Armchair CEOSuggestions from my living room

Tesla Motors recently went public. They are the first US car company to do this since the 50s. I don’t know all that much about the company, but from what I have seen I believe this company is going to fail.

The biggest issue is that Tesla is going to be hemorrhaging cash until they are able to mass produce automobiles. They raised over $200M in their recent IPO, but since they burned through over $50M in 2009 and $29M in just the first quarter of this year, that cash isn’t going to last very long. They will almost certainly need another round of funding with that kind of burn rate.

Tesla says they plan to begin shipping their next vehicle, the S-class sedan in 2012. Assuming that product launch is successful, that gives them at least another year and a half before the money comes rolling in. However, that is a big assumption. Would you bet on a brand new car company to pull off mass production so easily? Building an automobile is complicated. One can easily imagine that there will be a few missteps along the way and that production date could get pushed out to late 2012, 2013, or beyond.

Another strike against Tesla is the competition is ramping up. The Chevy Volt is expected to ship 10,000 units in 2011, and 30,000 in 2012. Nissan plans to produce 25,000 of their electric vehicle, the Nissan Leaf, in 2011. So not only will these models be available sooner, but both of these cars are expected to be priced $10k-$20k less than the Tesla S-Class.

The Tesla car is not going to be cheap. It’s supposed to be priced over $50,000. Sure, the S-Class might be more luxurious or advanced than the cheaper cars from GM and Nissan, but will that be enough to generate the kind of profits they need? At this price how many do you think they will sell? It’s hard to say, but they are going to be measured against some very luxurious cars from BMW, Mercedes and Lexus in that price range.

I believe the best outcome Tesla can hope for is to get bought out by one of the larger manufacturers who may want to purchase the company for it’s technology. Tesla has spent many years and millions of dollars on developing viable electric vehicle power trains. Thats got to be worth something, right?

Today, AT&T announced new pricing plans for their data customers. Currently all customers are paying $30/month for unlimited data usage on the network. AT&T is now moving to tiered plans starting at $15 for 200MB. A 2GB plan will cost $25.

At first this move didn’t make a whole lot of sense to me. Data is given in the article above:

Roughly 65% of AT&T’s smart phone customers use less than 200 MB of data per month and 98% use less than 2 GB, according to the company.

So AT&T is going to get less revenue from possibly 98% of their current data customers when they move to the new plans. However, they’ll now also be cheaper than Verizon’s data plan which costs $30 for unlimited. Are they going to be able to pick up enough customers from competitors or people who’ve been holding out on upgrading to a smart phone to make up for this loss in revenue? Don’t forget these new customers aren’t pure profit. They’ll incur costs for AT&T in the form of better equipped networks.

AT&T was recently reported to have 78.2 million subscribers of which 11.8 million were smartphone users. Let’s run through some quick math. Currently AT&T is making 11.8M x $30 = $354M in data revenue. If every customer switches to the most cost effective plan, that number will drop to (65% x 11.8 x $15) + (33% x 11.8 x $25) + (2% x 1.8M x ~$50 guess for data hogs) = $224M. That’s a drop of $130M. Let’s assume that the $10 charge per additional GB is close to AT&T’s cost for data. This means that every additional 200MB subscriber nets $13. To close the revenue gap, AT&T is going to have to add 10M additional subscribers either from Verizon or upgraded current customers.

I think this is very doable for AT&T. Smartphone growth rates are still very high, and with this data plan price drop, adoption rates could accelerate. If Verizon doesn’t match AT&T’s low end pricing for 200MB, AT&T can expect to gain a significant share of these new converts.

I guess we’ll have to wait until next quarter’s financial statements to see how this goes.

Last week I wrote about the coming competition in online banking and money transfer services. At the time I hadn’t heard about Revolution Money. This is exactly the kind of service I have been looking for. If they are successful, then the costs of doing business over the internet should substantially decrease. From what I can tell, most transactions between Revolution Money account holders are free. They are using free online money exchange as a trojan horse to get people to sign up for the service. Then their plan is to make money by charging a fee to merchants who accept the Revolution card.

As a consumer who is completely frustrated with the status quo in online payments, I think this service is great. Unfortunately, I am not convinced their business will succeed. There is a bit of a marketing problem for this service. It doesn’t currently cost consumers anything to continue to use the established services like paypal, VISA, or MasterCard. The price published on the website, is the price you pay. The savings is really seen by the merchant. Why would a shopper switch what they are used to and comfortable with when they already have a solution? Customers want convenience, and they aren’t going to switch to a new service to help out any merchants.

Remember BillPoint? Ebay controlled one of the largest online marketplaces on the internet in the early 2000’s and was still unable to overtake Paypal. Eventually they gave up and bought Paypal. Paypal had the first mover advantage in addition to substantial network effects. This proved to be too much for Ebay to overcome. In light of this, no one could blame you for betting against the success of Revolution Money.

I happen to think there is more to the story than first mover advantage and network effects. Many of ebay’s customers may not have wanted to use a service owned by ebay for fear of the additional control that would give the auction site. It’s no secret that since ebay bought Paypal, their fees have gone up and their new policies have been mostly unfavorable to merchants. Perhaps users in the early days continued to use Paypal instead of Billpoint because they anticipated these types of challenges.

Here’s three paths Revolution Money could use to overcome this marketing problem.

1. Micropayments – As I mentioned in my post before, the need for micropayments and their incompatibility with the current credit card system could drive the adoption of a free money transfer service like Revolution Money. It is completely impractical to send $1 through any of the traditional services. When a customer goes to check out and sees two options, $1 on Revolution and $1.30 for paypal, he may decide to give the service a try.

2. Grass roots marketing – Paypal attracted a lot of early customers by giving users $5 for signing up and additional money for signing up a friend. I don’t see any reason why this strategy wouldn’t help Revolution. Of course it could get quite expensive, but the campaign could go viral and give the service the momentum boost it needs to compete.

3. Discounted prices – Getting a number of merchants to offer the 1% savings back to their customers could go a long way towards adoption of the service. 1% doesn’t sound like much, but it adds up, and everyone involved saves money except paypal and the credit card companies.

I stumbled across Revolution Money while reading about Steve Case on wikipedia. There is definitely a marketing problem if potential customers only run across the service while performing some arcane internet searches like I did. The company has recently been purchased by AMEX. I am interested to see how they decide to grow the platform. I would have thought that Amazon or someone who stands to gain a lot from lower transaction fees would have been a better fit. If AMEX is successful with the acquisition they could potentially cannibalize some of their existing business.

At least now when my buddy from two states away owes me $20, I don’t have to eat the 3% in Paypal fees.

Hah! While stumbling across the internet today I read about Diaspora. It is a project that turned up on kickstarter recently. This software is supposed to decentralize Facebook, so that users can control their own data in P2P fashion. It set some records for kickstarter funding, but I tend to agree with Matthew Rogers on this one.

…we do know what the average social-networking user expects today, and it’s generally free. Not just free of any cost, but free from effort as well.

I think the second part of this quote is the most important. Users aren’t going to engage diaspora if it requires any kind of actual effort. All things considered, it’s pretty easy to sign up for Facebook, and then after that you don’t have to worry about anything. They take care of the logistics for you.

While on the surface, this seems like a great idea (and certainly the kickstarters think so), I don’t think it is the Facebook killer everyone is looking for.

I recently read a couple articles on techcrunch that seem to confirm a suspicion I have had for a while. Internet payments have some serious room for improvement. Paypal has been raking in the dough over the last 10 years, and I think some competition is finally starting to take a look at this space. There is a lot of money up for grabs to whomever gets it right.

I thought it was interesting that an early Twitter employee was moving on so soon. It seems to me that the big advantage in working for a startup, especially one as successful as Twitter is in hanging around until the IPO and cashing in some serious options. It makes me wonder if he was asked to leave. But that’s beside the point. I thought it was interesting what Alex Payne decided to work on after Twitter. He is starting a bank, called BankSimple. With all the news recently about banks going belly-up, I think it’s definitely a gutsy decision to try to open one. I imagine that since Alex is coming from the tech world, this bank will look more like a Paypal than a Wells Fargo.

The second article I saw discusses a deal between Facebook and Zynga over payments for virtual goods on the Facebook system. I think that Facebook is currently making a huge mistake with their Facebook credits program. They are currently charging a 30% fee on Facebook credits. Obviously they are charging that much because they can, but with a fee that high, the only things that can be transacted are digital goods. Physical goods will never trade with Facebook credits because the 30% fee is far too high. All the advantages the internet has over the B&M world are lost with a fee that high.

Digital goods are fairly limited. There’s software, media, and virtual game items. What else is there? Maybe I am missing something. Facebook should set their sites higher. They are in a position for world domination, and one step along that path should be a paypal competitor. To compete with paypal, 30% fees are just not going to get it done.

Fees aren’t too bad when you’re transacting amounts over $10, but I think there are a lot of uses for amounts less than that. Micropayments are going to drive competition in the online payment space. I am very interested to see what emerges. Facebook is certainly in a position to compete, but they will have to change their fee structure. I could see users paying $1 or $2 processing fee for credits. Buying 50 credits (10c value each) for $6 or $11 for 100 seems reasonable, but a 30% cut is pretty high.

Recently, I posted about the increasing use of fees to fuel airlines’ bottom lines. Since then I ran across this video from CNNMoney where they interview the CEO of Southwest Airlines. He indicates that the backlash from baggage fees is great enough to drive more sales to Southwest, generating revenue for them even though they aren’t charging for bags.

This falls in line with my belief that the airlines which will outperform will be the ones that avoid “nuisance” fees but charge for things which would be considered a luxury by the passengers such as better snacks, TV, movies or internet.

There has been a lot of commentary recently on the lack of Flash in Apple’s mobile products. I don’t know why this is so interesting. There is absolutely no incentive for Apple to include Flash. Content providers are increasingly moving to the standard that Apple does support and including Flash on the iPhone platform would remove some of Apple’s control over the platform.

Apple is aware that they have an incredible opportunity in front of them. They are well positioned to lock people in to their platform through music and app purchases. Once someone has purchased $50, $100 or $200 worth of content for their iPhone, they are going to need a good reason to move away from the Apple platform. A small increase in hardware specs isn’t going to do it. This leverage gives Apple the ability to make their own schedule for releasing new phones and provides some buffer against stiff competition from other manufacturers. They can produce an inferior product and still sell it to someone who needs a new phone, but has a big incentive to stay with the Apple platform.

How will the other manufacturers respond to this challenge? They have to do everything that Apple isn’t doing. One of those things is Flash. Another could be tethering. HP just bought Palm. What if they offer a phone and tablet PC that can use the same SIM? Apple forces their customers to buy two 3G data plans.  Perhaps a manufacturer will come out with a slick phone that only requires a data plan and integrates seamlessly with skype or google voice.

Apple is in a good position now. They are smart and I think they will stay on top for a while. But there is a balance to be struck with consumers. Creating too many restrictions is going to lead to some people dumping the platform. Flash however doesn’t appear to be a big negative in this sense. The trends are in Apple’s favor.

In his latest posting, Mark Cuban expands on the idea that facebook is becoming the internet. The internet has always been about communication, and facebook is certainly becoming the center of a lot of that communication. Given their huge user base, I see no reason why they can’t compete with some of the internet’s most successful enterprises.

Right now, Facebook usage is mostly contained within small friend groups. Content that is shared largely comes from the outside internet. Facebook’s attempts to take over the internet should include creating a public side to facebook. Allow users to make certain parts of their profile public, like a blog or status update. Public status updates is all that twitter is anyway. If Facebook turned that feature on, Twitter would have some real competition on their hands.

Even after ebay has crushed so many competitors, why couldn’t Facebook snag a piece of the online auction market? One thing many people miss about ebay is the yard sale feel it once had. Now many companies are selling new products on ebay and have crowded out a lot of the individuals selling their junk. This could be a great entry point for Facebook to compete. For example, if I had extra concert tickets I wanted to sell, I could post them to a Facebook marketplace, and all my local friends would see the announcement in their news feed. I don’t see any reason that wouldn’t work. In time the Facebook marketplace could grow and  even compete with ebay.

Mark Cuban’s post created a bunch of interest in Facebook last week. One article I read tries to explain why Facebook won’t be as big as google. The chart they posted shows several internet companies and their revenues per visitor in 2009. Some thing about that chart doesn’t add up. The vast majority of internet users don’t click any ads. I really don’t think google can possibly make so much money per visitor. Perhaps the earnings stats include adsense revenue while the visitor traffic doesn’t. That could really change the picture since so many sites are sending google ad revenue without sending them the visitors. The point the author makes is still valid though. Google makes more because they get a lot of targeted searches for products, while Facebook users are mostly just wasting time communicating with each other. I agree, however I don’t see any reason why Facebook couldn’t drive more product related traffic. If they are able to pull off competition for ebay there is plenty of room to grow real revenue streams.

Once you have a thriving marketplace, a paypal competitor would become the logical next step. Paypal is expensive to use. I don’t know how Facebook payments will work out, but if they are cheaper than paypal, and easy to use with the Facebook marketplace, I don’t see how that wouldn’t generate some serious revenue for the company.

One thing is for certain, the current facebook model of display advertising coupled with small friend group communication is not going to generate the kind of valuations currently being tossed around. The small friend group communication should be thought of as the driver of traffic. Now that they have this huge user base though, its time to expand.

Microsoft would be smart to try to buy Facebook. The problem is that once a large company buys a smaller one, innovation often becomes more difficult. Facebook is already so large that they appear to be slow moving. Why else are they allowing twitter to even get a foothold? If Microsoft can keep the innovation flowing, I think that Facebook could be their best chance to grab a significant piece of the internet.

In my opinion there is some real potential here, the question is just whether Facebook will make the right moves with the right speed to grab their share.

The internet caught fire this morning with Gizmodo’s release of some video and pictures of the new iPhone. The news and pictures of the device aren’t that interesting. After all, its just pictures of hardware and really just confirms what we already knew from reliable rumors. There is a front facing camera and the screen resolution has increased.

The more interesting story is how did Gizmodo get their hands on the phone? I think its pretty obvious that this phone was not found in a bar as the website claims. Apple has been known to keep a tight grip on new product security. The phone was either an intentional leak or was stolen and then sold to Gizmodo. There is good reason to believe that the phone is not an intentional leak. So that only leaves theft. I am curious to see Apple’s response to this theft.

I recently ran across a post on a blog about the resurrection of a web business, Movie-Vault. Tyler Cruz, the site owner goes into detail about some improvements he has made to his website. After a few years of neglect, the site had lost of lot of contributors. Tyler even tried to sell the site some time back for $12,000 with no takers. Now he is updating the content again and has paid $10,000 for improvements.

The main problem with Movie-vault is that it needs traffic. His site makes money from advertising, and advertisers want traffic. Unfortunately, there is a lot of established competition in this niche and traffic is going to be hard to come by. Updating the content is certainly a step in the right direction, but its going to be an uphill battle to compete with Rotten Tomatoes, or Yahoo in the mainstream movie review category.

Another troubling aspect of this venture is highlighted by Tyler himself when he says:

It’s also difficult because the movie niche is one of the lowest paying markets out there, which means that I’m unable to justify paying a lot for visitors when they’re worth so little when you view them as dollar signs.

I agree. Marketers to this audience are really just trying to sell movie tickets or DVDs. Thats not really a high margin product. With huge volumes of traffic, it can be profitable to run a movie site, but I imagine most operators are just doing it as fans. They probably don’t care too much about the money.

Given these problems, I just don’t think it is prudent to spend $10,000 on a site redesign/coding effort. Sure there could be some marginal gains in search engine traffic, but this money could be better invested in something else. I would suggest to Tyler that he take the site in a different direction. Avoid competing with all the other mainstream movie sites and move in a new direction. Perhaps turning movie-vault into an independent film hub would work better. Finding the right niche within the movie industry could bring the bulk of a subset of the movie traffic and open up possibilities for different advertising avenues. Low budget movie producers might be inclined to purchase ads for self promotion on an independent film site.

After a cursory review of movie-vault’s business model, I wouldn’t be surprised if it hasn’t grown much in the next year or two. Because of the competition and low paying advertisers, I really think it is best to refocus on a different niche or a different project altogether.