Subscription hell

Another week, another paywall. This time, it’s Bloomberg, which announced that it would be adding a comprehensive paywall to its news service and television channel (except TicToc, its media partnership with Twitter). A paywall was hardly a surprise, but what was surprising was the price: the standard subscription is $35 a month (up from $0 a month), or $40 a month including access to online and print editions of Businessweek.

And people say avocado toast is expensive.

That’s not the only subscription coming up though. Now Facebook is considering adding an ad-free subscription option. These rumors have come and gone in the past, with no sign of change in the company’s resolute focus on advertising as its core business model. Post-Cambridge Analytica and post-GDPR though, it seems the company’s position is more malleable, and could be following the plan laid out by my colleague Josh Constine recently. He pegged the potential price at $11 a month, given the company’s revenue per user.

I’m an emphatic champion of subscription models, particularly in media. Subscriptions align incentives in a way that advertising can never do, while also avoiding the morass of privacy and ethics that plague ad targeting. Subscription revenues are also more reliable than ad dollars, making it easier to budget and improve operational efficiency for an organization.

Incentive alignment is one thing, and my wallet is another. All of these subscriptions are starting to add up. These days, my media subscriptions are hovering around $80 a month, and I don’t even have TV. Storage costs for Google, Apple, and Dropbox are another $13 a month. Cable and cell service are another $200 a month combined. Software subscriptions are probably about $20 a month (although so many are annualized its hard to keep track of them). Amazon Prime and a few others total in around $25 a month.

Worse, subscriptions aren’t getting any cheaper. Amazon Prime just increased its price to $120 a year, Netflix increased its popular middle-tier plan to $11 a month late last year, and YouTube increased its TV pricing to $40 a month last month. Add in new paywalls, and the burden of subscriptions is rising far faster than consumer incomes.

I’m frustrated with this hell. I’m frustrated that the web’s promise of instant and free access to the world’s information appears to be dying. I’m frustrated that subscription usually means just putting formerly free content behind a paywall. I’m frustrated that the price for subscriptions seems wildly high compared to the ad dollars that the fees substitute for. And I’m frustrated that subscription pricing rarely seems to account for other subscriptions I have, even when content libraries are similar.

Subscriptions can be a great tool, but everyone seems to be doing them wrong. We need to transform our thinking here if we are to move on from the manacles of the ad networks.

Before we dive in though, let’s be clear: the web needs a business model. We didn’t need paywalls on the early web because we focused on plain text from other users. Plain text is easier to produce, lowering the friction for people to contribute, and it’s also cheaper to store and transmit, lowering the cost of bandwidth.

Today’s consumers though have significantly higher standards than the original users of the web. Consumers want immersive experiences, well-designed pages with fonts, graphics, photos, and videos coming together into a compelling format. That “quality” costs enormous sums in engineering and design talent, not to mention massively increasing bandwidth and storage costs.

Take my colleague Connie Loizos’ article from yesterday reporting on a new venture fund. The text itself is about 3.5 kilobytes uncompressed, but the total payload of the page if nothing is cached is more than 10 MB, or more than 3000x the data usage of the actual text itself. This pattern has become so common that it has been called the website obesity crisis. Yet, all of our research shows people want high-definition images with their stories, instant loading of articles on the site, and interactivity. Those features have to be paid somehow, begetting us the advertising and subscription models we see today.

The other cost is content production itself. Volunteers just haven’t produced the information we are seeking. Wikipedia is an extraordinary resource, but its depth falters when we start looking for information about our local communities, or news, or individuals who aren’t famous. The reality is that information gathering is hard work, and in a capitalist system, we need to compensate people to do it. My colleagues and I are passionate about startups and technology, but we need to eat to publish.

While an open, free, and democratized web is ideal, these two challenges demonstrate that a business model had to be attached to make it function. Advertising is one such model, with massive privacy violations required to optimize it. The other approach is charging for access.

Unfortunately, subscription seems to be an area filled with product engineers and marketers led by brain-dead executives. The default choice of Bloomberg this week and so many other publications is to simply put formerly free content behind a paywall. No consumer wants to pay for something they formerly got for free, and yet we repeatedly see examples of subscriptions designed this way.

I don’t know when media started hiring IRS accountants, but subscriptions should be seen as an upgrade, not a tax. A subscription should provide new features, content, and capabilities that didn’t exist before while maintaining the former product that consumers have enjoyed for years.

Take MoviePass for instance. Consumers can continue to watch movies as they always have in the past, but now they have a new subscription option to watch potentially more movies for a set price. Among my friends, MoviePass has completely changed the way they think of films. Instead of just seeing one blockbuster every month, they are heading to an art house film because “we’ve essentially already paid for it, so why not try it?” The pricing is clearly too cheap, but that shouldn’t distract from a product that offered a completely new experience from a subscription.

The hell is even worse though. We not only get paywalls where none existed before, but the prices of those subscriptions are always vastly more expensive than consumers ever wanted. It’s not just Bloomberg and media — it’s software too. I used to write everything in Ulysses, a syncing Markdown editor for OS X and iOS. I paid $70 to buy the apps, but then the company switched to a $40 a year annual subscription, and as the dozens of angry reviews and comments illustrate, that price is vastly out of proportion from the cost of providing the software (which I might add, is entirely hosted on iCloud infrastructure).

For product marketers, the default mentality is to extract a lot of value from the 1% of readers or users that are going to convert to paid. Subscriptions are always positioned as all-or-nothing, with limited metering or tiering, to try to force the conversion. To my mind though, the question is not how to get 1% of readers to pay an exorbitant price, but how to get say 20% of your readers to pay you a cheaper price. It’s not about exclusion, but about participation.

One way we could fix that situation would be to allow subscriptions to combine together more cheaply. We are starting to see this too: Spotify, Hulu, and Scribd appear to be investigating a deal in which consumers can get a joint subscription from these services for a lower rate. Setapp is a set of more than one hundred OS X apps that come bundled for about $10 a month.

I’d love to see more of these partnerships, because they are much more fair to the consumer and ultimately allow smaller subscription companies to compete with the likes of Google, Amazon, Apple, and others. Cross-marketing lowers subscriber acquisition costs, and those savings should ultimately stream down to the consumer.

Subscription hell is real, but that doesn’t mean the business model is flawed. Rather, we need to completely transform our thinking around these models, including the marketing behind them and the features that they offer. We also need to consider consumers and their wallets more holistically, since no one buys a subscription in a vacuum. For too long, paywall playbooks have just been copied rather than innovated upon. It’s time for product leaders to step up and build a better future.


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The formula behind San Francisco’s startup success

Why has San Francisco’s startup scene generated so many hugely valuable companies over the past decade?

That’s the question we asked over the past few weeks while analyzing San Francisco startup funding, exit, and unicorn creation data. After all, it’s not as if founders of Uber, Airbnb, Lyft, Dropbox and Twitter had to get office space within a couple of miles of each other.

We hadn’t thought our data-centric approach would yield a clear recipe for success. San Francisco private and newly public unicorns are a diverse bunch, numbering more than 30, in areas ranging from ridesharing to online lending. Surely the path to billion-plus valuations would be equally varied.

But surprisingly, many of their secrets to success seem formulaic. The most valuable San Francisco companies to arise in the era of the smartphone have a number of shared traits, including a willingness and ability to post massive, sustained losses; high-powered investors; and a preponderance of easy-to-explain business models.

No, it’s not a recipe that’s likely replicable without talent, drive, connections and timing. But if you’ve got those ingredients, following the principles below might provide a good shot at unicorn status.

First you conquer, then you earn

Losing money is not a bug. It’s a feature.

First, lose money until you’ve left your rivals in the dust. This is the most important rule. It is the collective glue that holds the narratives of San Francisco startup success stories together. And while companies in other places have thrived with the same practice, arguably San Franciscans do it best.

It’s no secret that a majority of the most valuable internet and technology companies citywide lose gobs of money or post tiny profits relative to valuations. Uber, called the world’s most valuable startup, reportedly lost $4.5 billion last year. Dropbox lost more than $100 million after losing more than $200 million the year before and more than $300 million the year before that. Even Airbnb, whose model of taking a share of homestay revenues sounds like an easy recipe for returns, took nine years to post its first annual profit.

Not making money can be the ultimate competitive advantage, if you can afford it.

Industry stalwarts lose money, too. Salesforce, with a market cap of $88 billion, has posted losses for the vast majority of its operating history. Square, valued at nearly $20 billion, has never been profitable on a GAAP basis. DocuSign, the 15-year-old newly public company that dominates the e-signature space, lost more than $50 million in its last fiscal year (and more than $100 million in each of the two preceding years). Of course, these companies, like their unicorn brethren, invest heavily in growing revenues, attracting investors who value this approach.

We could go on. But the basic takeaway is this: Losing money is not a bug. It’s a feature. One might even argue that entrepreneurs in metro areas with a more fiscally restrained investment culture are missing out.

What’s also noteworthy is the propensity of so many city startups to wreak havoc on existing, profitable industries without generating big profits themselves. Craigslist, a San Francisco nonprofit, may have started the trend in the 1990s by blowing up the newspaper classified business. Today, Uber and Lyft have decimated the value of taxi medallions.

Not making money can be the ultimate competitive advantage, if you can afford it, as it prevents others from entering the space or catching up as your startup gobbles up greater and greater market share. Then, when rivals are out of the picture, it’s possible to raise prices and start focusing on operating in the black.

Raise money from investors who’ve done this before

You can’t lose money on your own. And you can’t lose any old money, either. To succeed as a San Francisco unicorn, it helps to lose money provided by one of a short list of prestigious investors who have previously backed valuable, unprofitable Northern California startups.

It’s not a mysterious list. Most of the names are well-known venture and seed investors who’ve been actively investing in local startups for many years and commonly feature on rankings like the Midas List. We’ve put together a few names here.

You might wonder why it’s so much better to lose money provided by Sequoia Capital than, say, a lower-profile but still wealthy investor. We could speculate that the following factors are at play: a firm’s reputation for selecting winning startups, a willingness of later investors to follow these VCs at higher valuations and these firms’ skill in shepherding portfolio companies through rapid growth cycles to an eventual exit.

Whatever the exact connection, the data speaks for itself. The vast majority of San Francisco’s most valuable private and recently public internet and technology companies have backing from investors on the short list, commonly beginning with early-stage rounds.

Pick a business model that relatives understand

Generally speaking, you don’t need to know a lot about semiconductor technology or networking infrastructure to explain what a high-valuation San Francisco company does. Instead, it’s more along the lines of: “They have an app for getting rides from strangers,” or “They have an app for renting rooms in your house to strangers.” It may sound strange at first, but pretty soon it’s something everyone seems to be doing.

It’s not a recipe that’s likely replicable without talent, drive, connections and timing. 

list of 32 San Francisco-based unicorns and near-unicorns is populated mostly with companies that have widely understood brands, including Pinterest, Instacart and Slack, along with Uber, Lyft and Airbnb. While there are some lesser-known enterprise software names, they’re not among the largest investment recipients.

Part of the consumer-facing, high brand recognition qualities of San Francisco startups may be tied to the decision to locate in an urban center. If you were planning to manufacture semiconductor components, for instance, you would probably set up headquarters in a less space-constrained suburban setting.

Reading between the lines of red ink

While it can be frustrating to watch a company lurch from quarter to quarter without a profit in sight, there is ample evidence the approach can be wildly successful over time.

Seattle’s Amazon is probably the poster child for this strategy. Jeff Bezos, recently declared the world’s richest man, led the company for more than a decade before reporting the first annual profit.

These days, San Francisco seems to be ground central for this company-building technique. While it’s certainly not necessary to locate here, it does seem to be the single urban location most closely associated with massively scalable, money-losing consumer-facing startups.

Perhaps it’s just one of those things that after a while becomes status quo. If you want to be a movie star, you go to Hollywood. And if you want to make it on Wall Street, you go to Wall Street. Likewise, if you want to make it by launching an industry-altering business with a good shot at a multi-billion-dollar valuation, all while losing eye-popping sums of money, then you go to San Francisco.


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UK watchdog orders Cambridge Analytica to give up data in US voter test case

Another big development in the personal data misuse saga attached to the controversial Trump campaign-linked UK-based political consultancy, Cambridge Analytica — which could lead to fresh light being shed on how the company and its multiple affiliates acquired and processed US citizens’ personal data to build profiles on millions of voters for political targeting purposes.

The UK’s data watchdog, the ICO, has today announced that it’s served an enforcement notice on Cambridge Analytica affiliate SCL Elections, under the UK’s 1998 Data Protection Act.

The company has been ordered to give up all the data it holds on one US academic within 30 days — with the ICO warning that: “Failure to do so is a criminal offence, punishable in the courts by an unlimited fine.”

The notice follows a subject access request (SAR) filed in January last year by US-based academic, David Carroll after he became suspicious about how the company was able to build psychographic profiles of US voters. And while Carroll is not a UK citizen, he discovered his personal data had been processed in the UK — so decided to bring a test case by requesting his personal data under UK law.

Carroll’s complaint, and the ICO’s decision to issue an enforcement notice in support of it, looks to have paved the way for millions of US voters to also ask Cambridge Analytica for their data (the company claimed to have up to 7,000 data points on the entire US electorate, circa 240M people — so just imagine the class action that could be filed here… ).

The Guardian reports that Cambridge Analytica had tried to dismiss Carroll’s argument by claiming he had no more rights “than a member of the Taliban sitting in a cave in the remotest corner of Afghanistan”. The ICO clearly disagrees.

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Cambridge Analytica/SCL Group responded to Carroll’s original SAR in March 2017 but he was unimpressed by the partial data they sent him — which ranked his interests on a selection of topics (including gun rights, immigration, healthcare, education and the environment) yet did not explain how the scores had been calculated.

It also listed his likely partisanship and propensity to vote in the 2016 US election — again without explaining how those predictions had been generated.

So Carroll complained to the UK’s data watchdog in September 2017 — which began sending its own letters to CA/SCL, leading to further unsatisfactory responses.

“The company’s reply refused to address the ICO’s questions and incorrectly stated Prof Caroll had no legal entitlement to it because he wasn’t a UK citizen or based in this country. The ICO reiterated this was not legally correct in a letter to SCL the following month,” the ICO writes today. “In November 2017, the company replied, denying that the ICO had any jurisdiction or that Prof Carroll was legally entitled to his data, adding that SCL did “.. not expect to be further harassed with this sort of correspondence”.”

In a strongly worded statement, information commissioner Elizabeth Denham further adds:

The company has consistently refused to co-operate with our investigation into this case and has refused to answer our specific enquiries in relation to the complainant’s personal data — what they had, where they got it from and on what legal basis they held it.

The right to request personal data that an organisation holds about you is a cornerstone right in data protection law and it is important that Professor Carroll, and other members of the public, understand what personal data Cambridge Analytica held and how they analysed it.

We are aware of recent media reports concerning Cambridge Analytica’s future but whether or not the people behind the company decide to fold their operation, a continued refusal to engage with the ICO will potentially breach an Enforcement Notice and that then becomes a criminal matter.

Since mid-March this year, Cambridge Analytica’s name (along with the names of various affiliates) has been all over headlines relating to a major Facebook data misuse scandal, after press reports revealed in granular detail how an app developer had used the social media’s platform’s 2014 API structure to extract and process large amounts of users’ personal data, passing psychometrically modeled scores on US voters to Cambridge Analytica for political targeting.

But Carroll’s curiosity about what data Cambridge Analytica might hold about him predates the scandal blowing up last month. Although journalists had actually raised questions about the company as far back as December 2015 — when the Guardian reported that the company was working for the Ted Cruz campaign, using detailed psychological profiles of voters derived from tens of millions of Facebook users’ data.

Though it was not until last month that Facebook confirmed as many as 87 million users could have had personal data misappropriated.

Carroll, who has studied the Internet ad tech industry as part of his academic work, reckons Facebook is not the sole source of the data in this case, telling the Guardian he expects to find a whole host of other companies are also implicated in this murky data economy where people’s personal information is quietly traded and passed around for highly charged political purposes — bankrolled by billionaires.

“I think we’re going to find that this goes way beyond Facebook and that all sorts of things are being inferred about us and then used for political purposes,” he told the newspaper.

Under mounting political, legal and public pressure, Cambridge Analytica claimed to be shutting down this week — but the move appears more like a rebranding exercise, as parent entity, SCL Group, maintains a sprawling network of companies and linked entities. (Such as one called Emerdata, which was founded in mid-2017 and is listed at the same address as SCL Elections, and has many of the same investors and management as Cambridge Analytica… But presumably hasn’t yet been barred from social media giants’ ad platforms, as its predecessor has.)

Closing one of the entities embroiled in the scandal could also be a tactic to impede ongoing investigations, such as the one by the ICO — as Denham’s statement alludes, by warning that any breach of the enforcement notice could lead to criminal proceedings being brought against the owners and operators of Cambridge Analytica’s parent entity.

In March ICO officials obtained a warrant to enter and search Cambridge Analytica’s London offices, removing documents and computers for examination as part of a wider, year-long investigation into the use of personal data and analytics by political campaigns, parties, social media companies and other commercial actors. And last month the watchdog said 30 organizations — including Facebook — were now part of that investigation.

The Guardian also reports that the ICO has suggested to Cambridge Analytica that if it has difficulties complying with the enforcement notice it should hand over passwords for the servers seized during the March raid on its London office – raising questions about how much data the watchdog has been able to retrieve from the seized servers.

SCL Group’s website contains no obvious contact details beyond a company LinkedIn profile — a link which appears to be defunct. But we reached out to SCL Group’s CEO Nigel Oakes, who has maintained a public LinkedIn presence, to ask if he has any response to the ICO enforcement notice.

Meanwhile Cambridge Analytica continues to use its public Twitter account to distribute a stream of rebuttals and alternative ‘facts’.


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Vine co-founder halts development of its replacement, V2

There will be no “Vine 2” — at least for now. Trying to take on the giant social networks without external funding proved too tall a task for six-second video app Vine’s co-founder Dom Hofmann. “I’ve made the very difficult decision of postponing the V2 project for an indefinite amount of time. There are several reasons for this, including a bit of ‘sequelitis’, but I’d like to explain the biggest one, which is due to financial and legal hurdles,” Hofmann wrote on the community forums he set up for V2.

Announced in late December out of his frustration regarding how Twitter neglected and eventually shut down Vine, Hofmann had since built a creative tool startup called Byte, and is still leading a virtual reality company called Interspace, but was trying to run V2 as a self-funded personal project on the side. The plan was to launch in 2018 with an app that let you record or upload 2 to 6-second looping videos and much stronger anti-harassment safety features.

But without millions in outside investment, it was an insurmountable task to develop the app, host the videos and grow the audience. While Hofmann didn’t specify, it seems Twitter wasn’t happy about him using the name V2 and an almost identical logo. “The interest has been extremely encouraging, but it has also created some roadblocks . . . The attention has also raised an issue that we might not have faced otherwise: legal fees have been overwhelming,” Hofmann wrote. We’ve asked him and Twitter if Twitter was suing or threatening legal action against Hofmann or V2.

While there’s still no ubiquitous way to share super-short videos, Instagram, Facebook, Twitter, Snapchat and YouTube are no paltry competitors. So now, Hofmann says, “We take a step back. The code and ideas still exist, but until everything else comes together, we can’t move forward. Again, this is indefinite, which means that it could take a long time. But it’s necessary.”

You can read Hofmann’s full announcement here:


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The first 3D camera built on Google VR180 tech arrives

Timed with the release of the Mirage Solo headset, Lenovo is also releasing the first camera based on Google’s 180 tech. The Lenovo Mirage Camera, which seems to be geared heavily toward YouTube creators, packs a pair of fisheye 13MP lenses positioned about eyes-distance apart, allowing for high-quality 3D vision that’s perfect for VR viewing. At $299, the camera isn’t too expensive for creators looking to experiment, but it’s a worthy question of how big that niche really is. It starts shipping today.

The camera is based on YouTube’s VR180 platform, which is aiming to basically make capturing VR live-action content a little more palatable to creators. Indeed, 360-degree cameras have certainly gotten a lot of attention, but creators haven’t really figured out what to do with them for the most part. Google’s compromise here is to simplify the medium with a camera that shoots half as much but isn’t too expensive and delivers crisp 3D 4K video.

In terms of build, the camera is very nice. It doesn’t feel like it’s overtly high quality, but it’s solid enough and, most importantly, very pocketable. Like many 360 cameras, battery life isn’t awesome at two hours, but the battery can be swapped in and out and the camera comes with a spare, which is very nice. VR180 means 180 degrees, which you will understand in photos, especially if your finger creeps to the outer edge of the top of the camera — it will invade the 180 half-dome.

Users can utilize Google’s VR180 app to preview shots and live-stream footage from the camera.

It could all be a winning solution, but the question is really whether this product is popping up a little late. Tons of YouTube creators have undoubtedly experimented with VR-focused video and have gotten tied up in the frustrations. While the number of headsets is still growing, it’s still not enough that VR viewers can sustain a channel, and while VR180 videos are visible in “magic window” mode without a headset as well on mobile and desktop, it obviously loses the 3D capability as a result, which is kind of the biggest draw.


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