The 1% Problem

Sabeer Bhatia, of HotMail fame, launched Live Documents, on online office suite today. In the news coverage, this snippet caught my attention:

Bhatia said, "If Live Documents makes 1 per cent of Microsoft Office revenues, then we would earn USD 200 million a year. If Live Documents makes 10 per cent of Microsoft Office revenues then our revenues would be USD 2 billion a year in the next three to four years."

Here is Guy Kawasaki's The Top Ten Lies of Entrepreneurs and number 11 (sic) on that list is:

“All we have to do is get 1% of the market.” (Here's a bonus since I still have battery power.) This lie is the flip side of “the market will be $50 billion.” There are two problems with this lie. First, no venture capitalist is interested in a company that is looking to get 1% or so of a market. Frankly, we want our companies to face the wrath of the anti-trust division of the Department of Justice. Second, it's also not that easy to get 1% of any market, so you look silly pretending that it is. Generally, it's much better for entrepreneurs to show a realistic appreciation of the difficulty of building a successful company.

Of course, every rule is meant to be broken (or rather, every lie has to be told!), and if anyone can get away with it, Sabeer Bhatia, with his hot(mail) track record can.

Trying to get 1% of "office productivity market" is about as meaningless as trying to get 1% of the "software market": the category is way too broad. We tend to think of "MS Office" as synonymous with Word/Excel/Powerpoint, but I am almost certain that the $20 billion revenue figure includes a lot more than those. Just off the top of my head, I can think of Outlook, Access, OneNote, Publisher, perhaps Sharepoint, even Visio ... as part of the broader office suite.

A more serious problem is that markets are ever-changing, dynamic categories. Ever wondered what happened to the "pager market"? Revenue that comes under one category today may come under a totally different category tomorrow - for example, licensing revenue may become advertising revenue.

Finally, there is what I call the "tail problem" - it is the old 80-20 problem. It is quite likely that 80% of MS Office revenue comes from 20% of their user base. Now guess which 80% of the user base is available to online offerings like Zoho or Live Documents? If you answered "the most lucrative 20% of the Microsoft user base will be ready to switch", I want to bring your attention to that bridge we have available for sale.