CEO of the year Bezos, Inside Google, Facebook’s Next Billion, Flatworld Drops Free, BC Entrepreneurs Soar – The Week in Geek™ – Nov. 20, 2012
A note to faculty using my text: You’ve likely heard from my publisher, but I’ve also posted a personal statement on upcoming changes – Flatworld Drops Free. I’ve also included the statement below.
Jeff Bezos: Fortune’s 2012 Businessperson of the Year
Amazon’s stock is up 10 fold in six years, although net income is down & last quarter the firm posted a $274 million loss. For CEO Jeff Bezos, some red ink is acceptable – the firm invests for the long-haul. Bezos has announced the profit downturn is driven by investments in new businesses (cloud, Kindle). Short sellers were burned badly when Amazon decided to turn up profit harvesting a few years back, so you’ll find few betting on an AMZN slide today. Despite a nosebleed PE topping 100, as one analyst puts it, “Now you are either long term on Amazon or on the sidelines.”
Today’s Amazon sells more electronics than books. The firm is also in the midst of a big fashion push. The new amazon.com/fashion looks nothing like the conventional site, and the firm’s Gilt-like myHabit and high-end shopbop extend the haute-play. Amazon’s the firm to beat in cloud services (even offering a low-end database alternative to Oracle). Amazon will pioneer new businesses, buy them when it makes sense (taking key competitors off the table with acquisitions like Zappos and Diapers.com), or mimic growth opportunities when it feels it’ll win. The firm is not always right (it famously invested in Pets.com and the firm’s stake in LivingSocial is tanking), but Bezos is perhaps our boldest billionaire. He’s also a stakeholder in space-flight company Blue Origin which recently passed a launchpad test.
Investments are driven by customer-focus. Says Bezos “When [the competition is] in the shower in the morning, they’re thinking about how they’re going to get ahead of one of their top competitors. Here in the shower, we’re thinking about how we are going to invent something on behalf of a customer.” For an example of customer-focused loss-tolerance look at streaming, where Amazon competes with Netflix (and may be losing as much as $1 billion a year), but also provides much of the Netflix streaming infrastructure. Says NFLX CEO Reed Hastings “Jeff is a manic competitor, a delightful human being, and a trusted supplier”.
Tablet competition with Apple exposes radically different approaches. Apple’s operating margins of 31% last year compare with 2% at Amazon. The Kindle Fire is sold at break-even. Prior generation Fires are still sold for $159, the HD starts at $299, and low-end Kindles are $69 (Apple’s low-end cheapest iPad mini starts at $329). A favorite Bezos saying “Your margin is my opportunity.” To be clear, Amazon is a distant second to Apple, but this is a battle where Bezos can’t afford to miss out. Amazon’s physical media category is vanishing – if it loses the tablet screen it loses the store and all of the key competitive assets – switching costs & distribution channels – that go with it. Amazon’s Silicon Valley outpost, Lab126, hosts 1,500 employees, some with offices that can see Apple buildings from their windows.
Scale efficiencies and outright penny pinching help keep costs low. Employee desks are wood slabs, mimicking the firm’s early days where new hires had to build their own desks from inexpensive door lumber. Base salaries are anemic. The highest salary is only a reported $165,000 for the VP of the N. American consumer business. Don’t feel bad for him, he holds restricted stock grants valued at roughly $20 million. Amazon has also been a wonderful partner for my University, hiring many of our former students, hosting TechTreks, and we welcome their opening of a new Boston-area office.
Amazon Studios: Crowdsourcing for Films & TV
Amazon’s publishing disruption has been far deeper than discounting. The firm has created its own imprint lines with aggressive author royalty terms (publishing titles that rivals often refuse to carry). And Amazon has helped promote new formats like short-form Kindle Singles and episodically-released Kindle Serials. Now the firm hopes to bring a unique, crowd-sourcing twist to film and television production, too.
Amazon Studios allows artists to upload scripts and production pitches where they can be evaluated and commented on by the public. The effort in artistic crowdsourcing has 22 movies and 12 TV series in the early stages of review and development, though none have reached the point of being filmed. The jury is still out on quality – one project is called Zombies vs. Gladiators, although that work is being developed by one of the genre’s big names, Clive Barker. When titles do come out, they won’t be Amazon-exclusives – releases are targeted at theaters and television distribution, although you can be sure they’ll show up as Amazon-streamed content, too.
The Man who Wants to Destroy Amazon
Also in the Amazon piece in Fortune, is a profile of Rakuten’s Hiroshi “Micky” Mikitani, the Japanese billionaire who runs the world’s third largest e-commerce site. Rakuten means ‘optimistic’ or ‘positive spirit’ in Japanese, but the competition is seriously sharp-elbowed. The firm has bought and re-branded Buy.com, recently made a major investment in Pinterest, and sports a US headquarters in Boston. Mikitani showed up at the Tokyo book fair handing out camo-patterned t-shirts with “Destroy Amazon” written in Japanese. Looks like he’s serious – Rakuten also recently bought the Canadian e-Book reader biz Kobo for $315 million. Mikitani plans to launch Kobo in 27 countries by next year and have a full Rakuten e-commerce play operating with a similar footprint within five years (this despite a failed effort in China, which led to a dissolution of a joint venture with China’s search-leader, Baidu). For comparison, Rakuten’s 2011 sales in Japan tallied $4.75 billion vs. Amazon’s Japan unit’s take of roughly $1.9 billion. Past BC students had the special opportunity to visit Mikitani at the firm’s Tokyo headquarters on our IME Asia field study program.
Facebook: The Making of 1 Billion Users
On September 14, a counter on second floor of Building 17 of Facebook’s headquarters turned over with three commas. Facebook had hit a billion users worldwide – one-seventh of earth’s population – a phenomenal achievement considering Facebook isn’t even in the world’s most populous country.
As for the next billion, look for that to come largely from feature phones — a.k.a. “dumb” phones. Telcos in emerging economies often compete by offering Facebook as a free service. Says Kenya-based tech guru Erik Hersman, “That means that for those people in Africa with mobile phones but likely no computer access, Facebook is their Internet.”
The next billion might not bring comparable riches – APRU (average revenue per user) is $14 in the US, but only $3 elsewhere (note, reported ARPU figures vary widely, but the big gap between US and global is a consistent feature of all reported numbers).
It takes some serious hardware to serve a billion people. As BusinessWeek reports, “each day, Facebook processes 2.7 billion ‘Likes,’ 300 million photo uploads, 2.5 billion status updates and check-ins, and countless other bits of data”, using one of the biggest of the world’s ‘big data’ hauls, to customize user feeds, estimate which ads to serve up, and help developers refine and improve the Facebook experience.
The key to improvement is the A/B test, experiments (and at any moment Facebook may be running tens of thousands) that compare options and collect data for later action. Placement, wording, and mapping ad-characteristics to profile activity are all part of the relentless data-dive. As one example, tests revealed that users “got stressed out and left the site when they were asked if they wanted to ‘reject’ a friend request.” The new button carries the wording “not now”, and reportedly keeps users on the site longer.
Geeks rule on “Hacker Way” (the main drive on Facebook’s campus). The mantra “Move fast, break things” is visible throughout the firm’s new headquarters. Everyone has equal access to most of the code in the live site – even new engineering hires in the mandatory six-week engineering boot camp go hands-on with the actual site. And yes, sometimes things break. A little less than two years ago, one engineer accidentally released all of Facebook’s top-secret projects. Oops!
Code releases are internally referred to as ‘the push’, starting first with Facebook employees, then via small percentages of Facebook users, all to make sure things run more or less smoothly. Sometimes crashes occur, but that’s to be expected in Facebook’s “no-beta” culture. Pushes occur daily at 4:30pm HQ time, and may include up to 300 modifications. Large scale changes occur on Tuesdays, often including thousands of changes to Facebook’s code. Like Google, Facebook also has its own proprietary, air-cooled server farms dotting the globe from Oregon to Sweden, packed with hardware sourced from cheap commodity parts and built to the firm’s own specifications. Want a job? Facebook plans to add hundreds of new engineers to its already 1,000-strong staff (a remarkably small number when one considers the firm’s reach). Starting salaries for top tech grads top $100k.
Google Throws Open Doors to Its Top-Secret Data Center
Wired’s Steve Levy was provided unheard-of reporter access to Google’s data centers and he has penned a story chock-full of geeky awesomeness. From photos of Skittles-colored piping to video tours of the racks of brawny, custom-designed hardware, the piece offers great insights for those using the Google Chapter in my textbook. And Google’s new Data Center site offers even more facts and multimedia – a goldmine for students and profs.
Last year Google was America’s 18th most profitable company. The firm’s multibillion dollar infrastructure enables the firm to index over 20 billion web pages a day, handle 3 billion queries, auction ads in real-time, offer 425 million free Gmail accounts, serve over 100 million YouTube videos each day, and accept 48 hours of video uploads each minute.
Google owns at least six US data centers and three in Europe, with three Asian and one South American center acknowledged as under construction (Lenoir, North Carolina; Council Bluffs, Iowa; St. Ghislain, Belgium; Hamina, Finland; Hong Kong and Singapore among them). They’re also pricey – Google’s facility in The Dalles, Oregon cost a reported $600 million.
Much of that gear is custom-built. How much does Google buy remains a mystery, but as one indicator, consider that Google is now Intel’s fifth largest server chip customer after the likes of Apple, Dell, and HP. Yes, Google is one of the world’s largest hardware manufacturers. Why shell out for standard boxes that include unnecessary extras like graphic cards, keyboard ports, or cases? Google (as well as Facebook, Amazon, and other firms running the biggest server farms in ‘the cloud’) also builds its own super-fast networking gear.
Google has a carbon-neutral commitment, but being green also saves greenbacks. By some estimates, data centers collectively consume 1.5% of the planet’s power. Efforts for low-cost cooling help keep costs low and motherboards from frying. Belgian facilities cool with recycled canal water. Google Finland uses the Baltic sea. Google needs to prevent the power from going out, but instead of having remote backups, batteries are near servers cutting energy leakage and cooling and saving 15% over conventional architectures.
To give you an idea of how green Google is, Wired reports that the on the PUE (power usage effectiveness) scale where 1.0 = no energy loss, the standard for data centers is a rating of 2.0 (meaning only half of power is actually put to use). Google’s score of 1.2 is considered “unprecedented” in its efficiency.
The Google-owned server farms are supplemented by colocation (co-lo) facilities scattered around the globe. It makes sense to place high-volume, low-latency traffic, such as the most popular YouTube videos, in leased racks on someone else’s real-estate (at ISPs like Comcast or AT&T, or via carrier-neutral sites like Equinix). Watched Gangnam-style? It’s likely served up at a super-secret location so close you can drive there today. While my students get a personal tour of the Equinix facilities in Silicon Valley, courtesy of the firm’s Chairman, a BC alumnus, we wouldn’t know Google was there. Google says its co-lo installations are lights-out so no one can see. Technicians service boxes with miner-style headlamps.
Google’s stock has soared since IPO because the firm has been on a global growth tear, but at some point the firm’s business will mature, putting more pressure on the efficiency wizards dishing up free services. Earlier this year, and for the first time ever, total search volume declined.
Flatworld Drops Free
On January 1st, 2013, publisher Flatworld Knowledge will begin charging for the online version of all of its textbooks (mine included). For six editions I’ve been proud to offer my textbook via browser, free to all. It’s been wonderful to see the text used at hundreds of universities worldwide and I’ve been humbled and grateful to those who wrote with thanks. I’m also grateful to Flatworld for providing vital services: editorial, layout, graphics work, copyright clearance, hosting, and more – and I want to see them stay in business. The initial freemium model seemed great – free to all, but the more convenient print version would be offered at a very low price point. Enough students would want print versions that Flatworld could earn a living and authors like me could earn royalties to justify the enormous commitment for first version and continued revisions needed for a high-quality textbook.
It hasn’t worked out that way. I don’t know Flatworld’s economics, but it’s clear that a continued rise in commodity prices (paper, ink, and transport fuel) have put tremendous pressure on ‘dead tree’ edition costs. A hyper-efficient market for used textbooks also hurts in that no used sales benefit the firm or its authors. This likely caused Flatworld to stop offering printed texts in bookstores this past fall. Adding to that,the free online version was just ‘too good’ – there was little incentive for students to pay up for other digital products, while few wanted to wait to order a printed book mailed direct-from-publisher. There’s also an important faculty perspective: while my textbook is likely the most discipline impacting (and certainly the most gratifying) scholarly work I’ve produced, at a Tier-One research university this kind of work won’t get you promoted (I’d very much like to see this change, but I’m not optimistic that this will happen any time soon). The unfortunate reality is that in any model without significant incentives, high-quality work will struggle to get produced. An official Flatworld statement is available online. and there’s been widespread coverage of the change in the media.
So starting next year my text will cost $19.95 online (for other options, such as course-packs, and to provide feedback to Flatworld, please contact them at [email protected]). I hope that students and faculty will find the price to be fair. It’s still less than one tenth the price of many management texts (yes, for those not in school, the $200+ business textbook is the norm). The cost is even cheaper than rental services such as Chegg. I will continue to offer my personal lecture slides, podcasts, exercises, and other course material free to all at https://gallaugher.com/chapters. So with Flatworld’s change, here’s hoping the good guys in the white hats now have a model to thrive as we move toward a tablet-based, atoms-to-bits future.
Student Success
Sunday morning offered unexpected professor pride. While making breakfast for the family, the NPR broadcast I tuned into featured Deckard Sorensen, co-founder of BCVC ’12 winner NBDnano, discussing the bio-mimicry water-collection innovation he developed with BC classmate Miguel Galvez. Then when opening up the Sunday Boston Globe, I saw that CEO Miguel was in full-color on the front-page of the business section, headlining a piece on the coolest companies to come out of Boston’s accelerators. In just a few short months, NBDnano has gone from the Boston College Venture Competition to raising over half a million dollars in seed financing. Their firm’s low-cost, low-power method of harvesting water from air was inspired by the Namib Desert beetle (NBD = Namib Beetle Design). If successful, it could revolutionize thousands of products and bring clean drinking water and irrigation to millions.
I had the good fortune to see Miguel debut at TechStars Boston Demo Day (and if you follow me on Twitter you’ve seen some photos). The elite accelerator program has a roughly 1% acceptance rate for worldwide applicants. Admitted teams get 100 days of mentorship and modest capital in exchange for an equity stake. It’s a rocket to future funding and a better-than-MBA experience for most. And while 13 teams were in this most recent TechStars class, three sported Boston College CEOs. Wymsee, a firm made up of BC ’11 and ’12 grads, most of whom went through BCVC with different ideas on separate teams, announced SyncOnSet, a product that coordinates the massive pen-and-paper inventory management task conducted by set designers. In just a few short months the team has product in use on-set at over a dozen TV and feature film products, including “30 Rock” and “Boardwalk Empire”. Why is this a big deal? Because data for what’s on screen can directly fuel all sorts of revenue from product placement to television-driven commerce.
And while BCVC can’t claim 90s-era BC alum Jeff Fremont-Smith, his firm ImpulseSave was also named one of the coolest firms in the TechStars class. The firm’s app gameifies savings. Enter a goal (say paying down debt, or squirreling away enough for a Hawaiian vacation) and see the app’s graphs grow as you ‘ImpulseSave’ instead of reaching for that pair of shoes you don’t really need.
BCVC teams also made up two of the six teams invited to participate in the “Boston Shark Tank”. NBDnano and 2011 BCVC winner Jebbit both raised notable angel cash from the panel of Boston-area tech luminaries. In recent years, BCVC-affiliated teams have gone on to TechStars, Y-Combinator, Summer@Highland, MassChallenge; they’ve won at MIT and Yale; and they’ve raised millions in capital while launching several businesses. An enormous thanks is due to the alumni, executives, entrepreneurs, and investors who have so regularly and repeatedly helped BC build one of the strongest undergrad entrepreneurship success stories in the country.
And finally, the intellectual life at BC is by no means limited to entrepreneurship. I have the tremendous good fortune to advise BC ESS (Education by Students for Students). The organization runs BC Splash (on-campus short-courses taught by our students to hundreds of visiting high-schoolers), and BC Talks (TED-style talks by accomplished undergrads). Missed the most recent BC Talks? Watch this wonderful highlights video offered on the Boston College YouTube channel.