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Facebook apps need their own sites August 22, 2011

Posted by David Card in Uncategorized.
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Social games and app developers got a bit of a shock when Facebook snuck in some platform policy changes last week. Facebook rewrote some rules: forbidding cross-promotion to competitive social networks and tightening up the use of sponsorships that use virtual currency, the big revenue source for most games. What does this mean for apps and games developers trying to gain an audience and revenue stream from Facebook?

Even a minor change in how Facebook developers can communicate with their customers causes huge waves. When Facebook phased out mass gaming updates some time ago, customer acquisition costs went up 30 percent for some apps developers. Sending what Facebook might think of as spammy promotions can attract the wrath of Zuckerberg, with the terrifying potential consequence of being shut down.

Facebook says it’s not preventing games from promoting their apps that run on iOS or Android, at least. And Facebook’s promo ban is consistent with its advertising policy. But according to Google, even messages from individuals that mention competing social networks get spiked. Facebook claims the story-ranking algorithm on its news feed was only demoting less-relevant messages and indeed, CNET didn’t see the effect that Google was protesting. But clearly, it’s hard to use other social networks within Facebook, other than importing Tweets.

Using Facebook with “protection”

So what can an app developer do to get the most out of Facebook and insulate itself as much as possible from Facebook’s policy changes? Build its own site. Yes, in all likelihood, most of the activity around the app will come within Facebook, but an app can promote its own site and use a site to multiply revenue opportunities for several reasons:

  • Besided promoting its site with its app, developers can use Twitter – which may be more influential than Facebook fans – for site promotion outside and inside Facebook. At the same time, Facebook seems to take kindly to sites that use its Connect Like, sign-in and commenting functions outside Facebook. Those are proven audience builders, and while they cede some control to Facebook, they assist in two-way content syndication between the site and Facebook.
  • Given Facebook’s strict controls over its Credits, it is unlikely that an app site could bring in its own or alternative virtual currencies and integrate them with Facebook’s via some kind of currency exchange marketplace. However, an app site could offer richer advertising opportunities (branded sponsorships, video ads, coupons) on its site than it could inside its Facebook app. And a developer could provide in-app placement on its Facebook app the way, for example, that Electronic Arts’ new Sims app integrated Dunkin’ Donuts, which could complement and drive traffic to a site sponsorship.

Opportunities for new platforms?

When Facebook reversed an earlier policy and opened up user comments on company pages run by pharmaceutical companies, many were caught by surprise and chose to shut down their pages to avoid compliance and regulatory issues. Facebook risks getting a Twitter-like reputation for inconsistency in managing its platform and API usage policies, or at least being justly accused of a lack of transparency or clarity. Could this open up opportunities for competing social networking platforms?

Google just announced limited games support on Google+. Kevin Chou, the CEO of game developer Kabam, thinks Google will challenge Facebook as a game distributor and has already forced Facebook to create some new game-promotion tactics in response. But Google has yet to roll out APIs for Google+, and its developer support is thin. Google+ is only starting to add the mainstream users that play most social games.

If it doesn’t kill them, competition usually makes competitors better, and that goes for partnering with developers. For example, Google’s promising to take a smaller cut of virtual goods sales than Facebook does, at least for a while. Sure, developers with enough resources can try out Google+, and Myspace still has a large, if shrinking, audience. But for now, Facebook’s really the only game in town.

Question of the week

What other activities could an app site feature?
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Yahoo’s growth options dwindling July 25, 2011

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Yahoo reported another disappointing quarter, with ex-TAC revenues (i.e., revenues minus the money it shares with ad network partners) down 5 percent, to just over $1 billion. Its core display advertising business was up 5 percent, but it appears to be losing share to companies like Google and Facebook. Yahoo is still one of the biggest online properties in the U.S., with fairly sturdy content and communications assets, but its options for restoring growth are getting fewer.

The reason? Yahoo has missed the most important new digital consumer trends. It might still have a shot at adding social media; after all, after many failures, Google’s Google+ project to add social elements to its services appears to be gaining traction, at least among early adopters. But Yahoo failed to translate a solid position in casual gaming into social gaming, and it is only dabbling in social commerce, even though it coined the phrase. And its acquisition of “content farm” Associated Content doesn’t seem to be increasing profitable traffic. Meanwhile, outsourcing its search business to Microsoft hasn’t paid off yet. So what is the company to do?

Yahoo blamed its display-ad sluggishness on a sales re-org that delayed some big deals. Let’s give Yahoo the benefit of the doubt and assume it still has good relationships with big-brand advertisers like GMC, Visa and Target (all of which are serving up rich media ads or sponsorships on Yahoo as I write this). If Yahoo cashed out its assets in China, it could use that money for other acquisitions and investments to bolster online advertising and gain a little social media momentum.

Yahoo already has a decent number of online video viewers – it’s a distant No. 3 after YouTube – but it is relatively weak in how much time those users spend with its content (35 minutes per viewer compared with Hulu’s 185, according to comScore). Buying Hulu might be too expensive: Apple and Google are rumored to be interested, and Hulu may not get long-term exclusive contracts for TV shows. But Yahoo’s brand-advertising expertise is still better than Hulu’s, or Netflix’s or Amazon’s. Its IntoNow TV check-in acquisition is already focused on synching twin-screen activities with on-air ads, and Yahoo Connected TV is showing signs of life. Yahoo could make a compelling social TV pitch to advertisers like Coke and Verizon, for example, connecting an on-air ad to an on-screen or PC-based check-in or other activity.

Yahoo could try to be the social-media advertising marketplace for everybody but Facebook. Even a social network as big as Twitter needs help creating and selling ads. If Yahoo didn’t choose to acquire a real-time ad network like OneRiot or 140 Proof that places ads near social streams, it could still bulk up its social targeting and analytics via Lotame, 33Across or Media6Degrees. With some acquisitions and integration, Yahoo could ease the effort a publisher or ad buyer has to make to cobble together customized solutions.

Yahoo is reportedly working on a hybrid content/ad syndication network. Instead of just renting out ad space, a second-tier online publisher could get related personalized content and advertising from Yahoo in a single package. Yahoo has plenty of high-quality content, and it could make Associated Content create advertorial-like opportunities. Newspaper publisher Gannett attributed a solid online quarter partly to its ad network partnership with Yahoo, proving that Yahoo has some success dealing with quasi-competitors.

With some effort, Yahoo could reenergize its business around video, a social advertising network and/or syndication over the next 9 to 18 months. Its costs are under control and its ad business is growing, albeit slowly. If investors or its board don’t have the patience, I suppose it could try to sell itself to Microsoft or AOL, assuming they’re still interested. Either would be a pure consolidation play among general-purpose content portals, combining audiences, tech infrastructure and sales forces. That kind of cost-savings merger is always brutal, and brutally difficult to execute.

Question of the week

How can Yahoo start growing again?

Why music won’t be Facebook’s next billion-dollar business June 27, 2011

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Last week Om broke a big story on Facebook’s plans for music. We’ll likely see more details at Facebook’s upcoming developer conference, but as Om describes it, Facebook’s scheme sounds cool, and music is a natural fit for the dominant social network.

Om described a Facebook music dashboard that will accommodate multiple third-party digital music services from companies like Spotify, enable music streaming while still in Facebook, and incorporate sharing, recommending and syndication technologies like Connect and Like buttons. Such a platform has great promise for increasing Facebook usage, especially since music, unlike video, encourages background listening. A platform like this one also offers potential user lock-in through habitual usage or a third-party music collection locker. And all without Facebook having to do complicated licensing deals with record labels and music publishers.

But it will be tough for the company to cash in big on music for the following reasons:

  • There is a limited subscription market. Facebook probably wants a cut of revenues from digital music partners. But on-demand music services like Rhapsody and Napster have never gotten more than a million subscribers each at $10 to $15 per month prices. Spotify, which needs to sign all the labels before entering the U.S., has a lot of momentum in Europe, but it faces the same tight market. I go into detail in this post, but it will be difficult to convince music fans to change from a model where they mix radio and personally owned music to a rental model. Total, there are probably five to seven million prospective customers.
  • Facebook doesn’t charge rent. Remember the portal tenancy deals AOL used to extort from startups back in the day? Some music startups – I’m talking about you, Spotify – have paid up-front fees (funded by VC firms) to music rights holders, and they might do the same for premium positioning on Facebook. But Facebook has never directly charged its partners for placement or for using its platform, choosing instead to cultivate an ecosystem of companies with Facebook advertising nearby. Apps companies, social games, retailers and brands all get this free ride. And a music “real estate” model wouldn’t be sustainable without big digital music revenues.
  • The margins in music sales are low. Years ago I did analysis that suggested royalties and credit card fees ate up about 85 or 90 cents of a 99-cent single. Like PayPal, prepaid Facebook Credits could cut the credit card costs by a third, but not if Facebook wants its usual 30 percent cut. Albums or bundles of singles can also reduce the impact of per-transaction credit card fees, but they’re not the dominant digital music package.
  • It hasn’t prepared for the best advertising opportunity. The most natural music ad opportunity is in audio ads that play between songs, like in radio. Radio networks (CBS, Clear Channel) and Pandora are working hard on online audio ads, but it’s a small market so far. Facebook could do ad insertion and create an audio ad network, but it would have to start from scratch. But it hasn’t even done anything similar for the much larger display ad opportunity in apps or on its Likes network.

Facebook’s best business opportunities around music build off its existing advertising business. The company is getting smarter about brand advertising; for example, it recently launched an advisory council to better schmooze with brands and agencies. But it hasn’t created any fancy ad formats or sponsorships. Youth marketers like Pepsi, Coke, and Nike would jump on a rich-media sponsorship app that deeply integrated music sharing or listening, like the old My Coke Music. Facebook’s audience would be much bigger.

If any of its music partners can make money, Facebook will no doubt wean them off viral communications that run in its News Feed. Then it could steer them toward complementary advertising, just like it did with social games companies like Zynga. But that’s “if” they make any money.

Question of the week

How can Facebook make money off music?

How Groupon could turn a profit June 6, 2011

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Groupon’s prospectus for an IPO valuing it as high as $30 billion stirred controversy around the company’s explosive growth and huge losses. Silicon Valley wants Groupon to look like a technology company, but right now the company is basically in the Yellow Pages business, and until it starts successfully using data gathered from its sales and massive customer base to offer better personalization and targeting, profits will be scarce.

Groupon revenues grew from zero to $713 million in three years — and $645 million in 2011’s first quarter — but it lost $456 million last year and $147 million in the first quarter of 2011. Aside from international acquisitions, the big expenses driving those losses are staffing, especially in sales, and marketing spending. According to its S-1, Groupon has over 3,500 salespeople and over 900 editorial staff writing up its clever, quirky offer emails. It spent over $250 million on marketing in 2010 and a whopping $208 million in this year’s first quarter.

Looking at Groupon’s quarterly data, I see a flat to slightly down trend in deals sold and total revenues per subscriber. Meanwhile, marketing spending per new subscriber added is more than doubling. With competition increasing and the novelty of daily deals wearing off, customer acquisition costs will only go up.

While the cost of entry to any single daily deals market is low, the cost of scale across cities and countries is enormous. Groupon’s spending on growth hasn’t produced any economies of scale nor network effects. It has yet to show that adding additional consumers or merchants increases more than proportional value to its network, or that it can lock in either type of customer.

Groupon needs to increase its revenue per customer, both on the consumer and merchant side. Its 83 million subscribers have bought 28 million Groupons from nearly 57,000 promoted merchants. Number two daily deal player LivingSocial has 28 million subscribers. So Groupon should be better able to achieve a network effect by analyzing all of its data on consumer interests and purchases to craft better, personalized offers and deliver them to targeted audiences. That should generate more purchases per customer. Groupon’s data analysis should lead to better marketing insights on customer habits and preferences that it could deliver as a service back to its merchants.

But deal aggregator Yipit interprets declining sales per customer in a mature Groupon market as signs that Groupon’s personalized offers aren’t working well yet. Groupon needs to shift some of that customer acquisition spending towards big data analysis to make sure its network effects kick in. It’s about to face big, data-savvy competitors.

How the competition stacks up

Groupon’s business is not for the faint of heart, or, really, for new startups. Its competitors are the big guys, each of which has a major differentiator or two, balanced by a weakness:

  • Google has buying intent data from search and the analysis skills to apply it to offers. Google can also supply a variety of other marketing and advertising services to merchants along with daily deals. That’s why I thought a Google-Groupon merger made sense, because Google has only a small local sales force.
  • Amazon, which has an investment in LivingSocial and is testing reselling deals, is also wise in the ways of data. Of course, Amazon is the dominant force in e-commerce. But so far, daily deals are more about marketing than buying, and Amazon only dabbles in advertising.
  • Facebook has a distribution channel for deals but no local sales force. So it is aggregating deals from other companies and focusing on entertainment-oriented offers that appeal to groups of friends rather than deep discounts.

What’s next?

In addition to dialing up the data analysis, Groupon needs to add more services for its sales force to sell. But unlike Gilt Groupe, which is getting deeper into online retail (a business that scales less efficiently than technology-driven marketing), Groupon should add products for its merchants. Just like Yellow Pages companies such as YP.com and Superpages, Groupon should buy search and display advertising for its merchants: The company is well equipped to do the targeting analysis that would baffle a local small business.

Groupon should also help its merchants with their customer retention and loyalty programs with “brick and click” points and check-in programs. The company is testing mobile offers, but why not just buy Foursquare? Groupon could maintain the brand and probably triple Foursquare’s audience while adding its local sales force to Foursquare’s budding national advertiser business. By adding data-driven products and services for both its consumer and merchant customers, Groupon should be able to squeeze healthy profits out of its massive sales.

Question of the week

How can Groupon cut its losses?

How to Make Facebook Stores Pay Off May 31, 2011

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Last week, investors poured money into ShopIgniter ($8 million) and Milyoni ($3 million), two companies that build Facebook storefronts for merchants and retailers. I’m not the only analyst that’s skeptical about that opportunity, but with literally thousands of merchants building Facebook stores, it’s worth examining the challenges facing them and what could make them effective shopping vehicles.

Over 150 big brands have built stores as Facebook apps that can actually handle transactions rather than just function as marketing brochures or catalogs. At the same time, Facebook store–builder Payvment claims it has 60,000 stores running in its network of Facebook apps. Payvment CEO Christian Taylor told me that some of Payvment’s leading merchants are artists selling crafts, similar to Etsy’s e-commerce community, or unsigned bands selling merchandise. Indeed, most of the leading Facebook stores — ranked by Likes, as no one’s tracking sales volume yet — are band-, entertainment- or sports-related.

ShopIgniter, Milyoni, and Payvment compete with a dozen or more startups offering white-label e-commerce platforms for Facebook, including UsablenetMoonToastFluid and 8thBridge, which raised $10 million in March. Companies that help retailers integrate Facebook pages to online stores include ShopTab and SortPrice. With so many stores, the space feels like it’s getting a little crowded. However, many of these companies are equal parts platform and agency, meaning they do development and integration services, including helping strategize social promotions. That may be necessary now, but it’s a far less scalable business model than software. It’s also one that could be rolled up by existing digital agencies with social media ambitions. Publicis, for example, with Razorfish and Digitas already in its stable, snapped up Rosetta two weeks ago.

Stores Themselves Face Tough Challenges

While a Booz & Co. survey of social network users who shop online implied that 27 percent of them would be interested in buying within a social network, the flip side interpretation is that 73 percent wouldn’t. Based on interviews with online retailers, Forrester doesn’t even think social networks are very effective at promotion, let alone generating actual sales.

In my recent social commerce report, I describe other Facebook store challenges. First, online shopping is a directed, search-driven activity, where shoppers take advantage of the Internet’s price transparency and comparison capabilities via Google, Amazon and Kayak. Second, the mall approach of aggregating stores didn’t work for big portals like Yahoo and AOL, even with their powerful promotion capabilities. Finally, big retailers have been using recommendations and reviews effectively for years, without needing stores on social networks.

Tips for Making Facebook Stores Pay Off

Based on his analysis of the psychology of shopping, social psychologist Paul Marsden thinks Facebook stores will be good for impulse buying as well as more-considered purchases that depend on word of mouth, especially for first-time buys in high-risk categories. That makes sense to me for expensive vacation packages and high-end baby carriages for new mothers, where personal experience is highly valued. I’m less convinced it will outweigh structured comparison searching for financial services or consumer electronics, where exhaustive inventories, “technical” info, price comparison and expert advice should rule. Impulse purchases often require instant gratification, which would seem to point in the direction of digital goods like movies, music and games.

Tactics to make Facebook stores effective include:

  • In-stream promotion. Facebook lacks a big front-page ad format that could drive new DVD releases or Mother’s Day flower purchases. The closest equivalent is promoting products in the news feed. Sales and group offers might cut through the clutter.
  • Social commerce integration. Facebook says its own Offers will focus on group purchases rather than discounts. Integrating proven social commerce elements like daily deals, flash sales and group buying for fans with the store will be critical.
  • Ties to brick-and-mortar loyalty programs. Retailers should allow points redemption in their Facebook stores and even count Facebook store visits toward check-in deal points.

Question of the week

How can you make Facebook stores pay off?

How to Rate Network Effects in Social Media May 23, 2011

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Part of the excitement driving LinkedIn’s IPO last week comes from investors associating social media with network effects. You know, the principle that the value of a network increases dramatically with the number of its participants. That’s the engine that drove Windows and eBay, not to mention the public telephone network. Markets with network effects tend to have explosive growth and can end up with winner-take-all market share.

But not all effects are equal, and assessing the valuations and competitive positions of social media companies depends on knowing which network effects are actually at work and how those could play out.

Types of Network Effects in Social Media

Pascal-Emmanuel Gobry wrote a thoughtful piece on network effects last week for Business Insider; it includes some analysis on how companies focused on market niches eat away at generalists who benefit from network effects. And as Matthew Ingram notes, network effects can work go ways: For example, Facebook supplanted MySpace, which supplanted Friendster.

Looking closer, there are several different types of network effects that work in social media:

  • Core network effect utility: There’s a difference between economies of scale and the magic of adding connections to a network. Groupon is building a user base, a sales force and relationships with thousands of merchants, but until it uses its sales data to offer personalization, targeting and other marketing programs to merchants, it won’t achieve much beyond scale. Even then, once critical mass is achieved, additional connections don’t add as much.
  • Viral growth: LinkedIn and Facebook initially grew their networks the old-fashioned way: Users invited other users to join. Viral pass-along is a key growth driver for social commerce and games, but now services and apps can hitch a ride on existing social networks, leveling what was once a steep playing field.
  • Business model that reinforces the effects: Gobry’s wrong about Google. While there are minimal network effects for its search users, there are huge ones for its advertising network. Google’s $25 billion in extremely profitable search advertising depends on attracting advertisers to its dominant search audience and insuring a liquid marketplace via bidding and enforced relevance to create an unbeatable paid search business. Plus Google lets developers using its services and APIs tap into that revenue stream with minimal effort.
  • Participant lock-in: Technology platforms create positive business opportunities for developers. But they can also achieve customer lock-in for their originator by making those same developers dependent on APIs. End users can be locked in, too, via familiarity (e.g., the QWERTY keyboard) and data storage (e.g., contact info, photos, message repositories) that raise switching costs for members.

network_effects

Source: GigaOM Pro

As illustrated in the table above, here’s how network effects are shaping competition in selected social media markets:

  • Social graph: Though there are network effects aplenty, consumers tend to belong to multiple networks (Facebook, Twitter, Foursquare), meaning would-be data miners must target multiple data sources. And the industry is only just beginning to harness that collection of big data into reliable revenue streams.
  • Likes and log-in networks: Facebook was smart to hang Likes and Sign-ins off its Connect network, as each feature complements the others and assists in distribution; now LinkedIn and Google are trying to do the same. Bolting an ad network on top of those networks could provide missing revenue reinforcement.
  • Social commerce: As noted, most social commerce is more scalar than social. Without the additional services for consumers and merchants previously mentioned, single-market entry barriers and switching costs will remain low.
  • Unified communications: A cross-channel communications hub would sponsor habitual consumer usage. But so far, interoperability requirements have restrained the potential to lock in customers.
  • Social games: Many social games don’t depend on competition between users to be fun. Facebook’s distribution channel and cross-vendor virtual currency enforce interoperability — that’s good for growth but bad for Zynga’s or Playdom’s user lock-in.

Based on that framework, Facebook is well-positioned to build on its influence and add revenue streams. Its platform is a legitimate beneficiary of network effects, even in the face of competition from tech worthies (Google) and startups. LinkedIn has a solid business, but its platform aspirations remain just that: aspirations. Besides viral growth and some network utility, it’s not clear that other social networks (Twitter, Foursquare, Instagram) have network effects behind them.

Question of the week

Where are the real network effects in social media?

Integrating Social Media and Traditional Entertainment May 9, 2011

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Remember when social media was going to re-invent the entertainment business? Back in 2007 and 2008, Viacom’s MTV Networks tried to tie its shows together into the since-abandoned Flux social network, and even launched a short-lived TV channel driven by user-generated content. About the same time, NBC Universal’s Bravo network bought snarky fan site Television Without Pity, but has done nothing with it since. But that was then, and recent news suggests the social entertainment space is far from dead.

Last week, two big old media companies made acquisitions that signal new life: Warner Home Entertainment, home of the movie studio’s DVD efforts, acquired Flixster/Rotten Tomatoes, and News Corp.’s IGN bought Hearst’s UGO. Warner’s move hints at Netflix-envy: It said it wanted to use Flixster’s Facebook-driven user reviews and Rotten Tomatoes’ aggregation of professional ones to “grow digital content ownership.” Meanwhile, by doubling down on video game info sites, News Corp. is constructing a traditional aficionado-magazine model, but with lots of social media elements (user blogs, friend-following, points for participation). Most think News Corp. will spin off the combination.

Given these moves, has the industry finally figured out how to add social media to traditional entertainment for fun and profit?

Extending and Enhancing Entertainment Formats

Excitement about tablets and apps, lots of startup activity and Facebook’s role in distribution and audience acquisition are combining to create new opportunities to extend and enhance traditional entertainment forms. Expanding on Michael Wolf’s analysis of how this is working in social TV, here’s what TV and other entertainment media can do to capitalize on social media:

  • Discovery and user-based curation: GetGlue is the early leader in cross-media entertainment check-ins, smartly using Facebook and Twitter (a check-in auto-generates a topic hashtag) to amplify the promotion.
  • Extension: Forums and discussion boards give a fan a dose of his favorite TV show more than once a week, and book clubs are migrating online.
  • Shared experience: VH1 showed a slick app last week that, in addition to adding user commentary to live viewing, acts like a “DVR for tweets.”
  • Gamification: Entertainment check-ins deliver the ubiquitous participation stickers and leaderboards; they should offer virtual currency for loyalty.
  • Commerce: Apple’s Ping social network doesn’t seem to be boosting iTunes sales yet, and Facebook’s only just begun to dabble in video rentals.
  • Analytics and fan feedback: FOX Broadcasting and others use Think Passenger’s private communities for audience analysis. Who will figure out if simultaneous Twitter traffic means anything?

What’s Still Missing?

While the check-ins have stickers and can act as a launchpad for Twitter conversations, by and large, companies try to deliver the six objectives above via separate apps or experiences. Would they be more effective if they were integrated? I always thought digital music could blend discovery, retail and consumption, but Rhapsody combined them better than iTunes long before Spotify, and Rhapsody failed to catch on. Likewise, while a friend’s reviews and curation could emerge as valid components to an entertainment recommendation engine, by themselves they don’t appear to be as effective as the collaborative filtering approach of Netflix or Amazon, or Pandora’s professionally and algorithmically curated recommendations.

Perhaps the experiences should remain seaparte, but the business engine behind the apps and sites can benefit from roll-ups like News Corp.’s game-site play, or from formal partnerships and licensing. Some are emerging now: Time Warner already owns a piece of GetGlue and is responsible for many of the paid promotions that run on the service. Yahoo scooped up video check-in service IntoNow and is using audio recognition to track TV advertising. A handful of publishers are building a new digital book club and looking to tap AOL and Starbucks for ad sales and distribution.

It is inherently easier and more efficient in terms of audience reach, segmentation and analysis to offer advertising displayed on a network rather than an individual title or show. That means big media companies are best positioned to package and deliver social entertainment experiences along with advertising and sponsorship opportunities.

Question of the week

How can traditional entertainment companies implement social media strategies?

Handicapping Facebook’s Next Billion-Dollar Business(es) May 2, 2011

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Amidst reports that it was having trouble unloading $1 billion worth of shares at a very rich valuation, Facebook last week tweaked an existing advertising service and started testing its first home-grown social commerce product: Facebook Deals. Will that be Facebook’s next billion-dollar business? Possibly. But it already faces stiff competition from Groupon and LivingSocial, not to mention a new Google entrant. More importantly, other growth- and revenue-generating opportunities exist that could be worth exploration on the part of Facebook, too.

Let’s examine each of these potential new revenue streams.

Big New Businesses for Facebook

Facebook dominates social media and the advertising spending that surrounds it. The company makes its money from low-priced display advertising (estimated at nearly $2 billion in 2010) and the 30 percent commission it takes from social gaming companies using Facebook Credits for virtual goods (forecast to be $250 million in 2011). Its three best new business opportunities are:

  • Rich-media brand advertising: To get at ad budgets that need more than the low-priced display ads driving social networks, Facebook needs to offer brand advertisers big, rich-media ad units like those of the New York Times and AOL. If it’s worried about user resistance, Facebook could show the ad only once a day, leave it over on the nearly empty right-hand sidebar or even reserve it for Friday movie openings and holiday promotions. Other than Yahoo, Microsoft and AOL, no other site has inventory with the audience reach for this kind of advertising, which commands $30-plus cost-per-thousand pricing and is usually sold out. This one should be a slam dunk.
  • Deals and social commerce: Facebook’s toe is barely in the social commerce water — it’s testing Deals in only five cities, sourcing some of the offers from partners and not charging merchants anything yet. Facebook is differentiating its deals by not demanding they be deeply discounted, and focusing on more social, shared-experience offers like restaurant deals or concert tickets. Local deals require an expensive local sales force that Facebook doesn’t have. While the company can deal directly with national retailers and merchants that target locally — a good opportunity otherwise — most of them don’t make the kind of “shared experience” products mentioned above.
  • Connect-based ad network: Unlike most ad networks, which make do with remnant ad inventory scraped from the bottom of online publishers’ barrels, Facebook has access to ready-made, desirable space through Connect services such as its Like button, sign-on and comments. Even without getting into behavioral targeting, Facebook could show ads targeted by context just like Google’s AdSense network. For example, it could serve up a hotel ad in an online newspaper’s travel section. If publishers balk, and weren’t cowed by their need for the traffic that Likes generate, Facebook could always share a piece of the revenue.

Potential Partnerships

I’ve talked about Facebook’s need for brand advertising and its potential to create an ad network before, and this piece by Jason Calacanis and his Launch team also likes those two opportunities and tries to put a dollar figure on their near-term revenue. He also suggests Facebook do in-stream advertising, which I suspect Facebook would deem too intrusive and competitive with Like messages and other promotions. Other potential revenue streams? Facebook has never charged for company pages (it sells them ads), I’m skeptical that it could do search effectively, and it has been very selective about data licensing.

But it needs partners to tap into the three new businesses identified above. Companies like:

  • Microsoft, already working with Facebook on search, who could build the ad network. These days, however, Microsoft seems focused almost exclusively on search after outsourcing some ad network functions.
  • Gilt Groupe, whose Gilt City deals unit is part of Facebook’s trials. Unlike other deal companies, Gilt also is a retailer, which could open other social-commerce doors.
  • Other online ad technology companies that could help Facebook’s advertising platform. Those that do data mining (e.g., Experian, Audience Science, BlueKai) and social targeting (e.g., Lotame, 33Across, Media6Degrees, Rapleaf) may need to do direct deals with Facebook to accommodate potential privacy legislation.

Question of the week

What will be Facebook’s next billion-dollar business?

What Local Social Commerce Needs to Really Take Off April 25, 2011

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Last week, a handful of local e-commerce and interactive marketing announcements from Groupon, eBay and others hinted at future accelerators for the already-hot social commerce space. Up to now, the biggest social commerce category has been more about marketing than selling: Local merchants use their advertising and Yellow Pages budgets on daily deals from Groupon and LivingSocial to attract new customers. But for social commerce to expand, suppliers must get local spending from big national brands, improve conversion with personalized offers and expand beyond customer acquisition into retention. Then they can get around to the actual commerce part.

Marketing will continue to drive social commerce for the foreseeable future. E-commerce is like catalog shopping and won’t likely account for anywhere near 15 percent of retail for some time. But there’s plenty of excitement over bringing social media and local retail together, as illustrated by the following announcements:

  • Groupon’s acquisition of Pelago: Pelago made Whrrl, a location-based service, and Groupon will absorb its team’s expertise in mobile apps for real-time local deals. Whrrl will be shut down, but its CEO, Jeff Holden, will head up Groupon product development.
  • LocalResponse’s launch: Formerly known as Buzzd, LocalResponse makes management and targeting tools that monitor check-ins from location-based services posted to Twitter, among other social media feeds, and enable merchants to send targeted, localized offers in real-time.
  • EBay’s acquisition of WHERE: WHERE’s mobile ad network will live under PayPal, which will integrate payments into geo-targeted offers initially, and may build out other marketing services over time.

Tapping National Budgets

Conceivably, eBay could sell marketers data analysis based on connecting WHERE purchase intent with PayPal purchase data. But eBay is turning into a commerce infrastructure company and PayPal has historically relied on third parties to create marketing services from its data.

That’s fine, because like the LocalResponse services, such sophisticated analysis is beyond the capability of local merchants who don’t even have a marketing department, let alone a bunch of quants capable of doing real-time targeting analysis. Most local small businesses don’t even advertise online yet. The best opportunity for this kind of services is to work with agencies and go after national merchants and retailers who target locally.

Personalizing Offers

Personalized recommendation techniques are gaining momentum. Location-based check-in service Foursquare just started making recommendations based on user’s and friends’ activities. Loopt is adding a Q&A feature to its location service that could get recommendations from friends in real-time.

Om recently wrote that “interest graphs” could supplant “social graphs” in commerce. In other words, purchase decisions depend more on what you like than whom you know. As Groupon gathers more data about its users’ deal purchases and combines that with collaborative filtering, it could blend that analysis with Whrrl-like interest groups to make highly personalized offers.

Expanding into Retention and Loyalty

Today, most merchants use Groupon or LivingSocial deals to attract new customers. Merchants would rather not offer heavy discounts to existing customers who have already proven a willingness to spend, so social commerce companies will have to develop loyalty programs that accommodate frequent buying points, access to exclusive products and cross-category points.

That means bringing together multiple retailers and merchants. Foursquare did a program with PepsiCo and Safeway’s Vons store loyalty program. Swipely has de-emphasized its credit-card based purchase-sharing social network in favor of a points program that ties multiple loyalty programs.

Watch for a secret new startup that’s launching this week to unite all three of these angles. It will feature personalized offers based on consumer preferences that tie into loyalty programs from national players via their affiliate networks.

Question of the week

What will it take to grow local social commerce?

Why Color Is More Than “Yet Another Photo-Sharing App” March 28, 2011

Posted by David Card in Uncategorized.
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Much of last week’s buzz surrounding the launch of Color was justifiably skeptical. The startup, after all, raised $41 million to enter a crowded space without a business model or customers, and many wonder whether the world really needs another mobile photo-sharing app. But two components of Color’s vision — implicit networks (connections created without user effort) and place/time tagging — extend far beyond photo-sharing, and make the company worth watching as a potential indicator of social media and data-mining trends.

The Color app for iPhones and Android lets users share photos in real time with other nearby photo-snappers. The sharing network is determined by proximity rather than by a user explicitly specifying who his friends are. Users are anonymous and all content is public.

Early reviews are pretty negative. Om writes that Color is attracting more attention from pundits than users because the app may not deliver obvious fun or utility. Matthew Ingram wonders if the big funding bet is on Color’s all-star team — which includes Bill Nguyen (Lala), Peter Pham (BillShrink) and former LinkedIn chief scientist DJ Patil — rather than its product or ideas.

But some of those ideas matter.

Implicit Networks

Angel investor and Hunch co-founder Chris Dixon says he’s intrigued by Color because it is pushing the envelope on implicit social graphs. Color’s implicit networks aren’t specified by users, but rather are based on underlying contexts like geography or shared interests. I’ve written before about context-based social networks, and how Facebook Groups is struggling to deliver them. Peter Yared, a VP at WebTrends, writes that Facebook is also experimenting with implicit neworks of friends.

If Color builds on its implict network concept it could deliver instant groups of friends for different occasions or interests, and expose recommendations based on common tastes. Marketers could target advertising or offers within a Color network to real-time groups around an event or location, or aimed by shared interests.

Place and Time Data

Search pundit John Battelle goes a little overboard on how Color could push augmented reality. But he’s right about the importance of geo-tagged data. In a presentation last week at GigaOM’s Structure Big Data 2011 conference, IBM Distinguished Engineer Jeff Jonas showed how adding place and time to data objects can power big data analysis, predicting a person’s likelihood of being at a give location with astounding accuracy, and assisting in identity management. Again, if Color is a leader in gathering this data, it could build out a powerful — yet still privacy-protected — targeted advertising network.

Business Model to Come?

Color chief Nguyen says the company is really about data-mining rather than photo-sharing. He says combining place and time data with implicit networks can help services or marketers parse the difference between entertainment and work activities. That information will affect the elasticity of Color’s networks — how broadly it expands or contracts its sharing range — and power its algorithms for ranking photos and, presumably, other content or advertising elements.

Nguyen also talks about a future news API that could spawn a curated news app for journalists. He describes a pretty dumb restaurant service that would help waitstaff know customers’ first names and interests. Before he sold Lala to Apple, reportedly for $85 million, Nguyen took the service through at least three different business models. Lala started as a CD trading service, morphed to a digital music locker, and then offered Web songs with perpetual streaming rights for ten cents each. With its talent and cash hoard, there’s no doubt Color will evolve as well.

Question of the week

Is Color more than just another photo-sharing app?