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Wednesday, April 30, 2003

Fear & Greed

Technology products and services provide value to enterprises in five ways:

  1. Create new revenue
  2. Enhance existing revenue
  3. Reduce operational expenditures
  4. Reduce capital expenditures
  5. Reduce risk

When times are good, buyers start at the top of the list.  When they are bad they start at the bottom.  Think of it as Maslow's hierarchy of value propositions, ebbing and flowing with the business cycle.

On the VentureBlog (a must read for entreprenuers), this cycle is cast as fear vs. greed:

Fear Vs. Greed....The biggest tech spending revolutions have always been driven by greed at the opportunities available and the new applications possible. The personal computer revolution, the internet explosion, cellular phone proliferation and the huge companies created by them were made possible by end-users who suddenly had new applications available to them. If you're starting a company or building a product, it's certainly ok to rely on a bit of fear to get early sales. But ask yourself -- when the customer looks at the product, what's going to make them greedy? What will they do with your application that will make them money and their lives easier? What companies and products will be built that rely on your products' success before they can succeed? You can get your foot in the door with fear, but to really win, you have to inspire greed. [VentureBlog]

Beyond the business cycle, Zack Lynch points out that revolutionary waves of technology development follow a Pain-Pleasure Principle:

...the Pain-Pleasure Principle shows that once an upsurge of technological advancements focused on solving problems associated with pain gains momentum, we can assume that pleasure extensions of these technologies, where major profits reside, are not far behind.

VentureBlog joined Tim Oren in calling a bottom to this cycle:

...Venture capital will never lead the economy out of a slump: it's just too small a factor in the U.S. economy to ever matter. But increased venture capital investing is absolutely a leading indicator of better times ahead.

Actually its a following indicator.  Venture Capital lags the public markets by one year.  The good news is we are holding relatively steady in the public markets:

But if VCs are reporting increased dealflow and company formation, that's a good sign.  As a following indicator of increased investment its a good source (ask others to call the top of a cycle).

So new companies are being formed.  Many shortsighted ones will go after the easiest current proposition, reducing risk, especially for regulatory compliance.  Some with make good businesses.

But great businesses are born at the bottom of the cycle finding niches where people are buying products that create rather than purely protect value.  Technology has always predominantly been a source of competitive advantage, not complacent equivalence.  And at the bottom of the cycle, the big leaky pipes have been patched. 

At the bottom of the cycle less companies are placing big bets on new markets.  Innovation instead springs from small bets of overlapping self interest.  In particular, those where users are also producers, driven by commons-based peer production:

Figure 8: Innovation skyrockets when Users and Producers overlap
(as during the Linux development process).
Source: George Dafermos, Management and Virtual Decentralized Networks [52]

Decentralized technologies are the prime markets for this kind of innovation, because at the center are standards to foster open growth at less risk.  From these wellsprings of innovation great techologies of advantage emerge.

10:33:18 PM    comment []

Sizing Micro Markets

Tim Oren is looking for help in sizing the potential of micro-publishing markets:

Now one problem from the point of view of us bloody-minded folks is that while there are studies that definitely show the power law curves' existence, there is precious little data to suggest how much of that curve might be newly monetizable (is that a word?), given the possible existence of things like attention focusing mechanisms or open micropayment systems. Although it feels good intuitively, there's precious little hard evidence that I've seen.

Note there are several reasons why this is a hard problem. Mini & micropublishing are going to be inherently niched. Each niche has its own characteristic power law coefficients. Each niche exists as an epiphenomenon of a community of interest. The standards for reward in each of these communities are going to differ. Ergo, some of the creators might want monetary compensation, but others may be more interested in other outcomes: influence, egoboo, attention. So you can't assume that just because the content source exists at a particular scale that it will be explicitly monetized.

So if you're with me so far, I'd like to issue a challenge: I'm looking for proxy measures for the potential size of mini & micropublishing markets, in any and all niches. I'm interested both in arguments as to why an existing phenomenon might be a good proxy, and in actual data. Just to give some examples: The number of non-label, indy bands that have made CDs might be a good proxy in one domain. Does anyone have that number? How many advanced amateur/semi-pro photographers have tried to sell their images online? Got a number? Got another idea for a currently observable proxy for likely intent to play if such a market existed? How would you measure it? Number of participants, both selling and buying? Total value?

I actually think eBay might be a good proxy (by the way, Tim, you asked for proof that creative networks scale?).  A many-to-many structure like blogging that feeds off of Reed's Group Forming Networks Law.  All I have been able to find is Emergent Behavior of Bidding, a study that shows how the buy side of the market forms a power-law.  I haven't been able to find anything on the graph structure of the sell side of the network, uh, I mean, market.  My guess is that the sell side of the market follows the law of the niche when competition is intense and transaction and switching costs are low.

Help Tim out if you can, the results will be valuable to all.

3:01:44 PM    comment []

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