Xobni

I’m excited to announce RRE’s investment in Xobni. We recently led a round along with Khosla Ventures, and are thrilled to be joining the Xobni team as they continue to make email better and more useful.

This is a personally satisfying announcement for me. Those who know me well know that I’ve long admired Xobni and that Will (who joins the board in connection with our investment) and I have been looking for an opportunity to be involved with this company for almost two years. I had reached out to the Xobni folks back in 2008 shortly after I joined RRE. We look for big, unsolved problems at RRE, and I consider email to be one of them. Xobni was in between its Series A and Series B rounds at the time, but I immediately got why the company’s approach to people-centric email tools could be extremely valuable and could make users’ lives far better.

I think people see what’s on the horizon and forget the road they’re actually on. This is the only way I can rationalize the number of people I hear say “email is dead” or “social networks are the only things that matter”. I spend much of my day in email. My wife, whose professional life couldn’t be more different from mine (she’s in education) spends much of her day in email. My brother, a software developer, spends much of his day in email. My mom, a small business owner, spends much of her day in email. People spend more of their time in their email clients than any other single functional area. While there’s no question that social networking volume continues to rise (and yes, it now has more “global users” than email, whatever that means), email itself also continues to rise every year and the curve is steep.

Furthermore, email is the source of great user pain for most of us. We get too much of it. It’s hard to find things. You sent me an attachment two weeks ago but I don’t remember what it was called or to which of the 25 emails in a thread with the same “re:…” title contained it. I need your number but it’s not in your signature. I know you sent to me, but no idea when.

Xobni solves a hundred small problems and a few big ones. I use it every day throughout the day. I find it so useful that despite being a Mac native going back to the 80s, I live in a Windows environment at work. The recent Blackberry product, which goes through all my email and organically assembles a contact manager based on who actually emails me and the contents of their email (as opposed to who I remember to add and what data I include) almost has me willing to carry two phones. I am enthusiastically awaiting new Xobni products for the different mail environments in which I live besides Outlook.

Our belief is that Xobni has a half dozen viable ways to become a large profitable company. Some of the revenue-generating products are already in the market (Xobni Plus was an easy sell for me, and I bought it well before we were investors in this round; the Blackberry and Xobni One products are compelling, and the company is in the market with a well-received enterprise version), others are still on the roadmap. But ultimately our view is that when you alleviate massive user pain, your user base is primarily business users who live that pain every day, and you have a team as extraordinary as the one assembled at Xobni, the result is very significant value creation. I’m delighted to welcome Jeff and the Xobni team to the RRE family, and look forward to continuing to build a great company.

Are iPad Apps Overpriced?

In my initial iPad Reactions, I observed that the development community (and the media community) are clearly trying to reset customer expectations with regard to the price of native applications on the iPad. Whereas most apps on the iPhone are either free for very inexpensive ($0.99 and $1.99 are the two most common price points), iPad apps are frequently $4.99, $9.99 and even $14.99, a price point generally unseen on the iPhone. I’m hardly the only person to observe this, of course, but there seems to be widespread disagreement over whether iPad apps are overpriced or merely more expensive than those on the iPhone.

For my purposes, I step back and wonder why we expected these apps to be free (or nearly so) in the first place. Should something like Pages or Keynote be free on the iPad? Why? Consider the market for office software. On the one hand, you have Microsoft Office, longstanding champion on the desktop and the crown jewel of Microsoft’s cash machine. Today, on Amazon, the full version of Microsoft Office is over $300 ($400 if you want Microsoft Access). On the other hand, you have Google Apps – free for consumers and small businesses. $50 per user per year if you want the Premiere Edition. Pages, Numbers and Keynote on the iPad? $9.99 each.

In a way, we’re caught between conflicting paradigms for how both software and media should be priced. On the one hand, there was a period where there was a general expectation (both by consumers and by scholars and academics) that “all content should be free”, which inevitably bleeds into “all software should be free”. Books were published making this exact point and business models were built around this basic premise. And yet I wonder – exactly why do we think that all content, software and media should be free? Because radio was free (supported by ads) or because broadcast TV was free (supported by ads)? Cable isn’t free. Satellite TV isn’t free. HBO or Showtime aren’t free. Neither is Sirius/XM.

Remember that web browsers weren’t even always free. While the university-created Mosaic was free, back when Netscape was a standalone business, one of its revenue lines was charging $50 for the web browser. Their viewpoint was that this was important software and it stood to reason that a business that continued to improve an application as important as the web browser should get paid for it. What changed? Microsoft realized that they wanted to own the browsing experience, released Internet Explorer for free (subsidized, of course, by the massive profits from Windows and Office) and reset expectations that web browsers should be free, and with predictable consequences for Netscape.

As I consider the value of the iWork apps, or MLB’s app (which, for $15, gets me access to every game and allows me to actually watch every game with my mlb.tv subscription), or genuinely good games that cost $5, I struggle to generate empathy for those complaining that these apps are expensive. A latte from Starbucks is $4. A bottled beer at most bars in New York is at least $8. So why wouldn’t I be willing to pay $4.99 for Instapaper Pro, an app that’s useful, well-designed and enables me to take the web with me wherever I go? Why wouldn’t I be willing to pay a few dollars for references of various kinds, the likes of which would have only been found in $100 textbooks fifteen years ago?

I agree that the capital efficiency of software development has led to dramatic increases in the efficiency of its production, but I don’t think that leads to a rational conclusion that all software should be free or ad-supported. I’m actually glad, in the long-term, that the pricing expectation seems to be changing. In the short term yes, I’ll pay a bit more for apps, but in the long term this ensures that the quality of apps continues to be high and that developers have a reason to take the time to create really compelling things for this platform. At $0.99 an app, this motivation isn’t necessarily there, so as a user, the higher price point of iPad apps is good for me.

Quirky

Yesterday Quirky, Inc. announced its Series A funding, and I’m delighted to welcome Ben, Mitch and Team Quirky into the RRE family.

Quirky is a social products company, built on the idea that lots of people have great ideas but don’t happen to work inside of a consumer products company. We think that basic observation is correct – the majority of the world’s creative people, including those interested in creating great products, don’t work inside of the design department of the handful of large CPG companies.

But let’s step back and think about why this matters. Much of the last fifteen years of IT innovation has been geared toward using the internet’s capabilities to do things in better, faster and cheaper ways than were possible in the offline world. We communicate with each other, consume and produce media, share content, play games, do work, collaborate, etc… The internet dramatically changed all of these things. Quirky applies the transformative nature of the internet to the creation of consumer products.

I first met Ben Kaufman a couple of years ago when he first launched “Kluster”, a platform that enabled people to collaborate, but also had a system for measuring influence and attributing the final output to those who’d shared in its creation. I liked Ben and thought Kluster was cool, but it wasn’t clear to me what it was actually for. When he came to RRE talking about Quirky a couple of months ago, it was clear that this was the fit he’d been looking for – using a community to collaboratively design actual products. And there could be no more “native” investor for this company than Jim Robinson IV, who is as devoted a hobbyist as I’ve ever met, who builds things all the time, and who I knew would immediately start submitting his OWN ideas to the Quirky community (note: he already has one product in pre-production and I’m sure more are coming).

It made perfect sense to us. Almost everyone you know has that idea they think would just be HUGE if they could actually get it made. Only most people can’t get it made. They can’t do the industrial design, the marketing, the manufacturing or the distribution. And that’s why we think Quirky is so potentially powerful. There are people ranging from pure hobbyists to people using their professional skill on the side who can do ALL of these things. They just don’t all work in the same place. Quirky uses these distributed resources (plus Kluster’s collaboration engine) to crowdsource all the elements of product creation. Then the company uses its own expertise (Ben started and ran a significant company called Mophie that manufactured consumer products when he was 18) to gear up manufacturing and arrange for distribution. The profits are shared not just with the original inventor, but with every person who contributed in a variety of ways to the product’s ultimate outcome.

Quirky’s community will design 50-60 products a year. Some of them won’t ever actually be produced, others will sell a few thousands units, and others will wind up being major sellers. We are excited about the possibilities that emerge when you let regular people exert their influence over real products. We think some really interesting things are going to come out of Quirky’s process and we couldn’t be more excited to work with Ben, Mitch Lowe (who has joined as chairman), the Quirky team and the whole Quirky community to create the next great consumer products company. If you ever had an idea that you thought a lot of people would want, come on by and submit your idea. It’s only $99…

iPad Early Review and Reactions

I didn’t preorder an iPad, nor did I line at 6:00 AM at the Apple Store to get one, but as it turns out, Apple knew a lot of people were going to want them and the stores were well-stocked. At 4:00 yesterday afternoon I walked into the Upper West Side Apple Store and picked up a first-generation 16Gb Apple iPad.

When the device was first announced I (like many) had an initially underwhelmed reaction. “It’s a big iPod Touch”, I thought. “I already have a Macbook Pro, an iPhone and a Kindle – why do I need this?”

I woke up about two days later and realized that this was the wrong question. First of all, NEED is rarely the right frame for a new gadget anyway. But aside from that, what I realized is that the iPad would do most of the non-telephone things my iPhone did (web, video, games, ineracting with data via native apps) but better. And now that I have one, that’s my early observation. It is, in fact, basically a giant iPod Touch. And that’s pretty awesome.

A few initial observations and things that seem likely to be either big deals or medium deals to new iPad owners:

1. Apps are more expensive. I think developers realized that getting trapped in a consumer expectation that apps cost $0.99 is avoidable. Most of the apps are $5. Many are $10 or even $15. And yet the nature of the iPad is such that I suspect people are going to pay, because one’s ability to interact with some of these apps might have felt trivial on a phone but not here. A good example is MLB At Bat, which is $15. As a big fan of a non-local team (SF Giants), this app is like Gamecast on Steroids, plus I can actually watch the games streamed. That’s a big deal to me and easily worth $15. Lots of other apps will engender similar anlyses.
2. You will need a film and a case for this. It’s a magnet for smudged fingerprints and the form factor is (as originally criticized by early commentators) awkward enough that you might drop it at some point.
3. Netflix for the iPad (and video in general) is a big deal. As someone who, ahem, rarely tries to open a macbook pro in a coach airline seat, the notion of video on the iPad is highly significant. Netflix on demand is compelling.
4. I’m still not convinced this is serious tool for work. Apple is trying to push their office productivity apps, but even with a keyboard and a stand color me somewhat skeptical that this emerges as a real use case. As a side note, however, it’s really something to see word, spreadsheet and presentation apps being sold for $10 given what Microsoft continues to charge for desktop versions of Office.
5. And a question mark – the iPhone-using world is crazy for location-based services right now. I’m fascinated to see how (and if) this translates to the early iPad user community. My instinct is that apps that are more about single-purpose actions (like checking in) will continue to exist more on the mobile devices, whereas apps that encourage more interaction with data or other users (games, conversations) will migrate rapidly to the iPad.

My early conclusion is that this is a really cool device. I’m going to love watching video on it, playing the occasional game, browsing the web and interacting with data in much the same way I do on my iPhone but better. And, having said that, I strongly suspect that a subsequent post 45 or 60 days in will go on to describe all the things I’m doing with this device that I hadn’t thought of the day after I bought it.

Customer Service is the New Location

The old adage about building a retail business was that the three most important considerations were “location, location and location”. This made sense – while offline businesses like restaurants or retail stores rarely thought about “customer acquisition” in the same way that online businesses do today, the dynamics are analogous – you needed to build your operation in a way that enabled you to acquire customers profitably. Put another way, you needed to be able to attract customers without spending too much money and you needed to be able to charge them enough that they were worth that cost. Having a good location was demonstrably critical – you had to be where people either already were in large numbers, be somewhere that was already a destination for the right segment of people to whom your business appealed, or be convenient to complementary businesses for your target demographic. Thus, location location location.

Online businesses don’t have to worry about location (I’m going to sidestep the analogy between location and domain names, not because it’s illegitimate, but because it’s a separate point). Online businesses live on the web, where location is dimensionally irrelevant. So the question becomes, if offline businesses distinguish themselves fundamentally by location, how do online businesses accomplish the same distinctiveness?

Several of my friends have blogged on the topic of customer service over the past few weeks (see Josh Kopelman’s two posts on the subject, as well as Sarah Tavel and Eric Friedman’s related posts on ecommerce and customer service excellence). As I’ve observed my own use patterns over the past few years as a consumer, I’ve concluded that truly amazing customer service has replaced location as the single point of greatest leverage for online commerce (side question – can we retire the term “ecommerce” please?)

Zappos is a great example, and is always everyone’s first comment on this topic because they have done a superb job not only of creating a great customer service culture, but of promoting how superb their customer service culture is. I think the dynamic goes well beyond Zappos. In fact, while enumerating some of the early best practices that have come out of some of the pioneers in next-generation customer service is interesting and illustrative, for my money thinking about the underlying competitive dynamics is more interesting and ultimately more powerful in the long term.

As with most questions of business strategy, this analysis will ultimately hinge on competitive advantage (or lack thereof) amongst competitors within a segment. As always on this topic I refer back to Bruce Greenwald, from whom I learned most of my fundamental understanding of the sources of competitive advantage and the best ways to maintain and expand those. Location location location goes beyond the accurate but ultimately superficial explanations I gave in the first paragraph. Brick and mortar businesses that got location right built competitive advantage in their industries, particularly the larger, multi-location brands that at a core level became as much about having the right real estate as having the right product.

Consider the book business – prior to the internet, you’d talk about Barnes & Noble, WaldenBooks, Borders or B. Dalton. What were the distinguishing characteristics of these companies? You could cite little difference other than the footprint they held – who held the prime spots in the right malls? Alternately, who was building superstores elsewhere that upended the mall model? Either way, you were talking about strategies built on location, distribution and ultimately supply chains to feed the beast. Consider the book business now. Amazon owns it. And why wouldn’t they? They have every title at all times, give free shipping to just about every purchase, take things back easily and have good prices. Some of these elements are more obviously customer service than others, but I’d put all the non-price benefits under the same basic umbrella (particularly free shipping and easy returns).

Now consider Amazon as a builder of competitive advantage. Location is irrelevant, so the hundreds of millions or billions of dollars spent on retail distribution infrastructure and storefronts is sunk. Without location, how does a seller of a true commodity create competitive advantage? I believe the only answer is consumer habit, and the only real generator of that habit is superior customer service. That means considering the sources of habit and stickiness as core drivers. So what do you do if you’re Amazon? This is the genius of Amazon Prime. People love free shipping, so you get them to pay up front for free expedited shipping on everything they buy. Once you’ve spent the $79 on Amazon Prime, that free shipping benefit will draw you to Amazon whenever possible. It’s sort of the commerce equivalent of frequent flyer miles. I’d argue that this analogs of this dynamic can be found across all areas of online commerce where new entrants are using new sources of consumer retention to build lasting relationships with those consumers.

Ultimately, the demise of location as a differentiator amongst businesses seeking to sell to consumers destroys much of the competitive advantage present in these markets. I posit that in this newly-level playing field, customer loyalty can be obtained only by superior customer service. We’re going to see this thesis play out over the next few years, particularly as next-generation approaches to online commerce continue to gain scale (e.g. private flash sales, group buying platforms, subscription commerce, etc…). One possibility that I will allow for, both as an investor and as a consumer, is that the web actually is a true leveler – that there are no real sources of competitive advantage in commerce and that this will be a margin-destroying scrum that will lead to only the leanest of businesses surviving. If this is the case, operational excellence will become the determinant of winners and losers.

My thesis today, however, is that there is an opportunity for online merchants to build a sort of brand relationship with consumers, and that this opportunity hinges on stellar customer service. Those online stores and retailers who engender the trust of consumers should, under this thesis, obtain a measure of loyalty from those consumers. This thesis will be easy to test – if it’s true, the merchants who succeed will be able to charge higher prices than those who fail. If, on the other hand, Zappos and those like them, are exactly price-competitive with the field, then the correct conclusion will be that great customer service is actually a red herring. As a consumer, I certainly hope this isn’t true, and as an investor I hope the same thing, since I continue to look for online commerce businesses that have an opportunity to build something truly defensible over time.