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Demand Media: Search Spam or the Future of Content? January 31, 2011

Posted by David Card in Uncategorized.
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Demand Media’s successful IPO last week didn’t quite dispel the air of controversy surrounding the company. Demand has never been profitable, it and its content farm brethren are blamed for diluting search results and its content is damned as lightweight fluff written for near-slave wages.

But the controversy is overstated. Though Demand’s business model appears a little shaky, companies in online media should monitor it closely for lessons in content creation efficiency and targeting, and for potential partnership opportunities.

How It Works

Demand produces low-cost content to order based on its analysis of search trends, advertising rates, competitive content and its long-term value in terms of ad sales over time. It suggests topics based on that algorithmic analysis to a network of 13,000 freelancers. Those freelancers then write articles or make videos that Demand shows on its own highly search-optimized sites — eHow, Answerbag, Livestrong.com and Trails.com — or syndicates to partners like the San Francisco Chronicle and the NFL. It pays its freelancers $15 for short articles.

But this cheap, clinical approach to content creation inevitably offends journalists, and produces a lot of how-to articles of varying quality.

Limits to the Model

Demand Media content is at least mildly useful to the masses. Otherwise, it wouldn’t generate CPC revenues or enough clicks and links to influence Google results. That content is not hugely valuable, but it’s not as worthless as this this story, which compares Demand’s revenue per user to that of Google, implies — Google, after all, is one of the most profitable media companies in history. In contrast, Demand’s dollars per thousand page views on its own sites is showing modest growth, indicating the company is starting to move beyond low-CPM text ads into higher-value advertising.

In the most recent nine month period, Demand depended on Google for 28 percent of it revenues. It uses Google’s ad networks and has a revenue-sharing agreement for video content shown on YouTube. Two-thirds of the page views for its biggest site, eHow, come from Google, and search drives 40 percent of the views across its network.

But that dependence is one way. Google takes about a 15 percent cut of the ad revenues its network generates for partners (compare Traffic Acquisition Costs versus network revenues). So the $50 million Demand got from Google over nine months produced peanuts for the search giant. Any conflict of interest implied by Google making money from content farms just isn’t worth it, compared with the potential damage to Google’s reputation. Nonetheless, Google recently responded to chargers that content farms and spam were affecting search results quality. And Demand’s attitude that Google’s response had nothing to do with it isn’t entirely convincing. Demand’s Google dependency is a little scary.

How It Could Evolve

Yahoo acquired Associated Content, a content farm similar to Demand, and AOL has a rival freelance network called Seed, run by ex -New York Timesman, Saul Hansell. AOL’s Patch hyperlocal content network isn’t completely different from a content farm — and has search engine watchers equally concerned. Content farms are an evolution of the Times’ About.com property, and the Times considering investing in Demand. So clearly, Demand’s content farm model is attracting attention. Here’s how Demand might evolve it further:

  • Verticals. Some Demand properties align celebrity brands with topics (Lance Armstrong-health, Tyra Banks-beauty), but the company hasn’t invested much in higher-quality content for those sites, or in other verticals like technology, food, or older audiences that could command premium advertising.
  • Sponsored Content. With just a little polishing, Demand could apply its model to advertorial-like sponsored content and combine that with the social media tools it acquired via Pluck for advertisers.
  • Q&A and Content. Blending community-answered questions a la Quora with a content farm seems a natural fit – Mahalo may be steering this direction with video already.

Related Research: Google Needs to Fix its Spam Problem, Even if it Hurts

Question of the week

What can companies learn from Demand Media?
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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?

Can Mining and Filtering Monetize NewNet? December 20, 2010

Posted by David Card in Uncategorized.
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One of the keys to monetizing NewNet technologies like real-time feeds and social media will be harnessing the massive amounts of data they create. In recent weeks, there have been a handful of announcements illustrating creative ways of using this data to enhance products, often via recommendations. But most of them have not shown clear revenue strategies.

What the initiatives have in common is their use of information from feeds or social graphs. Foursquare posted a job listing for a data scientist to assist in mining its own data to enhance product features, but there may be more opportunities — and competitive differentiation — in combining data sources. The recent initiatives display at least two ways of tapping those veins:

  • Mining happens behind the scenes. Companies license and/or utilize APIs to extract information and apply it to applications and services to aid in targeted marketing, aid personalization, or create entirely new products.
  • Filtering is more visible to the end customer. Like mining, filtering adds relevance, but is generally controlled by the user.

Who’s Doing It, and How

Mining NewNet data from multiple sources may require the resources of a company with a big, established business —rather than a startup — for deployment if not development. Social media buzz-monitoring companies like Cymfony (part of ad agency giant WPP) and Buzzmetrics (part of Nielsen) sold themselves to ad agencies and market research firms. Because changing an established user interface is a tricky thing, innovations in filtering multiple data sources will likely originate at startups.

Examples of each include:

  • Wowd filters Facebook’s feed. It applies its own algorithms to Facebook APIs to automatically create natural groups of a user’s friends by analyzing users relationships to each other and posted info. Wowd allows the user to filter by time, topic, and trends.
  • Clicker, that makes an Internet video guide, is one of the few companies that pulls in Facebook data via “Instant Personalization.” It maps a user’s self-professed Likes into genres and topics to produce recommendations it shows alongside editorial suggestions, friends’ viewing, and popularity.
  • Google mined its own traffic and embedded content for YouTube Trends, and tweaked its social search presentation. Microsoft appears to be using Facebook data in its basic Bing results, as well as offering an alternative social view. MTV Networks created a new music discovery space by mining social data.

But Payoff Remains a Challenge

A simple ad revenue model for a site or app that filters a Twitter or Facebook feed produces pretty small dollars. I used traffic data from Compete, “visits” as a proxy for page views, and assumed a low-cost ad (CPM of fifty cents to a dollar). If a filter company showed a single, relatively untargeted ad per page, and siphoned of 10 percent of Twitter’s site traffic, it could generate yearly ad sales that would be measured in the tens of thousands of dollars to perhaps half a million. If the company managed to appeal to one percent of Facebook’s US users, the figures are in the same ballpark.

My model is very simple, and very conservative. If Facebook is really approaching $2 billion in revenues, it generates roughly $2 to $3 per user per year. Google is more efficient: it gets $25 per user/year. To get to multi-million dollar yearly ad sales, a filtering company would have to attract a million users, preferably of a distinct demographic, job description or sphere of interest. That would enable it to offer a better-targeted audience and a richer palette of ads and marketing opportunities to advertisers, and charge a CPM in the $3-plus range.

Active personalization — convincing a user to set up a customized experience — is tough. Yahoo never got more than 15 to 20 percent of its users to build out a My Yahoo page. Those who did were its most valuable users, the ones that used multiple Yahoo products and converted to paid services. The passive personalization enabled by mining could indirectly contribute to customer monetization via retention and increased usage frequency.

Question of the week

How can you make money off of social media and real-time data?

Multiple Models for Social Media Businesses September 20, 2010

Posted by David Card in Uncategorized.
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No single strategy guarantees social media success. Twitter’s recent relaunch mirrors some of Digg’s tactics, but social services — or recent hints of them — from players like Google, Apple, and Yahoo take entirely different approaches. But while there are multiple paths to social success, the one a company chooses tends to align it with a particular revenue model.

More Than One Way to Win

Last week, Twitter showed off a major overhaul of its site, which sponsored a “final post” by its former chief engineer. In the post, Alex Payne lamented that Twitter was abandoning its original “decentralized” set of services both users and developers could profit from. In its place went a more “centralized” broadcast-media-style model. Indeed, in efforts to broaden its audience and hold onto its users a little longer, Twitter risks cannibalizing the ecosystem of developers and applications that have grown up around it — companies like TweetDeck, Seesmic, and Bit.ly — by replacing their value-added features with its own.

In contrast, Facebook has “opened up” a bit. The social giant initially offered apps vendors like Zynga, Flixster and Living Social access to its audience and their social graphs, so long as the apps lived in Facebook. With initiatives like Open Graph and Facebook Connect, Facebook is giving third-party sites and apps access to services like common sign-in and message-exchange. Its goal is to establish those services as standards, locking out competitive offerings and enhancing the services’ utility for both users and developers via scale and scope.

Whether you call these approaches centralized vs. decentralized, closed vs. open or site vs. services, they don’t have to be mutually exclusive, and neither one always wins. MySpace initially thrived in part by offering its users the chance to embed photos and videos from other social media sources; now it’s collecting feeds from Twitter and Facebook. Whether MySpace succeeds in regaining user attention or not, its heavily site-centric strategy steers it towards a specific revenue strategy.

Sites, Services, Dollars and Cents

With a site-centric strategy, you’re in the eyeball business. That means you’re either selling to your audience or selling the audience itself (to advertisers, marketers, retailers). And either way, a social media site needs a big enough audience — even if it’s within a desirable, targetable subset — to attract advertisers or produce profitable volumes of sales. Both Twitter and Digg are redesigning their sites to appeal more to broad audiences: They recognize that there are far more content consumers than creators. At the same time, they both need to service the content creators or broadcasters. It appears that, in contrast to Digg, Twitter’s new content consumption features — embedded media, multiple panes, lists for filtering — have encouraged rather than alienated its power-user communicators. But while Twitter’s doing carriage deals with content companies and marketers, it still lacks a robust marketing and advertising platform.

If you’re primarily in services, you have three revenue strategies to chose or to mix and match:

  • Licensing: Enterprise applications have tapped social media technologies to create traditional or software-as-a-service businesses for companies like Salesforce.com, Box.net and Jive. Likewise, Amazon and others offer cloud-based hosting and storage in support of social media applications and functions. But it’s rare to see technology companies pay to license APIs and social media services.
  • Harvesting: This is social media’s big undelivered promise, and the real reason for Google to keep on trying. In theory, the information gleaned from community activities and users’ social graphs can provide powerful insights for marketers, or as a core driver for shopping or search.
  • Plundering: Will companies with social platforms turn on their ecosystem by replacing them with their own features, apps, and services? So far, Google Maps, for example, remains hugely popular mash-up material, and Facebook and Zynga are still getting along.

Related Research: Social Media in the Enterprise

Question of the week

Is there a superior strategy for making money off social media?