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Sunday, June 6, 2010

The Latest from TechCrunch

The Latest from TechCrunch

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Google Does The Hard Sell On Security For Its Enterprise Apps

Posted: 06 Jun 2010 08:08 AM PDT

It's no secret that Google has ambitions of becoming an Enterprise productivity suite powerhouse; perhaps one day taking over the top spot from Microsoft. As Google's President, Global Sales Operations and Business Development Nikesh Arora told us at TechCrunch Disrupt a last week, Google hopes for Apps to be a billion dollar revenue stream in three to four years. But one challenge has been convincing businesses that a move to the cloud promises security. And some early Apps users have even questioned the security of the suite, which includes e-mail, calendaring, document sharing and chat applications. To mitigate these concerns, Google has released a white paper to give enterprise customers greater transparency into Google's security practices, policies, and technology involving Google Apps. And of course, the white paper is also intended to also assure current and potential clients of its "strong and extensive security infrastructure." Google has even created a special portal about privacy and security for the educational institutions that use Apps.

Hands-on With the Ulysse Nardin Chairman Android Phone

Posted: 06 Jun 2010 12:46 AM PDT

How much would you pay for an Android phone? $99? $199? Maybe $299 with contract? How about $50,000. As you recall, the Ulysse Nardin Chairman is a freaking $50,000 phone. It's only in beta right now, but it will run Android 2.1 and come in multiple styles including a model covered with diamonds. The box, as you'll see in the video, is nutso too. It's basically a dock with speakers and a USB port. The phone is made for the ultrarich. As the charming young lady who showed it to us explained, it's for folks who can't bring their Ferraris into the club and need something equally ostentatious.

Can Indonesia’s Ciputra Prove that Great Entrepreneurs Are Made, not Born?

Posted: 06 Jun 2010 12:23 AM PDT

I've long argued that great entrepreneurs are born not made. I emphasize the word “great” for a reason. A hot market can convince someone to become an entrepreneur but such fortune-seekers are rarely the ones who build lasting, billion-dollar companies.

What about those who say they never intended to start a company but circumstances lead them to success? I'd argue that they may not have always realized they were entrepreneurs, but if you asked their friends, parents and siblings, they would describe them as having always been the kid with the lemonade stand, the kid working an angle, the kid creating something where there was nothing. Like a cylon, something just switched it on later. Seeing an idea through to become something huge is too hard. You simply have it or you don't.

One person has made me question this—a bit. I met him in Indonesia and like Madonna, he's mostly known by one name—Ciputra. That name is on universities and city subdivisions the country over. (That’s him to the right in front of a large painting from his impressive modern art collection.) If Ciputra is the Indonesian Donald Trump, Jakarta is his New York—a city that quite literally has his fingerprints all over it. Now in his late 70s, Ciputra has lived every painful chapter of Indonesian history from colonial times to Sukarno to Suharto and finally to what the country hopes is a stable democracy. And that ride has taken him from obscurity to success to bankruptcy and back to success again.

Ciputra is an architect who describes his aesthetic as "grand." Most of his properties have huge statues of horses, caught mid-air in granite galloping wildly with all their might, nostrils flaring. That, or statues of buxom women who look a bit like the painting at the beginning of "Good Times." He started his first company—a development consultancy—in architecture school but he was frustrated not controlling a project from start-to-finish. Soon after he started developing buildings himself, he grew weary of that as well, moving onto developing whole streets. But that still wasn't enough. He started developing cities within cities. Now,he has 50 under his belt, spanning several continents and some 25,000 hectares.

Since his 70th birthday, Ciputra has been thinking even bigger. He wants to redesign the country. And he wants to do it by creating thousands and thousands of entrepreneurs. Right now, his team has estimated that Indonesia—a country of nearly 250 million people—has just 400,000 entrepreneurs who build scalable, innovative companies. That’s less than 1% of the population. Compare that to 13% for the United States and 7% for nearby Singapore. Ciputra isn't greedy; he figures his plan could change the country if he could help encourage, create and mentor 4 million entrepreneurs or 2% of the country's population. How do you do that? Not with venture capital, but by changing the country's mindset, Ciputra says.

Here's where the born v. made debate comes in: Ciputra says in Indonesia universities don't train entrepreneurs—they train people to be employees. He wants to train people to create jobs, not apply for them. He thinks a change in a university’s mindset can change who comes out of it. He started by opening up a university for entrepreneurship in Surabaya called Universitas Ciputra. The university follows the national accreditation guidelines, but every Wednesday the curriculum is all about how to start high-growth, innovative companies. It was a $10 million dollar investment, and he says he's already ready to open a second one. He calls this the best kind of philanthropy for a country like Indonesia that was held down under colonial rule for a whopping 350 years.

The University has some nods to Silicon Valley, with role models like Google, Amazon and Yahoo splayed on the walls of the IT department. And its student housing is in a building called Berkeley, so kids can tongue-and-cheek say they’re at UC (as in Universitas Ciputra) Berkeley. But like other Ciputra developments, this is a huge project that includes not only a school but housing, a hotel, a golf course and one day, a waterpark just behind the school– to beat that brutal Surabaya heat I suppose. (The picture at the top is part of the complex’s model in the lobby.)

The school can influence several hundred new students a year, but that's not enough for Mr. C. That's why he partnered with the Kansas City-based Kauffman Foundation to help train the people who train entrepreneurs. (More on the collaboration here. Disclosure: Kauffman also partially funded the book I’m writing.) Those trainers train other trainers and suddenly the country has thousands of people teaching kids how to be Western-style, high-growth entrepreneurs. This year, he convinced the government of Indonesia to send about a dozen university teachers from colleges outside his purview to Kauffman's six-month training course that entails trips to Boston, Silicon Valley and other American entrepreneurial hot spots.

I visited the university in Surabaya during my trip to Indonesia a week ago, and was impressed at the students' enthusiasm. I got peppered with questions about monetization and motivation not only in Silicon Valley but around the world, and afterward one kid told me confidently I'd be writing a book about him one day. The university is about to graduate its first class and out of 166 kids, more than 100 have started companies. More surprising: Nearly 50% of the students are women. "We select people with passion," Ciputra says. "Don't come here if you don't want to be an entrepreneur. I told them at my first lecture to get up and leave if they wanted to be an employee."

But back to this question of whether entrepreneurs are born or made. As Ciputra told me about his grandkids and his friends’ kids who started mango stands and cake stands in Indonesia, I asked him whether he thought most kids were naturally entrepreneurial and whether a societal fear of failure—which is more pronounced in some places than others—somehow beats it out of us. He nodded. But he added that if that were true, kids need either a parent, a society or a school to encourage that feeling. Because all universities in Indonesia require government accreditation, school is the one of the three that can be centrally fixed, by fixing the curriculum and the teachers.

"Ah ha!" I said, having read that Ciputra grew up in a poor, remote Indonesian village. "If that’s true, what explains your success?" Ciputra says his father—a shopkeeper—instilled the entrepreneurial spirit in him when he was young before he was captured by the Japanese during the country’s occupation of Indonesia. But he adds he wished he'd had more encouragement. "Who knows? If I'd gotten it from school, I might be 10 times bigger today," he says. "The richest Indonesians have maybe $5 billion. Bill Gates has $50 billion."

In a country of 17,000 islands and 240 million people this is hardly a small job. But Ciputra clearly feels this is his legacy. He's got the money, determination and influence that few others in the country have—or would be willing to spend– on this vision. It's a project only a man bored with building cities could dream up.

Facebook, Steve Jobs, And Dog Day Afternoon

Posted: 05 Jun 2010 08:26 PM PDT

In his most recent email blast-turned-blog post, Jason Calacanis has chosen a familiar subject: Facebook CEO Mark Zuckerberg. The post is more focused than his previous one about Zuckerberg, but in some ways, it’s more outrageous as well. In case you haven’t been following along for the past couple of months, Calacanis is no fan of Zuckerberg and the way he’s handled the recent privacy fiasco or his company. He’s hardly alone. But in this latest post, Calacanis (humorously) compares himself to Serpico, the whistle-blowing cop (a real-life figure) played by Al Pacino, in Sidney Lumet’s 1973 film of the same name. And he gives Zuckerberg five “simple” ways to make Facebook more trustworthy.

Calacanis has asked for a response to his thoughts, so I figured I’d write it out just as I did to respond to his “The Case Against Apple-in Five Parts” rant last Summer. To be clear, many of Facebook’s recent privacy issues are very real. And Facebook, as usual, has done a poor job addressing many of them and managing the backlash. That said, the overall implication Calacanis keeps making that Facebook (or Zuckerberg in particular) is in some way an evil force out to screw us all is silly. Calacanis brings up Serpico, but this actually reminds me of another Lumet/Pacino pairing: Dog Day Afternoon. In that film at one point, Pacino’s bank robbing character, Sonny, starts screaming “Attica! Attica!” over and over again, invoking the Attica Prison riots in order to get the people to rise up against the police.

So is Calacanis Frank Serpico? Or is he Sonny Wortzik? The five points:

1. Add an export key

Okay, this seems like a fair idea at a high level, but the key to this is the details. Calacanis wants a button that a user can click and get returned all of their data in some kind of file format (similar to the tools most blogging software offer, for example). “In the case of Facebook you could do this by having the ability for users to export all their photos, contacts and–gasp–their social graph!,” he writes. Okay, contacts is simple enough, but their social graph? What exactly does that mean? The connections you have with everyone else on Facebook? How exactly do you export that? And even if you do, where else do you import that to?

If it’s an XML file showing who you’re connected to, how would another service be able to use that? They’d have to be able to match names to names — assuming that those people were also on their service in the first place. And if it’s not for import into another service, what use would this be to the user? Just peace of mind?

Further, the picture export is interesting. For a long time, the major critique against Facebook was that it was a completely closed garden. What’s funny now is that in some regard, we’re hearing almost the exact opposite complaint. Pictures is a good example of this because you can (finally) allow other service to import your pictures (and more importantly, keep them for more than 24 hours) through the new Open Graph Protocol. Sure, this isn’t exactly a user-friendly export — but I’d actually argue that no user-export feature is user-friendly. All pump out XML files (or the like) that 99.9% of users have no idea what to do with.

Better would be if a third-party service built this exporter tool (which Calacanis does sort of allude to). But that again would bring up privacy issues. What data about your social graph should this tool be allowed to access and export? Your data is the obvious answer, but the social graph means grabbing at least some data from others as well.

Calacanis does note that “no more than 1% of users would ever use this feature” — that’s undoubtedly true — so it’s important to note just how complicated it would likely be for Facebook to offer this sort of export. Aside from pictures and contacts (again, simple enough), you have status updates, social game data, wall posts, videos, etc, etc, etc. And you have all of this for connections between the nearly 500 million Facebook users. If we think the Privacy settings are a nightmare (and they are), I can’t even begin to imagine what the export settings would look like. And how much work would this require Facebook to put in for a feature that basically no one would use?

It’s a nice thought, but I’m not sure how much more trustworthy this would make Facebook seem to the average user.

2. Support a common 'Like' standard

Okay, this obviously isn’t a new idea — in fact, it sprung up at the same time that Facebook’s Like button did. Here’s the problem with this: it sounds great in theory, but would it be great in practice? And further, while it may be nice if Facebook supported something like this, they are still a company with their own goals, so what’s the benefit of supporting it from their perspective?

Calacanis’ stance is obviously that the benefit of Facebook supporting this would be as a gesture of good will towards both the open community and the larger web community that they (according to him) have screwed over again and again. Okay, again, that’s a nice thought, but I’m not sure it outweighs the benefits of Facebook having its own product. As I see it, there are two key benefits to this:

1) Facebook gets all of the “like” data. This is the core of why a lot of critics hate the Like button, but it’s also the core of why Facebook is doing it. This information is valuable both because it helps Facebook’s stated goal to make the web “more connected”, and it allows Facebook to be the service that can be the best at doing that. And it’s also undoubtedly valuable from a monetization perspective. Facebook won’t yet say how such data will be used to serve up ads, but it likely will be in the same way that Google searches are. No one calls Google evil for doing this (or at least, that has died down over the years), so why can’t Facebook do it? Newly instated CTO, Bret Taylor, recently told VentureBeat the following about the Like button:

Let me clear something up. We are 100 percent focused on explicit data. We have pretty strict data retention policies. The implicit data is anonymized after 90 days. We use it to measure something called "like-through" rate so we understand how the buttons and plug-ins are used and how we can improve them.

2) Facebook can control the experience. If the Like button was an open standard, Facebook would have to wait for whatever standard body is overseeing it to make changes. Chris Saad had a great guest post on Mashable the other day about some of these issues. In it, he writes, “Facebook's challenge, however, is that they are pioneering many of these interactions and can't necessarily wait for standards to emerge or crystallize before acting.” While he doesn’t specifically mention the Like button, Saad undoubtedly wants to see Facebook adopt an open version — but he also wisely acknowledges that it may not be in their best interest to do so in the short term. And he points out that Facebook leading the way in new areas gives ideas for new open standards, such as OpenLike.

Calacanis goes on to say that Facebook should support the Like standard rather than “steal everyone's ideas and incorporate them into your product and then make them closed,” but I’ll get to that in a second.

3. Do not require folks to use your currency

I’m not sure this would actually make Facebook “more trustworthy” at all. Calacanis says the service should allow “100 different currencies inside of Facebook“, but wouldn’t it seem more trustworthy to users if they had the one simple option that Facebook vouched for?

Calacanis uses a good portion of his post to heap praise on Apple CEO Steve Jobs, saying that Zuckerberg could learn a lot from him — but this one payment system rule is the exact same system Jobs has in place in the iTunes/iPhone/iPad ecosystem. In fact, I have no doubt that this movement to Facebook Credits is Zuckerberg learning from Jobs. Some techies bitch about Apple’s system being “closed” in this regard, but customers don’t. They like the simplicity. Can you imagine if developers were allowed to offer 100 different ways to pay for things through iTunes? Would that make the system more trustworthy? No, it would make it a lot less trustworthy.

I just don’t get this argument at all. This might make Facebook more trustworthy to third-party payment systems, but not really to anyone else. And further, the praise of Jobs in this post seems to directly go against much of the criticism against him in the post from last Summer that I responded to.

4. Remind users of their privacy setting

This idea Calacanis did pull directly from Steve Jobs. At the D Conference, Calacanis quotes Jobs as saying, “Privacy means people know what they are signing up for in plain English. Some people want to share more data. Ask them. Ask them every time. Let them know precisely what you are going to do with their data.” Calacanis takes that and says that Facebook should: “Require a dialogue box every 10 days or so that reminds users of the default status of their updates before posting them, and allow them to set their standard privacy setting in that dialogue box.” Setting aside the fact that this would annoy a huge percentage of those 500 million users to no end, that’s not exactly what Jobs was talking about.

Sure, Jobs played up Apple’s respect of user privacy in broad terms, but what he was actually referring to there was the sharing of location data. When you load up a new iPhone app, it prompts you if it’s going to use your location data (which you have to opt-in to). But for native apps, this setting is remembered (not brought up again every 10 days). Meanwhile, in Safari, each time you load an app that wants to use location data, there’s a prompt each time — and let me tell you, it’s annoying as hell to have to hit “Okay” each time.

Google is actually better than Apple at letting users know what each app does. Every time you install an app on Android, you’re alerted what it needs access to in order to fully function. Sure, you could argue that Android needs to do this since it doesn’t have the same locked-down App Store approval policies as Apple does, but it’s still worth noting that Apple isn’t quite as strong here and you may believe. And why not? Again, some of it is because of the App Store policies, but some of it is also because such prompts take away from the user experience.

Also, one application that does prompt you about your sharing of information every so often is Google’s Latitude. Because it’s running all the time in the background, every so often they send you an email to let you know it’s on, and to see if you’d like to turn it off. It’s a pretty good way of handling a controversial feature — but they key there is “feature” — it would be overkill for Facebook to do that for all of its privacy settings.

It’s also important to note that both of these Google and Apple “prompt” examples are about location. Facebook does not yet have a location feature. And you can be sure that the recent privacy flare-up is one of the reason they haven’t released anything yet.

5. Stop stealing every idea out there and partner!

This is an interesting point because (like point 3) it has absolutely nothing to do with the users. Users don’t care if Facebook is copying ideas from other startups. Most of them would have no idea. So I guess this is for Facebook to be more “trustworthy” within the startup community. But Calcanis’ argument breaks down quickly here.

In terms of stealing other features — Facebook absolutely has done this in the past. But to bring up Calacanis’ newfound hero again, Steve Jobs has a favorite Picasso quote on this. To which he adds, “we have always been shameless about stealing great ideas.”

Calacanis notes: “The proper protocol in the valley is to at least try and partner, or purchase, the startups who have innovated in a space you're going into. It's clear you have no intention of doing that, and hey, that's your right!

In my very first post for TechCrunch, I noted that Facebook was more or less copying FriendFeed, and that the Facebook you’d be using in the future would look exactly like it. What ended up happening? 4 months later, Facebook purchased FriendFeed.

Twitter is another company that Facebook has clearly been emulating. You may recall that Facebook tried very hard to buy them, but Twitter (probably wisely) wouldn’t sell.

In terms of partnering up with other startups, Facebook does seem to do this quite a bit. With video events, for example, they often use Ustream. For their own events, rather than selling their own tickets, they use Eventbrite.

So I’m just not sure about Facebook having “no intention” of partnering with or buying (even if only attempting to buy) other startups.

That being said, no one trusts you any more after you screwed app developers and lifted Twitter, FourSquare, Quora and countless other startups' innovations,” Calacanis writes. Twitter was already addressed, but Foursquare is an interesting one to bring up since, again, Facebook’s location features haven’t launched yet. That said, the indications are that Facebook will actually team up with services like Foursquare in some way to federate their check-ins. This again, is hardly smashing the competition.

As for Quora, it’s a product being built by ex-Facebook executives (not just your average new startup). And Facebook has already said (on Quora, no less) that it’s not trying to compete with Quora.

Attica! Attica! Attica!

Again, does Facebook have some privacy issues? Of course. But the real question we need to be asking ourselves is: why? Is it because the company and its CEO is evil and/or doesn’t give a shit about the users? I’ve said it before, but it’s worth repeating: if you honestly believe that, quit Facebook immediately. Don’t blog about it, don’t tweet that you’re thinking of doing it, just do it and never look back.

Personally, I have a hard time believing that. I do not believe we’re in some old-school James Bond movie where villains do evil things just to be evil. Nor do I believe this some new-school James Bond movie where villains do evil things for money. Is Facebook trying to make money? Of course. But they’d have to be the dumbest company run by some of the smartest minds in the world to start doing evil things on purpose to make money and believe that is a long-term business strategy. Everyone would follow my advice above and the company would go under.

Some people (like Calacanis) think we’re seeing that now. But the fact of the matter is that despite a lot of hubbub in the tech media, most users don’t seem to be fleeing – just as they didn’t after the last flare up, and just as they didn’t the time before that. I wouldn’t be surprised if more people joined Facebook on Quit Facebook Day than actually quit. Instead, Facebook continues to grow at an expanding rate. The limiting factor there seems more likely to be the number of people on Earth rather than privacy concerns.

So if the company isn’t evil and/or does actually give a shit about its users, then why are we seeing these very real privacy issues? Because they’re trying to do something very difficult. Facebook is trying to move from a service where most of the data is some level of private (which again, many people used to bitch about), to a service where much of the data is shared. If you believe them, they’re doing it because this will be the future of the web.

Twitter has had this stance since their inception, so for them, there is no controversy. But considering Facebook’s more private history, the transition is rough (to say the least). This is a big, ballsy bet for them. But that’s how Facebook got to where it is today — by making big, ballsy bets.

And again, I don’t think it’s in the name of screwing over the users — remember: most have signed up in the past year and don’t have the same notions of privacy on the service as some of us long-time users may. And I also don’t think this bet is entirely about making money (though some of it is). I think that many people at Facebook actually believe the steps they’re taking to make the larger web more social will lead to a better web. (If they didn’t believe that, wouldn’t we see a lot of them quitting?) And we can all take comfort in the fact that if they’re wrong, history will shove them aside. But I actually think history is on their side here.

Calacanis can build cases against Apple and Facebook all he wants (and then later make a case for Apple against Facebook, or something), but the fact of the matter is that the masses aren’t with him here. Why? Either A: they clearly don’t think Apple or Facebook are evil or they wouldn’t support them the way that they are. Or B: they simply don’t give a shit. Or C: both. I’m tempted to go with C, but I’m going to go with A here.

And if that’s the case, screaming “Attica!” over and over again isn’t going to work. It’s just going to make you lose your voice.

Also, Lakers in 6.

[images: Warner Brothers]

TC Teardown: Chegg Is A Money Machine

Posted: 05 Jun 2010 07:44 PM PDT

Editor’s note: Book rental startup Chegg is making money hand over fist. Guest author Steven Carpenter does a teardown of its business model and estimates its revenues will reach $130 million this year.  Carpenter was the founder and CEO of Cake Financial, which was sold to E*Trade earlier this year.  Previously, he’s written TC Teardowns on Groupon and Zynga.

Chegg may very well be the fastest-growing, most successful, second-generation e-commerce startup that you hardly ever hear about,except maybe for the fact that it’s raised more than $140 million. Chegg is the "Netflix for textbooks.” It lets students across 6,400 college campuses rent from a virtual bookstore containing 4.2 million books. Based on my analysis (which I get into more detail below), the company is on track to generate $130 million in revenues in 2010, up from $25 million in 2009, and $10 million in 2008. During the January, 2010 semester, I estimate the company made close to $1 million in revenue a day, up fivefold from $200,000/day the previous January, and it should double that this coming September. My analysis suggests Chegg will do close to $50 million in revenue this September alone. It is underappreciated, to say the least.

Chegg is disintermediating the $5B+ college textbook market by providing a low-cost, short-term, nationwide rental alternative to the high-priced university bookstore. This disruptive model will likely shrink industry revenues by half in the coming years, with Chegg in a leadership position to command 80%+ market share. The key questions, of course, are: 1) Is this a winner-take-all market, 2) What can Chegg do to fend off the likes of the major bookstore owners, Barnes & Noble and Follet, as well as Amazon and Apple, and 3) Is Chegg a harbinger of a new age of startup rental services?

Old School
The Chegg story is different from those of other breakout startups, such as Groupon and Zynga, in five key ways. First, rather than creating an entirely new industry, Chegg introduced a proven service concept and relied on established customer behavior (mail-order rentals) in an old, highly dysfunctional category, whose customers felt captive and where costs were spiraling out of control. Second, founded in 2003, the company took four years to find its business, so it was not a rocketship from inception. Third, rather than targeting a broad audience, Chegg focused on solving the pain point of a specific customer set desperate for an alternative. Fourth, Chegg, like traditional e-tailers Amazon and Zappos, requires a complex infrastructure to handle warehousing, shipping, and returns for millions of physical items, as well as a customer service desk that is highly seasonal. And fifth, because Chegg is innovating in an existing industry, the company faces rampant competitive threats from both the old guard and new entrants alike.

Not Just Extra Beer Money
According to the Department of Education, the annual cost of tuition, room and board for a four-year public institution is now $13,500, while a private university will set you back $30,400.

While college tuition costs have far outstripped inflation, having grown at an average rate of 7.74% per year since 1978, guess what constitutes the second highest educational expense for college students? Textbooks.

And those costs have grown at an average annual rate of 6.9% over the same time period, more than the growth of medical care expenses, causing real hardship to students who can already barely afford to put themselves through school. The issue of textbook affordability is so acute that in 2005 Congress asked the Department of Education to conduct a study on the matter and then released a plan in May, 2007 to make textbooks more affordable.

BMOC: Big Monopolist on Campus

According to the National Association of College Stores, students have historically been paying nearly identical prices for both new and used textbooks. Last year, the average list price for a "new textbook" was $64 compared to $57 for a "used textbook."

When you consider that bookstores are making significantly higher margins on used vs. new books (35.7% to 22.3%) as a result of taking advantage of students by buying back (for very little money) the very books they just sold them last semester, its is clear that bookstores have little incentive to change. Students, on the other hand, are more than ready for a more economical solution that treats them like customers.

"Hi, I'm Chegg"

Chegg launched its rental service in 2007 and it quickly gained traction with students. Highly dependent on the fall and spring semesters when the majority of textbook-buying occurs, Chegg saw a nearly 2X increase in traffic to its website  from Fall, 2009 to Winter, 2010.  In January, it drew 1.3 million unique visitors, according to Compete. This was 10 times more than its closest startup competitor, Bookrenter. Based on its current growth pattern, I expect to see another 2X – 2.5X increase in traffic to the website this fall.

How Fast is Chegg Growing?

Sometime in 2008, Chegg began publishing on its homepage a real-time tally of the total dollars the company was saving its customers. Thanks to screenshot captures and Google image search, I was able to put together the following chart, which shows the explosive growth the company has experienced since the beginning of 2010. The company passed the $100 million savings mark on January 11, 2010 after two years of operation and needed just an additional three months to cross $200 million in May.

Financial Report Card

Jim Safka, the former Chegg CEO, said in an interview that the company generated $10 million in revenues in 2008.  According to a company press release, Chegg saved students just over $16 million in 2008. That means the company is saving students 63% off the list price of books and making 37% in revenue. Using this ratio, I estimate the company did close to $1 million in revenue per day during the winter semester 2009-2010, an increase of four to five times its daily average of $200,000 a day during "off peak" business days.

Based on this ratio, I estimate Chegg generated $25 million in 2009 and will do $130 million in revenues in 2010, accounting for increased traffic and awareness, almost half of which ($50 million) will come in September alone.

Based on my analysis, Chegg is likely operating at breakeven or at a slight loss each month, making the bulk of its profits in September and January. The reason for this is the complex and expensive warehouse and customer service operations required for this business.

Chegg hires three different tiers of employees: full-time engineering and marketing, warehouse, and customer service. Chegg needs to preserve as much flexibility as possible with its customer service and warehouse teams, so that they can be ramped up or down depending on the time of the year. When things are slow, the company still needs to carry the costs of its warehouse.

With a strong affiliate program that costs the company 8% of revenues, and its textbook buyback program, Chegg's profitability comes down to how effectively they manage three aspects of the business: 1) textbook wholesale cost, 2) warehouse efficiency, and 3) customer service operations. These are three competencies that are very difficult to learn and mimic, creating strong barriers to entry.

Chegg is clearly planning for continued future growth. In February, the company announced plans for a brand-new warehouse facility in Shepherdsville, Kentucky, which will cost the company $27 million and employ another 100 full-time and 1,200 seasonal employees.  Based on my analysis, Chegg will likely have to double its monthly revenue run rate to $10 million in order to cover these additional expenses. Chegg had previously raised $55 million in debt in November, 2009 to invest in this area.

Is This A Winner-Take-All Market?

The nascent textbook rental market is looking a lot like the early days of the online DVD rental business. Online-only startup, Netflix, managed to out-innovate, out-operationalize, and outlast its deeper pocketed rivals—mainly Blockbuster—that had the added advantages of a local physical storefront and customers who already rented movies!

The potential challenges for Chegg look a lot like those facing Netflix a few years ago (and a key one that does not):

  • Lack of a physical footprint on campus
  • Industry long dominated by a few, deep-pocketed players; in this case, Barnes & Noble and Follett, which operate more than 1,500 campus bookstores between them
  • Impending threat of digital replacement of physical goods
  • A seasonal product need that does not fully utilize operational capacity

But here is what Chegg does better than anybody else, which makes it difficult to compete against and win:

  1. Test Quickly and Fast Rollout: The company can test concepts in discernable communities with limited risk and capital outlay. At the formation stage, the company could limit the number of books it needed. As it grows, it can roll out new services quickly after proving out the concept at say, Florida State.
  2. Marketing: There is nothing as viral as a college campus. FTW!
  3. Operational Excellence: Like Netflix, Chegg is excellent at pick, pack, ship, and return. This is incredibly difficult to do. And will become more so when the company begins experimenting with extending the model to other books. See #1.
  4. Scalable: Chegg will always have better inventory than local bookstores and better pricing. There is nothing stopping Chegg from offering other kinds of books for rent.
  5. Customer Service: 30-Day refunds, free return shipping, customer support, tree planting. As I mentioned above, managing for peak and off-peak times is difficult.

Based on my financial analysis above, operating a physical bookstore and running an online rental service require different core competencies. I believe this is a winner-take-all business and that Chegg should control 80%+ market share over time.

Strategic Plan

In order to further ensure its position as market leader, I believe Chegg should position itself as the "Amazon for College Students" and cater to their unique university needs. The company should also go deep into expanding its classroom offerings, such as class notes and digital goods.  Here are some other things it could do

  1. Partner with bookstores for physical presence and kiosks a la Red Box
  2. Expand its assortment of books to leverage its operational expertise and capacity
  3. Expand classroom offerings and potentially acquire companies in this space, such as lecture capture company, Echo 360
  4. Embrace digital a la Netflix and partner with publishers
  5. Work with Apple and e-reader company Kno (started by Chegg founder Osman Rashid)

The big question for Chegg down the line is how do they counter the cyclicality of the textbook business with more steady streams of revenue.  I’d rent a novel for $5 if there was an easy way to return it.  Wouldn’t you?

Join The Cult! Facebook Hoodie With Mysterious Insignia Found On eBay

Posted: 05 Jun 2010 04:31 PM PDT

Earlier this week during an interview at the D8 conference, Facebook CEO Mark Zuckerberg did the unthinkable: after finding the hotseat a little too toasty for his liking, he took off his hoodie.  Interviewer Kara Swisher quickly discovered that the hoodie had a mysterious badge stitched on the inside and joked that Zuckerberg was in a cult. And then the Internet went sort of nuts.

Tweets abound about Facebook’s Illuminati-like status. The folks at SFWeekly managed to recreate the diagram and did a thorough analysis on what it might mean. The Next Web thought it was creepy. And back at Facebook HQ, three goats were sacrificed in an attempt to ward off yet another wave of bad press.

Now, one Facebook employee has apparently tired of leading a life shrouded in secrecy — they’ve put their hoodie up for sale on eBay.  It’s described as “the exact same” as the one Mark Zuckerberg wore to the conference. And while it’s unclear whether the hoodie alone is enough to gain official entrance into Facebook’s cult (you may have to go through an interview or two), it’s probably enough to blend in at the weekly midnight bonfires.

Don’t be surprised if other enterprising cult members decide to sell off their hoodies in the near future to capitalize on the public’s increased awareness. Oh, and 15% of the proceeds of this sale are apparently being donated to the EFF.

Here’s the description:

This is a limited edition, employee only, Facebook hoodie. The same exact one worn by Mark Zuckerberg at the D8 Conference.

Size: XL

Buyer pays shipping. Will ship within 24 hours of winning the auction.

Ships from San Francisco, CA. No pick-ups/drop-offs.

Democratizing Talent: Guy Oseary, Greyson Chance, NowMov, IndieGoGo and the Future of Talent

Posted: 05 Jun 2010 03:19 PM PDT

This guest post was written by SGN founder and Executive Chairman Shervin Pishevar. Pishevar served as SGN’s CEO until January, when he handed off the role to former EA and LucasArts exec Randy Breen. Prior to founding SGN, Pishevar was the founding president and COO of Webs and cofounder of Hotprints and Hyperoffice. He is also an active angel investor.

I get home after a long day and there’s an email from the founders of Nowmov waiting for me in my inbox. I had recently invested in the angel round in Nowmov along with Ron Conway, Ashton Kutcher and others. Ashton had helped seed the idea of Nowmov and introduced me to the team. Their vision: to use the collective intelligence of the masses to watch the most popular videos and content on the Internet in real-time. When I met the incredible team behind them (YCombinator and former Apple engineers) I wrote the check on the spot. The idea of creating customizable channels programmed by the hearts and souls of humanity moved me. Little did I know, just how moved I would be until that little email was sitting in my inbox waiting for me to click on it.

The email was a link to Posterous where the Nowmov founders had created a forum for the investors to get updated and get feedback. I remember thinking 'this is really neat.' I saw a comment from another awesome angel, Andrea Zurek, a good friend and early googler who now is part of XG angels (ex-googlers). I responded right after saying,”I wish all startups communicated this way with their investors and advisors!” Then I clicked on Nowmov to help give further feedback to the founders. Immediately, the NowMov channels highest ranking video popped up showing me what video humanity was most loving that very second.

The video was titled “Paparazzi” and in it is a kid sitting at a grand piano on stage that looks like a school auditorium. My first thought was, ‘heh, he looks a lot like my son, Cyrus, who’s 12. On the piano he is playing the cords to the widely popular song Paparazzi. Behind him on the raised stage is a bunch of teenage girls about the same age of the piano player. They all look kind of bored in the beginning. After about 30 seconds, I am thinking, ‘heh, nice piano playing but I’ve seen better.” The girls in the background look like they are thinking the same thing.

But then at :33 seconds this boy opened his mouth. And out flowed a voice that immediately hits your heart. You can see the ripple effect across the faces of the girls. Theirs eyes widen. They turn to each other in shock and smile. You can see as he continues to flex his vocal skills they continue to be shocked and smile in wonderment. In their faces you see reflected the reactions of the whole word. A superstar is born before our very eyes. This boy has the potential to be his generation’s Elton John or Billy Joel. His name is Greyson Chance. It’s a name we will all know.

I immediately shoot an email to my friend, Guy Oseary, the superstar manager to Madonna and many more top stars. The title of the email said, “You must sign him today!!! He’s a superstar!!” Sixty seconds later my iPhone rings and it’s Guy. “I just met with him!”, Guy said. Guy was already on top of it and meeting with him and his mother all day. Meanwhile, over 40 other competing agents were trying to get to them. But when you could have Guy Oseary as your manager why would go anywhere else? The video quickly to over 4 million views in one day, after Ellen then featured it, and has now crossed 20 million views. The next day he performed on Ellen live! (Note: Guy and Greyson just announced that they have officially joined forces!)

I’ve watching this video many times. It’s playing as I write these words and tears of inspiration flow as I watch the transformation in the audience from boredom to wonderment in 30 seconds. The video captures a moment in time where this boy transforms before our eyes like a butterfly coming out of a cocoon. One minute he was an unknown somewhere in the world practicing in his living room countless hours to an audience of none and the next he is performing for the entire world.
This is the modern mythology of our planet; that anyone can pull out that magic sword and transform himself into King Arthur; The dream that anyone in the world with talent can and should be discoverable. We live in a world where true talent can be discoverable without barriers. Our generation must take it all way & democratize merit for all. In a world like this we don’t even need shows like American Idol. The collective hearts, minds and passions of humanity will discover that talent together and shine a passionate light on them.

The more access the world can have to resources to develop their natural talents the better. At the same time we must develop ever more channels for that talent to shine and be discoverable. Platforms like IndieGoGo and Kickstarter are now helping fund independent talent through crowdsourcing funding. My son Cyrus is about to fund his trip to train at the Shaolin Temple and my daughter Darya is going to raise funding for her iPillow invention using IndieGoGo! They are so excited! The Bake Sales of the past are now digital. And once the talent is developed and trained we have new services like NowMov to discover them and share our discoveries on Facebook and Twitter. As an angel investor, I have learned that investing in people always trumps everything else. So a future where people and talent are ever more discoverable is exciting time to be alive.

There are countless others in so many fields who are waiting to be discovered. He might be coding away in a tiny apartment in Moscow. She might be writing the next great novel in Buenos Aires. He’s composing the next great classical sonata in Karachi. He might be designing the next great wave of architecture in Tehran. She might be painting her way to the next Picasso. He’s discovering a cure for a cancer in Kenya.
The better we can incubate the world’s talent and the better we can broadcast those talents to each other the faster we can progress and inspire each other forward. Or as the lyrics to the Paparazzi song say:

We are the crowd
We’re a co-coming
Ready for those flashing lights
Baby, there’s no other superstar…

Why Privacy Failures Are In Facebook’s DNA

Posted: 05 Jun 2010 11:50 AM PDT

Elias Bizannes is the chairperson and executive director of the DataPortability Project; founder of the Startup Bus; creator of the Silicon Beach community; and manages the finance function at search engine startup Vast.com. He previously was at PricewaterhouseCoopers Australia, where he rolled out a CEO-sponsored social media program using to change collaboration practices at the firm and make it more “open”.  In this guest post, he tackles the cultural roots of Facebook’s ongoing privacy problems and suggests a solution in the form of a clear data portability policy.

Facebook’s technological prowess is tarnishing its image, which could damage its long-term corporate success. What worked for Facebook when innovating as a startup with a superior service, will not work when the technology manipulates the personal information of its community—without its perceived permission—especially once Facebook starts to monetize that information. If Facebook really wants to change the world, then it should start at home and not expect the world adapt to it.

The Facebook Culture: Do Now, Fix Later
Facebook is famous for releasing new products and completely reinventing itself, often to the protests of its large community. When the live homescreen launched, it was filled with bugs that subsequently had to be fixed—and Facebook’s engineers were proud of this. In their eyes, they were compliant with what founder Mark Zuckerberg has styled this organisation to be: a hacker culture, permanently in beta—rapid innovation for innovation’s sake and a “because we can” attitude.

The hacker mentality extends to Facebook’s practices with member privacy. When Robert Scoble posted a private exchange with Zuckerberg, Zuckerberg expressed this culture with these words:

We've been listening to all the feedback and have been trying to distill it down to the key things we need to improve. I'd like to show an improved product rather than just talk about things we might do.

This is the kind of statement a good entrepreneur would make at most startups in Silicon Valley.  It is not what the CEO of a globally significant company should espouse. Because when you already matter to the world, when you have built a community nearly 500-million strong, your existence is dictated more so by your environment.

Facebook is no longer a startup; it’s a company with a vast community, levying an impact so large that US senators bother to take the time to ask questions about company practices. Entrepreneurs might prefer a do-now, talk-later culture; but when you build a company on the philosophy of community and that has a global impact, you must engage members in a continuous dialog that demonstrates authentic concern for their needs and expectations.

“Stakeholder management”
If you expect to change the culture of a company or a community, you must manage the relationship with your stakeholders. I learned this important lesson when rolling out wiki and blogging tools at one of the world’s largest and most conservative private companies, tackling the specific problem of making the culture more open. I had the full support of my firm’s leadership to do what I wanted. Yet the middle management held me back because I didn’t recognize they were my stakeholders—and even though my vision was realized eventually, it took far longer than needed because I ignored a primary rule of leadership.

Stakeholder management isn’t just about listening, it’s about managing expectations and honoring relationships. Companies have stakeholders who are not just their shareholders; they are their employees, the local communities, and their customers (to name a few). These stakeholders might not have the traditional power of executive management or investors, but their vote matters just as much and sometimes more.

Facebook’s users may not be their customers, but they are its stakeholders. Because of Facebook’s hacker culture, the company can’t recognize the problem: even if they incorporate every pixel of feedback, they still are not going to succeed because stakeholder management is less about logic and more about emotion. It’s giving people a sense of control over an outcome that affects them and their data.

Zuck: Take a lesson from the marketplace. (The real one.)
Facebook isn’t the only company with this challenge. Any company that is listed on a stock exchange is well aware of stakeholder management. A single surprise announcement that deviates from expectations can smash the market capitalization of a company overnight. It’s why continuous disclosure policies around the world are growing in popularity, where companies announce significant company changes progressively through the year; and why capital markets require quarterly reports and management estimates in the lead-up to an annual report.

Disclosing your expectations and having your stakeholders informed can determine how companies on stock exchanges survive. In this vein, Facebook needs to recognize that it is no longer good enough to rely on its hacker culture to charm its community. Hacking works for product development, it doesn’t work for privacy—and while Facebook is not (yet) a public company, it needs to start practicing better stakeholder management with its community if it hopes to play with the big boys.

That’s not to say stakeholder management will make Facebook boring and predictable. Look at Apple.

Apple is now one of the largest companies in the world and it’s anything but boring. And as its CEO Steve Jobs said on stage this week, the company still operates like a startup. It’s not an easy thing to do, but done right, magic can happen (like the complete reinvention of a company, an industry, and a person as has happened with the Apple story).

What’s Next: The Portability Policy
It’s easy to criticize, which is why I’m more interested in having the industry discusss a solution—hence this post.The DataPortability Project, a registered not-for-profit that exists for the sole purpose of advocating the portability of personal data residing on websites and in networks, has recognised this as a key problem for all web services. (Disclosure: I am the chairperson and executive director of the DataPortability Project).  For the last 16 months, have quietly worked on a challenging way to address these issues.

We started with the observation that the current ToS and EULA model—those hundred page legal documents you are forced to agree to in order to use a service—are often ignored by consumers and hence they are surprised when they get a service enforcing its terms. We believed a simpler way is needed to communicate what a service does with respect to a person’s data and what rights they have over it.

Later this month, we will be formally announcing our initiative which we call the “Portability Policy”. This will be a set of questions a company can answer (with no right or wrong answers) that discloses what people can do with their data. The goal of this initiative is to create better communication in the marketplace between service providers and end-users. With better communications, we also hope this will give better clarity to what users can come to expect. And while this might not solve all of Facebook’s problems, it could be a tool that Facebook and other hacker-culture startups could use to better manage their stakeholder relationships and give users a sense of control. This is so they can iterate their technology in parallel, to innovate their products and pursue profitability.

The real challenge with data portability isn’t technical so much as cultural. As Chris Saad, who coined the term and helped found the movement, correctly pointed out in a post last week, Facebook’s vision was not clearly documented in its social contract. We want to help fix that.

The Portability Policy will be released soon and we look forward to launching a discussion about it. In the mean time, you can sign up and be among the first to adopt this new framework for communication and give feedback. For more, visit http://PortabilityPolicy.org/.

Photo credit: Flickr/Massimo Barbieri.

Bloosky Is Out, Original Founders Win Back Tracking202

Posted: 05 Jun 2010 10:41 AM PDT

Less than a year ago, affiliate ad network Bloosky acquired Tracking202. At the time, co-founders Wes Mahler and Steven Truong lauded the takeover as a “deal [that] made a lot of sense.” Tracking202, a marketing analytics company for affiliate advertisers, was struggling to rapidly scale up with its limited resources and needed a partner like Bloosky. That was in November 2009. Fast forward to June 2010, turns out the deal didn’t make a lot of sense after all and the original founders are back at the reins.

In his blog post this morning, Mahler did not fully explain why the Blooksy, Tracking202 deal fell apart, but he talked about returning Tracking202
to its roots. “I’m pleased to announced that the original founders of Tracking202 have undone the acquisition and Tracking202 is no longer a Bloosky Interactive company!…We’re bringing back the original Tracking202 culture that many of you have grown to know and fallen in love with. We are going to do our best to make Tracking202 even better starting by redoing everything that Tracking202 is currently.” Mahler, as he points out in his blog, was not a part of the company during the “past few months,” but will now return alongside other members of the original team.

Mahler did not divulge his grand plan for Tracking202′s makeover, but he did hint at “fairly large changes” and the discontinuation of Tracking 202 Pro. Tracking 202 Pro was the company’s paid version of its tracking software, which differed from the free model by offering higher integration with the major pay per click networks and more sophisticated cost tracking analysis.

There’s a lot of unanswered questions here: why did the Bloosky deal disintegrate so quickly (and how ugly was this break-up), how did the founders broker this re-acquisition (also, how much), and what will become of Tracking202? We have an e-mail in to the founders.

Full announcement below:

Tracking202 Has Been Re-Acquired by Original Founders

We have an important announcement to make today. I’m not entirely sure how to bring about this news so I am going to do my best and just come out with it. As many of you may know, Tracking202 was acquired by another company in our space known as Bloosky Interactive last November. However since then, many things have changed. A lot of things happened and as some of you may or may not know, I was no longer part of this company for the past few months. This has all changed now.

Today, I’m pleased to announced that the original founders of Tracking202 have undone the acquisition and Tracking202 is no longer a Bloosky Interactive company! As of earlier this week, we completed a deal with Bloosky to get Tracking202 back. I and a few members of the original Tracking202 team will be heading up the direction of the company moving forward.

We hope to continue innovating in our industry which is in need of great change more than ever. A lot has happened recently both with Tracking202, the affiliate industry and performance marketing space as a whole. We hope to change all of that for the better. We’re bringing back the original Tracking202 culture that many of you have grown to know and fallen in love with. We are going to do our best to make Tracking202 even better starting by redoing everything that Tracking202 is currently.

We are going to be making some fairly large changes to Tracking202, some of which we’ve already began doing. One of the first things we will be doing is discontinuing Tracking202 Pro soon because we feel there are better opportunities for our company to tackle. We will be posting more and more updates on what’s to come so please feel free to stop by our blog for further future updates.

We know we have a lot of work to do ahead of us and we look forward to making things happen for the community and the industry as a whole with these new changes. We do appreciate all of the support you guys have given us throughout the years and we look forward to working with you guys again.

Hello again,


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