Wednesday, July 1, 2009

Free for all in a free for all world

Chris Anderson, author of the provocative book "Long Tail; Why the Future of Business is Selling Less of More" has recently published a new book "Free: The Future of a Radical Price". Malcolm Gladwell, a noted author recently wrote an excoriating review in The New Yorker. It seems as if these notable thinkers are arguing about how close to totally free will information (and more broadly IP) become. It's an entertaining review, but frankly, I think Mr. Gladwell is arguing about how many angels can dance on the head of a pin.

If not already evident to most, it soon will be, that we are in an environment where the free fall of technology prices are right now creating myriad hundred million dollar markets on the shoulders of once proud billion dollar opportunities. Most often, new vendors, not burdened with protecting the status quo, will emerge as new leaders by embracing, and continuing to export commoditization (or deflation). Ignore this trend at your business peril.

Here's a summary of the debate published in the Times Online.

Much has been already written about the stunning decline of expenses required to start, and maintain an IP based company in the internet era. The marriage of lower bandwidth and storage costs, leveraged distribution, and open source (free) development tools has sped the time, lowered the development risk, has created a perfect deflationary storm that is at the root of the how close to free are we going debate.

There is another side to this coin that bears watching. The enhanced capital efficiency has evinced a spectacular explosion in the number of companies creating and offering (sometimes even charging money) their wares to customers or community members (thank goodness we have moved beyond calling customers 'users', or demeaning them with objectives such as 'account control'). With so many companies birthing from the primordial muck of capital efficiency, creative business propositions will surely follow and serve to fragment the number of customers adopting any one solution. An exception to this trend is that the closer a company is to the infrastructure layer (e.g. Twitter or payments), or the ubiquity of the network effect(LinkedIn or Facebook) will always have the potential to create a mega-winner that makes a Fund (e.g. Ebay and Benchmark).

But make no mistake, we are in the midst of a competitive free for all, call it Darwinism on steroids, that is unleashing creativity that will accelerate the pace of innovation.

Fortunately, due to the aforementioned capital efficiency, it's still quite possible for investors to show meaningful returns at exit multiples much lower than previously experienced. Nevertheless, I think we have to recognize that many investor portfolios are sadly saddled with the dual curse of having raised capital at valuations no longer sustainable and having value propositions predicated on assumptions that did not adequately factor in the ravages of capital efficient deflation. You have but to look at the ASP's, sought by tens of thousands of developers in the Apple store as a microcosm of the environment we've created in the consumer and prosumer worlds.

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