This one was good enough that I wanted to blog it and have a copy in my archives. Following is Mark Cuban’s take on media, technology and American business. It was featured in the December 2006 issue of Esquire.

Wherever I see people doing something the way it’s always been done, the way it’s “supposed” to be done, following the same old trends, well, that’s just a big red flag to me to go look somewhere else.

I think the underpinning of transition right now isn’t technology; it’s the fact that there’s so much money out there and there’s so much pressure on public companies. Back in the nineties, the Internet was booming and everyone looked like a genius. You know, everyone’s a genius in a bull market. But, of course, we’re no longer in a bull market, so everybody is trying to create the next something. There’s a lot of desperation out there. In my opinion, right now there’s way too much hype on the technologies and not enough attention to the real businesses behind them.

Whether it’s downloaded video, streaming, YouTube, or the Internet in general, there isn’t anything new anymore. There’s not anything right now that you can point at and say, Here comes a whole new rapid-fire change. To me, it’s like this: When you’ve got 10,000 people trying to do the same thing, why would you want to be number 10,001? There’s just no good reason. Now, if you have something superstrategic or amazing, great. But 99 percent of the time, it’s just people lying to themselves.

Which doesn’t mean that the Internet and all that technology is bad. When you have a hammer, everything looks like a nail. And today’s hammer is the Internet, or digital. To me, it’s like electricity. Once it was invented, it’s great. I’m not going to all of a sudden stop using electricity. I’m going to continue using the Internet and all things digital–high def, digital cameras, new tools, whatever. But now that we have a society that’s integrated all of that, you have to start asking the question: What’s next?

For HDNet, I’m just looking for programming that I think is going to be memorable, that is going to impact people personally, and stuff that people will think is funny–kind of like a baby HBO from a content perspective. Most companies, most media companies or public companies, are geared toward earnings per share, and that drives everything: hitting the numbers, hitting the quarter mark. But to me, it’s not about that. It’s about: Can we have an impact? If it’s Dan Rather or Dennis Rodman, it doesn’t matter–I don’t care, as long as it’s something unique. Everybody else does nothing more creative than following the trend. It’s like: Let’s do another poker show. Now let’s extend that to blackjack. Now let’s mix blackjack with poker. Now let’s pimp my ride, let’s pimp my house, let’s get tattoos, let’s get bounty hunters. If everybody else is doing it, I don’t want to do it. Rather than trying to grovel for an extra share of viewers like most media companies do these days, I’d rather just throw it up against the wall and take some chances.

If I had more time? I’d get into places where people are so afraid right now that the economics dominate the common sense. I’d get into a business like newspapers–local newspapers. Newspapers are a perfect example of how economics dominate common sense. Contrary to popular belief, newspapers aren’t dying. Newspapers are making tons of money; they just aren’t keeping their shareholders happy, they aren’t meeting the expectations on Wall Street. The problem with newspapers is that they’re trying to grow like they’re Internet companies in 1999. Their shareholders are bitching at them about not showing growth in share prices. The minute you have to run your business for share prices, you’ve lost. It’s over. They’ve focused on that and so they’ve lost. What they should do is step back and ask, “What makes us special?”

I don’t care how Internet savvy you are or whether you’re in ninth grade or college, you’re not going to read twenty-five pages of text online. In newspapers, you read more pages, you read more words. There’s no way around it. But newspapers don’t see their own value. They just don’t get it. So they do dumb-ass shit, like they can’t figure out who their customer is, they can’t figure out what business they’re in. They have all these news-wire reports, these breaking stories, but anyone who’s Internet savvy knows that breaking stories, sports events, all that stuff is available on the Internet thirty seconds after it happens. The people who are in tune to wanting stuff immediately are going to get it online. But when you read The New York Times or you read the L.A. Times, you read the Chicago Trib or The Dallas Morning News, when they break a story that is unique, not just first, but unique, a story that you can’t just pick up on the wire, you have to read it. And if it’s geared toward different demographics, fine. Like, businesspeople have to read the New York Times business section–even though from personal experience I know they’re wrong a certain percentage of the time. You still have to read it, just in case something clicks. Like for me. If I want to keep up with what’s going on in Dallas, I have to read the local paper. So newspapers aren’t dying; they’re just undergoing an identity crisis. They don’t know who they want to be.

We’ve got our iPods, we’ve got our PDAs, we’ve got our e-mail. Those are our time killers. You’ve got to realize: That’s the role they fill. These things are not the be-all and end all–I don’t think people think that through. They just think: Oh, everybody’s doing it; that must be where everything’s going. It perpetuates itself. It’s just small-minded. ? With the Internet, life’s become an open-book test. You don’t need to know anything. There used to be value for memory. Now you can just Google it.

In running a private company, if I’m making money, I’m happy. If we are profitable, great. If I make more than last year, great! It isn’t like, Dang, I’ve got to grow 15 percent this year. If I’m making money, if I’m paying my bills, I’m happy. Save a little bit, all the better. What’s fucked up is, the people who run public companies don’t think this way. They’re just trying to get rich. The idea of running a public company isn’t “Wow, I can run a company.” It’s “Wow, I might be able to get rich!” Not just a-couple-million-dollars rich, but a-couple-million-dollars a-year, fuck-you-money rich. The guy who has a $50 million gold en parachute is thinking, How can I get them to fire me? That fucks up a lot of things when it comes to business.

The number-one job of the hedge fund manager is not to make sure that you can retire with a smile on your face–it’s for him to retire with a smile on his face.

No balls, no baby: That’s what I like to say. It’s so true. Most people don’t want to cross that line. There’s safety on one side, uncertainty on the other. Most people don’t take that step. And it’s not even so much that they’re afraid to take the step; it’s that they know deep down that they didn’t do the work necessary to be prepared, and that’s the big difference. Most people think, Oh, I have a great idea, and the only thing missing is that I don’t have the connections, I don’t have the access to money. But that’s the biggest bunch of bullshit. The minute anyone says that to me, I know they’re a failure. Because if you’re prepared and you know what it takes, it’s not a risk. You just have to figure out how to get there. There is always a way to get there.

You can find any type of discussion group across the Net that is finite enough to make you a hero. It might just be three people, but in that group, you’re your own David Koresh. And I think that gives people a false sense of wisdom. And I think that’s kind of a hassle right now.

I don’t really know Scoble but he is terribly popular and he has interfaced with lots of smart people at Microsoft. However, his response to my previous post didn’t provide anything substantial to chew on but I’ll address it anyway. His response:

you can’t live off your existing community and be “cool”.

Why not? That’s what all companies do. Make money off consumers and get to be cool in the process (iPod, Google, et al).

His reasoning:

Why? Cause if you’re a consumer company and you want to see growth, you’ve gotta be interesting at minimum.

So “you can’t live off your existing community and be cool because if you’re a consumer company, you’ve got to be interesting”. That reasoning doesn’t follow and is incoherent.

Either way, one has to question: Why can’t SoapBox or any other video service besides YouTube be interesting? AltaVista was interesting, Netscape was interesting, The Rolling Stones were interesting. This is classic fad mentality and the science of fads is exactly what is feeding this frenzy and clouding judgment. Buying YouTube would not have made Microsoft instantly cool. I wish that were the case. I wish people would stop judging us by the cool things we purchase. That’s so superficial.

Some flame bait, and I’m biting:

That big audience that Microsoft has? It’s theirs to lose.

That’s unwarranted hyperbole. The MSN network has grown consistently and expanded into other services as I pointed out previously.

As a business we have a due diligence to make money. Maybe we got the valuation on YouTube wrong (things of value: denying the competition, acquiring content, creating PR or becoming cool, revenue projections etc). Or maybe we did not want to engage in yet another bidding war knowing Google’s ability to better monetize YouTube would’ve left us in a trailing position. Those are both intelligible arguments and things I am sure we considered.

Again Scoble is widely read and I hope that his post doesn’t entice a gross underestimation of the MSN community and Microsoft’s position on this. I don’t see us backing down and the video market isn’t running away. We will channel MSN users toward SoapBox when its ripe for the serving much the same way Google channels its users to their Sidebar, Videos, Froogle etc.

The Microsoft Story

Let me start with my take on Scoble’s post that Microsoft should have bought YouTube rather than take the build-it-yourself route. Scoble is saying we should pay 1.65 billion odd dollars for the community, not for the service. Some others are saying Microsoft failed to close the deal. But the truth is that Microsoft didn’t really lose out on this deal–it just didn’t make business sense at those prices. Steve Berkowitz (Senior VP, Online services) recently sent a mail to employees outlining our position:

…MSN has a huge global audience of 465M users per month that we can tap into and focus on Soapbox to contribute and share videos. We have a far better strategy around integrating Soapbox across MSN, Windows Live and Microsoft services like Windows Mobile, Xbox and Zune, that we couldn’t have matched with an acquisition.

We don’t need to buy any community, we already have a really large one we can tap into.

Consider how we leveraged the Hotmail community. What we get from Hotmail is far greater than one could attribute to the dollars generated. Hotmail could be attributed as the primary grower of the MSN network. We delivered the Hotmail Notifier that sat in the system tray and evolved into a messaging application and drove Hotmail users to what eventually became MSN Messenger. Messenger drove traffic to MSN Spaces with the gleam feature which helped us dominate the blog market share overnight. Messenger now has built in search that drives traffic to MSN Search and the default install of Messenger is also driving traffic to the IE toolbar, Live Sign-in Assistant etc. All those users originally came from Hotmail–users who wanted to connect.

Microsoft has plenty of users. Building a video service is very easy.

The Value of YouTube to Google

I would’ve considered the $1.65bn price tag to be exorbitant and reminiscent of the dot com era. But Google found it justifiable.

However, what YouTube means to Google is much more than what it means to Microsoft or Yahoo. The simple reason is that Google has a better ad infrastructure at present which will allow it to better monetize YouTube. They can recover their costs much faster than anyone else out there and so they can afford to pay more. There’s also the competitive aspect. Google would rather not see YouTube go to anyone else. YouTube is a big driver for Google’s ad traffic and losing it to someone else like Microsoft might mean the loss of all those ad dollars.

Further, Google does not have a large registered user base. Google Search is their primary traffic driver and it’s a hit-and-run type of deal. Google could potentially convert YouTube users into registered Google users or channel them to other Google services much like Microsoft did with Hotmail. The reason they will have more success with getting these users to register versus search users is that these users are lurkers. They hang around YouTube spending idle minutes entertaining themselves. Search users on the other hand are task driven–they want to find whatever it is they are looking for and be on with it. This makes YouTube all the more lucrative for Google.

YouTube’s Legal Hurdles

The most intriguing aspect regarding this whole ordeal will be the reaction of MPAA and RIAA to YouTube which is basking in the glory of copyright infringing videos. This will be similar to Napster albeit Napster’s traffic was almost entirely composed of copyrighted material while YouTube thrives on plenty of legitimate content. Further, if YouTube falls under the “safe harbors” of the Digital Millennium Copyright Act of 1998, the burden of finding copyright material will lie with the copyright holders who will be required to provide a list of copyrighted material to Google to take down. Napster failed here for technical reasons as they could not satisfactorily comply with or facilitate the major copyright holders to weed out infringing materials.

YouTube’s story is different as theirs is a much more tractable problem. One idea might be for Google to provide administrative accounts to the large media companies (and complying primarily with the major copyright holders is the key here) to remove infringing content themselves or possibly build a “community moderation” system. The latter will probably not work due to conflict of interest–the community finds value in free copyrighted content but the design could be modified to reward the community of moderators. YouTube could also hire auditors working around the clock to comply with the smaller players though Google is a strong believer of autonomous, scalable systems so its unlikely they will take this route in the longer term.

YouTube also differs from Napster in that their architecture is considerably different. Napster’s P2P network meant there were millions of infringers floating millions of copies of any particular song with hundreds of variations. YouTube has a very limited number of duplicates and uploading the same videos under different guises doesn’t make sense as the user will not be able to find or share it without the copyright owners being able to do the same. Further YouTube controls the content format which means that copyrighted content cannot be wrapped inside an encrypted layer which is how Napster users were able to share banned songs.

Finally, since the big copyright holders are the ones with which Google will primarily be concerned it will mean that YouTube can do traffic profiling to find videos with massive infringement. It doesn’t make sense to go after a copyright video that’s being viewed by < 1K users when there are videos out there being viewed by 50K+ users.

For all these reasons and more, Google/YouTube should be able to pull this off. The problem is easily surmountable.

In Summary

Google will weed out the copyrighted content and the problem is not hard to solve. They will get their moneys worth through direct monetization via AdSense and also by channeling these users to other Google services. It did not make sense for Microsoft to pay a similar amount for YouTube’s users since it already has a large registered user base from which it can carve out a community of video watchers and it could not have monetized as much from these users. Microsoft will continue to build upon its ground-up service, SoapBox which will be woven with other technologies like Zune, Spaces, Messenger and Mobile.

The legal hurdles should continue to hit the press in the coming weeks/months possibly wavering Google’s stock up and down. Bloggers at the same time will continue to feed the frenzy calling Google crazy and brilliant.

Users on the internet have been spoilt. They expect everything for free and when something is not free, it’s an “annoyance” rather than the norm. There are two issues:

# Someone has to pay for these services
# If you don’t give it for free, your competition will

For (1), the resolution is found in what most service providers already do: have sponsors pay for the service. The primary revenue model for internet services is subscriptions (users pay a montly or annual fee for the service) and ad-based model, where users click on an ad and the sponsors pay the orignal service provider a per-click fee. For e-marketers this is a great opportunity. As the number of free services go up, those free service providors will want to collect money through sponsors and the more they want to collect the better it is for e-marketers because it gives them better opportunity for marketing.

As for (2), the competition is only deferring the cost of free service. They will have to make profits sooner or later. This means that it is inevitable that these new competitors will also start charging or engage in rigorous ad-based revenue models themselves.

The idea of a free service is simple. New competitors as well as existing ones want to grow or retain their customer base — essentially locking them in. People don’t want to change their email alias every 10 months. Once users are locked there is a better likelihood of them upgrading to a premium service.

This is most apparent with the hotmail/gmail/yahoo saga. Hotmail offered 2MB which was good at the time. Then Google came along.

Google quoted 5X analyst estimates for revenues and has implemented a very successful “targetted” ad-based system by giving the users exactly the kind of ads that are appropriate to their current sentiment (what they are searching or what mails they are reading). Google Inc. reported a record revenue of $1.03 billion for the quarter ended Dec. 31, up 101% year over year, and 28% over its previous quarter. Of this, $490 million was from their adsense program (ads you see on Google search). [1]

Ofcourse, Hotmail and Yahoo followed suit and upgraded their service as well. They are currently both investing in better ad targetting. That is where the war will be fought. Hotmail currently has over 200 million users, of which there are 2 million paid users [2]. That’s a lot of potential revenue and it’s plain to see why they would be investing heavily in better ad-targetting.

All in all users will expect subscription based models to be replaced with ad-based revenue models provided ads don’t act as an annoyance. As data mining technologies and methodologies evolve, ad-targetting will improve. At present some sites have resorted to obtrusive ads — the kind that users must click to proceed to the site content.

My guess is that advertising will get more intelligent and e-marketers will gain the most. Value Click [VCLK] is one company to watch out for in terms of online marketing. [3]