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How Much is Facebook’s Market Power Worth? January 10, 2011

Posted by David Card in Uncategorized.
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Perhaps you heard some noise this week about a $50 billion valuation for Facebook. Or mumblings about a nine-month profit of $335 million? Or a potential IPO in 2012? Putting a value on Facebook is beyond my pay scale. But it is the most important player in social media, and social media — along with mobile — is driving innovation across the entire technology spectrum. To better compete against, partner with or invest in Facebook, it’s worth evaluating its market positions, strengths and weaknesses.

Facebook itself is a consumer company, playing in the still-ripening consumer Internet fields of communications, content and commerce. It’s also a platform player, and platforms with rich ecosystems of developers are one of the best and most defensible businesses ever — just ask Microsoft. And Facebook’s platform is not just about scale; it has a shot at a being a real network effect, with the accompanying implications of high growth, customer lock-in and winner-take-all opportunities.

Platform and Ecosystem

Facebook has established itself as one of the largest Internet companies in terms of audience reach, frequency of usage and ability to drive traffic to other online sites. It’s social media ecosystem is healthy and growing. It continues to spawn investment in advertising and marketing services, and the success of companies like Zynga hint at how other developers in entertainment apps, location-based services and social commerce could build solid businesses.

Facebook’s APIs, Likes and Connect are widespread. Its messaging strategy could provide a universal inbox — or even presence manager — for some of its users, but isn’t suited for corporate or marketing email, and isn’t likely to replace personal email for most consumers online. While Facebook has a chance to make its platform the single most important one in social media, I suspect the current proliferation of APIs and mashups from many players, including Twitter, Google and Microsoft, will continue. There’s too much data being created now for a single social graph to dominate.

Net: Facebook should remain a leader in consumer technology, but likely won’t establish a winner-take-all platform.

Advertising

Advertising is Facebook’s primary revenue stream, and advertising is a business driven by economic cycles and demands ever more cross-media campaign coordination and ROI measurement. Facebook makes less money per user than does Google or Yahoo. It offers self-serve, relatively low-cost display advertising and is just beginning to exploit the rich targeting capabilities of its social graph for those and other display ads. When it does, and as it builds out sponsorship opportunities and measurement systems, it will be able to raise prices and garner more brand advertising spending.

Facebook barely participates in the biggest sector of online advertising — paid search. It has a promising Microsoft partnership, but there’s little evidence that users will do commerce-related searching on social networks. Facebook says it has no plans to build an ad network to tap its social graph outside its own site, and doesn’t charge brands for status updates, its closest equivalent to email marketing.

Net: Facebook is well beyond critical mass and has achieved mass media status, with plenty of growth opportunity. That said, Facebook is an Internet-only media company that should focus on and beef up its efforts in brand advertising, and establish partnerships for search, ad networks and email marketing.

Other Markets

Virtual goods from social games provide Facebook with $250 million in revenue, but the company shows no interest in other digital goods like music and video, perhaps due to their competitiveness and thin margins. Net: Facebook is strong but limited in digital goods, a profitable, but not huge business.

E-commerce may provide some opportunity for Facebook retail storefronts, but the online mall approach never worked for portals like Yahoo and Aol. Net: Facebook is well-positioned to play a social commerce role in customer acquisition and retention, but unlikely to have significant influence in online or brick-and-morter retail transactions.

Question of the week

Just how strong an industry force is Facebook?

The Business That Powers Local Social Media November 29, 2010

Posted by David Card in Uncategorized.
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“Local” and “social” go together like bread and butter. Add “mobile” and you’ve got your sandwich, or, better yet, a trio of hot technologies attracting capital from investors and big companies alike. For consumers, there are obvious synergistic experiences: Mobility is local by definition, as are many social activities like physical-world shopping and going out for entertainment. But what’s the business driving this trio right now?

The digerati like to talk about local social commerce and conjure up visions of Minority Report-style advertising and proximity offers. But those are largely still visions today — promising, but as-yet undelivered. The near-term payoff for local social media is coming from more mundane sources like small-business marketing budgets that used to go to Yellow Pages, newspaper inserts, circulars and coupon mailings. So companies in this space need to support local small-business advertising in their business plans.

Local Advertising Online Still Nascent

Most local ad spending is still on traditional media. Eighty-five to 90 percent of the roughly $130 billion in U.S. spending isn’t digital. Print Yellow Pages is still a $15 billion business. Sure, thousands of small businesses buy paid search listings from Google and Bing, but they’re usually small online businesses that can convert sales on their web sites. The vast majority of local small businesses are barely online, if at all.

At the same time that minimal local ad spending has moved online, many local advertising vehicles are struggling, making for weaker competitors or potential partners. Free classifieds and Craigslist are killing a local newspaper revenue stream, and most newspapers’ best display advertising customers were recession-hammered car dealers, real estate and big retailers. Yellow Pages remains a sluggish cash cow for companies like AT&T and Verizon Superpages. Dex One is shutting down one of its online initiatives, Business.com. Another player, Local Insight, is in bankruptcy, as is Vertis Communications, a company that specializes in free-standing inserts.

Check-In Deals Proliferating

Meanwhile, announcements of advertising and promotional deals with check-in companies are peppering the news. Location-based services companies like Foursquare and Gowalla still have pretty small marketing staffs. They’re better equipped to service national or online brands and retailers that target local markets from a centralized national marketing or advertising organization. That includes companies like PepsiCo, Starbucks, McDonald’s and auto manufacturers and banks.

An online local content company like Yelp, that built its business and audience around a web site before going mobile, is better-equipped to deal with local small businesses, and has relationships in place.

Groupon’s “Dirty” Secret: It’s Not Really Commerce

The hottest name in social commerce isn’t even really about commerce. When daily deal powerhouse Groupon makes its pitch to local merchants and national brands aimed at local customers, the pitch is about new customer acquisition. When the economics work, it’s a compelling story: since the shopper pays for the Groupon coupon, the resulting customer location visit guarantees a sale, and is thus pre-qualified as a prospect.

When rumors of a Groupon-Google matchup made the rounds last week, some were critical of the potential. An acquisition, rather than a less formal partnership, makes sense for several reasons. Google would get a big local salesforce. It could offer complementary paid search and display ad services for customer acquisition, and perhaps do a better job of tracking customer conversion across email, search and online display ads (Google bailed out of radio). Google might be able to help Groupon with its own customer acquisition, although Groupon has only recently started to buy paid search listings and online ads. And Google would have to balance the value of running “house” ads versus paid-for inventory, as well as appease Groupon competitors.

Additional Service Opportunities

Other local social revenue sources beyond customer acquisition offers could include:

  • Media buying. Local social companies could assist unsavvy local merchants with SEM, SEO, distribution, and online ad network buying. Digital Yellow Pages does this.
  • Ad creative services. Companies like BuyWithMe already work with merchants on crafting their emails, testing offers, subject headings, etc.
  • Store loyalty programs. Check-in services are heading this way already.

Question of the week

What revenue streams should local social media go after?

Social and Online Media Need Privacy Plan Now October 25, 2010

Posted by David Card in Uncategorized.
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Privacy isn’t just Facebook’s problem. In fact, the whole consumer Internet and media industry had better get its collective act together on the privacy front or get ready to face serious consumer backlash and, perhaps worse, government regulation.

For the second time this year, Facebook is at the center of a privacy controversy. Many apps on the network have been transmitting Facebook user IDs to third parties, some of which are data aggregators or miners that create profiles of users or groups and sell them to marketers. This user ID leakage was the same problem Facebook “fixed” in May.

Although wiser heads pointed out that both times represented fairly common practices online, and that personal email addresses are potentially much more dangerous in terms of identifying and exposing consumers, the stuff hit the fan. “Is Facebook evil or merely incompetent?” asked one critic. Has it “lost control of its platform?” wondered another.

Consumers Care — At Least They Say They Do

Regardless of their behavior as consumers, many say they care about privacy. A Zogby poll showed that 87 percent of respondents were concerned with the security of their personal information online, and 80 percent were bothered by advertisers tracking them. In another survey, 96 percent said online companies shouldn’t be allowed to share or sell personal information to third parties without permission — though nearly half admitted they don’t read privacy policies. And if they’re annoyed enough, consumers will take action: The Federal Trade Commission says that 200 million phone numbers have been registered in its Do Not Call registry that clamps down on telemarketers.

What’s at Risk for the Industry?

Social media companies should be wary of potential government regulation. If legislators were to impose strict rules on information sharing or opt-in practices, the usefulness for consumers and companies of social graphs could be drastically reduced.

And then there’s advertising.

Alcohol advertising on television, for instance, is self-regulated; it’s the TV networks’ own standards that kept booze off the non-cable airwaves until recently. It’s not illegal to promote liquor, just the networks playing it safe. In contrast, advertising on kids’ TV shows is a matter of law, as is the tobacco advertising ban that’s been in place since 1971.

Members of Congress are questioning Facebook on its current snafu. They’re the same ones that went after the “zombie cookies” highlighted by the Wall Street Journal. Even before that, online privacy bills had been proposed in the House, and European regulators are passing fresh proposals around the European Commission. I doubt the online media industry wants to rely on congressmen understanding the nuances between zombies and other cookies — a ban on cookies would completely destroy ad targeting and optimization.

How Should the Industry Respond?

The online media industry needs to rev up its lobbyists (Google spent $1.2 million on lobbying this quarter; Facebook $120,000), explain what’s going on to legislators and to the public, and seriously consider self-regulation. Additionally, social media companies should:

  • Explain what they’re already doing with consumer information, and not just on developer blogs. These stories need to be on home pages and in ad campaigns.
  • Go after real bad guys publicly. Facebook, for instance, is suing spammers.
  • Use the publicized information outlined in the first two points to create a set of best practices and an audited seal of approval.
  • Use an organization like the Online Publisher’s Association — rather than the Internet Advertising Bureau or the Direct Marketing Association — as a hub for public campaigns. It would be better PR coming from the publishers, who shouldn’t be afraid to play the “democracy needs a viable press, and the press needs viable advertising” card.

It would be too hard for Facebook to “give up on privacy” and expose all existing posted information everywhere, with the idea that its users would gradually move that info into a new, “private Facebook.” Longer-term, we may see consumers evolve private and public identities, but the industry can’t count on that right now.

Question of the week

How can social media solve its privacy problem?