VC Perspectives

A nice thing with the summer break is that it provides time to read up on things. One of the books I read this summer was Free - The Future of a Radical Price by Chris Anderson.

Although most of the content is well known to people familiar with the web, open source, and social media, it is still a great read. In addition to giving some perspective on the development of free as a marketing tool, Chris provides an excellent overview of the various business models associated with a free offering. Even more importantly, he really invites the reader to think about free as an inevitable business model as marginal costs head towards zero. Basically anything digital delivered over the internet could be offered as free in one form or another. Thus it is important for any company to think about a) what should we do if someone adopts a free model and b) is there an interesting business around a free model that we could take advantage of ourselves.

The book is available for free at Spotify as an audiobook and for example at Chris’s Wired blog.

In the June edition of Wired magazine there is a very interesting section on “the next new economy” where writer Chris Anderson predicts more startups, fewer giants and a disaggregation of large companies into smaller entities.

With the internet providing a possibility for minimal transaction costs between supply chain actors, one would think that this decentralization already would have happened. And it has to some extent and in some industries. But on the other hand, we still see successful companies growing into semi-monopoly situations where the market leader wins as much (or often more) on economies of scale and exercising its dominant position as being innovative and fast-moving.

On the other hand, we have also witnessed the vulnerability of such large, inflexible companies and what can happen when someone nimble and fast innovates the hell out of the market leader. And the recent financial turmoil has underlined the problem of these large entities where taking on debt was the primary vehicle for creating value rather than being innovative.

In Wired, Paul Graham of Y-Combinator states:

It turns out the rule “large and disciplined organizations win” needs to have a qualification appended: “at games that change slowly”

Therefore it is very interesting to read Steven Levy’s article about how Google has created its own economy (Googlenomics) exploiting the near-to-zero transaction cost to its favor and how it has designed their ad sales model to be instant, automated and built bottom-up ensuring dynamic, market-driven results.

Although Google is an exceptional company I think there are valuable takeaways for most companies. Both from how it has developed a super efficient auction that is designed to adapt to market changes and the notion that if you’re in the game of transactions, you have to strive for automation and getting to the lowest transaction cost possible.