The New York Times just published a story called Death by Smiley Face: When Rivals Disdain Profit. It describes what we recently referred to as disruptive businesses -- a company that can grow while shrinking margins in its industry. In other words, a disruptive business can expand by making one dollar for every several dollars it takes from its antiquated competitors. Except The Times attributes the motive behind this business model to be altruistic, while we naively thought it was just a great entrepreneurial opportunity.
Their primary example is Craig Newmark, the founder of Craigslist. It's hard not to agree with The Times on this one. Craig probably has not made as much money as he could have with Craigslist without hurting user experience to the point that it would decrease traffic. If there was a one line AdWords-style ad in there, would you stop using it? This seems to be a good example.
It also cites FireFox as an example. FireFox is definitely not profit-driven as it's managed by the not-for-profit Mozilla Foundation. This is a pretty good example, but it only gets a couple lines in the article. It's also not strictly a disruptive business. Microsoft gives out Internet Explorer for free in part to drive traffic by default to its media properties. FireFox gets money from Google to drive users to its search site. Seems to be more of just an alternative.
However, Craigslist and FireFox are the only examples The Times cites that stands up to scrutiny for their altruism behind disruption theory. Their other two examples (which command most of the article) are:
- Chowhound.com: Shuns profits because it "steadfastly refuses to accept restaurant advertising." Isn't that just avoiding conflicts of interest? It's extremely difficult for small sites to rate their own advertisers, and if they happen to give a legitimate positive rating to a restaurant that's also an advertiser it would have the appearance of a conflict of interest which is often enough to turn off users. At the end of the day, the profit is often just the money that makes it into the entrepreneur's pocket. So why didn't Chowhound turn down the money when CNET Networks offered to acquire them? And how long will CNET continue to "disdain profits"?
- LaLa.com: The Times describes LaLa as "essentially a CD-swapping site that matches people who want one another's old CDs. It charges them a mere $1 a disc and provides the postage-paid envelopes to send them in for 49 cents apiece." The Times describes the founder as altruistic because while he thinks he might have been able to charge $4 to facilitate a CD trade, he decided to charge just $1 because "making money wasn't the point." Would you pay $4 to trade a used CD when you could buy a used CD outright from a used music store for $6? That question aside, venture capitalist Fred Wilson points out that even if the founder disdains profits, his VC investors probably do not.
I'm not making the Gekkoian greed is good argument. I'm not even saying that these entrepreneurs are enamoured with Ayn Rand. I'm just saying that disruption and integrity often make for good business in the long run, and to ascribe any other motive is the challenge of the author.
Now let's try to figure out the motives of some of the disruptive entrepreneurs we've had on the show:
- TerraCycle's founder Tom Szaky, who makes an organic and cheaper to produce alternative to Miracle-Gro, quickly admits to be operating his business primarily to make profits and because he thinks "we're a pretty damn sexy manufacturing company." A benefit to the environment? Great byproduct! Great sales tool! But not his motive.
- Fabrice Grinda, who we had on the show just after he finished his work at Zingy which he founded and sold for $80 million, is working on starting a business that's highly disruptive to one of the big three Internet companies if successful. We'll have more on that soon. Based on the interview, while Fabrice certainly believes that capitalism is ultimately good for people, he also has an eye for profits. In fact, one of his 9 Business Selection Criteria is "A business with little or no risk of disintermediation and/or margin compression by suppliers and/or customers." An entrepreneur who disdained profits would love margin compression.
- John Bogle, the founder of The Vanguard Group, has altruistic motives behind his invention of the index fund. Any skeptics would be hard pressed to find evidence otherwise. However, even if he didn't have altruistic motives, John would have been forced to run his index funds at a low expense ratio for fear of a competitor running an index fund at an even lower expense ratio. And he hardly represents a recent trend having started his business years ago.
Ascribing motives to the actions of others (or even to your own actions) is very tricky business. I hesitated to even analyze the motives of my guests before writing this post, but I figured if The Times can do it then so can we. However, if disruption does not require altruism, then this dubious analysis might not be necessary.
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A friend of mine is using lala.com and can't say enough good things about the site. I've tried to get in, but it's in a closed-beta.
I'm sure they have a business model and plan on making a profit, but all David can talk about is how great the site is and how he's enjoying music again.
Posted by: Jim Westhal at April 2, 2006 3:53 PM