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How IBM and Yahoo made Microsoft and Google July 30, 2009

Posted by Simeon Simeonov in Google, Microsoft.
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Here is the five-step recipe for creating the most important software companies of the past 30 years:

  1. Convince the market leader to give you something big they don’t see the value in for cheap
  2. Innovate, innovate, innovate
  3. Make a ton of money
  4. Eat the market leader’s lunch
  5. Bet on everything big

Guess which is the most important step…

The case of Microsoft

About 28 years ago, IBM made one the biggest strategic mistakes in its history. Being a company primarily focused on hardware, it didn’t understand the value in the PC operating system. It outsourced that work to a, at the time, little-known company called Microsoft. From Wikipedia, the ancient lore of the computer industry:

On August 12, 1981, after negotiations with Digital Research failed, IBM awarded a contract to Microsoft to provide a version of the CP/M operating system, which was set to be used in the upcoming IBM Personal Computer (PC). For this deal, Microsoft purchased a CP/M clone called 86-DOS from Seattle Computer Products, which IBM renamed to PC-DOS. Later, the market saw a flood of IBM PC clones after Columbia Data Products successfully cloned the IBM BIOS, and by aggressively marketing MS-DOS to manufacturers of IBM-PC clones, Microsoft rose from a small player to one of the major software vendors in the home computer industry.

The rest is history. Microsoft took the job seriously, created a pretty darn good product for the time and used the PC clone explosion as a way to increase its dominance in the value chain. IBM lost it leadership. The DOS and then Windows franchises generated massive cashflow which MS plowed into innovation (often in the form of cross-subsidies lasting a decade) to create often dominant product lines such as Office, the server business (don’t forget that Sybase in a no less brilliant move licensed core tech to MS enabling them to create SQL Server) and others. Now, the company bets on pretty much all large markets in the software space. If it’s big, there is no way MS would ignore it. In fact, from conversations with execs there, it seems like much of new market development planning begins with a process as simple as ranking future market sizes. That’s why Microsoft will relentlessly pursue search and why it was probably willing to do an even better deal with Yahoo. (Jason Calacanis has a good post on the Yahoo-Microsoft deal.)

The case of Google

In the case of Google, the strategic mistake was Yahoo’s. The company didn’t value search. It outsourced it to Google. Google took the job very seriously. They innovated a ton behind the scenes while smartly keeping the simplicity of their user experience. Through AdWords and later AdSense + the DoubleClick quisition, Google gained significant control of the advertising value chain. They passed by Yahoo and never looked back. The search franchise is so profitable that it gives them freedom to bet on everything from browsers to OSs to mobile, something pretty much no other company save for Microsoft can afford. Google’s version of the cross-subsidy is the perenial beta that just keeps getting better. Very, very hard to compete with that.

The moral of the story

The moral of the story is that the two most important software companies in recent history were enabled by massive strategic errors on behalf of the market leaders in their respective sectors. It was the market leaders who put the companies on the map, gave them distribution and scale and enough revenue to fuel innovation. IBM and Yahoo nursed the companies that nearly killed them. One could argue that without the explicit support of the market leader, a startup wouldn’t have had the chance to grow at a rate that allows it to have Microsoft’s and Google’s escape velocity.

Kudos to IBM for innovating around its business model and evolving into a company which is still a huge industry player. I’m not sure Yahoo will have that chance.

The interesting question is whether this will happen again… Do you think a market leader will make that type of mistake again? Can you point to where this is happening now or likely to happen in the future?

Dogfooding vs. maintaining perspective March 3, 2009

Posted by Simeon Simeonov in Apple, Microsoft.
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I’m all for dogfooding but not at the expense of deep competitive research. Sometimes you just have to live with your competitors’ products in order to understand them the way their customers do. I guess now that Bill Gates is focused on the foundation he is no longer interested in deeply understanding Microsoft competitors’ products. No other way to describe why iPhones and iPods are banned in the Gates household. What better way to learn about your competitors’ secret sauce than watch how your kids use their products?

Adobe Engage 2008 To Launch Flex 3.0 and AIR February 24, 2008

Posted by Simeon Simeonov in Adobe, Allurent, Facebook, Flex, Google, Industry News, Macromedia Flash, Microsoft, Web 2.0, startups.
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Tomorrow, at the invitation-only Engage 2008 event in SF Adobe will launch AIR and Flex 3.0. If you want to get a sense of what will be shown, here are the slides from the January pre-release tour. The event has attracted a high-powered group. For example, Marc Benioff, Chairman & CEO of salesforce.com will speak. (Salesforce.com’s AppExchange platform has a number of Flex-based extensions, including our own Centive.)

The AIR / Flex 3.0 launch is a big deal for three reasons:

  • The AJAX ecosystem is heavily fragmented
  • Flex 3 is a big step forward
  • AIR is a disruptive innovation enabler

There are just too many pure AJAX frameworks out there. This may be great for some abstract notion of innovation but is pretty bad for market adoption. It causes confusion and friction. Developers hate that. They want to feel like they are developing skills for the next cool technology which will be around for a decade. The tooling is also pretty immature, although my friend Paul Colton @ Aptana is doing some pretty cool work. I have also seen a number of new startups trying to make things better in this space but for now the situation is not great. After initially missing the AJAX boat in a big way, Adobe has recently gained traction in repositioning from Flash vs. AJAX to Flash vs. DHTML, both of which use AJAX. As proof, I’ve seen more startups mixing Flash/Flex with DHTML/AJAX.

There seems to be a rule that really big software companies get things right by version 3.0. That has been the case for years with Microsoft and now Adobe may be large-enough to join the list. Flex 1.0 shipped late and left a lot to be desired, which made Flex 1.5 more or less a requirement. Flex 2.0 was a big step forward but there was much more left to do to build a great RIA platform. Flex 3 steps up the innovation pace on a number of fronts. Better developer tools. Improved frameworks. Smaller application size. Better data handling throughout. And the Flex SDK as well as the BlazeDS remoting and messaging services are now open-source. Everything is in place to accelerate Flex adoption. There is a massive shortage of Flex developers in the market, always a good sign for a platform. The main challenge for Adobe remains monetizing the platform. I’m not 100% on board with the Flex Builder tool as the main revenue driver although the team recently added some great people from the ColdFusion team who really understand Web developers. For examples on what Flex can do, check out the app showcase. Warning: you may spend more time there than you previously  imagined.

AIR will become the biggest enabler for media-heavy Web applications. To get an idea about what I mean, check out the Allurent Desktop Connection video. This only scratches the surface of what one can do with a cross-platform, always on, richly interactive application with Net access and plenty of local storage. Adobe isn’t the only company who gets this–Google has plans based on Google Gears and Facebook has also moved in this direction with the Parakey acquisition–but Adobe has so far executed the best. Not surprisingly, Microsoft remains paralyzed by the Web <-> desktop strategy tension.

AIR is truly disruptive–in Clayton’s exact sense of the term–for two reasons. First, it given Web apps access to the desktop. Second, it does so while subverting the native operating system installers (using the Flash player executable as a conduit) which gives Adobe and its ecosystem substantial freedoms. One caveat–security. Adobe has done a pretty good job with the Flex 3 security model but it hasn’t been extensively tested in the wild. Also, the anti-virus and anti-spyware vendors have often been trigger happy in the past to blacklist totally legitimate software. I’m not expecting them to blacklist the AIR runtime but who knows how they’ll treat some of the apps… I hope the Adobe platform marketing team and evangelists have spent enough time with the security vendors. This is something I advised them to do at the Engage event last year based on some bad experiences from our portfolio.

With this launch, Adobe cements its platform leadership in Web 2.0 and makes life easier and more interesting for millions of developers and designers. A shout out to all my friends at Adobe who worked hard to make it happen and to everyone who put skin in the game during the beta process.

Polaris Digital Media Summit February 3, 2008

Posted by Simeon Simeonov in Digital Media, Google, Microsoft, Polaris Venture Partners, VC, Venture Capital, startups.
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I spent the last few days in Deer Valley, UT at the annual Polaris Venture Partners Digital Media Summit or PVPDMS08 as we casually refer to it (right). It’s a great event where the CEOs of our digital media companies mix with industry heavies, both successful startup entrepreneur types and the folks with multi-billion dollar budgets. A few days of focused round table discussions, good food and fun physical activities are the best way to build relationships. It’s one of the many ways the Polaris network helps our entrepreneurs.

The weather this year was both great and marginal. Deer Valley got about  55-60” of snow in four days. The powder made the skiers happy. Those of us who don’t do the downhill thing went snowmobiling. We had a good time although snowfall killed the visibility as you can see on the pic. On the flip side, getting to dinners with the road closings was a challenge and today a few attendees narrowly escaped an avalanche at Deer Valley Resort.

digital-media-summit-snowboarding.jpg

We covered many important topics: from how to build organizations in digital media startups and scale infrastructure, to new content & advertising models, to monetization of UGC and other forms of social media, etc. Many of the comments were insightful due to the diversity of backgrounds and perspectives around the table. I have a few good follow-on topics for blogging that I hope to organize and post in the next few weeks.

On Friday the group was abuzz following the news of the Microsoft offer to buy Yahoo. Several of the attendees had stayed up overnight and were prepping for board calls and press interviews. Microsoft does best when someone is breathing down its neck. I hope the same is true for Google.

Emerging Ecosystems & Platforms July 12, 2007

Posted by Simeon Simeonov in B2C, Digital Media, Google, Microsoft, SaaS, Social computing, Web 2.0, Web Services, iMeme, network effect, social networking, startups, virtual worlds.
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I’m at David Kirkpatrick’s iMeme conference in SF. It’s likely going to be a treat. The speakers and the attendees are of great caliber.

As an ex-platform guy who’s recently spent a lot of time thinking about social infrastructure, I’m was particularly interested in the opening panel on emerging online platforms, moderated by David who kept the conversation moving swiftly. The panelists were:

  • Marc Benioff, CEO, Salesforce.com
  • Marissa Mayer, VP Search & User Experience, Google
  • Mark Zuckerberg, CEO, Facebook
  • Philip Rosedale, CEO, Linden Labs (maker of Second Life)

The discussion centered on what it means to be a platform company on the Net and to get people to use your platform.

Philip and Mark acknowledged that they are in the very early phases of truly understanding what it means to be a platform yet there are some underlying principles for success.

Philip stressed that it is foolish not to allow your users to do what they want. Sometimes, that requires making some seemingly uncomfortable decisions. Traditionally, platform companies have tried to protect and leverage the core platform IP. However, if a platform enables network effects (which make it harder for users to leave), the platform owner can benefit by opening up and applying only a few key controls. Mark pointed out that there is a huge issue of trust between users, the platform provider and third party developers. That’s one key area of controls that the platform vendor should maintain control over for the benefit of all.

There are at least two other areas that IMO the platform provider should establish clear rules, if not controls, over.

The first one is around the question of who owns the data. Esther Dyson asked the panel a question along these lines and nobody provided a satisfactory answer. Mark’s response was “users have all the controls” but that doesn’t answer the ownership question. I’ve written about this before as one of the key issues underlining the emergence of social infrastructure.

There has been much debate recently on the topic of user data ownership. The information in question is the user-generated data and the attention data generated while using a site. There are three issues to consider. The first one is legal. Users implicitly assume that the profiles and the information they create on community and social networking sites is theirs. Most terms of service and privacy agreements are either mute on the topic or outright state that the operator can repurpose the data for their own use. Attention data is often not called out and its treatment therefore is unclear. The second issue is privacy. Facebook recently faced a huge backlash from their users when they made information about user activities on the site public. The specific outcry was less about the features Facebook had implemented and more about the fact that the information in question was gathered while the users thought it would be kept private. The company had to backpedal and put new privacy features in place.

The second one has to do with the notion of who is the law. Who provides the framework of what’s good vs. bad, what’s legal vs. not. Is there a notion of enforcement? By whom? If there are spillover effects into the real world (financial fraud, privacy violations, etc.) how is the real/virtual linkage managed. Release 2.0 had a good piece on this topic in its last issue.

Marc’s take is that the Net has become the OS and the killer apps (Second Life, Facebook, Salesforce.com, etc.) are becoming platforms. As an aside, none of these have any dependence on the “old” platform–the Microsoft OS. He further claimed that killer app companies that do not make the transition to platforms become irrelevant. His examples were Seibel vs. Salesforce.com, Oracle vs. Cullinet, etc.

One interesting question that comes out of this is whether one can build a successful platform company without ever building a killer app. Would Windows have been as successful without Office/Outlook? Unlikely. Could Facebook have launched as just a set of Web services? I bet not. I can’t think of many examples where a platform company has been successful over a long period of time without some ability to create user lock in + lead by the example of its killer apps. My personal experience at Allaire, which was a pure platform company, agrees with these observations.

In addition, everyone agreed that platforms only become successful if they give rise to successful ecosystems. One of the metrics Philip is watching is how many businesses in Second Life are cashflow positive. Facebook now has thousands of apps on its platform and some of them have millions of users. Marissa’s work at Google has enabled a huge monetization of content and traffic on the Net by many thousands of businesses. Beyond that, Google has been very successful with Maps, iGoogle and gadgets (10,000+ developers). I’ve written before about the Ecosystem Test that a platform must pass in order to be successful.

The ecosystem test asks whether a platform can enable a large group of average, poorly funded players with little to no domain experience deliver compelling solutions. It’s based on the observation that no platform has become hugely successful without a corresponding ecosystem of vendors building significant businesses on top of the platform. Typically, the combined revenues of the ecosystem are a multiple of the revenues of the platform.

The panel was followed by a short speech & interview with Catherine Cook, co-founder of myYearbook. She sees myYearbook, Facebook and others establishing the infrastructure for a new wave of media companies that will give old media a big challenge. One example she gave was myMag, a 100% UGC teen magazine they’ve launched. Teens contribute the content but professional editors package it.

Enterprises, Everybody Wants Your Data July 10, 2007

Posted by Simeon Simeonov in ECM, Google, Industry News, Microsoft, Microsoft Office 2007, Office 2007, OpenOffice, Polaris Venture Partners, startups.
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As storage gets cheaper, enterprises small and large accumulate more and more information. Finding the right information at the right time is becoming harder and harder. Information comes from many sources: email, IM, the Web and intranets, employee’s desktops, enterprise systems. Security and compliance are not easy to achieve in this environment. So, what’s the industry doing about this?

Let’s look at some data.

Some trends emerge:

  • Outsourcing of content archiving, which often means
  • Outsourcing of e-discovery, which is why we see
  • Search players buying hosted content archiving companies

To move content off-site, hosted backup/archiving providers need to tap into all key enterprise information flows (network, email, storage, desktop, etc.). This allows them to offer value-added services such as content security (DRM, IP theft protection, etc.) as well as implement a number of compliance-related policies. In addition, once content leaves the enterprise, there are many possibilities for additional services around e-discovery, collaboration, data mining, etc. That’s why everybody wants the enterprises’ data.

The biggest challenge to implementing this well is tapping corporate desktops–where most of compliance-related information (emails, docs & spreadsheets, IMs) ultimately originates. (Integrating with servers is easy + there are far fewer of them.) For a solution to truly work and be deployable to employees without requiring costly training and change in work habits it will have to be seamless–practically invisible and non-disruptive to the unstructured workflows of knowledge workers. There are two easy ways to do this. You can build these capabilities inside the office productivity software. Microsoft and the folks at Open Office have the lead there. You can host the productivity apps, which is Google’s long-term strategy for the enterprise. It is a very powerful idea, indeed. Right now, I know of only one solution on the market that can tap into MS Office & Sharepoint environments without disrupting employees. It comes from Meridio, a Belfast-based company I’m on the board of.

Some interesting questions:

  • Does IBM have this covered through it’s outsourcing offerings and a myriad of ECM technologies?
  • When will Microsoft get into the hosted content services business in a big way? Nearly 1/2 of KVS’s business was on the MS platform…
  • How will EMC respond? They have pushed to increase their service offerings (bought Internosis in 2006) and have been integrating search deeper into their storage and ECM product lines. Perhaps they’ll buy Autonomy?
  • Will FAST stay focused on search alone?

Google Targets Enterprises With Postini Acquisition July 9, 2007

Posted by Simeon Simeonov in Google, Industry News, Microsoft, Polaris Venture Partners.
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Another strategic move by Google–buying Postini for $625M. Postini has been a leader in the hosted email/IM security, archiving and compliance space. In addition to having well-thought out service offerings, the company has been able to operate on a big scale without embarrassing outages. (Fun fact: one of the reasons why Postini has been able to perform so well is that it uses digital archiving technology from Archivas, now part of Hitachi Data Systems. Archivas was my first investment at Polaris.)

The pitch of the acquisition announcement is that, by adding the Postini services to their portfolio of offerings, Google’s enterprise group will be able to address many of the concerns of larger enterprises not willing to move to Google’s hosted office productivity applications. I don’t buy this as the short-term reason for the acquisition. In the short run, larger enterprises won’t switch to the enterprise edition of Google Apps. I’ve been using Gmail, Google Calendar and Docs & Spreadsheets for a long time now. They don’t have the usability, offline capability and interop features to battle MS Office or Open Office now. I’m sure Google Apps will get there eventually with the help of time and Google Gears but not in the next 12-18mos.

The longer timeframe of extracting value from the Postini acquisition is one reason why I consider the acquisition strategic. The other is that through the acquisition Google is getting their hand on the content of 35,000 businesses and 10M users. That’s great for search and an important tool to help make Google Enterprise Search the winning product in this market. They have a long way to go, but the Postini move is a step in the right direction.

Playing Monopoly in the Advertising Space May 18, 2007

Posted by Simeon Simeonov in Advertising, Bubble 2.0, Google, Industry News, Microsoft, Mobile, startups.
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So, let’s see:

It feels like a game of Monopoly where the three players with a lot of cash (MS, Google & Yahoo) are buying up all the real estate. Across both the Web and mobile, control of advertising is consolidating. Search has long consolidated. If search is the traffic driver and advertising is the money maker, then it is difficult to escape the conclusion that the Net is increasingly falling under the control of the majors.

Only Google and MS have guaranteed staying power for the next few years. Since the fate of AOL and Yahoo is yet to be determined, there is a possible future with an overwhelming, antagonistic duopoly controlling the majority of search traffic and ad delivery.

This will be an interesting world for both startups and big publishers, one requiring significantly adapted strategies for success. It’s not all bad news. Sometimes restricted but efficient choices enable better outcomes.

Perception and Reality: Why It Makes Sense For Google To Pay $3.1B For DoubleClick April 13, 2007

Posted by Simeon Simeonov in Advertising, Google, Industry News, Microsoft.
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Perception and reality sometimes have a twisted relationship. That’s particularly true in cases where being perceived as the leader makes you the leader. We tend to see these types of self-fulfilling prophecies in aggregator / market maker and other critical mass businesses. Markets that have these characteristics tend to exhibit spending and bidding wars to reach/maintain dominance.

Using Occam’s Razor as a guide, this naïve explanation may just be why it made sense for Google to outbid Microsoft for DoubleClick. I discount the economics that DoubleClick can bring to Google for two reasons: (a) some of DoubleClick’s current customers/partners will look for alternatives and (b) Google is still learning how to handle large acquisitions. Also, from an economic standpoint, Google would not have been threatened in the short or medium run by DoubleClick going to Yahoo! or Microsoft. However, the opportunity cost of losing DoubleClick from a perception standpoint was huge. It would have exposed a crack in the armor.

DST Change, Cars, Sensor Networks and Software-as-a-Service March 12, 2007

Posted by Simeon Simeonov in Microsoft, Polaris Venture Partners, SaaS.
3 comments

Sunday came and went and all’s well, more or less. The ticking bomb called the Energy Policy Act of 2005 made a polite pop! but didn’t cause too much trouble when DST came into effect earlier this year than usual. Strangely enough, PCs were mostly unaffected, in large due to Microsoft’s success moving consumers to auto-update their PCs.

There were reports of a few problems with other types of devices. For example, George Ou @ ZDNet reports problems with his and his wife’s Sprint phones. I heard of similar problems for some Cingular models. Verizon made me patch my Blackberry but after I installed that I had no problems.

My car, which gets its time from the GPS signal feeding the nav system, had a problem. It’s a 2007 model, which is a shame. Acura wasn’t able to squeeze in a software patch between July 2005, when the Act was signed into law, and November 2006, when I got the car. In addition, Acura hadn’t thought about telling their customers (or their service centers for that matter) to expect a problem and so I (and many others, I presume) had the pleasure of making a few calls this morning to discover the buried “turn auto-DST off” feature. (If you’re thinking RTFM, my excuse is that I don’t even recall where I put the nav system manual.)

The broader story here is about the changing nature of software delivery in a world with lots of devices. The experience with Windows PCs and OTA-updatable cell phones this time around suggests that it is easy to deliver updates to many networked devices, which are configured to auto-update. If the devices are not networked, as in the case of my car, there are problems. If the updating mechanism is not automatic, as in the case of some cell phones, there also can be problems (over-reliance on user action). In short, the DST change has been a classic example of the benefits of software-as-a-service delivery models. (Just as a clarification, SaaS doesn’t have to mean everything happens on the server and runs in a browser. More here.)

Another story here is about the need to interconnect devices that don’t have direct access to the Net. The best example is everything in your home that has a processor and a clock but no network connectivity–from your car to your stereo to the clocks on your microwave and bedside table to the climate control panels. How long did it take you to change all these clocks? How many did you miss the first time around? DST clock changes are such a common use case that some climate control panels have specialized DST change buttons.

ZWave and Zigbee are the two competing standards offering the best hope for resolving these problems. (Polaris has invested in Ember, a leading Zigbee proponent.) When your climate control panel is connected to the rest of your home, not only can it automatically change to DST but it can also tell you when it’s time to change its battery or the house air filter. The fridge can tell you when it detected a leak or when its water filter should be changed or when the ice tray is empty because you forgot to turn the ice maker on. This is far short of the near sci-fi image of the fridge contributing to your shopping list and a lot more useful IMO.