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Google: Prioritize and conquer January 30, 2012

Posted by David Card in Uncategorized.
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You would think 25 percent revenue growth would satisfy Wall Street. But not for Google: An earnings quarter most companies would kill for disappointed Google analysts. The same week, a new privacy policy added more bad press to that surrounding the company’s product integration strategies. Wall Street is unhappy and confused. The numbers show the two areas that Google needs to prioritize to increase growth: Vertical search and display advertising. Other products, including mobile search and advertising, should be moved to the back burner.

Search is still a great business. Google’s profits (33 percent operating margin in Q4) are far better than other ad-driven companies whose margins are historically half that rate. But it is increasingly difficult for Google to grow search revenues. Google already has dominant market share in general web search in western markets, while China remains problematic due to government censorship and Baidu’s market leadership. The next big source of search volume will come from smartphones, which will be harder to monetize. Compared to the web, a mobile searcher will almost certainly be less likely to complete a purchase transaction or fill out a registration form, leading to lower cost-per-click pricing than web search.

Search underperformed in Q4 because, although clicks were up 30 percent, prices were down 8 percent. Google blamed cost-per-click declines on a natural result of volume growth, foreign exchange rates and ad format changes, but some observers thought mobile ads and search might be responsible. Google bragged that display ad sales were on a $5 billion yearly run rate, probably to compare with Yahoo and Facebook rather than as a piece of its own total $36.5 billion ad business. Casual observers might think this is new, but Google has always had a big display business. It’s just that it derives mostly from its DoubleClick and AdSense networks.

Where Google should focus now

What the quarterly numbers mean is that Google has to drive up the value of paid search clicks and sell more of its own display inventory. Google’s slightly botched integration and privacy strategies are integral to both. For immediate payback, Google needs to prioritize and shift resources to two areas:

Vertical search. Rather than bias its search results to its own properties, Google should accelerate its efforts in vertical search beyond travel and financial services. It could build out price-comparison properties around other markets like apparel and electronics relatively inexpensively by filtering its own results and licensing consumer reviews from companies like Bazaarvoice and Power Reviews. Searches done on vertically targeted microsites would command higher CPC rates because searchers would be “prequalified” leads. If Google’s microsites were effective, they would show up in organic search results naturally, and Google could even buy some of its own paid search listings.

Display advertising. Google needs to sell its own space – keeping the whole sale rather than a 20 percent to 30 percent network fee – and garner high CPC and CPM rates from targeting. Google’s privacy policy switch that shares user data across its properties is necessary so it can target display ads on YouTube, the only place it has its own inventory for fancy brand advertising or sponsorships. Those microsites would be great locations for display ads, too. But Google is correct to build out Google+ company pages that will benefit search and ad network sales immediately rather than trying to sell ads on Google+ pages and risk user resistance. I have written how data cross-licensing agreements among Google, Facebook and Twitter, possibly through a third-party clearinghouse, would ease tensions and improve the products and ad-targeting capabilities of all three. Right now, it appears that tensions between the bunch are increasing. That might be public posturing to gain negotiating leverage, but I wouldn’t expect any major deals in the next 6 to 12 months.

De-emphasize less-critical businesses. I have already described how mobile search is challenging; mobile display advertising is also a long-term play, and who knows how Google could improve Motorola profits. A handful of apps wins doesn’t prove a compelling case for competing with Microsoft Office. TV advertising is a pipe dream for now, and progress in branding display advertising will build relationships with advertisers and agencies that can feed TV ads in the coming decade. Google could reallocate resources and budgets away from these projects and zero them in on vertical search and display ad platforms and sales.

Finally, a little more reporting clarity wouldn’t hurt. Google could be more consistent in how it describes its biggest businesses — paid search, the different ad networks by CPC and CPM accounting, display ads sold directly for its own properties — instead of burying their financial results under two ad sales categories. That way it could demonstrate progress in each and make clearer comparisons with competitors. Then investors would really know if Google were gaining share versus Yahoo, Facebook, AOL, Microsoft and Groupon, its biggest rivals in online marketing.

Question of the week

Can Google get its priorities straight?

Facebook’s app ecosystem is still missing a piece of the puzzle January 23, 2012

Posted by David Card in Uncategorized.
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At its f8 developer conference last September, Facebook CEO Mark Zuckerberg laid out a grand vision of a new class of lifestyle apps enabled by Facebook’s technology platform. Last week, at a subdued event that attracted far less media coverage, Facebook sketched out its progress and showed some 60 apps. Facebook’s apps ecosystem is showing positive signs of evolving, but it still lacks an effective marketplace for app promotion and monetization. Such a marketplace would reinforce a virtuous circle: It would attract more developers and help generate more money for them and for Facebook.

Signs of progress

You will recall that one of the powerful — and potentially creepy — features of Facebook’s Open Graph was “frictionless sharing,” where apps could automatically post user activity without requiring the press of a Like button. Facebook has done some fine-tuning to its privacy and auto-sharing controls, including prominent instructions on how to opt in and how to focus sharing among particular friends, even for existing apps. But Facebook still mostly relies on users’ increasing acceptance of activity broadcasts. That seems appropriate for all but the most privacy-conscious rights organizations.

Facebook also has opened its apps approval process, offering simple guidelines that appear less restrictive than, say, Apple’s App Store. Facebook claims it wants to open up the ecosystem, but it remains to be seen if it has the staffing needed to enable speedy approval for hundreds of apps.

Developers appear to be excited about Actions, a key new technology from September’s announcement. Actions expands the vocabulary of sharing beyond Liking and Sharing to shopping-oriented terms like Own and Want as well as the media-focused Listen and Read, adopted successfully by the first wave of new apps like Spotify (which has added 4 million users since f8) and Yahoo (which has enjoyed a sixfold increase in referrals). Developers like Facebook store builder Payvment think these new Actions will better suit commerce and shopping than Likes, while others like Foodspotting expect them to broaden the type of activities people use their apps for. Even if generating transactions on a social network remains a challenge, Facebook’s new tech seems to be gaining developer attention. Ticketmaster’s new app even mashes up Actions to present concert information based on listening behavior, a smart idea.

Missing marketplace

My GigaOM Pro colleague Greg Sterling wonders if Facebook is poised to challenge Apple and Google in app stores. Facebook’s app ecosystem has already produced Zynga, a bigger company than Apple’s biggest star, Rovio, but I would estimate Facebook’s yearly take from virtual goods sales is measured in the low hundreds of millions of dollars, while Apple’s apps and music sales approach $1 billion a quarter. That is partly a function of app volume, but, just as important, Facebook lacks a store or marketplace to focus app discovery and sales.

Facebook told Sterling that a marketplace “would probably make sense at some point.” OK, but pointing to apps from an About menu link is no substitute. Right now, Facebook depends on Likes and frictionless sharing by friends to drive app discovery. Facebook filters a very limited number of app activities into a user’s news feed: Users spend the plurality (27 percent) of their Facebook time there, but Facebook doesn’t want to clutter or spam their major communications stream. The company is adding features to display app activity on profile pages, where users spend 20 percent of their time. In other words, Facebook is working hard on viral app discovery among friends, but it has a weak story for a user who wants to explore related interests outside his own circle of friends.

What Facebook needs is an app store with the necessary merchandising. Facebook should copy Apple, Amazon and Best Buy. That means featured products, apps ranked by category and popularity, sortable consumer ratings and reviews, and a merchandiser’s “editorial” voice as well as algorithmic promotion, sales on virtual goods, and so on.

Facebook’s marketplace should also do something that the others don’t. It should emulate paid search listings and enable developers to buy prominent promotional positioning via auction. Sure, that entails some serious effort, but Facebook has tons of user behavioral and preference data it could use to enforce paid link relevance to eliminate scams, spam and irrelevant promotions. This would be bold app store differentiation, and perhaps Facebook is nervous about appearing to be “for sale.” But paid promotions aren’t payola if they are transparent and fair, with enforced relevance.

An effective apps marketplace would accelerate the growth of Facebook’s ecosystem and add revenues for Facebook and for developers. With its expanded Actions that crucially work outside the Facebook site, Facebook could effectively extend its marketplace web-wide and build momentum for a potential mobile network.

Question of the week

How else could Facebook juice up its apps?

A modest proposal for the Google+ search integration problem January 16, 2012

Posted by David Card in Uncategorized.
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Google’s integration of Google+ and profile information into personalized search results is creating quite a stink. Twitter complained. The Electronic Privacy Information Center sent a letter to the FTC. Charges of favoritism and its being anticompetitive monopoly swirled. Let me make a perhaps contrarian argument that, rather than squabbling, Twitter and Facebook should do some serious negotiating with Google and license data to the search giant in exchange for big fees and reciprocal data sharing.

Longtime search watcher John Battelle and I seem to be in the minority that believes a little cooperation could enable each company to play to its strengths and grow its own business. Cross-licensing would make the core products of each stronger and would still maintain competition in areas like unified communicationsidentity management and creating the most powerful interest graph. No doubt licensing would be complicated. Possibly, to avoid privacy concerns and assuage regulators, each company must get access to the other’s data only after it has been anonymized. Each could combine its own data with the anonymized data to offer opt-in personalization features (e.g., relevant search results, info filtering, preferred content) and targeted marketing to its own users. That might require a third party to act as clearinghouse for the data exchange.

Consider the needs and objectives of the players involved:

Google. Google needs to incorporate social signals into its search algorithms to improve quality — especially in the face of thinning bad content-farm results — and individualized relevance. Google doesn’t need Google+ to succeed as a destination and to compete head-to-head with Twitter and Facebook for technologies like +1s, video chat and company pages to thrive and add to its other products. Google says, somewhat snarkily, that it is willing to negotiate.

Twitter. Twitter might ultimately make more money from licensing than advertising, and it used to license its full-feed “firehose” to Google. This is a different situation than Twitter’s licensing to a company like Jive Software or even to resellers like Gnip and DataSift. It should demand large royalties from Google, which should be able to pay. As Twitter builds up its advertising business, comparing aggregated search info with its own interest data will deliver better analysis on predicting purchase behavior. And if Twitter is developing search for its own feed, more power to it. Google’s interest in real-time search has waned, likely because that kind of service is more important for news than commerce.

Facebook. Facebook has stayed quiet during the current fracas, but though it licenses data to Microsoft, it reportedly rebuffed Google. Battelle’s source tells him that Facebook wanted stricter privacy assurances than Google offered, but I suspect it was more about two-way data sharing — that is, getting access to Google data in return. There is no need for Facebook to compete with Google in the general-purpose search business: It would be hugely expensive and a bad fit for its brand. Like Twitter’s, Facebook’s ad targeting could be improved by aggregated search data, but it doesn’t necessarily need large licensing fees. However, Facebook does need its company pages to be found by searchers, and that is already one area it allows Google to index. Google must assure Facebook that there is a level playing field on company and brand promotion.

Potential deal breakers

Besides failing to negotiate terms they all can live with, what might prevent such licensing?

But what’s the harm in negotiating? Maybe all the drama is just to get the companies to the bargaining table. There’s no telling what’s really going on behind the scenes. But data licensing between any of these companies would make their current products stronger, even without some complex three-way solution.

Question of the week

What are the chances that Google, Twitter and Facebook will cross-license data?

Priorities for Yahoo’s new CEO January 10, 2012

Posted by David Card in Uncategorized.
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Last week Yahoo announced it had hired Scott Thompson, currently the president of eBay’s PayPal business, as its new CEO. Thompson doesn’t have any media or advertising experience, and he is still stuck with Yahoo’s dysfunctional board. But he’s got product and technology cred, which means Yahoo should be fixable.

Being a portal that combined content, communications and web navigation used to be a great business. But search and social media have steadily eroded the value of a portal as a launchpad to the web, so Yahoo needs to focus on its current identity as a premium content destination site.

With that in mind, here’s what Thompson should do to get Yahoo growing again in order to retain its position as one of the biggest players in online advertising.

Top priorities

  • Forget about being a technology platform, a social media company or an ad network. Yahoo doesn’t have any compelling services it could deliver through APIs to an ecosystem of third-party apps. It is using Facebook effectively to promote its own content,  though it could do more with Twitter. And as much as I like the potential for a premium advertising exchange to raise the value of its remnant ad inventory, Yahoo should focus on doing that through better targeting and richer ad formats and sponsorships.
  • Target better. In theory Yahoo should have great marketing targeting ability based on analyzing all the information it has on its 700 million users: content interests and real-time behavior, authentic email identities, search behavior that is critical for retargeting display ads. Thompson may not be an ad guy, but he’s a data guy (he sits on the board of Splunk) and has said that data analysis will be key for Yahoo. I interpret that to mean Thompson must make Yahoo the best vehicle for targeting display advertising next to high-quality content. That means hiring big data scientists and investing in targeting and yield-management technology, and it sounds like Thompson’s on board.
  • Focus on brand advertising. Yahoo could adopt AOL’s big, rich media “Devil” ad format and then leave AOL in the dust with brand advertisers by servicing them and their agencies to death. It’s already at work on advertiser relations, but it needs to accelerate the process. Yahoo should hire more-expensive ad salespeople while Yahoo U.S. head Ross Levinsohn rebuilds relationships with advertisers and agencies. It should reassign the content farm team to creating quality sponsorship advertorials. Yahoo can also do more cross-media event sponsorships like its Sundance Film Festival promotion.
  • Bulk up on quality content. Lately Yahoo is less focused on selling itself than on unloading its Asian assets: There are tax advantages to trading those for other properties. Names like WebMD and The Weather Channel have come up, and they would both be great additions for Yahoo — WebMD for its task-focused ad-friendly audience and The Weather Channel for its everyday utility and cross-media opportunities. It might also want to look at youth or technology content brands that aren’t already part of bigger media companies; SB Nation is putting together an interesting network of properties.

Innovation opportunities

Thompson is already working on talent retention by talking up innovation. At PayPal, 40 percent of resources reportedly went toward projects with longer-term payoffs. Thompson might have a lot of ideas about e-commerce, but he should stay away from social commerce and the crowded daily deals space unless Yahoo can better target offers aggregated from third-party deal companies.

He is probably thinking hard about mobile, too. Rather than display ads, mobile advertising will likely center on search and offers for some time. There may be some opportunities for sponsored content. Yahoo’s phone efforts should focus on content and email rather than ads. Its IntoNow product — a sort of Shazam for TV — is truly innovative, and it presents ad syncing and interactive TV content opportunities that will pay off on tablets sooner than on phones (and way sooner than via Yahoo TV Widgets). Yahoo’s other new tablet app, the Flipboard-like Livestand, seems rough around the edges but supports the kind of big, glossy magazine-style advertising that Yahoo must deliver.

Here is how partners and competitors should evaluate Yahoo in the next six to nine months:

  • Big advertisers and agencies should get plenty of love from Yahoo, and they should demand proof of ad effectiveness. They should ask Yahoo to foot some of the bill for expensive media planning studies.
  • Google barely participates in brand advertising and seems happy to collect ad network fees rather than own more content inventory. Eventually, Google could try to replace Microsoft as Yahoo’s search technology supplier via its better conversion rates, but it might have to do more data sharing with Yahoo.
  • Facebook wants to raise the rates it charges for ads via targeted brand advertising but needs to offer better formats and sponsorships. Its role in content discovery is safe.
  • AOL and MSN need to execute a strategy similar to Yahoo’s, though each is more invested in being an ad network. Any Yahoo failure with brand advertisers is an opportunity for them.

Question of the week

What technologies should Yahoo acquire from outside?