The Kernel: Fresh fields and pastures new?

Britain is a great place to do business – or so we are told. But Government and media attention tends to focus on London – perhaps not surprisingly, given that, despite the relatively recent moves in the broadcasting industry to Cardiff, Salford and so on, a great deal of the Government and media is in London as well.

The regions have – or did have, as in the case of One North East – their own development agencies, and larger provincial cities such as Manchester and Leeds have made a reasonable stab at drawing non-manufacturing businesses to their metropolitan bosoms. But more rural areas have had only limited inward investment, and even less publicity. So just how realistic is it to set up a high-tech business in the hinterlands?

An example of a company bucking the trend is Cotswold-based mobile gaming company, Neon Play. Business success is never a given: clearly there is more to starting a company than setting up and pressing a big, fat “go” button, whatever the location. All the same, it seems we can learn something by teasing out the more geographical threads from the Neon Play story.

The first thing to note is that founders of Neon Play, Oli Christie and Mark Allen, were not in the area by accident. The disturbingly languid Cotswolds plays host to a sizeable creative and marketing community, much of which has been driven out of EHS Brann, now EHS 4D)=, a digital agency established 25 years ago that helped Tesco launch its Clubcard.

Cheltenham is another centre of creativity, illustrated by its recent design festival and the fact it is home to SuperGroup, best known for its Superdry brand. Other parts of the country have their own specialisms, built around similar success stories: for example, Bristol has animation (Aardman); Newcastle has software (Sage); Cambridge has silicon (ARM).

As concerns evolve and people leave their respective motherships, setting up as freelancers and forming alliances, an ecosystem of smaller firms can begin to grow organically, operating locally and often under the national radar. Like breweries on the Trent, Sheffield Steel or Kentish market gardens, it was ever thus.

An ecosystem is one thing, the logical extension of which took people into cities in the first place. But simply following the crowds to the epicentre creates its own challenges – not least, it can be the enemy of innovation. “Working independently from the big players gives us freedom and autonomy,” says Neon Play’s Oli Christie. “It enables us to come up with genuinely new ideas and drive the destination of our games.”

Deciding not to go with the pack comes with concomitant trade-offs, however, not least of which is attracting skilled staff. Ageism aside, it’s a fair bet that the designers, developers and other creatives at the heart of a gaming company will tend to come from a younger demographic – which won’t necessarily view the nightlife of a historic market town with untrammelled enthusiasm.

It’s not just the social challenges: larger centres come with a purpose-built community and work ethic. It’s impossible to walk through Soho or Shoreditch, for example, without getting a whiff of industriousness. “We knew that being in Cirencester wouldn’t be easy. Bristol would have been easier,” says Christie. “The culture is massively important. We had to think hard about making it stand out. We wanted to make it small, fun and passionate, a genuinely nice place to work.”

It’s not window dressing when the company offers “ten reasons to work with us” on its website, a list that covers everything from a quarterly bonus and extra days off to an inspiring office environment, no doubt taking a few leaves out of Google’s handbook. There’s beer on Fridays and “guaranteed posh bog roll”. (These things matter in the country.)

Another challenge is building the right relationships to both win business and maximise publicity – both important factors in the lottery-like mobile apps market, in which only about 1 per cent of apps make any decent money for their developers. To adapt the phase incorrectly ascribed to Willie Sutton, people do business in London because that’s where the money is.

While other developers have moved lock, stock and barrel into the smoke, Neon Play has settled on a compromise, involving frequent commutes for its more publicly-facing executives. “The new intermediary is the App Store,” says Oli. “It’s difficult to stand out against half a million other apps – we’re constantly trying to stand out on Twitter, Facebook, YouTube, you name it.”

Indeed, while it may not be true for all businesses, it is difficult to imagine how a social gaming company could be successful today without an equally social online presence. The upside is, of course, that the provinces are not quite as disconnected as they used to be either, even at developer level. Employees can benefit from lower costs of living and genuinely reduced levels of stress, at the same time as interacting – at least virtually – with their city-bound peers.

Ultimately, the country idyll isn’t going to be suitable for everyone. But everyone has a choice, thinks Oli: “You have to decide where you want to work and start from there.” Neon Play and companies like it are more than bucking the trend: they offer stoneground proof that tech startups do not have to feel restricted to a few higher-rent and lower-air-quality patches of our green and pleasant land.

[First published on The Kernel]

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The Kernel: The day the music died

Do you believe in rock and roll? Can music save your mortal soul?

When asked what American Pie actually referenced, Don McClean was reputed to say: “It means I never have to work again.” While he may have been among the handful of lucky ones to have achieved hit record nirvana, many pundits still hanker for the days when all hopeful musicians had to do was send a thousand demo tapes, tour their backside off and wait for glory.

Those days are gone, of course. The music industry is dead, gone, shuffled off this mortal coil; mere carrion to be picked apart by maudlin journalists. Behind the pronouncements about the current state of the biz from commentators, analysts and industry bodies lies a conundrum, however. Namely that people insist on continuing to listen to the damned stuff.

Today’s youth appear to be the worst culprits – not content with simply graffito-ing bus shelters or terrorising grannies on park benches, they are doing so against a back-beat of new (and un-danceable) tunes. And their generation-punk parents are no better, fathers and sons glued to YouTube and Spotify.

So, what’s really going on? Have the harbingers of industry doom got it nailed? Are we heading towards a world where creative acts return to busker status, mere sideshows in a Simon Cowell theme park or earnestly grateful participants in some free music utopia?

As with all such questions, the answer lies somewhere in between. For sure, there’s real pain being felt by many participants in the current music business, and potentially real gains to be had. If only the participants could work out where, and how.

Make the bad noises stop

Take a certain perspective on music’s recent fortunes and it is easy to get morose, particularly if your annual bonus, or indeed your mortgage depends on them. Total album sales plummeted steadily from 1999’s figure of 940 million to only 360 million in 2010, with only a minor blip in 2004. Not a great story to tell the bank manager.

The industry has put the blame firmly at the door of torrent sites and other music piracy tools, claiming up to 95 per cent of all music is illegally distributed and therefore unmonetised. While “protectionist” music publishers have been painted as the bad guys in the affair (they can, at least, be censured for their outrageously wishful thinking that every single illegal download corresponds to a lost sale), it’s difficult to imagine anyone in the same position taking a more positive stance.

Indeed, many artists have expressed similar anxiety at this erosion of revenues. Not just Metallica; many smaller, independent bands have suffered all the pain without having a major label’s lawyers to defend them. The comfort blanket of a record deal has proved scant comfort for many a good act, as cash-strapped majors have made efficiency savings by removing all but their fattest cash cows (such as Pure Reason Revolution, culled by Sony/BMG in 2006) from their rosters. To no avail. Of the big six, once-proud behemoths of music, two have already been assimilated and a third (EMI) is in the process of being, pending antitrust checks.

Digital music business models continue to baffle, meanwhile. Spotify is repeatedly being put under the spotlight about whether it pays decent royalty rates to artists, a topic on which it prefers to keep stumm (the answer: probably not, but have you any idea how much those negotiations cost?). Meanwhile, Apple’s iTunes has gone from industry darling to monopolist by taking a 30 per cent cut of every song sold though its store, even as it “owns” 70 per cent of the legal digital download pipe.

And still, hopelessly hopeful young bands hold on to the dream of getting signed by a record company, even as they upload their crown jewels to the free-for-all that, YouTube and SoundCloud and their ilk. What hope does anyone stand?

It’s not all awful

Of course if you are Coldplay, Cliff Richard or Kasabian, life remains a peach. You can record an album, head out on tour or release a DVD in the knowledge that each will more than cover its costs. “The people making it tend to be those who have already made it,” says Ed Averdieck, formerly of Nokia Music and OD2. Frustrations about artistic freedom and unfair contracts aside, today’s Don McLean types remain in a strong position.

As for the biz, recorded music sales are actually up, for the first time in seven years. Finger’s crossed that it isn’t another seven-year blip, like the one seen in 2004. Other segments of the market are also doing well, including live music revenues which increased year on year until a fall in 2010 (which could be put down to stadium-filling bands simultaneously not touring).

Move outside of the traditional music business, and a wealth of new possibilities abound. Radiohead has shown all and sundry how it is possible to be a commercial success while still cocking a snoop at the establishment; many bands have proven beyond doubt the pre-sale model to fan-fund albums or tours; the market for premium versions of albums such as Pink Floyd’s Immersion editions confirm a continued appetite for both physical music and associated flammery.

That’s before we even get to the rosy-cheeked optimism of music-related start-up businesses. It’s hard to believe that Spotify only opened for registration three years ago; even more astonishingly, YouTube (30 per cent of downloads are music videos) has been around for a mere seven.

It all adds up to evidence, surely, that the industry is alive and well? Perhaps. The trouble is that nobody seems to know what’s going on, nor have any real control over the direction things are going. “Music is messy, organic and human,” says Dan Crowe, CTO at live music site Songkick. “You can’t force it to happen.” But with business being all about a guaranteed return on investment, where exactly can more certainty be found?

Speculate, accumulate?

We can all speculate and philosophise of course, throwing out concepts and theories like long-tail or crowdsourcing, drawing Dilbert-esque bar charts and pie charts, linking boxes and arrows. We can represent or publicise the interests of one group or another, be they rights holders, publishers, retailers or industry players, individually or in combination. And we can all hope, in the process, that simply saying these things makes them so.

Or, indeed, we can just give it a go. Many start-ups and large company initiatives appear to be games of “what if”; a random progression of combinatorial experiments, each testing out new selections of features and services on an unsuspecting public, to see what sticks. And when we find, in hindsight, that only one out of a hundred ideas had any legs, we claim the experiment to be a huge success.

Perhaps that’s a bit harsh. Individual success stories shine out as clearly as the problems they are trying to solve, such as Songkick, an online service that helps people log their musical interests and sends an alert when a particular band is playing in the local area. “Our mission is to get more people going to see live music,” says the company’s CTO, Dan Crowe.

A straightforward ambition; and when faced with the number of half-empty venues at so many live events, one that clearly needs tackling. The ticketing industry itself is in turmoil, as agents, sponsors and venues test out the business models (including the nauseatingly oxymoronic “convenience fee”), balancing their own interests with the need to get punters through the door. “There’s up to six layers of intermediary between the artists wanting to perform live, and the fans wanting to see them,” says Crowe.

For every Songkick, however, there exists a field of wannabes and also-rans, as well as the Cinderellas that are yet to find their golden slippers. In the live events space alone, for example, there’s LiveMusicStage which claims to be focusing more on the social side (like Songkick isn’t… well, yes it is), Clubbillboard which is more about clubbing, the recently deceased Plancast… the list goes on.

Don’t get me wrong, I have nothing but praise for anyone who chooses to try to build something new and fresh, and there’s more than enough cynicism (particularly in the UK) to go round. Pretty clearly however, not all such ventures stand a chance of succeeding. It is also difficult to shake the feeling that many such setups are features, not companies. “We’ve created a mechanism for jazz listeners to share their favourite moments on Facebook,” for example.

Okay, I made that one up. But given the cauldron of opportunity, the danger of looking too closely is that all you will see is diced carrots. To understand the future, it is important to go back to the source.

Going back to basics

At the heart of all music-related sales lie six fundamentals. First, that people will continue to make, and subsequently listen to music. A raft of speculation exists on this topic, which all seems to reach the same conclusion: we do it because because it satisfies some basic, Mazlo-esque urge. So, one way or another, we’ll carry on doing so.

Second, despite common sense suggesting the contrary (“The natural inclination is to sell direct,” says Averdieck), intermediaries provide vital links between supply and demand. Managers, labels, distributors, retailers, broadcasters and agents all play their part in helping music reach its hungry audience.

The idea of disintermediation may offer a debating point but in reality each role serves its purpose. Some have discovered that they can perform certain functions themselves – self-managing bands, for example – but the management role doesn’t go away, it simply moves in-house.

Trying to remove a link in the chain can have disastrous consequences. “The music labels tried to cut out retailers, but that failed spectacularly, as retailers listen to their customers,” recalls Averdieck, which illustrates a third point, that vested interests will continue to skew the model.

Forget romantic notions of altruism: all parties are human, and therefore subject to the deadly sin of greed. Equally, grey areas of favour exchange, horse trading, back scratching and transactions that don’t make it onto the books will always exist, particularly where both money and creative types are involved. Indeed, in its worst excesses, the music biz is almost as bad as politics.

Despite this the fourth truism is that, contrary to the popular myth, people are genuinely prepared to pay for music. Sure, we are lazy and opportunistic, taking the lower road where it exists, looking for a bargain and casting a blind eye on our own hypocrisies. But as shown by Spotify’s impact on BitTorrent, we’re perfectly willing to take the legal route if it presents itself.

Turning to the artists, the fifth principle is that having a big break was never easy, and never will be. All the technology in the world will not make every hopeful ensemble successful overnight, however talented. Apart from the lucky few (and we can all win the lottery as well), most fledgling artists will still have to do their time playing basement bars, handing out flyers and taking down their own kit and if they want to make it big.

Finally, the notion of celebrity, or brand association, or whatever you want to call it, will continue to colour the musical business model. People pay a premium for Nike, Hollister and SuperDry because they want to wear the badge, and it’s the same for artists. Fans do like music, for sure, but they also like to be associated with their heroes, and are frequently willing to bang the proverbial drum in support of their favourite acts.

Musical information age

While all the technology in the world can’t change these fundamentals, it certainly offers an opportunity to do clever things. Whatever you want to call it, the interactive web, social networking or music 2.0 all try to capture the “new” ability we have to inform, share and comment on each other’s musical preferences. So many start-ups are based on the simple premise that people like talking to each other about music.

Tools from Soundcloud to Bandcamp facilitate and simplify the online experience for bands that don’t have major label marketing muscle behind them. What they don’t do is replace the need for direct interaction on the one hand, and a concrete rationale behind it on the other – as illustrated, for example, by the patronage model employed by artists such as My Life Story’s Jake Shillingford.

The two-edged sword of technology also serves in music’s publishing, delivery and monetisation. While it could be argued that YouTube, iTunes, Spotify, Pandora et al have already cornered the market, there appears to be plenty of room for others to try their luck at “reinventing music delivery”, such as the now-defunct mFlow and its successor, Bloom.fm.

The opportunity for bands to promote themselves today appears greater than ever, which raises an interesting spectre. Traditionally, artists could get on with being creative, leaving all that grubby marketing stuff to the labels. Not only might a virtuoso guitarist believe that self-promotion was for others to do, he or she might also be rubbish at doing so. In this brave new world, is there actually room for softly spoken musical genius, or will only the loud survive?

Even once an act has seen success, it will still be faced with the familiar challenge of keeping the back catalogue monetised. Familiar because, in the old days, records (like books) were subject to a certain production run. Today’s digital models enable a production run of “one”, but only (and this is the weakness at the heart of the Long Tail model) if people know where to look.

This issue is tackled by recently launched CueSongs, a rights buying portal started up by the aforementioned Ed Averdieck and musical pioneer Peter Gabriel. The platform makes it easier for corporate music buyers (think films and advertising) to access content which, when faced with the idea of having yet another Moby track on an advert or, please God no, not *that* Elbow riff as used by the Royal Wedding, is welcome news indeed.

“We’re looking to move artists higher up the value chain, connecting the growing market for licensed music tracks with commercially released repertoire,” says Averdieck. “Licensing a track for commercial use was entirely manual. Our aim is to streamline and simplify the process.” And, as a result, to also help rights owners get back catalogues into the sunlight once again. “All these rights are sitting in the basement in contractual straightjackets. We thought, if we could only give them a canvas…”

Technology has a role to play when it comes to enabling traditional music models to happen, according to understood principles and business models. The bar isn’t so much raised as moved to a different, online playing field. While the internet isn’t paved with gold for musicians and their representatives, the opportunity is at least to go where the action is.

But surely technology can be doing so much more for music? Well, yes, maybe it can.

The new frontiers

The sheer volume of information being generated around music is as staggering as it is unquantifiable – or at least, nobody has yet done so. By way of illustration, however, four billion videos are watched on YouTube every day, and we know that roughly a third of these are music related. Meanwhile about five million viewers a day are commenting on other social sites, comments that beget other comments.

Add to this the tracks played on Spotify or via Soundcloud; add all other related social networking activity, on other sites; add data around actual plays via connected devices; add commentary about who’s been to see whom and where; add metadata, advertising click-throughs and historical sales information; and you would start to build a very interesting picture indeed, if only you could make sense of it.

The self-effacing term is “big data”, which gives quiet mention to both the staggeringly vast pool of information, and the enormity of the challenge of making sense of it. Record labels are already throwing global sales information into the number cruncher, using the results to forecast demand and organise distribution.

And meanwhile, some start-ups are tackling the challenge of mining online sentiment from accessible social sites and generating useful results. For example, We Are Hunted and The Sound Index, both of which generate “charts” based on what people say they are actually listening to.

The opportunities are legion, not least in the live arena, thinks Songkick’s Dan Crow. “There’s a huge opportunity for a much more holistic, data-driven approach based on real evidence,” he says. Not only could this benefit performers and fans, but also owners of clubs and concert halls. With the right data at their fingertips, they would be better able to pitch to performers to come and play at their venues.

Thinking about the experience, plenty more can be done with all that data. Time for another buzz phrase, this time “augmented reality”, or the ability to add information to a current situation (as viewed, say, through a video camera on a mobile phone). Google Goggles is one indicator of the shape of things to come. Meanwhile, applications such as Soundhound and Shazam (which, in the simplest terms, can “listen” to music and tell you what the title is) are also examples of apps that combine captured information with that available from an online database.

Clever as they are, capabilities from We Are Hunted to Soundhound are only starting to scratch the surface, providing a rear-view mirror onto what has already happened. Things start to get exciting when they are seen as the basis of new decisions, or indeed experiences.

A purely speculative example involves putting together a touring plan. Yes, information about where the fan base was stronger would help the band make better decisions about where to play. But equally, if venues knew of the tour plans, they might also want to propose the band stop to play in their own town, en route? And, potentially, stream it live, if the facility to do so was available to them?

And new experiences? We’re already seeing bands experimenting with audience involvement in the creative act, for example, simply letting fans get on and record shows. “We’re seeing bands experimenting with more open policies around the recording of gigs,” says Songkick’s Dan Crow. “The line between recording and live is blurring, we’re going to see far more of it.” Bands like Marillion have taken this one stage further by recording a gig through the camera phones of attendees, then editing the footage together, into a music video.

Enough speculation, but for a final acknowledgement: that creativity doesn’t have to stop with guitars and keyboards. The DJ/producer phenomenon started in the era of Frankie Goes to Hollywood has evolved to such an extent that today’s chart-toppers are just as likely to be DJs (think David Guetta and Skrillex),something which the industry as a whole is struggling to et its head around. “DJs and producers were never really invited to the rock and roll party,” says Karl Nielson of Dubstep/D&B media company AEI Media. “The industry was built for white guys with guitars.”

Similarly, it becomes harder and harder to distinguish the boundaries between music and other spheres of creativity, entertainment and engagement. Examples from The Great Global Treasure Hunt to the multimedia stage adaptation of Howl’s Moving Castle by Davy and Kristin McGuire are indicative of both the shape of things to come and the kinds of revenue models that become possible, if only the industry itself chooses to pick them up and run with them.

There’s all to play for

Despite all the possibilities that technology now affords, we are perhaps not all that far from the fundamental principle of lobbing a shilling in a bucket in gratitude for being entertained. “If you can please the artists and the fans, the rest will follow,” remarks Songkick’s Crow. And all that “the rest” implies – managers, labels, broadcasters, marketers and everyone else involved in the production, delivery and performance process.

Perhaps the trick is to recognise that the traditional music industry was ever only a chain of intermediaries that became too powerful in one ecosystem, itself currently being dismantled to make way for another. Nobody has a monopoly on the future, but rest assured that major players will emerge, and in twenty years’ time will be the established music business.

While on the surface it may appear that incumbents are being hoofed out of the nest by a new generation of cuckoos, in truth, the last labels standing have as much chance as Songkick and the rest, if they choose to seize the nettle. “Music should be challenging, it should be entrepreneurial, it should be pioneering,” says Karl Nielson. “Record companies should be the most exciting places to work ever! Musicians are already going out on a limb, we should be as brave as the artists we are representing.”

Technology offers a wealth of possibilities, but more important is how it feeds the human desire to make creative use of such tools and perform the results to the largest possible audience. Nor will it change the business imperative to “become number one in the space”, or to overcome the nature of a few bad apples to upset the whole barrel. These are the ingredients we are given.

The winners in the music space will be those who crack the code, either through careful assessment or by stumbling upon the magic key, and then (did anyone mention MySpace?) not killing the golden goose.

In the meantime, just because a certain business model has existed for a few decades, that doesn’t make it the best way of doing things and should rightly be dispensed with if it gets in the way. Music might not be able to save any mortal souls but right now, it certainly offers a host of opportunities to any party with the gumption to get in the driving seat. In the words of Ed Averdieck: “Someone else was going to crack it – why not us?” Why not, indeed.

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The Facebook IPO, and where it takes us

The long-awaited Facebook IPO is nearly upon us. While there has been plenty of speculation about the company’s valuation, less has been said about how it’s going to achieve the quoted numbers, and its potential impact on the market. These questions are inextricably linked, so here’s a quick summary of the first.

Based on calculations linked to its SECC filings suggest a ‘worth’ of $5 Billion. However, trading on [controversial?] private exchange Sharespost implies a valuation of $80-85 Billion (understandably creeping up, given the suspense), and the general line is that the company could be worth as much as $100 Billion.

The term ‘worth’ should be used guardedly of course, given that share value is a construct existing entirely in the minds of investors. Some companies achieve the dubious distinction of a valuation that is less than their actual net assets – the stock broking equivalent of being worth more if you were melted down for scrap.

But just how much is Facebook’s valuation actually grounded in reality? The company turned over $3.7 Billion last year, and made a profit of $1 Billion. In other words, to pay back investors, it would take 100 years at current rates. So, there has to be more than it than that.

By way of comparison, Google reported revenues of $10.6 Billion in the last three months, and profits were up 6.4% to $2.7 B. Even with unforgiveably shoddy maths that equates to a return an order of magnitude greater than Facebook. Google is currently valued at $180 billion, which is twice as much as the suggested ‘value’ of Facebook.

Interestingly, at the time of its own IPO, Google was valued at 121 times annual sales but now trades at about 20 times – which is six times less – roughly the same proportion, one could say, that Facebook is overpriced. In other words, based on existing considerations Facebook shares are quite likely to drop to about 20% of their initial offer price.

Where’s the growth coming from?

Let’s go with the former scenario, for the moment. Additional revenues could come from three places – growing the subscriber base from the current model, or providing additional services to advertisers, or selling additional services to subscribers. Facebook currently earns about a dollar a year per subscriber in terms of revenues– so to grow organically from its current base it needs to expand to five times as many users – about 4 billion, that would be, or roughly everyone on the planet who has the capacity to read and write.

Advertising is the company’s biggest revenue stream, but while advertising revenues are increasing, a 500% uplift would result in a similar increase in expectations on the part of advertisers. One can only speculate how that would go down, even if the quality of click-throughs could be increased to reduce advertisers’ acquisition costs per lead. (Note: Ad pricing increased 18% in 2010, the number of ads increased by 42%)

It is difficult to see how this could happen without further erosion of individual privacy. The Facebook Open Graph, for advertisers, is predicated on the idea that not only are people prepared to give up their privacy on the premise of ‘free stuff’, but also that they will shop their mates. Or as Facebook puts it, “Helping brands connect with your friends.” You’ve had a Starbucks or bought some Levis – perhaps your pals would like to do the same?

So, what about selling additional services? Facebook’s biggest area of growth (up five-fold in 2010, to $557 million) is currently ‘payments’, i.e. ‘freemium’ apps such as Farmville, in which you can pay for additional stuff such as a rake or a bale of hay. The explosion in the gaming market overall suggests this could be an area of considerable growth to Facebook – but, as the company itself mentions in its 22 pages of risk factors in the IPO prospectus (LINK: http://www.sec.gov/Archives/edgar/data/1326801/000119312512034517/d287954ds1.htm#toc), much of this growth could be outside of the online platform’s control.

Speaking of the prospectus, the company is a lot less verbose when it comes to future strategy. The model is the model – and indeed, many of the company’s announcements (such as Open Graph, say) do, in hindsight, look like they have been implemented in order to give the IPO a bit more meat. But the model is the model, the plan is to grow by continuing to do what the company is already doing, with no suggestion of other rabbits to pull out of the hat.

“More of the same” includes mobile, possibly the most intriguing area for the company. Facebook is the most downloaded app on smartphones today, which is great news for the company’s footprint. Not so great for advertisers, nor for developers as the mobile Facebook client doesn’t support ads or apps. Indeed, this is quoted as a risk for the company – the IPO document suggests incorporating sponsored stories into the mobile news feed, but again, this is untested.

The broader impact

What, then, of impact on the wider market? All of the above suggests that if Facebook is to grow, it will need to start eating the lunches of other companies. Ruling out the unlikely scenario that existing punters have even more time to spend on social networking sites, Facebook’s required gain will require a level of pain from other providers, in particular Twitter and Google. Twitter, which is probably Facebook’s biggest contender for eyeballs, is not going anywhere, and Google is arguably the most creative of the three.

If the majority of Facebook’s revenues are from advertising meanwhile, the company will have other online advertising models in its sights. Like Google, Facebook operates a walled garden approach. While both offer a more attractive, ‘joined up’ proposition to advertisers, given the wealth of information they are building (rightly or wrongly) about their subscribers, the broader advertising world is also evolving – for example with web beacons and retargeting of ads.

Advertisers are currently investigating every potential alleyway down which they can connect with customers. Whether people like such models is a moot question – the important thing right now is that they work, and that advertisers will be clinical in how they assign their budgets, according to detailed analysis of Cost Per Acquisition (CPA) and other metrics.

Which brings us, inevitably, back to the question of privacy. You may be of the “Privacy is dead, deal with it” school of thought, but this makes some quite dramatic assumptions about both forward behaviours, and the fickleness of youth. Generation Z, we are told, doesn’t give two hoots about privacy. But equally (and following the same, misguided stereotyping logic), it doesn’t give two hoots about anything. Brand loyalty is everything, but loyalties can change very quickly.

Where else could Facebook have an impact? The answer to this question returns to developers. As things stand Facebook offers a highly scalable, globally accessible, advertising funded application platform, suggesting the real battleground for the company is more with Platform-as-a-Service companies such as Microsoft, Amazon and indeed, Google than with social networking providers. The latter have been targeting corporate apps and standalone startups; whereas Facebook’s offer is decidedly consumer (with undertones of Apple vs Microsoft).

Developers lead to startups, and whatever comes out of the IPO, Silicon Valley is likely to gain a number of angel investors (LINK: http://www.kernelmag.com/comment/opinion/1279/the-age-of-angellist/) with positive attitudes about the future success of the company, and hence the platform. Startups lead to diversity, and diversification could well be the key to Facebook’s future – though as the current model goes, it is more likely to bask in the reflected glory of those building on its platform. One can almost imagine a ‘Facebook Inside’ marketing campaign in a few years’ time.

Could Facebook itself diversify?

Given Mark Zuckerberg’s mission statement, “To make the world more open and connected,” there is no reason why Facebook-the-company needs to stop with Facebook-the-social-portal. The idea of Facebook smartphones, or indeed, Facebook SIM cards has already been suggested. However, to spread its wings it will need to enter areas of the market where it lacks first mover advantage. It has not succeeded in winning over email and messaging; it isn’t a player in videoconferencing; it doesn’t have a stack play; it has no enterprise offering. And to put it bluntly, the grudging acceptance of the Facebook consumer brand is unlikely to translate into the corporate space.

Perhaps, quite simply, Facebook’s future remains inextricably tied to the future of social networking. The company was always a bet, and it remains one. Thus far it has paid back in spades. Mark Zuckerberg and his merry men discovered a seam of gold that nobody had yet spotted – whether it got lucky or not is irrelevant. The real question is whether that seam of gold goes even deeper, or whether Facebook will have to compete more directly with other companies in the future.

The fact is that for a generation, together with Twitter, Facebook is social networking. However, while the company has achieved a staggering level of success and defined a whole new method of global communications in the process, the company’s ambitions in terms of the future of social remain relatively paltry.

Somewhere along the way, Facebook seems to have confused personal interaction with genuine, emotional engagement; equally, if the company doesn’t sort out a more solid (i.e. revenue-earning) mobile strategy, someone else will. The future in all its reality-augmented, near-field, sentiment-analysed glory will be device-independent, and Facebook’s business model (while not its reach) is still very dependent on the computer browser which, we are told, is seeing its twilight years.

So, will Facebook’s IPO have an impact? About the only thing we can say with any certainty is that a very short list of people are going to become very rich indeed.

[A shorter version of this article was originally published on The Kernel]

The Facebook IPO, and where it takes us

The Kernel: A home fit for start-ups

How would the European technology scene – from London to Berlin – seem to a visitor from another era? His or her experience would, I think, be rather similar to the world seen by the hero of Mark Twain’s novel, A Connecticut Yankee in King Arthur’s Court.

In the book, an American engineer of the Industrial Revolution finds himself, after a bump on the head, waking in the purported age of chivalry and knighthood. Purported, that is, as he quickly finds himself embroiled in serfdom, disease, prison and, above all, ignorance from the ruling classes. “CAMELOT – Camelot,” said I to myself. “I don’t seem to remember hearing of it before.”

Equally, an industrialist from Britain in the 1960s, brought up among the optimism of Blue Streak, TRS-2, and Harold Wilson’s “white heat of technology”, might find themselves just as disoriented to wake up in today’s Silicon Roundabout.

Twain’s hero, unfortunately, was unable to overcome the attitudes of Merlin and his “pretended magic”, even armed with inventions such as the telegraph, the Gatling gun, and printed newspapers. Intellect and technological prowess came to naught when faced with the massed institutions of the time.

By Mark Twain’s own day, the United Kingdom had a more positive attitude to its innovators: Brunel, Watt, the Stephensons and not least Charles Babbage, the father of computing. This continued into the 1940s and 1950s, with Alan Turing’s wartime work, at Bletchley Park, on cryptography, and the world’s first stored-program computer, the SSEM, which was designed and built in Manchester.

Ferranti’s Mark 1 was the world’s first general-purpose computer manufactured for sale. The stage could have been set for Great Britain to be the technological capital of the world.

But even as the information revolution started to gather momentum, the British spirit of entrepreneurship lost its lustre. The UK economy declined steadily in the post-war era, so that by the time mainframes were being fork-lifted into the computer rooms of large companies, UK-based computer makers such as ICL were already struggling.

It was a different story on the other side of the Atlantic: the United States saw strong economic growth, benefitting from the liberalisation of trade it had negotiated in the last days of the war. The first venture capital companies took root in California in the early Seventies, creating a financial engine room that drove Silicon Valley to world prominence.

Californian free thinking combined with New England sensibility and the Seattle work ethic to create and maintain technological superpowers such as Apple, Microsoft and IBM. In the UK, though, engineering prowess failed to be matched by funding, or political support. Venture capital firms were few and far between, with Investors in Industry – 3i – standing out like a light in the darkness even as many of Britain’s brighter sparks were being enticed across the Atlantic.

In parallel, the remaining elements of the UK’s manufacturing industries were diminishing. Manufacturing constituted 40 per cent of the UK economy at the end of World War Two; by the Millennium, this figure had halved. Britain had the intellect, knowledge and skills to lead the world in technology. But under-funded, over-bureaucratic and distracted by disputes, it was not to be.

It would take a period of considerable economic and social upheaval to set the scene for Britain’s entrepreneurial renaissance. The wave of privatisation and deregulation of the Eighties may not have met with universal applause. But it did set the scene for simpler finance and employment law – both important factors in creating an environment more suited to startup businesses.

It was not until the mid ’90s, however, that those changes made themselves felt in the technology sector – as another great British mind, Tim Berners-Lee, invented the World Wide Web and spawned a global boom in software and services. The initial the dot-com boom was driven from the US, but the mad scramble online was highly enticing to British fund managers and private equity firms.

Ben Tompkins, partner and investment manager at Eden Ventures, says, “There was a rush to join the market in 1999-2000. That’s when Britain got into its stride.” It may have been a bubble, but the trick was to get in early and the excitement was Transatlantic.

Early UK startups (for example, online auction site QXL) were often close mirrors of their US counterparts, a trend reminiscent of motorbike and electronics during the Seventies expansion of Japanese manufacturing. “If you had a web site that copied something in the US, it would be funded,” remarks Richard Eaton, a partner at law firm Bird and Bird, who was involved in the dot com sector at the time.

Few existing businesses could afford to ignore the much-hyped “e-business or no business” mantra, injecting further capital into the system and driving demand for software development and web design skills. Of course, the dot-com boom turned to bust. But even while the still-nascent UK venture capital community nursed an extended hangover, an industry subsector had been formed and an ecosystem had been created.

Wounds were tended, and by 2005-2006, investment started to pick up again. Today, VCs are older and decidedly wiser, and a wealth of creative talent is available – possibly a spin-off from the surfeit of media-related degrees that have attracted ridicule in the past.

The wave of interest around social networking has spawned a number of companies, some of which – like Bebo, Tweetdeck and Last.fm – have already achieved “exit” through buy-out. Unsurprisingly, there is less investment in hardware companies than in the past. “We’re seeing a lot of Web 2.0 and social media companies,” says Richard Eaton. “If they get £50,000 to £250,000 that will see them through for one or two years. The only fixed costs are their employees and the computers they use.”

The Industrial Revolution may have started in the Midlands and the North, but, for today’s start-ups, London is the hub of activity, for many reasons – not least because it is a hub of activity. “Interest in Shoreditch started largely because the rents were so cheap,” explains Rassami Hok Ljungberg, a communications consultant working with startup showcase TechPitch 4.5. The Government has capitalised on this interest, with initiatives such as the Tech City Investment Organisation heavily promoting the location.

Experts such as Bird and Bird’s Eaton are unconvinced that Shoreditch is an ideal location. “It’s trying to force something into where you wouldn’t think of having a technology hub,” he says. Shoreditch lacks a major research-based university comparable to Stanford, or indeed the ecosystem of financiers, lawyers and advisers that Silicon Valley boasts.

“All the same,” Eaton adds, “companies such as Cisco and Google have been very supportive – it can only help.”
Or, as Georg Ell, general manager of social software site Yammer, puts it: “When Yammer made a decision to start a European headquarters, the first decision was to place it in London, on the basis of the talent pool we felt we could recruit from and also that so many potential customers, multi-nationals, are headquartered here.”

That is not to say that UK start-up culture is a London-only phenomenon. Science parks around the country have also notched up success stories. Often connected to universities, Cambridge is the obvious – but by no means the only – example, spinning out Autonomy, Zeus and ARM.

Meanwhile, regional governments have their own inward investment and development schemes such as Software Alliance Wales and Connect Scotland. In addition, the pan-British Technology Strategy Board, formed in 2008 with a remit to “promote and invest in innovation for the benefit of business and the UK,” regularly funds competitions, matching funds in technology startups in fields from metadata to genetic research.

Another change for the better is the propensity for the British to actually see entrepreneurship as “a good thing”. Traditionally, Britons have been very good at holding innovators with cool disdain. “It’s fine as long as they don’t go on about it all the time,” is the general sense.
Recent TV programming such as Dragons’ Den, The Apprentice and even The X Factor should be acknowledged for their reinforcement that hard work deserves not only reward, but also praise.

Why base a company in Britain? A number of fortunate accidents of history and geography suggest themselves. History, because it could never have been foreseen that English would become the de facto language of global business. Yet its country of birth is undoubtedly a beneficiary, helping support that “special” relationship with the US that encourages investment from the other side of the pond.

Geographically, with the British Isles sitting between the US and the rest of Europe, the UK is a good starting point, along with Ireland, for US companies that want to expand onto the continent, as well as for European countries that have their sights set on the US market.

“For Scandinavian startups, their first port of call is the UK once they are developed within-region,” says Rassami Hok Ljungberg. But Britain offers more than a beach-head. “It’s easier to start up in the UK than elsewhere in Europe,” says Hok Ljungberg. “You don’t have to have capital up front, which makes it so much easier – and winding up a company is easier too.”

Unique benefits of the UK include more flexible employment law, tax breaks, post-nationalised industries, and the right kinds of inward investment. These factors lower the bar to entry for UK-based innovation.

But it is not all plain sailing, particularly given the reduced appetite for risk when it comes to funding. “Seed capital’s higher than ever before, but there’s not enough capital in the mid-market,” says Ben Tompkins. No doubt the current global financial crisis is not helping.

“It’s about the risk profile,” says Richard Eaton. “A lot of traditional VC players are just not operating in this space anymore. Some companies will get funded, but that’s where the squeeze is – it’s being called ‘The Valley of Death’.”

For these reasons it is not possible to consider London in particular, or the UK in general, as a replica of Silicon Valley. Quite clearly, it is not. “The culture is very different,” says Eaton. “There’s much more willingness to lose money in the US – it’s generally accepted that not every deal will succeed. European VCs don’t have that – they came out of the private equity market, whereas the Silicon Valley venture capital community was formed from scratch.

“Plus [in Silicon Valley] you’ve a large concentration of big companies all based in the same area, meaning a steady supply of people and a close eye on acquisition targets. It’s like one big incubator.”

Even once a product reaches release, the complex operating environment in the UK does not make it straightforward to do business – although, sometimes, this can be a good thing. “The UK has one of the most sophisticated, mature and diverse markets in Europe,” says Hok Ljungberg.
“Anglo-Saxon thinking can be a bit negative but it causes a constant, critical evaluation of everything which is very useful. If you can succeed in the UK, you can take it anywhere else in Europe.”

This makes the UK a better place to start up a business than many other countries. Berlin – increasingly seen as London’s great rival for start-ups – is full of bright, dynamic people but the city is still emerging from the shadow of the Cold Wwar. “A couple of years ago, it was illegal to be an entrepreneur in Berlin,” says Tompkins, just back from a trip there.

“There’s huge enthusiasm but limited capital. It reminds me of the UK in 1999 – a lot of cloning is going on, copying US success stories and creating local language versions [of services].”

In Paris, attitudes may be more positive but employment law makes it tough to afford growth in personnel. In Stockholm, Swedish law has no concept of share options operating on a tax-free basis for capital gains. And in Amsterdam, you have to go to court to change the articles of association of a company. Startup Britain may be hard, but it is fair.

What would Mark Twain’s Yankee think if he came to the UK today? The country has a wealth of resources, both intellectual and practical, that could be better utilised than they currently are. Britain is a long way from achieving the kinds of funding models, legal ecosystems, or indeed the general spirit of entrepreneurship that exists across the US.

But perhaps it will not need them. Start-ups such as Seedrs are questioning the roots of innovation funding itself. “We’re pending FSA approval but we hope by the spring of 2012 we will be providing hundreds, or even thousands, of companies a new way of raising capital effectively, from ‘the crowd’,” says Jeff Lynn, co-founder and chief executive.

Britain does still occupy a unique position in Europe, but again this could change. Berlin may be in a similar position to where the UK was in 1999, but the city will not stay in intellectual clone territory forever. The best estimate is that the UK has a decade’s grace before other European cities catch up and begin forging their own new directions.

The UK is still weak on inward infrastructure investment and current manufacturing forecasts do not bode well. A state of financial crisis persists, and it remains to be seen whether David Cameron’s recent use of the European veto will have any lasting impact on Britain’s business interests – though perhaps the UK’s unique geographical position will trump even that card.

And if there is one lesson to learn from the US, it is the importance of investing in, supporting and rewarding designers, innovators, engineers and technologists. The education system is the place to encourage an entrepreneurial spirit, by building the confidence to step outside the norm, and the necessary self esteem to counter any fear of failure.

Entrepreneurs – and those who back them – warn that UK must review its institutions, governmental and corporate, to ensure these encourage and promote future growth, even if this is at a cost in the short term. If there’s one lesson the UK’s start-up culture can learn from the US, it is the importance of investing in, supporting and rewarding those in the driving seat, so that they no longer feel the need to go elsewhere to succeed.

“He’s one of the cleverest people I’ve ever met,” says Richard Eaton of Dr Mike Lynch, Cambridge graduate and founder of Autonomy, recently acquired by Hewlett Packard for $10 billion. “He’s a mathematical whiz, but equally, he could see that if he wanted to succeed, the US was the place to go.”

Perhaps if Twain’s Connecticut Yankee travelled in time to the UK in 2012, or perhaps more realistically, in 2015, he would feel more inclined to stay.

[This article originally appeared in The Kernel]

The Kernel: A home fit for start-ups