - raw economic stuff, like resources and value activities - in the edgeconomy is simply too plastic and liquid to be inertly forced any longer. No firm is strong enough to stop plastic and liquid stuff from flowing through the gaps, wrinkles, and holes in value chains and market space.

But some firms are smart enough to understand that when those gaps, wrinkles, and holes are exposed - stuff happens: plastic, liquid economic stuff naturally flows into them.

That's edge leverage - a fundamentally and radically different approach to creating value than at the (decaying) core.

Edge Principles: Free Beats Paid

The structural pressures for more and more goods to be free/indirectly paid for are going to intensify sharply in the edgeconomy. Media's just the tip of a very big iceberg.

And more and more revolutionaries are going to discover that shifting from paid to free is a particularly powerful path to fundamental, often deeply necessary, and utterly radical business model innovation.

Here's an interesting example in a totally counterintuitive industry - cars.

Read and reflect.

How Not To Think....Pt 91384

So, at Supernova this year, one of the people I was looking forward to hearing was Andrew Keen - because he's been such a heartfelt critic of anything even remotely 2.0.

I was really (really) disappointed. Andrew is not a fun guy to listen to - because he doesn't have real arguments - just naked assertions, which he kept repeating ad infinitum.

And these assumptions often fly directly in the face of the most basic economic logic/evidence. So while Andrew's positions are heartfelt, Andrew's arguments are too irrational to take seriously (in fact, they can be pretty funny).

Here's the most recent example.

Andrew notes that Radiohead's open pricing was successful. But then goes on to argue that this is actually bad, because record industry folks have mouths that need feeding - because it's putting "music business people out of work".

Wow. That's not just asinine - it's actually almost totally devoid of any kind of logic. This is just sophistry.

Keen is arguing that we should prop up a dead business model for the sake of...consumption. Those poor, poor record label execs - how can they do without power lunches and private jets?

Never mind the glaringly obvious economic reality: the music industry is not creating enough value to support this consumption. Production and consumption are totally out of whack - hence, the industry is slowly dying.

If anything, Radiohead's experiment offers a tremendously powerful avenue for the most radical kind of business model innovation - a way to keep the industry alive.

Look. This argument is a bizarre plea, essentially, for commercial socialism: that, at the limit, we should always and everywhere redistribute wealth regardless of value creation.

Lolz. You can't run an economy - much less an industry - like that. Having mouths to feed didn't prevent the Soviet Union from disintegrating, or the Berlin Wall from walling.

And it certainly won't stop one of the most evil industries under the sun from having a righteous vengeance wreaked on it by the people who've suffered most under it's iron grip: bands and consumers.

When labels start creating some value, Andrew - then let's talk about sharing wealth with them.

Sex Appeal

Scoble notes enterprise software isn't sexy.

Very true - and very obvious. Not sexy - to the Street, to buyers, to suppliers, to complementors, to much of anyone.

There's a simple way to make enterprise software sexy - apart from ditching the ridiculously awful jargonized name (I mean, seriously - how can anything called "enterprise xyz" be sexy, unless it's a starship?).

Enterprise software is lame because it offers little potential for revolutionizing anything - market space, value propositions, industry economics, strategies, etc. That's why software players are able to create less and less value - the marginal gains to software are shrinking because "enterprise software" only impacts relatively the lowest value of value activities.

Simple version: edge beats core - so investing in software that provides a tiny marginal benefit to activities focused purely on the core is necessarily a losing bet.

In contrast, if software guys started focusing on what's really wrong with the economy/industries - instead of providing low-value point solutions to minor-league information problems - the sex appeal would happen, in spades.

The real evidence, though, is the sheer boringness of Scoble's post - the ideas to jargon ratio is like 2:10,000. That's not his fault (ok, only kind of), but a deeper intellectual poverty within the software industry itself.

Strategy Isn't Spreadsheets, Facebook Edition

So a couple of days ago I noted that relying on pure data isn't a substitute for thinking strategically - especially when it comes to business designs dominated by increasing returns.

Strategy isn't spreadsheets - basic economics should give us the hypotheses we look to data to (dis)confirm, not the other way around.

As it turns out, I was on the money - Facebook's big jump in usage last month was likely due to Beacon inflating visits by counting iframes on partner sites.

Lol. Vive la revolucion, once every hundred years, etc.

Whether or not Facebook is "dead" - and I agree, it isn't - the point is: data (dis)confirms hypotheses. It's the hypotheses that count - not the data.

And that's doubly true in the edgeconomy, where data is often inherently inaccurate (measuring the wrong thing rightly), or inherently invalid (measuring the right thing wrongly). This is a near-perfect example of both.

Look. This is happening altogether too frequently these days - not just about Facebook, but across many different discussions.

This kind of non-debate is what's made boardrooms so toxic (ie, people go waaay too far to then "make" the numbers = macropocalypse).

It shouldn't happen at all in the blogosphere - and it should be a bit of an alarm bell to you when people wave big!! numbers!! around - but fail to put any real logic behind them.

Nice catch, Erick.

The Macropocalypse and The Future of the Firm

"...Facebook is a profit-seeking business and just like any other profit-seeking business it will engage policies and practices that have the potential for profit and negative consequences for its consumers.

What about this is hard to understand?"

What's hard to understand about this is...welll...umm everything.

Let start with the basics: it's hard to understand how such companies hope to compete. The implication is that they have to do so by trading the most value from consumers to shareholders.

Now, that sounds asinine. But it's a very deep economic insight. Because that's exactly what companies as disparate as the Gap, Wal-Mart, and Microsoft have been doing for the better part of a decade.

But the game's up. That was yesterday. Not only can this trade not work in a world where the balance of market power is shifting to consumers - this trade never really worked at all.

No value was ever created. It was a shell game; a deception; a masquerade of value creation.

Let's rewind for a second.

The original purpose of the corporation - and of business - was to make everyone involved in trade better off.

Stop and think about that for a second - everyone.

Somewhere along the way, in the annals of corporate history - we lost that purpose.

And the firm became what the commenter's describing: a value-shifting machine, not a value-creating machine.

So: the fact that people can even think that such a design makes economic sense - businesses exist solely to maximize profits, at the expense of consumers - speaks volumes about what's really wrong with th larger economy today.

It doesn't - and the longer we buy into it, the harder, nastier, and more cataclysmic the coming macropocalypse (see - liquidity crunch becomes full-blown global banking crisis) is gonna be.

The macropocalypse isn't just about bad loans - it's happening because the ways in which we manage are deeply obsolete. Whether it's letting Wal-Mart get away with shifting massive costs onto sweatshop workers, or letting unscrupulous bankers and brokers sell contracts no one but a few eggheads understands to small towns and grandparents - the problem is the same: the firm is rotting from the very core.

Hollywood Suicide

"...-- The breakdown: If a DVD is sold to one of the big boxes and Lionsgate collects $18, then Lionsgate’s net profit is $16, Burns said.

"Don’t get me wrong, that's not without catches. We're the ones taking the inventory risk, it's basically everything on assignment there. So if we can't justify a lower price to them, how can we sell it to Apple for $12 for a digital download to own? You can make the case that if the price went up, you could certainly back-out the shipping costs, the inventory risk and duplication of the DVD. I believe that is forthcoming with the major studio. But in that case, I’d much rather be the tail than the dog."

Uhhh. In this edition of media suits destroying value, we bring you Michael Burns, vice chairman of Lionsgate.

You know, last time I checked, shipping costs, inventory risk, and duplication costs were kind of...ummm...nonexistent for goods whose marginal cost is pretty close to zero.

I could go on (and on) about how trying to fight elemental economic forces with nonsensical arguments designed to shore up bargaining power is about as futile as trying to mountain bike up Mount Everest.

Or maybe about how these different costs and risks - inventory, etc - are exactly what markets, networks, and communities can vaporize.

But honestly, at this point, I'd rather watch Hollywood crash and burn.

Not convinced yet?

"...-- Online Renting: He finds the proposition for a $4 dollar online rental more favorable, noting Lionsgate's 20 percent piece of CinemaNow. That’s going to be a bigger business. It's still tiny, but it's gone up 8-fold for us. It's still less than $10 million per quarter in terms of our business. But it's going to get bigger. I still say, although rental downloads will be big, VOD's going to be bigger."

Lolz. See the point yet? The marginal cost is zero, the distribution cost is almost zero, the good in question is essentially durable forever.

But - amazingly - Burns still thinks that renting is going to create more value than buying.

Actually - all else equal, that's economically impossible, given this cost structure.

Such a fundamental and almost total misunderstanding of basic economics is pretty astounding.

Sure, yes, I know - Burns is just jockeying for position with Steve Jobs.

But this also means that it's almost utterly inevitable that any strategy built on these economics will be not just dominated - but instantly in decay.

Does this sound familiar? It should. It's exactly what killed lots of music industry initiatives, and left massive market space for iTunes to disrupt the labels.

Lucky for us LGF is the only publicly traded film player - time to short perhaps.

Facebook, DNA, and Advantage

Fake Steve makes the very points I've been making about Facebook for the last few months:

"...Thing is, nobody ever doubted that Facebook can do better. What's scary is the fact that they won't do better until people start to scream at them. It's the fact that it doesn't really seem to be in their nature to do the right thing. Their instinct, in fact, seems to be to do the wrong thing, and to keep doing it until they get caught. Even after they get caught, their instinct is to spin and fudge and brazen it out. No wonder the Borg has partnered with them. It's a match made in heaven. These guys are like Google, only their slogan isn't "Don't be evil" -- it's "Don't get caught."

That's exactly right.

DNA is powerful because it shapes and constrains the strategic choices players are able to make. That's why advantage is in the DNA; why Facebook seems like a mute actor on a stage, unable to stop itself from making tremendously wrong choices over and over again.

Checkmate, Special Beacon Edition

0) It's a good thing that Zuck apologized. It takes a lot of courage and humility to step up to the plate - most CEOs, in fact, never do it.

1) Apologizing for being evil doesn't make you good. There's a big difference between the two.

2) When you're dealing with positive feedback systems, pure data (ie, Facebook usage didn't dip right away so Beacon-hate is irrelevant) is an incredibly unreliable path to thinking strategically. Strategy isn't spreadsheets - think economics, not just numbers.

3) Here's an example: I don't expect everyone to stop using Facebook right away. I'm making an economic argument. As the costs of interaction go up, so users benefit less, and growth slowly contracts, until an inflection point is reached.

But all that's kind of besides the point.

4) The real point: Facebook has learned...well...not much that's new - that the trust of connected consumers is the foundation of value creation in the edgeconomy; that connected consumers can trump you, rather than the other way around.

From a strategic pov, the problem isn't that Facebook hasn't learned much. It's that the costs of not learning much have been very, very steep.

This isn't strategically sustainable.

The real trick is to learn a great deal fast and cheap.

That's the opposite, unfortunately, of the outcome Facebook's realized.

Look. You can't fight deep economics: Facebook's outcomes were predictable a few months ago - our prediction was surprisngly accurate despite the skyscrapers of hype - and they remain equally predictable today (ie, not strategically sustainable).

So. I'm really glad that's over - I've been (mind-crushingly) bored writing about it for days now.

Let's talk about more interesting - and more meaningful - stuff for a few days.

Industry Note: Dazed & Confused

Ryan from Engadget makes an interesting point about the dynamics of competition changing in media.

Let me carry what he's saying even further.

Media revolutionaries have to decide today if they want tomorrow's media industry to be as like yesterday's. They have to make decisions about how to compete for the future.

Let me explain.

Beneath all of Zuck's grandiosity - "media changes once every hundred years", apparently - was a profoundly rich, deep irony: that Facebook's contempt for consumers is well, almost exactly like big media's contempt for consumers.

Plus ca change is an understatement.

Look. You've gotta choose, guys. You can't sit on the fence forever - I'm looking at you Digg, Memeorandum, Technorati (relaunch or not), especially Facebook, etc. Either you buy into the old model, or you don't.

Now, I don't think buying in is a good move - but at least you'll be putting some chips on the table. The worst thing you can do is to end up like Facebook - dazed and confused.

So which way do you wanna go?

Faceblah, Blah, Blah, Pt 91765

Guys, Facebook is not (just) having a PR crisis.

The PR crisis is an effect of a deeper cause: a poor capacity for strategic decision-making. Beacon isn't Facebook's first major error, remember.

Obviously, what's happening now won't feed through to growth yet - it's way too soon for that. But I don't think it's unreasonable, at this point, to assume a serious hit to growth in the near term (a few quarters from now).

The real question is - why is Facebook's capacity for decision-making so poor? Because, for all that Zuck has supposedly taken away from the real master of edge strategy - Google - he, and the rest of the team haven't really internalized much.

Facebook is a company that seems devoid of the capability to interact meaningfully at the edges.

Take a close look at what's happening. Almost every blog post critical of Facebook gets sock-puppeted to death.

Check what happened to poor Josh Quittner yesterday for writing what was actually a fairly incisive post. If those comments are for real - that deluge of comments, actually - I'm Dick Cheney.

It's been - what, a couple of weeks? - and no word from anyone at Facebook about anything of substance.

Facebook, I think, listens to stakeholders when it comes to minor-league stuff. But in this case, they're actively, deeply resisting learning from what's already a relative failure. And, of course, it's exactly learning from failure is one of the keys to mastering edge strategy.

Here's an example. I like what Dave has to say much of the time. But his latest post is perfect evidence of this.

Look - it's simple. Facebook should be learning from this episode (these episodes, actually). I don't actually think it can - I don't think that's in the Facebook DNA, but that's another story.

The point is: This is not about PR/spin/etc. Touting a future upside is an exercise in futility for a company that doesn't have the capacity for strategic decision-making.

Let me make the point even clearer.

Dave says: "...for a $15B valuation and $300M in cash, i can deal with a shitload of tomatoes."

Actually, it's exactly the reverse. A $15b valuation and $300m in cash give you the room to learn - from the people throwing them - how to turn shitloads of tomatoes into gold.

But if all you do with those resources is just have your PR drones carefully wipe the tomato off your face and tell you again how cool you really are - you're on the road to nowhere.

So...does this look like sock puppetry to you? Read some of the comments. Poor Josh gets flamed like I've rarely seen before.

It looks a lot like massive sock puppetry to me - the readers/comments ratio is wayyyy too high.