Opportunity Cost

You have to focus. Doing one thing really, really well is infinitely better than doing many things merely adequately. That means selectively choosing which activities to engage in. This is true whether it's a business or a private individual doing the choosing.

In business, doing everything ensures mediocrity. This rule seems to hold true regardless of the size of the business. As companies like Yahoo and Microsoft have found out, as they try to find new horizons to conquer it becomes difficult for them to maintain the compelling nature of their original offerings. Additionally, people have a hard time accepting the company as a business that exists outside of their original space. For example, most people view Microsoft as an operating system and office suite company, or at least a maker of desktop and server applications. Far fewer think of them for their online offerings, such as Office Live or MSN.

I hear a lot of ideas for Internet start-ups, and I see a lot of people making the mistake of trying to do everything. It's gotten to the point that when I hear a pitch for a business that contains a bundle of the currently hip buzzwords ("social networking" is the term du jour), I instinctively start to wonder if there's a real idea in there. It's just too easy to start building an Internet business without establishing the business part.

Sometimes this comes from start-ups comparing themselves to established businesses. They assume that they have to launch with all of Amazon's e-commerce features, all of Google's search capabilities and all of Facebook's social networking features. Not only is this a way to wrack up an enormous development bill, but it won't particularly serve the start-up in the marketplace. The Internet rewards great new ideas, or at least ideas done in a great new way.

So the secret is to not do everything. Strategically choose features not to implement, business areas in which not to engage. If your core idea is good then you'll have a foundation on which to build, and if it's not then all those additional features won't save you anyway.

Micro-Problems

Micro-payments.  Cool huh?  The term was thrown around for awhile as the solution to content providers looking to find a revenue stream.    People could show up on a website and buy some content for a tiny amount - insignificant to them.  But the tiny amounts would add up and the content provider would make some real money.

Unfortunately this is a case where the brick and mortar world has held the web back.  There are fundamental issues with accepting micro-payments that can threaten the very business model of companies that have planned on charging, say, $1.00 per transaction.  The problem is the cost of the transaction itself.

Before we go any farther though, let's first define what we mean by micro-payments:

• $3 to $5 The Starbucks Range:  It's arguable whether this range is really micro-payments.  It's more like mini-payments.  Equivalent to an espresso bar drink in terms of cost, this range has a relatively low resistance to sales for items that are perceived to have value.  Movie rentals on iTunes are in this range.
• $1 to $2:  The iTunes Range: Long been considered the range of acceptable pricing for music and TV shows ($1 and $2) respectively.  This range seems to be low to no resistance for downloadable goods - at least for those who are willing to pay for digital media at all.
• Less than $1:The Mythical Range:  The realm of the original micro-payments range.  A price point considered to be so low that no one could possibly object to it.  Not much in the real world lives at this tier, for reasons we'll see in a minute.

From a marketing perspective, the original idea of micro-payments was to set the price for digital goods low enough that paying for them wasn't a big deal.  There would be no appreciable pain to the consumer, and volume would create a revenue stream for content providers.  The "true micro-payment" range (less than $1) was often cited in the context of this usage.

However there is a hard-to-solve problem lying in the heart of micro-payments - and that's  the cost of the transaction itself.  It costs money for a merchant to take a transaction.  This money is generally trivial in a "regular" size transaction, but it becomes an unreasonably large part of gross revenue when micro-payments are involved.

The problem is middlemen.  When one takes money on a website there are at least two other parties involved besides the merchant and the customer.  The first is the transaction gateway, such as Payflow Pro (owned by PayPal, which is in turn owned by Ebay) or Authorize.net.  These are the  people that connect the banking system to the Internet, allowing only credit card processing to be possible.

The second group is the merchant bank.  In order to receive credit card payments, a company must hold a merchant bank account and sign up for merchant services, usually provided by the same bank that issued the account.

Both of these two parties levy fees on each incoming transaction.  And fees are always structured as a few cents minimum, plus a percentage of the transaction.  It's the minimum fee that's deadly to micro-payments.

About a year ago I went shopping for a bank that could set me up with a micro-payment deal to accommodate purchases of $1.  The best I could come up with, after speaking with almost a dozen banks, was a deal that added up to about 37 cents of transaction fees on the dollar (that's the gateway cost, plus the bank charges).  That's 37% of the gross revenue going to bank charges.

One strategy to address this is transaction aggregation.  This is (probably) being used by iTunes.  How it works is that when you purchase the first micro-payment item, your credit card is authorized for an amount beyond what you actually purchased.  Subsequent purchases that take your total to an amount below the authorized amount cause no further activity with the gateway.

Then at the end a a certain time period, all the transactions that you did in that period that fall  under the original authorization are run as a credit card capture, all at the same time.  This will usually be less than the amount that was originally authorized.  In the end there is only one completed credit card transaction performed by the gateway and the bank, which hopefully contains several micro-payment purchases by you.

The first catch is that credit cards limit the amount of time a merchant can hold an authorization on a credit card without capturing it.  It looks like the most restrictive version of this is about a week, which is why if you buy stuff on iTunes you'll see a charge go through at the end of the week.

The second catch is that aggregation only works if the customer buys more stuff during the aggregation period.  So it means that iTunes only gets the advantage when you buy more than that first song during a one week period.  If your purchases are spaced out over a longer time - iTunes is out of luck, they need to run a new transaction.

The problems with the micro-payment structure may be one of the driving reasons behind the enthusiasm for subscription models with content.  The obvious advantage (besides the "reliable revenue stream" thing) is that the entire content income is balled into one big monthly transaction,  making the relevant transaction costs pretty insignificant by comparison.  Unfortunately the big transaction also has a big price tag, which brings with it increased buying resistance with consumers, also known as "sticker shock".

I don't have a great solution packaged up for you, unfortunately.  However I would urge caution when evaluating any business plan or idea that has micro-payments at the center of it.   Often thrown around as an idea, they have some real brick and mortar problems attached to them.

Fun with focus groups

Ai is conducting informal usability testing for a client this week. We've had a small procession of strangers come to our office for 45-minute sessions, and in exchange, we're handing out American Express gift cards.

This is the first time we've done tests on-site, and it may be our last. The testing has gone great, but we've had one person double-air-kiss our moderator and another demand twice as much compensation as we offered in our ad.

Then there's the job candidate who stopped at our front desk on her way out. Our office manager, Katie, was in deep discussion on the phone, and handed the woman a gift card, inadvertently paying her $50 for her job interview.

Imagine Katie's surprise when she got off her call and discovered the usability tester still in her session.

(The interviewee kept the card. What would you have done?)

SLA's for Web Services?

On Friday, Amazon's S3 online storage service went down for awhile. Many different online services now use S3 as a way to distribute content and store media online, and everywhere S3 is used - things didn't work for awhile this morning.

Is this an unacceptable failure of an automated business process? Or should we just accept it as the normal behavior for the web? Clearly a service like 37s Basecamp can't ensure that S3 stays up, because they have no control over any of Amazon's services. But their paying customers were nonetheless compromised when Amazon's service went down.

Wikipedia defines a Service Level Agreement as an agreement between parties that defines a "level of service" in terms such as percentage of uptime, power uptime etc. It has its roots in agreements between telecom companies and their corporate customers.

As more and more mission critical business is moved over to online services that themselves may outsource functionality to other parties, the question of reliability comes up. Where is the assurance that the third party will be there when you really need them? It was these kinds of questions that led to SLAs in the first place.

SLA-backed web services could be viewed as premium - something that you pay an additional amount, in order to ensure that the vendor is investing in the infrastructure to ensure the required level of service. Vendor's could look at SLA-backed service as a potential profit center.

MicroYaSoftHooPaq

Poor Microsoft. I almost feel sorry for them. Well, I would except for the whole evil empire of the 90s. Ah, screw 'em.

I just don't get them. They have so many brilliant, talented people working there, and they just can't be an excellent company. Why are they so competition centered? Instead of going out and finding new markets, its like their standard operating plan is to sit around and identify a competitor, and then just try and knock them off of their roost. They seem to miss so many opportunities - for example:

• X-Box could have been the "digital hub", the way the iTunes / iPod / AppleTV is shaping up. They could have owned that.
• They disbanded the IE team after the end of the browser wars and left IE6 sitting around for five years, allowing Firefox to ascend to its current status. They just ceded the market they had fought for so hard, previously.
• They have more than enough engineering firepower to own the online document collaboration space, but instead they just sunk everything into the black hole that is Vista. People still struggle with good online collaboration tools.

It might be classic Christensonian disruption mechanics at work. Or maybe they're just trapped by their own culture. I just don't know. But know they're starting to get into corporate M&A hijinks. I woke up this morning to find they've offered to buy Yahoo for about $44.6 Billion.

Ok so clearly such an acquisition would be a customer grab - getting Yahoo's ad revenue and market share. But would MS be able to stop with that? I doubt it, I think we'd see Yahoo get sucked into the whole MS technology wormhole - no more FreeBSD for Yahoo servers, you need to run IE to use it, etc. Sigh.

I can't help but think about this in terms of the HP-Compaq merger a few years ago. They're moving towards where the game used to be, instead of where its going. A MS outright purchase of Facebook would have been a lot more interesting. At least then you might get a sense of where there game was going ("trading documents with your social network on XBox!!!!"). They really need to start to actually innovate, or they're going to be about as relevant as IBM in a couple of years.

Platform: Proprietary vs Open

Some time in the last 12 hours or so this went live.

OpenSocial is a common API for writing social networking apps. Its being embraced by practically every single social networking site out there, with the notable exception of FaceBook. Basically the promise of this is that an application developer can write an application against one API and then deploy it in any of the compliant social networks.

FaceBook, as the current king, has the least incentive to adopt the open standard. In fact the OpenSocial API can be seen as a check to FaceBook. Its simple to understand really, in place of "Facebook" use the word "Microsoft Windows" and in place of "OpenSocial", use "Java". The FaceBook strategy is to add value to their platform by harnessing third party developers to write to their proprietary API. OpenSocial is a counter-strategy to that, by making a universal API that is supported by all social networking sites.

The potential fallout from a successful deployment of OpenSocial is the movement of value in the supply chain away from the social network, and towards the applications. When an app can be deployed on any social network, it doesn't matter so much which network someone is on.

The natural response to this would be for various social networks to "embrace and extend" the OpenSocial API, to try and create lock-in for their own platforms. In the past Java had several legal protections in place to prevent this (not that Microsoft didn't try anyway). JavaScript, with none of the legal protections of Java, was forked mercilously, creating a difficult programming environment for JS developers that persists to this day.

Historically, Java failed at driving a wedge between Windows and application developers. It remains to be seen whether the social networking application community will standardize on FaceBook, OpenSocial, or something else.

The Art of Competing Without Competing

All the tech buzz this week has been around the latest release of Apple's operating system: Mac OS X Leopard. However, in the previous release (Tiger), a new technology called Core Image was introduced, which is only now starting to bear fruit. Using Core Image, at least three low-cost image manipulation programs have sprung up, namely Pixelmator, Acorn and DrawIt.

Core Image does a lot of image manipulation heavy lifting that has previously only been associated with applications like Adobe Photoshop. Presumably if Apple wanted to compete in this space they could have released an application, but instead they chose to do something far more clever.

By taking the hard parts of graphics programming and wrapping it up into an easy-to-use library Apple is playing a death-by-a-thousand-cuts strategy against Adobe. Now any reasonably talented Mac developer can come a long and lay down some low-end disruption on Photoshop Elements. And Apple can always claim: "Hey - we're not competing against you!"

This is a platform play. Platforms (Windows, Linux, OS X, Facebook) enable application developers to do cool stuff without having to roll everything on their own. As the platform developer, the third party application developers add value to the platform, locking the end users into it. The application developers benefit, but the platform developer benefits a lot.

Cross-Border Shopping

In Toronto for the long weekend (blogging in the strangely futuristic indoor patio of Richtree in BCE Place) and thinking about some of the lesser known reasons for the success or failure of e-commerce:

• Sales Tax: Often its cheaper to buy online, especially from companies that have no business presence where you live. In New York its a little over 8%, but in Canada there's usually provincial and federal sales tax, potentially adding up to 15% or so.
• Bank / ATM cards with credit card insignias: Any bank card issued in the states will almost always have a Visa or Mastercard label on it, and can be used as such. Canada bank cards have no equivalent label, and always require the entry of a PIN in order to operate. This means that if Canadians want to shop online they are obligated to use credit cards (not necessarily a financially wise move) or to use a solution like PayPal (requires a level of sophistication beyond some shoppers).
• Import / Export restrictions: You know, wine is an e-commerce tragedy. A closed bottle of wine is relatively non-perishable, has a range of pricing from discount to premium, has easy differentiation across the industry, is (with care) extremely shippable, and is primed for a great online service to offer a level of variety vastly beyond what a local provider could offer. Unfortunately its absolutely screwed by the law. Cross-border shipping restrictions, prohibition-era laws preventing the ordering of out-of-state liquor, import taxes - all combine to create a completely inviable (or at least inhospitable) environment for what would otherwise be a great e-commerce product. In Ontario its a complete non-starter: only the government can sell alcohol: its more or less illegal to run a private wine enterprise.

When I was running my little start-up in Toronto in the 90's, I always felt like a great opportunity was being missed by Canada. With its highly-educated population and its modern infrastructure (and, at the time, an exchange rate which made it extremely attractive to shop there from the States), it seemed like a short hop for it to become an e-commerce powerhouse. But the legal and financial support just never materialized, allowing other countries to pull ahead of it. I knew a couple of people from Toronto who were successful, but they became so by leaving.

I had dinner with (Torontonian) Jeff Skoll, co-founder of Ebay, a few years ago, and we puzzled over what was missing from the Canadian start-up landscape. He basically said that four things were required to form a great start-up environment:

1. Smart people with great ideas.
2. Angel investors willing to put up seed capital to fund it.
3. Venture capital funds willing to put up larger amounts of capital to allow a company to build up its business.
4. Larger underwriters willing to take the companies to IPO.

Canada is missing 2 and 3. I believe him, Jeff has always seemed to be right a lot.