
Scott Rafer on Dalton's letter: "Learning the wrong lesson" - fascinated
http://rafer.net/post/28638883246/mark-i-know-for-a-fact-that-my-experience-was-not
======
salman89
"The lesson instead is: build something whose very nature makes it a
cannibalistic cash flow hit for a BigCo so that their shareholders resist
competing, but which their users love."

Can anyone explain more what he means by that? How can something that is a
cash flow hit for a BigCo not be a cash flow hit for anyone else?

~~~
paulsutter
Quantcast's free audience reports couldn't be copied by the incumbents
(Comscore and Nielsen), because selling similar reports was their core
business. They hated us, but we never spent a moment worrying about them. In
fact we were always open to working with them, but they were bound up in a
knot over our model.

Southwest undercut united and American by avoiding business and first class,
flying only one model of plane (737), which lowered maintenance costs and
allowed easier substitution of planes among flights. They skipped the hub and
spoke model and flew out of peripheral airports that were cheaper, and boarded
like buses with no reserved seats to shorten the idle time a the gate, etc. no
long flights meant no meal service. There was no possible way for United and
American to match them on price. They were afraid to adopt any of these
changes because it might tarnish their brand. They were too focused on
competing with each other.

Dell offered lower costs than their competitors by charging up front for the
computer before buying the parts (which were steadily falling in price). The
competition were stuck with a channel model where they shipped finished
computers to channel partners for stocking in inventory, so they not only had
to buy parts far in advance but had to give a cut to channel partners and
retailers, making their prices higher and profit lower.

Netscape had a dozen competitors to their browser. Netscspe offered free
downloads to anyone, and with a wink asked for a licensing fee. No individuals
paid it, but corporations did because they wanted to be in legal compliance.
Best of both worlds (free for individuals and paid by corporations, but only
after achieving critical mass within the corporation). They crushed their
competitors with this model, who were charging license fees to all customers
from the beginning, as competitors didnt get the benefit of rogue employee
groundswell to achieve critical mass in corporations.

Hilariously, Microsoft in turn crushed Netscspe by goong a step further,
making Internet Exploror completely free, no wink needed. Netscspe browser
revenue dried up as corporations stopped paying for Netscape because they
already had a free license to ie.

This was funny to me, as it led to all sorts of crybaby behavior by Netscape
screaming "antitrust!", when all Microsoft did was tweak the strategy used by
Netscape themselves to crush the others.

All of these cases are "strategy", which is defined by Michael Porter as the
way that you are different from your competitors. Ideally, in a way they
cannot copy. Notice how a strategy allows you to avoid competing, because
you're playing a different game altogether.

~~~
salman89
Great examples. How do you think this would apply in Dalton's case though,
where the very mechanism of building on Facebook/Twitter's platform can be
shut down by Facebook/Twitter?

~~~
paulsutter
I don't know. But unless you have a strategy, don't start a company. Without a
strategy you're just picking up nickles in front of a steamroller.

I'm sure that strategies exist on any platform. Zynga doesn't seem worried
that Facebook will copy its games (even if they do hate paying the platform
tax). Many products are pretty safe from Facebook. For example, build an app
for dentists, or personal trainers, or pregnant women.

~~~
petegrif
There only is one sure strategy for avoiding the potential steamroller of the
platform company. Don't build on the platform.

~~~
scottrafer
Like any other resource or dependency that you build into your business, using
a platform requires an ROI calculation of some sort. The distribution
advantage needs to be worth the risk.

~~~
petegrif
True. The point however is to understand how to quantify the risk. The
complicating factor in this case is surely the fact that he had received
explicit assurances that his development was welcome and would be supported.
The thing I don't understand is how you would go about assessing the
'distribution advantage' given the fact that the risk is evidently so hard to
evaluate. DC has evidently now come to the conclusion that it is too risky for
him no matter what the advantage. I am curious to better understand your
thinking on how to weigh advantage against risk.

~~~
scottrafer
Treat the 'explicit assurances' like politicians' campaign promises. If they
lose, the promises are irrelevant. If they win, those promises had better
align with the new incumbent's larger aims or they were just marketing.

The risk is not very hard to assess. It's pretty binary per startup
opportunity. Do the relevant incumbents' revenue models, distribution models,
or inherent cultural limitations prevent them from competing with you.
@paulsutter covered the first two well early in this discussion. For the last,
Apple has great difficulty with social, Facebook hasn't figured out Touch,
Google is excessively focused on those two competitors, etc.

Please also see these two comments:
<http://news.ycombinator.com/item?id=4336783>
[http://rafer.net/post/28638883246/mark-i-know-for-a-fact-
tha...](http://rafer.net/post/28638883246/mark-i-know-for-a-fact-that-my-
experience-was-not#comment-609227651),

------
gojomo
I think to understand @daltonc's strategy with join.app.net, one should be
familiar with Thomas Schelling's concept of 'precommitment':

<http://en.wikipedia.org/wiki/Precommitment>

Note that the 'textbook' examples of precommitment involve the burning-of-
bridges or burning-of-ships-at-the-shore.

If there's any hope of an alternative to Facebook/Twitter at this point, given
the incumbents' long head-starts, it's going to be a 'zag' to the incumbents'
advertising-supported 'zig'. Caldwell might not have gone _into_ his Facebook
meeting fully intending that sort of confrontation... but by the time he left,
the choices were stark.

I thus view Caldwell's anecdote _not_ as a complaint, "boo-hoo I was wronged",
but as him sharing a difficult lesson: that Facebook's model makes it
impossible for Facebook to be a magnanimous platform steward. Perhaps Caldwell
should have seen the writing on the wall earlier, but many exterior-platform
shops are missing the same point, as evidenced by the surprise and indignation
after each new consolidating move by the platform proprietors.

Perhaps Caldwell could have intuited the reality beforehand, and written about
it in abstract terms. The anecdote _illustrates_ the problem, in a way that
far more independent developers will understand.

~~~
scottrafer
I fully understand breaking the rice pots and burning the boats, and I hope
that you are right. However, his implementation doesn't create the developer
education that you suggest. As they well should, young founders look up to
guys like Dalton and may well take him at this word that Facebook's
negotiating tactics are surprising. FB's stance on these issues are so
ruthlessly consistent and well known that it's hard to even consider the
specific tactics described as unethical.

I feel a responsibility to make it clear that such things are the norm and
need to be accommodated in business planning and risk assessment from the
beginning. Please note that I failed to do so the first time I dealt with
Facebook, but that doesn't make it their fault --
rafer.net/post/168541483/lookeryupdate

Please also note, that I'd be damn excited for app.net's current iteration to
take off and will go out of my way to use it if I can. I'd love a dev program
that had ongoing stewardship built in, but no for-profit platform provider has
_ever_ made such a thing work over time.

~~~
petegrif
I don't think that the key message is that FB's negotiating tactics are
surprising. Whilst he was certainly surprised the point is surely that he was
shocked because their behavior at the meeting was so at variance with what he
had previously been led to believe. You say that FB's tactics are 'ruthlessly
consistent' and 'well known' but this is surely a simplification. For example,
the FB platform supports games but I am not aware of any instances in which FB
has muscled in on a games dev.

I agree that it is helpful to point out that there are major risks when you
develop for an alleged platform. But isn't that the point of his post?

I think the point of the app.net initiative is to create a platform that
because of its different business model (subscription for
infrastructure/service) will not suffer the conflicts that are inevitable when
the business model is ads. And whilst this is indeed unusual lately, it is not
long ago that such for-profit platforms were the norm. Older examples include,
DOS, Windows, UNIX, Linux, X-Windows... More recently there is a profusion of
companies providing commercial support for open source software or providing
such software as a service.

~~~
scottrafer
Facebook has muscled in on literally everything but games, other than their
_ex poste facto_ 30% revenue share, and during their earnings report they
intimated that they may get into games directly.

And, I'm shocked at your statement about the older platforms. I don't know if
your entire background is on your LinkedIn page, but what you say is simply
not true of Windows, DOS, the Mac, and is very tough to credit to Sun or SGI
in their heydays. Those vendors cherry picked their ISVs all the time and with
no more rhetorical consistency, stewardship, or charity than Dalton describes.
They did so because they had market share in their segments and could.

That's why I specifically included this in my post: Playing naive to that
reality went out the window in the mid-1980s with PC software and has been
reproven by the platforms at least every 24 months since.

Everyone from RedHat to BeOS to Sega who behaved (somewhat) better did so
because they needed their ecologies to grow. If they'd succeeded in building
market share, I'm pretty sure I could predict their changes in policy.

------
dalton
pmarca has been a personal friend and mentor to me for over 2 years. I have
learned a _lot_ from him.

I know where he stands about all of this. I don't want to drag him into this
fight any more than he already is, but I don't think you understand pmarca
very well.

~~~
scottrafer
I don't claim to understand @pmarca at all. I've never even shaken the man's
hand.

I've got some great supporters and advisors who help me tremendously. It just
pains me to watch someone great like that drift further from a startup.

------
petegrif
Scott - you say "It’s incumbent on you (and certainly also me) to make sure
that we’re starting businesses in segments that actually require a new entrant
and can not be filled by aproduct line extension from an incumbent. Whether or
not they fill holes as early as Twitter, large companies with developer
programs all consolidate their segments — and do so a economically as
possible. That means every third-party developer grows up, sells cheap, or
dies."

But what does ‘require a new entrant’ mean here? Who requires it? There is
surely only one meaningful answer - the consumer. Moving on... What sort of
new entrant offering ‘can not be filled by a product line extension from an
incumbent?’ I suggest in the context we should parse this to mean ‘...
platform company cannot build a competitive offering.’ But of course, there is
little that such well financed companies who control the platform can’t build.
More to the point there is still less that can’t build if all they have to do
is copy an existing product. So this is a very strong condition. Perhaps you
mean - software the platform company doesn't want to build? One answer along
these lines is to build software for a small segment the platform company
cannot be bothered to address. But for an ambitious developer who wants to add
significant value to millions of users I am not sure it is possible to develop
such an offering - insulated from potential competition by the platform
company - unless the platform company has a clear policy vis a vis developers
and provides very clear signals with a very clear record to trustworthy
behavior that gives a high degree of confidence it is safe to proceed. But of
course developer is taking a risk that the platform company can bait and
switch. I am unsure what ‘large companies with developer programs all
consolidate their segments’ means. But if it means that such platform
companies have an inbuilt drive to purchase their devs I can’t agree. The big
platforms have so much software on them that even the wealthiest company
couldn’t buy it all even if they wanted to. I don’t know what a cannabilistic
cash flow is. This may be a term of art I am just unfamiliar with. But if it
means a cash flow built on the back of the host platform, this surely refers
to the cash flow of all apps built on a platform. So I am unclear this idea
moves the ball forward. If on the other hand the idea is that it will cost the
host money for no clear ROI then this is indeed always possible, but just as
obviously if there is no clear monetization strategy the dev is taking a huge
risk. It can work out but of course most times, not surprisingly, it doesn't.
(Clay Christen makes much of this dynamic and the challenges of marginal
rather than absolute costing when he discusses such cases as Blockbuster
competing with Netflix. But the undiscussed part of his argument is the
hindsight effect. Blockbuster were right to ignore most of the market
entrants. Most never got any traction. With a thousand flowers trying to
bloom, which one will see the sunlight?) So building software that doesn't
seem to make financial sense will doubtless reduce the risk of the platform
company competing, but you'd better have something up your sleeve. The
Instagram example is indeed important. But it is important precisely because
of the very different behavior of Apple and Facebook vis a vis their devs.
Apple has had long experience of working with devs and a deeply wired
understanding of how to foster and manage relations with their developers. iOS
is a platform. Apple provides some core apps but other than that it is a free
range and the overwhelming majority of devs can be confident Apple isn’t going
to compete with them. It seems to me that the whole point of DCs argument is
that Facebook declared itself a platform, provided APIs, provided assurances
that his product was seen as valuable and would be welcomed and then, having
given him the confidence to build it, turned on him threatened to cut off his
access to the platform on which his app relied and then offered to buy him
out. This is very different behavior.

So to be honest, I don’t find the argument very clear. I’m not sure we agree
on what the responsibilities of a company that declares itself to be offering
a platform are. I can’t extract a convincing strategy here for how you feel
devs can best to develop on a platform. And whilst you seem to feel you have
some sort of lesson for DC about how to work on a platform even if the company
baits and switches, I can't fathom what that lesson is.

~~~
paulsutter
Read my response to salman89 below.

If you don't have a clear strategy that protects you from competitors big ans
small, don't start a company.

~~~
rhizome
I think you're indulging in extremism. "The perfect is the enemy of the good,"
and all that.

~~~
paulsutter
Dude you can do whatever you want. If you want to start something that's
readily copied, go ahead.

But if Godzilla steps on you, dont act surprised and dont expect a lot of
sympathy.

~~~
rhizome
No really, I get the "cold-hearted businessman," thing. However, you're
describing preparations for an unknowable situation: "you should have
predicted the future better."

~~~
scottrafer
I don't see it as crystal ball reading. The question that needs to be asked
is, "If my new new thing takes off, what prevents the platform from cloning
me, turning me off, and/or buying me cheap?"

In Zynga's case for instance, FB was pretty darn dependent on the advertising
$$ Zynga paid them (among other factors). In Instagram's case, I believe that
Facebook wished to avoid pumping up mobile app traffic that quickly. Etc.

Obviously, YMMV. The strength of the answers varies wildly, and startups often
lose the bet -- even when the bet was calculated well. C'est la vie, et c'est
la guerre.

