media economy « discourse and notes

The situation at Apple is emblematic of the broader media and consumer technology segment in some ways. In other ways, the rest of the sector population could only wish that Apple were emblematic of it. The second comment alludes to Apple’s stellar earnings report, handily beating all expectations. Any company, in any industry, would wish to be like Apple at such a time. The first comment, on the other hand, refers to a different reference point, one having to do with the descent of invention and ascent of execution in the ranks of relative visibility – and relative value – for both Apple and the industry it leads.

Coming out of a 10-15 year stretch during which Apple, and consumer media more broadly, gave rise to a string of innovations that is unprecedented, such a run will be difficult to sustain. For Apple, the list includes iTunes, the iPod, the iPhone, the iPad, Apple TV, and the App Store – all of these segment-redefining in greater or lesser degrees. For the Internet, the list includes Google, Facebook, Twitter, now Groupon, and Apple.Â While we can’t go so far as to claim that popular media innovation has reached its absolute limit, a case can be made that probability at this point favors incremental adjustments – a steady progression of enhancement – rather than revolution and the breaking out of brand new systems. There are only so many times that telecommunications, consumer devices, and popular entertainment can be torn down and recreated in the span of a generation or two, let alone 10-15 years.

Still, while the social network can no longer be invented, it can be perfected. Digital communication exists, but can be improved. Digital advertising is everywhere, but has a very long way to go. And online commerce is only beginning to test out possibilities, despite having been around since Amazon and eBay.Â As Apple has just demonstrated, substantial growth can be realized even if only one novelty – and really just a giant iPod Touch at that – is introduced in the course of a year. Growth is now likelier to happen on the heels of execution, successful competition, and tight management.

With all this by way of background, the Apple news that everyone has been thinking about these past couple of days can be taken in context: The unfortunate departure (hopefully temporary, if not brief) of Steve Jobs from his regular position. While this is truly sad for Mr. Jobs, it is not catastrophic for Apple, and the stock market seems to agree. It is to Mr. Jobs’s credit, in fact, that he has succeeded to implement a system, a set of values, and a brand, that necessitate his presence less and less to preserve at Apple. Given the more probably evolutionary than revolutionary changes in the industry ahead, a well oiled machine with emphasis on operations will fare quite well. Competitors, entrepreneurs, innovators, investors, should take note, as Apple once again leads the way into what will undoubtedly be a lasting trend: To grow by execution.

It has been at times trying on one’s patience, truth be told, spending one’s adulthood immersed in the modern evolution of media and technology. After another game, another way to share pictures, an app to facilitate the inconsequential, a product that stirs up giddiness for three or four days until something else does the same, one is prone to develop a sense of envy for those involved in healthcare, education, energy, why heck, even law. In the past months, however, I’ve begun to feel with increasing profoundness, with real conviction, that there was all along a bigger purpose to the games and apps: There was a collective learning, a Â mass adjustment, that has made the world a different, more efficient, place.

And not a moment too soon… considering the exponential population growth of the last century, the globalization of commerce, and other forms of acceleration and complexity that impact daily lives worldwide. The introduction of digital efficiency into nearly every stratum and geography may have been a byproduct or a cause of such phenomena, but either way is an important reality that is now intertwined with, (if not the essence of), the gamut of worldly aspects from capital flows to politics to sociology to the previously listed subjects of intermittent envy: healthcare, education, energy, heck, even law.

We are reminded of the enormous importance of digital technology and its close relative, the Internet, in a number of news headlines that have coincided these past days. The CEO of what is maybe the world’s most influential financial institution did not attend an IPO pitch meeting at one of the world’s largest insurance conglomerates, in which the U.S. Treasury happens to be the principal shareholder, but around the same time did attend an IPO pitch for Groupon. This company may be only two years old, but it Â has served to reshape the global retail industry with digital communication, and the segment will never be the same. At another level of impact and relative importance, we now read in The New York Times that the threat of a military catastrophe has been set back substantially, cleanly, and without violence, by hacking. Regardless of political orientation, this has to go down as a landmark in military history if nothing else. Similarly regardless of politics and sides, the influence of Wikileaks, most recently manifest in a government overthrow, has to be noted.

It seems inevitable at this point that the effect of digital media, networks, and communication will expand and even take over new spheres. Certain consequences of this growing immersion will be good, and others will be less so – in any case much of that will be subject to interpretation, perspective, understanding. Either way, however, there is an aspect of improved traffic – of clean organization, of openness (and this is key) which does not spell chaos – demonstrated and made possible by digital technology in its various forms. This is a welcome addition to our evolving culture, and in order to arrive at this point, it may have been expedient, most likely also unavoidable, to begin with basics: A game, an app, a message system, a gadget. The world works in mysterious ways, but works.

Upon the report of a major Facebook financing, registering third after Groupon and Twitter had also announced spectacular funding rounds in the space of one month, the question was asked: What about Zynga and LinkedIn? Where are they in this spectacle? Such a question implies that there might be an indiscriminate craze for the best names in media, and that the popular names absent from festivities may soon arrive upon the scene as well. This could certainly be the case, and perhaps even beyond Zynga and LinkedIn there are other spectacular rounds being planned as we speak, some of which may well provide the “bubble” chatter with all sorts of additional nourishment. There is, however, a different way to see recent events, so that the particular selection of three names – Facebook, Groupon, Twitter, (in size order) – no longer seems incomplete but rather very particular. And by the same token, the absence of Zynga and LinkedIn and others would come across as less of a lapse than a different grouping entirely – one that does not belong in the pattern at all.

Putting size order aside for the time being, and forgetting relative valuations and the appropriateness or inappropriateness thereof, the key to the question is one of definition. Because Facebook’s is the largest and most recent of the three deals, we may be inclined to see it as the defining event, the anchor transaction by which the other two are to be taken in. By that standard, the three deals are milestones in social media involving the most outstanding names in the field, and by that standard it is correct to wonder where the others are, (for example, Zynga and LinkedIn). But what if the defining event, the anchor transaction, is not Facebook at all but instead Groupon? Seen in this light, from the special angle of what sets Groupon apart, then the trio of situations is not anything like popular media at large, or particularly even social, but three unique platforms that facilitate retail and online commerce in specific ways, and that may find themselves at the start of a massive industry evolution. Seen in this light, Zynga and LinkedIn simply don’t belong, but Yelp or Foursquare or Gilt well might.

From such a perspective, the eye-popping surge of Facebook, Twitter and Groupon in the world of private investing, may have fewer public market parallels at, say, Google, Microsoft, Aol, or even Apple, than they might at Amazon and eBay. Out of the first-mentioned group, Apple (also surging) is closest to e-commerce (ref. iTunes and the app store), and Google is, for a variety of competitive reasons, most anxious to get in. (I note, by way of evidence, the effort made by Google to acquire Groupon, and I suggest, by extension, that Twitter may not be a terrible second choice.) This being neither here nor there, I would nevertheless put forth, and with confidence, that the notion of Apple, Google and Facebook dividing the world between them – a notion that among industry observers has for some time become a standard rule of thumb – is a flawed and antiquated notion. We should not rule out the commerce plays: Increasingly the distinction between commerce and media is being blurred. (I note, by way of evidence, that Groupon has begun to direct much attention to editorial quality and is providing organized training to its copywriters, as though it were a real content shop.)

For entrepreneurs and ventures in digital media and technology, 2011 will be a year for execution. While it is true that every year should be that way – because execution should never be a unique or passing trend – the distinction for 2011 will be particularly one of contrast. Execution will begin to trump invention as the first order of business, and we may have already begun to see indications – direct or merely suggestive – that a shift in focus is happening. Some examples:

Twitter has appointed a new CEO, who according to reports will be purposefully attentive to revenue production. One of Twitter’s earliest investors, a group recognized for its skill in identifying new web trends and emerging media innovation, is reportedly raising a new fund that is notablyÂ not dedicated to startups but to late-stage investing. (To be clear, late-stage investing is about execution and professional development, not new sensations.) And speaking of sensations, the talk of the funding circuit these days is not Facebook but Groupon, a company that perhaps more than any symbolizes efficiency of execution. In two years, Groupon has grown from nothing to billions of dollars in revenues and worldwide operations, and the source of its new $950 million financing includes late-stage funds more prominent for IPOs than venture capital. On the subject of funds, whileÂ 2010 showed a mild decline in overall fundraising, there was a concurrent uptick in money raised for mezzanine and restructuring activities: Again, the theme is execution, operations, more than novelty.

Now, it is in no way being suggested here that invention will be frowned upon and cease. According to strict dictionary definition, this very article is a form of invention, as are hundreds of millions of other items created every day. But the question is one of pace, magnitude, influence, and such relative variables, where this article lies at one extreme and the invention of the mobile phone, for example, at the other. In between, there is the iPad, introducing a set of new features to a previously perfected technology. Groupon, by the same token, did not invent email, did not invent retail discounts, did not even invent direct customer-calling. And even Facebook’s most dazzling breakthroughs of the past year have been a “like” button and a new form of messaging that is pretty much like IM. The point being that, in 2010, some fifteen years into the introduction of the popular web and its assortment of gadgetry, we can’t reasonably expect the refresh to be continuous.

What’s more, a slower pace is a good thing when this occurs at the end of an explosive innovation cycle, because we really need to take stock of what we have. Consumers need to establish habits, investors need to realize exits, entrepreneurs need to let their concepts season: In short, substance needs time to form. The skills and perspectives necessary to execute, rather than strictly invent, and the attributes picked up along our rapid evolution, now need to mature and come into their own.Â Two decades into a massive transformation of media and related technologies, we should be ready.

It has been argued by some that the enormous cash balances held by the largest corporations – for example, Google, Apple, Microsoft, Intel, and a host of other dominant figures in technology – bodes well for large-scale M&A dealmaking in the months and years ahead. The argument is that cash will eventually have to be put to use. This is true: cash must be put to use, cash exists in order to be spent. But what is also true is that cash is spent even when this is not overtly happening. For example, cash is spent when it sits “idly” in “cash equivalents,” or when it is distributed through dividends, or used to buy shares of one’s own corporate stock, or, by its very presence, it underpins one’s own stock value. All these are legitimate ways to spend cash, and none of the listed examples have anything to do with mergers or acquisitions.

To be clear, this counter-argument is in no way a bearish view on deal making, but presented as an offset to the binary notion that big cash necessarily equates to big M&A while small cash equates to lackluster deal activity. There is much simplicity in such a perspective, and current realities are nothing if not nuanced. Fundamental economic risks are only the tip of the iceberg, while underneath that tip there are issues of rapidly evolving technology and consumer behavior. All of these variables present uncertainties (and opportunities) that can’t be reduced to a straightforward discussion of liquidity and money supply.Â We can, however, strip away the layers, and pare down the issue to its most fundamental. What does M&A accomplish, and why does it exist?

At its most basic, M&A occurs for two principal reasons: to consolidate a field that warrants consolidation, or to expand the strategic capabilities of combined entities. For large scale M&A to occur – as a trend – one of the two possibilities, or both, must exist.Â Historically, M&A has been known to follow cyclical patterns in which extended periods of consolidation or conglomeration are followed by periods of separation or spinoffs. We have not seen extensive spinoff activity in the past decade, but consolidation in a variety of fields has been prevalent for some time. My perspective is tainted, admittedly, by a narrow focus on media and technology, but this also happens to be the segment in which the referenced cash balances are frequently observed, and pointing to these cash balances as the rationale for massive M&A will be difficult to support on the basis of consolidation alone.

The case for strategic expansion, on the other hand, tells a different story and is much more convincing. Particularly in the context of a technology dynamic that is in flux and consumer behavior that is evolving, the strategic acquisition of new applications, new innovations, newly opened doors, can make a great deal of sense. In this, however, we must be careful in our conclusions. Such acquisitions are likely to be smaller than those marked by consolidation opportunity, and must be increasingly pinpoint sharp. Not all technology expansion is strategic, and in an environment of continuous innovation new technology becomes old fast. In short, unlike the purchase of a large revenue base or an existing operation that can facilitate the spreading out of costs over a wider base (i.e., a consolidation play), the acquisition of technologies is more like buying options and is accordingly priced.

For an illustration of what may continue to lie in store for M&A in months and possibly years to come, Google seems like a very good case study. A company with operating cash flow of $7.5 billion in its latest quarter, and concurrent cash balances of $33 billion, has in the past twelve months completed 26 strategic technology acquisitions, aggregating some $2 billion in transaction value. Its recent attempt to buy Groupon for $6 billion, the only true example of Google M&A worthy of its fabled liquidity, was (arguably) a consolidation transaction that has for now at least fallen apart. Rumor had it that regulatory approval would have been difficult to obtain. Prognosticators ought to take careful note.

One cannot conquer a perpetually fleeting concept with rigid definitions, and media is a concept that is always on its way but never where it is expected. To differentiate between new media and old media, for example, is not constructive, and since the introductions of iTunes, Netflix, Hulu, e-books, and for that matter Yahoo Finance, doing so would be altogether misleading. It is possible, however, to break down an idea into its component parts. The distances between these pieces, their relative magnitude in relation to one another, and the degree of opposition or confluence between each and each, all this may vary at any time, but the nature of respective elements will be constant. In this fashion, maybe a way to break down the idea of media would be to isolate the following four constituent particles: information media, entertainment media, social media, and a fourth piece that has been recently gaining prominence, transactional media.

As was already indicated, such a fixed set of elements (as that used for current purposes) is not to suggest that the parts are mutually exclusive or even necessarily distinct. On the contrary, there is a great deal of overlap between the four, and some could even argue that these are all beginning to converge. It is probably not essential, moreover, that the media sector should be described as the sum of these four parts per se, because multiple other facets and cross-sections in this complex industry could suit a variety of perspectives. The reason for selecting this particular framework – of information, entertainment, social, and transactional media – is that in so doing the last piece, transactional, becomes possible to see. There has been quite a flurry of activity in this sub-segment lately – from the attempted pairing of Google and Groupon, to the actual pairing of Amazon and LivingSocial, the acquisition of Milo by eBay, and even the new venture investment into Factual – and this surge could lead some to project that the prominence of transactional media will rise, maybe rapidly, in relation to the other parts of the media sector.

It actually stands to reason that this should happen, because all industries tend to maximum efficiency, and often this must be analogous to disintermediation. If one were to observe the media dynamicÂ through a different lens – as has been done in a previous article here – and describe the sector’s primary function as one of moving product between vendor and consumer, a function in which advertising serves an intermediary role, then direct commerce is an example of disintermediation. The Internet makes this possible, and because web advertising has been a relatively inefficient mechanism, despite (or because of) the myriad advertising networks and targeting technologies that have emerged, it is a natural phenomenon for media to begin to eliminate the inefficiency. There is as little need to pay for the placement of a display when it is possible to acquire direct access to a pre-qualified customer, as there is to pay for a full-service broker when free research is accessible and trades can be executed at minimal cost.

In a series of interviews given by Mark Zuckerberg in the past several weeks, the Facebook founder has made repeated mention of commerce in relation to social networking, and the role that Facebook will play in this evolving mechanism. Before Facebook, there was Google, which was in many ways the original web commerce platform. And before Google, there was Amazon, which was the first major media retailer. PayPal and many related processing technologies are only a stone’s throw away from online banking, brokerage, and other disintermediation pioneers. As various forms of information, entertainment, and social media have come and gone, the transactional platforms have shown formidable staying power. As the dynamic between information, entertainment, social, and transactional media continues to sort itself out, it should not be surprising to see the latter assume a dominant position. Efficiency, as always, will prevail, and for this we will be very closely watching.

“I’m talkin’ about friendship. I’m talkin’ about character. I’m talkin’ about – hell, Leo, I ain’t embarrassed to use the word – I’m talkin’ about ethics.” An interesting discussion has been taking place on the venture circuit, which reminded me of the citedÂ Miller’s Crossing motif. The discussion is about design and its proper place in technology innovation, and the growing importance of the arts to the success of startups.Â While I agree with the message, I don’t think it goes far enough. The arts do not only influence design, but also strategy and vision… which is not only important for startups, but for all enterprise. In other words, there are two very different subjects contained in this broader theme of arts and technology, and only one of these is esthetics. The other – hell, I’m not embarrassed to use the word – is ethics.

For argument’s sake, let’s think about business development as comprising two subdivisions: the micro and the macro domains. Micro aspects include operations, branding, product quality, and such other matter pertaining directly or indirectly to a company’s offering and its interaction with the customer. In this realm design features prominently, and probably more so every day in a fragmented, highly competitive, and at the same time maturing sector that is the Internet. This is the realm of esthetics, and its appeal is to the senses. (From a purely technical perspective, the Apple line of products is not materially different from that of Microsoft or Google (Android), but from the perspective of design, it is arguably without match. This, by way of example.)

The other half of the subject, however, the macro level, is an entirely different discussion, and is at least as important, if not more so in the longer term. This has to do with the business leader’s vision and ability to incorporate one’s strategy within a larger social context. This is not so much about esthetic execution as it is about, if you will, esthetic thought. It is not so much about design as a means of improving a feature, as it is about design as a means of enriching a goal. And if the former is founded on a sense of sensual beauty and a study of the visual arts, the latter is shaped by an ethical study of the humanities: literature, history, philosophy, music.

As the Internet has evolved in the last 10-15 years, the sector has led an existence in which entrepreneurs have had to rush product out: to introduce new qualities, frills, advantages, technical invention, all in a race to capital, to recognition, market position, competitive presence where barriers are low. As the Internet as a segment is beginning to mature, (and we can’t expect it to be in infancy forever), innovation and its frenzied pace will increasingly be supplemented (and eventually replaced) by perfection. As this occurs, not only will design and its adjacencies move to a higher order of importance, but mature thought and long-term strategy will also rise to the surface as differentiating factors.

By this I mean a way of thought that transcends coding and coolness. I mean a way of thought that augments esthetic product design with a sense of ethical decorum. In this established businesses should seek to find a proper equilibrium, and startups will be well served to pay heed. Iteration at breakneck speed is not always recommended, and as a segment matures this may even become awkward and come across misplaced. “Is there a point… or are you just brushin’ up on your small talk?” (Quote borrowed from Miller’s Crossing again, an endless source of business education.) As Facebook and others keep fooling with settings, this is a theme that matters, and the question should be asked.

Two social media news stories last week stood out: Facebook’s resumed privacy scandals, and a fund created by Kleiner Perkins to specifically target social media for startup investing. Although these are on the surface independent events, on closer analysis these may be part of a theme that suggests a relationship, if not a direct connection, between the two. To understand the connection between a privacy breach and an investment fund, it is probably necessary to first establish a couple of working hypotheses: (1) To the consumer, the price paid for free content is not nothing, but rather the cost associated with sharing personal information with the content publisher; and (2) because the universe of free content has become highly fragmented, the value of such a product to the consumer has deteriorated, and continues to deteriorate.

The proximity of price paid for a product to the value received, and whether the difference is positive or negative, will influence consumers’ decision to consume. In the case of media content, the value of the product for the consumer can diminish with the presence of advertising, while the same is needed to produce revenue for the publisher. To bridge the gap, advertising technologies have been created to direct ads more subtly, more contextually, less intrusively, into published product, so that the value diminution from the consumer’s perspective suffers less. Publishers, for their part, have attempted to understand their audience better in order to promote themselves more effectively to advertisers, and by necessity publishers have begun to mine audience data and share this intelligence. In short, as advertisers and publishers have proactively gained access to and made use of personal consumer data, this has been in order to continue to offer consumers a product that is free of charge and still make money.

As privacy breaches and other uses of personal data have become publicized, the consumer population is in all likelihood now mindful of this reality, and the cost is recognized. Whether the sacrificed privacy is or is not a fair price to pay, that is a decision that consumers now make quite knowledgeably in relation to the procured product. Substance quality will always feature prominently in this decision, and in this the presence and conspicuity of advertising is factored. Additionally, in a fragmented market that is saturated with quality substance and targeted ads, quantitative issues will also matter. For example, a particular item will be impacted by its proximity to other quality items, its regularity and frequency, and the critical mass of ancillary features presented by the same provider.

As much as revenue efficiency may be achieved through advertising and data analysis, therefore, content value will also be optimized by scale. And as the limits of data mining and ad targeting are tested, expanding volume is a last value enhancement option that remains. At such a stage, the industry undergoes consolidation.

AOL seems to agree with this position, as does, to some extent, Yahoo! – both of which have sought to add to the scale and features of their content base in the fragmented field described. But these are both works in progress. A more concrete example of the case is Facebook: a platform with 500 million users, each of whom is a content creator, and each of whom is also a customer and member of a network that generates value through its sheer enormity. Facebook’s content value to 500 million users is evidently worth the cost of privacy sacrifice, as one after another of reported blunders is having no impact at all on Facebook’s popularity.

When Kleiner Perkins announced its sFund – in which Facebook is a partner, in addition to Zynga, Amazon, Comcast, and several other major media brands – some of the social media establishment scoffed at the idea, emphasizing the move’s seemingly anticlimactic arrival upon a scene that has been populated with venture funds for years. Seen in that light, the criticism may be fair enough; but seen from a different perspective – in my opinion, more appropriate – the new sFund is not late to arrive but rather the first of a new era. It marks a possible consolidation wave ahead – necessary, for reasons described – which may include collaboration, early-stage ventures, and a variety of strategies that don’t necessarily result in mergers, but lead to sizable impact.

In economic news: Inflation is of no concern. Analysts have written extensively about the impact on stock markets and broader financial environment of a low- or dis-inflation environment. There has also been much commentary about a separate phenomenon – not unrelated – which is our jobless “recovery.” The case has been argued that small businesses and entrepreneurship can go a long way to boost employment and economic productivity. What we have not seen, however, or at least not to the same degree of attention, is commentary that combines the concepts – assessing the potential impact of no inflation or even deflation upon entrepreneurship and small business. As the situation becomes more pronounced, the subject should warrant more scrutiny.

The digital media and technology sectors, which have been a breeding ground for entrepreneurship for much more than a decade, comprise an interesting laboratory in which to observe such economic issues. As this segment, moreover, includes some of the world’s largest and most successful corporations and has been a hotbed of financial and strategic activity, the actions of its participants and investors can provide useful insights to entrepreneurs as they seek to navigate relatively uncharted terrain ahead. Lastly, the Internet and many of its affiliated segments – e-commerce, devices, communication services and infrastructure – have been marked by deflation for a long time: Much that is offered is offered free of charge, and much that is charged is charged less than was the case in prior years. The activities of this sector’s participants, therefore, really are exemplary of a deflationary economy, and serve as a useful case study.

Some initial observations follow below. As indicated, these are based largely and as a matter of convenience on the digital media and technology sectors, where examples in support of each presented comment are numerous. Nevertheless, this is truly scratching the surface, and is not meant to be more than that. Many of the notes are basic, and others are intuitive. Not all are obvious. It is anyway interesting to frame what we may already perceive into a current economic subtext, from which starting-point roadmaps may be charted.

To set the stage, a precept: Within a range of financial asset classes, with cash at one extreme and equities at the other, a high-inflation environment favors equities over cash, and a deflationary environment will highlight the opposite. Other forms of capital (between the two extremes) vary in accordance to their proximity to cash or stocks.
In a period of negligible inflation or deflation, cash will gain favor with investors, relative to stocks, and the extent of the dis-inflation will determine the degree to which cash is preferred.
In very broad terms, companies accumulate cash – or pay down debt, which is a corollary – as a means to prop up equity with a floor underneath its value.
In very broad terms, companies spend cash for growth – such as for acquisitions or R&D – when confidence in equity value and its positive reaction to such projects is high; which is to say, expending cash on growth projects is a bet on equity’s ability to underpin itself.
When companies hoard cash and reduce investment expenditures, this signals a relative favoring of cash over equity – in the framework described – which is a deflationary signal.
When companies use very small cash allocations (relative to their aggregate cash balances or market capitalizations) to acquire entrepreneurial platforms for the technologies these have produced, this is for the acquirer a deferred R&D expenditure in which the risk of failure has been mitigated. It signals a preference for cash preservation, lesser risk tolerance, and cautious equity perspective. This is a deflationary signal.
The use of more meaningful cash amounts (relative to aggregate balances and market capitalizations) to make consolidating acquisitions, does not only signal a predisposition to expend cash in order to grow business prospects, but also as a means to cut costs. As this is used to enhance cash flow with external assistance, as it were, it is not in itself a bullish equity signal, but is a way to acquire more cash. It is a deflationary signal.
When investors favor (substantial) cash-generating properties for IPO candidacy over companies with merely solid prospects, this is also a deflationary signal as it favors a strong present cash profile over unproven future largesse. (Here and elsewhere, we are speaking in relative terms.)

Reviewing this list, many will recognize the strategic and financial patterns of behavior that have – especially in the past year or two – been prevalent in the digital media and related technology sectors. As already suggested, this should not be surprising for a segment that has been characterized by deflationary economies. For entrepreneurs and small businesses, there are important messages in these trends, which should be studied, because large corporations and institutional investors represent funding sources and exits. Whether these messages and other conclusions carry over to fields outside the Internet, is a more complex question, but one worth investigating. For now, the principal take-away for entrepreneurs should be this:

When investors and corporations signal a relatively deflationary outlook through their actions, entrepreneurship must direct its strategies accordingly, and follow one of two paths: either to be a top-quality source of deferred R&D for cash-rich future buyers, or to become a cash-producing cash-rich entity that may be an attractive target, or itself a buyer in the future. Stated otherwise, entrepreneurs should think about becoming either the outsourced R&D group, or the bank.

In social networking there is a point of diminishing contact. To begin with a numerical example, let’s assume that an early Facebook or LinkedInÂ or Twitter user started out with one connection. This one connection was his or her closest friend online, and this friend – for purposes of current illustration – reciprocated by only following this one person. When such an initial adopter sent an update into his or her network, that update was personal in the true sense, and was noticed. It was probably also responded to. Even if only for a split moment in early beta trials, this situation may well have existed.

Let’s now travel quickly into the future, from the point of origin depicted,Â to a time when a tweeter or Facebook or LinkedIn subscriber has hundreds, or possibly thousands, of followers, fans, or connections. In relation to that first update that was sent to his or her first social network contact, any message that is now broadcast to very large numbers will have a diluted impact. First of all, this message is no longer personally directed; and secondly, it will be received by an audience that in turn follows hundreds if not thousands of update senders. This is not an audience that pays intimate attention.

This new illustration is of the social networking world in which we now reside. Many of its participants, in fact, have already surpassed the numbers highlighted, in many cases by far. With 500 million Facebook subscribers worldwide – and the number of Twitter or LinkedIn users, (keeping to the original examples), approaching new powers of ten all the time – the vastness of individual networks is necessarily headed to extremes. As a result, the message of the individual is necessarily diluted. At an extreme point, that message is completely ignored, and social networking loses its meaning.

With this existentialist backdrop, it is of special interest to note the emergence of new online resources that aim to reduce rather than expand, and bring back a personal element to an increasingly anonymous experience. Peer Index, for example, which has built some momentum recently, offers to sift through the millions of opinions on social networks and deliver to the solicitors of such opinions those voices most likely to carry weight. As elitist as this may seem, it is at least a filter that can increase the opportunity for certain voices to be heard. An even better example, however, is a service that advertises itself as a sophisticated product recommendation engine:

Hunch has had no shortage of exposure – in blogs, social networks, technology publications – and this current edition is not meant to be part of the push. The development is worth consideration, however, that in a world of diluted social networks approaching anonymity, a service should rise to prominence as a result of the following message, (more or less): answer a few questions about yourself, and we will show you that we understand who you are. This understanding is demonstrated through the delivery of customized and highly personal recommendations, based on the user’s unique profile, for consumer products and entertainment.

That Hunch is a recommendation engine is, in my opinion, of secondary importance. This is not an end, but a means: the recommendation serves as a proof – you know me, Sir! – of which the subject is recognition. The reason that users gravitate to Hunch, in other words, is perhaps less for the suggestion of camera to buy or movie to see, than for the experience of being acknowledged. In short, this is a social network in reverse: rather than offering to blast a user’s message into an ocean, the ocean is captured in a snapshot, in the background, that is in fact a portrait of the user. Like any portrait, its subject can cherish it as a mirror.

discourse and notes

Tag Archives: media economy

Growth by execution: Apple leads the way again

Pride in digital technology and its consequences

A deal surge in media, which is actually commerce

A year of execution and its early signs

Not quantity but pinpoint quality in M&A ahead

Disintermediation, efficiency and media’s elemental particles

Design and thought in the next phase of web innovation

The value of content and the cost of privacy: a new equilibrium and its necessary scale

The bank and R&D department: Internet as deflationary case study