Summation

The Black Hat Tax on consumer Internet businesses

I am a big fan of James Currier. James was the CEO and founder of Tickle (formerly eMode) -- one of the top social networking companies (and now a part of Monster.com). so when James says something, I listen.

A couple of months back we were grabbing a smoothie and I was going on and on about consumer internet, how it is so great and easy, yadda yadda ... when james chimed in with something very interesting and profound ... and something I have not been able to shake since:

Most consumer Internet sites today have an inherent tax of about 25% on them due to scamming, phishing, hacking, and government requests. That 25% is based on time and mind-share. And the 25% is only going to get worse. This is troubling.

I'm calling it the Black Hat Tax. And we’re certainly facing it at Rapleaf.

Since james and I spoke I spent some time talking to a bunch of consumer internet sites -- from start-ups to establish companies. these companies, especially those in the dating or social networks space, are increasingly spending their time thwarting bad guys.

A great example is PayPal. The book PayPal Wars details an intense battle the engineering team and even the CEO fought against fraud. This was one of the consuming issues of the company.

Now PayPal is a financial institution, so you would expect lots of fraud. But dating?

After surveying most of the dating sites, I have found that one of their top three issues is fraud. A frequent scam is to contact an unsuspecting middle-age man from a profile of a good looking woman saying "my husband is beating me here in Moscow, please send $2000 so I can buy a plane ticket and escape." The unsuspecting chap sends the money only to never hear from the person again. Apparently there are scam factories in the Philippines and other places that have thousands of people, paid on 50% commission, working to scam unsuspecting dupes in this way. And one success a month is $1000/mo which compares well to many countries where the avg salary might only be $200/mo.

And this is in addition to people actually hacking into your site. That is a whole other cat-and-mouse game.

James thinks the Black Hat Tax is 25% for most consumer Internet companies right now (with some approaching 40%). I think that is a fair assessment. That means that 25% of your engineering time and 25% of your management team is about preventing fraud. That is a really onerous tax. And James believes this is even getting worse.

Another strain on time is government requests. I talked to an IT person at a social network that was consumed for three days with a government request for information on someone promoting pedophilia. Not only did this person have to get a bunch of information to the federal authorities, but then he had to ensure that the information was backed-up and cannot be erased for at least three years. not to mention that the work was disgusting as the person had to sift through some horrible pictures.

The nefarious characters are getting more sophisticated too. And while thousands of sites are working feverishly to implement best security practices, the bad guys only need to find one hole.

So while my originally point (that launching a consumer internet company is really easy) is still correct, maintaining that site over time is becoming increasingly difficult. More and more mind-share from the engineering team and the executives are going to thwart the bad guys than to actually improve the offering.

This is a really big problem. Really big. The Black Hat Tax is costing consumer Internet companies Billions and billions of dollars. And it is a much higher percentage tax than off-line brick-and-mortar shops invest in security and anti-fraud matters.

Book: Night

Night
by Elie Wiesel

amazingly enough, i have never read this book. but wow ... i am glad i read it (actually listened to it) now. we must never forgot.

there is not much i can say about this book that hasn't already been written. even though this book was written over 50 years ago, it is still being reviewed here and here and here and here (these four reviews were posted today).

summation: read this book. we must never forgot.

book: The Hacker Ethic

The Hacker Ethic and the Spirit of the New Economy
by Pekka Himanen, Linus Torvalds and Manuel Castells (read by Oliver Wyman)

I liked this book. the authors contrast the hacker ethic with the protestant ethic. and while i don't discount the protestant ethic like the authors do (i actually quite like the protestant ethic), i am a big believer in the hacker ethic. instead of working to live, hackers create and build things for the greater community.

i continue to be blown away with great hackers like Jimmy Wales and thousands of others who band together to create great projects.

one a personal note: this week was my first one back in an office. i have been working from home for 3.5 years ... i truly love working from home ... but an office is more conducive to getting something done greater than one person can accomplish. while setting up the Rapleaf office (we've been cleaning, moving things, setting up desks, etc), i listened to this book.

summation: a great book to read ... especially if you are a hacker yourself.

Book: Science Friction

Science Friction : Where the Known Meets the Unknown
by Michael Shermer

this was another really dissappointing book ... I heard about the book on NPR (they interviewed the author) and it sounded fascinating. but readign the book ... it seemed to have been written more for a high school audience. the content made sense and the author makes some good points ... but it is nothing illumunating.

summation: this is the frirst book i didn't finish in a long time. skip this book.

Book: Charlemagne

Charlemagne
by Richard Winston

what a wonderful book. and great that it is available in Audible.

if you are like me and are fascinated with history's greatest leaders, this book is worthwhile. It gives you a real snapshot to what went on around 800 AD. It is a rather long book (took me many runs, drives, and chores to get through it ... but it is worth it). And it is a good companion to A World Lit Only by Fire.

I highly recommend this read (especially the Audible version)

Book: Get Back in the Box

Get Back in the Box : Innovation from the Inside Out
by Douglas Rushkoff

Keith Rabois strongly suggested that I read this book. A few months ago, Keith suggested that I read The Search (which I loved). So when Keith said to read this book, i ran out and bought it.

But Get Back in the Box was not very enlightening for me. While i strongly agree with the message of the book, I found little insights that were non-obvious.

summation: you might want to skip this book and just read the summary.

losing weight will be easier in the future

Bodymedia recently launched the Bodybugg which monitors how many calories you've burned everyday (it kind of a pedometer and heart-rate monitor on steroids). Accompanied with the hardware is web-based system that allows you to log your food so you have a good idea of your calorie intake. And as the bodybugg web site says:

weight loss is simple. you just need to burn more calories than you take in. it's that easy.

Astro Teller and the BodyMedia gang are on to something. This system will truly get people to better understand their calories going in verses what they are burning.

Now this system will only be used by early adopters now ... now ... but I expect that this will have great appeal as the systems become even more user friendly. Certainly this is a lot more practical than Atkins.

As society invents more and more ways to get obese, it will also invent greater and greater ways to beat obesity and stay trim. So eat another Big Mac -- that's only three hours extra on the treadmill ...

Book: Takedown

Takedown : The Fall of the Last Mafia Empire
by Rick Cowan

This is a riveting audiobook (and available on Audible). really enjoyed it. true story about a New York City police officer that goes undercover for three years in the early 1990s to break-up the mafia's garbage cartel. this a can't-put-me-down book ... and well worth the read. and if you get the audiobook (as i did) the narrator, Christopher Meloni, does a great job with all the New-Yawk voices.

detective Cowan ultimately lead to over 50 convictions and the elimination of one of the mafia's most profitable lines of business.

summation: a great book about the lack of competition and one's man's mission (with a great team behind him) to bring New Yorkers and better deal.

book: Down and Out in the Magic Kingdom

Down and Out in the Magic Kingdom by Cory Doctorow

A few weeks I was grabbing coffee with Craig Newmark ... giving him the update on Rapleaf and getting his advice on our project to make it more profitable to be ethical. “you’re talking about Whuffie,” he said.

“huh?”
I admit, I rarely read fiction. I’ve limited myself to reading one fiction book a year ... and last year it was a novel that a was written by a friend. But Craig convinced me. “Rapleaf is about Whuffie.” He said I needed to read Down and Out in the Magic Kingdom right away. I have a huge amount of respect for Craig ... so of course I went out and bought the book right away

... and then it languished on my bookshelf for a few weeks while we were big fixing. But I finally had a chance to down the book.

And Craig was right ... this is a fantastic book.

And one that really defines what a futuristic portable reputation is. Cory Doctorow’s weaves a great story of Jules and his adventures in a futuristic Disney World. And it goes very well with the Singularity is Near by Ray Kurzweil which I read earlier in the year.

In this world, the reputation of the person is his currency. Wikipedia’s definition of Whuffie:

The usual economic incentives have disappeared from the book's world. Whuffie has replaced money, providing a motivation for people to do useful and creative things. A person's Whuffie is a general measurement of his or her overall reputation, and Whuffie is lost and gained according to a person's favorable or unfavorable actions. The question is, who determines which actions are favorable or unfavorable? In Down and Out, the answer is public opinion. Rudely pushing past someone on the sidewalk will definitely earn you negative points from them (and possibly bystanders who saw you), while composing a much-beloved symphony will earn you positive Whuffie from everyone who enjoyed it.

Summation:
1. always listen to Craig Newmark’s suggestions
2. if you are interested in reputation and musings about the future, read this book

Thanks Craig!

vertical search engines and vertical advertising networks

Rapleaf is launching in a few days ... so i have been taking some time away from blogging.   Luckily, i followed Reid Hoffman's advice and created 30 blog posts last December.   so i have ammunition for the blog by just cutting and pasting:

There are a bunch of vertical search engines … everyone talks about them. We all know them. Simplyhired (jobs), Indeed (jobs), Oodle (classifieds), Become.com (shooping), Trulia (real estate), Feedster (blogs), etc … vertical search engines galore. These sites look to aggregate users in one central location to help them find useful information. A few of these sites make some money now -- most are better they will become more popular in the future. Many will get bought or mimicked by Yahoo or Google. 

 

Then there are vertical ad networks. These companies, like Adteractive, Quinstreet, NetBlue, etc. make a great deal of money today. Instead of creating one central location, they specialize in finding people wherever they are on the web. 

 

We are seeing a huge proliferation of both types … one is a central location, one is more distributed...

 

My hunch is that we've only seen the tip of the iceberg on these vertical ad networks. Today we see a huge lead business in mortgages, higher education, and services like NetFlix. 

 

But lead gen can be applied to a lot of verticals that it hasn’t yet been applied to. 

 

For instance, for the last six months I have been trying to convince the military to develop a distributed leads gen model for its recruits (note: I've had little luck. even though I have met with most of the generals in charge of recruiting, they are the government and are slow to adopt new practices). 

 

And also any financial product to consumers could be great for lead gen. so can leads for customers of enterprise software, hot candidates you might want to hire, new couples for wedding planners, and clients for lawyers. And we'll see these businesses increasingly proliferate and the companies that will make all the money won’t just be the ones that provide a great service but also the ones that provide the hot leads to those firms. 

In our Always-Be-Closing society, thee vertical ad networks are becoming increasingly important. And while the vertical search engines are cool and provide a great service, their total addressable market 10-100 times smaller than the vertical ad networks.