You are here
Here is a very simple thesis on how to disrupt billion dollar industries:
Content platform + user platform = BOOM!
That is a bit cryptic, so let me explain.
Traditional retailers like RadioShack and Barnes & Noble were great "content platforms"; they have millions of products on shelves across thousands of physical stores. Amazon disrupted them by moving online, and Amazon was able to build an even better content platform with many more products. In addition, the internet enabled the creation of "user platforms". Amazon is a great user platform as it knows the interests of the 250 million customers it has on file; it uses that customer information to recommend products to buy. Amazon built a great content and user platform.
Businesses with a content platform that aren't investing in a user platform will most likely get disrupted. To understand why user platforms matter, take a look at a traditional media company like The New York Times -- one of the world's best content platforms, both online and offline. But it's also one of the world's poorest user platforms; they don't have a 1-on-1 relationship with all their readers. By aggregating the best content from many different sources, Flipboard is as good of a content platform as The New York Times, if not better. However, Flipboard is a much better user platform because all of its readers explicitly tell Flipboard what they are interested in and Flipboard matches content to users based on their interest. For The New York Times to survive, their strategy should be to invest in a better user platform: they should spend more time getting to know every single reader and serving curated content that matches the user's interest. The New York Times seems well aware of this problem, with its decision last week to host its articles directly on Facebook to get access to Facebook's user platform with 1.4 billion users.
Similarly, Netflix is disrupting both traditional broadcasters and cable companies because they built a great user platform capable of matching movies and shows to users. To many Netflix users' frustrations, traditional TV broadcasters still have the better content platform, but that hasn't stopped the growth of Netflix. Furthermore, Netflix is investing heavily in becoming a better content platform by producing their own shows, including original series such as House of Cards and Orange Is the New Black. Unless traditional broadcasters invest in becoming great user platforms and matching content to users, they risk losing against Netflix.
The challenge for newspaper organizations or cable providers is usually not with the technical evolution, but with changing their business model. Take the cable providers, for example. Legacy constraints like distribution models, FCC regulations and broadcast spectrum requirements prevent them from moving as fast in this direction as a Netflix might. Fortunately for most cable providers, they are also the internet providers, which allows them to become user platforms if they too can master the personalization and contextualization equation.
Facebook, Twitter and Google are some of the world's best user platforms; they know about their users' likes and dislikes, their location, their relationships and much more. For them, the opportunity is to become better content platforms and to match users with relevant products and articles. By organizing the world's information, Google is building a massive content platform, and by launching services like Gmail, Google+, Google Ads, Google Fiber and Google Wallet, they are building a massive user platform. Given that they have the world's largest content platform and the richest user platform, I have no doubt that Google could dominate the web the next couple of decades.
The examples above are focused on print media, television and radio, but the thinking can easily be extended to commerce, manufacturing, education, and much more. The thesis of content platforms adding user platforms (or vice versa) is very basic but also very powerful. Adding user platforms to existing content platforms enables a transformative change in the customer's user experience: content can find you, rather than you having to find content. Furthermore, brands are able to establish a 1-on-1 relationships with their customers allowing them to interact with them in a way they were never able to in the past. By establishing 1-on-1 relationships with their customers, brands will be able to "jump over" the traditional distribution channels. If we've learned one thing in the short history of the internet, it is that jumping over middlemen is a well-known recipe for success.
Anyone building a digital business should at least consider investing in building both a better content platform and a better user platform. It's no longer just about publishing content; it's about understanding what uniquely delights each user and using that information to manage the entire experience of a site visitor or customer over time. The idea of using interests, location, user feedback, past behavior and contextual information to deliver the best user experience is no longer a nice-to-have; it is becoming a make-or-break point. It is the next big challenge and opportunity for everyone building digital experiences. This is why I'm passionate about content management systems needing to evolve to digital experience management systems and why Acquia has spent the last two years building software that helps organizations build user platforms. As I talked and wrote about years ago, I believe personalization and contextualization will be a critical building block of the future of the web, and I'm excited to help make that a reality.
I believe that for the web to reach its full potential, it will go through a massive re-architecture and re-platforming in the next decade. The current web is "pull-based", meaning we visit websites or download mobile applications. The future of the web is "push-based", meaning the web will be coming to us. In the next 10 years, we will witness a transformation from a pull-based web to a push-based web. When this "Big Reverse" is complete, the web will disappear into the background much like our electricity or water supply. We'll forget what 'www' stood for (which was kind of dumb to begin with). These are bold statements, I understand, but let me explain you why.
In the future, content, products and services will find you, rather than you having to find them. Puma will let us know to replace our shoes and Marriott will automatically present you room options if you missed your connecting flight. Instead of visiting a website, we will proactively be notified of what is relevant and asked to take action. The dominant function of the web is to let us know what is happening or what is relevant, rather than us having to find out.
Facebook and Flipboard are early examples of what such push-based experience looks like. Facebook "pushes" a stream of personalized information designed to tell you what is happening with your friends and family; you no longer have "pull" them and ask how they are doing. Flipboard changes how we consume content by aggregating the best of the web and filtering it based on our interests; it "pushes" the relevant and interesting content to you rather than you having to "pull" the news from multiple sources. Also consider the rise of notification-centric experiences; your smartphone's notification center provides you with a stream of relevant information that is pushed to you. More recently, these notifications have become interactive; you can check in for a flight without having to open your travel app. You can buy a product without having to visit their website.
What people really want is to tune into information rather than having to work to get information. It saves them time and effort and in the long run, an improved user experience always wins. In most cases, "Show me what I want" is more useful than "Let me search around and see what I can find".
With some imagination, it's not too hard to picture how these kind of experiences could expand to other areas of the web. The way the e-commerce works today is really no different than having to visit a lot of separate physical stores or wading through hundreds of products in a department store. We shouldn't have to work so hard to find what we want. In a push-based world, we would sit back as if we were watching a fashion show -- the clothing presented could come for hundreds of different online brands but the stream is "personalized" to our needs, budget, sizes and style preferences. When the Big Reverse is complete, it will be the end of department stores and malls. Keep an eye on personalized clothing services like Trunk Club or Stitch Fix.
Ten years from now we're going to look back and recognize that search-based content discovery was broken. Today the burden is put on the user to find relevant content either via directly typing in a URL or by crafting complex search queries. While pull-based experiences might not go away; push-based experiences will dominate as they will prove to be much more efficient.
Many of you won't like it (at first), but push will win over pull. Healthcare is going through a similar transformation from pull to push; instead of going to a doctor, we'll have web-enabled hardware and software that is able to self-diagnose. Wearables like activity trackers are just the start of decades of innovation and opportunity in healthcare. Helped by the web, education is also moving from pull to push. Why go to a classroom when personalized training can come to you?
We are at the beginning of a transition bridging two distinctly different types of economies. First, a "push economy" that tries to anticipate consumer demand, creates standardized or generic products in large amounts, and "pushes" them into the market via global distribution channels and marketing. Now, a "pull economy" that—rather than creating standardized products—will create highly customized products and services produced on-demand and delivered to consumers through one-on-one relationships and truly personal experiences.
This new paradigm could be a very dramatic shift that disrupts many existing business models; advertising, search engines, app stores, online and offline retailers, and much more. For middlemen like online retailers or search engines, the push-based means they risk being disintermediated as the distribution chain becomes less useful. It marks a powerful transformation that dematerializes and de-monetizes much of the current web. While this might complicate the lives of many organizations, it will undoubtedly simplify and better the lives of consumers everywhere.
Marc Andreessen famously said that software is eating the world. While I certainly agree with Marc that software companies are redefining our economies, I believe that much of that technological shift is being driven by data. So is the value of a business in the data or is it in the software? I believe data is eating the world because the value is increasingly more in the data and not the software. Let's investigate why.
Netflix provides a great example of a data-driven customer-centric company. By introducing streaming video, their software "ate" the traditional DVD business. But Netflix soon realized their future wasn't in the medium of delivery -- it was in the wealth of data generated simply by people using the service. The day-to-day data generated by Netflix viewers provides a crucial ingredient to competing in the marketplace and defining the company's mission: improving the quality of the service.
To that end, Netflix uses passive data -- the information gathered quietly in the background without disrupting users' natural behaviors -- to provide TV and movie recommendations, as well as to optimize the quality of services, such as streaming speed, playback quality, subtitles, or closed captioning. Of course, Netflix subscribers can contribute active feedback to the company, such as movie reviews or feedback on the accuracy of a translation, but the true value of Netflix's user data is in the quiet, zero-effort observation that allows the company to optimize experiences with no friction or disruption to regular user behavior. In fact, the company even hosted several competitions to invent better algorithms for user ratings, with a winning prize of $1M USD.
Within very saturated marketplaces, data is also becoming a key differentiator for some companies. For example, when Google first started, its value was almost entirely centered around the quality of its Pagerank algorithm, or its "software". But Google did not rest on the laurels of having good software, and prioritized data-driven insights as the future of the company. Consider Google Waze, the world's largest community-based traffic and navigation app. Google Waze relies heavily on both active consumer input and passive location-based data, combined with a sophisticated routing algorithm. The routing algorithm alone would not be enough to differentiate Waze from the other navigation systems of the world. Consumers are demanding more accurate maps and real-time traffic information, which could not happen without the use of data.
The future of software
There is another element in the rising importance of data: not only is the sheer amount of consumer data growing, but software is simultaneously becoming much easier to build. Developers can leverage new software programming tools, open source, and internet-based services to build more complex software in less time. As a result, the underlying intrinsic value of software companies is diminishing.
Netflix and Google are still disruptive companies, but no longer primarily because of their software -- it's their ability to use the data their customers produce to extend their engagement with customers. Their actual software is increasingly being commoditized; recommendation engines and navigation software both exist in open source and are no longer trade secrets.
Tomorrow's applications will consume multiple sources of data to create a fine-grained context; they will leverage calendar data, location data, historic clickstream data, social contacts, information from wearables, and much more. All that rich data will be used as the input for predictive analytics and personalization services. Eventually, data-driven experiences will be the norm.
And this basic idea doesn't even begin to cover the advances in machine learning, artificial intelligence, deep learning and beyond -- collectively called "machine intelligence". Looking forward even more, computers will learn to do things themselves from data rather than being programmed by hand. They can learn faster themselves than we'd be able to program them. In a world where software builds itself, computers will only be limited by the data they can or cannot access, not by their algorithms. In such a future, is the value in the software or in the data?
As value shifts from software to the ability to leverage data, companies will have to rethink their businesses, just as Netflix and Google did. In the next decade, data-driven, personalized experiences will continue to accelerate, and development efforts will shift towards using contextual data collected through passive user behaviors.
Companies of the future have a lot on their plates. More than ever, they'll need to adapt to all types and formats of data (closed, open, structured and unstructured); leverage that data to make their product or service better for users; navigate the gray area around privacy concerns; and even reconsider the value of their intellectual property derived from software. They'll have to do all this while providing more contextualized, personalized, and automated experiences. "Data-driven" will spell a win-win situation for both users and businesses alike.
Society is undergoing tremendous change right now -- those of us who enjoy services like Uber and Kickstarter are experiencing it firsthand. The sharing and collaboration practices of the internet are extending to transportation (Uber), hotels (Airbnb), financing (Kickstarter, LendingClub), music services (Spotify) and even software development (Linux, Drupal). While the consumer "sharing economy" gives us a taste of what it's like to live in a world where we own less, perhaps there is an equally powerful message for the business community. Using collaboration, companies are dramatically reducing the production cost of their goods or services.
Welcome to the zero-marginal-cost economy, a way of doing business where ownership of a core process is surrendered to community collaboration. In economic terms, the cost of a product or a "good" can be divided into two parts. The first part is a "setup cost", which is the cost of assembling the team and tools needed to make the first unit. The second part is called the "marginal cost", or the cost of producing a single, additional unit.
For decades, competitive markets have focused on driving productivity up and marginal costs down, enabling businesses to reduce the price of their goods and services to compete against each other and win customers. A good example of this approach is Toyota, which completely reinvented how cars were made through lean manufacturing, changing the entire automotive industry. Japanese cars were produced much more quickly than their American counterparts, created via traditional assembly lines in Detroit, ultimately driving down the final cost for consumers and shrinking margins for companies like Ford. Software development methodologies like the lean startup methodology and Kanban are modeled after the Toyota production line and have made software development more efficient.
Today, the focus is changing. Within service industries like hospitality and transportation, new entrants are succeeding not by optimizing production, but by eliminating production cost altogether. Consider Uber versus traditional taxi companies. For a traditional taxi company to add another taxi to its fleet, a car and license need to be acquired at significant cost. Instead of shouldering that setup cost, Uber can add another taxi to its inventory at almost no cost by enabling people to share their existing cars, all coordinated via the internet. Airbnb does the same for renting properties vs. acquiring more physical space. The fact that both these companies have near zero-marginal-cost production is threatening longstanding business and regulatory models alike.
In the software industry, the low marginal cost of producing Open Source Software threatens to our equivalent of longstanding business models: proprietary software companies. Free Open Source Software essentially can undermine the way proprietary software companies make money -- by selling software licenses. By sharing the cost to develop software, organizations can increase their productivity, accelerate innovation and bring down their setup costs.
The open source ideology extends even further beyond software. Last month, Elon Musk open sourced the patents for Tesla. His main reason? Pushing the automotive industry to create more electric cars. If Elon Musk is an indicator for industries across the board, it's further proof that capitalism is starting to become more collaborative rather than centered around individual ownership.
Great businesses can be built by adding value on top of a low-marginal-cost community that is owned by many. For example, my company, Acquia, creates value on top of the open-source Drupal software by providing support and software-as-a-service tools. Similarly, Uber adds value by providing consumer-friendly, on-demand services beyond just increasing the supply of available cars on the road. In both cases, the companies' products grow stronger as their communities grow, even as the acceleration of those same communities brings down marginal costs. The power of the community vastly improves previously inefficient base process (such as waterfall software development or taxi regulations) and creates a forcing function for business to generate profit based on products and services that appeal directly to users.
Within the next decade, businesses will need to become much more open and collaborative to survive in an increasingly zero-marginal-cost economy. Those who develop proprietary software are finding it harder and harder to sustain "business as usual". The sharing economy and collaborative development will further streamline capitalism, and organizations that figure out how to master this dynamic will succeed. A community model can work in any number of industries -- we just have to challenge ourselves to as entrepreneurs to discover how.
(I originally wrote this blog post as a guest article for The Next Web. I'm cross-posting it to my blog.)
A few days ago, I sat down with Quentin Hardy of The New York Times to talk Open Source. We spoke mostly about the Drupal ecosystem and how Acquia makes money. As someone who spent almost his entire career in Open Source, I'm a firm believer in the fact that you can build a high-growth, high-margin business and help the community flourish. It's not an either-or proposition, and Acquia and Drupal are proof of that.
Rather than an utopian alternate reality as Quentin outlines, I believe Open Source is both a better way to build software, and a good foundation for an ecosystem of for-profit companies. Open Source software itself is very successful, and is capable of running some of the most complex enterprise systems. But failure to commercialize Open Source doesn't necessarily make it bad.
I mentioned to Quentin that I thought Open Source was Darwinian; a proprietary software company can't afford to experiment with creating 10 different implementations of an online photo album, only to pick the best one. In Open Source we can, and do. We often have competing implementations and eventually the best implementation(s) will win. One could say that Open Source is a more "wasteful" way of software development. In a pure capitalist read of On the Origin of Species, there is only one winner, but business and Darwin's theory itself is far more complex. Beyond "only the strongest survive", Darwin tells a story of interconnectedness, or the way an ecosystem can dictate how an entire species chooses to adapt.
While it's true that the Open Source "business model" has produced few large businesses (Red Hat being one notable example), we're also evolving the different Open Source business models. In the case of Acquia, we're selling a number of "as-a-service" products for Drupal, which is vastly different than just selling support like the first generation of Open Source companies did.
As a private company, Acquia doesn't disclose financial information, but I can say that we've been very busy operating a high-growth business. Acquia is North America's fastest growing private company on the Deloitte Fast 500 list. Our Q1 2014 bookings increased 55 percent year-over-year, and the majority of that is recurring subscription revenue. We've experienced 21 consecutive quarters of revenue growth, with no signs of slowing down. Acquia's business model has been both disruptive and transformative in our industry. Other Open Source companies like Hortonworks, Cloudera and MongoDB seem to be building thriving businesses too.
Society is undergoing tremendous change right now -- the sharing and collaboration practices of the internet are extending to transportation (Uber), hotels (Airbnb), financing (Kickstarter, LendingClub) and music services (Spotify). The rise of the collaborative economy, of which the Open Source community is a part of, should be a powerful message for the business community. It is the established, proprietary vendors whose business models are at risk, and not the other way around.
Hundreds of other companies, including several venture backed startups, have been born out of the Drupal community. Like Acquia, they have grown their businesses while supporting the ecosystem from which they came. That is more than a feel-good story, it's just good business.