Welcome to Bill Gurley Notes. Together, we’re taking a step back in time to the early days of the internet and into the writings of Bill Gurley, the famed 6’9 venture capitalist and author of his aptly titled blog Above the Crowd. We started with his maiden issue and are working forward in chronological order. To follow along with the un-notated versions, check out my friend KG’s comprehensive collection of Gurley’s writings here.
This Thing is Huge: The Internet Will Change the World
7/24/1995
“Time may change me, but I can’t change time.”
—David Bowie, Changes
We know this is not a pioneering thought or anything, but we think this internet thing is huge. And despite the fact that you read about the internet everywhere you turn, we would even go as far to as say [sic] the importance of the net is underrated. Yes, we said underrated. Technological discontinuities do not come along discontinuities changed business or science, this one has the potential to change society and politics as well. Think of the industrial revolution simultaneously combined with the launch of the television and you will begin to understand the magnitude of potential change.
Now before we push the cynics into complete nausea, let us state that we understand your cynicism. After all, the media has promised you the "Information Superhighway" complete with interactive television and videos on demand. The internet's Usenet groups and World Wide Web pages pale in comparison to what has been promised. The ironic thing is thathose [sic] that fail to see or refuse to see the writing on the wall. Companies and investors often get overzealous looking for the forest instead of focusing some pretty important seedlings. This is problematic as technology diffuses through the early adopters first and the mass market last. And typically the company that establishes a presence with the early adopters generates so much momentum that the "mass marketers" are often left in the dust.
Consider the two other major technological discontinuities of the past 20 years -- the personal computer and the GUI (Graphical User Interface). Think back to when these products began to emerge. Cynicism was everywhere. Do you remember the comments "why would I ever use a PC?" and "I don't need a GUI, my text editor does just fine!"? Remember that the companies that adopted these attitudes, for example IBM and Borland suffered unrecoverable losses, and the companies positioned to "ride the discontinuity" have created enormous shareholder wealth. The internet is growing 15% sequentially per quarter. Cynicism is a blindfold.
So where does this leave investors? That is a great question. As a simple rule, we would advise that you focus on the companies that are catering to early adopters and be wary of companies that downplay the significance of the internet. Also, it is probably easier right now to make a list of industries that will be hurt by the internet rather than those that will be aided. Keep in mind that the internet has no sense of fairness. If a new competitor can accomplish the same task for half the cost or even free, then they will. And please do not fall victim to the trap of thinking that superior quality or service will help yesterday's winners prevail. This is just like targeting the mass market instead of the early adopters. Technology enabled competitors will develop better service over time. Techno-cynical companies will be locked out over time.
Now let's look at a few examples. After using the Web for some time now, we fail to see how print based classifieds will not be threatened over time. The Web will offer lower prices, be more timely, and even support color photographs. We would have to suspect the yellow pages will shrink over time as well. Retailing will also become increasingly more competitive as price comparisons become merely a key-click away. And if you plan to simply ignore customer price requests, than you just fell out of the consideration set.
The record industry will also experience change. A recent article in the New York Times suggested that 44% of the price of a CD is attributable to distribution and retailing. This cost is necessary to compensate the distributor and the retailer for managing and financing all the redundant inventory that exists around the world. The Web will allow for centralized inventories and eventually just-in-time production. Now we know what you will say, "records and books are impulse purchases, people need to browse." Correct us if we are wrong, but the software you use to access the Web is called a browser, isn't it? In addition searches will be easier and you will even be able to sample the music. The record industry must also come to grips with the increased potential for piracy. If someone can listen to the music, they can easily re-record it digitally, encrypt into JPEG pictures of Cindy Crawford, and distribute it to all their friends.
We even think the mighty Microsoft feels threatened by the rise of the internet. After all, it is entirely possible that today's Web browser becomes the operating system of tomorrow. Now, Microsoft did address the internet at their recent analysts meeting in Redmond. In fact, they prepared a 20 minute video spoof to berate the current financial opportunities. They claimed the net was over-hyped because it was disorderly and lacked significant revenue streams. That sure sounds remarkably similar to a description of the PC software market in 1980. Would anyone care to return to 1980 to make an equity investment in Microsoft?
Couldn’t find this video—please email me if it exists/you have it.
Of course, Microsoft seems much more aware of the threat of the internet than IBM was of the threat of the PC. For one, the company listed Netscape as a potential competitor in operating systems. But more importantly, consider the thinking that likely went behind the making of the "bash the internet" video. If the internet and the companies involved with it are truly competitors to Microsoft, than what better way to limit the capital available to those businesses than to make the top 200 technology analysts in the world feel insecure about the opportunities?
So how quickly will it take for change to manifest itself? Right now, infrastructure is clearly a problem. The telcos seem unappreciative of the opportunity to provide high-bandwidth internet access. We still have not seen one consumer targeted ISDN advertisement in New York City. And by the way, the latest "hype" is that power-users are conducting real-time audio conversations over the Web. Maybe that will wake up the telephone companies. We are probably more mystified, however, by the attitude of the cable companies. Despite the recent buzz concerning cable modems, the cable companies are still overly focused on the big picture. Forget about video-on-demand. The current revenue opportunities are in delivering internet access. Period. And forget about Joe consumer as well.
Assume that 2.5% of the world's 200MM PC users are power users. If they each spend $25 a month on internet access that represents another $1.5B annual revenue stream. And then, just as the PC market evolved, these power users will drive down the costs of cable modems and access, allowing the market to expand. Of course, this model requires that cable companies agree on a ubiquitous cable modem standard - a move would go against the general thinking in that industry.
So when and where should we invest to take advantage of this emerging discontinuity? The PC discontinuity may provide a little guidance, but more likely frustration. If you pulled out of IBM when the PC first hit the market, you missed the top in the stock by about 6 years. Also, if you jumped into shares of Intel in 1981, you endured many years of frustration before realizing your rewards. Of course, investing in Microsoft on its IPO resulted in a 100-fold return by 1995, despite the limited revenue that existed at the time.
Takeaway
There’s a funny thing about reading great predictions in retrospect: the insights often seem boring, so obvious do they seem to us now. This is a quality shared by Steve Jurvetson’s long run of successful predictions at the Churchill Club. It’s easy to overlook their brilliance.
1995 was the year of Clifford Stoll’s infamous Newsweek article entitled “The Internet? Bah!” on why the internet was not going to be all it was cracked up to be. The piece included this gem of a passage:
Visionaries see a future of telecommuting workers, interactive libraries and multimedia classrooms. They speak of electronic town meetings and virtual communities. Commerce and business will shift from offices and malls to networks and modems. And the freedom of digital networks will make government more democratic.
Baloney. Do our computer pundits lack all common sense? The truth in no online database will replace your daily newspaper, no CD-ROM can take the place of a competent teacher and no computer network will change the way government works.
The piece focused on the shortcomings of the era’s product offerings: “the Internet has become a wasteland of unfiltered data.” That the internet’s pre-Google apps left something to be desired was exactly true (and still is in many cases—not sure how the name “Wasteland of Unfiltered Data” lost out to “Meta”).
This kind of thinking was widespread—mainstream even. But it’s exactly the logic Gurley describes as missing the forest for the trees.
As savvy frequenters of Zillow will know, the greatest value is found not in the perfectly staged, professionally shot listing, but in empty, tired-looking units with photo uploaded from an iPhone. If you squint you might even get to enjoy the glory of a good popcorn ceiling.
It may seem trivial, but the fact remains that even investors and technologists (who are supposed to know better) are swayed by well-staged listings—it is hard to imagine what a space might look like. It’s why my favorite investors evaluate opportunities by asking “what might this look like if everything goes right?”
But until the rest of them start reading Bill Gurley Notes, the reality is unlikely to change. Now go find yourself an unstaged apartment.
Until tomorrow,
DS