15 December 2010
Nowadays tech is not hardware. Tech is software, and the cutting edge is the Web. PC-based software is a bit like mustard jeans in the early 90’s. Out-of-date and likely to get you killed.
Web-based software is the new mustard jean pant.
In the past 10 years the Web has spawned global brand names, wiped out old economy businesses and connected billions.
And it has made some people very very rich.
How? Scalability. With some code, coffee, and a bit of luck, you can reach 5.5 billion people from the comfort of your bedroom.
What are the barriers?
In established markets the most powerful barrier is the network effect. The more users a service has, the more attractive it is to potential new users. This is encapsulated by Metcalfe’s Law[1], which states that the utility of a network equals the number of users squared.
Once you reach critical mass, everyone wants to use your product. Regardless of whether it is actually the best product! Think of e-Bay. Crappy experience, much better auction sites out there. Owns the market because it was first to reach critical mass and didn’t make any stupid mistakes subsequently.
So it’s difficult to start another eBay.
First-mover is not always the defining factor in attaining critical mass. Another oft-used expression is “fast-follower” advantage. Think Google (over Altavista), Microsoft Explorer (over Netscape), Facebook (over Smallworld).
The trick is fostering community. The more interactive the product is, the greater the strength of the network effect, the harder for others to take away your users.
How did tech take-off?
Many factors converged, but the single biggest contributor to the boom of the past decade was bandwidth. In the USA, the infrastructure explosion of the late 90’s led to a Pythonesque glut of bandwidth. This led to price wars, bankruptcies and very cheap, very fast broadband connections.[2]
The yanks piled onto the Internet.
In April of 1996 there were less than 19 million Internet users in the USA. By December 1996 there were 50 million…
This was the trigger for the explosion in online success stories. Google, Facebook, Amazon, e-BAY, Craigslist, MySpace, the list goes on…
The evolution of online in the USA was roughly as follows:
- Portals (Yahoo)
- Search (Google)
- Classified ads (Craigslist)
- e-Commerce (Amazon, eBay)
- Social networking (Facebook)
If you were Yahoo in 1998 you would have bought into (or started) Google, Craigslist, Amazon, eBay and Facebook, thereby covering the biggest plays. More important than strategic value, you would be able to foster cooperation between these beasts!
How big are these guys today?
| Market Cap | Launched | |
| Yahoo | $22 billion | 1995 |
| $189 billion | 1998 | |
| Craigslist | $5 billion (2008 est.) | 1995 |
| Amazon | $79 billion | 1994 |
| eBay | $40 billion | 1995 |
| > $50 billion (Dec 2010 est.) | 2004 |
And they are at war! Instead of cooperation, we have a fragmented market with mutual paranoia and pervasive distrust.
Take Apple[3] for example. Apple had long banned certain Google services, like Google Voice, from its iPad and iPhone app stores. Similarly, Google and Facebook are currently having a very public spat over Facebook’s refusal to allow Gmail to import friend email addresses, leading Gmail to block Facebook from accessing Gmail contacts.
Evolution
Sometimes we forget how sites like eBay started. eBay makes money by charging a listing fee. In the early days, before PayPal, you simply sent eBay a postal order for the requisite fee (couple of dollars). eBay staff would then cash in the postal order at the nearest bank. Not the stuff of techie wet-dreams! But it worked.
It also created the opportunity for PayPal to enter the world. How did PayPal get traction?
Apart from plugging into the screaming need of eBay buyers and sellers to electronically transfer money, the trick was simple. Every new user received $10 in their account, and then received $10 for every new user they referred. PayPal burned through over $150 million dollars in this way, but now they make more than $2.8 billion per year and have 90 million active users (out of 230 million total users)…
Western Union, VISA, MasterCard, watch out. PayPal is coming to get you…
Disintermediation
The Internet is all about disintermediation. Cutting out the middleman and creating more efficient markets.
Some examples:
- eBay disintermediated antique dealers.
- Amazon disintermediated Barnes & Noble
- Google disintermediated Yahoo!
- Facebook is disintermediating Google
Facebook is the real scary looking guy from Mondeor.
Imagine you could facilitate commercial transactions between people that know each other intimately (or at least have intimate friends in common.) How likely are you to break a promise when you know that a thousand of your closest friends will know of your deceit within hours? Facebook has the potential to blow marketplaces like eBay out of the water!
Hence Google’s panic. They have held the monopoly on Internet usage since 2001. But now they see Facebook, with over 600 million users, controlling an inaccessible database of personal data, and engaging users for roughly 3 times longer than Google (and that includes Gmail and YouTube). 25% of all page hits in the USA are Facebook!
Most of the time you don’t need to invent a new market. You simply cut out the middleman and you’ve got a business.
So what do most the success stories of the past have in common?
Community! eBay, Amazon, Facebook, Google, LinkedIn, all of them are communities with social connections of varying strength.
But these companies are all from Silicon Valley, where everyone has an iPhone, a credit card, and unlimited data. Everyone speaks English and eats locally-grown-lactose-free-certified-organic-chocolate-muffins.
In other words, it is slightly removed from the reality of life for 6.5 billion people in the world. 5 billion of which have a mobile phone.
PC Web is the past. Mobile Web is the future.
Mobile Internet
The mobile Web is exploding. Doubters of the obvious can check out this presentation from Mary Meeker, http://www.slideshare.net/CMSummit/ms-internet-trends060710final.
As exciting at the numbers are, the analysis is focused on the 1st world (as usual).
What about the 3rd world? What about Africa?
There are 450 million people in Africa that have a mobile phone.
International connectivity? Below is a map of planned undersea cables:
Five years ago, sub-Saharan Africa was served by one cable system with a maximum capacity of 120Gb. Today South Africa has 1,580Gb capacity. By 2013 it will have a capacity of more than 19 000Gbit/s.
Mobile phone penetration + International bandwidth = Opportunity
Africa is on the verge of joining the global Internet community, leap-frogging PC-based Internet usage, and going straight to the mobile Internet.
Can you sense the opportunity? Hell yeah! But what do most African’s need?
It’s easy to sit in a Starbucks and think that the most important need is growing your Farmville empire. Or buying a mountain bike on eBay. Or ordering Blue Mountain coffee on Amazon.
Newsflash: Rich people have different needs to poor people. And poor people fundamentally need money. Making money or saving money, is the numero uno priority for 90% of the world. Make it easy to make or save money via mobile phones and you have a winner.
Do you have any idea how popular mobile networks are? South Africa’s operators in 2009 carried 54 billion minutes, 12 billion SMS’s, and 11 billion PleaseCallMe’s.
That is 34 million SMS’s a day! And that’s just the expensive stuff. MXit does over 250 million messages a day…[4]
Oh, and WAP impressions grew by 400% in past year.
South Africa has 7% of Africa’s population. Multiply those numbers by 15 and you get a feel for how big the opportunity for mobile services in Africa is…
The good news is that the space is wide open. Most players to have struck gold still treat a cellphone as a communications device[5] (think MXit, mig33). It’s like the early 90’s when for many people “Internet” meant having email.
And everybody that isn’t building “the next MXit” is selling ringtones or blurry pictures of purportedly naked women via dodgy late-night TV commercials.
So there is plenty of room for people who take some lessons from the history of the web giants and adapt them to emerging market realities. It’s not just a (dumb) phone; it’s the best Internet access for at least 2.5 billion people…
[1] Robert Metcalfe, co-founder of 3COM.
[2] “Why is broadband cheap in the rest of the world?” 5 January 2010, AKC
[3] Apple is technically a hardware company (it makes money selling beautifully designed devices), however, at its core, Apple is a software company. They would not have had $25billion revenues in their last quarter if not for their intuitive interfaces and seamless integration between products. That is software. They have simply adopted the “free” model. Give away software for free (including music and apps), and charge for hardware!
[4] MXit claim 450million per day, but internal sources indicate numbers closer to 250mil
[5] Note that while MXit styles itself as a social network, there is a big difference between communication and social. Communication is an important part of social activities, but those activities generally include (and require) a lot more than communication. As Google discovered when they tried turning Gmail (a communication platform) into a social network by slapping Google Buzz on top of it to general indifference from their users.