Web 2.0 Strategy: Customers Create Value

Note: Over the next few weeks I’m blogging my notes on Amy Shuen’s book Web 2.0: A Strategy Guide: Business thinking and strategies behind successful Web 2.0 implementations. (O’Reilly Media). The book is both a good introduction and a synthesis of diverse theories that should offer something to even experienced strategists.

Background: What is Web 2.0?
Wikipedia entry
What is Web 2.0?, the seminal article by Tim O’Reilly

Chapter 1: Users Create Value / Flickr

  • Alvin Toffler predicted the “prosumer” in his 1980 book The Third Wave, and with recent technical advances in web and digital technology his vision is being realized.
  • Like so many startups, Flickr started out doing one thing (a game) and by listening to customers transitioned to another offering, online photos. The small team including technically-smart founders could turn customer feedback into rapid release cycles. A key to Flickr’s growth was making photos public by default.
  • The freemium business model was first described on Fred Wilson’s blog: “Give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing, etc, then offer premium priced value added services or an enhanced version of your service to your customer base.
  • Flickr’s platform was timely in compounding the positive network effects of broadband, digital cameras, blogging, social networking, and online syndication.
  • Flickr’s core business message: Don’t build applications. Build contexts for interaction.
  • Stages in the open systems movement: Linux; APIs; user-generated content. Flickr combines the last two to compound their use.
  • Flickr’s interestingness algorithm factors in popularity, interaction, identity, and time.
  • Flickr uses the first three of the six kinds of revenue models: Subscription/membership; advertising; transaction fee; volume/unit-based; licensing and syndication; and sponsorship/co-marketing/revenue-sharing.
  • They managed to avoid the four major cost drivers (inventory, payroll, IT, and marketing/advertising/CRM) compared to retail photo printing and online stock photo companies.
  • In March 2005 Yahoo! brought Flickr for an estimated $40 million, a value that can be calculated using a customer-based formula in which revenues are directly tied to customer fees, not unit prices. Tracking customer behavior and metrics on an ad-supported site can result in an average revenue expectation per customer; in 2006 it was $13 for Google. Flickr had advertising, premium services, and partner revenue, making the average revenue per customer about $20. Multiplied by Flickr’s 2 million customers, we arrive at the $40 million valuation. More sophisticated formulas might give different weights to customers based on how actively they use the platform.

How Can I Be More Strategic?

Designers often ask this question. Sometimes I think the question arises from a genuine desire to be doing something else which is more strategic in nature, and sometimes I think what is being asked is, how can I convince or influence others to do things my way?

The answer might be the same or it might not. I’ve started to keep track of the answers I hear to shed some light here.

  1. Change your title, brand identity, clothing, etc. in order to change perceptions of what you offer.
  2. Charge more money so that only the people who have real strategic influence can afford you.
  3. Bootstrap your way into different work.
  4. Be strategic. In Porter’s definition, strategic is long-term planning. Avail yourself of strategic tools both simple (e.g. roadmaps) and complex (futures analysis and design).
  5. Illustrate the strategic implications of seemingly tactical efforts. If strategic = long-term, show the long-term effects.
  6. Be more thoughtful, for example go beyond providing expertise to providing decision-making frameworks.
  7. Educate yourself. Strategy may be harder than finance, operations, and other business topics. Take the time to learn what strategists really do.
  8. Don’t be strategic in the usual sense. Instead, elevate your craft and expand its boundaries. See the influence and flexibility of a breakout designer like Joshua Davis.

What else have you heard?

Kevin Kelly on Eight Uncopyable Values

Kevin Kelly established himself as an Internet pundit with true foresight with the 1998 New Rules for the New Economy which is still a classic, if showing a little age with its dot com bravura. Now he’s working on a new book piece by piece on his blog. The latest chapter examines the future of value online. In Better Than Free he posits:

“When copies are super abundant, they become worthless.
When copies are super abundant, stuff which can’t be copied becomes scarce and valuable.
When copies are free, you need to sell things which can not be copied.
Well, what can’t be copied?”

His answer is eight uncopyable values, which he calls “generatives”:

Immediacy — Sooner or later you can find a free copy of whatever you want, but getting a copy delivered to your inbox the moment it is released — or even better, produced — by its creators is a generative asset.

Personalization — A generic version of a concert recording may be free, but if you want a copy that has been tweaked to sound perfect in your particular living room — as if it were preformed in your room — you may be willing to pay a lot.

Interpretation — As the old joke goes: software, free. The manual, $10,000.

Authenticity — You might be able to grab a key software application for free, but even if you don’t need a manual, you might like to be sure it is bug free, reliable, and warranted.

Accessibility — Ownership often sucks… Many people, me included, will be happy to have others tend our “possessions” by subscribing to them.

Embodiment — …PDFs are fine, but sometimes it is delicious to have the same words printed on bright white cottony paper, bound in leather. Feels so good.

Patronage — It is my belief that audiences WANT to pay creators… But they will only pay if it is very easy to do, a reasonable amount, and they feel certain the money will directly benefit the creators.

Findability — …no matter what its price, a work has no value unless it is seen; unfound masterpieces are worthless.

Microsoft Offer for Yahoo! Shouldn’t Be Too Surprising

Ray OzzieIn my Internet Strategy Class I walk through the 2005 Internet Services Disruption memo from Ray Ozzie. The takeaway is that Microsoft realized services have become strategically crucial but that the company has significant organizational obstacles in the way of making the transition from installed software.

So it’s not terribly surprising when they start buying up companies like Avenue A/Razorfish and now an offer for Yahoo. They need to add this capability and revenue stream, and it’s extraordinarily difficult to turn the Microsoft ship around fast enough.