The Monk and the Riddle: The Art of Creating a Life While Making a Living

by Randy Komisar

  Their Teleworld idea was to sell a new kind of hardware, a home server that not only digitally stored incoming electronic information, including audio and video content, but also linked the gamut of digital devices rapidly becoming commonplace in the home: computers, PDAs, and Internet appliances. Concerned that they might be ahead of the market and that customers would be slow to appreciate the ultimate value of their product, Mike and Jim planned to jump-start the business by giving customers the ability to digitize and store several hours of television programming in a set-top box. Their initial product would be, in effect, a souped up VCR with a clever programming guide. Because of the costly electronic storage requirements, it would carry a hefty price tag.

  Their strategy made me cringe. Working at companies like GO and WebTV convinced me that there is no margin in the consumer hardware business. It requires an enormous investment, demands massive distribution, and scales slowly. I believed the value of consumer hardware could be derived only from the services it delivered to the consumer and industry partners (in this case, advertisers, programmers, and networks). The business model inherent in such a strategy, though, is uncertain. If you price the hardware high enough to generate acceptable margins, your product's retail price is too costly to quickly develop the volume of users needed to enable a robust service business. On the other hand, unlike with Internet services and software where there is no or nominal marginal expense for each new user, the cost of subsidizing these pricey boxes to make them affordable in order to accelerate adoption could break the bank. Mike and Jim talked about selling hundreds of thousands of set-top boxes, but that wouldn't build a large enough audience for service providers and advertisers. They would have to sell millions of units, and quickly. If they focused on the boxes, I told them, “your legacy may be that you sowed the seeds of a huge market, which the consumer electronics giants and service providers ultimately reaped.” Pioneer new territory, I cautioned, but don't end up with arrows in your backs.

  What a buzzkill I was. They were gracious and thanked me for my candor. As we parted, I couldn't imagine how they would succeed in the hardware business they envisioned, and I never expected to hear from them again. Entrepreneurs, in my experience, don't like to be told they're wrong. It isn't in their dispositions to sit and listen to that kind of critique. That's why many ideas in this Valley happen against all common sense. It's good when entrepreneurs are a little bit deaf and blind, but if they're completely deaf and completely blind—and many are—they're unlikely to learn enough from the market and their advisors to make their vision a reality.

  To my surprise, Mike called back a week later, and I agreed to meet again. He and Jim hadn't taken my advice wholesale, but they had carefully considered it and revised their plans where they thought their ideas could be improved. Their new idea, which ultimately became TiVo, was much, much bigger.

  In essence, they had evolved the business from a hardware-based model to a service-based strategy. The gist of their big idea was what they called “personalized television.” Using the box and its ability to record programming, they now proposed to build a service that would give viewers complete, individualized control over what they viewed on television and when they viewed it. They would price the box lower to foster sales in higher volume, leaping into a financial no-man's-land in a gamble that they could assemble a marketable audience in time for the service revenues to kick in and more than compensate for their losses on the boxes. How would they make money when each box was priced below cost? Volume—that is, a volume of viewers sufficient to fund a money-making service based on subscriptions, advertising, and commerce. The mix among those revenue sources and the balance between how much would come from consumers and how much would come from industry partners would be determined later. Eventually they believed that the stand-alone hardware and its expense would disappear as televisions and other set-top boxes provided the power and digital storage necessary for personalized television. Then TiVo would be a service provider only, with a much stronger financial model.

  I listened to their new idea and realized that if they succeeded, the grid between television programming and network time slots would be broken. If the viewer was watching a show that had been time-shifted, commercials would no longer have a captive audience. The viewer could simply skip forward at will. He could watch a show broadcast Sunday mornings during weekday prime time, and vice versa. Advertisers who paid top dollar for prime-time audiences might or might not reach those audiences any more. With TiVo's box, your time was prime time, anytime you watched. Control would move from the broadcast networks to every single member of the audience. Television would never be the same.

  There was more, I realized, because TiVo would be interactive. The service required a phone connection for data transmission and customer support, which created a direct path to and from every single viewer. Viewers would be able to communicate with the TiVo service for a myriad of purposes—at first to express opinions about shows or organize their own lineups and, eventually, if anyone cared, to buy the blouse right off an actress's back. As you watched television, your box would learn what you liked and, if you wanted, automatically find and save it for you. Eventually you would receive only relevant advertising and marketing messages, targeted to your interests. These services depended on sophisticated technology at the back end, but users wouldn't have to know about any of that. It would all be transparent to them.

  This was a chance to find value in increasingly segmented audiences. An audience of two million might be worth more than an audience of twenty million, because of what was known about those two million people. Better to send an advertisement for Corvettes to a small audience composed entirely of affluent single males than to a large audience composed mostly of working couples with three kids. Best of all, the audiences' personal profiles would be private and secure, allowing viewers to decide when and if they wanted to share personal information. The possibilities raised by this vision were enormous, but many pieces would need to come together to make it work, and many incumbents in the television business might see the impending changes as a threat and resist.

  As I sat in the Konditorei during that second meeting with Mike and Jim, my mind was spinning through the possibilities. I thought, “These guys don't need $20 million, they need $200 million just for starters.” This effort would require experienced leaders, a management team capable of forging a complex set of relationships among advertisers, programmers, broadcasters, and content creators. The team risked making enemies of those behemoths unless they could convince them to join the movement. The incumbents could not be ignored, because their roles in the future of television entertainment would remain critical. It all depended on content, and somebody, somewhere, would have to pay for it. It was unlikely that everything would become pay-per-view, and so the role of advertisers would remain powerful, and then both content and advertising would still need to be distributed by networks and broadcasters. This would require shuttle diplomacy, not simply technological prowess.

  I couldn't resist their big idea. When they invited me to help make it a reality, I didn't hesitate. Eventually I joined the executive committee of the board of directors.

  For two years, Mike and Jim tirelessly evangelized the industry players, and after their initial alarm, the leaders were intrigued enough by this big idea to offer support. Now TiVo needed to raise a large sum in order to finance its race to roll out the technology and build an audience. It was time to go to Wall Street. We were at today's board meeting to bless this next step, the IPO.

  Much of the meeting focused on Byzantine legal issues regarding an initial offering. The lawyers from Cooley Godward, a venerable Valley firm, reviewed the status of the Red Herring, an initial filing with the SEC. Most of us had heard the litany before, so the lawyers balanced doing their duty with being succinct. They discussed the accounting issues regarding stock options granted to employees. The SEC claimed that some of these were priced below market. If the fed
eral watchdog only knew how hit or miss these ventures were, how sudden the surge forward toward an IPO could come on, they might better understand why almost every company in the Valley regularly faced the “cheap stock” issue. The lawyers cautioned us against discussing the IPO during the “quiet period,” another faux pas, according to the SEC, because it can be misconstrued as prematurely promoting the stock. We were reminded, as was common practice with IPOs, that the company's employees and investors would be “locked up,” or forbidden from trading in TiVo stock, for 180 days, thus ensuring a more manageable stock price in the six months following the offering. Finally, the SEC wanted clarification about my title, “Virtual CEO,” and asked that it be changed to avoid misleading the market. Old dogs don't take well to new tricks, and it was once again obvious why the new economy germinated in the Valley.

  The board cautioned the management team to avoid becoming too distracted or euphoric about the IPO. Not even founders and management committed for the long haul can avoid some preoccupation with the IPO's life-changing potential. The first day of trading can be mesmerizing for those who have worked tirelessly to build the company. To these entrepreneurs, the IPO is proof they aren't lunatics. They are finally able, at least temporarily, to stop protesting to family and friends that this work will make a difference and that they are sane despite having sacrificed everything for this chance. After the IPO, riding the share price around the curves and corners can make you dizzy. Good management must remind people constantly to ignore the jerking and lurching of the market and focus on the horizon. Stay.com.

  TiVo had a chance to change the status quo for the better, with a potential we could only guess at. Sure, the market and business model were not yet proven, the incumbents could stonewall, and competitors large and small might hijack the opportunity, but Mike and Jim were up for the challenge: smart, experienced, flexible, capable of learning on the fly, and willing to do what it would take to win. They did not waste any time speaking to me about exit strategies. Personalized television would be their legacy.

  I returned home midafternoon, changed into shorts and a T-shirt, opened the doors to the hills, let the dogs mosey a bit, and spent an hour or so working out in the downstairs exercise-room-cum-office-cum-dog-dorm. I lifted a few weights and put in some time on the treadmill while taking and responding to phone messages, my own recipe for multitasking. Then I checked e-mails. Surprise, surprise. Lenny had not disappeared. Tucked in the middle of several messages was one marked “Urgent!”

  * * *

  TO: randy@virtual.net

  FROM: lenny@alchemy.net

  SUBJECT: Pay Dirt

  Hey Randy,

  Great news!

  Frank called and wants us to present next Monday morning at his partners' meeting. This is the break we've been waiting for. I don't know what you said, but thank you.

  One little glitch. Allison, my partner, got a job offer she's considering taking. I think she's losing patience— just when all our work is beginning to pay off! The job offer is from some HMO. She'd be involved with developing a strategy for supporting members on the Net, though it doesn't compare to Funerals.com. She's agreed to come with me for the presentation Monday, but she's wavering between Funerals.com and the new job.

  Would you be willing to get together with us after we meet with Frank and his partners? If Allison had the chance to talk with you, I have a feeling she'd be back on board, especially if the meeting with Frank goes well. I realize you don't know her, so I'm forwarding her e-mail along with another revised version of the business plan.

  I've given a lot of thought to your question, but right now I need to focus on the meeting.

  I can almost smell the money! Finally-- I can't believe it.

  Lenny

  * * *

  I let out a sigh. Stranger things have happened. As any other good VC would do, Frank was sniffing around that big market, and Lenny was his only play for the moment. I'm sure that as soon as he heard from Frank, Lenny eagerly set aside all the issues I was raising. Why bother with some loopy metaphysical question if you're going to raise the money anyway and get rich in the process?

  Allison's indecision posed a critical challenge to Lenny. If he lost her, it would be a serious blow to his chances. I opened her e-mail.

  * * *

  TO: lenny@alchemy.net

  FROM: “Allison Whitlock” awhitlock@digger.net

  SUBJECT: Re: California Here We Come!!

  Hi, Lenny,

  All right, I'll go. I don't want you to fail, even if I'm not associated with Funerals.com in the long run. You have labored so hard for this. Whatever happens, I hope it works out for you. You deserve it.

  But please understand, even if I go with you, I am not committing. I'm having trouble seeing in Funerals.com now the idea that attracted me to it in the first place. When we started talking about it and planning for it, when you and your family were having such a hard time with your dad's death, we saw it as a way to help people who are struggling with loss and grief. It wasn't just selling cheaper caskets. As you say, that's a good place to start, and I understand why investors will focus on the economics of the business. But personally? I'm not interested in simply being an e-tailer.

  I'll help as much as I can. But I'm not there yet. I have to let the HMO know in ten days.

  Later,

  Al

  * * *

  It wouldn't have surprised me if Lenny's partner bailed out because she'd received a better offer, something concrete in contrast to the hazard inherent in a startup. But I hadn't considered that she might be at odds with Lenny's lifeless mission or that their original idea might have been more compassionate and compelling than Lenny now let on. I couldn't tell from the little Allison said, but “helping people who are struggling with loss and grief” seemed more intriguing to me than flogging cheaper caskets. A bigger idea. I was already beginning to like this Allison.

  The chance to work on a big idea is a powerful reason for people to be passionate and committed. The big idea is the glue that connects with their passion and binds them to the mission of an organization. For people to be great, to accomplish the impossible, they need inspiration more than financial incentive. Lenny appeared to be jettisoning his founding vision for some misguided notion of what success demanded. He was trying to reduce Funerals.com to an equation, a formula, a model. Impatience wasn't Allison's problem. Finding something in Funerals.com to care about was.

  HER AMBIVALENCE and Lenny's focus on the formula over the mission brought to mind my experience at Apple, specifically one of the most pivotal negotiations I was involved in there, which was reported only recently for the first time.

  Apple's big idea had been Computing for the Rest of Us. But the company increasingly found itself hostage to the margins and quarterly results generated by its business model, which was built around premium hardware. Its share of the PC business was limited as it became addicted to selling computers at much higher margins and prices than its competition. Its intuitive, friendly interface was the justification for those margins, but that business model and Apple's position were threatened by none other than Microsoft. In 1986 we had all seen Windows 1.0, and while it posed no threat to the Macintosh operating environment at the time, we understood what it meant. Microsoft's toe, even its whole foot, was in the water. At some point it would develop a product that was good enough. Then the competition would look sufficiently like Apple to erode Apple's margins and back it into a corner of its own making, with declining share and profit.

  Along with many others inside Apple, I was a strong proponent of licensing the Macintosh operating system in order to preempt Microsoft in setting the standard for user-friendly computing. After all, it was Apple's birthright, its overriding mission. It would mean cannibalizing our own model, sacrificing margins for volume and market share, but it seemed better than circling the wagons and defending an ever-declining piece of the PC business. Apple's general counsel, my boss, asked me to devel
op a licensing plan for the Mac operating system, with safeguards for protecting Apple's basic interests.

  In a first step toward a new strategy, a colleague and I were assigned to negotiate a license of the Mac look and feel to Apollo Computer in Massachusetts, one of the leading manufacturers of workstations at the time. My partner, Mike Homer, was a prodigy in Apple's marketing organization. He was facile with technology and had a flair for sales and marketing. Later he would play a crucial role at Netscape. The two of us tag-teamed the negotiations with Apollo for months, flying back and forth across the country, coordinating with the mother ship in Cupertino, and eventually reaching an agreement.

  Now all we needed was the signature of John Sculley. Mike brought the agreement to Apple's executive staff, fully expecting it to be signed and the company to announce it was finally licensing the operating system to others. Negotiating the deal had been a deliberate process, the outcome of a calculated strategy for which there had been something of a consensus. What happened instead—typical Apple management style at the time—was that pent-up reservations about our margins and business model surfaced and carried the day. Sculley caved in at the eleventh hour. We barely managed to catch the Apollo people, en route to Cupertino for the final signing and celebration, at Logan Airport in Boston.