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A field guide to surviving the shakeout in daily deals October 31, 2011

Posted by David Card in Uncategorized.
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Groupon is on its pre-IPO road show, and the daily deals giant still inspires both love and loathing, even though it’s playing down controversial accounting and has cut its losses. Daily deals are the social commerce segment with the highest profile, and the market is overcrowded with hundreds of players. Winners in daily deals will have to achieve scale, mine their troves of data and deliver a collection of marketing services to merchant partners.

The shakeout is under way. Early entrant BuyWithMe had trouble raising money and laid off half its staff. Web traffic data shows Groupon and LivingSocial pulling away from the pack. Is it a two-horse race? Not yet. Even though Facebook scaled back its own daily deals plans, Google is accelerating. Last week Google signed up 14 new deals partners. Most of them are second-tier players, but Google is also working with Gilt Groupe, one of the bigger brand names that has flash sales, daily deals and more-traditional online retail products. (More on each’s prospects for success below.)

Some day, wallets and technologies like NFC for wireless transactions and geofencing for real-time offers will be important social commerce components. But consumer and merchant adoption of these technologies is years away. So even more important than adding new consumer products, right now daily deals players need to focus on the following:

  • Scale. To offer an effective variety of deals, companies need to work with many merchants, and local merchants need the support of a large direct sales force.
  • Data. With user and merchant scale comes enough data for actionable analysis. Then companies can target their offers to increase conversion based on understanding customer buying habits and purchase intent.
  • Marketing services. While national sellers are used to data-driven marketing, local small businesses have little expertise or dedicated staff. Deals companies need to develop simple marketing campaign management tools for them and offer them other marketing services like online display and search ad buying. Such services will lock in merchant loyalty and raise switching costs, dissuading them from using competitors.

Who’s ahead

Groupon clearly has the scale, but it hasn’t proven data expertise. It is more focused on new consumer products than on merchant services. If Groupon is smart, it will invest some of that IPO money in data analysis — it has relatively few employees in technology — and in marketing services for its massive sales force to sell.

LivingSocial’s success is driven more by high-margin offers like tours than on understanding data in support of merchant programs. Amazon, which has an investment in LivingSocial, will add both scale and data expertise to LivingSocial. But so far, while I’m a big Amazon Prime customer, the only targeting I’m seeing from Amazon’s LivingSocial deals is a broad definition of my neighborhood as “downtown New York City.”

Google has the data expertise, the easy-to-use analytics, and the powerful search and advertising networks. It’s a compelling platform for local merchants, but it sells technology, not services. Its network of merchants won’t want to share data or customer relationships, so Google’s potential scale loses effectiveness for them. Google could buy a Yellow Pages company if it wanted a big sales force to “own” those end-user customers.

The potential big three are emerging, but each has flaws. Groupon and LivingSocial have the direct relationships with customers and merchants, but Google has the analytics. To beat the other two, Google needs to migrate from platform to service provider. If it stays a platform, the other two will gain advantage by combining data with services. Meanwhile, there are new entrants: credit card companies with partners and attractive loyalty programs, and an energized AT&T building off its Yellow Pages base. Scores of deals startups will shake out, but big new competitors are just getting started.

Question of the week

Who will be the ultimate winner in daily deals?

Google seeks mobile search payoff October 24, 2011

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At its third-quarter earnings call, Google said its mobile advertising business was on pace to hit $2.5 billion in yearly revenues, and shortly thereafter it launched a handful of new search ads for mobile apps. But that same week, Apple showed off its latest iPhone with Siri voice technology, which has a big potential to disrupt search. Analysts questioned whether mobile search would ever be as big a business for Google as the desktop market. Will mobile search be a bonanza? If so, is Google the company to win it?

Mobile introduces new challenges to Google’s usual strengths in search, but the company is well-positioned to address most of them. And Google is developing a war chest of marketing services that will complement mobile search and help compensate for mobile’s relatively smaller revenue potential.

Here are some of the characteristics of mobile search that make it different for Google:

Siri could be a disruptive force in search because of its role in UI and in the presentation of results. Siri may be evolutionary, but its natural language recognition is generating a lot of iPhone buzz. A Siri query can produce a Google search result, but Apple has also engineered Siri to pull up results from local info provider Yelp and other search engines and sources. Google’s own voice-activated search depends more on structured commands than natural language. Google will need to deliver competitive technology or train users how to use commands.

Google and its search marketing ecosystem are working on mobile results and ranking. Making sites more Siri-friendly requires search engine optimization techniques identical to the ones marketers already use to boost their organic results on Google, so that won’t hurt Google. Meanwhile, Google is tuning its analytics tools and adding location extensions to search ads to assist search marketers with mobile SEO and paid search. And Google is already taking things like proximity into account when ranking mobile search results.

Google didn’t break down its reported $2.5 billion run rate into display vs. search advertising, but it’s a safe bet that the vast majority is search. Meanwhile, Google is adding paid features and services to beef up mobile search transactions. Click-to-call lets advertisers show local phone numbers on mobile search results with pretty positive results. Advertisers like Enterprise Rent-A-Car seem to like Google’s hyperlocal ad features. Presenting deals and offers next to mobile search results will be crucial for enticing transactions, and Google is working aggressively on Offers and a new ad Circular format.

So far, Google is well-prepared to withstand potential Siri disruption, even without counting on Android market share gains. It still needs to improve its own voice-driven search interface, though. Google’s mobile search and ad enhancements will add to its mobile marketing revenues, though they won’t approach search sales volumes for at least three to five years. But Google’s tactics to make search results more local and mobile will guarantee that its own results show up from a Siri call, and they will help dissuade Apple from integrating more Google alternatives.

Question of the week

Will mobile search be a bonanza, and is Google the company to win it?

Zynga’s Project Z could be the next big game network October 17, 2011

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Social gaming star Zynga hosted its first-ever press event last week, where it showed a handful of new games and dropped big hints about a “Zynga Direct” strategy that could ease the company’s dependence on Facebook. Zynga didn’t give a timeline or details about “Project Z,” but it is building a gaming destination site, and potentially offering platform services for other developers. Does Zynga want to be a game distributor rather than just a studio? It sure sounds like it, so let’s examine how that might play out.

Building a gaming network would benefit Zynga in two ways: It would give Zynga more control of its own destiny, and it would smooth out revenue swings that depend on releasing a constant flow of new hits.

If Zynga and Facebook are in a co-dependent relationship, Facebook has the upper hand. Zynga derives nearly all of its revenue from Facebook traffic while Facebook users spend only 10 percent of their time on apps in general. Facebook takes a 30 percent cut of the virtual goods Zynga sells — Zynga’s main revenue source — via its Credits program. And Facebook can control viral game promotions, though it has traffic guarantees built into its agreement with Zynga.

But blame a slight slowdown in Zynga’s recent growth on a lack of new hit titles, rather than Facebook Credits. Like other entertainment studios, Zynga must successfully manage a portfolio of titles where the business is dominated by hits. During Zynga’s recent half-year, franchise titles FarmVille, FrontierVille and CityVille produced $77 million, $71 million and $47 million in incremental revenue, while all its other games totaled $78 million of the growth.

At the press event, Zynga assured people that it wasn’t divorcing Facebook. I suspect Zynga will leverage Facebook platform services and APIs, rather than creating much new technology. Zynga promised that Project Z would incorporate core Facebook Connect technologies, and its brand new HTML5 gaming engine is optimized to support Facebook’s mobile strategy.

What could Zynga add to create a social gaming network? Here are a few ideas:

  • Game destination hub. Zynga could act as the central hub for games played on social networks or mobile devices. Like Xbox Live, it could build out arenas, leaderboards and cross-game contests focused on social gaming.
  • Promotional opportunities. Zynga offers other games an alternative to depending solely on Facebook’s ever-changing news feed. It could create a Google search-like ad marketplace or paid listings, options Facebook and the apps stores have resisted.
  • Game identity with connectivity. Zynga will give gamers a game-centric persona or identity that still leverages Facebook Connect. It will support new Connect features like Wants and Owns in a less cluttered real-time stream. Ultimately, Zynga could wean games off Credits by offering better rates and encouraging a virtual goods exchange.
  • HTML5 engine. Zyngs could license its new engine to developers, a practice common in videogames, or to ad agencies looking to build advergaming “branded entertainment” sponsorships.
  • Advertising. Zynga could offer richer advertising vehicles to developers than Facebook, and actually share the revenues with developers. It should offer sponsored genre channels and cross-game sweepstakes and couponing.

App stores aren’t any fun, and social networks are crammed with communications and other features. Today, big gaming companies rely on Facebook for their social games distribution. Electronic Arts might try to weave titles from its proposed PopCap acquisition into its sluggish Pogo.com site, but it runs its other social gaming acquisition, Playfish, like a studio. Disney’s Playdom hub hasn’t really gone anywhere. So if Zynga can demonstrate better promotional vehicles and revenue opportunities on its own social gaming network, developers will have to take notice. Competitive games notwithstanding, Zynga could instantly offer a better story for game developers than Google+.

Question of the week

What are Zynga’s chances at building a social gaming network?

Quarterly wrap-ups on tap October 10, 2011

Posted by David Card in Uncategorized.
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If you need to catch up on what happened in Q3, be sure to read our GigaOM Pro Quarterly Wrap-Ups that will be appearing this week. With these reports, we analyze the most important events of the past quarter in each of our coverage areas: Infrastructure, NewNet (social and real-time media and enterprise), Mobile, Green IT and Connected Consumer.

Look for a new Wrap-Up each day this week. Green IT is first out the door. Likewise, our archives give insights on past quarters, and enable you to watch disruptive trends in technology as they emerge.

Let us know what you think are the trends to come.

What the ad numbers mean for online and social media October 3, 2011

Posted by David Card in Uncategorized.
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While there’s renewed interest in paid content, advertising pays the bills for most social and online media companies. Last week the Internet Advertising Bureau published U.S. online ad sales figures for the first half of the year. Revenues grew 23 percent to $14.9 billion, showing online to be one of the healthier sectors in all of advertising, even in a lousy economy. What’s less encouraging is that display ad pricing is actually down, and companies can’t escape the grip of cheap ad inventory aimed at direct marketing. Let’s take a closer look at the numbers and evaluate some possible solutions to maintain growth and increase profitability.

Here’s what the numbers mean for those selling online ads:

  • Growth by category. According to the IAB and its data partner, PricewaterhouseCoopers, both display ads ($5.5 billion) and paid search ($7.3 billion) grew at 27 percent rates. Online video ads ($891 million) are  growing even faster, while classifieds and email are down. The bottom line? Good growth but no big structural changes.
  • Pricing. That lack of change is reflected by a slight decline in display ad pricing — CPM is down 5 percent. Display growth came from volume, not price increases. Pricing pressures, along with the continuing dominance of cost-per-click (64 percent of sales) show that online isn’t really poaching dollars from brand-related TV advertising budgets.
  • Market share. The IAB doesn’t do market share breakdowns, but eMarketer projects that Facebook will surpass Yahoo in display ad sales this year, while Google remains dominant in search. Google’s ad network is gaining a little share in display ads, too. Both it and Facebook are contributors to the price decline since they’re delivering massive volumes of CPC or low-priced CPM inventory.

So what’s the outlook for the rest of the year for ad sellers? Given the new IAB figures, I expect existing full-year growth forecasts will be raised by 1 to 2 percentage points. Even with no signs of an economic recovery, fourth-quarter sales are usually the strongest of the year, and election spending will start early. EMarketer projected 20 percent growth for the full year, with display growing a bit faster than search. MagnaGlobal forecast 16 percent growth overall.

As for pricing, using inventory optimization tools raises the yield, or price per unit, by enabling better forecasting, targeting and reduced discounting. One such optimizer, Yieldex, just raised $10 million. Likewise, sites with higher-quality content or specialized audiences can raise CPM rates by participating in private exchanges or ad networks like Glam Media’s. Even the big guys like Yahoo and AOL are building premium exchanges, though, so it’s likely to get crowded.

It’s not getting any easier to steal dollars from big TV brand advertising budgets – even online video just doesn’t have the audience scale. Instead, online ad sellers should look to complement traditional media buys. That means working on multiscreen campaigns and using social media to “amplify” messages across media. Another complementary use of social media is to pretest the creative content of advertising messages to ensure the efficiency of print or TV buys. Social media analysis will help sell those complementary ads. Through such analysis, Networked Insights, which recently raised $20 million, says it helped a client buy cheaper TV ad inventory to reach the same audience as it switched channels.

Companies selling online ads need to adopt these yield management and analysis technologies and combine them with the selective use of networks and exchanges. They may also have to offer additional services — e.g., audience and ad performance analysis aimed at media buying agencies, which can be a drain on resources. But by doing so, they’ll get more than their fair share of spending and will hold off price erosion.

Question of the week

How can online media companies improve ad revenues and profitability?