On value and valuation

Over in Fast Company, Tim Beyers nicely threads quotable pearls from Cluetrain‘s four authors, including yours truly, in Twitter’s Investors Missed the Cluetrain – Here’s Why. The context of the story is continued investment in Twitter at a reported $1 billion valuation of the company. (Fast indeed.)

Now that the piece is up, I thought I’d add a few more thoughts of my own.

First, while valuation is unavoidably interesting, value is avoidably important. In other words, it doesn’t get much respect. Not if it’s not being sold.

For example, RSS (currently getting more than 3 billion results on Google). It’s extremely useful. We would hardly have blogging or online journalism without it. But Dave Winer, to his enormous credit, decided not to make RSS itself a business. Instead he decided to release it into the world so countless uses could be made of it, and countless businesses could be built on top of those uses. He made RSS open infrastructure, just as Linus Torvalds did with Linux, and countless other geeks have done with their own contributions to the virtual lumberyard of free building material we use to make the online world. Open building material is valuable beyond calculation, because it has use value rather than sale value. (Eric Raymond explains the difference here.) The leverage of use value on sale value can be very high indeed. Where would Google and Amazon be without Linux and Apache? Where would any of us be without SMTP, IMAP and other email protocols — or, for that matter, the suite of free and open protocols on which the Net itself runs?

Twitter’s creators have chosen to make it a commercial form of infrastructure. This is not a bad thing. In terms of investment valuation (especially at this point in time) it’s a smart thing. But we should not mistake Twitter itself, or even its API, for the kind of true (free and open) infrastructure that comprise the Net and the Web. Nor, for that matter, should we consider Twitter the last word in the category it pioneered and now dominates. At this point in history, Twitter soaks up nearly all the oxygen the microblogging room. Thus there is no widely adopted open infrastructure for microblogging. (Identi.ca and the OpenMicroBlogger folks have worked hard on that, but adoption so far is relatively small.)

But, given time, something will take. I’d place a bet Dave’s RSS Cloud. It’s live, or real-time. It’s open infrastructure. And, as Dave put it here, it has no fail whale. (And now TechCrunch is Cloud-enabled.)

This relates to Cluetrain in respect to what a market is, and what a market does. Markets by nature are open. They are not “your choice of captor.” Cluetrain, at least for me, was a brief against captors, a case for open marketplaces. So, while Twitter may provide means for conversation out the wazoo, it still falls short of what are, for me, more important Cluetrain ideals. I await the fulfillment of those with growing patience.

If you had told me in 1999 that the two hottest names on the Web in 2009 — Facebook and Twitter — would both be silos, I’d have been disappointed. I’d have figured that by now most folks would understand the infrastructural nature of open code, open protocols, open formats. (For more on those expectations, see Making a New World, written a few years back but still relevant as ever.)

With time comes perspective. It is helpful to note that the Web as we know it is barely old enough for high school. (The first popular browser appeared in 1995.) As an environment supporting new forms of business life — ones thriving in an environment of ubiquitous and cheap worldwide connectivity that each participant is in a position to improve — we are at a paleozoic stage in which even the innovative companies continue to follow familiar industrial age models of command and control. That’s why they trap users, customers and whole markets in walled gardens that are value-subtracted simulacra of the whole Net. In the best cases (such as Twitter’s, Facebook’s and Apple’s) they create new markets around new inventions and new ways of doing things, but at the expense of isolation for themselves and all their walled-in dependents. So, even when they embrace (though never completely) openness and other forms of goodness at the engineering level, they remain Old Skool at the corporate level where equally Old Skool investors still place their bets. And, while they speed things up in the early stages — when they are still new and original — they slow things down after their walled markets become large enough to become industrial farms, harvesting income from trapped inhabitants.

The longer that walled farming remains a prevailing business practice, the longer the Industrial Age persists in the midst of the one that succeeds it, and the farther we are from arriving at the Net’s mesozoic: it’s dinoaur age. That age will be characterized, as it was for sentient reptiles, by greater liberty for individuals and greater autonomy for families, tribes and other groups of individuals.

Many of us have long seen that liberation coming — and implicit in the nature of the Net itself. The Cluetrain Manifesto announced it in early 1999 with “we are not seats or eyeballs or end users or consumers. we are human beings and our reach exceeds your grasp. deal with it.” Chris Locke wrote that, and it galvanized the rest of us by giving voice to the liberating nature of the Net itself. Yes, the Net supports silos, but it is not itself a silo. It provides a base infrastructure for freedom, independence and empowerment. It creates wide open spaces for the social and business constructions we call markets. True, the urge by companies to build walled gardens in these wide open spaces persists undiminished. But in time companies will discover how much more value can be created by contributing to open infrastructure, and by offering original products and services based on that infrastructure, than by trapping customers in closed spaces and operating their own private marketplaces. (As, for example, Apple does with its iTunes store, and other phone makers and companies are now copying. This is very paleozoic stuff.)

We are now caught up in “social” everything. Cluetrain’s opening thesis, “markets are conversations,” is often credited for predicting, if not inaugurating, the “social web”. Overlooked in the midst, however, is what I think is a far more important thesis, coined by David Weinberger: “Hyperlinks subvert hierarchy“. Ask yourself, How well do links work in Twitter? Better question: What happens when bit.ly goes down — or out of business? URL shortening needs to be part of the Net’s infrastructure too. Today it isn’t. For more on that, look up Dave Winer and URL shortening: Dave has a history of not being listened to by Google, Twitter and other giants. But he’s right about URL shortening. And about how Twitter can help de-silo it. Single-source commercial URL shorteners are handy and all, but they weaken hyperlinks by making them vulnerable to the failure of one company, or one authority. I am sure Twitter doesn’t mean to weaken hyperlinks (but rather strengthen them, in a way), but that’s what it does by relying on a commercial silo for shortened links. Weakening hyperlinks, at least to me, makes Twitter less valuable, no matter how much investors think it’s worth on some future stock market.

Dave Winer has long advised, “Ask not what the Web can do for you, ask what you can do for the Web”. Answering that generously in the long run will result in maximum value — and valuations in alignment with a more open and value-producing future.

15 comments

  1. Brett Slatkin’s avatar

    I agree with your premise that silos are bad for the web. It’s good that people are waking up to this in the context of social networks.

    You asked, “Where would any of us be without … the suite of free and open protocols on which the Net itself runs?” This begs the question of whether or not the net could run on rssCloud.

    There are two key attributes of Internet protocols:

    1) They are free, community-driven, and unencumbered specifications.
    2) They are scalable, rigorous designs that will withstand the test of time.

    It’s important to note that the “light ping” style and loose definition of rssCloud achieve neither of these crucial requirements. I investigate why *actual* push (and potentially the PubSubHubbub protocol) are necessary for the future of the web in this article:

    http://code.google.com/p/pubsubhubbub/wiki/ComparingProtocols

    Please take a look and let me know if you have any questions!

  2. glemak’s avatar

    good post as usual doc: the problem i see w/ twitter (and its current hype derived valuation) is that it’s an accidental product/infrastructure that was not architected for the meteoric communal growth its experienced and the amazing cottage industry that has blossomed around it – it’s valuation is based on an exit strategy alone (normal for most vc’s & shallow entrepreneurs) and not a valuable long term sustainable business/product – yes dave’s rsscloud is interesting as a technological exercise but does not look sustainable when mapped against the desired simplicity of the twitter or facebook demographic, unfortunately…

  3. Rogers Cadenhead’s avatar

    “But Dave Winer, to his enormous credit, decided not to make RSS itself a business. Instead he decided to release it into the world so countless uses could be made of it, and countless businesses could be built on top of those uses.”

    Dave Winer wasn’t in a position to decide whether RSS should be an open standard or not. Ramanathan V. Guha and Dan Libby created RSS at Netscape:

    http://www.rssboard.org/rss-history

    Netscape also stood back and let others pick up RSS after it abandoned its original RSS portal. The company gets far too little credit for its role.

  4. Doc Searls’s avatar

    Rogers, thanks for the link.

    Credits where due. The Netscape folks deserve credit for creating RSS as Rich Site Summary. And Dave deserves credit for ubiquitizing it as Really Simple Syndication.

  5. Doc Searls’s avatar

    Brett, thanks unpacking distinctions between pubsubhubbub and its alternatives. I do have questions, but want to look more deeply into the whole pile before I come up with them.

    And glemak, we’ll see where it all goes.

    Meanwhile, I think we can all recognize that many forms of technological progress — including free and open infrastructure — begin as technological exercises.

  6. Jay Deragon’s avatar

    Doc, great article. Silo thinking has been the mind set of business leaders for decades. As you often say “it will take time”. The irony is that as “markets of conversations” explode innovation in thinking explodes since everyone is thinking and learning from each other.

    The walled gardens will and are coming down under the surface of efforts to control content, conversations and markets. Control is lost and most of the market has failed to recognize that control is out, always has been and always will be.

    The value rest in what we do with the technology not in the technology. The more people you “give” technology to the more opportunities to expand the market with innovative uses from which the market can learn and improve on. Just my two sense

  7. Matt Terenzio’s avatar

    While I respect all the work Brett is doing with PubSubHubbub and agree with his comparison of the protocols (great job he did there), I do disagree with his (and others) conclusion that rssCloud is not scalable.

    It just puts the load on the hub, instead of the publisher. Whether that is better or not is another worthwhile conversation.

  8. Pauly’s avatar

    I hate to sound marxist (because the only thing I detest as much as regulatorium-entrenched oligarchies is heavyhanded redistribution from producers to the unearning), but why would any of these silos ever cede their capture (and hold) business models? Wouldn’t doing so require hard work, innovation, strategically-oriented investing and a measure of luck in order to thrive (or even survive) at the expense-account- and corporate-jet-levels they’re used to? All of which are a good deal less critical (not to say unimportant) if they can retain “control”.

    I imagine an answer assumes low barriers to entry so new innovations that are more compelling offerings can bloom and surpass siloed offerings. A good example might be the transition from steam locomotives to diesel-electric in railroading. The diesel had such compelling value to the railroad customers that it was clear that the steam locomotive business would not survive. So each of the three major steam locomotive manufacturers – American Locomotive (Alco), Baldwin and Lima – tried to compete with GM’s scalable and market-tested and mass-manufacturable diesel-electric offering, which built on GE’s early century one-off innovations. Baldwin and Lima didn’t last long. Alco partnered with GE and occupied a marginally successful #2 niche until the mid-1970s, probably due to the desire of the railroads to keep a second supplier for pricing leverage against the dominant first-mover GM. The death of Alco somewhat ironically was caused by GE’s decision to begin to build diesel locomotives on its own in the late 1960s. This left no surviving steam locomotive builders.

    What lessons do I take from this example?

    One is that even in a situation where existing businesses see the writing on the wall, their cultures and business practices may have been an impediment in terms of competing with the new innovator, despite their advantages of deep connections in railroad purchasing and engineering departments. But Alco showed a transition was at least possible. And more importantly that there was no apparent barrier to GM’s entry in the locomotive business. This might be because of the ignorance of the threat on the part of the steam locomotive vendors, some arrogance on their part, or both. I’d be interested to know to what extent they may have lobbied local, state and federal governments to make things more difficult for GM when they realized their exisiting business was at severe risk.

    But another is that the locomotive business was in analogy to the internet more like Twitter and Facebook (probably a better analogy is the router business) in that it was an infrastructure layer dependent on another larger infrastructure layer, in this case the railroads themselves. Moving from steam to diesel required no significant changes to the railroad network itself apart from de-comissioning coaling and watering stations and building fueling stations and reworking maintenance shops, all easily ROI-justified by the economic benefits of diesel-electric motive power. So while we now have a diesel locomotive duopoly, it’s still possible I suppose to innovate in the context of railroad locomotion. If we look one step down at the railroad infrastructure level however, we see essentially the same railroads (modulo mergers and consolidations and the 1970′s rescue of Penn Central and other bankrupt northeastern railroads) we did at the time of the steam-to-diesel transition. Moreover, these six North American railroads most definitely practice a capture and hold business model, and given the absence of public funding for maintaining their highly capital-intensive network, they must. Sure you can observe the innovation of (publicly subsidized) roads and trucks providing competition, but for many commodities (notably coal and grain) there are not many alternatives.

    Do I see the still- or even increasingly-relevant railroad business being de-siloed? No. Do I see the telco/cableco duopoly of internet service provision being de-siloed? Sadly again, no. Facebook and Twitter? More likely because of the lower barriers to entry (but subject to the whims of the communications infrastructure duopoly).

  9. Sam’s avatar

    I can’t fault your support for your friend (Mr. Winer) but the issues with RssCloud are well known and have been seen before. Of note Mr. Winer was instrumental in shepparding rss from obsurity to ubiquity but a name change and some spec modification does not make one the creator.

  10. Sam’s avatar

    Sorry hit send to soon. On Mr. Winer’s argument, I submit that different people have different goals. While Twitter, Facebook, etc MAY be primarily motivated by profit, I think Mr. Winer is motivated by legacy. Neither is bad but ubiquity will only come from open standards as you and Mr. Winer suggest and I agree.

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