Scenario - Google World
TRANSCRIPT
Hambrecht & Doerr—Internet 2010
Panel Session
“Google World”: How the Phone (and almost everything else) Became Just Another Web App
Panelists:
- Lawrence E. Page — co-founder, CTO, Google, Inc. (Nasdaq: GOOG)
- Irving Wladawsky-Berger — Senior Vice President, CTO, International Business Machines Corp. (NYSE: IBM)
- John Ludwig — General Partner, Ignition Partners, L.L.C.
Moderator: (applause) “Gentlemen, we’re delighted to have you as panelists at today’s Internet 2010 conference. While this is an investor conference, to be sure, we’re particularly keen on helping our audience and our clients really understand the strategic implications of technology change. And so we’ve assembled an absolutely world-class group here to talk about both a new web-based telecom business model and the enabling technologies that continue to change all web applications, the phone definitely being one of them.
”...Google has emerged on top of the new category of web-centric communications, finally realizing the technical convergence that network engineers and product innovators have been pointing to for years.”
“About five years ago, a lot of voice communication started becoming embedded in applications. Today, Google has emerged on top of the new category of web-centric communications, finally realizing the technical convergence that network engineers and product innovators have been pointing to for years.
“Google now ‘carries’ about 15% of voice and 30% of the video communication minutes in consumer markets and has transformed the economic model both of how that communication is paid for, and the cost of its underlying infrastructure. Given that we call our panel ‘Google World’ – I’ll let Larry explain why (laughter)… – Larry, can you fill us in on how you got here, and tell us if this means that you’re going to beat Microsoft in a race to build the ‘Star Trek’ computer after all?” (laughter)
Lawrence Page: “I guess there are some misquotes you just can’t live down… All I ever said about the ‘Star Trek’ computer was that it wasn’t a very interesting idea, although Microsoft’s vision of computing often bears an uncanny resemblance to that model (laughter).
“Our vision is quite different from that, in fact. The phone being just another web app is an element of it, but only one. Back about five years ago you began to see our vision implemented in a series of small innovations released at increasingly short intervals at accelerating rates. So, GMail, GoogleDesktop, GoogleEarth, GoogleSuggest, GoogleCom, etc.
“Our innovation model has always had a pretty loose strategic organization that has worked very well for us, but that most companies might find uncomfortable. The ‘looseness’ is in large part by design – we’re just not into grand plans, don’t see them as all that relevant a way of thinking. So our approach is a combination of ‘beta’ releases to test whether a small innovation is interesting to our user community, and targets that come from either stuff we think is cool and useful, or by identifying existing applications that we think we can do much better, including at an order of magnitude lower development cost.”
Moderator: “Like Microsoft Office?” (laughter)
Lawrence Page: “As I said, by identifying existing applications that we think we can do much better, including at an order of magnitude lower development cost. (laughter) But let’s talk about what used to be known as ‘telephony’ and then about the underlying innovation models and technologies that allowed us to serve our community’s communication needs.
“So, we looked at how to do a better job with communication a long time ago – even before our IPO. We had two, well three, simple thoughts: (1) embed communication services right in the things our community already does – blogging, browsing, research, entertainment, buying, transacting, etc. (2) get paid for contextual sponsorship of communication services just like we do for search, and (3) organize a kind of virtual, but large-scale communications infrastructure to do this.
“Let’s just run through each one of these briefly.
“The first idea, embedding the services, is simple and critical. We didn’t want the mindset of a separate application. If you’re blogging and want to quickly chat with another community member, you shouldn’t have to stop, launch or refocus on another ‘application’, look up how to reach that person, is he or she available, what way should I try to reach him, etc. What you want is the right set of communication services to be offered in the context of whatever you’re doing. Frankly, we weren’t all that thrilled with these increasingly fat ‘instant messenger’ programs that had more buttons – make a phone call, start your webcam, whatever. Our vision of application boundaries is not that hard or literal, and is much more web-based.”
John Ludwig: “I wonder if I could just interject here for one second …”
Moderator: “Sure, go ahead.”
John Ludwig: “Larry raises an extremely important point when he said he wasn’t thrilled with ‘these instant messenger programs’. There have been plenty of those dating all the way back to the likes of ICQ, and softphones like VocalTec’s iPhone back when VoIP had just been invented, not to mention what followed from AOL (NYSE: TWX), Yahoo! (Nasdaq: YHOO), and Microsoft (Nasdaq: MSFT). And, indeed, they got quite bloated in features and complexity, and as important, had a poor economic model – either free, or sign-up with a credit card to make cheap calls, etc.
“The real insight Google had was massive simplification, making communication organic to what you were already doing in your web browser…”
“The real insight Google had was massive simplification, making communication organic to what you were already doing in your web browser – you could right-click something in a frame on a page and bypass an application, the instant messenger that is, that was both too big and not all that relevant. So now they’ve both streamlined functionality and made it more relevant, and also piggy-backed on their model for monetizing things.
“By making GoogleCom available as widget, or kind of plug-in, on an array of portable devices, of course as a browser plug-in for Windows PCs, and recently as a native application on some Sprint (NYSE: S) cellphones, they brought communication from the internet directly into the web – a big difference. Yet, at the same time they preserved and surpassed the capabilities of these former stand-alone instant messengers, by providing things like 20GB of storage for voice and video-mail; a ‘PowWow’ feature for families, small businesses, and project teams; and Presence information which makes the phone smart about how calls should be received and handled.
Moderator: “Didn’t eBay (Nasdaq: EBAY) and Yahoo! set out to do this as well, and what happened?”
Irving Wladawsky: “If we’re all jumping in here…”
Moderator: “Absolutely, please…”
Irving Wladawsky: “I think looking back on eBay and their acquisition of Skype back in ’05 we can see that the scope of the eBay community wasn’t enough to support the ‘organic communication’ model Larry’s describing…”
Lawrence Page: “Not to mention they spent almost the same amount on Skype that we raised in our ’05 secondary!” (laughter)
Irving Wladawsky: “… yes, I’m sure the economics were painful. Auctions, per se, didn’t generate the kind of communication volume and mix of needs that were enough to make a go of it, and as we’ll probably talk about later, the Google technical solution approach, that is how to organically integrate communications into web-based applications, was also something eBay was missing.
“And as to Yahoo!, I think it’s clear in hindsight that their agenda shifted very strongly towards content and interactive media, in which they’ve clearly established a leadership position now. So in part this is a story of portals or big consumer internet brand name sites finding their way towards divergent strategies and dominating in particular areas.”
Lawrence Page: “It’s helpful of John to underscore that point of massive simplification, because to us it made a tremendous amount of sense, and that’s not at all how it worked at the time. And as Irving’s explained, eBay, Yahoo! and others going off in different directions helped clear the way for us to keep pushing on this communications angle. So let me continue to the second point John already alluded to, how we would get paid.
“It would be the same way we get paid for anything else – sponsored contextual presentation, whether outright advertising or something else. So our customers could elect to sponsor communication services in our community as much as paid search or presentation of their web apps. There’s no one answer to ‘who pays for those phone calls.’ If you’re using our web-based word processor, it might be a document archiving or encryption or graphics arts supplier sponsoring those calls – not just to them, but to anyone. Or it might be included in the fee you pay to the document printing service you selected when you signed up to use our word processor, etc.
“On the consumer side, our content and entertainment providers sponsor about half of the voice calls cleared through our system in return for click-throughs to their trailers, or as part of the paid entertainment subscriptions they offer through us. Remember how, say, ten years ago pre-paid long-distance cards were often used as inexpensive promotional premiums or give-aways? This is kind of like that but with more measured pay-for-play and much more definable returns to the sponsor.
“Third, organizing the communications infrastructure. We looked around at the telecom industry about five years ago and, granted we’re not telecom people, but the whole situation seemed ridiculous.”
Moderator: “Uh, I’m not sure I follow you…”
Lawrence Page: “Let me give you a couple of examples – people started guessing, sometimes correctly, that since we had to build our own solutions for managing complex server installations, over time we might have to do something like that with networks. We wouldn’t always want to rely on an open internet, run-of-the-mill ISP to provide the communications performance we’d soon be needing. And by ‘performance’, I’m not really talking about speed, but making our applications work better.
“Anyway, the theories about us five or six years ago, you’ll recall, got increasingly outlandish – we’d buy every available unlit wavelength in the continental US, whatever. (laughter) Well, you laugh, but we had investment bankers calling us with pitch books to buy AT&T. According to them, we could have all the network infrastructure we needed at bargain prices, and ‘unlock’ additional value – banker-speak for dumping things, apparently (laughter) – by selling off any parts of AT&T we didn’t want.
“All we were really interested in was ‘who can help us provide performance-assured network services that architecturally align with our approach to web-based applications?’ So when I say things were kind of ridiculous, it’s because we expected there to be some existing networks that could do that already, and certainly a lot of interest in doing more of it. Maybe Sergey and I should have actually finished our Ph.D.s because we were kind of shocked to discover none of this existed (laughter). We talked to carriers and they said ‘oh, we have IP VPNs!’ and smiled a lot (laughter).
“It turned out that for phone-related stuff, most of the pieces were [already] there, but from smaller innovators…”
“It turned out that for phone-related stuff, most of the pieces were there, but from smaller innovators – ENUM, which allows you to map phone numbers to IP addresses; voice peering, which allows you to transit the VoIP traffic over purpose-built connections, not the open internet; a lot of the middleware, but no one had really integrated so-called ‘softswitch’ features with web services platforms. So we just worked with some small providers and vendors and started gluing stuff together ourselves. Our rapid ‘beta’ philosophy really helped here, and one thing led to another…”
Moderator: “’One thing led to another’, the inside secret of Google’s success! (laughter)… Larry, you’ve used the term ‘beta’ a couple of times now. What is that all about exactly?”
Lawrence Page: “We don’t have a good alternate word for it really. ‘Beta’ not in the sense of software that doesn’t work yet, or a ‘trial’ version, but a high-quality, quick, iterative implementation. The ‘trial’ part is much more about whether our community likes it and how they use it, not whether it’s technically any good. It’s our alternative to big, process-driven product planning.”
Moderator: “Okay, got it. Now back to the communications story. It seems that first of all, since Google had nothing vested in communications per se, you were free to co-opt as much ‘communicating’ as you could into your community, and secondly, you ended up leaving nothing left over for telcos. I mean you took away a third of their consumer retail communications, by minute volume anyway, and there weren’t any ‘wholesale services’ per se for them to provide here as a consolation prize, right?”
Lawrence Page: “Well…yes. That’s absolutely true. I mean on the first point, we just decided to see how many forms of communication add-ons we could stick in here and there, and on the second point, the ‘wholesale’ services side is, frankly, trivial. It’s just a small delta to the infrastructure we already use to deliver everything, whether communication-related or not, so there’s nothing to buy from telcos other than connectivity which, of course, is still getting cheaper.
“This gives us a huge advantage. While weren’t about to use actual cash subsidies, we have plenty of ‘tradeables’ we can use to defray what are really small voice termination costs, for example. As you probably know, a lot of the clicking on our web sites leads to us setting up a VoIP bridged connection between two regular phones – eventually more people will have native IP phones, but today most still don’t. So anyway, we pay fractions of a cent per minute, even internationally, most of the time. And, of course, the idea of ‘termination’, i.e. onto the old PSTN [public switched telephone network] is rapidly becoming an anachronism. In the UK, BT started turning off their old TDM switches this year. There is no British PSTN anymore, or actually I guess there is, it’s just that it’s an all IP network now.”
Moderator: “So for the part of communications you grabbed, there was no ‘race to the bottom’, you just took the whole thing away…”
Lawrence Page: “I don’t know what to tell you, um … Yes?” (laughter)
Moderator: “Okay, let’s talk about the next part – wireless. What happened here?”
Lawrence Page: “Well, it’s a shame Sprint couldn’t be here, but let me explain it at least from Google’s point of view.
“As you know, GoogleWiFi was our response to subscription-based hotspots. In the US, this meant T-Mobile. We saw three problems: (1) it cost too much, (2) it wasn’t ubiquitous enough, and (3) it didn’t work right – the roaming, sign-up, using 802.11a or b instead of the much better MIMO technology – all of that.
“Just at the time the press was painting Google as an ‘advertising-based house of cards’, apparently meaning this sponsored contextual placement model of ours wouldn’t work outside of paid search, we launched our WiFi offer. We’ve been a bit surprised at how rapidly it’s succeeded. There was a lot of frustration about the whole ‘roaming’ thing and the relative lack of utility outside of a few branded locations typical of nomadic use, the Starbucks of the world, the airline clubs.
“We cracked the economics of this supposedly ‘saturated’ market in several ways. First, we provided a meaningful revenue-sharing arrangement for the site owners – municipalities were our biggest success here. Second, we created a premium context for some of our customers – reaching someone at the moment they’re on the road, knowing where they are, without all the nonsense of the location-based services from cellular that still don’t work, created more value. And finally, we partnered with a wireless carrier that seemed to be in a spot of trouble.”
Moderator: “Sprint has been relatively silent on how they came to this arrangement…”
Lawrence Page: “I think it’s sufficient to look at public information as to how they were doing. By 2005, pre the Nextel merger, they seemed to be doing great. High ARPUs [average revenue per unit/user] from wireless data plans, early mover advantage and high usage rates on everything from ring tones to game downloads, to whatever. Then reality set in.
“Wireless data access charges all cratered as the inevitable breakdown in price discipline caused by 3G price pressures set in across the entire cellular industry.”
“Wireless data access charges all cratered as the inevitable breakdown in price discipline caused by 3G price pressures set in across the entire cellular industry. What was launched at $80 was available for $20 per month or less. And the $3 or more per unit charges for a song, or whatever completely collapsed both as content providers wised up and the obviously better distribution options of satellite radio, DVB-H devices crushed the cellular industry’s wireless content business.
“So all of a sudden, and this isn’t to bash Sprint, they all have this problem to some degree, the ‘bright future’ of wireless imploded. Oh, and all that ‘fixed mobile convergence’ stuff? It never worked. So even though Sprint got rid of their wireline business, other ‘multi-service’ carriers never managed to figure out how to use ‘convergence’ to integrate their way out of declines in all sides of their business – wireless, wireline, and broadband.
“We came along and offered Sprint three things: offload traffic from expensive 3G spectrum in a lot of major markets, using now common hybrid WiFi/cellular handhelds. Second, get rid of all this ‘service creation environment’ stuff that never worked, and go straight to web implementations – ours, that is. Third, because of the way we monetize these connections, we can actually pay Sprint – I won’t say how much – ‘x’ dollars a month to add back into their ARPUs. On a wholesale basis, this is a pretty reliable revenue stream for Sprint that stabilizes their business as they deal with other problems.”
Moderator: “Okay, well let’s turn next to understand the background on what these new applications are about. A few years ago we heard the term ‘Web 2.0’, and then later ‘LiveWeb’ as labels to characterize them.
“Irving, you’ve long been at the center of the IBM brain trust on all things internet, you’re almost unique as a senior executive there with your background as a research scientist. Can you explain what Google and others ‘did to the web’, so to speak?”
“Two big things were changing, and changing together: what software is made of, and the process of how software is made.”
Irving Wladawsky: “Sure. Let’s reach back to 2005 and look at what was happening in software development. Two big things were changing, and changing together: what software is made of, and the process of how software is made.
“You may remember, I think it was just as the dotcom bubble was imploding, that ‘new ideas’ were surfacing about what the web should be – that the ‘browser paradigm’ was too limited, that we needed a new Tim Berners-Lee to come along and invent the next one, and that a whole new internet, literally called ‘Internet 2’, would be needed to make it work. Well, these are engaging problem statements, but as often happens the solutions were both more prosaic and more interesting.
“What software is made of began changing into smaller, smarter pieces, still presentable through existing web browser technology. The old ‘click, wait, and refresh’ model of user interaction really limited what kinds of things you could do in a browser – if the user’s ‘context’ had changed in between refreshes you really couldn’t tell that on the server end, and the redundant updating created excessive server loads and bandwidth consumption. So you spent all these resources updating a whole screen, without really knowing what the user wanted to do next and being able to do just that part.
“Another problem was only the browser could initiate requests, the web server would just sit there, wait, and respond. The server might ‘know something’ that should change what the user does or needs to see, but the browser was already locked into this kind of monolithic web page model where only the user clicking the mouse could start something new.
“A lot of applications don’t want to work this way and ended up being badly implemented or not written at all in this old way of doing web apps. Along came a new set of technical solution approaches, that is, ways of using and gluing together technology that already existed, and they were used in some very, very innovative ways. Something called ‘AJAX’ was one example, and there were others too. ‘AJAX’, by the way stood for ‘asynchronous JavaScript + XML’, so obviously we don’t want to go down that path too far (laughter). But the point is these technology combinations were the beginning of solving both the major problems I mentioned above.
“The consequence was that you could make more bite-sized, more interactive little applications, and make web applications you couldn’t have done without downloading yet another executable onto the client. By the way, very few corporate users are allowed to download much of anything on to their computers these days, certainly not executables, so that’s a non-starter in more ways than one.”
Moderator: “Irving, did you say you were referring to Microsoft’s security features here?” (laughter)
Irving Wladawsky: “(unintelligible) … so now we have better web-based software made of different stuff. The next part is how that software is made, which it turns out goes hand in hand with the technologies of the new ‘stuff’. Predating the roughly five-year ago mainstream arrival of AJAX-like solutions was a movement towards writing software differently.
“The overall philosophy was generally called ‘agile development’. One particular school of thought was called ‘XP’, or extreme programming’. Basically it looked at the process and social aspects of software engineering and their bearing on productivity and quality. If you look inside XP, no individual element will be cause for jaw-dropping surprise, but the speed and quality of the outcomes it creates are. It’s about small, definable pieces, teamwork, defining quality ahead of time, not ‘inspecting it in’ or debugging it out later, etc. It’s also about some new programming languages – Python is one that Google adopted as their primary development language quite early on – that made it a lot easier to do.
“All sounds like common sense to the non-software person, but there’s a lot of subtlety to making it work. And it was the antithesis of how the largest software development entities were writing code five years ago. And on your earlier question to Larry about ‘what is this beta thing’, note how well-aligned Google’s business philosophy, the technical solution approach I described, and the ‘beta’ approach are.
Moderator: “Okay, so overhauling software – components, tools, process – equals…what?”
Irving Wladawsky: “Equals what we have today. I have to say, Larry is underplaying the shift that is well underway, and Google’s role in stimulating it. And setting Google’s modesty aside, it’s important that our audience understand how large a shift in value has been created here.”
“Let me just dramatize it by asserting plainly: Microsoft is in fundamental trouble. From that one sentence we can then deconstruct what is going on.
“I say that not because it brings long-delayed gratification (laughter), but because I think my observations and insights are somewhat valuable – they come from bitter experience. I lived through the cataclysm at IBM at the beginning of the ‘90s when we failed to anticipate at least the rate at which the shift towards client-server computing, away from mainframes, would materialize, and failed too to understand the implications of profit migration away from technology to what we have called ‘business value’.
Moderator: “So is this new generation of web applications creating new ‘business value’?”
Irving Wladawsky: “Yes. It is creating business value incrementally, starting with small application insights, using the superior economics of a web-based delivery model, and software engineering that is at least an order of magnitude more productive.
“When GoogleOffice gives you immediate web access to a word processor, a spreadsheet program, etc. that seem as ‘interactive’ as live client-based software, this is a fundamental change. This is also qualitatively different from ‘hosting’ existing client applications with a web-based interface thrown over it. It’s not that these new web-based applications are a replacement for client-based software, but, for many, it is a very satisfactory substitute, and for still others a very satisfactory complement to software actually installed on their laptops.
“It’s also worth noting how an individual or small business ‘pays’ to use these web-based office functions. Often, he or she doesn’t, at least not directly. In line with Google’s fee for contextual presentation business, document printing, graphics, encryption, translation, etc. services are plainly but unobtrusively made visible when you use, say, the web-based word processor.
”...Google and others created not just an alternative innovation model – that alone is troublesome for Microsoft – but a business model which was and is fundamentally dangerous to Microsoft’s software-on-endpoints, license-based model.”
“So on the ‘Microsoft is really in trouble’ theme, Google and others created not just an alternative innovation model – that alone is troublesome for Microsoft – but a business model which was and is fundamentally dangerous to Microsoft’s software-on-endpoints, license-based model.
“The value in a traditional client software license is being redistributed from one software vendor to potentially many contributors. It is many thin slices versus one big slice. And this includes telecom as well. The providers of wholesale, ‘application-aware’ network services added an array of niceties than improve messaging performance between distributed application components. You don’t fill many unlit fiber wavelengths this way, but you do restore a layer of added value to what would otherwise be generic connectivity.
Moderator: “It strikes me that this connects to a theme you articulated over a decade ago and one that, in a way, became central to IBM’s corporate strategy – the idea that we’re in a ‘post-technology age’ as you called it. That technology itself was no longer a strategically differentiating factor, and that ‘value’, a polite way of saying profits, I guess, migrated to people who knew how to apply the tons of technology that was already lying around.”
Irving Wladawsky: “In hindsight, I think you’re right, although I certainly wasn’t smart enough then to envision all the implications of that theme. People have gotten a lot smarter about new, exciting ways to apply as you say, ‘stuff that was already lying around’, and tweak that ‘stuff’ a bit too. The LiveWeb story coupled with ‘agile’ processes is a prime example of this. This is in part what makes it so hard for, say, Microsoft to adapt. They have no problem with understanding and switching technologies – but their entire innovation model is geared around very different business processes of how to apply technology.”
Moderator: “How does this reorganize the IT food-chain? For example, where is IBM in all of this?”
Irving Wladawsky: “As you know, we aren’t really in the pre-packaged application business. What we have done is make sure we participate in this world of applications through our software infrastructure. As good as the AJAX, etc. world is, it still relies on web services middleware, like our Websphere products, or database systems, like our DB2 family to create the back-end of very large-scale, commercial-grade solutions. We’ve adapted those two product families very much with this new generation of web-based applications in mind.
“In addition, the enterprise potential of this application model is enormous. We continue to see displacements of Siebel (Nasdaq: ORCL) customer care and sales force applications, for example, and our Global Services teams work with our customers to replace them with these new web-based application architectures.
“Finally, the new web-based applications are very well-suited to IBM’s ‘on demand’, hosted or partially-hosted solution model. We are continuing to partner with a number of large telcos, our work with BT Group’s (NYSE ADS: BT) wholesale operations for example, to provide the value-added network infrastructure which these new applications benefit from. Along with Microsoft, we were early movers in ‘service development platforms’ for telecom, although I’d be the first to admit that what we had, say, five years ago has been totally overhauled to focus at least as much on wholesale value-added as retail service innovation. It’s just worth noting that not all web applications are of the ‘LiveWeb’ type, so there is still a market for telco service creation environments, although it is still struggling.
“So, overall, our view is that the shift to proportionately more web-based application value, more quickly delivered, fits well with both our large-scale grid, or utility computing view of infrastructure in which the network itself adds value, and with our ‘on demand’ scalable infrastructure model. The fundamental shift of value upward from system components, to system infrastructure, to business value, including applications and professional services will continue for some time.”
Moderator: “Okay, John, let’s wrap up the session with you and revisit the innovation theme. It seems obvious, though not necessarily how, that this shift towards much more capable and economical web-based applications creates entrepreneurial opportunity. Tell us how as a VC [venture capitalist], you see this unfolding, and what’s ‘hot’.”
John Ludwig: “The primary effect of this new and still-evolving web application technology is that it has recreated a software industry, though let me say at the outset here that the opportunities for classic VC-level returns are actually pretty limited, or so it seems so far. In part this is because of Irving’s ‘post-technology age’ theme – we actually don’t need nearly as much new technology for now, and the big difference versus ten years ago is that people actually recognize this (laughter)… so instead the money is in using it smarter. Unless you’re prepared to invest in, say, professional services, we’re in a cycle where deal flow in our investment space has thinned out.”
Moderator: “’You said LiveWeb has recreated a software industry’? … Your alma mater now faces real competition?”
John Ludwig: “All major application providers, not just Microsoft, are swept into the challenge of redefining what an application is, how it’s made, how it evolves, how it’s sold and distributed, and the economics of that entire chain. Relating to your telecom theme, ‘applications’ like PBXs, i.e. office phone systems, have also been redefined here. Like so many disruptive innovations, things that were once dismissed – as ‘toys’, ‘shareware’, etc. – have now attained commercial significance.
“All major application providers, not just Microsoft, are swept into the challenge of redefining what an application is, how it’s made, how it evolves, how it’s sold and distributed, and the economics of that entire chain.”
“At Ignition, we’ve seen four kinds of new venture opportunities enabled by new web-based application technologies, or ‘LiveWeb’: add-ons, point innovations, aggregate markets, and grand challenges.
“Add-ons come from the disaggregation of formerly ‘monolithic’ applications – so there’s a robust if modest business in, say, third-party add-ons for Microsoft Word as that application has been re-architected to compete in this environment. Not of much interest from a VC point of view, but significant nevertheless.
Moderator: “But isn’t that – ‘add-ons’, I mean – isn’t that exactly what the phone became relative to other applications?”
John Ludwig: “You’re absolutely right – and by calling things ‘add-ons’ I don’t mean to trivialize their value, since the phone is an enormous example. But that’s already behind us. It was an insight as to how a whole class of communications functions could be disaggregated and re-absorbed in applications. It took building a platform and network services to enable that and it’s already been done, by Google and by others. And the value has been captured mainly in what we call the ‘aggregate markets’ opportunity, not by individual providers of and add-on phone ‘button’.
“So, continuing down our list – ‘point innovations’, these are stand-alone new functions, not add-ons to existing applications. The trouble with these point innovations, as the name implies, is that they usually mean ‘point businesses’ too. In other words, they aren’t of sufficient scope to make a business out of them. And the challenges of branding, distribution, even for web-based functionality, remain very high. So, if you’re making a bet here as a VC, it’s going to be long shot.
Moderator: “Wouldn’t an analogy here be the kind of point solutions that got funded five to ten years ago – obscure stuff like ‘session border controllers’, or whatever, with an eye towards being bought by Cisco (Nasdaq: CSCO)?”
John Ludwig: “I don’t think so. I mean not with those kinds of exit multiples, because the entry barriers here are so low. Ten good developers can do substantial LiveWeb stuff with almost zero capital – that’s different from the infrastructure business. And it’s not clear there would be buyers – you’ll note that Google, for example, hasn’t done any M&A in about three years now…”
“So another opportunity area is in what we call ‘aggregate markets’. These are somewhat more interesting, but in large measure are attempts to duplicate Google’s business model. You’d take some cool ‘point innovation’, and add more value through branding, promotion, i.e. creating a destination site, and leave additional innovation to outside suppliers. We might also encourage more and more interworking amongst contributed applications. You both aggregate functionality and create a mini-marketplace for selling it.”
Moderator: “So you’d try to out do Google in a particular category?”
John Ludwig: “Well, as I said – that’s the problem… (laughter)
Finally, I mentioned the so-called ‘grand challenges’. These are really big problems, like health care or education delivery where the economics, reach, and productivity of web-based applications might make a huge difference and create quite a bit of value and have positive social impact. People have mentally pigeon-holed LiveWeb technology and software engineering processes as being only for small-to-midsized problems. This is almost surely wrong. Irving already mentioned entire enterprise customer care packages in the process of being displaced with applications architected around LiveWeb solutions. So the grand challenge problems that for decades seemed to defy good use of IT may finally be addressed. But I think it’s too early to tell, and that is, frankly, outside of our investment space.”
Moderator: Alright, we’ve run over our time. Thanks again to our terrific panel (applause)… and we’ll open it up to Q&A from the floor.
* * * * *Disclaimer: This “transcript” is entirely fictitious, created to illustrate simulated strategic outcomes in telecom and other industries. We use the names of actual companies and publicly-known individuals in order to add a measure of realism, detail, and interest to discussions of industry strategy. We are entirely responsible for the views expressed in these simulated scenarios; they are not endorsed, sponsored, or in any way the responsibility of the entities or individuals named herein.
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11 October 05
