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How to Make Facebook Stores Pay Off May 31, 2011

Posted by David Card in Uncategorized.
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Last week, investors poured money into ShopIgniter ($8 million) and Milyoni ($3 million), two companies that build Facebook storefronts for merchants and retailers. I’m not the only analyst that’s skeptical about that opportunity, but with literally thousands of merchants building Facebook stores, it’s worth examining the challenges facing them and what could make them effective shopping vehicles.

Over 150 big brands have built stores as Facebook apps that can actually handle transactions rather than just function as marketing brochures or catalogs. At the same time, Facebook store–builder Payvment claims it has 60,000 stores running in its network of Facebook apps. Payvment CEO Christian Taylor told me that some of Payvment’s leading merchants are artists selling crafts, similar to Etsy’s e-commerce community, or unsigned bands selling merchandise. Indeed, most of the leading Facebook stores — ranked by Likes, as no one’s tracking sales volume yet — are band-, entertainment- or sports-related.

ShopIgniter, Milyoni, and Payvment compete with a dozen or more startups offering white-label e-commerce platforms for Facebook, including UsablenetMoonToastFluid and 8thBridge, which raised $10 million in March. Companies that help retailers integrate Facebook pages to online stores include ShopTab and SortPrice. With so many stores, the space feels like it’s getting a little crowded. However, many of these companies are equal parts platform and agency, meaning they do development and integration services, including helping strategize social promotions. That may be necessary now, but it’s a far less scalable business model than software. It’s also one that could be rolled up by existing digital agencies with social media ambitions. Publicis, for example, with Razorfish and Digitas already in its stable, snapped up Rosetta two weeks ago.

Stores Themselves Face Tough Challenges

While a Booz & Co. survey of social network users who shop online implied that 27 percent of them would be interested in buying within a social network, the flip side interpretation is that 73 percent wouldn’t. Based on interviews with online retailers, Forrester doesn’t even think social networks are very effective at promotion, let alone generating actual sales.

In my recent social commerce report, I describe other Facebook store challenges. First, online shopping is a directed, search-driven activity, where shoppers take advantage of the Internet’s price transparency and comparison capabilities via Google, Amazon and Kayak. Second, the mall approach of aggregating stores didn’t work for big portals like Yahoo and AOL, even with their powerful promotion capabilities. Finally, big retailers have been using recommendations and reviews effectively for years, without needing stores on social networks.

Tips for Making Facebook Stores Pay Off

Based on his analysis of the psychology of shopping, social psychologist Paul Marsden thinks Facebook stores will be good for impulse buying as well as more-considered purchases that depend on word of mouth, especially for first-time buys in high-risk categories. That makes sense to me for expensive vacation packages and high-end baby carriages for new mothers, where personal experience is highly valued. I’m less convinced it will outweigh structured comparison searching for financial services or consumer electronics, where exhaustive inventories, “technical” info, price comparison and expert advice should rule. Impulse purchases often require instant gratification, which would seem to point in the direction of digital goods like movies, music and games.

Tactics to make Facebook stores effective include:

  • In-stream promotion. Facebook lacks a big front-page ad format that could drive new DVD releases or Mother’s Day flower purchases. The closest equivalent is promoting products in the news feed. Sales and group offers might cut through the clutter.
  • Social commerce integration. Facebook says its own Offers will focus on group purchases rather than discounts. Integrating proven social commerce elements like daily deals, flash sales and group buying for fans with the store will be critical.
  • Ties to brick-and-mortar loyalty programs. Retailers should allow points redemption in their Facebook stores and even count Facebook store visits toward check-in deal points.

Question of the week

How can you make Facebook stores pay off?
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How to Rate Network Effects in Social Media May 23, 2011

Posted by David Card in Uncategorized.
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Part of the excitement driving LinkedIn’s IPO last week comes from investors associating social media with network effects. You know, the principle that the value of a network increases dramatically with the number of its participants. That’s the engine that drove Windows and eBay, not to mention the public telephone network. Markets with network effects tend to have explosive growth and can end up with winner-take-all market share.

But not all effects are equal, and assessing the valuations and competitive positions of social media companies depends on knowing which network effects are actually at work and how those could play out.

Types of Network Effects in Social Media

Pascal-Emmanuel Gobry wrote a thoughtful piece on network effects last week for Business Insider; it includes some analysis on how companies focused on market niches eat away at generalists who benefit from network effects. And as Matthew Ingram notes, network effects can work go ways: For example, Facebook supplanted MySpace, which supplanted Friendster.

Looking closer, there are several different types of network effects that work in social media:

  • Core network effect utility: There’s a difference between economies of scale and the magic of adding connections to a network. Groupon is building a user base, a sales force and relationships with thousands of merchants, but until it uses its sales data to offer personalization, targeting and other marketing programs to merchants, it won’t achieve much beyond scale. Even then, once critical mass is achieved, additional connections don’t add as much.
  • Viral growth: LinkedIn and Facebook initially grew their networks the old-fashioned way: Users invited other users to join. Viral pass-along is a key growth driver for social commerce and games, but now services and apps can hitch a ride on existing social networks, leveling what was once a steep playing field.
  • Business model that reinforces the effects: Gobry’s wrong about Google. While there are minimal network effects for its search users, there are huge ones for its advertising network. Google’s $25 billion in extremely profitable search advertising depends on attracting advertisers to its dominant search audience and insuring a liquid marketplace via bidding and enforced relevance to create an unbeatable paid search business. Plus Google lets developers using its services and APIs tap into that revenue stream with minimal effort.
  • Participant lock-in: Technology platforms create positive business opportunities for developers. But they can also achieve customer lock-in for their originator by making those same developers dependent on APIs. End users can be locked in, too, via familiarity (e.g., the QWERTY keyboard) and data storage (e.g., contact info, photos, message repositories) that raise switching costs for members.

network_effects

Source: GigaOM Pro

As illustrated in the table above, here’s how network effects are shaping competition in selected social media markets:

  • Social graph: Though there are network effects aplenty, consumers tend to belong to multiple networks (Facebook, Twitter, Foursquare), meaning would-be data miners must target multiple data sources. And the industry is only just beginning to harness that collection of big data into reliable revenue streams.
  • Likes and log-in networks: Facebook was smart to hang Likes and Sign-ins off its Connect network, as each feature complements the others and assists in distribution; now LinkedIn and Google are trying to do the same. Bolting an ad network on top of those networks could provide missing revenue reinforcement.
  • Social commerce: As noted, most social commerce is more scalar than social. Without the additional services for consumers and merchants previously mentioned, single-market entry barriers and switching costs will remain low.
  • Unified communications: A cross-channel communications hub would sponsor habitual consumer usage. But so far, interoperability requirements have restrained the potential to lock in customers.
  • Social games: Many social games don’t depend on competition between users to be fun. Facebook’s distribution channel and cross-vendor virtual currency enforce interoperability — that’s good for growth but bad for Zynga’s or Playdom’s user lock-in.

Based on that framework, Facebook is well-positioned to build on its influence and add revenue streams. Its platform is a legitimate beneficiary of network effects, even in the face of competition from tech worthies (Google) and startups. LinkedIn has a solid business, but its platform aspirations remain just that: aspirations. Besides viral growth and some network utility, it’s not clear that other social networks (Twitter, Foursquare, Instagram) have network effects behind them.

Question of the week

Where are the real network effects in social media?

What the Google-Facebook Battle Is Really About May 16, 2011

Posted by David Card in Uncategorized.
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Facebook’s silly scheme to plant anti-Google privacy stories further highlights the bitter rivalry between the two companies, but it also points at what they’re really fighting over. The competition is not so much about each company’s core business — search vs. advertising-powered social networking — as it is about future products and services, and each company’s respective role as a technology platform provider. And potential partners and competitors need to know which battles these two competitors will take seriously so they can adjust their own priorities and investments.

Here are the key areas of competition for Facebook and Google:

  • The “interest graph:” In contrast to a social graph of information about relationships between people, an interest graph based on topics might actually be a better indicator of purchase intent than what friends — who may not have similar tastes — like. Facebook Likes and Google search results feed such a graph — though Twitter may have more easily collectible info here than either.
  • Web navigation: Facebook hasn’t proven it can drive shoppers to commerce sites the way Google can, but it’s becoming an important source of visitors to online media sites like the New York Times, CNN and HuffPo. Consumer platforms depend on habitual use, so Google can’t risk losing ground as an overall web-discovery vehicle.
  • Communications: It’s unlikely social media will completely replace email, but both Google and Facebook are competing to be a user’s unified communications hub by integrating mail, chat and posts with contact lists and presence management. Such a hub would generate constant use and potential customer lock-in, and be a rich source of contact data.
  • Identity management/authentication: Facebook tries to enforce a single, authentic user identity, but it isn’t very good at letting that user manage his relationships between different types of friends or groups. Google does offer a sign-on service, but its Profiles are mostly for search personalization. Authenticated identities could play a big role in payments systems and professional/career relationships.
  • Ad networks: Google ad networks dominate search and are strong in direct-marketing display. In theory, Facebook’s Like network could serve context- and behavior-based advertising on sites web-wide. Facebook’s complaint that Google scrapes social information without explicit permission might be based on potential privacy legislation. One bill under consideration would give companies with formal consumer relationships more freedom to use data for advertising. That would give a company like Facebook an advantage over third-party ad networks.

Build, Buy or License?

Facebook doesn’t seem interested in building a conventional search engine, but Google sure is trying to build out some Facebook-like technologies. Google recently introduced +1, a competitor to Facebook Likes, where users recommend search results, ads and, eventually, web pages. Website owners will no doubt flock to +1 for its potential influence on Google search ranking. But, faced with yet another link-sharing option, users may ignore +1, especially since Google lacks an established equivalent of Facebook’s news feed to display links.

Neither company likes to license technology or data from other companies, with the exception of Facebook’s Microsoft partnership. Google seems to have some arrangement with Facebook that gives it access to Facebook company Pages, but the two have long bickered over sharing contact information.

Since they don’t like partnerships, how about acquisitions? Business Insider has a laundry list for Google, but two are big and might also appeal to Facebook:

  • Twitter: Either company’s ad business could instantly monetize Twitter better than Twitter can itself. But neither may need to buy into Twitter, as it seems pretty easy to get access to Twitter data.
  • LinkedIn: The professional social network is stingier about sharing data, has a working business model and could play an important role in identity authentication. But it’s about to go public, so would-be acquirers would have to act fast.

Question of the week

What are Facebook and Google really fighting over?

Integrating Social Media and Traditional Entertainment May 9, 2011

Posted by David Card in Uncategorized.
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Remember when social media was going to re-invent the entertainment business? Back in 2007 and 2008, Viacom’s MTV Networks tried to tie its shows together into the since-abandoned Flux social network, and even launched a short-lived TV channel driven by user-generated content. About the same time, NBC Universal’s Bravo network bought snarky fan site Television Without Pity, but has done nothing with it since. But that was then, and recent news suggests the social entertainment space is far from dead.

Last week, two big old media companies made acquisitions that signal new life: Warner Home Entertainment, home of the movie studio’s DVD efforts, acquired Flixster/Rotten Tomatoes, and News Corp.’s IGN bought Hearst’s UGO. Warner’s move hints at Netflix-envy: It said it wanted to use Flixster’s Facebook-driven user reviews and Rotten Tomatoes’ aggregation of professional ones to “grow digital content ownership.” Meanwhile, by doubling down on video game info sites, News Corp. is constructing a traditional aficionado-magazine model, but with lots of social media elements (user blogs, friend-following, points for participation). Most think News Corp. will spin off the combination.

Given these moves, has the industry finally figured out how to add social media to traditional entertainment for fun and profit?

Extending and Enhancing Entertainment Formats

Excitement about tablets and apps, lots of startup activity and Facebook’s role in distribution and audience acquisition are combining to create new opportunities to extend and enhance traditional entertainment forms. Expanding on Michael Wolf’s analysis of how this is working in social TV, here’s what TV and other entertainment media can do to capitalize on social media:

  • Discovery and user-based curation: GetGlue is the early leader in cross-media entertainment check-ins, smartly using Facebook and Twitter (a check-in auto-generates a topic hashtag) to amplify the promotion.
  • Extension: Forums and discussion boards give a fan a dose of his favorite TV show more than once a week, and book clubs are migrating online.
  • Shared experience: VH1 showed a slick app last week that, in addition to adding user commentary to live viewing, acts like a “DVR for tweets.”
  • Gamification: Entertainment check-ins deliver the ubiquitous participation stickers and leaderboards; they should offer virtual currency for loyalty.
  • Commerce: Apple’s Ping social network doesn’t seem to be boosting iTunes sales yet, and Facebook’s only just begun to dabble in video rentals.
  • Analytics and fan feedback: FOX Broadcasting and others use Think Passenger’s private communities for audience analysis. Who will figure out if simultaneous Twitter traffic means anything?

What’s Still Missing?

While the check-ins have stickers and can act as a launchpad for Twitter conversations, by and large, companies try to deliver the six objectives above via separate apps or experiences. Would they be more effective if they were integrated? I always thought digital music could blend discovery, retail and consumption, but Rhapsody combined them better than iTunes long before Spotify, and Rhapsody failed to catch on. Likewise, while a friend’s reviews and curation could emerge as valid components to an entertainment recommendation engine, by themselves they don’t appear to be as effective as the collaborative filtering approach of Netflix or Amazon, or Pandora’s professionally and algorithmically curated recommendations.

Perhaps the experiences should remain seaparte, but the business engine behind the apps and sites can benefit from roll-ups like News Corp.’s game-site play, or from formal partnerships and licensing. Some are emerging now: Time Warner already owns a piece of GetGlue and is responsible for many of the paid promotions that run on the service. Yahoo scooped up video check-in service IntoNow and is using audio recognition to track TV advertising. A handful of publishers are building a new digital book club and looking to tap AOL and Starbucks for ad sales and distribution.

It is inherently easier and more efficient in terms of audience reach, segmentation and analysis to offer advertising displayed on a network rather than an individual title or show. That means big media companies are best positioned to package and deliver social entertainment experiences along with advertising and sponsorship opportunities.

Question of the week

How can traditional entertainment companies implement social media strategies?

Handicapping Facebook’s Next Billion-Dollar Business(es) May 2, 2011

Posted by David Card in Uncategorized.
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Amidst reports that it was having trouble unloading $1 billion worth of shares at a very rich valuation, Facebook last week tweaked an existing advertising service and started testing its first home-grown social commerce product: Facebook Deals. Will that be Facebook’s next billion-dollar business? Possibly. But it already faces stiff competition from Groupon and LivingSocial, not to mention a new Google entrant. More importantly, other growth- and revenue-generating opportunities exist that could be worth exploration on the part of Facebook, too.

Let’s examine each of these potential new revenue streams.

Big New Businesses for Facebook

Facebook dominates social media and the advertising spending that surrounds it. The company makes its money from low-priced display advertising (estimated at nearly $2 billion in 2010) and the 30 percent commission it takes from social gaming companies using Facebook Credits for virtual goods (forecast to be $250 million in 2011). Its three best new business opportunities are:

  • Rich-media brand advertising: To get at ad budgets that need more than the low-priced display ads driving social networks, Facebook needs to offer brand advertisers big, rich-media ad units like those of the New York Times and AOL. If it’s worried about user resistance, Facebook could show the ad only once a day, leave it over on the nearly empty right-hand sidebar or even reserve it for Friday movie openings and holiday promotions. Other than Yahoo, Microsoft and AOL, no other site has inventory with the audience reach for this kind of advertising, which commands $30-plus cost-per-thousand pricing and is usually sold out. This one should be a slam dunk.
  • Deals and social commerce: Facebook’s toe is barely in the social commerce water — it’s testing Deals in only five cities, sourcing some of the offers from partners and not charging merchants anything yet. Facebook is differentiating its deals by not demanding they be deeply discounted, and focusing on more social, shared-experience offers like restaurant deals or concert tickets. Local deals require an expensive local sales force that Facebook doesn’t have. While the company can deal directly with national retailers and merchants that target locally — a good opportunity otherwise — most of them don’t make the kind of “shared experience” products mentioned above.
  • Connect-based ad network: Unlike most ad networks, which make do with remnant ad inventory scraped from the bottom of online publishers’ barrels, Facebook has access to ready-made, desirable space through Connect services such as its Like button, sign-on and comments. Even without getting into behavioral targeting, Facebook could show ads targeted by context just like Google’s AdSense network. For example, it could serve up a hotel ad in an online newspaper’s travel section. If publishers balk, and weren’t cowed by their need for the traffic that Likes generate, Facebook could always share a piece of the revenue.

Potential Partnerships

I’ve talked about Facebook’s need for brand advertising and its potential to create an ad network before, and this piece by Jason Calacanis and his Launch team also likes those two opportunities and tries to put a dollar figure on their near-term revenue. He also suggests Facebook do in-stream advertising, which I suspect Facebook would deem too intrusive and competitive with Like messages and other promotions. Other potential revenue streams? Facebook has never charged for company pages (it sells them ads), I’m skeptical that it could do search effectively, and it has been very selective about data licensing.

But it needs partners to tap into the three new businesses identified above. Companies like:

  • Microsoft, already working with Facebook on search, who could build the ad network. These days, however, Microsoft seems focused almost exclusively on search after outsourcing some ad network functions.
  • Gilt Groupe, whose Gilt City deals unit is part of Facebook’s trials. Unlike other deal companies, Gilt also is a retailer, which could open other social-commerce doors.
  • Other online ad technology companies that could help Facebook’s advertising platform. Those that do data mining (e.g., Experian, Audience Science, BlueKai) and social targeting (e.g., Lotame, 33Across, Media6Degrees, Rapleaf) may need to do direct deals with Facebook to accommodate potential privacy legislation.

Question of the week

What will be Facebook’s next billion-dollar business?