March 22, 2009

Pipe Dreams: Did Silicon Valley Pick The Right Role Model?

just a series of tubes

just a series of tubes

by Freddy J. Nager, Founder Of Atomic Tango LLC + Guy Who Really Values Public Utilities But Wouldn’t Want To Work For One

The late Senator Ted Stevens was roundly mocked for his comment that the Internet was a “series of tubes.” Now, there were many reasons to ridicule venal Ted, but his analogy wasn’t that off the mark. Yes, it was technically wrong, but many Web 2.0 companies share the same purpose as public utilities: they exist to pipe stuff to users…

Consider YouTube, Twitter, flickr, LinkedIn and the rest: all successful and useful companies that simply make it easy to get content from point A to point B.

While working in Silicon Valley, I noticed other similarities between utilities and Web 2.0 companies…

  1. Millions of users each
  2. Total emphasis on technical quality — it’s all about the infrastructure
  3. Zero emphasis on creativity or branding, with a general disdain for marketing

Since utilities and Web 2.0 companies are largely run — and sometimes managed — by engineers, the similarities make sense. And aside from being coma-inducing places to work for us creative types, there’s nothing wrong with utilities. They’re large, solid businesses that are generally recession proof. In most cases, they’re absolutely essential, which is how some people feel about Google and Twitter.

The big difference: utilities have a great revenue model that’s pure cash flow. Web 2.0 companies? Not so much.

Those Damn Users

Another problem is that, when consumers start to depend on a utility, they also start demanding “rights” and a say over any major decision that affects them. Imagine if a water utility decided to make its water green and taste like cucumbers because that was “in” — and it did so without a public hearing. The uproar would be deafening.

Now just ask hardcore Facebook users how they feel about CEO Mark Zuckerberg fiddling around with “their” site. Even though Facebook is Zuckerberg’s company that he lets others use for free, millions of Facebook users (including myself) have developed a sense of entitlement: “Zucky better consult with us first before he does anything drastic.” At one point, Zuckerberg tried to significantly alter the Terms of Service on his own site, but he capitulated after a user revolt.

Above all, those utility users are expensive: according to TechCrunch, “Facebook may be burning though $20 million or more per month, even on top of revenues.” Lucky for Facebook, advertising is proving to be a growing source of revenue — but most Web 2.0 utilities aren’t so fortunate.

Vintage Business Models

Not far from Silicon Valley is another valley where the mindset is completely different: all the companies there compete heavily on branding, and marketing is essential. Sure, these companies are relatively minuscule and generally ignored by VC’s, but their basic revenue model makes sense, demand is relatively steady, and profits can be immense. Plus, if all else fails, you can drink the inventory.

I’m talking about Napa Valley, of course, the heart of Northern California wine country. Business is brutally tough there, but where isn’t it tough these days? Oddly enough, 100% of customers willingly pay — indeed, premium prices can be an attraction — while making no claims on how to run the business. Above all, wine consumers like purchasing from a variety of brands, and that supports a number of competitors.

With utilities, consumers really need just one in each category. How many water companies do we need? How many video sharing sites? Winner takes most if not all of the market share.

The Utility Model’s Threat To Other Industries

The bigger problem occurs when that utility mentality is seen as a “best practice” and creeps into other industries, which then proceed to sacrifice creativity and variety for efficiency — Clear Channel radio is a case study in that.

But building a wine brand isn’t as grandiose as building a utility. Winemakers rarely go IPO or sell for billions of dollars. Plus, wine requires artistry, creativity, imagination and other variables that can’t be measured on a spreadsheet, and that’s too much like Hollywood. With a utility, it’s all about the engineering, and that’s what gets the VC’s all hot and bothered. Consequently, there’s little wine made in Silicon Valley, but a whole lot of Kool-Aid, and someone has to drink it.

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Freddy is the Founder & Creative Strategist of Atomic Tango. He also teaches at the University of Southern California (go Trojans!), shoots pool somewhat adequately, and herds cats. Freddy received his BA from Harvard and his MBA from USC.

2 Responses

  1. You hit it on the head. Plain and simple.

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