Leveraging Scale vs Scarcity

  The threads which led to this topic really came from everywhere (most of my thought processes resemble bowls of spaghetti, I've decided) -- but were crystalized (or twirled together, to not mix my metaphors) upon re-watching the Enron documentary, The Smartest Guys in the Room.

Aside from being the cautionary tale that it has become, Enron is also a great catalyst for talking about leveraging scale vs  scarcity.

Scarcity? It's much more complex than it sounds, but essentially Enron was playing with the power stations in California in order to create artificial scarcity -- and then profiting from hugely inflated prices. Enron got tired of boring old supply and demand, and got creative. Law-breaking creative.

Scale? You build the pathways first, then monetize them. Remember the failed partnership between Enron and Blockbuster to offer movies online?

Ever used Google? Or Twitter? I recently read something Jason Calacanis said in reference to Twitter, "Running a startup is NOT about revenue anymore--it's about critical mass. It's about scale. When you're playing in the big leagues with unlimited access to capital you shouldn't worry about revenue BEFORE you have critical mass."

Too bad Enron was booking imaginary revenue to an idea the moment it was conceived -- revenue that their investors expected to see materialize. But Jason might also want to watch the documentary as well, I've seen very very few startups that succeeded by ignoring revenue, and we're supposed to be smarter than the first bubble was. I'm too old for that level of hubris. Right?

By creating mass without a fully realized revenue plan, you run the risk of building a channel that inherently will ignore you or revolt against you later. (See Facebook SocialAds and Beacon) When Twitter decides to flick that revenue switch, the entire industry will be holding their breath.

Then I ran across a post by Seth Godin, where he said, "Most items of value derive that value from scarcity. Digital changes that, and you can derive value from ubiquity now."

The answer isn't to try to create scarcity, but to evolve the fundamental proposition of your business. Seth and others talk a good deal about how new marketing is all about permission -- critical mass is great, but unless you're using that scale to learn more about the crowd and then following up with relevant, tailored, intelligent messaging, you're just creating traffic. And it all begins with earning permission from your customers.

Seth also points out that a scared customer isn't a happy customer. Enron's movements in California created mass confusion and unrest, which ultimately hurt their efforts in arguing for energy privatization in other states. Outside of energy monopolies, its pretty hard to keep a customer when a competitor pops up with the same offer minus the fear. (sound like the Giuliani problem?)

I've talked in depth on this blog about the end of scarcity -- especially for creators. We're facing an ultimatum -- leverage scale or continue floating on a melting sheet of ice.

This post is a little everywhere at once and nowhere for very long, but here's something to ask yourself, where is your business headed? Can you survive digital?
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I apologize for not updating sooner into the new year, dear reader. I was extremely busy doing some strategic synapse firing and working with the bright kids here to help launch a new project.

Comments

[Bud Caddell]

Jason,

Thanks so much for commenting here on my blog! You Rock.

First, in nooo way am I saying your suggestion compares to the illegal actions undertaken at Enron. No way.

Second, I'm incredibly, anxiously awaiting the debut of monetized twitter. How will they do it? What will the community do? It's exciting stuff.

Third, when do you think advertisers will catch up to this model and demand more than just critical mass? Will the site's owners have to work harder to create opportunities for connection, or will this stay on the advertiser's shoulders?

Again, thanks for the follow-up.

[Jason]

Couple of things:

1. The advice I gave was for *Twitter* which is run by a well-respected team that has a lot of access to capital and a great track record. I specificcally said this advice was for the established folks with a lot of experience.

2. The idea here is to not worry about "proving the business model" of internet advertising. You don't have to prove this any more... you just need scale. It really is that simple today on the internet: if you have a lot of traffic you'll have a lot of advertising revenue. You don't even need a sales department any more--you can use the

3. I saw the Enron doc a Sundance a couple of years back... it's amazing!

4. There is a big difference between fraud at Enron and what I'm suggesting for a specific group of entrepreneurs in a specific vertical (advertising-based internet businesses).

best j