Saturday, June 25, 2016
Phil Spencer explains why you shouldn't think "that everything we're doing is about selling you an Xbox console" During a busy first day of E3 2016, I visited the Xbox booth to sit down with boss Phil Spencer. In the aftermath of the press conference in which Microsoft announced two distinctly new members of the Xbox family, the Xbox One S and the super-powered Scorpio, my head was filled with questions about Microsoft's quickly evolving strategy. Was this really a sea change to the console industry as we know it? How does Microsoft view the technology curve and will developers and consumers be willing to ride that curve? And what about Microsoft's continued reticence on actual sales numbers while Sony's PS4 races steadily ahead? On that last point, it's become evident that the Xbox business is, ironically, no longer about selling Xbox units. Wrap your head around that - Phil Spencer does not care if you upgrade from Xbox One to Scorpio, so long as you're an Xbox user. Yes, there needs to be a certain number of boxes out there, but what matters most to Microsoft now is that you're an active user of Xbox Live and their ecosystem, purchasing games, DLC and playing online. Whether you're doing that through an Xbox One, an Xbox One S, Scorpio, a Windows PC or some other device is of little importance. The full interview with Spencer follows below. Scorpio sounds like it's effectively the beginning of the end of the traditional 5 to 6-year console cycle, and that would have huge ramifications for consumers and developers. Recently you've hinted at how things could be headed in the direction of a smartphone technology curve, where every year or couple of years a consumer might want to get a new console. Does Scorpio mark the beginning of that happening? Spencer: I probably think about the motion in console a little differently than the phone market, though I've used the phone market as an example, so I'm not being critical of you using that model. When I think about gaming technology, I think there are certain inflection points that happen that excite gamers and developers to a point that they create kind of a foothold for themselves. 2D to 3D was one of those. Cartridges to discs was one of those. Standard def to hi-def was one of those. And frankly, when you think about the generation of consoles that are here today with PS4 and Xbox One, I don't think there was actually that big thing that we could all point to... Standard def to hi-def to PS3 and 360 was just so obvious. 4:3 to 16:9 [aspect ratios], interlace to progressive. You saw a thing on screen that was just so obvious that [you said] "Ok, a new generation of graphics is here." When we were looking forward with Scorpio, we saw 4K as something that's catching on on the PC side of gaming and we said, "Ok, is there a way for us to bring that to console?," but to also not create a scenario where somebody has to start again at zero with their library and their overall experience, the old kind of put all my stuff in the closet, buy something new and start again that we're used to in that kind of generation change. And 4K was that thing on the horizon that we saw and said let's go and build a box. And when we started talking to creators, six teraflops of power was what they were looking for. Probably where it differs a little bit on the business angle... cell phones are sold almost always at a positive margin on the device, so the model of selling you a new phone every - as often as you will buy it - is a good business for phone manufacturers, most of them. For us in the console [industry], the business is not selling the console. The business is more of an attached business to the console install base. So if you're an Xbox One customer and you bought that console 3 years ago, I think you're a great customer. You're still using the device. That's why we focus on monthly active users. That's actually the health of our ecosystem because it's really you want this large install base of people that are active in your network buying games, playing games. That's the actual judge of the health. Not somebody who buys a console and puts it in the closet. That's actually a horrible customer for us because we probably paid money actually, subsidized the console and nothing ever happens with it. So our model's not really built around selling you a new console every one or two years. The model is almost the exact opposite. If I can keep you with the console you have, keep you engaged in buying and playing games, that's a good business. "So our model's not really built around selling you a new console every one or two years. The model is almost the exact opposite" But when you see things like 4K coming, I want to make sure that we create a part of the Xbox One family that supports 4K but doesn't have you feel like you're leaving all the content investment that you made in the platform itself. So that's what we think about the generations differently. 4K I think you can say will be a generation, but unlike in previous consoles, we don't want you to have to feel like you left behind the experience you had. And, frankly, if you're an Xbox One customer, and you want to continue to build your library and buy and play games, if and when you decide 4K and Scorpio is for you, we'll be there. And if you never do, you're a great customer for us. I don't need to abandon you in any way. In fact, I want to keep you as happy with your Xbox One as you've ever been. So that's what we think about Xbox One and Xbox One S and Scorpio as all part of one family. Right, I get that, but we've seen some Twitter reactions from developers saying, "How can we afford to support yet another console?" And if they're building out a game that takes advantage of Scorpio's much greater power, how do they make that same experience at the same time for Xbox One? Do they have to water it down? Spencer: That's a great question. When we were talking to people about the design point for Scorpio, we talked to the people in the PC community because the PC community has been doing this for a while. And frankly, we know this. There's no developer out there today, except for in maybe a first party, that's only focused on one platform. Some are still going PS3, 360, PS4, Xbox One, and PC. When you say PC there's probably a minimum [spec], a recommended [spec], and then an uber-config that they're focused on. So what we've been talking about for the last couple of years is how do we unify that PC and console development ecosystem on Xbox so that if I'm a DirectX 12 developer they run on both consoles and Windows. If I'm using Xbox Live, that's available on console and Windows. So my social connection, my graphics layer all works. The engine and middleware providers are almost all on console and Windows. We're continuing to grow the capability of the Universal Windows Platform to literally allow you to build one game that would run on console and on PC. So that's an enabler. You still have a scenario of whether the different configs [and resolutions is something you'll support] and I think that will all be part of install base size. 1 Xbox One is at an install base now where as a developer you're going to look at that design point of the Xbox One and Xbox One S capability and there's enough - I mean, there's tens of millions of customers there. So you're going to say, "Absolutely, I'm going to focus on that config." And then we want to create that same capability with Scorpio and we kind of bridged to some of the 4K capability in PC to say, ok, here's a common design spec here. And then other people will go and do unlocked frame rate 6K games on PC and we want to freely support those as well. So I don't think Xbox One actually becomes a challenge in support because you've got so much capability in that PS4/XBox One compute spec that people will see that install base of players there that will always be worth [targeting] for an awful long time. On the PC side, developers have been doing this for quite a while, right? You kind of look at, whether it's GPUs that created real massive consumers that you still see in the PC space or in console generations, like I said, there are still people building Xbox 360 games and PS3 games. It's really all about an install base of players that are buying and playing games. But how do consumers afford a quicker upgrade to Scorpio? Is there a possible scenario where the business model changes so that an Xbox Live subscription helps subsidize a new Xbox console purchase every few years? Spencer: To some extent, that model already plays. I mean, most of the hardware that's out there - if you look at the fully burdened costs of all the design work and everything else, is not really sold at a profit. Most of it's sold at break-even to a loss. And the model is I'm selling games on top of that and I have services that I sell on top of that. In terms of subsidizing even more, we looked at this at the tail of 360, of do we go and actually create - effectively they're financing plans, because in the end it's all, "Ok, how much do you pay up front and how much do you pay over time and what's the interest rate on that?" There's no secret math there, right? It's all pretty straightforward in terms of how the business runs. And there could be models where you'd want to say, "Is there some kind of plan that I'm on?" Clearly the cell phone model has data plans that they attach... we don't really have a data plan necessarily that we would add on top of. If I was to add something on top of your purchase today, buy your next console early or something, in the end it's just a financing or a layaway plan, depending on how you look at it for the model. "If I was to add something on top of your purchase today, buy your next console early or something, in the end it's just a financing or a layaway plan, depending on how you look at it for the model" We want to focus on making consoles as affordable as we can. I love that Xbox One S is $299. Today we announced that the original Xbox's promotional price is at $279. What I can say to the price sensitive customers, which is a vast majority of the customers that are out there, you go buy one of those consoles now and start building the library of games that you want to play, when you move to Scorpio, if you ever do, those games are going to continue to run just like we did with 360 back compat and we're going to continue to invest in the experience for you across the whole family and making sure that as you upgrade, when you upgrade, if you upgrade, you feel like you're getting value in the new hardware but your experience is also continuous with what you've done before. Does Scorpio upscale those older games to 4K if you have a TV to play in 4K? Spencer: So a couple things happen. Even on the Xbox One S, if it's plugged into a 4K TV, it is going to upscale the picture to 4K. It doesn't touch the pixels of the game. It just upscales everything. The video it supports is obviously true 4K. It has true 4K video streaming in Blu-ray. There are games that were written on Xbox One, and we continue to evangelize this tech of dynamic scaling - Halo 5's a good example - when Halo 5 runs it wants to max out at 1080p/60 frames per second or highest resolution/60 frames per second. As scenes get more complex, the vertical resolution will shrink... to keep the 60 frames per second. When that same game's running on Scorpio, because of the compute capability, it's effectively is going to run at its max resolution the whole time. And so you will see advantages like that when your Xbox One games are running on Scorpio. So that's why we continue to talk to developers about dynamic scaling because I think as compute capability goes up on the hardware, they kind of get it for free. Now, it's not going to make Halo 5 run with 4K pixels. The frame buffer is not a 4K frame buffer for the game. But it will run more solidly. And certain developers might go back and decide if they've built a 4K version for PC already for some of their games, they might go back and decide to enable a 4K version for the Scorpio Xbox when it launches. It seems like Scorpio is being built to support VR in part. I realize Microsoft is looking to build its own mixed reality ecosystem with Windows Holographic, encouraging devices to be built around that, but how does the overall VR/AR picture fit into Xbox and Scorpio? Spencer: When we were designing Scorpio, we went out and talked to developers about what they wanted from us and, as I mentioned, 4K was something that was really important. As we continued along that journey and people were doing VR work - in fact, Todd Howard was in our Scorpio video talking about Fallout 4 for VR - we made sure that our device capability and graphic capability in the box could support the high-end VR that our creators wanted to go and make. That was an important point for us, because, like you said, you kind of see that VR is an emerging technology and an emerging art form and entertainment form and we wanted to make sure we were building a box that was part of that. The mixed reality work we do with Hololens I would say is further out, when you think about an untethered device where all of the compute capability is built into a head mounted display [and] it doesn't really dock to anything or tether to anything. But as you mentioned - a couple weeks ago at Computex in Taipei, we announced Windows Holographic as part of Windows that we would make available to VR and mixed reality companies. And, obviously, since Xbox One is a Windows 10 device, we want to enable those VR developers that are doing so much incubation on Windows to see that capability come to console. We will talk more about specifics about what we're doing with Scorpio later, but it was an important part of the road map as we designed it. You've talked previously about how proud you are about how Microsoft Studios has grown with a diverse lineup, but many people have characterized Sony's studio system as being stronger in that regard. Do you feel that that's an unfair comparison at this point considering the array of content you have? Spencer: That's a trap question... You know, I was very proud of our line-up in 2015. I thought we had a really good line-up. When I look at this year, I'll just take the E3 conferences... we showed four big games launching exclusively on Xbox One and Windows 10. When I think about Gears, Forza Horizon, ReCore, Dead Rising 4 - all of those games are launching this year and they've been announced, there are dates next to them. And I think on the indie side, we've got Inside which I've been playing. We've got We Happy Few. We've got Blow. We've got Cuphead. There are a ton more, but I'm just thinking about some real highlights in indie games that are coming this year. When I watch the other platforms, it's not always clear to me when the games are shipping or how many of them are shipping this year. 2 And then when I think about next year for us, I think about Sea of Thieves; I think about Scalebound; I think about Halo Wars 2; we've got Crackdown coming; we've got State of Decay 2 which we showed on stage. I'm really proud of the line-up that the studios have and we continue to deliver year-in and year-out. It's an art form, so it's not like every game is going to be perfect for every person, but a diverse set of games, like you said, that they're not all shooters, they're not all this, they're not all that. I mean these are a pretty diverse set of games from a great set of developers. And to say that the other consoles are doing a better job shipping more games for their customer... I don't see that. And I see what the other first-party is doing - Uncharted was an amazing game. I think Naughty Dog did a great job. I'm sure Last Guardian, when it ships this year, will be great, but I just look at the lineup and the quantity and the quality that our team's been shipping and I feel really good about that. Xbox has continually evolved its strategy. First you had to do the about face with the always-on approach, then you had to distance yourself from Kinect and separate it from the bundle, and now the real focus seems to be with Xbox Play Anywhere and the ability to play cross-platform and create one ecosystem between Windows 10 and Xbox. Is that the crux of the strategy going forward now, what you expect to drive the Xbox momentum? Spencer: I think the strategy is really based on what we see our customers doing. And we have our biggest Xbox customers playing on console and they play on PC, and I want to embrace what they're doing. I see all the snaky comments that people will send me, "Thanks for putting all your games on PC. Now I don't have to buy an Xbox One." And I'm like, if you want me to build content to force you to buy an Xbox One... it's this kind of weird [perspective], like somehow they've caught me in some kind of trap that I didn't realize that we were creating. I want to build games and services that can reach people where they want to play. I think we have a great console experience when you're sitting on your couch with your controller in your hand looking at a TV screen 10 feet away. That is a different experience than playing on your PC. I want to embrace the console gamer, PC gamer, and frankly, a lot of people who play in both and I think we've got unique capability there. I've noticed certain people, certain constituents out there are kind of looking for manipulation. I think we're trying to offer choice in what people can do and if you want to buy our first-party games and play them on Windows, as Microsoft that's a good thing for us. At the same time, we just announced two game consoles in the same conference. I mean, who does that? It's kind of crazy. "The strategy is focus on the customer, giving them choice about what they want to do. If you're a PC customer and you want to play all our games on PC and never even learn to spell Xbox, that's great" We remain focused - I don't want to get distracted by other things. That's why we're not doing a lot of other things around - just people playing on PC and people playing on console, making sure that we've got the right control, we've got the right library, we've got the right service for those customers. That is the strategy. The strategy is focus on the customer, giving them choice about what they want to do. If you're a PC customer and you want to play all our games on PC and never even learn to spell Xbox, that's great. We're not trying to build any false lures to move you back ad forth. If you're a console customer and you don't play on PC and it's not for you, we want to make a great experience there. Things like Xbox Play Anywhere is, "Hey, if you're playing in both places, I don't want to have you buy the game twice." We'll authenticate you in both places through your Xbox Live account so you can play in both places. We're just trying to put the customer at the center of it and I think usually good things happen when you do that. So with We Happy Few coming to Xbox preview program, are we going to hear more about how the preview program is doing? Early Access on Steam has gained momentum. I'm kind of curious if that's something you've been watching and learning from or have you been getting a lot of developer feedback? We haven't heard a whole lot about how it's going. Spencer: So We Happy Few is coming to Xbox preview in July, but we've got a lot of games in preview now... I'm usually not a big fan of talking a lot in numbers on stage, but Chris [Charla] did go through some of the numbers in terms of Preview. It's been really successful for good games and for good pre-games that are a little earlier in development it's less good. That's the way it should be, right? Good games do well. Do I watch what Steam does and take the learnings from what different people do? Absolutely. I think that's just trying to be smart about the path forward. Developers definitely give us a lot of feedback. They love the Preview program. They see a preview program on console as a way for them to get in front of a lot of active really consumptive gamers that play a lot, get feedback and evolve what they're doing. I think We Happy Few will be a great addition to the Preview program. The fact that we've got thousands of [ID@Xbox] developers now across Windows and console - because most of the ID teams are trying to develop them both - they're just looking for as much oxygen and customers as they can get. I loved how we showed up on stage with ID. A couple years ago people thought we were really behind in our outreach to independent developers. I looked at it this year and I thought we had a really strong showing with some great independent developers showing amazing content. We Happy Few...was the demo for the show at such an emotional level and I love the work that Chris and the team have done both in preview and in ID across both Windows and Xbox to take the feedback from those teams about what they're looking for from a platform holder. You mentioned the Xbox install base earlier, but are you able to address where Xbox actually is in terms of install base now? You've acknowledged previously that Sony is way ahead but we haven't had an update in a while, and I'm wondering if you believe Xbox One S might make a difference? Spencer: The reason I focus our team, I focus the studios we work with, I focus the company and Microsoft on our monthly active user number - and I get some pushback sometimes if I'm just trying to dodge a PlayStation 4 vs. Xbox One number - I will say over and over the core of our strategy is to drive more and more engagement on Xbox Live, which means more people playing games, which means more games get sold for our partners and our customers are more happy. And that is the total focus. The last number we announced was 48 million monthly active users... And certain people say that's a cop out that we focus on the monthly active users. I would like to say it's actually more risky than install base. Install base always goes up. Monthly active users, actually, year-over-year can go down if people are less engaged on Xbox. I know how games that sell on Xbox do relative to the competition to some extent. I'll hear the anecdotes. What I would say is Xbox Live has grown 26% year-over-year... our customers buy a lot of games. I'm trying to reach them on Xbox and on Windows. "The last number we announced was 48 million monthly active users... And certain people say that's a cop out that we focus on the monthly active users. I would like to say it's actually more risky than install base" So the real reason I get less focused on how many consoles I'm selling versus Sony is because it falls right back into the trap of the guy tells me, "Thanks for putting your games on Windows. Now I don't have to buy one of your Xboxes." I don't want people to start painting a strategy onto us that everything we're doing is about selling you an Xbox console because that's not actually what we're trying to do. So then I kind of feed the wrong view into the business and what we're trying to get done if I play into a number that's actually not a number that we use to drive our strategy or our focus on delivery of games. So I know certain people will say, "Oh, that's PR speak and he's just a suit and he's kind of walking around it." I will say, fundamentally, how many people we can get on Xbox live - we just announced Minecraft coming to iOS and Android connected with Realms, that'll be more Xbox Live customers coming in - having those people engaged on the service buying games is the fundamental part of the strategy, whether they're on Windows, Xbox, or, frankly, on other devices. I understand that, but at the same time it's almost like situation around Hillary Clinton's Goldman Sachs speech. It's like, "Why don't you just release it?" What's the big deal if it's not going to hurt you or harm you? Even if the numbers of engaged users on Xbox Live matters more, why is it going to harm you to put the install base figure out? Spencer: Because the dialogue then turns into the other discussion of, "Hey, what can you do to sell more Xbox Ones than Sony sells PlayStation 4s." And I would say, the answer would be probably not put my games on Windows because then you have to buy an Xbox One in order to play those games. But then that's not what we actually get from our customers in terms of what they want. So then it starts this whole [dialogue] - I start having to answer the other question of, "Well, why don't you do more things that are counter to the actual core strategy that you have?" when the discussion that I want you and I to have is the engagement success of the studios putting the customer at the center. Xbox Play Anywhere is a program you would never do if all you were focused on was selling more Xboxes. So then I end up having this weird conversation with you about the things that I really think we should be doing and you're going to keep asking me about something that's actually not what I'm [trying to achieve]. Honestly, I'm not focused on doing things purely to outsell PS4 with our Xbox One. We're doing things beyond that.
Saturday, June 11, 2016
Microsoft has two new Xbox consoles on the horizon, according to reports on Kotaku that Polygon has corroborated with its own sources. Those sources also told Polygon that one of those new consoles will be over four times more powerful than the current Xbox One and that the announcement at E3 was triggered by, among other things, a faster-than-expected timeline for Sony’s own upgraded PlayStation 4. The other console, a slimmed-down version of the current hardware, will also be getting a redesigned controller. The latter is scheduled to be revealed at E3 or at an event shortly before, as plans are currently in discussion. Tom Warren at Polygon sister site The Verge reports that the console will be "40 percent smaller than the current model and will likely include 4K support," which will be for video content specifically, though the existing Xbox One models include scaling hardware to output games at various resolutions. Our sources also confirm that this will be the smallest Xbox ever made. Current plans have the smaller Xbox One scheduled for release this August. Pricing for the system has not been finalized. The other console, codenamed Scorpio, is unlikely to be released until late 2017, according to Polygon's sources. It will likely be announced in the next month, though plans are somewhat in flux. Like the all-but-confirmed PS4 "Neo," Scorpio represents an evolution of console generations, one that straddles the line somewhat between an entirely new installment of the Xbox platform and a continuation of the existing Xbox One. Power is a primary concern for Microsoft with Scorpio. The PS4 has remained a constant leader over the Xbox One in this respect, with games on the platform usually running at higher resolution and a higher framerate on the PS4 than their Xbox One counterparts. Microsoft is determined to end this narrative. The Xbox One is believed to operate a peak target of 1.32 teraflops, compared to the 1.84 teraflop performance numbers attributed to the PS4. Meanwhile, per documents secured by Giant Bomb's Austin Walker — and corroborated by our sources — the PlayStation 4 "Neo," at approximately 2.25 times more powerful than the PS4, is likely to have a peak performance number of 4.14 teraflops. The current performance target for Microsoft's Scorpio is approximately 6 teraflops. Previous reports and documentation for Sony's new console have suggested that PS4 games will work on both its current iteration of the system and the Neo, and our sources indicate this is also the case with Scorpio. Kotaku also reports that Scorpio will be "technically capable of supporting the Oculus Rift." Polygon's sources verified that while Scorpio will be technically capable of supporting the Oculus Rift, Microsoft's relationship with the virtual reality headset maker hasn't changed since it was announced last summer. Microsoft originally had no plans to announce Scorpio in 2016, preferring to wait until next year, possibly at its own event prior to E3 2017. This would be in keeping with the company's existing precedent for new hardware launches. This was timed to combat expected plans by Sony to announce and launch the Neo in 2017. However, after GDC, evidence industry-wide has indicated that Sony's timetable for the Neo either has accelerated or was always intended for this fall. Because of this and other factors, Microsoft is feeling pressure to announce both its new, smaller Xbox One console and the upgraded Scorpio — colloquially referred to internally as Xbox One-Two — at this year's E3, or a last-minute event just prior to the LA convention. There are those internally at Microsoft who are sensitive to consumer unrest at the prospect of more powerful hardware so quickly compared to the previous console generation. The Xbox 360 was released in November 2005, the Xbox One in November 2013. Discussions are underway about how best to manage that. A price for Scorpio is also still under active discussion, and is unlikely to be revealed until next year. More clear, however, is that "universal compatibility" is a core principle for the system. Scorpio is currently being designed to support all Xbox One software. Much of this information has been rumored for weeks. Well-known Microsoft insider Paul Thurrott's site, Thurrott.com, originally discussed new Xbox hardware in a post written by Brad Sams in April, which also reported that a new controller was in development. [Ed. note: This article originally miscredited reporting on Xbox rumors on thurrott.com to Paul Thurrott. We regret the error.] Thurrott also reported on additional expected convergence between Windows 10's gaming platform and the Xbox One, which Kotaku further corroborated. The outlet learned of a specific initiative, codenamed Project Helix, to launch day and date versions of Xbox One software on Windows 10 as well, though this is already being borne out with the PC launch of Quantum Break in March and the simultaneous launch of Halo Wars 2 on Windows 10 and Xbox One later this year. Xbox head Phil Spencer, during a keynote at an event in February of this year, suggested the possibility of new Xbox hardware that followed a different path from previous generational transitions. "We can effectively feel a little bit more like we see on PC, where I can still go back and run my old Doom and Quake games that I used to play years ago but I can still see the best 4K games come out and my library is always with me," Spencer said. "Hardware innovation continues while the software innovation is able to take advantage and I don't have to jump a generation and lose everything that I played on before." In a follow-up interview after Spencer's keynote, the Xbox head elaborated on the company's philosophy for a new approach to hardware with Polygon's Nick Robinson. "We look at these other ecosystems out there like mobile, tablet and PC and we see that they have a very continuous evolution cycle in hardware, whereas between console generations most of the evolution is making it cheaper and potentially making it smaller," Spencer said. "Both are meaningful but don't make the games play any better. If you look at PC specifically and see the evolution that happens there, there's no reason why console can't ride that same curve. "I look at the ecosystem that a console sits in and I think that it should have the capability of more iteration on hardware capability. Sony is doing this with VR and adding VR capabilities mid-cycle to the PlayStation 4 and they are doing that by adding another box. I don't mean that as a negative. But it's not changing what the core console is about. "For consoles in general it's more important now than it's ever been, because you have so many of these other platforms that are around. It used to be that when you bought your console you were way ahead of the price performance curve by so much, relative to a PC. But now PCs are inexpensive and your phones are getting more and more capable. "I still think a console is the best price to performance deal that is out there but when you look at the evolution ... I'm not going to announce our road map for hardware ... but what I wanted to say on stage for people when they see this vision of ours and question our commitment to console I want to make sure that people see that what we are doing enables us to be more committed to what consoles are about than we've ever been and innovate more consistently than we ever have. That's the key for me."
Wednesday, June 08, 2016
To understand why I think this way, bear with me for a few paragraphs about what makes venture capital firms successful. There aren’t many successful firms, as this Kauffman Foundation research makes clear. Cambridge Associates, an advisor to institutions that invest in venture capital, says that only about 20 firms – or about 3 percent of the universe of venture capital firms – generate 95 percent of the industry’s returns, and the composition of the top 3 percent doesn’t change very much over time. Those premier venture firms succeed because they have proprietary knowledge of the characteristics of winning companies. Over the years, the knowledge of what it takes to succeed is passed down from partner to partner and becomes part of the firms’ institutional memory. (In a professional setting, it’s not the failures that teach people the most, but the successes. Failures teach us a lot personally, but that’s a different story.) The premier venture capital firms know the best investments have high technical risk and low market risk. Market risk causes companies to fail. In other words, you want companies that are highly likely to succeed if they can really deliver what they say they will. Unfortunately, consumer Internet companies don’t follow that pattern. They usually have low technical risk and high market risk. There is very little chance they can’t deliver their product. The big issue is whether the startup’s product is of value to a large enough audience. Most people see angels as taking market share from venture capitalists. I think that is the wrong perspective: The premier venture capital firms have consciously outsourced consumer Internet companies’ bad market risk onto the angels, maintaining their returns as a result. How low are returns for angels? I don’t know of good statistics on returns for angels who invest in tech companies, but I can deduce returns from what I know about the venture capital business. As explained in the Kauffman Foundation research, the overall return for the venture capital industry has been quite poor (the average VC fund barely returned investor capital after fees). According to an annual seed financing survey by Fenwick & West, only 45 percent of companies that received seed financing in 2010 went on to raise venture financing in the next 18 months. Twelve percent were acquired, but likely in talent acquisitions that lost money for the angels. If the average VC fund barely makes money, and seed investments represent even less compelling opportunities than the ones pursued by venture capital firms, then the typical return for angels must be atrocious. Even Ron Conway’s second angel fund, which had the good fortune to invest in Google (a 400x cost winner), only broke even (that means close to a 0 percent IRR)! I know some of you are thinking you’ll be the exception to the rule. Maybe, but if so, it won’t be because you’ve been a great executive at a startup. My teaching partner at Stanford, Mark Leslie, the founding CEO of Veritas Software and a successful angel investor, tells me I would have been a better venture capitalist if I had been CEO of Wealthfront first, and a venture capitalist second, instead of the other way around. I tell him absolutely not. Running a company has not improved my investing skills, which are completely unrelated to being a good leader and strategist. Unfortunately, many entrepreneurs do not understand that being a good executive has nothing to do with being able to pick companies likely to succeed on the large scale needed to generate a good investment return. My conclusion is that unless you are Andy Bechtolsheim, legendary founder of Sun Microsystems, Granite Systems and Arista Networks, and can have the pick of the best technical founders in the Valley, or you are a member of the Paypal Mafia, you should not be an angel investor. A few elites have a chance of making money. The rest of you are in for pretty dismal results. I know that most of you are going to ignore my advice. If you do, and decide to make angel investments, here are a few tips: Assume you are going to lose all your money. Treat success as a complete surprise. Successful venture capital firms generate approximately 80 percent of their returns from less than 20 percent of their investments. The chances are high your angel investments will be losing bets. Don’t do it unless you are worth at least $1 million or earn at least $200,000 per year. The SEC requires these minimums for angel investors because it is the minimum regulators believe is necessary for an individual to withstand the loss of the investment. Take a portfolio approach. Whenever you invest in a risky asset class like startups, movies or new artists, you need to have a portfolio, because the law of small numbers will likely lead to a complete loss on your investments. Remember talent acquisitions, which represent the vast majority of successful angel investments, usually result in a loss for the investors. Try to build a portfolio of at least 15 companies. Limit the size of your angel portfolio to 10 percent of your investible assets. Even sophisticated institutions that have the financial wherewithal to take significant risk and have access to the premier venture funds tend to allocate no more than 5 percent to 10 percent of their portfolios to venture capital. You don’t have the staying power or the financial expertise of these endowments, so try to limit the size of your overall bet. Perhaps the best angel investment you could make is choosing the right company to work for. The value of the options associated with a successful company will swamp the return on any angel investment you’re likely to make, even if you do happen to have a success. In case you’re interested, I make one or two angel investments each year, but I don’t do it to make money. If I wanted to make money on those investments then I would want the benefit of the counsel of my former partners at Benchmark Capital, because I know it is too hard to make such high-risk investments on my own. I make those few angel investments because I want to help my best students achieve their goals, and because I like being involved in startups. That’s the ultimate lesson from the fish stories in Silicon Valley. True fishermen cast their lines not because they want the fish, but because they like fishing. It’s fine to be an angel investor – just don’t do it for the money.
Sunday, May 15, 2016
After years of only playing on the Xbox 360 and PlayStation 3, gamers finally saw the next generation of gaming arrive in 2013, when both Microsoft and Sony released their new consoles. Immediately, the war for console gamers heated up, but after E3 that year, Sony clearly came out on top. First, Microsoft took a lot of heat for some of its controversial leaked policies regarding the Xbox One, including an always-on digital rights management system, as well as forcing players to use Kinect. Eventually, Microsoft renounced those policies, but when the consoles went on sale later that year, players didn’t forget those initial fails. Sales for the first two years of the next-generation consoles clearly saw the PlayStation 4 as the winner in the next-generation competition. Although Microsoft has done its best to placate gamers, the Xbox One still struggles to keep up with the PlayStation 4. With Black Friday right around the corner, with special deals for both consoles likely to happen, what can Microsoft do to turn the tide? Here’s how Xbox One can become more competitive with the PlayStation 4. Backward compatibility This month saw the arrival of backward compatibility on the Xbox One, which did a lot to drive sales for the console (October 2015 even saw Xbox One sales beat PlayStation 4 sales). Backward compatibility means that players can still play many of their Xbox 360 games on their Xbox One, motivating many to finally upgrade to the next-gen console. More than 100 Xbox 360 games will become playable on the Xbox One, with Microsoft promising more titles to come. “Xbox One Backward Compatibility will be available at no additional charge, so you won’t have to pay to play games you already own,” wrote Microsoft on the Xbox website. “Not only is backward compatibility one of the most-requested fan features, it’s also part of our vision to provide the biggest and best games catalog without limits, so you can get more out of the investment you’ve made in your game collection, and your games library is not limited to just one device.” Of all the moves that Microsoft could make to become more competitive with Sony’s console, backward compatibility is probably one of the most important. Sony has PlayStation Now, which charges players for the service of playing older PlayStation titles, but with Microsoft offering something similar for free, Sony can’t compete. Price Another way Xbox One can move more units is by lowering the price. Adopting next-generation consoles early on isn’t exactly cheap (with both systems initially going for around $400), but now that these consoles have been out for two years, the price wars will likely begin this year. Microsoft already started offering a Kinect-free version of the Xbox One for $50 less, making the console less expensive than the PlayStation 4. However, to win the next-gen console race, Microsoft needs to do even better, perhaps by knocking off $100. It’s likely that Black Friday will see such a price drop, perhaps for both systems, but Microsoft could do even better if it kept the price at $299 or less year-round. Although gamers generally have a little money to throw around, those hesitant to upgrade might become more willing to do so if the price of the console costs less than a PC. Games Perhaps where the Xbox One fails the most is in its games exclusive to its system: Microsoft seems focused on only capturing players with interest in third-person shooters and Call of Duty clones. However, it completely misses that market of players who like games with a little more story and content. Innovative games is where Sony excels, with this year seeing the release of Until Dawn, a story-driven game where every choice made has a consequence and affects the story. These aren’t the kind of games players see much of on Xbox One, and Microsoft needs to start partnering with new game developers who can see beyond the box of standard shooters. Sure, Xbox One gets Rise of the Tomb Raider as an exclusive, but only for a limited time. The game will eventually get a release on the PS4, too. That’s probably not enough to drive console sales. Also, Sony has always had a good relationship with smaller game developers and embraces the indie game market. Xbox’s relationship with indie game devs is less than stellar, and the company even once established that all Xbox One games had to have a publisher, something many indie games do not have. However, the company changed its mind and now states it allows self-published games. However, is this a case of too little, too late? Small developers already have a good working relationship with Sony. Most prefer to spend their valuable time and money working with just one platform. Microsoft really needs to start holding out its hand out to these developers to entice them to embrace the Xbox One. Regardless, Sony has more of a variety of games that cover different genres and appeal to more gamers. Microsoft needs to embrace that if it wants to catch up. Virtual reality If this year’s E3 was any example, virtual reality will soo become not just the future of gaming, but the present of the industry. Although developers always toyed with the idea of VR, 2015 was the year that those ideas became a reality. Sony released the prototype for its PlayStation VR system (formerly called “Project Morpheus”) and had more games to demo than any other company at E3 2015. It also works with any standard PS4 console, which means it could come in at a lower price than other systems, too. However, Microsoft could quickly catch up to Sony with VR because the company has a partnership with Oculus Rift, a system that’s been in development for years. Microsoft also announced a partnership with Valve for that company’s VR system. However, neither of these are proprietary to Microsoft, which means that users would have to pony up more dollars to play VR on the Xbox One than on the PS4. Microsoft needs to compete in the VR arena, though, to keep up with the PlayStation 4. The company should eventually invest in its own VR system, because working with third-party systems makes the process too complicated for gamers. Microsoft also needs more games to show off with VR, but partnerships with two separate systems could help it achieve that goal
Yesterday, my friend Steven Crowder promised that he would not stand idly by after the Gizmodo exposé of Facebook’s suppression of conservative points of view in its trending topics. Today, Steven announced his next move — a legal demand from Facebook for its records relating to curation and editorial actions. Steven says that the action was “a long time coming,” but that Gizmodo’s report made it all the more urgent to act now:
Some of this is on consumers, though:
Update: Congressional oversight is definitely not the way to proceed, however:
The Gizmodo.com story coincides with, and now potentially provides an explanation for, Facebook’s mismanagement of payments made to Facebook by Mr. Crowder and its woefully biased and unprofessional treatment of his accounts during an ongoing billing dispute. Simultaneously, Facebook has chosen to avoid any transparency in the ongoing removal of certain political posts by Mr. Crowder, ignoring all requests for explanation of purported policy violations. These issues have been ignored by Facebook and its Legal Department despite repeated attempts to resolve the issue on his behalf. Facebook’s ongoing refusal to take action regarding their clear-cut, inexcusable financial errors has necessitated that preliminary legal steps be taken.It’s unclear to what extent Facebook will feel compelled to comply with a pre-lawsuit demand for discovery, but at least it gets the dispute with those alleged to be directly harmed into the judicial arena. That’s one arena, but it’s not the only one. In my column today for The Week, I argue that conservatives should fight in all arenas — even on Facebook — rather than cooperate with the attempts at marginalization:
It is fully understood that Facebook has every right to curate any content they so desire on their platform. However, Facebook’s bullying methods of operation in tandem with both the long-standing evidence of misconduct and the allegations newly brought to light require further investigation given the direct financial ramifications on business clients acting in trust with Facebook.
In the wake of these allegations, discussion among conservatives on social media turned to questions of why conservative sites bother with Facebook at all. Should conservatives just dump Facebook?Conservatives have been here before, lets not forget. We’ve been dealing with editorial bias for decades, and have only been able to break free from the gatekeepers by engaging and exposing them. Bernard Goldberg wrote about this in his seminal book Bias, and how both deliberate and unconscious bias impacted the news that traditional media presented us, both in presentation and by omission. Facebook’s actions are particularly dishonest, though, as they never disclosed that curation and editorial intervention existed in its trending-topics index.
No. This would be a terrible mistake. Facebook is enormous. Nearly three in five American adults have a Facebook account. Failing to be part of Facebook would only make conservatism more insular than it already is.
But an even more compelling reason to engage is this: Pulling out is exactly what liberal Facebook “curators” want. They wanted to banish conservatives from the platform, or failing that, to make them as irrelevant as possible. Why cooperate with that? Conservatives should use the open platform of Facebook and other social-media networks to engage people, make connections, and use those networks to expand the reach and relevance of the conservative agenda.
Some of this is on consumers, though:
Never before have consumers had this much access and choice in news sources — and with it the ability to defeat the editorial gatekeepers and gain a balanced and informed perspective. Relying only on Facebook is akin to reading only the hometown newspaper and believing it contains all the news that’s fit to print. Instead of trusting a social media network to make those choices, consumers should exercise their own choices — and call out those gatekeepers when their biases become so obvious as to be insulting.And the only way to expose that is to remain engaged — and maybe flood the zone so that those biases become even more apparent.
Update: Congressional oversight is definitely not the way to proceed, however:
“If Facebook presents it’s Trending Topics section as the result of a neutral, objective algorithm, but it is in fact subjective and filtered to support or suppress particular political viewpoints, Facebook’s assertion that it maintains a ‘platform for people and perspectives from across the political spectrum’ misleads the public,” Senate Commerce Committee chairman John Thune, R-S.D., wrote in a Tuesday letter to Facebook CEO Mark Zuckerberg. …To put this politely, that’s nonsense. Facebook is not the Internet, but is content on the Internet. It falls under precisely zero points of federal regulation; it’s a widely used but voluntary association, answerable to no federal agencies. Ergo, Congress has no business butting in. Conservatives have plenty of market power on their own to challenge this abuse, and should have no appetite for the camel’s nose of speech regulation to enter into this tent.
“Facebook must answer these serious allegations and hold those responsible to account if there has been political bias in the dissemination of trending news,” Thune said in a statement accompanying the letter. “Any attempt by a neutral and inclusive social media platform to censor or manipulate political discussion is an abuse of trust and inconsistent with the values of an open Internet.”