February 2006 Early Indications I: The Price of Attention

Four data points from the past several weeks:

- Bucking the trend against investor wariness in the tech sector, Vonage filed for an IPO of $250 million. The SEC documentation shows that the company's acquisition costs are running roughly $214 per customer (up from $137 in 2004) even as average monthly revenue has dropped from $31 to $26.63. The churn rate has also increased from 1.7% in Q1 05 to 2.26% in Q3 05. Analysts are concerned that the service will struggle once big cable operators begin to compete seriously in consumer VoIP: the $250 million, minus commissions and fees, will barely cover one year of loss-making. The company has lost over $310 million, net, since its inception, about $190 million of that in the first three quarters of 2005.

- Satellite radio has evolved into a two-horse race between XM and Sirius, which as a company is younger but boasts stronger on-air talent (Howard Stern) and management (in the person of Viacom veteran Mel Karmazin). Both companies reported losses last week: Sirius pegged subscriber acquisition costs at $113 per subscriber for the fourth quarter and $139 for the year. XM had earlier reported an $89 cost per new customer, and a board member had quit, citing concerns over marketing and programming expenditures. According to a letter quoted on Bloomberg, Pierce Roberts said that "Given current course and speed there is, in my view, a significant chance of a crisis on the horizon." XM stock has fallen by roughly 40% since October.

- A new Gallup poll tracks blog-reading as it relates to other Internet activities, and the pollster's conclusion is that despite a continuing increase in the number of weblogs being produced, readership stayed flat in 2005 after a quick run-up to 20% readership in 1994 (9% of those surveyed read "frequently", 11% "occasionally"). By contrast, results of the same survey assert that 72% of Web users check news and weather on a regular basis, 52% shop, 40% pay bills, and 28% play games. The 9% of heavy users closely tracks the Pew Internet and American Life figure of 7% who reported reading a blog "yesterday" in September 2005.

What conclusions might we draw from the behavior underlying these findings and results? First, it's hard to imagine AT&T or NBC in their early development calculating customer acquisition costs. XM and Sirius are caught in between the expensive realities of a network build-out much like the aforementioned companies' and the standards-based Internet that lets voice, video, or other information services ride effectively free on existing infrastructure. The satellite broadcasters have to simultaneously conduct a 20th century battle on the capital investment and engineering front and a 21st-century conflict as they fight for attention with Net-based media.

Second, novelty will always draw a splinter population; the challenge, to use Geoffrey Moore's time-worn (but time-proven) phrase, is to "cross the chasm" between early adopters and the meaty part of a bell curve distribution. Nobody has figured out how to measure podcasts, for example, but one could easily hypothesize that the growth in blog-reading that didn't appear in poll data was siphoned off by the newest new thing.

Third, we tend to frame competitive landscapes in terms of obvious comparisons. XM and Sirius are outspending each other trying to win what they construe as a winner-take-all game, but several equity analysts have wondered whether podcasting is the real disrupter in the radio market. If that turns out to be the case, the hundreds of millions of dollars spent launching satellites and subsidizing receivers will have been undermined by an existing base of music players fed by cheap microphones and Internet connections.

Fourth, it's not clear that anyone understands how new media track between the big broadcast model (an oligopoly of well-capitalized networks that control infrastructure and talent) and the "audience of one" or narrow-cast model. Millions of people apparently want to watch American Idol or listen to Howard Stern, but a) they may not want to do it on the broadcaster's schedule or b) they may be doing so in a multi-networked mode: watching, chatting on line, and talking on a voice connection. There are signs that such crowd favorites as Seinfeld and more recently "24" are inspiring more communal, interactive modes of viewership that nobody knows how to measure or explain. In such a world it's easy to see the appeal of a Google or Yahoo ad model in contrast to Nielsen ratings, which feel inadequate to the task of measuring time-sliced viewing habits.

Finally and most important, supply and demand are at work. If something is available in glut, its price will drop relative to something scarce. With effectively unlimited information choices but only 24 hours in a day, people have control of the scarcity, which appears to be attention. Vonage is not only contending with Skype or Comcast; its success will measure, to a degree, how willing people are to spend money on talking as opposed to communicating by e-mail, playing basketball, or going out to dinner. To illustrate attention as scarcity, consider that at the same time that blog-reading stayed flat and podcasting exploded, instant messaging declined in popularity, to the extent that Gallup data are accurate.

While it's possible to buy more cars than one can drive, or more clothes than a person will ever wear, it's impossible to do more things than there is time do do them in. One of the key differences between a good and a service is that services are perishable. Lots of attention has been focused on this issue from the supply side: hotels and lawyers worry constantly about utilization, because every unbillable hour or empty room implies lost revenue that can never be recouped.

Perhaps it makes sense to look more carefully at the dynamics of consumption in a services economy: what are the constraints to information services, in particular, that the 24-hour day imposes? As highly as I may value mudbaths or psychotherapy, or podcasts or phone calls, there's a finite quantity that I can consume. What are the dynamics of partial attention? How can both providers and consumers of information services establish value and price parameters given bits' abundance? How will multitasking be measured? The answers, however far off they may be, will affect everything from network engineering to application design to the valuation of any attention-dependent company.