Airbnb and the Internet Revolution

Despite the fact Airbnb1 is, along with Uber, the poster-child for the new sharing economy, the former seems to attract a lot less attention than the latter, particularly among the chattering class. I suspect a big part of this is the way people view drivers vis-à-vis sublessors: despite the fact drivers work for Uber by choice — and, as Uber is eager to point out, come and go as they please — while on the clock Uber controls their rates and revenue share. Not only does this raise the question as to whether or not drivers are employees,2 it also provides grist for countless anecdotal stories about how a company valued at tens of billions of dollars3 is taking advantage of drivers earning tens of dollars per hour at best.4

Airbnb, on the other hand, is generally thought to be much more of a win-win: sublessors make some more money, and sublessees get a more inexpensive place to stay than a hotel, or a more home-like environment in a different sort of neighborhood than they might otherwise; often it’s both. More importantly, both parties are clearly happy with the arrangement.

Of course the nature of the relationship between sublessors and sublessees differs depending on whom you ask: hotels, facing real disruption from Airbnb, accuse the startup of being a shadow hotelier focused on stealing their business. Airbnb, for its part, focuses on the idea of “home”. Last summer, while announcing their new branding and mission statement, Airbnb founder and CEO Brian Chesky wrote:

In 2007, Joe and I opened our home up to the first Airbnb guests. They booked a place to stay, but they ended up with something more than just an airbed at a slightly messy apartment. They learned our favorite places to grab coffee, ate the best tacos in the city, and had friends to hang out with whenever they wanted. They were thousands of miles from where they lived, and yet they felt right at home. What started as a way for a few friends to pay the rent has now transformed into something bigger and more meaningful than we ever imagined. And what we realized is that the Airbnb community has outgrown the original Airbnb brand. So Joe, Nate, and I did some soul-searching over the last year. We asked ourselves, “What is our mission? What is the big idea that truly defines Airbnb?” It turns out the answer was right in front of us. For so long, people thought Airbnb was about renting houses. But really, we’re about home. You see, a house is just a space, but a home is where you belong. And what makes this global community so special is that for the very first time, you can belong anywhere. That is the idea at the core of our company: belonging.

A not insignificant number of cities are equally concerned about “home,” but in their view Airbnb is destroying them by incentivizing landlords to remove residences from the rental market and instead offer them full-time on Airbnb. Paris, for example, which is Airbnb’s biggest market, has in recent weeks conducted raids on unauthorized Airbnb listings. As the Wall Street Journal reports:

Paris officials say there are some 30,000 tourist apartments available for rent in the city — about 2% of the total number of units — with as many as two-thirds operating illegally. Airbnb says that it is a fringe issue on its platform; just 17% of hosts in Paris say they rent out apartments other than their primary residences. It isn’t clear how many of those might be doing so without city authorizations.

Some hotel owners and other activists argue that full-time tourism apartments likely account for more than that in revenue terms, however. “You can’t call this a sharing economy anymore,” said Laurent Duc, president of the French Hotel Federation. “This is an underground shadow economy.”

It’s this last sentence that really gets at why the entire debate around the “sharing” economy is so stilted: at the risk of relying too heavily on my own anecdotal experience, it seems clear that at least a sizable portion of Airbnb’s business is made up of apartments and houses dedicated to Airbnb. In other words, no one staying in these professionally cleaned listings, complete with fresh sheets, towels, and complimentary toiletries, is joining their hosts for coffee or tacos or to simply hang out, no matter how delightful Airbnb’s founding myth may be. It is, as the president of the French Hotel Federation said, “an underground shadow economy.” Why, though, should it be underground?

The Industrial Revolution

I thought it fascinating that Chesky invoked the Industrial Revolution in his post:

We used to take belonging for granted. Cities used to be villages. Everyone knew each other, and everyone knew they had a place to call home. But after the mechanization and Industrial Revolution of the last century, those feelings of trust and belonging were displaced by mass-produced and impersonal travel experiences. We also stopped trusting each other. And in doing so, we lost something essential about what it means to be a community.

Chesky’s focus is on travel, but in reality no one actually did so.5 Nearly everyone lived on subsistence farming, more often than not working land owned by someone else; said landowners, along with the church, exercised nearly complete control, with the occasional merchant facilitating a bare minimum of trade primarily to the benefit of the ruling class. The Industrial Revolution — and the accompanying agricultural one — completely flipped this arrangement on its head. Thanks to the efficiencies afforded by technologies like the loom and mechanical power people were able to specialize and trade the outcomes of their labor for a much fuller and richer life experience than what they had previously.

I get that I’m putting an awfully neat bow on what was 150 years of wrenching change. After all, I just basically described soul-destroying — and often body-debilitating — work in 18th century sweatshops as “specialization”; it’s a bit like Uber’s insistence on calling its drivers “entrepreneurs.” And yet, when you consider how structurally the old taxi medallion system resembled the landowner-peasant relationship of old, why is everyone so eager to declare that the new boss is worse than the old boss?

Of course the rise of factories — and the truly awful conditions within them — eventually helped lead to the rise of the modern regulatory state. Child labor was banned, and eventually hours were capped and minimum workplace safety rules were instituted. More broadly, regulation was applied to the massive amounts of new trade being conducted both locally and across borders, and as cities rose up around those factories and trading centers, regulations covering day-to-day life rose up as well.

This was as necessary as it was inevitable: when Chesky writes that before the Industrial Revolution “everyone knew each other” the unspoken truth is that we simply didn’t know many people, and those we did know were governed by the same shared mores that govern any community. Regulation wasn’t necessary because we regulated ourselves and each other. However, the rise of factories and cities concentrated both power and people even as it magnified the number of interactions conducted by those people and influenced by that power; there were no shared mores because nothing was shared beyond the temporary need for a shared transaction governed by self-interest, making self-regulation a utopian fantasy. We needed regulation because we were incapable of regulating ourselves and each other.

Airbnb and Trust

In the interest of full disclosure, I’m actually writing this post while sitting in an apartment rented through Airbnb. The pictures were ok, but the plethora of reviews were effusive in their praise of this surprisingly large one-bedroom apartment with easy access to the train, so I took the plunge. Indeed, the reviews were spot-on: the apartment is beautiful, and I couldn’t be happier with my choice. One more thing — my family and I are working really hard to keep the place as pristine as it was when we moved in. After all, while I trusted the ratings over the pictures, future Airbnb sublessors will surely care greatly about my rating as well.

There isn’t the sort of community that Chesky promised; I haven’t met our sublessor in person, and likely never will. I don’t know his favorite coffee shops or taco places (or ramen joints for that matter), and I very much feel not at home.6 But despite that fact, some of the most important trappings of community do exist: the shared mores, and common accountability. My sublessor is incentivized to provide a great place, and I’m incentivized to keep it that way, and that more than anything is what makes Airbnb work. And, by extension, one of the big advantages of hotels — the trust instilled first by the concept and reinforced by the brand — begins to erode.

The commoditization of trust is far more injurious to hotels than you might think: it’s not simply that Airbnb is more competitive on one particular vector; rather, the “trust” vector was by far the biggest priority for both travelers and hosts. Hotels could be infinitely more inconvenient, expensive, or sterile relative to your typical homestay and it wouldn’t matter. In the pre-Airbnb days travelers — and sublessors — justifiably prioritized trust above all else. In other words, the implication of Airbnb building a platform of trust is not that a homestay is now more trustworthy than a hotel; rather, it’s that the trust advantage of a hotel has been neutralized, allowing homestays to compete on new vectors, including convenience, cost, and environmental factors. It turns out homestays are quite competitive indeed: to return to my personal anecdote, I am living in a beautiful, remodeled one bedroom apartment in one of the best neighborhoods in this city, and paying a fraction of the cost of a mid-tier hotel for the privilege.

Here’s the kicker though: without Airbnb I wouldn’t even be making this trip. Staying in a hotel would not only be too expensive, it would also deny me the opportunity to at least get a taste of what it’s like to live day-to-day in a different country and culture — something you don’t get at your typical branded hotel. And that’s why the calculation for cities is more complicated than the president of the French Hotel Federation would have you believe: yes, the apartment I’m living in is off the market, but to what extent is one less rental unit made up for by the amount I will spend over the several weeks I am here?

All of these considerations apply to Uber, and many of the other sharing economy startups: what makes them work is not simply mobile access to the Internet, location data, and all the rest; equally important is the systematization, and by extension commodification, of trust. To be sure the latter isn’t a new concept: Ebay deserves special credit for pioneering the fundamental mechanic as applied to Internet businesses. The addition of mobile, though, made this mechanic exponentially more powerful: we went from a vision of apps that let you book last minute hotels to apps that made every house in every city in the world a potential place to stay.

The Internet Revolution

It has been a consistent thesis of mine that the Internet Revolution, which I believe has only just begun, will prove to be in the long run just as transformative as the Industrial Revolution. In other words, it’s not only that we would become more productive; it’s that society as we know it would be fundamentally changed. How, though, hasn’t been entirely clear: if the industrial revolution moved us from subsistence farming in the countryside to factories in cities, where might we go next?

I increasingly believe that it is the sharing economy that is beginning to reveal the answer: a world of commodified trust has significantly less need for much of the infrastructure of modern society, including inefficient sectors like hotels whose primary differentiator is trust, along with the regulatory state dedicated to enforcing that trust. On the other hand, this brave new world has brand new holes through which people can fall: those who have lost trust, or do not have the means to build it. I’m no crazy libertarian; quite the opposite in fact: we need a significantly stronger safety net and a judicial system predicated on arbitration.

The nature of assets changes as well, and not just hotels: as more houses — and rooms — are offered as a service, the definition of ownership begins to shift. This will clearly first play out in automobiles: the long-run promise of Uber is a world where few own cars and few cars sit idle. This will impact not just auto-makers but insurers, dealers, repair shops, and more. More profoundly, it will affect people. We will be less tied down, more willing to move, especially if our work becomes just as transactional as our possessions. And that, ultimately, will change the way we relate to each other, just as the shift from the small knit community in the countryside to the chaos of the city upended everything we thought we knew about how individuals, communities, and governments interacted.

Just because the future is coming into focus, though, doesn’t mean the road there will be smooth. Once again it is Paris giving us a glimpse of the convulsions along the way: taxi drivers upending cars, setting them on fire, terrifying passengers, all in the pursuit of a world as it was. And for now it seems they have won the battle: the French government is taking action to curtail UberPop. The war, though, is only just beginning, and one desperately hopes said reference to war — in contrast to the climax of the Industrial Revolution — remains figurative.

  1. The company just raised $1.5 billion at a $25.5 billion valuation; by the way, that article is worth a click for the chart comparing hospitality companies: it captures very neatly how valuation is based on revenue and growth (along with profit margins and addressable markets, of course) []
  2. The California Labor Commission ruled that one driver was; other courts have held that drivers are not []
  3. $40 billion now, $50 billion soon []
  4. Few of these stories consider what these drivers ought to do otherwise, or why Uber should feel compelled to pay more beyond the insinuation that they can, an assessment that belies the fact that that valuation is predicated on Uber returning the billions invested in the company at a multiple. []
  5. And the Industrial Revolution didn’t happen “last century” []
  6. That, of course, is the point in coming []

Curation and Algorithms

Jimmy Iovine spared no words when it came to his opinion of algorithms during the unveiling of Apple Music:

The only song that matters as much as the song you’re listening to right now is the one that follows this. Picture this: you’re in a special moment…and the next song comes on…BZZZZZ Buzzkill! It probably happened because it was programmed by an algorithm alone. Algorithms alone can’t do that emotional task. You need a human touch. And that’s why at Apple Music we’re going to give you the right song [and] the right playlist at the right moment all on demand.

About Beats 1, the new Apple Music radio station, Iovine added:

[It] plays music not based on research, not based on genre, not based on drum beats, only music that is great and feels great. A station that only has one master: music itself.

According to the Apple Music website “Zane Lowe and his handpicked team of renowned DJs create an eclectic mix of the latest and best in music”; then again, if you keep scrolling the page, you’re reminded there is more to Beats 1 than curated music:

Building your own station couldn’t be easier. Just select any song, album, or artist and it will practically build itself. Adjust the mix to hear more songs you know or discover unfamiliar gems. Love a track? We’ll play more like it. The more you fine-tune the station, the more personalized it becomes.

That sounds a bit like an algorithm. So which is more important, and why?

The Rise of Curation

Curation has been all over the news for the past few weeks. At that same keynote Apple introduced Apple News, and while the presentation made it sound a bit like those user-generated radio stations — Craig Federighi introduced it as “Beautiful content from the world’s greatest sources personalized for you” — it turns out that Apple is hiring editors to, in the words of the Apple job posting, “Ensur[e] that important breaking news stories are surfaced quickly, and enterprise journalism is rewarded with high visibility.”

Apple News is hardly the only effort in the space: a month previously the New York Times released version 2 of its NYT Now app; the big headline was that the app was now free, but just as interesting was the decision to decrease the number of articles from the New York Times itself and intersperse them with a nearly equal number of articles from other publications with the intent of providing a one-stop curated news experience.1 BuzzFeed just released their own take on the concept with the BuzzFeed News app which adds tweets to a mix of BuzzFeed content and content from around the web, all helpfully summarized in easily digestible bullet points.

Twitter itself announced plans to get in on the game with its forthcoming Project Lightning, a tool that, according to BuzzFeed, “will bring event-based curated content to the Twitter platform.” The articles notes:

Launch one of these events and you’ll see a visually driven, curated collection of tweets. A team of editors, working under Katie Jacobs Stanton, who runs Twitter’s global media operations, will select what it thinks are the best and most relevant tweets and package them into a collection…They’ll use data tools to comb through events and understand emerging trends, and pluck the best content from the ocean of updates flowing across Twitter’s servers. But human beings will decide which tweets to include.

Lightning hasn’t launched, but Snapchat’s Live Stories have been drawing in huge viewer numbers for some time now; they too are driven by curation: Recode reports that “the company has grown its team of Live Story curators from fewer than 10 people to more than 40 people” since January, and is now producing multiple events per day. Even Instagram is adding curation to its new Explore page.

When Curating Makes Sense

There are two important advantages to curation:

  • First, where context is critical to immediately determining how important something is — as is the case with news — human curators are, at least for now, superior to algorithms. Humans are also able to quickly identify that these forty stories are about the same event, and have the taste to decide which is the best option to present
  • Taste figures much more prominently when it comes to Apple Music and other similar endeavors. The DJ-focused Beats 1 “radio” station, for example, is clearly intended to make certain songs popular, not simply identify popularity after it is already attained. This in particular is a natural fit for Apple, and is the part of Apple Music I am most intrigued by: the company is most comfortable setting trends, not following them (as is the case with the core streaming service)

It’s possible that algorithms will one day be superior to humans at both of these functions, but I’m skeptical: the critical recognition of context and creativity are the two arenas where computers consistently underperform humans.

The Algorithmic Giants

That said, despite curation’s advantages the two biggest content players of all — Google and Facebook — are pure algorithmic plays. Google News has always been algorithmically driven, but the more important tool for content is Google search itself, which uses the most valuable algorithm in the world to not only find content but to rank it as well. Facebook, meanwhile, is in some respects the exact opposite of Google: rather than responding to an input Facebook proactively selects what you see when you open the app; that selection, though, is also 100% algorithmically driven.

Both search results and the news feed are algorithmically driven
Both search results and the news feed are algorithmically driven

When considering the question of what is better, algorithms or curation, I think this observation that the core Facebook and Google algorithms are actually solving two very different problems is a useful one. Google is seeking the single best answer to a direct query from an effectively infinite number of data points (i.e. the Internet); while the answer it gives is to a degree influenced by the profile Google has built about you, or the various contextual clues surrounding your search, for most queries there is one right answer that Google will return to anyone who searches for the term in question. In short, the data set is infinite (which means no human is capable of doing the job), but the target is finite.

Facebook, on the other hand, creates a unique news feed for all of its 1.44 billion users: while Facebook has a huge amount of data,2 the amount of information any one user will ever be interested in is finite; what is infinite are the number of targets (which means Facebook could never employ enough humans to do the job). In other words, neither Google nor Facebook are able to rely on curation even if they wanted to, but the reasons that Google and Facebook rely on algorithms differs:

Google searches an (effectively) infinite amount of data, while Facebook needs an (effectively) infinite amount of personalization, which is why both are algorithmically driven
Google searches an (effectively) infinite amount of data, while Facebook needs an (effectively) infinite amount of personalization, which is why both are algorithmically driven

However, as I just noted, these two reasons run in the opposite direction: Google does personalize a bit, but it mostly concerned with one right answer, while any single Facebook user doesn’t care and will never care about the vast majority of Facebook’s data. Presuming this relationship holds, you can actually put the above two graphs together:

Curation makes sense in the middle of Google and Facebook: some personalization, and a finite set of data to curate
Curation makes sense in the middle of Google and Facebook: some personalization, and a finite set of data to curate

This curve is a useful way to think about the aforementioned curation initiatives: curation works best when there is a good amount of data, but not too much, and the goal is a fair bit of personalization, but not on an individual basis.

Curating News

The Curation-Algorithm curve makes it clear why news is an obvious curation candidate: while a lot of news happens everywhere all the time, it’s still a lot less than the sum total of information on the Internet. Moreover, the sort of news most people care about tends to be relatively widely applicable, which means personalization is useful but only to a degree. In other words, news mostly sits at the bottom of this curve.

Newspapers figured this out a long time ago: editors were curators, deciding what went on the front page, what was on page 13, and what was buried completely. It mostly worked, although many editors perhaps became too enamored with “prestige” stories like world news as opposed to truly understanding what readers wanted. Moreover, once the Internet destroyed geographic monopolies, it quickly became apparent that most newspapers didn’t have the best content on the particular stories they covered; readers fled to superior alternatives wherever they happened to find them and curation gave way to social services like Twitter and Facebook.

This is what makes the NYT Now and BuzzFeed News apps so interesting: both accept the idea that their respective publications don’t have a monopoly on the best content, even as both are predicated on the idea that curation remains valuable. Apple News takes this concept further by being completely publication agnostic.

The Twitter Question

The current Twitter product, based on a self-curated time-line, doesn’t really fit well on the Curation-Algorithm curve. Power users, through the long and arduous process of following and unfollowing a huge number of people, can ultimately arrive at a highly personalized feed that is relevant to their interests. Beginners, though, are presented with a feed that is nominally about their interests as decided by a torturous first-run experience but which in reality is a stream of mumbo-jumbo.

Twitter struggles because it doesn’t have any products on the Curation-Algorithm curve
Twitter struggles in part because it doesn’t have any products on the Curation-Algorithm curve

Project Lightning is clearly focused on hitting the algorithmic sweet spot with event-based “channels”: it’s an obvious move that should have been done years ago. What is perhaps more interesting, though, is whether Twitter ought to pursue an algorithmic feed: I think the answer is “Yes”. While Twitter’s value is its interest graph, its organizing principle to date has been people; an algorithmic feed would help Twitter more effectively bridge that disconnect.3

Curating Ethics

There is one more big reason why tech companies have previously given curation short shrift, and it’s the flipside of Apple’s efforts with Music: it is a lot easier to abscond with responsibility for what you display if you can blame it on an algorithm. Human curation, on the other hand, makes it explicitly clear who is responsible for what is seen by the curating company’s users.

The potential quandaries are easy to imagine: will Apple’s News app highlight a story about worker conditions in China?4 Will Snapchat’s planned coverage of the 2016 election favor one candidate over the other? Would Twitter have created an “event” around the exit of its CEO?

On the other hand, hiding behind algorithms is increasingly untenable as well. For one, algorithms are made by humans; choosing which story appears in your Facebook feed is the responsibility of Facebook whether they choose it explicitly or implicitly via an algorithm. Google, for its part, has successfully argued that its algorithm is protected free speech, an admission of ultimate responsibility even more profound than the company’s regular algorithmic updates explicitly designed to adjust rankings.

Google in particular has a special responsibility. I wrote in Economic Power in the Age of Abundance:

The Internet is a world of abundance, and there is a new power that matters: the ability to make sense of that abundance, to index it, to find needles in the proverbial haystack. And that power is held by Google. Thus, while the audiences advertisers crave are now hopelessly fractured amongst an effectively infinite number of publishers, the readers they seek to reach by necessity start at the same place – Google – and thus, that is where the advertising money has gone.

Google’s position as the Internet chokepoint has been exceptionally profitable, but with great power comes great responsibility: in a welcome development Google is slowly accepting said responsibility and delisting revenge porn upon request. It’s the right move for both moral and practical reasons — moral because Google is uniquely positioned to prevent people’s lives from being ruined, and practical because if Google didn’t take action eventually the government would compel them. Indeed, that has already happened in Europe with the “right to be forgotten”, and while there is certainly a debate to be had as to whether or not that is good policy, the idea that Google is a hapless bystander is no longer viable.

Ultimately, I see the embrace of curation as a mark of maturation of the technology industry. Today’s technology companies have massive amounts of influence over what people the world over see and consume, and while there is a long ways to go when it comes to transparency about what is seen and why, at least everyone is now being honest about possessing that power in the first place.

Moreover, I’m excited about the real user benefit that can come from balancing algorithms and curation: while Facebook and Google rightly focus on algorithms only, most content is best delivered by a mixture; getting that mixture right will likely prove to be both massively popular and massively valuable.

Discuss this Article on the Stratechery Forum (members-only)

  1. The previous NYT Now app included articles from other publications as well, but in a different tab []
  2. The vast majority of which is inaccessible to Google, to the latter’s consternation []
  3. One more thing: don’t sleep on Twitter search. It remains the single best way to quickly catch up on anything that happened in the last few hours []
  4. For the record, I do believe Apple’s record is better than most []


The entire point of the name “Unicorn”, first coined by Aileen Lee in November 2013, is to describe something very rare: “U.S.-based software companies started since 2003 and valued at over $1 billion by public or private market investors” was Lee’s definition.

Over the last year-and-a-half the definition has changed a bit — most include international startups, and limit the list to private companies — but the biggest difference is the number of companies that qualify: Fortune’s Unicorn List has 100 companies on it, a big jump over the 39 counted by Lee.1 Many, including Andreessen Horowitz in a presentation entitled U.S. Tech Funding — What’s Going On?, have argued the reduction of a unicorn to something more akin to a zebra — exotic, but not exactly rare — is due to a shift in money from tech IPOs to late stage growth rounds. In the presentation these growth rounds are defined as rounds of >$40 million and given the label “quasi-IPOs”:

Screen Shot 2015-06-17 at 6.41.11 PM

Bill Gurley, for one, made clear he’s not buying this blurring of the lines in a March post aptly titled Investor’s Beware: Today’s 100M+ Late-stage Private Rounds Are Very Different from an IPO:

Some have argued that each of these companies would already be public in a prior era. Buying into such a notion is dangerous – dangerous for the entrepreneur and dangerous for the investor. Actually, very few of these companies are at a point where they could or should consider being public. Lost in this conversation are the dramatic differences between a high priced private round and an IPO. Understanding these differences is crucial to understanding the true risks in this large private-round phenomenon.

Gurley is particularly concerned with the lack of scrutiny for non-public companies, along with the ease with which unicorns can “mischaracterize their financial positioning relative to industry standard or norm.” The Wall Street Journal highlighted the latter concern last week:

As young technology companies jostle for investors who will pour money into the firms as they try to make it big and strike it rich, some companies are using unconventional financial terms. Instead of revenue, these privately held firms tout “bookings,” “annual recurring revenue” or other numbers that often far exceed actual revenue.

The practice is perfectly legal and doesn’t violate securities rules because the companies haven’t sold shares in an initial public offering. Public companies can use “non-GAAP” financial terms but must explain them and disclose how they differ from measurements that follow strict accounting rules…

Skeptics claim that the practice is yet another sign that the tech sector is plagued with overconfidence and setting itself up for a fall. They say investors who go along with vague, unconventional financial terms are inflating valuations and leaving almost no room for error at fledgling technology companies.

For his part Gurley has said on several occasions that there will “be some dead unicorns this year”; for the sake of argument, let’s say that he’s right.2 The question, then, is whether or not a dead unicorn (or ten) means the bubble has popped — or perhaps more accurately, whether or not there were a bubble at all.

Last week Chris Dixon described The Babe Ruth Effect in Venture Capital: the idea that swinging for the fences (10x returns) necessarily means more strikeouts (failed investments).

The Babe Ruth effect occurs in many categories of investing, but is especially pronounced in VC. As Peter Thiel observes:

Actual [venture capital] returns are incredibly skewed. The more a VC understands this skew pattern, the better the VC. Bad VCs tend to think the dashed line is flat, i.e. that all companies are created equal, and some just fail, spin wheels, or grow. In reality you get a power law distribution…

What is interesting and perhaps surprising is that the great funds lose money more often than good funds do. The best VCs funds truly do exemplify the Babe Ruth effect: they swing hard, and either hit big or miss big. You can’t have grand slams without a lot of strikeouts.

Dixon’s post is about the performance of individual venture capital firms, but I think the Babe Ruth framework is a useful way to think about the current crop of unicorns. Indeed, a close look at the valuations of the actual companies involved shows the exact sort of skew Thiel was talking about:3

Unicorn valuations from most to least valuable
Unicorn valuations from most to least valuable (in billions). Click to see a large version.

The line is a power curve — even unicorns fit the expected venture capital return. This has one really important implication that should shape the way we talk about unicorns and whether or not there is a bubble. Namely, for tech broadly nothing matters outside of ~10 or so companies:

  • Xiaomi and Uber alone account for 22% of Unicorn valuation
  • The top 10 most valuable companies (Xiaomi, Uber, Airbnb, Palantir, Snapchat, SpaceX, Flipkart, Pinterest, Dropbox, Theranos) account for 49% of Unicorn valuations
  • The top 20 account for 65% of Unicorn valuations

Anything that happens to any of these companies is a big deal when it comes to the overall health of the startup ecosystem; anything that happens outside isn’t. To put it in concrete terms, if Dropbox, probably the most fragile of the top 10 (members-only), were to have a down round or sell itself for less than its valuation, that would be a very big story. If Evernote, which is suddenly changing its CEO, were to do the same, it wouldn’t be nearly as big a deal. Keep this in mind when and if Gurley’s predicted unicorn deaths occur.

On the flip side, should a few of these top unicorns finally go public and validate their valuations, nearly the entire unicorn cohort would come out ahead. The entire list of 100 has raised around $55 billion collectively, which is about the same as the combined valuation of any three of the top 10 (or any two if one of the set is Uber or Xiaomi).4

There’s another insight to be drawn from that $55 billion collective investment: it turns out its distribution fits a linear curve much more closely than a power curve (at least once you remove Uber from the calculation):

Unicorn funding. Companies in order of valuation.
Unicorn funding (in billions). Companies in order of valuation. Click to see a large version.

This too echoes what you might expect at an individual VC firm — you invest equally, but profit unequally — but given that no VC firm is invested in every unicorn, there will clearly be winners and losers when it comes to individual firm performance. It’s possible (and probably likely) that the industry comes out ahead in the aggregate even as a significant majority of individual venture capital firms lose money.

I’ve previously laid out why It’s Not 1999: these unicorns are real companies with real business models and real revenues. Profitability is lagging, but given said business models — SaaS in the enterprise, and mostly ads in consumers — that’s to be expected. Most importantly, there simply isn’t the sort of public market froth that made the last bubble so contagious.

Indeed, I suspect that 1999 was less a cyclical peak than it was the top of the hype cycle:

Ideas - 1

  • The Internet was the technology trigger
  • The Dot Com era was the peak of Inflated Expectations
  • The bursting of the bubble and much of the 2000s was the trough of disillusionment
  • The last five years have been the slope of enlightenment

In this reading the technology industry is on the verge of the plateau of productivity, a steady march to remake industry after industry. That’s an exceptionally valuable prospect, and more than anything explains these unicorn valuations, particularly transformative market-makers like Uber or Airbnb.

To be clear, this isn’t exactly a controversial view; indeed, while macroeconomic factors like low interest rates play a role, I think a big reason for the quantity of unicorns is the fear of missing out on one of the greatest periods of value creation we have ever seen. However, some of the most valuable opportunities — particularly the aforementioned market-makers — have strong winner-take-all characteristics: this potentially limits the number of quality unicorns.

I think it’s this dichotomy that makes the current bubble discussion so difficult: most unicorns may be overvalued, but in aggregate they are probably undervalued. It turns out winner-take-all doesn’t apply just to the markets these startups are targeting, it applies to the startups themselves.

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  1. Fortune’s and Lee’s definitions are different: Fortune includes 15 companies that were started before 2003, plus 26 international companies; on the other hand, Fortune does not include any public companies []
  2. I suspect he is []
  3. Valuations are drawn from the aforementioned Fortune Unicorn List; I updated a few of them to reflect recent fundraising []
  4. The $55 billion was drawn from Crunchbase; it’s an estimate, as not all companies had information, some included secondary offerings, and there was a much greater chance of human error on my part []

Apple Music and Apple’s Focus

In a spot-on introduction to a spot-on piece, Dr. Drang nails why, at least in the context of yesterday’s WWDC keynote, Apple Music was such a disaster:

Endings are important, which is, unfortunately, why today’s WWDC keynote will be remembered as a flop.

Two weeks ago I wrote about how Google I/O (members-only) was two separate keynotes: the beginning was about Google doing stuff primarily, at least as far as I could tell, because they were big; the second part was about Google furthering their original mission and doing what they do best — “Organize the World’s Information” — and it was incredibly compelling and exciting.

WWDC went in the other direction. The first 90 minutes were excellent: very tight, with excellent clarity and momentum, well-rehearsed speakers delivering mostly iterative announcements with the occasional surprise. The final 60, on the other hand — the “one more thing” — were the exact opposite: unclear and dragging, with unprepared speakers delivering…well, I’m honestly not sure what most of them were saying. If there was a surprise the lack of a coherent message has to be top of the list.

After all, as Apple CEO Tim Cook so frequently reminds us, “Apple loves music”. Most of us, including myself, have for years given Apple the benefit of the doubt when it comes to such statements, even as the company’s flagship music product, iTunes, has fallen into an increasingly unusable state, and even as the App Store has long since surpassed the iTunes Music Store as a source of not only revenue but more importantly differentiation. When Apple’s annual music event was switched to a grab-all product announcement in the face of plummeting iPod sales, itself reduced to an app, no one questioned Cook’s insistence that music is “in our DNA”.

There is no question that music was in Steve Jobs’ DNA, and you could certainly argue that that specific aspect of Jobs’ DNA was a key component in transforming Apple from a barely solvent niche computer maker to one capable of creating an iPhone, an App Store, and everything else that makes Apple the most valuable company in the world. None of the latter happened without the iPod, without the iTunes Music Store, without that DNA.

Moreover, to be perfectly clear, the ending of the annual music event, the diminution of the iPod, the eclipse of the iTunes Music Store — each of these was the natural order of things. An important part of what makes Apple so impressive as a company is its willingness to destroy its own businesses, an approach that requires always looking forward to the way the world will be, not backwards to the world as it once was (not to mention an organizational design and incentive structures that remove the very real human tendency to preserve and protect). Recall what Tim Cook said about Steve Jobs at the Apple founder’s memorial:

“Among his last advice he had for me, and for all of you, was to never ask what he would do. ‘Just do what’s right,’” Cook said. Jobs wanted Apple to avoid the trap that Walt Disney Co. fell into after the death of its iconic founder, Cook said, where “everyone spent all their time thinking and talking about what Walt would do.”

Here is my question about Apple Music: it certainly is what most of us think Jobs would do. But is it right?

We know streaming is the future (and, for all intents and purposes, especially when you include YouTube — as you must — the present). Sure, iTunes music is DRM-free, and pirated content is as easy to access as ever, but on mobile devices where space, bandwidth, and time are limited, actual music files you have to move from device to device are as obsolete as physical CDs were once the iPod came along.

The business and strategic implications of this shift are profound: the labels would have never made the original deal with Apple had the Cupertino company not been so clearly the lesser of two evils, which means Apple would never have come to dominate their revenue (and thus to gain monopsony power). But now that the piracy threat is inconsequential the labels are unencumbered in their ability to exact monopoly rents from their music collections, ensuring any streaming service operates at their pleasure, on their terms. Including Apple.

Moreover, the fact that the iPod became just an app is symbolic of a far more profound shift: Apple has become a platform company in a way they never were even in the Mac’s heyday, and certainly unlike they were when the iPod was king. Perhaps the right thing to do is to enable — and extract rents from — services with not just the DNA but also the incentives and focus to deliver a compelling music experience.

I can hear the pushback now: A streaming service is table stakes, it’s an essential part of the ecosystem, Apple needs to diversify into services (Android app!). I get it. It makes no strategic sense to not have a music service. On paper anyway. The great thing about Apple, though, what has made the company so unlike every other, is another lesson Cook learned from Jobs. From the Goldman Sachs Technology and Internet Conference earlier this year:

We are the most focused company that I know of, or have read of, or have any knowledge of. We say no to good ideas every day. We say no to great ideas in order to keep the amount of things we focus on very small in number, so that we can put enormous energy behind the ones we do choose, so that we can deliver the best products in the world…

That is not from just saying “Yes” to the right product which gets a lot of focus. It’s saying no to many products that are good ideas, but just not nearly as good as the other ones. And so I think that this is so ingrained in our company that this hubris that you talk about which happens to companies that are successful but then decide that their sole role in life is to get bigger, and they start adding this and that and this and that. I can tell you the management team of Apple would never let that happen. That’s not what we’re about.

“That” sure sounds like Apple Music: there is this (streaming music) and that (curated lists) and this (BeatsOne radio) and that (Ping Connect) and no cogent thread to tie them together beyond the assumption that Apple must do a music service because that is what they do. That’s what big companies do.

Moreover, it’s not like this was the only example of Apple failing to question its assumptions and subsequently losing focus. Yesterday’s demonstration of native Watch apps was very good, but in a very “Why does WatchKit even exist?” sort of way. When the Watch came out most reviews concluded that the Watch made a lot of sense in the long run, but few could get over just how poor the app experience was, with many concluding customers ought to wait.

Imagine an alternate reality where the Watch had the exact same Watch face functionality (including complications), the exact same notifications and communications capabilities, the exact same performant Apple apps, the exact same unexpectedly strong battery life, but no apps beyond a promise they were “coming soon.” Surely reviewers would gripe, but with a “It’s already great, and it’s going to get better” sort of vibe. Yet Apple couldn’t bring themselves to say “no”.

Indeed, what made the first half of yesterday’s keynote so compelling wasn’t just the speakers’ delivery; rather, the clarity of the delivery flowed from the fact Apple was doing what they do best: iterating on products that, once upon a time, were minimum viable products from a feature perspective delivered with a maximum focus on the user experience. John Gruber perfectly captured this quality of Apple in a 2010 piece called This is How Apple Rolls:

Apple has released many new products over the last decade. Only a handful have been the start of a new platform. The rest were iterations. The designers and engineers at Apple aren’t magicians; they’re artisans. They achieve spectacular results one year at a time. Rather than expanding the scope of a new product, hoping to impress, they pare it back, leaving a solid foundation upon which to build. In 2001, you couldn’t look at Mac OS X or the original iPod and foresee what they’d become in 2010. But you can look at Snow Leopard and the iPod nanos of today and see what they once were. Apple got the fundamentals right.

Maybe Apple Music will be great. Maybe the fundamentals are spot on. But the messaging certainly was not, and as I noted after the Watch unveiling, muddled messaging often stems from a muddled product, and muddled products come from a lack of focus. Maybe it’s time for Cook to spend less time talking about how “the management team of Apple would never let that happen” and make absolutely sure that a loss of focus is not, in fact, happening.

Tomorrow’s Daily Update for Stratechery members will include a point-by-point analysis of the rest of yesterday’s keynote

The Funnel Framework

For folks who weren’t there, it’s difficult to describe just how dominant Microsoft was at the end of the 20th century. It wasn’t just that the company and its products were everywhere, both literally and figuratively, but also the longevity of said domination: Microsoft and Windows were the most important company and product in the industry for 23 years.1

Platforms Versus Ecosystems

That longevity was built on the fact that Windows was not only a platform but also the cornerstone of a massive ecosystem. These two terms are often used interchangeably, but I think it’s important to draw a clear distinction:

  • A platform is something that can be built upon. In the case of Windows, the operating system had (has) an API that allowed 3rd-party programs to run on it. The primary benefit that this provided to Microsoft was a powerful two-sided network: developers built on Windows, which attracted users (primarily businesses) to the platform, which in turn drew still more developers. Over time this network effect resulted in a powerful lock-in: both developers and users were invested in the various programs that ran their businesses, which meant Microsoft could effectively charge rent on every computer sold in the world.

  • An ecosystem is a web of mutually beneficial relationships that enhances the value of all of the participants. This is a more under-appreciated aspect of Microsoft’s dominance: there were massive sectors of the industry built up specifically to support Windows, including value-added resellers, large consultancies, and internal IT departments. In fact, IDC has claimed that for every $1 Microsoft made in sales, partner companies made $8.70. Indeed, ecosystem lock-in is arguably even more powerful than platform lock-in: not only is there a sunk-cost aspect, but also a whole lot more money and people pushing to keep things exactly the way they are.

Microsoft’s dominance had a big impact on everyone, and today most people in technology still talk in the language of platforms and ecosystems. However, in today’s era I’m not so sure either holds the sway it once did, particularly in the consumer market. Consider today’s dominant operating systems: Android and iOS. According to platform logic, Android should have long ago achieved total dominance thanks to the network effect that is supposed to accrue to whichever platform has the most users. Android’s advantage is arguably even stronger when it comes to its ecosystem: nearly every non-Apple OEM in the world and every carrier has good reason to push Android, and while it is by a comfortable margin the largest operating system and the closest thing we have to a modern Windows, it is nowhere near as dominant, powerful, or profitable.

The fundamental ideas of platforms and ecosystems also don’t translate well to today’s other giants: Internet companies like Google, Facebook, and Tencent. The latter two clearly benefit from network effects, but it is a one-sided network: users connecting to each other. As for Google, by platform and ecosystem logic, they should be the most vulnerable of all: competing search engines are simply a URL away. Clearly there is another factor at work.

Scarcity Versus Abundance

It’s common to think of the modern computing era as having been launched by Windows and the IBM PC back in 1981 (or the Apple II in 1977): for the first time computers were for individuals, not just departments (minicomputers) or back-end offices (mainframes). The individual nature of computers has only intensified now that we carry them everywhere.

The structure of the PC business, though, while an order of magnitude larger than previous eras, wasn’t that much different from minicomputers or mainframes: there was a defined market to sell to (primarily enterprise), and limited distribution channels. In other words, the opportunity for software companies was scarce, which is why the biggest providers — Lotus, Ashton-Tate, Borland, etc. — all relied on large sales teams. Smaller outfits relied on getting shelf-space at hobbyist stores or a friendly contact with a value-added reseller.

This reality greatly magnified Microsoft’s platform and ecosystem advantages by tying them together: the ecosystem, heavily invested in Windows’ continued success, was the channel for the applications built on Microsoft’s platform; application providers, forced to invest heavily in sales, could hardly spare the money to build for another platform (i.e. the Macintosh) that didn’t have an ecosystem to sell their products anyways.

What ultimately broke Microsoft’s stranglehold was the Internet: specifically, the fact that it made distribution free and freely available. While this didn’t necessarily matter to Microsoft’s core enterprise customers, there was an entirely new market developing: consumers. This, though, was a completely different kind of market: you couldn’t reach consumers through a sales team — there were simply too many of them, and they were only valuable in the aggregate. To put it another way, the shift to Internet distribution and consumer markets meant a shift from scarcity to abundance. Instead of constricted channels and known customers there was a new world of free distribution and an effectively infinite-sized market.

This didn’t affect Microsoft immediately: all those Internet applications ran on a browser that ran on Windows. But while the PC-era Microsoft was king, the post-Internet Microsoft was the proverbial emperor with no clothes: its old platform and ecosystem lock-in were gone, even if the company didn’t know it. That reality would only manifest itself after both consumers and enterprise customers abandoned Windows Mobile as soon as something better came along.

The Rise of “User-First”

Referring to iOS (as well as Android) as “something better” may sound blasé, but the idea of a new offering winning on the substance of its user experience was a profound change: instead of convincing a centralized buyer via a limited distribution channel, winning products had to appeal directly to widely dispersed independent users. And, as I’ve discussed at length, in the case of Apple and the iPhone in particular, the implications of winning via the user experience were profound: no matter how much cheaper “good-enough” modular Android alternatives have become, the integrated iPhone retains a (growing) hold on the high end.

What is interesting, though, is the impact on platforms and ecosystems of a user-first approach. iOS has maintained a platform lead, just as Windows did, but unlike Windows said lead is not based on owning the ecosystem (and thus distribution);2 rather, iOS owns the best customers, i.e. the customers who are most willing to pay. This is hardly a revelation, but I think there is a larger lesson to be drawn: success no longer depends on platforms or ecosystems; rather, platforms and ecosystems themselves depend on access to desirable customers. By extension, the companies who own that access — who own the funnel, to use a marketing term — are the ones who gain outsized influence and, in the long run, outsized profits.

Consider Google; the basis of the company’s success is very simple: their search engine was, and is, superior. They didn’t have a sales team pushing their product to CIOs, or a revenue-sharing plan with resellers; they built an Internet application that was available to everyone and that everyone (eventually) used because it was the best. And, now that they own access to the most consumers looking to buy something online — now that they own the funnel — they have outsized influence and outsized profits.

Facebook fits the same mold: the company built a superior product that connected an extraordinary number of people, all generating content that made the product even more attractive and able to capture even more attention. And, now that they own an outsized amount of consumer attention — now that they own the funnel — they have outsized influence and outsized profits.

The Funnel Framework

All three companies succeed with very different product focuses, but all share the ability to capture a specific type of customer and funnel them to someone who is willing to pay:

Product Focus Captures Funnels To
Apple Superior UX Willingness-to-pay Apple (and developers)
Google Superior Search Motivated Users Direct Marketers
Facebook Personally Important Content User Attention Direct and Brand Marketers

Note the critical link is first delivering a superior user experience and then leveraging that into owning a funnel to a specific type of customer. To put it another way, in contrast to the PC era, distribution and access is no longer the means of control but the end result.

If you look around you can see the funnel framework everywhere:

  • Taxis used to dominate because they owned distribution; Uber delivered a superior user experience, captured the most desirable customers, and leveraged that into dominance of the transportation market
  • Hotels used to dominate because they owned supply; Airbnb delivered superior value to end users and created a virtuous cycle that resulted in a two-sided network
  • Messaging apps deliver huge value to end users and monopolize attention; LINE and WeChat are leveraging that by pushing users to pay-to-play games in particular, while Snapchat is delivering advertising
  • Newspapers used to dominate because they had geographic dominance; BuzzFeed and other successful Internet publishers attract readers by first figuring out what they want and then giving it to them, and then sell either that skill (in the case of BuzzFeed and Vice) or the attention they gather (everyone else)
  • Broadcast channels used to dominate because they owned the airwaves; Netflix and HBO earn consumers’ attention by delivering superior programming and capture the value directly via subscriptions

It’s hard to not be excited about the long-term implications of the funnel framework; I know that a lot of pre-Internet companies are struggling, and I sympathize with employees caught out by failing business models, but it’s worth noting that most of these doomed enterprises were based on something other than providing a superior product. On the Internet, on the other hand, being the best is a first order concern; as a consumer — and as a wholly independent entrepreneur — that makes me pretty happy.

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  1. By my count, measuring from the launch of the IBM with DOS in 1981 to Google’s IPO in 2004; it’s 26 years if your end date is the launch of the iPhone; 19 if you start with Windows proper in 1985 []
  2. This is also why iOS’s lead is much, much smaller than Windows’ ever was []

21 Inc. and the Future of Bitcoin

It seems like no one has been talking about Bitcoin, at least for quite a while. That is what happens when the price of a seemingly magical currency plummets from a high of $1,242 in December, 2013 to a mere $238 as I write this, a drop of 81%. That means the total Bitcoin market cap is about $3.4 billion — far more than perhaps many expected even a few years ago, but a tiny number in the grand scheme of things (for the sake of comparison, Apple sold $3.9 billion worth of iPhones every week last holiday quarter).

That’s why many were shocked back in March when 21 Inc., a Bitcoin-focused startup co-founded by Andreessen Horowitz board partner Balaji Srinivasan, announced that it had raised a shockingly large $116 million in funding for…well, no one knew exactly. Srinivasan’s co-founder Matthew Pauker said at the time, according to the Wall Street Journal:

“Bitcoin is going to change the way that people and businesses and even machines interact with each other,” he says. “But for Bitcoin to realize that vision we need mass adoption. It can’t just be for Silicon Valley.”

Indeed. Perhaps the single biggest obstacle facing Bitcoin is that most folks don’t really understand exactly what it is, or why it’s so interesting.

Bitcoin in Three Bullet Points

Here’s my best attempt to explain Bitcoin in three bullet points:

  • Using cryptographic keys, I can convey to you X amount of Bitcoin (fractions or multiples). This is cool because I’m transferring something digitally — no real-world analog (and associated clearinghouse, like a bank) required.
  • Our transaction is submitted to a global peer-to-peer network, which verifies the transaction and enters it into a public record (the blockchain). Because the blockchain is a ledger of every Bitcoin ever made, any one Bitcoin, or fraction thereof, can only ever be owned by one person. This is cool because it prevents me from double-spending — transferring something multiple times. In other words, Bitcoin makes digital goods rivalrous — uncopyable.
  • That global peer-to-peer network isn’t verifying transactions out of the goodness of its heart; rather, you may know of this verification process by a different name: mining. About every ten minutes one of the verifying computers is awarded with 25 Bitcoins for its effort (a current value of $5,950). This is cool because it means Bitcoin is a self-supporting system: transactions are verified with absolute certainty for free.

Note that only the third bullet point really seems to have anything to do with money: what is most exciting about Bitcoin, at least from my perspective, are the first two points — that Bitcoin specifically, and the applications enabled by the Blockchain broadly, are digital (with all its attendant advantages, including worldwide instantaneous transferability, divisibility, tracking, etc.) yet scarce — in stark contrast to everything on the Internet that can be copied at no cost, much to the detriment of content producers in particular. This means Bitcoin could theoretically be used for all sorts of transactions, including messages, contracts, identity verification, etc., and, of course, monetary ones, where today’s digital applications just don’t work.

Mining and Money

It is monetary transactions that dominate discussion of Bitcoin, not only because that application is the easiest to understand, but also because money is the driving force behind mining. While mining first took place on personal PCs, the fact it is an embarrassingly parallel computational problem meant it was well-suited to graphics cards. Soon, though, as the price of Bitcoin increased, miners began investing in Application-Specific Integrated Circuits (ASIC), chips custom-built for Bitcoin and placing them in data-centers wherever electricity was cheap.

While ASICs represent the fixed cost of Bitcoin mining, the expense of electricity is the marginal cost; indeed, Bitcoin is, for all intents and purposes, the digital representation of electricity. This presents a downside of Bitcoin — it is “free” in part because many of the externalities of its production are borne by society broadly in the form of pollution — but also highlights that even when it comes to mining money is only tangential. Were Bitcoin to go to $1 the vast majority of miners in the world would stop production tomorrow, yet Bitcoin the protocol would continue, automatically changing the difficulty of its algorithm to keep up the same steady pace of transaction verification on whatever processing was available to the network.

Let me be explicit on this point: Bitcoin inherently has nothing to do with money, all of its representations as a digital currency to the contrary. Rather, it is a protocol that enables rivalrous (non-copyable) digital goods.

21 and Mining Everywhere

Last week 21 Inc. finally announced exactly what they were working on. Well, not “exactly,” but at least they said something. Here’s Srinivasan on Medium:1

21 is now officially open for business — and business development. After much hard work, we’ve created an embeddable mining chip which we call the BitShare that comes in a variety of form factors. The 21 BitShare can be embedded into an internet-connected device as a standalone chip or integrated into an existing chipset as a block of IP to generate a continuous stream of digital currency for use in a wide variety of applications. You can request a dev kit by signing up on our website to get started.

That’s right, with the BitShare chip, your Internet-of-Things toaster can mine Bitcoin, along with your cell-phone, and your refrigerator, and, well, your USB charger, which 21 Inc. is starting with.2 Srinivasan lists a whole hosts of potential benefits from this “free” revenue stream, including micropayments from a “free” revenue source,3 subsidized devices, even subsidized chips with 21 Inc. IP.

Frankly, I think Srinivasan massively overstates his case with these examples — the economics for consumers simply don’t add up, for now:4

  • A single BitShare chip, given its minuscule processing capabilities, would need around 93 years to “win” a Bitcoin award
  • Thus, 21 Inc. will operate all of the BitShare chips it sells as a pool: Bitcoin income will be shared across all BitShare-installed devices, but only some — 21 Inc. will keep 75% of the revenue
  • Meanwhile, remember what Bitcoin is — digital electricity. And the consumers who own all of those BitShare-enabled devices will be paying 100% of the cost of that electricity

Indeed, it makes far, far more sense for consumers to simply buy Bitcoin that has been harvested by the sort of industrial mining operations I talked about above on the open market.

But that brings us full circle: what consumers, and why? Read that Pauker quote again:

“Bitcoin is going to change the way that people and businesses and even machines interact with each other,” he says. “But for Bitcoin to realize that vision we need mass adoption. It can’t just be for Silicon Valley.”

Indeed, all the benefits of Bitcoin are right now mostly theoretical: making it real requires a massive journey from here to there, to a world where everyone uses Bitcoin just as they use the Internet, and I think 21 Inc. is best understood as a massive bridge-building project from today’s speculative curiosity to tomorrow’s essential trust network.

A (Digital) Wallet in Every Device

When 21 Inc. first began in 2013, it was as a traditional mining operation: they brought on chip designers and built at least two generations of mining chips, earning 5,700 Bitcoins in 2013, and 69,000 Bitcoins in 2014. While it’s possible the company is pivoting to BitShare chips, I don’t think so; rather, 21 Inc.’s traditional mining pool gives it flexibility in making Srinivasan’s promises a reality. The company will actually have sufficient Bitcoin to guarantee an OEM that they will get a certain return for having placed a BitShare chip in the hardware they build, long before 21 Inc. achieves the sort of scale necessary to even fantasize about meaningful returns. 21 Inc. could also ensure consumers are compensated for the electricity they use, although I’m a bit skeptical about this — I think the play is primarily focused on getting manufacturers on board and hoping that future scale eventually ensures consumers get their fair share.

That may be dubious ethically, but the payoff could be huge: the dynamics of Bitcoin and its application for a variety of trusted transfers shifts tremendously when everyone has multiple hardware-based digital wallets — whether they know it or not! For example, if your phone has a hardware-based digital wallet, applications for trusted messaging or contract signing or a whole host of applications no one has yet thought of become approachable not only for those capable of setting up a Bitcoin wallet but also those able to simply download an app. Identification depends not on usernames or passwords but on unique digital signatures. The possibilities are endless, and, I think, good — and they only rely on a single Satoshi (0.00000001 Bitcoin, the smallest amount that can be transferred).

This is what I think Srinivasan means when he says “we are less concerned with bitcoin as a financial instrument and more interested in bitcoin as a protocol” and that “embedded mining will ultimately establish bitcoin as a fundamental system resource on par with CPU, bandwidth, hard drive space, and RAM.” It turns out lots of people are willing to spend electricity for essential functionality: nearly all of us run routers 24/7, whether we are using them or not, because instant access to the Internet is worth the electrical cost. A more extreme example are DVRs: our set-top boxes are the biggest power drains in our houses, costing $3 billion annually in electricity in the U.S. alone — nearly the entire worth of Bitcoin! — all in the service of making watching TV just a little bit more convenient. Why wouldn’t we eventually be ok with using just a bit of electricity not for profit but for mining the Satoshis we need to use an entirely new class of apps?

Bitcoin the Network

This, then, is the bridge I believe 21 Inc. is building, and why they specifically and Bitcoin broadly deserve more attention: Bitcoin at a conceptual level is not about money, and neither is 21 Inc., at least not directly.5 It’s about dispersed trust and digital scarcity, and the massive number of new applications that can be built on such concepts both similar yet wildly different from what is enabled by today’s Internet. And, while many of those applications are unimaginable — just as Facebook and Google were unimaginable at the birth of the Internet — what is very much certain is that step one is getting everyone, somehow, connected. As Coindesk reported, 21 Inc. is seeking to learn from the best:

“The AOL CD of bitcoin,” the document called the strategy. “Give every user a free trial of bitcoin at near-zero marginal cost. A proven model to onboard millions.”

Best keep an eye on your mailbox — and electricity meter.

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  1. Has Medium replaced Tumblr for the default startup blog? []
  2. That is a slide from the 21 Inc. pitch deck; it’s quite old (note the reference to 21e6, 21 Inc.’s original name), and possibly not accurate []
  3. Journalism’s unicorn []
  4. Unless otherwise cited, 21 Inc. facts and figures come from this report from Coindesk []
  5. Indeed, an under-appreciated part of 21 Inc.’s approach is that all of these embedded chips will verify transactions without the incentive of monetary reward, allowing Bitcoin the protocol to survive even when there is no more Bitcoin to mine []

Podcast: Exponent 046 — Everything Has a Price

On the newest episode of Exponent, the podcast I co-host with James Allworth:

In this week’s episode, we discuss ad-blockers, both personal ones and the rumored carrier-implemented one, as well as and the moral quandary that is the Internet.


  • Ben Thompson: Carriers to Implement Ad-Blocking — Stratechery Daily Update (members-only)
  • Laura McGann: How Ars Technica’s “experiment” with ad-blocking readers built on its community’s affection for the site — Nieman Lab
  • Ben Thompson: Open Source Apps — Stratechery
  • Ben Thompson: The Changing — and Unchanging — Structure of TV — Stratechery

Listen to the episode here

Podcast Information: Feed | iTunes | SoundCloud | Twitter | Feedback

Discuss this podcast in the Stratechery Forum (members-only)