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Still seeking social commerce October 29, 2012

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Fancy, a site that looks a bit like Pinterest, but invites brands and merchants to sell the items “fancied,” has raised an over-$26 million round of funding, according to SEC documents. Another social commerce play, Pickie, that aggregates social recommendations a bit like a Flipboard for shopping, announced it is launching on Apple’s App Store with a $1 million seed fund. And last week, Facebook closed down its Pinterest-like Collections test, claiming it was doing so not because it was a flop but because it was analyzing early results in preparation for re-launch as a real service.

We’ve written that Pinterest could likely thrive – if not challenge Amazon or eBay – by connecting some dots for merchants and retailers, even if it just scraped by on affiliate fees. But building a large company while being a middleman for other middlemen like retailers leaves pretty thin margins and/or requires huge scale. Some data show that Pinterest is highly engaging for would-be shoppers. And Facebook has its own data to make the case to sellers for its advertising, and its Offers product.

But most e-commerce is directed. Search, price transparency, and comparison shopping are complemented by reviews and recommendations, from friends or otherwise. Social commerce feels like impulse purchasing. Facebook storebuilder Payvment cites analysis that impulse purchases represent the majority of offline retail. But that’s impulse purchases made in stores, not in social gatherings or quasi-magazines. Social commerce that weaves threads across channels, where consumers shop as well as browse, will likely be the real payoff.

 

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Can eBay tap into social commerce? October 11, 2012

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Before PayPal became the engine driving eBay, I wondered whether eBay could expand its role as a core technology platform supplier. Arguably, eBay was a social commerce player before anyone called it “social commerce,” and it was the original e-commerce ecosystem. Ebay’s latest experiment in offering limited local daily deals is being painted as its first foray into services (rather than products) and as a shot across Groupon’s bow.

I’m not sure local deals play to eBay’s strengths. Supporting local small businesses is generally a service-intensive business. Groupon’s advantage is the size of its salesforce and its existing relationships with those merchants, rather than its technology. Groupon’s foray into other commerce infrastructure, including point-of-sale systems, can leverage those advantages, but will anyone trust Groupon as a tech supplier? Small businesses buy search from Google, but the search engine giant hasn’t really staffed up to support them with other marketing services.

Ebay is sourcing deals from Signpost – that also provides some Google offers – and acting more as a distributor. Ebay has a big customer base, though they probably don’t associate its brand with local services. This doesn’t seem like a bricks-and-clicks platform play to me, but rather a PayPal extension. Keep an eye on it, though, there’s more life in eBay these days than there has been in a long time.

 

Amazon’s online advertising potential October 5, 2012

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I really wanted this Advertising Age story to deliver the goods: “Amazon Breaks Silence on Ambitions in Advertising…” Unfortunately, it seems that Amazon was its usual close-to-the vest self, even as it promoted its offerings – I hesitate to say “platform” – to an audience of advertisers and agencies. Why should anyone care? Because Amazon has the reach, the data, and the ad inventory to be a really important player in digital marketing, potentially disrupting companies like Google, Facebook, and the portals.

Ad Age says Amazon has “hundreds” of sales people and 92,000 square feet of New York office space. Amazon pumped Kindle, but also talked up its ad inventory on its owned-and-operated content site IMDB as well as its content/retail hybrids Soap.com and Diapers.com, and its own and Zappos retail sites.

In my experience of working with Amazon, it’s a numbers-driven company. So when it makes the decision to sell third-party ads on screen real estate it could be using for Amazon promotions, it knows what it is doing. Those ads are likely effective for advertisers, and profitable for Amazon. Unlike social media and portals that infer purchase intent from content behavior and self-expressed Likes, Amazon has tons of data on actual purchase and search behavior. Its targeting should be top-notch, for both brand-building and actual conversions. With Kindle and apps, Amazon has a mobile story that’s more robust than most content companies or ad networks.

Because Amazon is so secretive – even in its financial documents – it’s difficult to get a read on just how much ad spending it absorbs. But I wouldn’t be at all surprised if Amazon’s ad revenue were bigger than that of a company that gets a lot more attention as a media business: Twitter.

 

Facebook gifting hardly revolutionary September 28, 2012

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There is a lot of gushing over Facebook starting to roll out the fruits of its Karma acquisition. Gift cards are high margin, but if Facebook is just taking an affiliate fee off a retail product, that will make for slim pickings, even if you make outrageous assumptions on buy rates. Hardly enough to “completely transform” the company, or disrupt e-commerce.

Social networks have been a tough sell for commerce. We’ve written about Facebook stores before, and Facebook hasn’t knocked anybody over with Offers. Gifting could be a piece of a Facebook mobile play, but I suspect coupons and offers will pay off better. In fact, it might be wise to think of gifting as a data play, with Facebook gaining a few insights and lots of credit card numbers.

Shoes and subscriptions September 26, 2012

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ShoeDazzle’s switch from its original shoes-as-subscription business model to a more conventional e-commerce approach has cost CEO Bill Powers, ex of ProFlowers, his job. Om thinks that the company will have a hard time regaining its customers’ love, even as it puts original founder Brian Lee back in charge. (He notes that the board must have approved the business model change, so it’s not all Powers’ fault.)

Om observes that “joy and love were the two emotions ShoeDazzle’s customers associated with the company.” It’s hard for a retailer to establish that kind of relationship, but it doesn’t have to be dependent on the business model. This is a banal observation, but the usual pitch to a consumer for a subscription business focuses on things like:

  • Value. For one low monthly fee, you get access to all these TV networks or music, instead of paying separately.
  • Utility. Think magazine and newspaper delivery without the reader having to do the work.
  • Revenue alternative. Skip the ads by signing up for a subscription.
  • Replenishables. Similar to utility, but subtly different: re-stock your razorblades automatically.

For some customers, shoes are replenishables, or such a frequent purchase that the utility kicks in. And like the old book or record of the month club, there’s a value pitch, too. Or at least an “I already paid for it” benefit. Do those values apply to a big enough audience?

Groupocalypse: Groupon loses its way August 20, 2012

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In my last few Weekly Updates, I’ve written about Zynga and Facebook, two companies whose business models I’ll continue to defend. But right now they make up a pair of the Horsemen of the IPO Apocalypse. I might as well add a third. Groupon’s second quarter results were about in the middle of its guidance, it showed a profit, and it cut way back on marketing expenses as a percentage of sales. The result? Its stock is at an all-time low. Can Groupon turn it around?

The opportunity

Unlike Facebook — a digital media leader and core technology platform provider — and Zynga — on a cold streak but with a plan — I’m pretty sure that Groupon is headed in completely the wrong direction. I have written that Groupon’s scale would be a huge competitive advantage as social commerce shook out. I thought its massive sales force, customer base, and merchant relationships would produce a terrific combo.

In theory, Groupon should be able to analyze its customer data to help it target and improve deal conversions and feed insights back to its merchants. Groupon should be building out other marketing offerings for those merchants, so that it could move beyond new customer acquisition into loyalty programs, and sell them services like paid listings and SEO. Groupon could be a local merchant’s one-stop marketing supplier in a way that even Google would have trouble matching.

Misdirected?

Instead, Groupon’s revenue in actual retail is growing faster than its high-margin deals business. It envisions itself as an e-commerce technology platform provider. CEO Andrew Mason says he wants Groupon to become the “operating system for local commerce.” And the company is bragging about being a leader in mobile commerce.

Does Groupon really want to build warehouses and compete with Amazon in multi-category online retail? Perhaps it wants to get into payments – no, that’s not a crowded field at all. Or how about in-store point-of-sale hardware for small business? Madness.

Yes, mobile commerce is promising. Groupon says that in July nearly one third of its North American transactions were completed on mobile devices, a figure that’s up 35 percent from the year earlier. Groupon’s mobile app has just as much adoption as those of Amazon and eBay, but does that mean Groupon could become a mobile transactions platform for local merchants and retailers?

Perhaps. But I expect big, national retailers that sell through local stores and affiliates are better equipped to handle sophisticated technologies like geofencing and real-time inventory liquidation than the local small businesses that are Groupon’s strength. Remember, airlines are the leaders in yield management. Your typical local restaurant or gas station is probably not thinking about balancing discounts versus empty slots that might go unsold via complex algorithms and business rules. Lots of Groupon merchants couldn’t even handle volume discounts profitably.

There’s no shame in being a force in local marketing. BIA/Kelsey projects that digital advertising will only comprise 11 percent of a $150 billion U.S. market by 2016. There’s plenty of opportunity – and plenty of competition already – for Groupon to offer services to support local merchants’ marketing needs. Make no mistake, there are some positive signs for Groupon’s core U.S. business:

  • Groupon’s targeting is starting to improve efficiency in cities where it has been using it longest
  • Nearly 20 percent of its merchants are increasing their use of Groupon’s other services.
  • Its Groupon Rewards loyalty program is gaining traction.

What momentum Groupon has is in marketing services. Once it embraces this, and shifts its development and sales assets accordingly, it will start to claw its way back towards prosperity.

Question of the week

How could Groupon turn itself around?

Takeaways from Facebook’s Q2 earnings call July 30, 2012

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Last Thursday, Facebook did its first earnings call as a public company. Though it showed a solid 32 percent revenue growth to $1.2 billion, reactions were mixed at best and the stock suffered. Unrealistic expectations are causing people to overlook Facebook’s fitful progress in online advertising, and signs that it really does have a clue in mobile.

Here are the important takeaways from the call. Executive commentary is taken from the transcript.

Its business model appears solid. Advertising sales were up 28 percent to $992 million. Observers seemed far more disappointed by slowing revenue growth than by Facebook’s loss, that was driven by $1.3 billion in stock-based compensation expenses from its IPO. Excluding that, the company showed a healthy 43 percent operating margin, and would have had a $515 million operating profit.

With 955 million active monthly users, Facebook’s user base is huge and growth is naturally slowing. Still, Facebook claimed that the number of monthly users even in the mature U.S. market was up versus the last quarter, and that it detected no slowdown in activity, even among younger users. So much for the “fad” fading.

Its role in online advertising is expanding. Before and during the call, Facebook has been trying to illustrate that its social media advertising platform can be effective for marketers, even as it remains cautious in its deployment of ad formats. The company is paying to do the necessary research to show off its advertising ROI, and it is poised to gain significant share even without making much of a dent in brand advertising. Home-grown display ad revenue from the big three portals – Yahoo, MSN and AOL – was flat or down this quarter. Facebook is the only big player growing sales of display ads it sells on its own site; the portals and Google are growing via ad networks.

Facebook attributed its ad revenue growth to an 18 percent increase in the number of ads delivered and, more important in the long run, a 9 percent hike in price per ad sold. It boosted the number of ads shown per page, but that effect was muted by mobile usage. In fact, the number of ads shown in the U.S. actually declined two percent. Facebook managed to counter that by being able to charge even more in the U.S. with its Sponsored Stories social units that show in the news feed. U.S. CPMs were up over 20 percent. That U.S. figure is quite promising for future Facebook growth.

It’s starting to monetize mobile. Half of Facebook’s monthly active users came from mobile devices. CEO Mark Zuckerberg said mobile users were 20 percent more likely to use Facebook on a daily basis than web users. He said that by the end of June, Sponsored Stories were generating $1 million in sales a day, half mobile. At that rate, it won’t take long for Facebook to be a leading player in mobile advertising. Of course, that’s an easy thing to say, as it only takes $100 million a year to be a “leading player.” Google is the only company with a billion-dollar mobile ad business yet.

Facebook blamed relatively flat sequential growth in fees revenue to mobile gaming, where most social games don’t use its payment system. It’s an open question whether Facebook can take its payment system beyond its site. But it sounds like it won’t be using a Facebook phone to do so. In response to a question about integrated mobile devices versus apps, Zuckerberg said, according to the transcript, “There are lots of things that you can build in other operating systems as well that aren’t really like building out a whole phone, which I think wouldn’t really make much sense for us to do.”

Facebook’s near-term success depends on how it works the following:

  • Ecosystem mining. Zuckerberg hinted that Facebook wouldn’t take as big a cut – in terms of ad spending as well as its 30 percent fee on virtual goods – from other businesses that use its platform as it does from social gaming. That’s not just a mobile issue: he specifically mentioned web-based music and e-commerce.
  •  Ad expansion. Facebook said fewer than half its ads were social, and a very small percentage were Sponsored Stories. Critics make a valid point that many Facebook advertisers come from its apps ecosystem. But COO Sheryl Sandberg described a $2.75 million campaign from Electronic Arts for the Battlefield 3 console game. Brand advertisers are very interested in social marketing, but they’d also appreciate a few more traditional formats as well.
  •  Mobile substitution. Facebook said daily web usage in the U.S. declined relative to mobile. To-date, mobile usage has been incremental to more ad-friendly web usage. Google is worried about mobile search ad CPC. But while Facebook’s mobile ads look relatively cheap, it’s demonstrating that in-stream ads can carry a premium over other formats.

The victim of expectations, Facebook’s IPO and public market performance is a wet blanket on consumer and social media startups. But Facebook itself is building what looks like a sustainable business with the potential to accelerate its growth engine in the next 12 to 18 months.

Question of the week

Where will Facebook’s growth come from?

Some rough waters for Kayak IPO July 16, 2012

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Travel search company Kayak Software filed an updated S-1 last week, implying that it will finally make its long-delayed IPO sometime this week. Kayak aims to raise as much as $100 million in a valuation that, at the high end of its pricing, would approach $965 million. The debut bears watching. A successful offering would bode well for the overall startup environment and as a proof of concept for vertical search. But Kayak also raises a few caution flags.

Kayak’s would be the first consumer Internet offering after Facebook’s, and the world wonders what it will take to take to remove that somewhat bitter aftertaste. Facebook raised $16 billion and kept tight control of the company, but priced the offering so close to demand that it failed to “pop” on opening day, and the stock has been sluggish ever since.

Kayak is something of a “traditional” consumer web play based on search, e-commerce, price transparency and consumer choice. Kayak isn’t riding any of the biggest buzz trends – cloud computing, big data or social media – and another, mobile, may be some cause for alarm. Consider:

  • Data. Kayak depends on real-time access to data about inventory, pricing, etc., but not in the unstructured formats that characterize big data analytics. The reason Kayak delayed its IPO for nearly two years was because it was fighting Google’s acquisition of ITA, the source of the bulk of Kayak’s airfare info. As part of a consent decree to enable the acquisition, Google’s ITA contract with Kayak can extend into 2016. But Google is building out its own vertical travel site.
  • Social. TripAdvisor, a bigger competitor, has built user reviews that, in fact, Kayak references, and integrates Facebook more deeply, resulting in higher engagement activity for its Facebook app than Kayak’s.
  • Mobile. Kayak says its mobile application has been downloaded 15 million times and that mobile users generated 17 percent of Kayak’s travel queries in the first quarter of 2012. But Kayak – like Facebook and Google – is a little nervous about its ability to monetize mobile activity. It estimates that mobile queries only generated 2 percent of Q1 revenue.

Hints of vertical search success

Kayak is one of the few examples of a vertical search business outside of retail. Amazon, Best Buy and others use search technology effectively on their own shopping sites, but few companies have made a go of a standalone, specialized search site. Although Kayak does enable hotel booking on its site, most of its revenue comes not from direct transactions but from bounties paid by travel sites it sends traffic to, and from advertising. Kayak had $225 million in sales in 2011, up 32 percent from $171 in 2010. It showed an operating profit of $15 million. Kayak’s growth rate increased in Q1 to 39 percent, and the company said it expected the June quarter to show revenue of about $75 to $76 million, up 31 to 34 percent from a year ago.

Those are solid if not spectacular numbers for an ageing startup in a market that’s probably already seen its big disruptions. Search engines and the first wave of online travel agencies rocked the travel industry when they exposed airline pricing and availability and put control in the hands of consumers, wiping out huge swaths of the off-line agency business. Kayak continues to fuel those online agencies, perhaps at the expense of revenue diversification. During Q1, 63 percent of its total revenue came from Kayak’s top ten travel suppliers and online travel agencies. Expedia alone accounted for 23 percent, while Priceline and Orbitz produced another 10 percent each.

So Kayak has begun to make the case that standalone vertical search can work, at least as long as it can add differentiation to the search experience through its speedy and efficient user interface. Unlike a lot of sites in the e-commerce ecosystem, Kayak doesn’t depend heavily on Google for traffic. According to its S-1a, 75 percent of Kayak’s query volume originates from people who directly visited its site or mobile apps, and only 10 percent from general search engines.

Kayak has to pay for that awareness. The company spent $58 million on brand advertising (including TV and billboards) in 2011 and a whopping $21 million in the first quarter of 2012. It expects to invest at this level or higher for the foreseeable future. And online marketing expenses – including money it spends on Google search keywords or contextual advertising – increased even faster, at over 60 percent to $18.5 million in Q1. But even with these expenses, Kayak’s margins are holding up.

Can Kayak continue to thrive in the face of general search and Google’s own vertical search efforts? Well, in 2008 Microsoft acquired Kayak competitor Farecast, and subsequently launched Bing Travel. But since 2011, Kayak has had a co-branded, revenue-sharing partnership with Bing Travel. If Kayak can continue to differentiate, maintain customer loyalty, and ride its partners, it should continue to show steady growth.

Question of the week

How can Kayak continue to differentiate in travel search?

Social commerce remains a licensing play May 21, 2012

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One theme attached to Facebook’s IPO was the company’s need for revenue diversification. Advertising and virtual goods pay Facebook’s bills, but delivering on the promise of social commerce – connecting the dots between content, curation, communications and commerce – would be golden. That’s something Facebook has failed to do so far. Meanwhile, a startup like FindTheBest is tapping an established social commerce revenue stream while Pinterest raised $100 million on e-commerce hopes.

Three main categories of services drive social commerce: 1) reviews and recommendations, 2) group buying and daily deals and 3) shopping communities. Facebook’s strategy is to use its platform to enable developers to weave all three together. But, while Likes are ubiquitous and Facebook is adding shopping-friendly “verbs” to its Open Graph, its own deals and coupons Offers product is off to a sluggish start and retailers and merchants have seen little success for their Facebook storefronts.

Beyond impulse purchases

Online commerce is largely directed shopping, playing off the web’s strength in search and price transparency. But social commerce – especially when it’s delivered within the confines of a social network – seems better suited to casual impulse purchases. Two areas where social technologies could add fuel for e-commerce are:

Potential players

FindTheBest began life as a consumer site, but increasingly positions its vertical comparison engines and aggregated and curated reviews as “content” for publishers. The company does revenue-sharing deals – from advertising, affiliate fees and lead generation – rather than pay-upfront licensing. That’s an intriguing model, if a little far removed from where the transaction occurs, and FindTheBest has signed 30 deals with publisher sites this quarter.

In contrast, even though the lead funder behind Pinterest’s latest round was the Japanese e-commerce holding company Rakuten, the transaction connection still seems a little whimsical. Content sites and some merchants show compelling anecdotal evidence that Pinterest can drive traffic, but they’re sketchy on conversion data. It would be wise for Pinterest to tap into this phenomenon by charging for marketing pages or collecting affiliate fees before it leaves too much money on the table.

Pinterest might turn out to be better at delivering licensable technologies than e-commerce transactions. In fact, that may be Facebook’s role as well. Right now, social commerce feels like a technology platform play rather than a retail business. According to our GigaOM Pro 1Q12 U.S. consumer survey, only 7 percent of social network users regularly shop on social networks. That’s a condition likely to continue for 24 to 36 months at least.

Question of the week

When will social commerce actually drive significant transactions?

Facebook store flops demand a shift in emphasis February 22, 2012

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Last week, a pretty negative Bloomberg story about Facebook storefronts got wide pickup. It described how GameStop, Gap, J.C. Penney and Nordstrom had closed their Facebook stores. Social commerce is doomed!

Well, not exactly. I have been bearish on how many commerce transactions stores on Facebook would generate since the concept of “f-commerce” was introduced, but that doesn’t mean retailers should give up. Instead, they should put their Facebook stores in the hands of their marketing and promotions staff and prioritize marketing objectives over sales.

I have described before how storefronts built on Facebook pages face at least two significant challenges. Most e-commerce arises from directed shopping that exploits the Internet’s searchability and price transparency rather than the impulse purchases a buyer might make on a social media site. And I have also suggested some ways to accelerate Facebook storefront success: in-stream promotion, social commerce integration and ties to brick-and-mortar loyalty programs. Plenty of smart companies are implementing the first two, but they are still thinking too hard about sales volumes. Just like daily deals, f-commerce efforts should initially concentrate on customer acquisition, engagement and loyalty.

Feeding the feed gains user attention

E-commerce sites like Ticketmaster, TripAdvisor and Fab.com were quick to take advantage of Facebook’s October Open Graph enhancements that enable “frictionless” auto-sharing of activities without a user creating a post or pushing a Like button. Social commerce believers like Yardsellr.com think it is best that promotions come from customers rather than marketers. And store builder 8thBridge reports that 90 percent of Facebook shopping activity comes from friends sharing with friends.

That approach makes sense, but it oversimplifies some issues. “Frictionless” sharing doesn’t show up in Facebook’s main news feed but rather off to the right, in the live ticker. That means those kind of shopping activities may be quick to appear, but they will also disappear just as speedily and likely won’t be called to a user’s attention by Facebook’s ranking algorithm. In contrast, Ticketmaster and Lucasfilm encourage their customers to pass the word — leading to new customers — and actively engage in logical social activities like group travel-planning or event-planning.

Another store builder, Payvment, is also using Open Graph, but not the way Spotify does, where every interaction with the app is broadcast. Payvment is conscious that shopping activities might require more privacy and user control than music listening. So Payvment is focusing on the new action verbs, like Want and Own and claims they are starting to catch on. But the new actions are mostly on apps or Facebook company pages and have not spread outside Facebook on the Web the way Like buttons have.

And friend-to-friend sharing faces other scale issues: Payvment concedes that most users don’t have enough friends to deliver the kind of volume that big retailers want. So it is promoting the idea of a “taste graph” that aggregates interests — as described by Likes, Wants and Owns — across strangers as well as friends. That would enable offer targeting and the personalization of Payvment’s mall of Facebook stores. It is an intriguing big data play, but companies like Groupon and LivingSocial, with far more resources and data than Payvment, have yet to pull off customized targeting that would improve sales conversion. These are longer-term payoffs.

It’s all about marketing

So before f-commerce stores can generate many sales, smart sellers are treating social commerce as a means of branding, customer acquisition and loyalty building. Heinz says a “get well” soup campaign in the UK generated the sale of one can of soup for every eight fans, and it had to buy plenty of Facebook advertising to deliver that much. Wisely, Heinz was more concerned with adding fans and generating PR than selling soup. Similarly, ad agencies and marketing firms like TBG Digital think that over time, those new action verbs will be a key part of Facebook advertising.

Meanwhile, retailers looking to get the most out of Facebook for the next 18 to 24 months should reassign some of the merchandisers and retailers working on their Facebook storefronts. They should move staff in marketing, promotions, advertising and customer acquisition onto the job. The measure of their success will come from metrics like new customers, visit frequency and brand lift. That is where advertisers and marketers have expertise. Then two years down the road, the retail experts can start thinking about total sales, conversion rates, cost of sales and other transactional measurement.

Question of the week

How else can retailers use Facebook?