Class weblog
What’s going on with Netflix
May 1st
Netflix, not surprisingly, reported a weak quarter with its first loss in several years. So what’s changed for Netflix in the past few months?
I think Netflix’s problem is threefold: partners, competitors and customers. First, it was obvious Netflix’s original margins were not sustainable in the long run. Netflix secured some of its early licenses at very low costs and it was clear that the content owners would seek more the next time around. So, netflix’s costs have gone up. This is not likely to get better for Netflix. Second, Netflix has more competition now with the likes of Hulu and Amazon and also streaming services being introduced by the incumbents (Comcast and others). This competition will only get worse in the next 12-24 months. Third, customers used to Netflix’s biggest strength in the past. They have delivered WOW consistently. The past year hasn’t been great for Netflix. They have had several missteps, most important of which was the recent debacle with pricing and the spinoff. I think this was the most painful for Netflix.
It’s not surprising that Netflix is being squeezed by both partners and competitors. However, it needs to continue growing its customer base and upselling existing customers in order to address the partner and competitor issues. Going forward, the key to Netflix’s success is to win back customer confidence. Investor confidence and wall street will follow.
Prospects for Coursera, Minerva
Apr 25th
As many folks have pointed out, there are too many inefficiencies in modern day education (high fees, bureaucracy, etc). I have been looking at Coursera, Udacity, Minerva and other higher Ed startups with great interest. I also had a nice recent discussion on the subject with John Katzman (founder of Princeton Review, 2tor). Here’s my take on the prospects for these firms. But first, a short summary:
Coursera & Udacity offer online access to top courses/professors. Students register for courses, access content online, complete assignments, get grades and are certified.
Minerva: If you could build a University from scratch, what’d it look like? Minerva wants to compete with the Ivy league through a hybrid online-offline model.
Coursera/Udacity: This model makes sense. Use the Internet to provide students who currently have poor access to goo teachers/content. Quality of content & delivery is highly variable and there is no reason why everyone cannot access the star teachers. There will likely be a big winner here.
Minerva: This one is tricky. It’s hard to compete with Ivy League & similar universities despite their inefficiencies. Reputation & branding matters (unfortunately) and I can’t see a good student foregoing Harvard to go to a startup university. Plus, students have access to 1000s of courses at Universities. They experiment with courses in various areas & find their way through college education. It’s too expensive to develop this many courses for a startup. And I don’t think 100 courses can provide the breadth of options that one has in college. John Katzman also reminded me that it’s hard to compete with the full college experience which includes college sports, extra-curricular activities and socializing. It’s hard to build that infrastructure overnight. So i am bearish on this. Am i missing something?
Investors lining up to cut checks
Mar 28th
Apparently, there were 66 startup presentations but 400+ investors at the YC demo day yesterday. Standing room only. This is precisely why I feel it’s better to be an entrepreneur than an investor in the current climate.
Traits of exceptionally smart people.
Feb 15th
My uncle, PG Bhat, forwarded a link to this interesting blog post about what makes exceptionally smart people different from the rest of us. According to the blogger, it is that they ask questions:
“I have noticed one overarching theme among smart people: they ask questions. When someone explains something new to me, I’ll usually just nod my head like I know what they’re talking about. If I don’t understand something, I’ll just Google it later. After all, I don’t want this person to think I’m a moron. Smart people are different. If they don’t understand something, or even if they think they understand something, they’ll ask questions.”
Let me add another closely related construct. It’s that they are modest and humble. If someone believes they are exceptionally smart and it gets “into their head,” this creates a conceit that gets in the way of asking questions and eventually in the way of growing. But why don’t all humble/modest people ask questions. The other quality of these exceptionally smart people is confidence. If you are confident, you don’t have to worry about being a moron. So, I suspect one needs to be in that narrow corridor – confident but not conceited – to ask questions.
Among the people I have met with the humility to ask questions despite their status are Herb Simon (Nobel prize in Econ, Turing award in CS, APA award in psychology and National Medal of Science) and Dr Irwin Jacobs (former MIT prof and founder of Qualcomm).
Web: too many entrepreneurs, investors and opportunities
Feb 6th
The startup world is highly hit-driven. For every success, there are over 30-40 failed startups. Even the top venture funds lose money on close to 75% of investments. And probably make meaningful returns on less than 10% of their investments. All that is about to change in the next few years … tech will be even more hit-driven than in the past.
Lots of smart (and not-so-smart) undergrads are dropping out of college to pursue startups like never before. Several of my students have dropped out just in the past 12 months. More engineers from top Engg schools are becoming entrepreneurs than ever before. Also the MBAs. While the typical (if there is one) Wharton MBA used to be a banker/consultant 5 years back, there is a marked shift towards tech & entrepreneurship. In short, there are lots of aspiring entrepreneurs. Further every other guy, self included, is an angel investor (the remaining folks, of course, are the said entrepreneurs). The supply of angels will only increase after the FB millionaires enter the fray. In short, there is a lot of money chasing these entrepreneurs. What does all this mean? IMO, too many startups will get funded and too many will fail.
Lots of poor ideas will get funded. Lots of ideas will get funded too early. Lots of ideas will get funded at crazy valuations. It takes little to get funded these days. Don’t get me wrong. I am a big believer in the long-term prospects for tech, especially web/cloud (heck, I started a PhD focused on e-commerce in 1999 and did my first startup in 2000 … I’ve been a believer for a while now). And I continue to believe that the best innovations on the web are yet to come. So I do think there will some big hits in the future, perhaps bigger than in the past. That said, the supply of entrepreneurs and capital exceeds potential opportunities. So there will lots of failures. In short, the successes will be bigger than in the past and there will be more failures than in the past. As a result, the tech space will be more hit-driven than ever before.
What makes things worse is the quality of the median talent will only continue to decrease with the entry of so many folks into the tech world. Almost everyone is a hacker or “code ninja” these days. In the 90s, most of the engineers had degrees in CS and understood how databases & OSes work. Many of today’s code Ninjas are history or social science majors who sensed a better opportunity elsewhere. Solid understanding of fundamentals is not needed anymore coz there are enough companies looking to hire and enough capital chasing the talent. Here again, the best developers are way better than the last vintage and they will become even more valuable given the median developer out there.
So what’s the takeaway:
1. Consumers will be better off: So many ideas & opportunities will be pursued. This will bring more products & services to consumers.
2. Investors will be worse off: Median angel & venture returns will drop (it’s already fallen relative to the 90s).
3. Winners will be bigger than ever before: Good ideas will be off the ground faster (access to capital) and at lower cost (cloud). They will also scale faster (web-based businesses scale faster than traditional businesses). Small differences in quality will result in big differences in success because of this ability to scale. So winners will completely dominate their markets. So expect some big exits like FB. Expect some superstar developers. And expect some venture funds to win big while most venture funds, startups and tech talent will produce low returns.
I am rethinking my role as an angel.
