hey facefeed, let’s just be friends

I can’t help wondering if Facebook’s acquisition of FriendFeed isn’t an overreaction by the giant social network, in response to the deafening buzz around Twitter.

It must have irked Facebook that the tech blogosphere has been obsessed this year with Twitter Twitter Twitter – Facebook’s growth has been just as impressive, arguably more so since it’s rarer to grow a large base much larger than it is to grow a small base into a medium-large base.

So in the past year, Facebook has tried to buy Twitter and has copied features of both FriendFeed and Twitter.  And this acquisition appears to be about bringing the values of FriendFeed to Facebook.  Among those values are an emphasis on product openness and sharing beyond your circle of friends.

But what if users don’t want to be more open?  Could it be that Facebook grew so fast because its users regarded the service as a safe place to share their lives with only a close circle of friends?  If Facebook becomes more like Friendfeed, will the service become less attractive to a mass audience?  (I’m certainly going to have to rethink my social media use.)  Maybe it’s only folks like the 250 that believe that everyone wants to share everything all the time.

Oh sure, Facebook has and will have a variety of privacy settings that give people choices about what to share – but these are terribly confusing and difficult to use.  More importantly, a company has to choose a single dominant brand image.  Will Facebook remain the place where friends can share their lives?  Or will it continue to morph into a knockoff of its less popular competitors?

Early indications are that Facebook will integrate FriendFeed’s staff, which is likely to lead to shuttering the FriendFeed service.  I think that could be a lost opportunity.  Facebook might do well to reaffirm its core brand as a more private place for friends, and retain FriendFeed as a brand extension that focuses on open data and public sharing.  That way they can serve the mass market and the avant garde with different product philosophies and branding.

virtually great currency

The acquisition of SuperRewards by Adknowledge is a notable milestone in the evolution of virtual currency business models. This is the first time an independent virtual currency platform has been acquired by a company outside of the virtual goods category, and so the first time that a virtual currency has achieved monetization for someone other than its creators and users. We’ve moved into the peak of the third phase of business models for virtual currency.

The first phase was a sort of prehistory where virtual currency was a gameplay feature of massively multiplayer online games – points that players could gain through the completion of tasks, and use to acquire in-game items that were valuable for further progress in the game. Although points have been a feature of most videogames since the inception of the medium, the relevant new thing about MMOGs was the operation of a “persistent” online economic environment. That meant that even when particular players weren’t online, the service constantly maintained an environment where items of value could be acquired and traded. Much of the trading of items for value was “off-service” – often against the game rules – but this was the first step in virtual currencies breaking free of gameplay rules.

The second phase started when online services that were not solely game-oriented used virtual currencies to encourage trading of service assets – this time trading currency for service items wasn’t against the rules, but specifically designed to encourage sales within the service. Korea’s Cyworld was a pioneer in this use, with “Cyholics” using “acorns” as a medium of exchange for digital presents that users could buy for themselves and each other. Chinese Internet portal Tencent built QQ coins into a $900 million economy, while in the U.S., Second Life users are heading towards $450 million (in U.S. Dollars) of Linden Dollar transactions. The authorized use of virtual currency within these services led naturally to implicitly or explicitly authorized use of their virtual currencies outside of the traditional boundaries of the service, demonstrated by Chinese users buying real-world items for QQ coins and Second Life users setting up 3rd-party currency exchanges and virtual goods stores. (As an illustration of the differences in culture, it’s interesting to note that the Chinese government eventually banned the use of virtual currency for “real” items, and that Linden Lab rebuilt or acquired the third party services.)

In the third phase, we have businesses that were natively built as a platform for virtual currency to be used on other services (rather than a feature of an economy within a more comprehensive service). Some have stayed closer to virtual currency’s MMOG roots, like PlaySpan and LiveGamer, while others have tried to ride the wave of social media apps platforms, like TwoFish and SocialGold. SuperRewards and OfferPal brought a new twist by using marketing offers as the underlying value to the virtual currency.

This part takes a little bit of explaining. For any currency to gain favor with a user base, there must be some underlying value to the medium of exchange – from a consumer point of view, this is sometimes expressed as a demand that the currency be “backed” by something of value. In ye olden days, governmental currency was backed by precious metal; in theory you could turn in your dollars to the government in return for equivalent value in gold. Most governmental currencies came off the gold standard decades ago, and are now backed by the declaration of the government that the currency is legal tender. The meaning of this declaration is a little murky both in theory and in practice.

Suffice to say that there are virtual currencies that emulate most of the historical models of real governmental currencies. e-Gold tried the gold-backed model, to disastrous result. Some virtual currencies are run as essentially stored value systems for governmental currency, so ultimately they are backed by the same declaration of the government. QQ coins to some extent, and Linden Dollars to a greater extent, are free-floating media of exchange that are backed by the commercial viability of their operators – a private rather than governmental declaration of value (this is not as revolutionary as it may seem, since in many ways it’s similar to airline miles and other customer loyalty programs).

By using marketing offers as the underlying value, virtual currency operators can sidestep some of the difficulties involved in demonstrating that a currency is sufficiently “backed” to satisfy customer demand for stable value. This technique introduces significant complexity and cost by introducing many additional parties to the value chain, but now SuperRewards has demonstrated (to its investors if not yet a skeptical public) that this kind of backing does create a valuable virtual currency. OfferPal is not far behind, and of course is now far ahead in terms of its ability to maintain an independent business.

So what’s coming for the fourth phase of virtual currency business models? That’ll have to be the subject of another post. But for now the developments to watch are the competition between Facebook and MySpace in their own virtual currencies, app developer currencies from companies like Zynga, and the continued progress of OfferPal.

advertising in 3 E-Z slides

Has the Internet ushered in a revolution in advertising, or is web advertising destined to fail?

I couldn’t begin to have an opinion without some basic context about advertising, so I gave myself a crash course.  Here’s the 3 most important things I learned:

1.  Advertising has multidimensional sectors.

Two of the fundamental axes in advertising are the lines between brand and direct response marketing, and between online and offline ads.

ad status

I can’t do the differences justice here, but essentially brand marketing is intended to make you feel a certain way about a product, while direct response is intended to make you take an immediate action regarding a product.

The concepts seem simple, but whenever new media arises, it can be quite tricky to determine what kind of advertising is suited to the media.  When the Web first burst into mass acceptance, some advertisers treated this new medium as a branding opportunity, plastering their logos and flashy campaigns wherever they could.  Google was among the first to realize that direct response principles fit the Web much better than branding – deliver ads against search results and you have a natural audience to act upon that hyperlink.

But the Web continues to evolve, giving continued opportunities to make the wrong choices about ads.  When social networks like Facebook reached mass popularity, many advertisers tried to deliver targeted direct response advertising to demographics discovered through the social graph.  But “banner blindness” and the very social intent of these sites combined to make pure direct response ads ineffective.  The better strategy for advertisers in social networks is to build a community and create engaging viral media to enhance the brand.

So the lesson here is that advertisers have to make very savvy choices between brand and direct response advertising as the evolution from offline to online continues.

2.  Online and offline ad spending patterns are currently inverted.

In the excitement about the growth of online advertising, it’s easy to forget that offline is still much bigger, with online making up roughly $23 billion of a $137 billion U.S. ad market.  These numbers are even more interesting when examined along the divide between brand and direct response.

 

According to one estimate, around 75% of offline ad dollars are spent in brand marketing, while 80% of online ad dollars are spent in direct response.  Because offline is so much bigger than online, that means that direct response offline (a.k.a. “junk mail”), makes up around $28 billion.  Yep, junk mail is bigger than the entire Internet ad industry.

Now here’s a point that’s a little more abstruse, but I hope it’s worth the time to understand it:  the advertiser’s spending pattern is inverted in online vs offline.

Offline brand advertising is expensive to create, but reaches a mass audience, so the spend per viewer is low.  Take a Super Bowl ad:  a 30-second commercial can cost $4 million (for air time and a lavish production cost), but with 95 million viewers, that’s only 4 cents per viewer.  Let’s call this low cost per viewer a mass spending pattern.

Offline direct response advertising total cost is lower, but higher per person reached.  For example, it can cost $50K to produce and mail a catalog to 10K recipients.  At $5 per person, that’s 125 times more expensive per person than a Super Bowl ad!  But it works because of the targeting – those 10K people have been identified by the advertiser as being likely to be interested in the product.  This low threshold, high cost per viewer is a targeted spending pattern.

The patterns are rewired online.  Search advertising and email campaigns are direct response in that there is a clear desired action (usually a click).  Though the cost of the keyword or email campaign can be relatively low, the distribution is very broad, so the cost per viewer is extremely low –  this is a mass spending pattern.

Conversely, doing effective brand advertising on a social network requires really identifying the target demographic and crafting a creative campaign to get that ballyhooed viral explosion.  That means relatively high creation cost and a specific audience, resulting in a high cost per viewer – this is targeted spending.

So offline, brand advertising is mass spending while direct response is targeted spending.  And online, brand advertising is targeted spending while direct response is mass spending. Or at least, that’s the way it is today . . .

3.  Successful advertising tactics will seek equilibrium.

Pundits are always rushing to declare failure, or any new method the death of all old ones.  But offline advertising feeds online, and online direct response may morph into “brand response.”  Advertising, like nature, restlessly searches for equilibrium.  The story above is heading towards a more stable balance so the value of the spending better matches the returns.

ad future

It’s not controversial to suggest that offline ad dollars will move online – that’s more an observation than a suggestion at this point.  And it’s also been an observable trend that offline direct response marketing is declining at an even faster rate than offline brand marketing, because Internet direct response has rapidly become effective for larger audiences.  But I’m adding two conjectures that aren’t easily observable today.

First, online brand marketing will grow at a faster rate than online direct response.  This means that social media like Facebook and Twitter (like them, not necessarily those two) will grow revenues faster than Google.

Second, online brand spending will revert back to the offline spending pattern of mass rather than targeted, and online direct response will similarly go to targeted spending rather than mass.  I believe that dominant social media sites and practices will arise that allow brand advertisers to reach a large audience at a low cost per viewer.  At the same time, increasingly effective data collection on Internet consumers will allow data holders to sell highly targeted direct response ads at premium prices per consumer.

What does it take to get from here to equilibrium?  In monetary terms, holding the total ad industry constant at $140 billion (not a safe assumption):

  • $50 billion will move from offline to online
  • $15 billion will move from offline direct response to online direct response
  • Online direct response will grow by $20 billion, while the revenue per viewer seeks a relatively high number
  • Online brand marketing will grow by $30 billion, while the revenue per viewer seeks a relatively low number

That is a lot of money sloshing around, in a lot of different directions.  I think it’ll happen within 5 years.

that’s entertainment

Is social media entertainment?

Of course it is, whatta silly question, you say. When people spend their leisure time engaged in updating their profiles, messaging each other with pokes and posts and status updates, posting and viewing photos and videos – well, that’s entertaining. The answer to the question from the user’s perspective is undeniable. But of course the fun in any analogy is to see how far you can extend it, so I’m really wondering if social media is entertainment from a business model perspective.

Think of a big-budget movie. A group of people get together around a concept, script or performers. They raise financing in excess of $100 million from traditional studio and independent interests, often pre-selling shares in future revenue stream. Many dozens, sometimes hundreds of people are employed in executing the vision into the reality of the work on screen. Distribution occurs not just in theaters, but downstream on DVD, TV, and of course the Web. A successful blockbuster returns hundreds of millions of dollars in a burst, and a continuing annuity essentially forever.

Is this so different from what we’ve seen in social media? From Tribe to Friendster to MySpace to Facebook, it’s been a hits-driven business. People assemble around a concept and produce, and it seems that there is a limited window for the concept to catch fire with the broader public. If and when it does catch fire, there is a period to maximize revenue during the peak of popularity, and then a long slow decline. Maybe the curve is a little more like a successful TV series than a blockbuster movie, but the dynamics are the same: the production of a media experience that has temporal value for audience entertainment.

This is certainly an analogy that most social media companies would resist. They prefer to think of themselves as technology companies, building a platform for media delivery, or even becoming a fundamental part of the infrastructure of communication.

It’s not easy to define a platform on the Internet. You would think the concept of infrastructure is simpler. It’s relatively easy to envision the most concrete elements of the communications infrastructure: the physical wires (be they fibers, cables or tubes), the hardware of routers and switches and terminal devices, the often unglamorous stuff that moves the bits and bytes around. Database and storage are surely infrastructure components as well.

But can a software service company become part of the infrastructure? This isn’t a question of offering infrastructure services in a cloud of computing – it’s a question of whether a service that is not about transport and storage of information can be considered essential to modern communication.

In areas where that can be considered a serious question, we have an enormous market. Search is the prime example. Without search, the way we communicate and create on the Internet would be severely hampered, in the same way it would be hampered if we didn’t have significant storage or large databases. And search is a good example of a putative infrastructure element that must be provided as a service – which means a business can be built around it. Coming up with a protocol like TCP/IP may give birth to the Internet, but it doesn’t necessarily give rise to any dominant business for its creator.

So are the companies involved in today’s creation of social media making infrastructure? Can essential services be built in social media that become a fundamental component of communication? Even if so, is the social graph going to be as enriching as TCP/IP (that is, in more of a spiritual than monetary sense)?

Or is it all “just” entertainment?

social networks and the dunbar break

A couple of months ago, The Economist noted that the Dunbar number appears to apply to online social networks like Facebook.  I’ve since been thinking about the threat this represents to Facebook’s business, and all social networking businesses.

To recap:  The Dunbar number is a theoretical limit to the number of social relationships that one person can maintain – this number is often estimated at 150.  Facebook’s “in-house sociologist” confirmed that the average Facebook user has 120 “Friends” (i.e. other Facebook accounts linked to the user’s account).  Moreover, when measuring the interaction between users, such as comments on each others’ accounts, men average regular interaction with only four people, while women average six people.

You see the problem?  It’s too easy to leave social networks:  you’ll leave as soon as your six closest friends do.  From Tribe to Friendster to MySpace, no one has been able to hold on to their users.  Given that history, Facebook and Twitter have to fight more than just faddishness – they have to fight the cognitive limits of the human brain.

Ironically, social networks do not have the full benefits of network effects.  A really robust network effect means that each additional user of a network adds value to the network for all users.  In social networks, once all of my friends have been added, I don’t really care if any more people join the network.  And that means that the converse is true:  once all of my friends leave, the network has no value to me, no matter how many other users are still on the network.

The ”’Dunbar break”’ occurs at the point at which so many of your contacts have left a social network that you no longer value the network.  Dunbar’s number suggests that this point might be as high as 150, but looking at the actual interaction on Facebook, your personal Dunbar breaking point for Facebook could happen when as few as half a dozen of your friends leave.

That’s why Facebook and other social networks must paddle furiously to try to add value that scales across all users with a true network effect.  But with advertising and applications and ”’lifestreaming”’, they haven’t quite found the magic formula yet.

Does current media darling Twitter hold the key to defeating the Dunbar break?  As a combination of social media and broadcasting, it has some intriguing possibilities.  Ask yourself:  Once all of my friends are on Twitter, do I care if anyone else joins?  And would I care if all my friends leave Twitter, while the rest of the world joins?  A lot of people are answering those questions differently for Facebook and Twitter, which is why Twitter is such a popular dance partner these days.

losers, killers, drugs, cars

What does it mean to say that TV lost to computers, as Paul Graham suggests?  Graham tries to explain why the Internet “won” in the battle of media convergence, but he begs the question of whether media “convergence” was a valid proposition in the first place, or what it was even supposed to mean.

Take a close look at any claim that one kind of media “lost to” or “killed” another.  Were they ever really in competition?  Sure, every kind of experience is a competitor for our limited time, but I’d call this “attention competition” rather than “replacement competition.”

I might choose to watch basketball rather than baseball in the limited time I watch sports, but basketball didn’t kill baseball:  although basketball had a later start and has grown more in recent decades, both sports businesses are larger than they have ever been before.  Things that compete for my attention do not kill each other, they just give me more choices.

In contrast, I use a safety razor to shave my face.  A safety razor is better than its predecessor, the straight razor, in every way – shaving is faster, cleaner, closer, easier, safer – except possibly price, which I am happy to pay for those benefits.  I am not the only person to make this choice, by and large the entire shaving market has.  Although some people stick to the straight razor for reasons of fashion, self-esteem, or violent secondary uses, the straight razor has been replaced by the safety razor to such a large extent that you can say the latter killed the former.  Losers and killers in the market can only exist among things that accomplish the same function.

A lot of media is entertainment, and “entertainment” is not a function, it’s a category.  Historically, there has been a huge amount of attention competition within the entertainment category, but much of this competition has only given us more choices in an expanding market for leisure.  Novels did not replace plays, radio did not replace books, movies did not replace radio, TV did not replace movies.  Most if not all of those businesses are larger in absolute terms than they’ve ever been, even though many are smaller in audience share.

On the other hand, vinyl albums nearly got replaced by 8-tracks and then cassette tapes, then all of these lost to CDs, and now CDs are losing to music downloads and streaming on computing devices.  All of those formats simply fulfill the function of delivering music, so here you really can say that a new format killed an old format, and various businesses were winners and losers along the way.

If you’re thinking that it’s not so simple, you’re right.  Let’s go back and examine the entertainment category again.  TV may not have completely replaced radio, but a certain kind of radio show no longer exists in any noticeable volume:  the radio drama, of the type that the Shadow knows.  Were these replaced by TV shows?  Probably.  And for that matter, books and their predecessor scrolls and tablets did replace cave drawings.  So how can you really tell when you have competitors for attention within a category, rather than replacement competitors in a race to be the best format for the same function?

I think one key is to ask whether the format gives rise to a distinct art form.  I don’t mean to make lofty judgments about art, but more mundane observations about senses and brain responses.  (I could say “neurosensory experience” rather than “art,” but that would be replacing pretension with didacticism.)  The novel engages the brain in conveying a narrative in a way that the brain is not engaged in hearing or watching essentially the same story.  Plays have a sensory experience in a way that is not captured in TV or movies.  But radio dramas never really attempted to deliver any experience that wasn’t the same experience done better by a TV drama, so when people began enjoying TV shows, that did kill radio shows.  There is arguably no distinct form of art tied to radio – music obviously can be delivered well in many formats – so it’s likely that radio will actually be killed by superior forms of distribution for audio content.

So does TV have a distinct art form?  Well, over the last few decades we have seen the rise of ever longer dramas that tell a story with character depth that have been quite distinct to TV (especially as opposed to movies or plays).  From Hill Street Blues to The Sopranos, viewers became accustomed to following character development and story lines over years rather than one-hour episodes.  This “long form passive story viewing” is distinct to TV – and even though you can watch these same TV shows on your computer, that doesn’t mean that the Internet ”’killed”’ TV.  It matters whether we are talking about the art form of TV, or the delivery vehicle of TV.

See, this my objection to Graham’s argument.  He says that “Facebook killed TV,” meaning that the social applications made possible by the interactivity of the Internet led to the downfall of TV.  But this mixes and matches the format and the substance; it is an inapt attempt to make a larger artistic and social commentary.  Social applications are an attention competitor for the long form passive story viewing that is on TV today, but neither will kill the other.  To say that TV loses to the computer is only saying that the screen in your house on which you watch TV shows will also be the screen that you use for Facebook – it’s a somewhat interesting comment, but not more interesting than cassettes beating 8-tracks.

My view here is complex and probably not stated very well, so I’ve come up with a simple question to ask when considering the losers and killers that others see:  Are we talking about drugs or cars?

Popular recreational drugs have distinct effects on the brain, and all are competitors for the attention of recreational drug users.  Some people prefer particular drugs, but in the overall drug market, meth doesn’t kill heroin doesn’t kill cocaine doesn’t kill weed – all of these have their audiences because each elicits a distinct effect on the brain.  (For some reason, only heroin seems to be a popular point of comparison for technology in general, Internet addiction, or porn on the Net.  I think comparisons should be more exact:  TV is heroin, social networking is coke, Internet porn is meth, and so on . . . but I don’t really have the time or social position to research this properly.)

Before safety razors and CDs, cars are the prototypical replacement choice – the advent of cars killed the horse-and-buggy, literally a superior delivery vehicle.  If it’s not this kind of outright replacement, then there shouldn’t be talk of losers and killers.

man bites App Store

A study that most iPhone apps fail is being picked up by credible news outlets.  This is a classic abuse of the “Man Bites Dog” principle:

When a dog bites a man, that is not news, because it happens so often. But if a man bites a dog, that is news.

The fact that most new efforts fail is not news.  In recent years, we’ve seen amazed reporters discover that corporate and brand Facebook apps fail as FB developers struggle.  Shockingly, most businesses fail in virtual worlds.  Although small business failure rates are often exaggerated, the real numbers show that most startups fail.  Without going to the trouble of actually doing research, I will make the following guesses:

  • most Google advertisers fail.
  • most blogs fail.
  • most eBay sellers fail.
  • most television shows fail.
  • most movie producers fail.
  • most book authors fail.
  • most cave drawings fail.

I look forward to the startling exposes crafted by hardworking reporters on these topics.

Sarcasm aside, it’s interesting to consider the underlying assumptions of those who would find news in high failure rates.  If these stories really are about man biting dog rather than vice versa, then the assumption must be that there is a new means of business delivery that ensures success for the majority of its users.

That of course is a flawed assumption.  There is not now and never has been any way of delivering new business efforts that guarantees success in a free market.  Apple does not make businesses successful, Facebook does not make businesses successful, even mighty Google does not make businesses successful.  Instead, each of those companies have enabled some businesses to become successful – which is just another way of saying that they’ve given most businesses a new way to fail.

So the ultimate test for these companies is not whether they magically improve failure rates for others.  The test is whether the company itself operates a profitable business.  Apple and Google have passed that test with flying colors, Facebook has yet to do so.