On today’s episode, Jason talks with Dalton Caldwell founder of App.net and formerly imeem. They talk about the history of imeem, how app.net can change social networks, and the trials and tribulations of entrepreneurship.
Transcription of This Week In Startups Episode #306 – Dalton Caldwell of App.net
Jason: Hey everybody it’s Jason Calacanis today on This Week in Startups we’ve got an amazing guest, Dalton Caldwell is with me he’s an amazing serial entrepreneur and he’s a leading thinker in the social space and he’s got an amazing new product that’s captured the imagination of the industry called App.net and we’re gonna get into it today and talk about Facebook, Twitter and the future of social which may just be App.net.
Hey everybody it’s Jason Calacanis we’re here in Angel Pad in San Francisco I am busting my ass for you guys trying to get the best interviews, you tell me on Twitter with the hashtag #twist who you want on the show and then I get on a plane, I wake my sorry ass up in 6 in the morning like I did completely tired, my flight is cancelled but I do it for you guys and for me as I learn so much from the programme. Today we’re going to have an amazing experience, I’ve got a serial entrepreneur who’s gotten his ass kicked, kicked ass, raised a bunch of money from crowd funding and is literally reinventing the way we think about social networks and the social space and also building APIs it’s going to be an amazing episode, Dalton Caldwell of App.net is with us but before we get to Dalton who’s going to be an amazing guest I want to tell you about an amazing product. Igloo is an intranet you will actually use – how do I know this? Cos we actually use this intranet here at thisweekin.com and we use it very simply to do calendaring and to share files with our partners like sponsors of the show and our work here and I’ll show you today we keep our group calendar here of all the pre-tapes we’re doing of all the showings and we can have discussions around this; it’s really very well done intranet software and it’s of course secure so you can use it in a business context fully hosted and managed in the cloud and all the shooting and filming and all of our equipment we keep all that stored in the system so we’re never wondering like is that in a google doc or is that in a dropbox folder it can be in all these different places, we’ve now got everything centralised on the Igloo software system. Follow @Igloosoftware and go to igloosoftware.com/thisweekin and you’ll get a free 30 day trial and you’ll be entered into a contest to get a free iPad mini. So go ahead and start that trial – hey oh and interesting companies ITC, Deloitte, Net.app, Blackberry, Hospice they all use Igloo Software and you will love it. Bring your team in from the cold by getting inside the Igloo. That’s a pretty good catch-phrase I like that.
Jason: Hey listen, Dalton we’ve known each other for a while, I don’t know how long probably getting close on a decade now. When I met you you were running Imeem, which was what?
Dalton: Imeem was the social music service so it’s a free music streaming site that was ad supported.
Jason: There you go. And this was in 2004 you launched it?
Dalton: I started the company in late 03 and it went through several early iterations and pivots and we only got real traction in 05/06 when it took off.
Jason: Which is right around the time YouTube was taking off and a lot of people sort correlated those two, Youtube video, Imeem music, and you had this crazy idea to socialize music and it grew incredibly fast, I think it became one of the top 100 sites.
Dalton: Yeah it got to Alexas 75.
Jason: That’s extraordinary. And that’s globally or the United States?
Jason: To give people an idea 40 / 50 / 60 million uniques?
Dalton: Yeah so the website itself had about 30 million uniques, 26 million registered users and we had our widgets which at the time (this dates us but) we were all over My Space and so we were reaching over 100 million uniques a month; we were playing music to over 100 million people a month which at the time I calculated to be 8% of the internet saw an Imeem widget in a month.
Jason: That’s amazing and you really started to understand social from that experience. What did you learn at that time about social that other people really didn’t know and to give people some context I don’t think Facebook was launched or about to launch.
Dalton: It was out it was just college only. It was on our radar but at the time the My Space guys scoffed at it as like oh those college kids like it but we have the older people.
Jason: We have the goods, we have ten times as many people.
Dalton: Yeah that was the conventional wisdom.
Jason: Friendster had died, My Space was surging.
Dalton: It was so big, it was number one, Alexa one.
Jason: It became Alexa one, over 100 million uniques at the peak I think and billions of pages, they were a page machine. What do you think they got wrong? I mean obviously, they got a lot right. So what did they get right, what did they get wrong?
Dalton: I meanI think it all came down to innovation, I know this is what people usually say but to drill down to it they did things that were kinda user hostile to drive page views, like remember log in / log out through all those extraneous clicks?
Jason: Yeah I do remember that like logging in was like two extra clicks.
Dalton: It was because they wanted to show you that extra ad unit that was a premium ad unit.
Jason: Right, everybody had to log in every time. It wouldn’t save your log in.
Dalton: No it wouldn’t.
Jason: It would log you out.
Dalton: So there were a lot of user hostile things they did and there were a lot of things they didn’t do to iterate on the product as fast as they could. They did a huge rewrite and rewrite’s are good sometimes but it wasn’t a user facing rewrite it was just rewriting the back end and I don’t think – their belief was that network effects were everything and that technology didn’t matter. Like the software didn’t matter, maybe someone has a better mousetrap but who cares we have all the users.
Jason: And that’s wrong why, why is that wrong?
Dalton: It’s been disproven so many times. Digg, Friendster itself there are so many examples of companies that get massive, massive network effects and we feel we’re unstoppable, like in the press think about those things written about all of those companies
Jason: Yeah MySpace was a juggernaut, it’s changing everything like MTV
Dalton: Yeah like Fox they have all the IP from move tie-ins, television show tie-ins. But we’ve seen things like unstoppable, but the network effects can go the other way.
Jason: Ah, so as quickly as you can go up, it can accelerate the downfall.
Dalton: I think so, like we’ve seen it right?
Jason: Right it seems to be with Digg that happened. And why do you think Digg unravelled so fast, what was the critical mistake? All friends with Kevin Rose obviously, brilliant guy but there were some hard lessons there and he talked about them on the show but what do you think as an observer, what do you think the crack was?
Dalton: They change the core user experience and sometimes you can do that and get away with it like newsfeed or something. Like sometimes you can completely radially change your product.
Jason: Right like when Facebook changed the newsfeed but people were protesting outside their offices. People hated it like literally somebody protested that the fact you can put something or now my parents can see what you put on my feed it was sort of different experience but they went with it.
Dalton: So they changed the core product, someone argued that it was for monetization reasons and it didn’t go over too well but it started to downward trend and once you’re on that it’s pretty hard to break out of it.
Jason: Imeem had this incredible rise but the music industry came in and just as they threatened to shut down YouTube and destroy it they did actually succeed in killing Imeem, was it the music industry that killed it?
Dalton: Look it’s too much of a cop out to say oh it’s not our fault the music industry did it it created an untenable situation where the amount we had to monetize and the amount we had to change to the user experience were detrimental to the long-term health of the company. And the other issue is even if you can dodge those two bullets somehow which is questionable, because the deals are up for renewal every year or two you don’t actually own your business per se. Like if you only have there content owners and they supply all of your content and they can change their rates – this is what like Netflix is going through, the thing with Netflix is that you don’t expect them to have every single network channel.
Jason: Right if they don’t have Bob Dylan or Coldplay it’s not the end of the world, there’s enough here to find a two hour experience that’s good.
Dalton: Yeah Netflix has trained us to not expect all of the TV to be there, but when you’re using Spotify or Imeem using one of these services if they’re missing a huge percentage of the catalogue you’re getting annoyed. And so that’s why I argue music services are harder from a licensing perspective.
Jason: Are they impossible, like you look at Pandora right now and it feels like at any moment of time Pandora can end and they’re constantly raising the prices that Pandora has to pay for the for the streams I think they pay 50 or 60 % of every dollar to the music industry and like you’re saying these deals are low single digits, the music industry is not stupid I mean they are incredibly savvy.
Dalton: What’s fascinating about Pandora is that it’s actually congressionally mandated, they don’t even do deals, it’s part of the DMCA, internet radio is a statute, it’s a sub point of the DMCA and every few years that rate gets renegotiated on market effects and so Pandora has lobbyists and the industry has lobbyists and they’re actually influencing congress to try to get them not to raise the rate, in fact to lower it.
Jason: Why is congress need to be involved in this.
Dalton: There was no legal way to do web radio in 96/97 like if you ran an internet radio station it was grey, it wasn’t clear so as part of the Digital Millennium Copyright Act they created a whole definition of internet radio and rates and a definition of what is and isn’t legal as well as a body that you pay money to and it disperses it to labels, it’s called Sound Exchange so that’s why congress got involved as it was in the wild west where it wasn’t clear whether it was legal or not.
Jason: Cos they had done the airwaves it made sense to do?
Dalton: That airwave stuff is all covered.
Jason: We’ll get to App.net next which is getting phenomenal interest from folks but just wrapping up the Imeem that must have been personally hard for you putting in five years and building the 75th largest site in the world and then have it just stop.
Dalton: Yeah it was really hard.
Jason: What was it like in those two or three months when you busted your ass and told the team you were going to change the world and then you realize there’s absolutely no way to solve the problem, it’s like Kobayashi Maru from Star Trek, like this is an unwinabble situation, we’re going to crash into the Klingon ships, you have to just kill yourself, it’s corporate seppuku. What is that like for a CEO founder?
Dalton: you know when you spend so much time on something and you”rethet personally invested in the outcome of it I think you take that on psychologically like pretty personallyIt was hard for me to separate that from my own identity.
Jason: So yeah like you were Imeem, you were the Imeem guy every party you go to every day you wake up you’re running Imeem and all of a sudden you can’t solve the problem. It’s an outside factor.
Dalton: I had to reach the point psychologically where I knew that was the right thing to do. I had to believe that it was unwinnable and I got to the point where it was time – it’s like when you’ve got a pet that’s sick or something- when it’s time.
Jason: This animal is in pain.Wow that’s an incredible analogy, how painful.
Dalton: I remember hitting the button to redirect the site to MySpace this landing page, and that was it.
Jason: But in a way it has to be great relief for you to be able to close that chapter, at what point did it go from being extremely painful to a resolution I can move onto my next chapter in my life. How long did that take between these two moments?
Dalton: I don’t think that there was a moment in time, it became less and less consciously painful.
Jason: in a way like death
Dalton: so I can’t say there was this date where everything was great, it actually took me quite a bit of time to make sense of what it meant and I still am frankly.
Jason: because it was worth hundreds of millions of dollars probably and you were considered, you and Zuckerberg same sentence no problem; you were a genius on social and then you got your ass kicked which I’ve been through myself.
Dalton: we all have and that’s part of what makes it…
Dalton: like one of the reasons I’m able to do this and I try not to take it seriously is when you go from call to uncool so many times you start to realize that this is just…
Jason: The nature of it.
Dalton: you’re the same person
Jason: Right so it’s like you go from being like a genius, that’s the Imeem guy, to this is the Mahalo guy, he’s taking on Google. You just have to write these things out and psychologically it’s trying.
Dalton: I think at the end of the day though I like to think it makes you better because if you believe your own press, either way it’s bad on the good side and on the bad side and it’s pretty easy to see who believes their own press, and I don’t necessarily think that’s good for their own psychological health.
Jason: right because the press is a magnifier both ways. Like right now Mark Pincus is the worst human being on the planet and that is the biggest genius ever all in the span of 12 months. It’s unbelievable psychological pressure but I guess after you’ve been getting ass kicked and being the hero a couple of times you realize we can just hit the reset button at entrepreneurs any time you want.
Dalton: yeah and you wonder whether it’s worth or not but that’s a whole different topic.
Jason: it’s interesting topic to. Is it worth the psychological damage that you went through for Imeem?
Dalton: the last thing I want to do it still sorry for myself, a lot of people would kill to be able to do that kinda stuff. How many times is it worth signing up to that call of duty.
Jason: #First world problem I get the chance to take unlimited swings at the bat as a seasoned entrepreneur I know when Imeem shut down the first thing I did was to email you and ask when the next thing I can invest in that Dalton is going to do you must have a lot of those emails right.
Dalton: it was good and that’s what felt good knowing that I did not get kicked out of town or something.
Jason: in fact it’s like when you’ve gotten those scars, is almost like a right of passage isn’t it. Anybody who’s in the game if you’re not are you asking some percentage of the time you’re probably not pushing hard enough.
Dalton: I think that’s right.
Jason: let’s talk about app.net for a minute. I’m fascinated about this project, I think it’s completely under the radar and it’s gonna be a juggernaut. I don’t want to put any added pressure on you about it but I think you have the most perfect idea at the best possible point in time. Tell us what is app.net and how did you start it.
Dalton: So App.net is the culmination of a lot of ideas I’ve had that honestly since the beginning of social. I remember going to the conferences and onstage would be Ambrams and Pincus of Tribe and Reid Hoffman.
Jason: Of Linked In, Spoke, Rise…
Dalton: And no-one knew if social was going to work.
Jason: yeah big question mark.
Dalton: like remember the debate is there one social graph, does everyone eventually meet
Jason: are these networks going to connect. Will App.net people ever know the Linked In people.
Dalton: that was a good debate ok.
Jason: is the world flat or around…
Dalton: Yeah I think we’ve solved that one. At the time it wasn’t clear if it was going to work and it was also right when Google is taking off in 04 with their monetization and you think about what you were thinking about time, the idea that you are triple your chances of succeeding by having it paid, and once you get 10 million or 100 million users we’ll just sprinkle some Google dust on it and here’s their CPMs and sounds good. And anyone in who was in room who was behind closed doors were saying I don’t know if social is going to work.
Jason: and even today monetization is a fraction of what Google’s actually is on a per-user basis I mean Google actually has less users than Facebook and has a magnitude more in revenue.
Dalton: Exactly and so what I’m trying to say is if I think back to those early days monetization was intentionally hand wavy as no-one actually knew it was going to work. And so the first generation and second generation of social networks were are all trying to get to where Facebook is today. Penetration on a worldwide basis is huge. They have like a billion active monthly users. It’s ridiculous the penetration they got. So here we have 10 years later, oh my god it worked and Linked In worked and all of those are big time companies. Everyone was making up as they went along and the ad supported business dinner where I met you we were told the same thing grow grow grow and no one actually knew if you ad businesses was gonna work. It was like here’s how you’re going to hire your first sales guy. So it was all predicated on figuring it out later.
Jason: Leap of faith.
Dalton: It was all leap of faith. So here we are in the future and it did work but the business models that were hand wavy, in practice doing direct ad sales and premium ad units was much harder than we thought and the dream of self service simple AdSense – wages going to replicate the Google model – remember hypertargeting?
Jason: yeah MySpace was going to get new people based upon they loved this band
Dalton And it didn’t actually raise our CMPs to a sufficient amount.
Jason: It was still garbage CPMs and terrible click through and on Facebook today terrible click through and they’re desperately squeezing their advertisers and users to try make it work.
Dalton: I would argue that they are the best so if you’re not Facebook then all the other guys down the chain, it’s really hard. And this is from the perspective of someone who built a two million dollar a month ad business. I’ve sold ads and.
Jason: It’s a grind.
Dalton: There’s always downwards pressure on CPMs, in tech it’s better, not upwards pressure that’s the way the market.
Jason: it gets more efficient therefore it goes well and lower it’s almost as if you’re in this kind of arms race.
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Dalton: So getting back to what is App.net. So I’ve known this, I’ve internalized this a lot. I’m able to pattern match and see in other businesses the squeeze that went on with MySpace and the need to up monetization. I remember sitting in conference rooms and having the need to turn off our dev API and turning off some video features, all these things that were not good for users because it hurt our ad business and we needed to make our numbers. So now I look at other businesses…
Jason: It seems to be what Facebook is doing right now at this very moment.
Dalton: They need to hit their numbers. The App.net inspiration was seen when, ah man Twitter is going to nuke their entire dev ecosystem and it’s really going to happen, wow, this is unprecedented.
Jason: And this was the company that was built of APIs.
Dalton: And when I look at it I relate to them, I’m not angry at Twitter I remember being on that side, if I was in their business I would probably do the same thing but it was because they made decisions early on on their business model perspective that said we need to have premium ad units we need to have consistent ad units to apply across all these different places, we need to render the tweets ourselves using Twitter cards so we can put ad units in it, we need rich ad units, video ad units.
Jason: Can you say what a Twitter card is?
Dalton: A Twitter card is a way of mandating where you have to display a tweet, it’s like a widget basically where they can put rich ad units in.
Jason: Right so if you want to show a tweet you can’t just cut and paste it.
Dalton: No not any more, they own that.
Jason: They own the license to it exclusively I guess.
Dalton: It’s a little complex but basically you have to display a Twitter card you can’t just display it, you can get shut down by the API.
Jason: But as a journalist I can pull a quote any time, it’s if I try to automate it that I can get into trouble.
Dalton: Yes, from an API basis you have to use cards.
Jason: So they’re basically doing things that are not in the best interests of two people, the users and the developers who want to leverage what the users have put into the system, and in essence Twitter owns nothing, the users own those tweets.
Jason: So the users have built Twitter, Twitter is now forced to monetize, go public, get a return on all of those incredible valuations and are shutting down the very Tweetdecks…
Dalton: The engines of innovation, where was the innovation on MySpace? Where has the innovation come from? I would argue it’s come from third party developers.
Jason: And that was what the innovation was on MySpace they couldn’t do photo hosting video hosting, music, you guys did that.
Dalton: Do you remember when they blocked PhotoBucket then bought PhotoBucket. I’ve seen this before, it’s like you buy some, you kill some, you hope some go away.
Jason: And then you tighten up the rules.
Jason: And so we don’t blame Twitter.
Jason: We understand it’s happening.
Dalton: It’s a business, they should do whatever they want.
Jason: Right it’s a private business, it’s not like this is a public airways, there’s nothing they’re doing that’s illegal or even unethical. But that does create a pent up demand for an alternative and the developers have been desperate for an alternative and the users have in fact have been desperate to systems that just aren’t open and innovative.
Dalton: Exactly so my belief is that technical and product innovation has been what’s been driving social for the past few years and the opportunities being created by the lockdown to doing monetization right now are unprecedented. So App.net is an unbundling. Unbundling is the technical innovation pattern where in one generation you do the whole thing, then the next generation you split into companies. So if you think about the PC business, IBM built the processors and the operating system, you would build the full stack all the way up, then the operating system in the next generation is built by the next company.
Jason: Yeah Microsoft builds the operating system, Dell and Gateway build the computers.
Dalton: So you unbundle that, that’s good for consumers, that drives down prices.
Jason: Yeah you have competition on the operating system, on the hardware, you can pick different operating systems, OS2 or Windows
Dalton: Exactly so you unbundle that, you unbundle third party app developers on those platforms.
Jason: So you have Microsoft Word, Excel
Dalton: So you see all this unbundling and every generation of technology the previous generation that gets disrupted are the people who are doing full stack, and the new thing that they laugh at at first, the unbundling actually innovates faster. So as you look at this innovation cycle, I would look at the App Store, Apple doesn’t build all the apps, they are unbundling quite a bit of development that occurs.
Jason: They don’t have a social network for example, they don’t have a streaming music service currently but they have a lot of amazing products on their platform. And they were the company that actually contracted and said let’s build all the hardware and software and the app layer but they do open up the App store.
Dalton: They get the benefit of third party app developers I’d say. There are obviously ways they are totally locked down, they’re not a shining example of doing everything right, but imagine if you had to build every app in house.
Jason: Yeah it would very much limit the platform.
Dalton: Right and so here we have a social platform, I would argue that Twitter is two things: It is a social platform and it is the end user thing that you actually use and in the early days it was the social platform that was all that mattered as no-one used first-party clients as everyone used third party clients like TweetDeck. The way you interacted with the thing was actually never… they effectively unbundled and have been trying to put the two faces back together and they’re saying we’re going to be building every app experience, which to me is like really?!
Jason: Yeah and they need to do that for monetization reasons and simplicity reasons because Facebook is doing that. But you think with App.net you can crack that and just atrt over again.
Dalton: So the play here is that I believe in third party developers. As a third party developer I have the financial systems set up right and I believe I have all the infrastructure at my disposal I will be building third party developer apps on top of this. And so if we can create all the right financial incentives we can capture all the value that a full stack can get. So that’s why I don’t think this is like the next Facebook or anything like that, that’s ridiculous, the value of this company is smaller but because it’s letting a lot of the value flow upwards to the people building on top of the stack I would argue that the aggregate size of the ecosystem can be a lot bigger.
Jason: Right so people can buy into it because you have made a commitment that the system will always be friendly to third party developers.
Dalton: We don’t have third party apps at all. Fred Wilson had this quote where someone was challenging him about this on stage a couple years ago and he said ‘well guys you know if we wanted to have an open API we would have just never built twitter.com at all and just launched all with third part devs. He meant to say that as a joke but that’s what we did. Like we’re running the Fred Wilson playbook, so thanks Fred!
Jason: But you do have a website so people can go and you did ask people to sign up and pay to join the beta. Talk about the crowd funding effort you did and how that went.
Dalton: So the crowd funding thing was my attempts to not build something no-one wanted. Again as I’ve done this a few times I know I can fall in love with an idea, and it’s not a good idea! And this is something where the whole point of it is it’s dependable, reliable and you pay for it so if you build something that doesn’t hit critical mass, it’s just a waste of everyone’s time. And I don’t want to waste people’s time, that would make me feel terrible. Of we can’t gauge demand, then how will I know it won’t just wither up and die in six months? You can’t make that promise. So I intentionally, for my own sanity and as well as because I think it’s the right thing to do, is create a definition of success that if we hit this milestone of this amount of users or revenue there is a there there and we do it. And if we don’t then thanks everybody.
Jason: It’s sort of a lean startup, Kickstarter hybrid almost, like we have this idea, we think it’s valid, now I challenge you guys to validate it.
Dalton: Yeah do you guys want this? Does the world need this.
Jason: And you asked people to give $50 to secure their account.
Dalton: Yes for a year.
Jason: So I did that obviously to get @jason and you respected people who had twitter accounts.
Dalton: Yes we wanted to not have squatting it could have gotten weird.
Jason: And how many people signed up to that and how much did you wind up raising? What was the goal?
Dalton: The goal was 10,000 users and $500,000 and we got 12,500 at close and I think the final number was $850,000, it went over the goal.
Jason: Well over so that’s great for you and your board and investors.
Dalton: It works and that’s validation.
Jason: So as a product am I going to be eventually sending my family to App.net to register and then have them pick whatever client they want? Sort of like the early days of Twitter.
Dalton: Yeah the way to think about it is that app.net is almost like your identify provider. Like imagine a Facebook connect unbundled – ok this is the thing I log into sites with it, I have my billing information stored, I have my privacy information stored, I can revoke apps access or ad apps, I can find new apps.
Jason: Bring your friends with you which is a thing that twitter has seemed to have locked down and killed the ecosystem.
Dalton: That’s correct.
Jason: This is a real loss I mean I used to be able to log into tumblr and find all my friends or log into facebook, instagram, twitter and discover all those people and not have to recreate the graph. You have to recreate the graph now don’t you?
Dalton: Cos that’s what they own, in a media business you own your content it’s like the music business. What you own is the “content” it’s not a service you’re providing, you’re monetizing the content that’s created and I would just argue that those are just very different business models. With a service provider you pay for the service and you do with it what you want.
Jason: Will you ever have advertising in the service or is that something you believe will be handled by developers on their side?
Dalton: We will never have advertising on the service, the idea is developers can choose their own business model so they can sell their app in the app store, they can layer charges on top of it, they can give it away for free, whatever they want.
Jason: And so how do you make money off of this?
Dalton: We are making money from the direct user subscription. So the way we think about this is that in its current scale the number of people that this appeals to on a consumer level is fairly small and that’s frankly to be expected
Jason: At $50 a year.
Dalton: We dropped the price already it’s $36 a year.
Jason: Now we’re down to $3 a month right?
Dalton: And we added a monthly plan so it’s $2 effective but you can also do a monthly plan which is $5 a month or $36 a year which is effectively $3 and we’re going to keep dropping it as it gets bigger and bigger. But the point is the more apps there are the more attractive it becomes and so the innovation in devs… so their financial incentives is to get more people to the platform because that increases their revenue and the more different kind of apps that exist. This is one of the things that I think people struggle with a lot, they’re like well this is a paid twitter clone, no-one want that. Yeah ok maybe wants a clone of what twitter looks like today.
Jason: But what could it look like.
Dalton: Right, if you look at the things that are shift. The Tweetbot guys built Netbot and Tweetbot is the number one third party twitter client like all the bloggers love it, all the app people love it so they ship something for app.net and it’s live in the app store and it’s exactly the same fit and finish so if the way you access twitter today is through tweetbot you can download netbot today and have something exactly as polished, as sophisticated and as high quality experience that you’re gonna have from a software perspective as you are on twitter today and this project was announced four months ago and we hit funding three months ago.
Jason: So already you’ve caught up.
Dalton: Yes so effectively what we have from an API perspective is parity.
Jason: Wow, kind of mind blowing.
Dalton: It is right.
Jason: And that doesn’t scare twitter as they’re playing a different game now with this monetization and network effects. But that must be, for the developers over there, be heartbreaking to them to see all the latest stuff that they worked on just be instantly duplicated, instantly caught up.
Dalton: Well a lot of what the engineers are working on is advertising frankly. These are very hard problems, I’m not trying to diminish…
Jason: So you’re bet is that you charge the users and all this amazing innovation happens and you get the virtuous cycle going.
Jason: Now there’s a contingent of people who will never have the money to pay for a social network, how do you manage that?
Dalton: So as the thing reaches more and more scale I anticipate the price to go down. If it goes to zero I don’t think that necessarily be a good ideas as then… I don’t think people are good or bad they just have economic incentives to do bad things, that’s why I personally shut down an API with my previous company. It wasn’t because I hate those guys, it was just a financial decision. So what I would say though is that you can reach the point where it almost becomes noise, from a cost perspective and a lot of people have a cellphone plan and they pay for that, other things that we use to do computing do cost money for the most part.
Jason: But because you already have Facebook and Twitter for free and they already have the network effects I guess you could argue it’s an uphill battle for you, is it not?
Dalton: So this is the crux of the argument. If we have a sound business model, it doesn’t matter.
Dalton: Cos we can have a fantastic business of a million users, ten millions users. Think about how hard an ad business is, think of those meetings we went, if we didn’t get to 10 / 20 million registered, if you don’t shoot for the moon with your ad business, you’re dead. You don’t have a business.
Jason: But here if you get a million people to sign up at $5 a month and you’ve got a $60 million a year business that costs $10MM to run or $20MM to run.
Dalton: We’re pumping money into innovation so this is a bet that, you know the iPhone had high margins, early competitors had high margins, we don’t have to reach the level of scale that some of those sites get, we’re for the innovation engine to get cranking.
Jason: So if everyone caught up in four months, what would they make of the next four months and the next four years that would just totally outpace Twitter and Facebook.
Dalton: Right as everyone there is working on monetization, right.
Jason: Wow, it’s kind of mind blowing. You’re talking about making a virtuous system that is not corruptible to use a word, you’re not going to have the focus of the intelligence in the ecosystem on advertising which in a way is a waste, like who is that servicing, it’s servicing manipulation of attention of users to sell somebody else’s product whereas this can be just a beautiful experience free of advertising like HBO which happens to be the best television on TV.
Dalton: Right and there is a place for network television and this is why I don’t think it’s a zero-sum game, it’s just that there’s a place for both and again I do believe that innovation is the thing that makes things work and when you stop innovating that’s how you get disrupted and the cycle of technology.
Jason: Facebook has really not innovated in their history, they’ve just copied everyone else’s ideas with the exception of maybe the app platform.
Dalton: Well I think their app platform was their killer shot, the smartest thing they ever did.
Jason: But everything else, just slightly more efficient or better scaled version of what came before it.
Dalton: From just an engineering perspective I’m in awe of what they did over the years to make the things scale and to keep the site up and reliable, just the game they brought to the table in 06 was wow.
Jason: No-one would doubt the scale is tremendous but on an innovation level it seems they just do a Q&A five years after Dodgeball and three years after Foursquare they do places.
Dalton: I think they’re betting on Platform, basically they’re betting that you’ll use facebook without going to facebook.com, and everywhere you go connect comes with you and all their stuff comes with you – I believe that’s the bet long-term.
Jason: But their squeeze of people who are investing in the platform has become legendary now, they screwed over the app developers, first they were getting all these free users from posting to the feed, then they made them pay to post to the feed, then they made people pay to get likes to their pages, ok maybe didn’t make but they offered that service, then the dooped everybody to putting like buttons on their sites and now you build up a million fans and if you want to reach a million fans you have to pay them again!! It’s triple taxation, first you pay by the nature of putting the like button on your site, then you pay to acquire friends or likes and now to reach those same likes that you already paid for twice with screen real estate and money you pay again. I mean how stupid are people Dalton?!
Dalton: Put yourself in their perspective though, think about what Wall Street’s done to those guys. I always try to put myself in the shoes, I don’t try to demonize people so if I’m there and I’m looking at that stock price and revenue growth, ok secret plan 14/15/16 go right?
Jason: It feels desperate..
Dalton: I don’t think it’s quite desperate it’s things they would not have done two years ago…
Jason: Zuckerberg has made a total shift from ‘I will not put advertising in the main feed’ to ‘I will sell anything on the site’.
Dalton: Because what they’re doing is the closest thing they can get to Adwords which is selling visibility. If you think about what Adwords is doing, you’re bidding on visibility in a search result; the newsfeed is actually the engine of monetization.
Jason: Not the sidebar? The sidebar is garbage.
Dalton: But being able to play games to bid up things on newsfeed, that’s the holy grail ad business model and they have to make it work on mobile and maybe they will, so I’m not saying it won’t happen…
Jason: How annoying that the things I think are content in my feed may or may not have been paid for. It’s asked me five or six times…
Dalton: No they don’t market it like Google does.
Jason: It’s not clear and I’ve been asked would you like to promote this post to all your followers for like $49 and it’s someone else’s post that they are asking me to pay to re-amplify.
Dalton: It’s free money for them though, who knows how it converts but think about their perspective.
Jason: I’ve thought about it but one of them was for gay marriage and I’m pro gay marriage so I almost though I’ll re-amplify this but then I was like, isn’t that what the like button is for?! And now I don’t know in my feed what’s paid and what’s not and I think that might be illegal if the FTC’s listening. Should we know what’s amplified and who paid to amplify it?
Dalton: I actually don’t know.
Jason: You have become with your position papers that you wrote for app.net, would say you’re radioactive, would you say that people are nervous around you, that you’ve made enemies as you’ve taken a stance against facebook?
Dalton: I’m sure that there are certain things that I’m not getting invited to but the other way to think about it though is it’s almost worse when you become irrelevant and bland and you stop innovating. The way the valley works is that we respect people that say things and believe things and say the truth.
Jason: Do we?
Dalton: I think we do.
Jason: I do but I don’t know, sometimes I wonder.
Dalton: So the biggest feedback I had about this whole thing is that I spoke at Staryup School, the Y Combinator thing and Paul Graham invited me and it was a big deal because they usually invite all the people who got really rich.
Jason: Right not just the brilliant people who got their ass kicked.
Dalton: And he booked me and I had this speaking slot after Adam D’Angelo and before Mark Zuckerberg so I was booked on the stage at the highlight of the whole thing and what he wanted me to do was tell the truth about what I learned during the music business and I was really stressed out about it to be honest with you and I went up there and I’m just going to tell the truth and so I laid it out and I was expecting to get slammed for that and shockingly more people remember me for that than anything else I’ve ever done in my career.
Jason: Moreso than Imeem?
Jason: And because you’re a truth seeker and a truth teller you’re credibility is through the roof and as many meanings as you lose, you gain more.
Dalton: Right, and so I was rewarded. Strangers who I didn’t know said thanks for doing that and until this day it was my little learning experience that if you speak from the heart and I’m not bullshitting people, I’m not saying this is definitely going to work guys but there’s a lot of thinking behind this and it’s an honest to goodness experiment to try to get a different outcome than our current oh get a million users, get 10 million users oh hire some ad guys, try to sell this as fast as you can before your business craters.
Jason: The emperor has no clothes, except in the case of google.
Dalton: It’s true this is a sincere and honest attempt to do something different and I’m willing to put myself out there because I do believe that things like that I’m saying about innovation.
Jason: and you’re kind of fearless which is one of the things I like about you Dalton. One of the things you have is maybe your experience with Imeem informs your fearlessness I think you never be as bad as having to shut down a company and have it all go away overnight. Like you’re playing free.
Dalton: I’m not worried about losing face.
Jason: yeah it’s like a boxer who gets knocked out just gets pummeled and says yeah I’ve had my ass kicked by the fighter I get to 12 rounds I’m going to do what it takes. You’ve got that heart, it’s really commendable. And the project is so perfect for this moment in time and I think what you’re doing and what Path is doing is really looking at the users and saying what are the users really want? Users don’t want to twitter to turn off the API.
Dalton: yeah I don’t think that’s good to users no.
Jason: and I don’t want Facebook to put ads that are hidden in their feed or indiscernible and people who are investing in the ecosystem don’t want to think that they’re going to get dooped and get taxed and triple taxed and have a rug pulled out from under them over and over.
Dalton: Cos they go to eat too, you don’t want to be building on starving platform, right?
Jason: And now they’re also in the double trap on Facebook because their public, and how much is that change everything for them?
Dalton: A lot. Users are smart, they sophisticated. Time and time again we see people move, they explore alternatives. You can’t think of them as we have all the users we have all the network effects, we just need to milk them a little bit.
Jason: people know when they’re being squeezed, and the airline tells them we going to charge you for the soda, charge you for the extra bag and they start to look at that stuff. So in your mind Facebook peaked?
Dalton: no I still think I’m long on Facebook, is just not going anywhere but that doesn’t mean there’s not room for a lot of innovation. It’s like hear it is it’s staying over here and it’s got a lot of capital and talent or whatever, it’s not going anywhere and the revenues will go up, that’s okay great that’s not the end of the world then we should stop building new software.
Jason: that people had given up to a certain extent in social, Facebook is such a juggernaut it takes crazy guys like you and Dave Moran to really say I can make a go this, but to get it funded in social how hard is that?
Dalton: I think it’s pretty hard, it’s a fact I’m sure you’ve seen it, Facebook apps are tough to get funded right now.
Jason: why is that?
Dalton: because open graph you can go up, but then it can exponentially decrease, they can just turn you off and that’s a little scary if you’re an investor. They’ll put their thumb on the scale to help you and then take it right off.
Jason: if you don’t sell to them, if you don’t buy ads from them.
Dalton: or just arbitrarily, I don’t think Vinny in SocialCam was any bad faith in that but yeah those guys crated.
Jason: They just decided with Vinny in SocialCam it wasn’t good for users and therefore when not going to let them post to the main feeds.
Dalton: they let them keep posting you just don’t see them any more, like this thing with a edgerank and this is the thing with newsfeed is as an API developer you can post all the time but it’s a black box what it decides to show users.
Jason: right is also like SEO and Google, they get to decide they keep it opaque
Dalton: and now paying for access is the new thing.
Jason: just pay to get through that opaqueness. Which is kind of like Google is saying, SEO yeah it’s a crapshoot, maybe you get number one ranking maybe you get number 100, but there’s a sure way to get number Zero.
Dalton: that’s it that’s the insight, that’s what I think we’re seeing happen. Bidding for newsfeed placement is the closest thing to google’s ad business that we ever seen.
Jason: wow I just got it, it took me a minute to get what you’re saying and that’s Sheryl Sandberg’s influence having come from Google she basically said the news feed is the search result.
Dalton: so organically you can still get in if you have high quality content, if you post some cool stuff cool you’ll get in there anyway but if you want guaranteed placement pay.
Jason: so if you want to short-circuited just go ahead and we’ll guarantee it.
Dalton: otherwise it’s up to you to create compelling content that our algorithm decides is good .
Jason: and if you want to talk about our algorithm we don’t really talk about that’s because it’s proprietary. And if Google, just taking your thought process, did you ever think of a search engine would be a good idea? If I paid $10 for a search engine that I knew had no ads and just ranked to the transparent way?
Dalton: I think that it would have to have enough paying users to justify the cost, you know as well as anyone that. So you would have to have a million guaranteed paying users but there are people who are nostalgic from 2001 era Google where there was none of that junk all over the place.
Jason: Which Skrenta was doing – what was the name of his project? And then there’s Duck Duck Go.
Dalton: Yes which is coming along, it used to be a Yahoo guy I believe.
Jason: Yahoo had a gorgeous API – Rich Skrenta of Blecko – it’s so crazy that we can’t remember what he’s working on when he’s such a brilliant guy.
Dalton: and it worked really well, I used it for stuff.
Jason: how sustainable right now are you as a the company, how many people do you have?
Dalton: the Company has 13 employees and from a start-up perspective we have infinite time.
Jason: you raised a ton of money from Andreessen Horowitz.
Dalton: we did an A two years ago which was $5MM and we just didn’t spent it which was clever. And given the money were making from our customers we have…
Jason: you basically profitable or could be?
Dalton: Yes. What needs to happen is not that we sit hear in status, we have to let the experiment play out and see innovation occur on the platform which has done a great job so far but that’s the leading indicator of whether this is working.
Jason: and Twitter has blocked you stopped you from putting in my friends list? What can I do with the interaction between the two services?
Dalton: the best thing that I’ve seen is like Buffer
Jason: Buffer is amazing.
Dalton: so you can post a multiple things at once and that works
Jason: they can’t block that
Dalton: I don’t believe that’s block-able.
Jason: that they can block you pulling my tweets in.
Dalton: but we don’t
Jason: so if I wanted to syndicate it the other way and install an app that puts my tweets on app.net
Dalton: it doesn’t work, they block it, that’s what If This Then That did, remember when they blocked ITTT, that’s why.
Jason: ITTT was so awesome
Dalton: you can go in ITTT, ITTT was a way to, it’s like Yahoo Pipes, to connect different data sources to each other so if you want to archive your instagram photos to dropbox. If you want to post an app.net post to twitter and to facebook create an ITTT recipe, there were a hundred different services all integrated to it and you can just wire them together in different ways.
Jason: And Twitter said that’s a really cool service, keep us out
Dalton: You can post into twitter but you can’t post out.
Jason: Roach motel, come in but we’re not going to let you out. And particularly unfair as I own my tweets as @jason, I give them a perpetual license to them but I can take them down that I want to. It sort of on there as I would not have signed up for a service that allowed it this way and they sort of changed it which I guess is there right which is why I now use Buffer as my default posting. Actually I haven’t on mobile switched yet as the buffer app’s not how I want it to be yet, it needs to be a little bit better, but on desktop I am 100% in on Buffer and but why not a checkbox on the site where I can check off some of that Buffer functionality within App.net, is that so you don’t want to take Buffer’s steam?
Dalton: At this stage we’re pretty close to at Twitter-like service and for this experiment to succeed there needs to be a breaking off point where the things people post are different, the apps that people use are different and the user experience is different. Someone build a group chat service where you can all watch a YouTube video at the same time.
Jason: like a Google hangouts functionality
Dalton: yeah, a third party dev built that, some people built games like a chess game you can play on top of it.
Jason: has anybody built a tool where I can suck out all my friendships recut Facebook and invite them to app.net?
Dalton: Nope, not yet, people have built tools to find your twitter friends.
Jason: and that third party one you have to give them access to your twitter account and they read like 1000 an hour, it’s throttled
Jason: because Twitter is throttling this issue, so they’re basically trying to ankle the service, or any service from competing with them.
Dalton: Yup, and so philosophically were trying to be the platform and really mean it not just play lip service.
Jason: so you’ve integrated this into your terms of service is there a way legally that you can bind yourself to this concept, to almost put the site into a trust? This is the trust of app.net and we are always going to abide by these basic tenants.
Dalton: So we have our core values and I’ve actually talked to lawyers to try and make it that we can’t change… what we want to create are certain terms as being irrevocable. The idea here is that it’s a paid service, right now on a free service or you can do is leave. The financial incentive is if everyone cancelled that would be really bad. Let’s say I got hit by a truck tomorrow and some evil guy comes in and takes over, let’s just play that out, evil guy last thing he’d want to do is rock the boat, is make people cancel on mass, whereas on facebook newsfeed people are protesting but what you’re going to do about it?
Jason: Yes who cares? You can only vote by leaving and not participating.
Dalton: that’s one of the interesting psychological aspects of this is is that you have a way to leave
Jason: stop paying
Dalton: I’m gone, I get hit by a truck and evil guy is running it, that seems like a pretty financially motivating factor.
Jason: maybe you can make a board of trustees that manages the terms of service, five people respected in the community, a power user, a power journalist and there developers and they are a council for terms for service changes.
Dalton: Interestingly we have our TOS on Github and it’s open for people to comment on already and submit patches to it, and people have gone through and picked it over and we’ve already revised the TOS once due to the feedback.
Jason: No-one knew if this was going to work but I have great sense that you have a greater than 50% chance of making it work and I think it’s going to change everything. Just because it’s been a free advertising business forever, so was television until HBO came out.
Dalton: Right and network television didn’t go away but aren’t we glad as consumers.
Jason: And what’s the best? Hands down the Emmys go to… I think that’s going to be the analogy, you’re going to win all the Emmys, they’re going to have more audience but they’re going to do things with their shows that don’t have integrity.
Dalton: If you think about it if you’re running a network you can only put things on network television that advertisers want to advertise against as well as they have to be mainstream enough to run. A lot of shows that run on cable can never run on network, it’s not like these are the equivalent shows on cable and network, they actually creates different things, they occupy different spaces.
Jason: There’s no Sopranos and Boardwalk Empire coming to ABC, and if it does it wouldn’t work.
Dalton: It makes no economic sense.
Jason: And how could you watch it with a commercial break? It would be terrible, makes no economic sense, you need a certain level of revenue and artistic freedom to do those kind of things. Listen Dalton it’s been an amazing hour and continued success with it. If we want to participate, what’s the best way to participate in App.net?
Dalton: If you create an account it’s really easy to interact with anyone in the community. One thing that’s fun about having it this small is that people can @reply me or my co-founder or anyone else and everyone responds. It’s small enough that everyone is actually participating and it’s the easiest way to talk to me. Like any time I’ve ever done podcasts in the last couple of months it’s cool cos I know when the podcasts go out cos all of a sudden people sign up and say ‘hey I’ve just seen your podcast Dalton, how’s it going?’.
Jason: You wouldn’t have a spam problem in your system of a fake account problem as it’s too expensive, like if sending an email cost a tenth of a penny – there was a company called Good Mail that AOL had, was a really interesting concept and everyone was up in arms but $20 a year to get rid of all your spam.
Dalton: But everyone would have to adopt that all at once and that’s why those schemes never worked, but I think in this case it is an interesting way to prevent and at Imeem we had spam problems, I’ve fought spam before.
Jason: it never ends
Dalton: It’s hard and they get smarter
Jason: It’s almost like they’re deranged, it’s like a deranged 12 year old, I’m gonna like poop on your stoop and you’re going to come out and step on it and clean it up and then I’m gonna put shaving cream on your door handle, it’s like juvenile almost.
Dalton: I think some of it is that way but some of them are making 10 or 20 grand a month, I think that’s a lot of the twitter spam problem is people are making real money.
Jason: It’s amazing to me as I see people quoting me and retweeting me and then I look and why is a bikini model quoting me and then I realize it’s not a bikini model quoting you Jason, although that would be great, they’re spambots and it’s not one bikini model it’s like 100 different strippers, bikini model, car show girl, it’s pretty crazy and it’s all torso photos. I get at least 10 DM spams a day – ‘did you see yourself in this video’ all this craziness – then I get at least a couple dozen a week reply girls, real people model types wearing low cut stuff and they reply to a video and you watch Gangnam style and a 12 year old sees cleavage, beautiful girl I’ll click on that.
Dalton: to get subscribers on YouTube right?
Jason: I think they get subscribers and just views, so for every thousand views they get a dollar or if Gangnam Style gets a billion views and they are the number one commenter as they immediately comment on everything and so they banned ‘comment girls’ but then some comment girls were actually providing interesting value, providing intelligent comments. It’s the grey stuff that I find interesting.
Dalton: There’s always people who push the limits; that’s the entrepreneurial spirit. There will always be people who try to find right where the line is and try to not cross it.
Jason: Everybody follow @daltonc on twitter or more importantly go to app.net and open an account if you are a believer in innovation, if you are a believer in freedom, in transparency, in a world not filled with advertising but maybe great content I urge you to support this very important product and really project and movement and Dalton I really have great respect for you and in terms of entrepreneurs you may not have the highest net worth.
Jason: But you have incredibly high worth in my mind for what you’ve accomplished in your career so keep going, don’t stop.
Dalton: Thanks Jason
Jason: It’s great having you on the programme.