April 25, 2006

As Wifi Grows, So Do the PR Attacks

An AP story ran yesterday suggesting there are problems with a city-wide Wifi network in St. Cloud, Florida.  What is amazing here is that the writer talks to 3 people total and then infers many grand assumptions.

Here are the facts:

  1. In a few short weeks over 3600 residents of St. Cloud have registered for the service.  This is a higher penetration rate (by an order of magnitude) that EVDO has seen in any city.
  2. The performance of the network is as high as 10X over EVDO downstream, and 100X upstream.
  3. The gentleman that complained is outside the coverage zone and can't get service.  In other words, teh big negative here is that more people want it than can get it.  Hmmm....
  4. EVDO is not planned to be dployed in a town this size (28K residents) anytime soon.  The carriers are focused on the higher denisty cities.

Talk to the people and policy makers in St. Cloud and they will tell you this is a huge success.  They post updates frequently.

Esme gets is right over at MuniWireless.

Better performance than EVDO at a much lower cost.  You won't stop this with an AP article.  Are their issues?  Sure, but I drop 5 cell calls a day in Silicon Valley and that technology (cellular voice) is over 25 years old. 

Posted by Bill Gurley on April 25, 2006 at 09:21 AM | Permalink | Comments (95) | TrackBack

April 05, 2006

Why SOX Will Lead to the Demise of U.S. Markets

Everyone should read this article from the CEO of Nasdaq. He is properly concerned that the overly bureaucratic Sarbanes-Oxley (SOX) processes could lead to the end of global domination by the U.S. capital markets. Ironically, the two gentlemen that created SOX did it with the intention of “preserving” U.S. capital market leadership. Their fear was that people viewed our markets as too risky, and so they created SOX to ensure that investors would “trust” our markets.

It turns out that SOX is doing the opposite – it is ensuring the demise of the leadership of U.S. capital markets. New up and coming companies outside the U.S. are now shunning the U.S. markets in mass. Let us not forget that the Nasdaq has and as always had “weaker” listing requirements that the NYSE. And eventually, the then new and up and coming companies like Microsoft, Cisco, and Intel eventually came to dominate the Fortune 500 – and they all started as emerging companies that preferred the Nasdaq. Now companies are going to “prefer” other markets with requirements that are less stringent than the SOX laden U.S. markets.

This is a HUGE issue. I applaud the Nasdaq BOD for going after the LSE, and I have to wonder whether Mr. Sarbanes and Mr. Oxley have any idea that they will go down in history as the specific architects of the demise of U.S. capital market leadership.

Posted by Bill Gurley on April 5, 2006 at 10:02 AM | Permalink | Comments (3) | TrackBack

July 22, 2005

Wifi Nation...

Wifination_1_1 Click on this graphic from the most recent edition of Business Week.  What you will see, and what many continue to deny, is that Metro-scale Wifi isn't a theory, its a reality.  The networks are live.  They perform way better than EVDO or any cellular alternative.  They are cheaper to deploy.  AND, there is huge momentum around more and more networks. 

This is classic "Innovator's Dilemma" type disruption.  And the incumbents should start to embrace it instead of trying to pass laws to make it illegal. 

Resistance is futile...and denial is typically a poor business strategy.

Posted by Bill Gurley on July 22, 2005 at 10:26 AM | Permalink | Comments (6) | TrackBack

July 19, 2005

Do VCs Help in Building a Technology Platform?

Here is an interesting article on whether or not Microsoft’s “.Net” technology is attracting the interest of the venture capital community.

As a platform company, Microsoft has reaped huge benefits from the formation of vibrant application opportunities on top of its OSes.  In the 80’s, the Microsoft desktop OS was the breeding ground for such successful application companies as Lotus, Borland, Adobe, and many more.  Many of these companies were very successful stand-alone public companies.  In the 90’s, many enterprise software startups were successful by betting early on Microsoft NT.  IPO’s resulted here as well.

Venture Capitalists look to the public markets for clues on where to go next.  There is no point in investing in technologies that don’t lead to liquidity events.  What the article stresses is that the majority of VC money these days is being spent on top of the Open Source platform rather than the Microsoft’s .Net platform. 

It’s not clear to me if this is because (1) VCs are making a conscious bet on the future success of the Open Source platform, or if (2) VCs have recognized that Microsoft tends to move up the stack quickly eating up these application opportunities, and have therefore turned to a platform that is seemingly more benign.  It is also unclear what impact this will have on the overall staying power of the Microsoft platform.  Rapid and fervent application availability certainly reinforces, fortifies, and protects any platform play.

Posted by Bill Gurley on July 19, 2005 at 08:54 PM | Permalink | Comments (4) | TrackBack

July 12, 2005

DVD Glut

I can't help but wonder if the recent news at Dreamworks and Pixar is in some way related to the Internet, Tivo, and other disruptive technologies.  Could it be that people are watching Shrek 2 on Tivo and saving that on Tivo for future viewing?  Could it be that other activities, such as Internet usage, is infringing on DVD time?

There is another big issue.  Why, in 2005, are we creating "inventory" of a digital good that can then be returned and cause an earnings miss?  Why not VOD, or at least "print on demand" at Best Buy and Tower Records.  Or at the very least, only recognize revenue on sell through.  This seems like a 1980 problem raising its head 25 years late.

Perhaps Amazon can solve the problem...

Posted by Bill Gurley on July 12, 2005 at 10:10 AM | Permalink | Comments (14) | TrackBack

June 23, 2005

Pro-Broadband Muni Issue Goes National

The battle to allow cities to control their own broadband future is now national.  See the front page of today Wall Street Journal.  Also, see this three page article in this week's Forbes.  The anti-broadband, anti-competition group appears to be back on their heels, as the WSJ exposes Pete Sessions key reason for his position -- campaign contributions.  Municipal WiFi is cheaper and faster than any other alternative...and VoWifi is coming soon.

Posted by Bill Gurley on June 23, 2005 at 01:03 AM | Permalink | Comments (0) | TrackBack

March 21, 2005

The State of Texas Refuses to Block Municipal Broadband

It appears that people are listening to the voices of the cities and their citizens, who are asking state legislators to say "no" to special anti-competitive provisions being asked for by incumbent carriers and MSOs.  Recent language in a Texas bill was  removed, thanks in part to a large grass roots movements in Texas.  Let's hope it doesn't re-emerge as an amendment on the floor. Texas joins Indiana and Illinois as key states that have voted in favor of consumers and broadband.  Let's hope others follow suit.

The battle now moves to Colorado, where the current language is perhaps the harshest ever seen.  This proposed bill, in its original form, would prohibit a city from helping any new carrier whatsoever get started.  It's a pure and blatant anti-competitive move.  It's been modified slightly, but it is still one of the harshest proposals of any state, and once again created only to help the incumbent carriers by removing competition.  Consumers do not benefit from this language.

Let's hope the state legislators in CO have the same sense as those in Texas and Indiana.

Posted by Bill Gurley on March 21, 2005 at 10:36 PM | Permalink | Comments (5) | TrackBack

March 11, 2005

Believe It or Not: Your State Leaders May Be Acting to Slow the Proliferation of Broadband

A very important battle is emerging between the cities and towns of America and the incumbent telecommunications carriers (ILECs) and cable operators (MSOs).  The former are fighting to retain the rights to control the destiny of their own telecommunications services, while the latter want to ensure that these cities do not become a competitive threat to their core monopolies.  In March of 2004, the Supreme Court ruled (Nixon vs. Missouri) that states "can" restrict their cities from offering telecommunications services if they choose.  The Supreme Court did not say that they "should" outlaw this behavior, but simply that they "could."  The ILECs and MSOs jumped at the opportunity, calling into action their massive state-by-state lobbying campaign contribution efforts to push forward legislation that would attempt to stall the rising competitive threat of very low cost, city-wide, wireless networks.  Currently, the most high profile battle is in Texas, where Sec 54.202 of the Texas House Bill 789 seeks to strip the municipalities of such rights.  There is also proposed legislation in 11 other states including Florida and Colorado.

New technologies, such as 802.11, mesh-networking, and eventually WiMax, allow for the quick and easy deployment of high-performance broadband networks.  Consider the town of Chaska, Minnesota.  Last summer, Chaska, through an ISP that is associated with the city-owned utility, deployed a 16 square-mile, 802.11 city-wide network, leveraging Tropos Networks' 5110 mesh routers (Benchmark is an investor in Tropos).  This multi-megabit network, operating at speeds similar to DSL and cable, and much higher than 3G wireless technologies such as EVDO, offers coverage to its citizens throughout the entire town (picture an umbrella of 802.11 coverage).  The city priced its broadband service at a competitive $15.99/month, and the citizens voted with their pocketbooks.  In twelve short weeks, over 25% of its citizens signed up for and installed the service.  Chaska believes it has an asset that differentiates itself relative to other cities. This asset improves quality of life, improves the quality of education, and attracts businesses and jobs.  What's more, due to the low-cost of the infrastructure, Chaska expects to pay for the entire network in less than 18 months.

Some state legislatures, and the above mentioned ILECs and MSOs, feel that the citizens of tens of thousands of towns and cities across America should not be allowed to make a decision like that made in Chaska.  To protect their rights of self-determination, it is imperative that these cities and towns, and their citizens, do everything they can to prevent these state laws from being passed.  Smartly, the states of Indiana and Illinois, and the city of Philadelphia, have already said "no way" to such initiatives.

Here are six key reasons why other states should do the same:

1.  The primary reason these legislators are proposing to "take rights" from these towns and cities is to reduce or eliminate competition for the ILECs and MSOs.  Allowing incumbent carriers with little to no competition to push laws onto the books that blatantly impinge on the rights of the municipalities is unprecedented.  This is equivalent to allowing auto manufacturers to introduce legislation that cities shouldn't be able to fund city buses or other forms of mass transit.  Or imagine a large real estate developer urging state legislators to outlaw cities from building low-income housing, simply because they compete with their apartment projects.  The ILECs and MSOs wouldn't even exist if it wasn't for government cooperation in the form of eminent domain, franchise agreements, etc.  The most restrictive of the proposed anti-muni network legislation (such as that in Colorado) would prevent cities from cooperating in a similar fashion with private entities for wi-fi networks, e.g. banning cities from leasing pole attachment rights.  This is a clear violation of Title 47, 253(a) of the United States Code.  Obviously, this is a direct effort to reduce competition and increase monopoly rents.  The incumbents also argue that the municipalities are ill prepared to deploy the network and provide proper customer service.  Isn't it ironic that they want to protect them from competition that is in their own view inept and uncompetitive?  It is as if the Harlem Globetrotter's found out that their nemesis, the Washington Generals, were actually holding practice and now they are up in arms about it.

2.  An oligopoly does not a marketplace make.  Some conservative legislators argue that cities simply shouldn't be in competition with these private service providers.  However, there is no proof whatsoever that open competition exists in markets were there are only one or two alternatives for service.  In fact, in cases where there are only one or two providers, monopolistic and duopolistic actions tend to work to the detriment of the consumer.  Chaska.net proved wildly popular with consumers because DSL and cable modem services in town cost 2-3 times as much as the wireless network.  Guess what is going to happen to broadband prices in that town now?  The FCC is quite proud of the fact that it was not until a third cellular provider was introduced to most regions (with the auction of the PCS licenses), that competition increased to the point of aiding the consumer.  One proof point that this lack of competition harms customers can be found in the numerous cases around the country where ILECs are being sued for a practice known as "redlining."  Redlining refers to the practice of only pushing new services and technologies in wealthy communities and ignoring the poorer communities.  In Texas, 93 counties have only one service provider and 70% of rural areas have absolutely zero access to broadband.  On top of all this, the US ranks 13th worldwide in terms of broadband penetration per capita, and is falling in the ranking.  Is this really an environment where competition needs to be reduced?

3.  Taking these rights from municipalities will have a negative overall impact on American innovation.  The technology industry at large has a ton to lose if initiatives like these are adopted.  Why?  Because it is the efforts of the more progressive cities and towns that push the envelope forward in terms of technology and innovation, especially when it comes to communications services.  Additionally, more broadband competition leads to faster and cheaper broadband, which will obviously have a huge impact on the demand for technology products and services.  Faster and cheaper broadband will greatly expand the breadth of services that can be offered into the home.  Services such as IP video on demand, VOIP, picture telephony, and streaming online education are all dependent on a massive broadband footprint.  Considering that this is at a time when many Americans are concerned about high-tech job growth and innovation shifting to Asia, why are we considering proposals that will cause America to fall further behind?

4.  Even if a city has no intention of deploying wireless services, it is still in that city's best interest to retain the right to do so.  Consider the example of two cities, City A and City B.  City A has the right to deploy telecommunications services if it so chooses, whereas City B is in a state where the legislators have taken away its rights to do the same.  Now consider what happens when the ILEC that serves each city begins to drag its feet on a new broadband deployment, or it decides it is going to "raise rates" on its DSL service.  Which city is more likely to be able to negotiate a better outcome: the city that retains the leverage or threat of being able to be able to deploy its own services (City A), or the city that has no leverage whatsoever because the state has already stolen its key leverage point for negotiation (City B)?  Anyone that has ever sat down to the negotiation table knows the answer to this one.  Over the next 5-10 years, the states that restrict the rights of their cities will be surprised to find that the ILECs and MSOs moved much faster in deploying services, and deployed them at much lower prices, in the states that allowed their municipalities the right to compete.

5.  In 2005, isn't it reasonable and potentially enlightened for a city to choose to offer broadband as a community service?  It is common practice in America for a municipality to provide services to its citizens in areas where (1) there are economies of scale for the city providing those services, and (2) where it is in the best interest of the community.  As such, local government agencies are the primary provider of schools, libraries, road construction and maintenance, security, fire protection, judicial services, and certain registrations and licenses.  In 3,600 cities across the US, cities currently provide utilities such as power, water and electricity.  Today's 21st century American city finds itself concerned with (1) the quality of education of its children, (2) whether or not those students will be competitive in a global marketplace for jobs, (3) the reduction of employment opportunities in such staple American industries as agriculture, manufacturing, and textiles, (4) the fact that even "new economy" jobs such as call centers, help desks, and even software engineering are increasingly moving overseas.  In such an environment, who is to say that the future citizens of any municipality will not be better served by having subsidized or perhaps even free access to the Internet?  Isn't this the library of tomorrow?  The reason America is 13th in the world in per capita broadband is precisely because government entities in other countries invested in broadband as a community service to the people.  Perhaps Michael Copps, FCC Commissioner, said it best in a recent interview, "I think we do a grave injustice in trying to hobble municipalities.  That's (municipal wireless) an entrepreneurial approach, that's an innovative approach.  Why don't we encourage that instead of having bills introduced?"

6.  A founding American principle - localized government whenever possible.  Perhaps the most insupportable aspect of these efforts to take rights from American cities is that the effort reeks of heavy-handed, centralized government.  One can be certain that these same legislators seethe whenever our national government attempts to impose rules and regulations on the states.  Those states recognize that their local constituency is smart enough to make decisions for themselves.  The effort to restrict the rights of these municipalities from a state level is denying the citizens of these communities the right to make their own decisions.  Moreover, it infers that these citizens, and their elected officials, are not intelligent enough to make these decisions themselves.

In what is ostensibly the cornerstone "democracy" on the planet, one would think that the citizens in each of America's cities could simply "vote" on the services they believe make sense for their city to provide.  Running a wireless network in a city like Topeka, Kansas simply has no overriding impact on the state as a whole.  As Thomas Jefferson aptly wrote in a letter to William Jarvis in 1820, "I know of no safe depository of the ultimate powers of society but the people themselves; and if we think them not enlightened enough to exercise their control with a wholesome discretion, the remedy is not to take it from them, but to inform them."

________________________________________________________________

If you would like to ensure your town or community has the right to deploy innovative broadband services (and you don't live in Indiana, Illinois, or Minnesota), please send letters, emails, faxes and phone calls to your local legislators to urge them not to pass laws that take broadband service rights away from your city.  In Texas, please let the members of the house and senate telecommunications committees know where you stand on this.  Save Municipal Wireless.

Posted by Bill Gurley on March 11, 2005 at 10:34 AM | Permalink | Comments (7) | TrackBack

October 19, 2004

The Revolutionary Business of Multiplayer Gaming

It's so easy when you know the rules
It's so easy all you have to do
Is fall in love, play the game
        -Queen, Play the Game

What's the most valuable Internet company in China? Is it a portal? Is it an e-commerce site? No. The most valuable Internet company in China, clicking in at US$2.0B in market cap, is an MMPORG. MMPORG, an acronym whose length is matched only by PCMCIA, stands for Massively MultiPlayer Online Role-playing Game (a shorter acronym, MMOG is also gaining acceptance). Simply speaking, MMOGs enable multiple players from multiple geographies to meet online and interact in some form of digital group activity. Once considered a niche business, and even a failed one in the U.S., the prospects for multi-player gaming businesses are rising sharply. This renewed faith may be prescient, as the business case for MMOGs is remarkably compelling.

Today's MMOGs are direct descendants of Multi-User Dungeons ("MUDs"); text-based multiplayer adventures popular with the UNIX crowd in the early 1990's. Since then, there have been numerous failed attempts at MMOGs , including several companies such as Worlds, Inc. that achieved a high profile status during the orginal Internet boom. The first title to obtain undisputed business success was Ultima Online, originally released in 1997 by Electronic Arts' Origin Studios. In a telling move, the creator of Ultima Online, Richard Garriott (aka "Lord British"), is now working with Korea's NCSoft, as MMOG's have found their largest audiences in the Asian markets.

NCSoft's hit MMOG, Lineage, has amassed more than four million users, and NCSoft has gone on to deliver many successful follow-ups, including Lineage II and more recently City of Heroes, which they are marketing primarily in the US. Like China's Shanda, NCSoft sports an impressive market capitalization of US$1.7 billion. Webzen, the number two player in Korea, sports a US$780 million capitalization, while NetEase, a portal in China that generates over 50% of revenue from gaming, has a market cap of US$1.3B. Make no mistake about it -- these are real businesses.

Shanda, despite being considered by some a "Johnny-come-lately" and by others a mere distributor, is the undisputed champion of the Chinese MMOG market. The company, which began by repackaging a massively multiplayer game from the Korean developer Actoz, is a distribution machine. It was early to deploy its provisioning technology and promotional materials to nearly all of China's several hundred thousand Internet cafes. This allowed the Internet cafes to  collect cash on behalf of Shanda, a critical accomplishment in a market that lacks credit card adoption. Shanda is now investing in original intellectual property and will be more publisher than distributor in the future.

Despite a price point that can be as much as ten times lower than that in Korea, Shanda's 2005 forecasted revenues of US$160 million will come close to matching those of NCSoft. This is because Shanda's average number of concurrent users (700K+) is greater than the number of members that have ever played the corresponding leading title in the U.S. If this were not enough, roll in the low cost of Chinese development, and operating margins come in north of forty percent.

Despite Asian dominance, there are U.S. success stories as well. The leading U.S. MMOG is Sony's EverQuest, which has attracted around 500K registered users. Concurrent users are likely 10-20% of this number, perhaps 50 to 100K; still dramatically lower than that of Shanda. With a $50 initial fee and a $13 monthly subscription fee, EverQuest is likely in the $80-90 million dollar per year revenue range. A recent Forbes article notes that,"Sony figures it could earn up to $500 million in profits in eight years on EverQuest, which costs $30 million to build and $14 million a year to update." Nice.

With numerous, innovative MMOGs in the market, the genre has moved beyond its swords and sorcery fantasy beginnings. Players can replicate WWII as a grunt in Battlefield 1942, join in an intergalactic struggle in Planetside, decorate their virtual homes and entertain friends in Sims Online, or build comic book characters and battle evil in City of Heroes. MMOG players make astonishing emotional commitments to their in-game characters and to the master narrative of the virtual world. It's not uncommon for users to continue paying monthly service fees long after they stop playing regularly, so that they don't have to "kill" digital avatars in which they have invested literally hundreds of hours of activity.

In fact, in many MMOGs, the opportunity to "make a living" playing the game is totally feasible, and there are many examples of gamers earning north of $40K a year selling virtual property from within the game world. In Korea, some of these passionate activities have taken on a more serious tone, as the government has responded to numerous reports of digital theft. To be clear, this is where one player "steals" a digital asset from another user inside the game world, and the police intervene to try and reciprocate what they view as an abduction of value. Even more seriously, some Korean players have resorted to real-world physical retaliation for battles they may have lost within the game.

Over time, as millions and millions of people from across the globe interact across the Internet, today's role-playing games will become one of many genres of MMOGs. Already there are examples of MMOGs that are more casual and that penetrate more demographics than today's titles. In Korea, the leading chat site SayClub has morphed into a multi-player avatar-driven gaming destination. China's leading instant messenger company TenCent has added gaming to its QQ client and is rapidly becoming a leader in casual multi-player gaming. AOL and Yahoo are quickly mimicking their Asian counterparts. NeoPets, an Internet site focused primarily on children, may in fact be the most successful MMOG in the U.S. While many hard-core gamers may not consider NeoPets a true MMOG, a closer look will reveal many of the core elements, such as avatars, persistence, intellectual growth, group activities, and a virtual economy.

Perhaps the most ambitious MMOG to date is LindenLab's SecondLife. SecondLife, which most closely resembles Neal Stephenson's famed Metaverse, from the pages of cyberpunk best-seller SnowCrash, is based on the theory that the MMOG itself should relegate to the users as much creative freedom as possible. In other words, let the community design and build as much of the environment as it can, simultaneously unlocking human potential and business economies of scale. LindenLab has also established an interesting new pricing model where users pay for such things as "land" and "taxes," and where the community creates actual digital businesses, such as a virtual nightclub that charges admission to an event.

There are many reasons why MMOGs make enviable businesses:

1. Recurring Revenues. Anyone who has ever sold software covets the predictability of recurring revenues, particularly subscription revenues that are basically "good until cancel." Most of the leading MMOG businesses employ some form of subscription pricing.

2. Competitive Moats. Warren Buffet is fond of saying he likes businesses with castle-like moats (i.e., ones with high barriers to entry). As users invest more and more time into a persistent character, into an avatar, into accomplishments, into online relationships, and into the resulting reputation, the higher the costs to switch to an alternate platform.

3. Network Effects / Increasing Returns. There is no better online barrier to entry than a strong community. Witness how Amazon and Yahoo both failed to distract eBay users even when offering a free product. For most MMOGs, the more users a particular game has, the more compelling the experience is for incremental users. This self-reinforcing form of Metcalfe's Law is alive and well in many MMOGs.

4. Real Competition. In the future, traditional software-based games will merely be practice vehicles for the much more interesting endeavor of multiplayer competition. MMOGs allow for a sense of competitive accomplishment and provide vehicles for the human ego to be rewarded, all of which drives extremely obsessive behavior.

5. Time Engaged. According to the previously mentioned Forbes article, "a good PC-based game has a lifespan of 30 hours of play; a good multiplayer game gets 20 hours in just a week." This puts MMOGs, from the perspective of today's users, on par with television in terms of time engaged.

6. Unlimited Complexity. In a world where other players are part of the user experience, the number of permutations of experiences is quite realistically limitless. From the relatively simple rule-sets and economies present in most MMOGs, astonishingly complex emergent behaviors arise. This offers a stark contrast to previous interactive entertainment where the game can eventually be "beaten" by the user.

7. High Risk, But High Reward. The number one criticism of MMOGs is that they are "hit" businesses like Hollywood businesses. A closer look will reveal that the average successful MMOG has had a useful life of over five years. What's more, sequels are amazingly popular. As such, it is not unrealistic for a title to last ten years. That said, there are many, many MMOG efforts that fail to reach the break-even number of subscribers necessary to have a positive return on investment. As with the entire history of finance, risk and reward remain correlated.

In the future, one interesting characteristic to watch is just how susceptible a particular title is to increasing returns. As we mentioned, most MMOGs are partial to increasing returns, but there are different levels of scale. Many MMOGs reach an upper limit to their network effect. For example, consider online chess or backgammon. A room of 200 players does not offer a dramatically different experience than a room of two million. For a four-player game like Hearts, that number may by 400 or 500. Add a competition or ladder scheme to the mix and even for simple games, the network effect can rise higher and higher. Complex fantasy games like Lineage or Shanda's Mir have an even higher liquidity threshold, although they are sometimes limited by their own architecture (only so many players can interact on a particular server instance). The ultimate MMOG will have a viral, self-reinforcing value proposition and no upper limit on its ability to exploit network effects.

Some skeptics argue that MMOG is still a "niche" business and that the same half-million users are migrating from Everquest to Ultima Online to City of Heroes. Under this theory, MMOGs will never be mass market and will never really "matter" in the $20 billion interactive entertainment business. However, with billion dollar businesses now dotting the NASDAQ, it becomes harder and harder to invoke such skepticism. And if new paradigms, architectures, and broadband speeds allow for titles that meet the needs of a wider demographic, ignoring MMOGs may be equivalent to ignoring the successor to television.

Posted by Bill Gurley on October 19, 2004 at 08:00 AM | Permalink | Comments (2)

May 06, 2004

Entrepreneurialism and Protectionism Don't Mix

"I think it's time
That you found what the world is waiting for
I think it's time
To get real."
     -Stone Roses, What the World is Waiting For

It is quite bizarre to see John Kerry, Pat Buchanan, and Ross Perot all on the same side of a political issue. Of course, regular Above the Crowd readers might find it equally bizarre to be reading about politics in this newsletter. However, one recent political issue directly threatens the high-tech community. Economic protectionism, the mandate that strangely ties the above three gentlemen together, suggests that in order to protect jobs in America, the government should put up barriers to free trade that "advantage" the American worker over others. If implemented, a protectionist policy will have a profoundly negative affect on high-tech startups, entrepreneurialism, and innovation.

Here are seven reasons why Silicon Valley should be very alarmed over protectionism:

1) Protectionism Will Hurt the Overall Economy:

History has confirmed that Adam Smith's theory of comparative advantage was remarkably prophetic. Not only have scores and scores of countries thrived as they initially encountered global trade, but many others have crashed dramatically upon raising barriers to the same. While there are many examples of such catastrophes, including China at the end of the first millennium, Holland in the 1600's, Great Britain in the 1800's, and Japan in the late 1900's, perhaps the most relevant is America's own protectionist movement in the late 1920's, which led to the single worst economic drought in American history. Ignoring the theory of comparative advantage is the intellectual equivalent of harboring thoughts that gravity might be a myth or suggesting that diet and exercise really aren't that important. While it may seem trite to mention it, crashing the overall economy will certainly hurt the market for startups.

2) Startups Don't Collect Subsidies:

One typical method for implementing protectionism is to offer subsidies or tariff advantages to local companies such that they have an advantage vis-à-vis foreign competition. Here is the catch: startups have no idea how to file for subsidies. They don't have large lobbying groups in Washington. They have no idea how to schmooze their Congressman in order to increase their chances of receiving preferential treatment on some new multi-billion tax credit program. These are the skills of large, bureaucratic companies in staid industries that already have hundreds of employees in the nation's capital.

3) Diversity Is Critical to Startup Success:

The startup world embraces diversity like no other industrial sector. It is not unusual for a company in Silicon Valley to have employees from numerous geographies, representing numerous religions, and numerous languages. More importantly, no one seems to notice. Companies succeed, because they can recruit the very best from all around the globe. Multiculturalism is ingrained in the fabric of everyday life. The xenophobic notion that someone deserves a job over someone else simply because of religion, ethnicity, or nationality has no place in the 21st century. Protectionism will only serve to bring tension to a community that has none.

4) Startups Are Increasingly Global at an Early Age:

Ironically, the protectionists in Washington are beginning to beat their drums just as startups have become dramatically more adept at crossing boarders. Jamdat*, an emerging player in the mobile gaming space, is distributing software in 29 countries, transacting business in 9 currencies with 60% of its employees living outside the U.S. Skype, a company that began just 18 months ago in Europe, already has 40% of its users in the Americas and Asia. Google may have grown internationally faster than any company previously. It already offers its search service in 97 languages across 95 international domains and in its recent quarter, international revenues were already 30% of its overall results. The Internet has reduced friction in communication and distribution and has enhanced the speed at which young companies can serve the entire world. Protectionism will put a quick end to this remarkable development.

5) The Critical Emerging Markets Are Outside the U.S.:

The leading cellular markets are in Europe. The most innovative broadband carriers are in Korea and Japan. Increasingly, the majority of consumer electronics are being designed and assembled in Taiwan and China. The largest emerging market for every product under the sun is also in China - the country with the leading GDP growth, and the country that will one day be the largest industrialized country in the world. America is interesting, but it's hardly where the action is. Startups are increasingly focusing on markets outside the U.S. - sometimes bypassing the U.S. and entering the market elsewhere. Protectionism will slam the door on the most critical opportunities for startups.

6) Taking a Step Backwards:

The U.S. Government, as well as leading companies such as Intel, just spent the past year convincing the Chinese government to embrace a single global standard for 802.11 wireless products, bypassing its previous decision to implement a proprietary security standard. This single feat will have an overwhelmingly positive impact on thousands of small companies that build products based on 802.11 in the United States. All of their products will now work out of the box in the most important emerging market on the planet. It seems laughable that just as we convinced the most historically communist country of the benefits of free trade and comparative advantage, a few of our own leaders seem to have contracted amnesia.

7) Protectionism Is Inconsistent with the Entrepreneurial Mindset:

It is hard to imagine a successful entrepreneur arguing that he or she deserves a job over someone else that is equally skilled and willing to work for a lower wage. The entire spirit of entrepreneurialism is based on finding ways to do something better, faster, and cheaper. It is the whole nature of the game. If someone can do something better somewhere else, it simply means it's time to innovate again - with intellect and technology, not politics.

Perhaps the only saving grace is that the international community may protect Silicon Valley from Washington. Just as our entrepreneurial founding fathers must have had choice words for a maturing Europe, America is now being criticized by the emerging economies of our time such as India and China. The WTO has taken on a significant role in the global economy and many of its members are specifically targeting U.S. protectionist polices as their key agendas. Just as many countries criticized what they consider to be unilateral U.S. military behavior, they are equally up in arms with regards to unilateral economic behavior.

What many in America may miss is that the rest of the world will go on without us. Over the past thirty years, the key market for technology products was obviously the U.S. Startups in Europe, Israel, and Asia would develop their products at home, but quickly shift the focus to the U.S. when it came time for marketing and sales. This is no longer the case. In many instances, Europe and Asia are quickly becoming the enviable markets. What's more, as recently noted in the New York Times, "Foreign advances in basic science now often rival or even exceed America's, apparently with little public awareness of the trend or its implications for jobs…" If America closes its borders, intelligent and resourceful entrepreneurs in Europe and Asia will cheerfully step in and generate tomorrow's leading break-through companies.

*Benchmark Capital has an investment in Jamdat

Posted by Bill Gurley on May 6, 2004 at 08:00 AM | Permalink | Comments (0) | TrackBack

DISCLOSURE: The information contained Above the Crowd has been obtained from sources believed to be reliable but is not necessarily complete, and its accuracy cannot be guaranteed. Any opinions expressed herein are subject to change without notice. The author is a general partner of Benchmark Capital, a venture capital firm in Menlo Park, Calif. Benchmark Capital and its affiliated companies and/or individuals may have economic interests in the companies discussed herein. © J. William Gurley 2005-2006. All rights reserved.