Category Archives: Insights

The Artist’s Share

There is a commonality in the Hachette/Amazon and Spotify/Pandora/Recording Artist debates and it looks something like this:

  • By not paying enough royalties to the licensor (book publisher, record label), authors and artists are being starved.
  • We are told this is critically bad for authors and artists who can no longer earn a living.
  • Thus, creators won’t create, and art and culture ultimately suffer.

None of us want there to be fewer books or songs in the world. But frequently lost in this debate is a discussion of the presence, or perhaps obsolescence of the middleman and the amount of revenue they keep. Spotify, Pandora, Amazon and the other licensees of ebooks and music are ultimately just retailers. Their job is to acquire and retain customers, and sell them as much music and books as they can. They license their content from book publishers and record labels. The terms of the license are set unilaterally by the publishers or the label as they have exclusive authority over the titles they represent. The publishers and the labels form agreements with their authors and artists. These agreements dictate how much of the money received from retailers gets paid out to the creators. Spotify, Pandora, and Amazon have no control over the terms of the relationships between the creator and the middleman publisher or label.

For every dollar spent on books or music, we know how much retailers keep. In the case of Spotify, more than 70% of every dollar they collect gets paid to record label and music publisher middlemen. In the case of Amazon, we see from their gross margins that they pay out about 70% – 80% of every dollar they collect to the book publishers. Pandora pays out about 55% – 60% of the revenue it receives. Apple, the world’s largest retailer of music, pays out 70%. Most retailers of media, through both analog and digital eras, squeak by on about 30% gross margins and pay about 70% to the middleman. (Apple, in their AppStore, keeps 30% of app revenue and pays 70% to developers.) The argument is often made that “these retailers build their businesses on the backs of the creators and should keep a relatively small share.”

Fair enough. Except how much of the money collected by the book publishers and record labels makes it back to the actual authors and artists—the creators without whom there would be no art? And in a changing digital landscape, are the analog legacies of these payments appropriate for the digital world?

In music, the deals between record labels and artists has two types of royalty structures: a) a percent of revenue paid to the artists for recorded music that is sold (a CD, a digital download) and b) a different percentage for music that is licensed (for use in a film, or perhaps a digital streaming service). Different artists have different deals, and massive superstars can demand better terms, but on average, revenue sharing for music sales are in the 15% – 18% range. That is, the artist receives only 15-18% of the wholesale payments the record label receives from sales. In real dollars, for a $1 download, Apple keeps $0.30, pays $0.70 to the label and the label pays $0.10 – $0.13 to the artist. That is a shockingly low amount and helps explain why artists often feel bitter about digital music sales. If retailers only keep 30%, why do the record labels keep more than 80% of the money they receive?

Traditionally, they claimed they served an invaluable role in the creation of music. They advanced money to the artists to live, they paid for studio time, they guided the recording process and helped select material, they manufactured the records and CDs, they shipped them in their trucks to their distribution facilities and then to the retailers. They also paid for music videos and marketing activities. If the labels needed 80% share to cover all of these costs, that might make some sense. Except in record deals, the artist is actually billed for most of these costs and has to repay them (“recoup”) by allowing the record label to withhold royalties until their advance and many of these costs are recouped. Interestingly, the overwhelming majority of these activities are not needed in the digital age (trucks, manufacturing) or cost a whole lot less to perform (electronic distribution).

In the digital world, many artists have successfully argued that digital services are being licensed by labels and thus the licensed royalty amount should apply. Again, this is negotiable, but generally is about a 50%/50% split. That is, half of the royalties collected by the labels get paid out to the artists, subject to deductions and recouping of costs. In the previous iTunes download example, the artist would receive about $0.35 for every $0.99 download sold.

In book publishing, for eBooks, many book publishers pay out about 25% of royalties they receive directly to the author and pay out about 5% – 15% of the retail price (or about 25% – 30% of the amount the publisher receives) for physical book sales.

In their most recent financial statements, Warner Music Group indicates that they are paying out to artists about 52% of the revenue they collect, far less than Apple, Amazon and Spotify pay to record labels and book publishers. In the case of book publisher John Wiley & Sons, they pay out to authors only about 29% of the revenue they collect, keeping 71% for themselves.

If retailers “build their business on the backs of the creators,” so too do the record labels and book publishers. Are they entitled to the majority of profits of every sale? Are they even any good at the marketing skills required to excel in the digital age? With audience proving grounds like Kickstarter and IndieGogo, how much creative direction and marketing does an artist need in this new world? It’s time not just to revisit the very purpose of these legacy middlemen, but also to re-examine the amount of money they take for their services.

 

 

 

Source: http://www.pakman.com

Dollar Shave Club and the Modern Brands

Dollar Shave Club just celebrated its second birthday. In two short years, this modern men’s lifestyle company has captured about 9% of the U.S. men’s razor cartridge market, according to BGP Group. (This is a measure of market share by units.) It’s a remarkable feat for a young company in a very short amount of time and it shows how dramatically industries can be transformed by new entrants who reimagine a market an entirely different way than how incumbents think.

In the case of consumer packaged goods, most are manufactured by CPG behemoths who rely chiefly on two aging mechanisms for building consumer awareness: broadcast marketing and physical retail shelf-space. Dollar Shave Club, and similar modern lifestyle brands like Warby Parker and Bonobos, view these dependencies as a disadvantage and have turned the model on its head. Broadcast marketing, in the age of social media, looks as out of touch to digital natives as President George H. W. Bush looked to us when he was surprised by a supermarket price scanner . Now, brands are built by having direct conversations with your customers, not shouting at them, engaging them to provide real time feedback on your products and services and enlisting them to vouch for their satisfaction with your brand. Brands are now built by your customers, not announced to them. And because of this, product discovery is shifting away from physical shelves into the social streams we all follow. If your brand does not occupy meaningful share in the minds of your customers, it won’t move through the streams and allow influencers to introduce you to new customers.

Social marketing done correctly requires far less marketing spend in aggregate than broadcast marketing. This means brands built with the economic firepower of $100M+ traditional marketing campaigns end up pricing their products higher to cover their required marketing spend. This is why you see the modern brands able to offer their products at lower prices than the incumbents, creating a value gap in the minds of customers.

Traditional CPG has built big walls around physical retail distribution. They have leverage over the decisions physical retailers make as to which products to stock on shelves. But modern brands are born on the internet and sell directly to their customers, initially bypassing physical retailers, sometimes forever. They get to know their customers, they speak with them, they use social data to understand their influence and their habits. In short, they are hyper-informed as to who their customers are and what they want, and they have an easier time finding new ones. With so much of commerce moving online (14% of US holiday season sales were online in December 2013), customers prefer the convenience of direct-to-you product delivery and the low-friction of mobile commerce. Traditional CPG, like other industries who sell through complex multi-layer distribution, must allow for healthy distribution and retail markups and don’t get to know their customers. They are slower to learn when preferences shift or to react to the moves of competitors.

All of these differences add up to advantages for the modern brands built on the internet — price advantages, information advantages and most importantly, higher customer loyalty. Dollar Shave Club has received envious net promoter scores and, for the subscription part of the business, has extraordinarily low churn rates. About half of all of their new customers are added organically and not through paid marketing. Their products cost less and provide more value than the legacy brands. Legacy brands often cannot respond to these threats effectively. They can’t undercut their own retail partners on price, they can’t sell directly in any real volume, and most importantly, they don’t hold an authentic place in customers’ minds, so they tend not to have a strong place in the social streams. Their customers are not their partners.

Once established firmly online, modern brands do move offline. But you are seeing them do so in inventive ways. They tend not to just sell their products into legacy physical retail, they work to re-invent physical retail with their own branded presence (Apple Stores are the high water mark here, and Warby Parker has made some important innovations too). They do often expand to traditional ad formats like TV and radio, but they do it in a highly quantified and targeted way, with a holistic view of a customer across every channel and touch-point, able to see the online influence of a customer who hears a radio ad in Dallas and how many social connections of that person ended up visiting the mobile site of the brand itself.

Dollar Shave Club, like some of the modern brands in their cohort, has grand ambitions to build a multi-billion dollar lifestyle brand, in partnership with its customers. They have expanded into content such as podcasts and the hysterical “Bathroom Minutes” as a way to be even more present in their customers’ lives. They are launching many more products over the coming months to offer great value across many product categories to their customers (often in response to customers begging them to do so). Their growth is accelerating and they see a clear path to capturing double-digital market share in each of the product categories they enter. With more than one million paying subscribers and a fresh $50 million of new capital, they have grand designs on building a better bathroom. I am honored to be along for the ride and to have a front row seat.

Source: http://www.pakman.com

A Very Cool Thing I Learned About My Dad

Every so often a family member does something significant that makes you really proud. That happened to me this week when I learned about the full details of the role my Dad played in trying to prevent regulatory failure by the New York Federal Reserve in a pretty astonishing story that was uncovered by Pulitzer Prize-winning reporter Jake Bernstein at ProPublica and This American Life and covered subsequently by Michael Lewis on Bloomberg and by the Washington Post.

The story involves a former employee of the New York Federal Reserve named Carmen Segarra who was fired for refusing to back down from her conclusion that Goldman Sachs fell short of regulatory requirements for dealing with certain conflicts of interest. Sensing that she was working in an overly deferential regulatory system that would reject her conclusions, she secretly recorded meetings that supported her case.

The most notable smoking gun quotes were from a Goldman employee who said that “once clients are wealthy enough, certain consumer laws don’t apply to them” and from a fellow Fed regulator who responded to Segarra’s surprise at this statement by saying “you didn’t hear that.”

The background for this story is that in 2009, the head of the New York Federal Reserve asked my father, David Beim, a Professor at Columbia Business School, to write an internal report on how the Fed could have missed all the incredibly risky behavior at investment banks that helped cause the 2008 financial crisis.

After dozens of interviews, he came to a conclusion that surprised him. He expected to find a failure of financial analysis, but what he found instead was a cultural failure. The NY Fed had become overly risk averse, and its employees kept their heads down, prioritized peaceful coexistence over challenging conversations and allowed institutional consensus to weaken their findings.

His report suggested a path forward, including recommendations to find more independently-minded employees and to create a culture that would enable them to speak freely, come to uncomfortable conclusions and let the truth bubble up. The Fed sought to take his advice after receiving the report and went on a hiring spree to find more outspoken people like Carmen Segarra, although as suggested by subsequent events, many cultural problems remained.

The report had been kept secret until it was released in legal proceedings relating to Carmen Segarra’s departure from the Fed. Now it is out in the open for all to read. It is, as Michael Lewis says, an extraordinary document.

What impressed me was not only that my Dad hit upon one of the core uncomfortable truths that helped create the financial crisis, but that he did so in a thoughtful, unafraid manner and refused to bend even when the Fed tried to get him to modify his report so they wouldn’t look so bad. Pressured by senior Fed officials to remove a quotation from someone he had interviewed that “regulatory capture” set in very quickly after new employees joined, he refused to do so. This was a core failure of a core institution in the U.S. financial system, and he did not want to let politics interfere with the truth.

Courage, thoughtfulness, honesty and unwavering integrity are things I’ve always admired in my Dad. If the majority of financial managers and regulators on Wall Street were made of similar material, I honestly don’t think we would have had a financial crisis in the first place.

(My Dad recently joined Twitter. You can find him @dobeim.)  #BeimReport

Source: http://www.nickbeim.com

Cyber crime wins, CEOs lose

In a world of escalating cyber crime, heads are on the chopping block and its getting bloody. “Uneasy lies the head that wears a crown” is more true than ever for business leaders and CEOs. When Target retail suffered one of the largest cyber security breaches on record—resulting in 40+ million credit cards compromised—the Target CEO was fired after 35 years with the company. The Home Depot breach appears to be on track to have even higher losses (2,200+ stores with 56 million credit cards compromised). Outcries on social media are exerting public pressure to fire the mega retailer’s CEO and CISO (Chief Information Security Officer). Meanwhile, JP Morgan Chase acknowledged that its quarter of a billion dollar IT security spend for FY2014 was insufficient to protect the firm from a recent cyber breach.

woman-crown

What do all these recent headlines have in common? Large US-based companies with millions of customers’ credit cards on file are being successfully breached by cyber criminals. And the companies’ leaders have plenty to lose including their own jobs.

The consensus view among IT security professionals is that every organization has been compromised or breached to some extent, whether they know it now or discover it later. It’s the new reality. Here is a list of the top 10 “publicly known” security breaches in retail with # of customers affected by credit card theft:

Retailer Date # of impacted accounts Case description
TJX companies Jan 2007 90 million Partial compromise of payment processing systems
The Home Depot Apr 2014 56 million Point of Sales system compromise across 2,200+ stores
CVS Caremark Jun 2005 50 million Security flaw in loyalty card service exposes sensitive purchase data
Target Nov 2013 40 & 70 million Two breaches of 40M credit cards and 70M customers financial data
Barnes & Noble Aug 2008 40 million Specific retail stores were compromised to obtain credit card info
Sony Computer May 2011 25 million Stolen customer account information from an outdated database
Zappos (Amazon) Jan 2012 24 million Customer name, email, address, last four digits of credit card number
Deviantart Dec 2010 13 million Entire database of customer accounts hacked and stolen
Dangdang (China) Dec 2011 12 million E-Commerce customer account information compromised
BJ’s Wholesale Mar 2004 8 million Hackers charged fraudulent transactions against specific customers account

The above list of breaches is staggering, and this is only a narrow subset of breaches focused on POS within the retail vertical that have been publicly disclosed. If we extend the view to other industries and include data and intellectual property (IP) theft, the number of customers with breaches increases by an order of magnitude.

My view is that it’s unfair to assume that all of these companies’ IT security protection was simply full of holes due to negligence or not following best practices. I believe most IT teams did what they could within the confides of their roles within these companies. Despite a measured increase in IT security spending ($76.9B USD annual spend in security products and services by 2015 — Gartner) over the past 10 years, cyber security protection has gotten worse for businesses in almost every measurable category.  The budgets have increased but I would argue cyber security remains relegated to IT departments as one of many challenges they must tackle.

One question that the Target incident raises: When your organization is hacked and customer data compromised, should our response as shareholders be to fire the CEO—even as we acknowledge that almost every organization is compromised to some extent? Should the CEO be looking to fire her CISO and head of IT because it happened on their watch?

Like most complex questions, I think the answer really depends on the situation.

Perhaps Target’s CEO and his cadre of reports were negligent, particularly with subcontracted employees maintaining the store’s HVAC (heating, ventilation and air conditioning) systems. Those employees checked email unknowingly laced with malware and gave up their credentials for managing an internal HVAC system. This action set in motion the initial breach that migrated to Target’s POS (point of sales) systems.

Here is my favorite depiction of the anatomy and workflow of the Target breach (kudos @ChrisPoulin):

targetbreachworkflow

SOURCE: http://securityintelligence.com/target-breach-protect-against-similar-attacks-retailers/

This is not easy to understand due to the complex nature of the systems under attack. The stakes are high for cyber security. Business owners are being held accountable when companies lose their customers’ financial data and trust. Firing CEOs is simply a wake-up call.

Risk management needs an overhaul when it comes to incentives. Overall, we have a lots of innovation coming from the Next Gen [fill in the blank] (pick any: anti-X, DLP, endpoint protection, firewall, IDS, IPS, proxies, SIEM, etc) funded heavily by venture capital firms. Examples of a few Venrock investments: CloudFlare provides DDoS protection as a service to even the smallest companies around the world and its recent release of Keyless SSL has the potential to be game-changing for Internet encryption. Shape Security brings a new class of Bot Firewall for web application protection. VeloCloud has created the first Cloud-delivered WAN that includes branch firewall and VPN encryption as a service.  I think it’s critical to continue to fuel these types of security technology innovations.

However, where are the offerings that change business leaders’ fundamental motivations?

In the past, most business leaders viewed cyber breaches as being akin to shark and bear attacks: scary but relatively rare occurrences that happened out in the wild somewhere. Today, cyber attacks are becoming so commonplace that they’re considered more like auto accidents or flooding: events that happen all the time and range from minor to career/life-ending. Few of us would want to build our home in a known flood zone (high risk undertaking). None of us drive our cars without being licensed (third-party assessment) and insured (accident protection). It’s time to extend that same attitude to ‘driving’ a business.

Cyber insurance has remained a fairly niche industry since its inception in 1997. But the past two years has seen a dramatic rise in cyber insurance products and underwriting. This change offers the opportunity to shift cyber risk management decisions to business executives, not just IT departments, with the incentive being to lower premium costs and increase coverage breadth. Having this deeper motivation for financial risk/reward, while simultaneously strengthening IT security, is a useful tool. When applied properly, cyber insurance expenditures and the continuous risk assessment rating to gauge coverage can force cyber security to stay forefront in the mind of CEOs and business leaders.

Bottom line: Whether it’s fair or not, CEOs are being held accountable for cyber incidents. Business owners generally operate at a disadvantage compared to their adversaries. Cyber criminals are highly motivated by a financial risk/reward model that tilts in their favor. To help turn the tide and reverse our losing trend in cyber security, let’s arm the good guys with a better risk/reward model of their own. Cyber security should be a business initiative that CEOs can understand and own, instead of treating as one of many IT challenges. Promoting continuous security improvements motivated by meaningful financial incentives for cyber insurance coverage/pricing is a step in the right direction.

The post Cyber crime wins, CEOs lose appeared first on Doug Dooley.

Source: http://www.dougdooley.com

We Are Not All the Same, So Why Should Our Incentives Be The Same?

We are not all the same. Yet health plans and employers seem to think so. They keep designing benefits programs and health plans in a one-size-fits-all approach. What each of us can do to be healthier and reduce healthcare costs for ourselves and our employers or health plans is different. So why is it that almost all employers and health plans offer exactly the same incentives to all people to be healthier and reduce costs? This makes no sense.

Today, I am very excited to announce our investment in Jiff, a healthcare IT company that personalizes incentives for people so we are rewarded for doing what makes sense for us as individuals to be healthier and save healthcare costs. Moreover, Jiff delivers incentives to people through the most engaging web and mobile software products we have ever seen in healthcare. By engaging more people through personalized incentives, employees, employers, and health plans all achieve large savings and people will be healthier. Jiff does this by connecting people to the fast growing ecosystem of tools, products, and services used by employers and health plans through their platform, with more choices. In addition, Jiff has built the most engaging activity based challenge on the market today that works with every type of fitness tracker and device.

It’s no secret that we at Venrock are very involved in this sector and have high hopes for the capacity for technology to fix healthcare, so we are thrilled to add Jiff to the family. We see many synergies with Jiff and our existing portfolio. As an investment, Jiff is consistent with our strategy of investing in companies that help employers get more value for their healthcare expenses. We are also optimistic that more employers will use Jiff to take advantage of the 50% increase in economic incentives that employers can offer workers to participate in wellness programs as part of the Affordable Care Act.

Finally, at Venrock, we back great teams. Founders, James Currier, Stan Chudnovsky, and CEO Derek Newell have built a world-class team who will continue to innovate in ways that will make Jiff exceptional. We cannot wait to help Jiff grow faster, achieve more, and become our next great healthcare IT company!


Source: http://bobkocher.org

Venrock 7

With our fundraising complete for Venrock 7, Bryan Roberts and I are looking forward to putting more capital to work in the healthcare IT space. We believe now is the time for our clunky and expensive healthcare system to be reimagined and we’re seeing some of the most talented entrepreneurs flock to this sector, bringing much needed creativity, brain power and passion to address this massive challenge.

Finally, this market is getting serious about attacking the 30% of healthcare spending that is wasteful and unwarranted, providing transparency around cost and quality, and improving patient experiences so hospitals can stop duking it out with cable TV and airlines for the worst customer satisfaction. Now that the Affordable Care Act is no longer a politically uncertainty – we can get on with helping the market respond to significant incentives changes. Incentive changes like Medicare’s bundled payments in 2015, expansion of the ACO program, stage 3 of meaningful use, the employer mandate, and the Cadillac Tax in 2018. Furthermore, the longstanding opportunities to attack negative labor productivity across the sector, a payment system that even Rube-Goldberg could not have imagined, and IT systems designed in the 1980s, all present tremendous opportunity for entrepreneurs.

At the same time, the adoption of narrower provider networks among consumers on public and private exchanges, availability of information to enable shopping by patients, and greater cost sharing, will make the commercial market more competitive. As this happens, large employers and commercially insured individuals will soon realize that they are the high margin customers for healthcare providers and suppliers. The days of unmanaged spending to hospitals and doctors and uncertainty around value for money will be over. All of the approaches used by employers to manage non-healthcare spending categories will be ripe for translation by entrepreneurs to healthcare.

Venrock has a long history in this space that began in the late 1990’s with companies like athenahealth, which is a $5 billion company today. In the following decade, we invested in RelayHealth, Vocera and Castlight Health, among others. Today we have the pleasure of working with some amazing entrepreneurs who want to make healthcare better. These companies are helping give everyone “insider” access to top specialists in the country (Grand Rounds), giving consumers mobile access to excellent doctors to resolve everyday issues (Doctor on Demand), and our newest investment (Aledade) is helping physicians transition to the ACO model so they can spend more time with their patients delivering better outcomes at lower cost.

But there’s so much more to do. We want to partner with the next generation of Todd Parks’, Jonathan Bushs’, and Gio Collelas’ to make companies that, at first, may seem crazy and a few years later seem common sensical. As this happens, many more billion-dollar successes will be created and value will be delivered to all of us through better healthcare sooner.


Source: http://bobkocher.org

Venrock 7

My partners and I are thrilled to continue collaborating with fantastic entrepreneurs to help build enduring, iconic and meaningful companies. Last week, we completed the fundraising of Venrock 7, a $450M fund focused on disruptive early-stage tech and multi-stage healthcare companies. For many VCs, the process of raising a new fund brings a helpful opportunity for self-reflection — a chance to take stock of the world, the disruptive technical forces likely to bring change and a candid assessment of one’s abilities to thrive in this environment. While we are always observing the world around us and making adjustments to our areas of focus and investment strategies, every four years or so, we too go through a rigorous process of prophesy and self-evaluation. Like an entrepreneur presenting their company to a VC, we pressure test our strategy with LPs during the process of raising a new fund. We came away with some exciting observations about both ourselves and the world. I am pleased our LPs share our view of our abilities and have entrusted us with the resources necessary to help build some great companies.

At Venrock, preeminent among all of our abilities is a belief in the importance of a performance-oriented and supportive culture — internally and with our entrepreneurs. We believe we will not excel as a partnership if we do not truly admire and respect each other. We are good at listening not just to the entrepreneurs with whom we meet, but to each other, distilling each other’s wisdom and foresight. And we work hard to preserve this culture internally. Each day, I feel my partners are behind me 100% and are rooting for my success, as am I for theirs. Equally important, however, is a focus on performance. We are in this business to make money for our LPs, and that can only be accomplished by investing in great companies and participating in their upside. In my almost six years at Venrock, I have never been more excited by the team surrounding me, our expertise, our intuition, but mostly our deep mutual respect and support for each other.

Areas of Excitement

There are plenty of important trends to discuss in tech. Here are just a few areas that really excite me:

New York

shutterstock_114734815New York continues its ascent and importance to the tech ecosystem. As a firm that has been in New York for decades, we have now made a deeper and even more meaningful commitment to investing in early-stage New York City tech companies. We are doubling down in New York with a larger team and have invested in some of the largest and most important tech companies here. Appnexus, Dstillery, Smartling, Dataminr and a few others not yet announced represent what we hope to find in our investments — hungry, passionate, and brilliant entrepreneurs bent on creating enduring and very large companies, sometimes creating new industries themselves. As a firm, we are confident some of the greatest tech companies of the coming decades will be founded in New York City and we hope to find them and invest in them early.

AdTech -> Marketing Cloud

funnelTraditional adtech is evolving into the SaaS marketing cloud. We continue to focus on the highest-value layers of the adtech and marketing services stack as consumer attention continues its migration away from traditional to online media. Ad-supported business models continue to dominate the internet, are performance-based and offer brands better control and measurement of their ad dollars. Our unwavering belief in the long-term primacy of ROI-driven advertising leads us to seek out the most innovative and best-performing ad products and the technologies underlying them, especially as ad formats and consumer media platforms change from desktop web to social mobile stream to app to OTT video and beyond. We focus on the emergence of best-in-class tools for marketers to help them take control of the entire marketing funnel, from prospecting to conversion to long-term customer relationship management.

Blockchain

opengraphThe emergence of the blockchain may be one of the most promising technical innovations of the last five years. We see the highly inefficient and expensive legacy payment and money transfer mechanisms being pressured by the far lower-cost methods made possible by blockchain-driven solutions. We are excited by innovations in addition to Bitcoin that can be built atop the blockchain, especially contracts, IP transfer solutions, voting solutions, ticketing, identity, and eventually distributed computing.

Video

shutterstock_129089885Readers of this blog know of my passion for the disruption of legacy media companies. I am particularly excited by the changes underway to the video ecosystem. The emergence of mobile as both a video creation and consumption device is sucking attention away from the traditional TV screen but also democratizing the creation of engaging video. I believe changes in the traditional TV value chain are well underway and I look forward to finding more companies catalyzing these changes.

And More

We continue to explore the intersections of technology with education, financial services, branded commerce, enterprise software and, of course, healthcare and healthcare IT. As always, we believe in the power of entrepreneurship to bring progress, efficiency and new capabilities to markets and are thrilled to have fresh resources to invest in great entrepreneurs embarking on exciting journeys.

 

Source: http://www.pakman.com

Venrock 7: Looking Back & Forward

Last week, we completed the fundraising for Venrock 7, a $450 million pool of capital to deploy as we partner with some terrific entrepreneurs to build great technology and healthcare companies. The establishment of a new fund feels like one part cause for proud announcement and 99 parts assumption of a decade or more of responsibility to relentlessly strive for excellence for our two crucial constituencies – the founders, entrepreneurs and teams in whom we invest and the limited partners who have invested in us.

Venrock got started, depending upon how you look at it, either 76 or 45 years ago.  In 1938, Laurance Rockefeller started doing what we would today call venture investing when he provided the initial capital for both Eastern Airlines and McDonnell Aircraft.  Laurance continued making a new investment or two each year for the next 30 years, at which time the financial construct of venture investment vehicles led to the creation of some of the iconic early venture firms, Venrock among them. “Fund” numbers in this case are a bit misleading in terms of history as, in addition to 30 years of Laurance’s checkbook, Venrock 1, whose portfolio included companies like Apple and Gilead Sciences, was an evergreen fund for the Rockefeller family that invested in new companies over a 30 year period, rather than the 3 – 4 year new investment period that is typical today.

While our core mission and values – to generate great returns by partnering with world-class talents to build businesses that change the way we live – have remained remarkably consistent, most everything else has changed over time.  The areas of compelling investment, the depth of partnership and involvement with entrepreneurs and the competitive dynamics of the ecosystem are nearly unrecognizably altered.  With each of these Darwinian “opportunities” to evolve (and the terrific legacy of Laurance Rockefeller and the early Venrock partners as the standard to which we aspire), we reinvented the Venrock culture and investment team over the last 10 years.  Change and continuous improvement will absolutely be an ongoing effort, but today we are a cohesive, “do the right thing” focused team intensely committed to our partner entrepreneurs and LP’s.

We’ve enjoyed some recent success, though certainly not as much as we hope to create in the future. We have been an investor in eight companies with $1B+ exits over the past five years and, in 2014, have had five IPOs and five M&As, including Castlight Health and Nest. The current portfolio holds promise across a variety of industry sectors – AppNexus, Ariosa Diagnostics, CloudFlare, Dollar Shave Club, Grand Rounds, and Intarcia to jinx only a few.

Going forward we are really excited about what’s happening at the intersection of healthcare and technology, as the opportunity to dramatically remake our healthcare system attracts a quality and breadth of entrepreneurial talent that is truly staggering.  We have doubled down in New York to take advantage of the increasing opportunities in the very fertile, growing New York startup ecosystem. We also see data-driven solutions bringing true value across a spectrum of use cases as massive amounts of data are finally corralled and synthesized to produce real insights and ROI. And we are always trying to keep an eye on what’s around the next corner, experimenting and exploring to latch onto the next interesting area for innovation and growth.

I like our odds, but building companies is hard work. We will catch some breaks and will definitely lose some.  We will make mistakes and do our best to minimize their repercussions – that’s a lot more productive than trying to avoid them all together.  But most of all we will devote ourselves to partnering with really passionate, visionary entrepreneurs and serve them in any way we can to give them an unfair advantage on their road to success.

 

 

Without Aereo, How Will Traditional TV Be Disrupted?

After yesterday’s Supreme Court Decision
against Aereo, will traditional TV be disrupted?

The First Phase of Disruption Already Started
There has been a major shift away from appointment TV to on-demand viewing, beginning with the DVR, followed by Netflix, and now partially fulfilled by hundreds of OTT on-demand apps, from HBOGO to Crunchyroll. The cable networks, of course, only make their programming available OTT if you authenticate with your cable log-in, preserving MVPD economics. So the only part of the TV ecosystem feeling pressure from this trend is commercial advertising, since, with a few exceptions, the majority of on-demand viewing is commercial free. But this shift to on-demand insures that our kids fully expect all video programming to be portable and on-demand.

Will there be a cheaper cable bundle?
With the end of Aereo, it is unlikely we will see bundled economics of cable TV programming disrupted by a tech company outsider. The only way to offer traditional TV programming over the internet will be to license it from its creators or distributors. Those content owners set rates in such a way as to preserve traditional cable bundle economics. Sure, Apple, Google or Amazon could become an MVPD, but they would be unlikely to offer a cheaper or smaller bundle.

There is real pressure on the bundle, however. Remember, cable TV is really a bundle of bundles. If an MVPD wants ESPN, they must also license and pay for ESPN2, ESPN3, ESPNNews, etc. These mini bundles force MVPDs to pay for more channels than they may otherwise want and in turn must charge consumers more. But they have little choice. Even if you wanted to assemble a smaller, less-expensive bundle of programming, it is made nearly impossible by the imposition of these mini-bundles. And the costs of these mini bundles have been rising, which has led Comcast to buy NBC, Comcast to buy Time-Warner Cable, and now AT&T to buy DirecTV, all as attempts to create leverage against rising mini-bundle costs. This upward price pressure is creating a real problem, since the number of cable subs is now falling in this country. Rising rates, falling subs.

It is unlikely tech companies will be able to meaningfully change these core economics. For this reason, I believe the core disruptive force acting on traditional TV is coming from outside of the TV ecosystem. It is coming in the form of alternate programming being consumed largely by the youngest demographics. I’m talking about YouTube, Twitch.TV and many smaller video companies stealing kids’ time away from the tube.

The Second Phase
YouTube, for many years, was scoffed at by the traditional TV content owners as lacking in quality. But my eleven year old today watches 90% of his video programming on YouTube. CaptainSparkles and Crazy Russian Hacker are true celebrities to him, as big as Kevin Spacey is to me. With more than 6 billion hours of video watched each month, YouTube today reaches more people than any cable network and, even among adults 18-34, they are bigger than any cable network. Their growth rate continues unabated and in short order, YouTube may one day be bigger than all of traditional TV. By buying Twitch, they cement themselves as the overwhelming largest platform for video game content, one of the two most popular content types among kids. And newer entrants like Livestream and YouNow are building engaged audiences with long tail programming.

This view that TV’s competition comes from the bottom is not a new one. (Hunter Walk and I discussed this in this post.) What is new is the widespread shift to mobile devices. As smartphones hit scale, we carry with us both a video creation and consumption device at all times. The real-time web collides with the mobile video web and a new genre of video programming emerges, somewhere between broadcast and messaging. These new personal video formats will steal even more video viewership away from TV, particularly among youth. So if younger kids grow up consuming video away from TV, and TV’s response is continued rising prices of bigger channel bundles, something has to break.

Image credit: Denys Prykhodov / Shutterstock.com

Source: http://www.pakman.com

Cloud networking beyond SDN and NFV

New innovations in networking are being triggered because of at least four broad-based macro trends:

  1. Cloud: Growth of business-critical applications in the cloud (SaaS, PaaS, IaaS)
  2. Mobility: More branch offices and mobile workers using a variety of devices
  3. Security: IT administrators losing visibility and policy control over their networks
  4. Speed: Employee reliance on faster access to apps with lower latency and higher bandwidth

Before we dive into these issues, let’s first agree on some basic terminology:

  • Cloud networking is a new way to market distributed enterprise networks. It delivers enterprise-class network capabilities around the globe via a highly resilient, multi-tenant application that requires no capital investment in networking equipment. Unlike traditional hardware-based legacy solutions, cloud networking is extremely simple to implement, enabling businesses to deploy remote locations in minutes and operate their distributed networks via a cloud-based service, while maintaining centralized control and network visibility. These services are subscription-based.
  • Software-defined networking (SDN) separates the network’s control (brains) and forwarding (muscle) planes, creating one of the most disruptive technologies to hit networking in decades. SDN originated with researchers in campus networks such as UC Berkeley and Stanford with their approach to open standards like OpenFlow. SDN gained further momentum with commercial adoption in cloud data centers such as Google.
  • Network functions Virtualization (NFV) offers a new way to design, deploy and manage networking services. NFV decouples the network functions, such as network address translation (NAT), firewalling, intrusion detection, domain name service (DNS), caching, etc., from proprietary hardware appliances, so they can run in software. NFV’s origins trace to a consortium of service providers.

Lately, SDN and NFV have generated tremendous buzz in the networking industry. However, if you ask customers how much they have budgeted for SDN or NFV, you will generally be greeted with a puzzled look. I believe the “hype cycle” around both SDN and NFV has been driven mostly by vendors and less so by customers. Don’t get me wrong; I believe in several of the key benefits promised by SDN and NFV, such as:

  • Abstraction between the control-plane and the data-plane
  • Faster delivery of new features in the network through the use of virtualized services
  • Leveraging low-cost, commodity hardware with more open, programmable software

Still, there are major gaps between “marketecture” diagrams often describing SDN/NFV potential capabilities and real solutions that solve specific problems for customers. When I talk to Enterprise customers about what areas of their IT budgets they are growing, the most common answers I get across all verticals and organizational sizes are: (1) cloud services (2) cyber security, and (3) mobile applications. Further, when I ask that same IT audience what areas of their budget they are shrinking to make room for growth, the common areas include: (a) legacy software with low usage and (b) maintenance contracts on big-iron hardware. Customers vote with their wallets and their wallets are telling us where they see the biggest IT opportunities to save money, protect their company data, and increase overall productivity.

The most innovative customers, the ones who have considerable experience with cloud services, have highlighted one of their biggest frustrations with legacy networking choices: the sheer number of hardware-based appliances required to add new capabilities to their networks. Customers are frustrated with the stacks of branch office gear they are asked to purchase, configure and maintain from legacy/incumbent vendors like Cisco, Juniper, Riverbed, and BlueCoat just to get a fast, reliable and secure network. For example, here is a list of commonly purchased branch office networking appliances (initial capex):

  • Branch router: $1k-$5k USD
  • Branch firewall/VPN: $1k-$10k USD
  • Branch web proxy: $1k-$10k USD
  • Branch WAN optimization: $2k-$25k USD

The combination of the capex and opex in the branch drives the TCO for these solutions well above where customers can sustain. Unfortunately, avoiding these costly appliance purchases has not left good alternatives. In any distributed Enterprise with multiple branch offices, IT admins typically have two primary options for their network designs:

Options 1: Full private back-haul
Disadvantages of this option include:

  • High capex and opex with multiple networking appliances and expensive private WAN links (complex, costly)
  • Inefficient and often congested network path to maintain visibility and policy control by hair-pinning all traffic back to corporate HQ (poor performance)

diagram legendoption 1 full back haul

Option 2: Private vs. Internet split
Disadvantages of this option include:

  • IT loses visibility and policy control in the branch for Internet/cloud destined traffic (poor security)
  • Unpredictable Internet performance and reliability for cloud-hosted applications (poor reliability)
  • Different systems for HQ/datacenter vs SaaS/Internet cloud applications (higher opex, complexity, costly)

diagram legendoption 2 split traffic

A new option:
New cloud networking services are coming to market soon that will give businesses a third option better suited to the macro trends mentioned earlier of: cloud, mobility, security, and speed. This upcoming third option overcomes the disadvantages of the first two options while delivering several important benefits, such as:

  • Delivers Enterprise networking services (virtualized) from the cloud
  • Transforms consumer-grade broadband into business-grade reliable WAN connectivity
  • Simplifies the network and increases visibility and policy control for IT administrators
  • Improves application performance for both SaaS and DC-hosted apps
  • Reduces overall costs by eliminating hardware and private WAN expenses

Venrock, NEA and The Fabric have led the investment of $21M USD into VeloCloud, which is pioneering this third option called Cloud-delivered WAN to help mid-range Enterprises that need a new approach to their data center-to-branch office connectivity.

We encourage you to stay tuned for more details regarding what VeloCloud has built, early customer reactions, and how you can try it for your environment.

velocloud

More to come…

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Source: http://www.dougdooley.com