About Frédéric Filloux

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Facebook in Frantic Mode

Facebook’s acquisition of Instagram — for one billion dollars — tells a lot about Mark Zuckerberg’s state of mind. Which is at least as interesting as other business considerations and was best captured by cartoonist Ingram Pinn in last week’s Financial Times comic. To illustrate John Gapper’s excellent Facebook is scared of the Internet column, Ingram Pinn draws an agitated Mark Zuckerberg frantically walking through a hatchery, collecting just hatched startup-chicks as fast as he can, while, in the background, AOL and Yahoo collect older chickens in larger carts.

In last week’s Monday Note, I hinted that I’d never put my savings in Facebook’s stock. (For that matter, I see writing on business and owning stocks as incompatible). When I read the news of the Instagram acquisition, I wondered: Imagine Facebook already trading on the Nasdaq; how would the market react? Would analysts and pundits send the stock upward, praising Zuckerberg’s swiftness at securing FB’s position? Or, to the contrary, would someone loudly complain: What? Did Facebook just burn the entire 2011 free cash-flow to buy an app with no revenue in sight, and manned by a dozen of geeks? Is this a red-flag symptom of Zuckerberg’s mental state?

Four things come to mind.

1/ Because he retains 57% of Facebook voting rights, Zuckerberg rules its board and can make any decision in a blink of an eye, no debate allowed. This can be a great asset in Silicon Valley’s high speed tempo, or it can stir up shoot-from-the-hip impulsiveness.

2/ Facebook’s founder attitude reminds one of Bill Gates during Microsoft’s heydays: no crack allowed in the wall of its dominance. The smallest threat must be eliminated at any cost. Where Microsoft used legally dubious tactics, Facebook unsheathes its wallet and fires a billion dollars round. In the startup world, this will have two side effects: For one, Facebook is likely to become the exit of choice Google once was. Two, the size of the Instagram transaction (some of it in stock) is likely to act as a beacon for any startup harvesting users by the millions. It sets an inflationary precedent.

3/ By opting for such a deal, Facebook’s management reveals its own feelings of insecurity. It might sounds crazy for a company approaching the billion users mark and providing an array of services that became a substitute to the internet’s basic functions. But, with this transaction, the ultra-dominant social network acted like an elephant scared of a mice. Instagram has 35 million users? Fine. But how many are using the service more than occasionally? Half of it? How many are likely to switch overnight to a better app? Most likely many will. Especially since Instagram is not a community per se, but a gateway to larger ones such as Twitter and Facebook.

4/ From a feature-set perspective, Facebook might find itself in a quandary. Kevin Systrom and Mike Krieger designed the ultimate stripped-down application: a bunch of filters and a few basic sharing features. That’s it. It is both Instagram strength and main weakness. Such simplicity is easy to replicate. At the same time, if Facebook-Instagram wants to raise the feature-set bar, it might lose some of its users base and find itself competing with much better photo-sharing applications already populating Apple or Android app stores.
To put it differently, Facebook photo-sharing model had been leaking for a while. Zuckerberg just put  a serious plug on it, but other holes will appear. A couple of questions in passing: Will Facebook continue to accept and encourage loads of third parties photo-sharing apps that connect to its network? Some are excellent — starting with Apple’s iPhoto, especially the iDevice version that will always benefit of an optimized hardware/software integration. How does Facebook plan to deal with that? And if it chooses to grant some level of exclusivity to the Instagram app, how will the audience react (especially when you read comments saying “We liked IG because it wasn’t FB”)?

Lastly, the bubble question. Again, three things.

First, let’s be fair. If indeed there is a new internet bubble, Facebook isn’t the only player to fuel it; investors who lined up at Instagram’s doorstep did it too. A few days before the deal, IG raised $50 million at a half billion valuation; Zuckerberg snatched the company by simply doubling the bet.

Two, comparing the FB/IG deal to Google’s in 2006 acquisition of YouTube for $1.65 billion doesn’t fly either. From the outset, everyone knew internet video was destined to be huge; it was a medium of choice to carry advertising. Therefore, the takeover by Google’s fantastic ad-machine was likely to yield great results. YouTube became a natural extension of Google services — just look at how competing services such as DailyMotion in France, or Vimeo are doing without the ad rocket-engine.

Three, the metrics used in an attempt to relativize the deal are dubious at best. Instagram had no monetization strategy–other that a lottery-like exit. This says applying any kind of cost per user ($33 for the theory in vogue) is bogus. Being unable to project any sustainable revenue mechanism makes such a valuation process completely pointless. In Instagram’s case, the only way to come up with a price tag was guessing the amount of money a small group of suitors–Facebook, Google and Twitter–might be willing to cough up for Instagram’s eyeballs.

If this deal shows one thing, it is the frenzied, cutthroat competition these three players are now locked in. Mark Zuckerberg is not through with collecting hatching eggs. He won’t be alone either.

frederic.filloux@mondaynote.com

Facebook’s Bet on Privacy

Would you buy Facebook shares? A few weeks ahead of its mammoth IPO, millions of people probably dream of getting a slice of it. Spreadsheet jockeys have done their job and demonstrated with unanimous conclusiveness that, indeed, Facebook deserves its expected $100 billion valuation — or that gravity’s law will inevitably apply.

Facebook numbers are both fascinating and frightening. The social network will pass the 1 billion members mark this year and the capillarity of its services is creating an alternate internet before our very eyes. It has already become a credible substitute for email; it soon will be the dominant news channel for millions. At the same time, it is hugely profitable: Facebook’s margin reaches 62% and its $3.5 billion cash pile will allow occasional mistakes or, if you prefer, bold experiments.

Then, what could go wrong for the ultra-dominant digital rhizome? Two things: its contempt of privacy and Wall Street frothy expectations.

Two years ago, I interviewed David Kirkpatrick for Le Monde Magazine. He’s the author of the Facebook Effect, a book that remains a must-read if you want to understand the company and its founder. In our conversation, he described a Mark Zuckerberg perfectly aware of the sensitivity of privacy issues, but at the same time deeply convinced social norms would evolve towards nearly-total transparency. According to Kirkpatrick, Zuckerberg felt that, as long as users where given the proper tools to control it, privacy should not be an issue for his empire’s future. Put another way, Zuckerberg deeply believes in Facebook’s Grand Bargain: its core followers will accept full openness as a default setting and trade personal data in exchange of its features-rich service. He actually lived by this belief. And monetized it brilliantly.

Facebook’s most valuable currency is not the “Credits” used in its games, but its huge trove of consumer data.

The efficiency of this system comes form the “platform effect”, from Facebook’s federation of millions of sites that embed the “Like” button or allow their own users to register with their Facebook ID. Trying to protect one’s privacy while using Facebook is a hard Protean task as the company constantly changes its rules. Applications hosted by Facebook only make things worse as user personal data are allowed to leak to third party developers in a sneaky and overly abundant ways.

Last week, as a part of its remarkable What They Know series, the Wall Street Journal published a compelling story titled Selling You on Facebook:

A Wall Street Journal examination of 100 of the most popular Facebook apps found that some seek the email addresses, current location and sexual preference, among other details, not only of app users but also of their Facebook friends. One Yahoo service powered by Facebook requests access to a person’s religious and political leanings as a condition for using it. The popular Skype service for making online phone calls seeks the Facebook photos and birthdays of its users and their friends.

You might ask: What’s the connection between these privacy concerns and the upcoming IPO? Well, Facebook derives most of its revenue from advertising. And said advertising revenue stems from its ability to profile its users like no one else in the business. Still, in spite of its ability to serve an ad targeted to a South Texas single mother who likes Bob Dylan and Taco Bell, Facebook yields little revenue per capita. Where Yahoo makes $7 per user and per year and Google $30, Facebook’s ARPU actually amounts to a mere $4.39.

A further problem: Facebook does so after saturating its most solvent markets.

Now, let’s turn to Wall Street expectations. A $100 billion valuation would mean Facebook being traded at 27 times its 2011 revenue. For comparison, Google, Apple and Microsoft, all highly profitable, are valued between 4 or 5 times their respective revenue for their last fiscal year.

Hence the math: In a recent story published in Fast Company, Farhad Manjoo quotes a Dartmouth finance professor who said “[to justify Wall Street expectations] Facebook will need to see $70 billion in annual revenue by 2021, up from just $3.7 billion in 2011″, which translates into a 25% to 30% growth over the next decade… in the context of an advertising market growing at 4% per year, as Manjoo points out.

To meet these goals–even by going way beyond the one billion members mark–Facebook will have to extract more bucks from each one of its users. This means making an even better use of the data users traded for services.

This brings us to the biggest risk for the Facebook economics. If Facebook doesn’t play the privacy game well, two things are likely to happen. One, members will pressure the social network to limit its use (meaning the sale) of user data. Two, legislators will enter the fray. We already see early signs of political challenges with movements such as the Do Not Track initiative, one that is laying the ground work for legislations all over the world. This concern was reflected in the Risk Factor section of Facebook’s S-1 filing :

Our business is subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection, and other matters. Many of these laws and regulations are subject to change and uncertain interpretation, and could result in claims, changes to our business practices, increased cost of operations, or declines in user growth or engagement, or otherwise harm our business.

Facebook’s future relies in great part on its ability to wisely adjust the privacy dials. Even at the expense of its shareholders’ dreams.

frederic.filloux@mondaynote.com

Culture Shift: User To Client

Fifteen years ago, Louis Gallois, the SNCF (French Railways) chairman decided to change the company’s lexicon: passengers were to be referred to as “customers” instead of the old bureaucratese “users” (in French: “clients” vs. “usagers”). The intent was to convey notions of choice and consideration for the rider. This being France, the edict led to convoluted debates. The upper management old guard held the company was on its way to betraying its traditional mission of service public. Unions—notoriously opposed to any forms of competition threatening their fiefdoms—saw the new word as a portent of evil mercantile designs. In Louis Gallois’s mind, a clientele should not be seen as captive herd but ought be shown respect and empathy. It took more than a decade to see the French railway system become more customer-oriented. The French Postal service underwent a similar transformation—largely under pressure from internet-based services. Today, when compared to most other countries, these companies have become good performers.

Back to my media beat, you see where I’m going: The transforming media industry is still stuck into a user’s culture. Media companies still believe this: One way or another, they own their readers (or viewers and listeners). Of course, this belief is not evenly shared among different corporate layers. In the C-suite, the comfy old view is long gone as numbers confirm, quarter after quarter, the industry’s slump. Most executives share a sense of vital urgency. But the deeper you dive into those companies, the more you see complacency still lurking.

As long as the old media culture still dominates and resists change, better business models won’t be able to gain traction.

It all boils down to a simple market place evolution.

In the pre-internet era, the media sector lived by its own rules: a captive audience left with no other choice but a bunch of well-entrenched media outlets. At the time, these companies didn’t feel the need to probe their audiences, let alone to market to them. People were listening, viewing, and reading, roughly at the same rate, year in and year out. Editors and publishers felt immune to any form of challenge. Newsrooms were a great place to be, filled with witty, smart people, most of them notoriously unproductive, but great to hang out with, caring very little care for the user’s state of mind.

Then, the digital wave unfurled. With it came a new business culture, completely antinomic to the legacy media’s thinking. At first, the tech/startup way of doing things was dismissed as a freakishly geeky and completely inapplicable to media organizations.

Then the two spheres—the new entrepreneurial culture and the old one— got closer and closer and began to intersect. The overlapping zone was, precisely, digital information. It began in chaotic but participatory (massively) and profuse ways. This led to the rise of “commodity news”—whose value evaporated in the process—at the expense of the original (and traditional) news sources that were slow to understand the scope of the upheaval. This put a brutal end to the widespread old complacency.

As the user morphs into a customer, s/he becomes more demanding of its media provider. There is a reason for that shift: a magazine subscriber is also an Amazon patron and s/he now expects the same level of service. Instead, for most magazines, it still takes 3-6 weeks for a monthly print subscription to start.

Today, the media industry must change its reference system. Every single day, traditional-media-in-transformation collides with companies (pure players, aggregators, portals, search engines, mobile applications, retailers, distributors) built on very different, opposed sometimes, values and principles. As a result, the competition on products (and audiences) leads to a competition on the processes of building and marketing these products.

This can be summed up to three notions.

The Customer (again).  He (she) is no longer a well-defined monolithic individual. Consider the structure of a digital audience: news consumption is scattered all over the day with different size and shapes. This should impact the way news is packaged. Most newsrooms are currently unable to adapt to the time-sensitive diversity that has become expected. Too many newsrooms don’t understand their output should be reformatted, re-edited, for different uses, at different times of the day, on different devices.

Competition / Speed => Leading the pack. The media business is now intensively competitive. Newsrooms should be obsessed with beating the competition in every possible way, exactly in the same fashion a tech company is constantly rolling-out new features for an application or a service. Unfortunately for the slowest and the weakest, the media industry is migrating to a “winner-takes-all” system, with very little oxygen left to the lower tier.

Responsibility / Empowerment / Focus => Better Execution. This implies two moves: First, a complete overhaul of the HR culture. The old media culture is plagued by poor accountability and dilution of responsibility. It’s time to shift to one project (or one segment of the business) = one Direct Responsible Individual, meaning true delegation, a clear mission, and the sanction (positive/negative) that goes with it. Two, it involves a change in the compensation structure, until then dominated by guild-management negotiated agreements that abhor genuine meritocracy. Again, the technosphere teaches us the benefits of the opposite: a human management system able to attract, retain and promote talented people. The combination of responsibility and reward (not only financial) is a non-negotiable requirement for better execution.

Before going back to spreadsheets and corporate dashboards, all the boxes above must be checked. Vaste programme.

frederic.filloux@mondaynote.com

The “Sharing” Mirage

This week’s most stunning statistic: In February, Facebook drove more traffic to the Guardian web site than Google did. This fact was proffered (I couldn’t bring myself to write shared) at the Changing Medias Summit Conference by Tanya Corduroy, Guardian’s director for digital development (full text of her speech):

Eighteen months ago, search represented 40% of the Guardian’s traffic and social represented just 2%. Six months ago – before the launch of our Facebook app – these figures had barely moved.

A recent Pew report echoed these figures, revealing that just 9% of digital news consumers follow news recommendations from Facebook or from Twitter. That compares with 32% who get news from search.

But last month, we felt a seismic shift in our referral traffic. For the first time in our history, Facebook drove more traffic to guardian.co.uk than Google for a number of days, accounting for more than 30% of our referrer traffic. This is a dramatic result from a standing start five months ago.

She made her point with a graph showing the crossing of the two traffic lines, even though the Facebook referrals now appear to be receding:

This is obviously a great achievement for the team who created the FB app. Overall, The Guardian’s relentless pursuit of digital innovation is paying off. Its last month traffic stats are staggering: more than 4 million unique browsers (+64% vs. Feb 2011) and almost 70 million unique browser monthly (+76% vs. Feb 2011). As for its mobile site, it is growing at a year-to-year rate of… 182%, with 640,000 unique browsers a month.

The Guardian Facebook App played a critical role in this rise in traffic. Over the last five months, 8 million people downloaded it and 40,000 are signing up every day, again according to Tanya Cordrey.

While it is the most documented, the Guardian’s case is far from being an isolated one. Scores of online news organizations are now betting on Facebook to boost their traffic. So far no one regrets the move. Not even the reader who can now enjoy for free what s/he is otherwise expected to pay. Take the Wall Street Journal: Against my objections, by forcing me to buy the mobile version, it abusively charged me €307 to renew my yearly subscription (which translate into a 100% price hike!) — this while most of it content is available on Facebook for free. And here in France, I know of one of the most viewed newspaper site about to go on Facebook with the following rationale: ‘We know we are not going to make a dime from this move, but we have to be there. We know our FB app will be a hit, and we’ll decide later what to do next…’ Once hooked on that eyeballs fix —even non-paying ones— it is safe to assume this company’s marketing people will be reluctant to lose their valuable new audience.

There are plenty of good reasons for large news organizations to be on Facebook. But the current frenzy also raises questions. Here is a sample:

#1: Demographics. As the Guardian example shows in the graph below, FB’s demographics are attractive: most of its social users are among the 18-24 group which, for this newspaper, is otherwise harder to reach:

(I found this graph on Currybetdotnet, a blog maintained by Martin Belam, the Lead User Experience and Information Architect at the Guardian. Martin wrote this great piece about the Guardian Facebook app).

#2: Control. Facebook apps are usually Canvas Apps. The pages are hosted and served by the publishers within a Facebook iFrame. This is the equivalent of an embedded mini site on the brand’s Facebook page. One of the key advantage is you retain control of all the relevant analytics (unlike working with Apple or Amazon). It can be quite helpful to see what kind of content the 18-24 group is interested in.

#3: Audience quality. In theory, being able to tap into Facebook’s 845 million users is attractive. But reaching readers in a remote African country, thanks to Facebook’s growing penetration in the region, makes very little economic sense from an advertising standpoint. More broadly, the web already suffers from of a loss of audience quality as publishers are pursuing eyeballs or unique visitors just for the sake numbers. A Facebook page (or app) doesn’t carry any stickiness: 8 out of 10 readers look at a single page and go elsewhere —and every marketer knows it. Being big on Facebook won’t translate into big money.

#4: Dependence. To me, that’s the main issue. Media should be very careful with their level of reliance on other content distributors such as Facebook, Google, Apple or Amazon. This can be summed up to a simple question: can we trust them?

The short answer is no.

It has nothing to do with any evil intent from these people. I’m just stating a mere fact: these companies act primarily in their own best interest. Everything they do is aimed at supporting their core business: building a global social rhizome for Facebook; extending its grasp on search and, as a result, on the related ad dollars for Google; selling more iPads, iPhones, and Macs for Apple; and up-selling high margin products and retaining the customer for Amazon. Everything else is secondary. If, at any given moment, distributing media content through deals attractive to publishers serves these goals, fine. But conditions might change and pragmatism always wins the day.

Facebook might decide to charge for hosting a media site, or require the use of its Credits currency for the transaction it carries. Amazon might alter its revenue sharing scheme without warning. Apple can decide overnight that some application features are no longer accepted in the AppStore, etc. Shift happens, you know.

Don’t expect any support from the legal side: all contracts are under US jurisdiction. You can challenge the big ones only if you seek seven figures damages. But let’s face it: for a media group form Sweden, or for a regional paper from the Midwest, it is completely unrealistic to consider suing a Silicon Valley player.

Of course, that doesn’t mean a media company shouldn’t work with large American tech companies. All have products or distribution vectors that result in fantastic boosters for the media business. But, updating the old saying: When you dine with one of these high-tech giants, bring a long ladle.
Naïveté is not an option.

frederic.filloux@mondaynote.com

Media Culture Shifts: theory vs. reality

This weekend, my ritual readings were dominated by corporate media culture issues: How to transition from the legacy media culture to the more agile and chaotic digital world? I’ve been reading up on this topic — and sometimes conferencing about it — for years. But, to my surprise, over time, I’ve been feeling lectured on those very issues. Sometimes irritatingly so. The last sermon was delivered early March by the Pew Research Center’s Project for Excellence in Journalism. The report –which I nevertheless recommend reading– reverberated over many other great online publications such as the Nieman Journalism Lab in a piece written by two journalism professors, Jonathan Groves and  Carrie Brown-Smith; their column is softly titled A call for leadership: Newspaper execs deserve the blame for not changing the culture.

For once, I’ll align myself with the blamed “Newspaper execs” and provide a perspective from this vantage point.

Since December 15, I’m in charge of digital operations for Groupe Les Echos which publishes the only remaining business newspaper in France. Together with a seasoned CEO and a team of managers in charge of business units and critical functions, we’re doing our best to put the company back on track.  All of us are here because we firmly believe in the strength of the company’s core products: a competent and highly specialized newsroom and a line-up of solid business-related products and services. The main idea is to revitalize everything, restore profitability, increase and secure market share and create an enviable working environment capable of attracting the talent required by our many fields of activity. That’s the plan.

I addition to this recent line in my resumé, thanks to numerous exchanges with foreign colleagues, my affiliation with several trade groups such as INMA or the Gobal Editors Networks has nurtured my reflection. We are all converging to a similar train of thoughts: morphing a legacy media business into a modern, digital-dominated company is a f*** (frighteningly) complicated endeavor.

Now I’m coming back to the lecturers of all stripes. When you look at their CVs, not a single one can claim any managing experience. They all have a remote view of what a P&L or a KPI is; they never had to fire someone or to agonize over picking up x vs. y to fill an open position; they never had to make a recommendation for investing several million dollars or euros in a project with an uncertain future. They probably never experienced failure and the ensuing humiliation and anguish. This doesn’t mean they’re not interesting (and sometime entertaining) to read, it simply says they propagate a theoretical and narrow view. In a way, some of their ‘‘obvious’’ prescriptions remind me of people who claim losing weight is easy: All you have to do is exercise more and eat less. Sure. But don’t tell me what, tell me how.

Let’s address a few items mentioned in the Pew Report.

First, the authors deplore the propensity of newspapers management to remain more print centric than prone to speeding up digital transition. There is a good reason for this. According to the survey:

The papers providing detailed data took in roughly $11 in print revenue for every $1 they attracted online in the last full year for which they had data. Thus, even though the total digital advertising revenues from those newspapers rose on average 19% in the last full year, that did not come anywhere close to making up for the dollars lost as a result of 9% declines in print advertising. The displacement ratio in the sample was a loss of dollars by about 7-to-1.

Then, of course, everyone is focused on increasing the $1 digital revenue, but it’s difficult to blame managers for not trying to slow down the decline of print activity that stills account for…92% of the revenue of the 38 newspapers surveyed by Pew.

Fact is, very few industries are suffering as the newspaper business does. According to the latest statistics released by the Newspaper Association of America the evolution in print ad revenue went like this:

2005 +1.5%
2006 -1.7%
2007 -9,4%
2008 -17.7%
2009 -28.6%
2010 -8.2%
2011 -9.2%

Since 2005, print advertising revenue has dropped by 56%. And the $20.6 billion it brought last year has to be compared with the $3.2 billion scored by digital operations. Overall, despite the growth of their digital business, American newspapers have lost 52% in revenue from advertising since 2005.

Such massive revenue depletion is supposed to call for serious restructuring — a move that, at the same time, has become increasingly less affordable. A couple of years ago, management at a French national newspaper briefly considered switching to 100% online, no more print. It made the following back-of-the-envelope calculation: of a €20 million investment for the switch, €15 million would have been swallowed by restructuring costs such as discontinuing print-related operations, buyouts etc. The manager quickly decided against even mentioning the idea to its owner.

Newspaper companies have to deal with the specificities of their workforce that complicates any strategic move. An aging staff, locked-in by layers of antiquated guild or union-negotiated contracts, doesn’t favor labor agility. The same goes for training, job reassignments, etc.

Those constraints, combined to a residual sense of entitlement within newsrooms, further complicate the transition. Regardless of upper management’s determination, you’ll never be able to steer a century-old company the way a young startup adjusts to changing circumstances, whether it’s explosive growth or adverse events.

As a result, management of a legacy media company is left with a dual agenda. On the one hand, going for the low hanging fruits, getting quick wins such as small, swiftly executed projects thanks to “agents of change” identified within the company. And, at the same time, setting deep culture-changes in motion.

One of the most compelling “culture statement” I’ve seen was designed three years ago by Reed Hastings, the CEO of Netflix, a company that rocked the streaming media sector like never before. Here is an excerpt of Hastings’ 126 slides presentation that I think deserves consideration:

– The “Behavior and skills” section is broke up into nine items “…Meaning we hire and promote people who demonstrate these nine:
1. Judgement
2. Communication: Listening others and articulating views
3. Impact: “You focus on great results rather than on process. You exhibit bias-to-action, and avoid analysis-paralysis”
4. Curiosity : “You learn rapidly and eagerly”, “You contribute effectively outside of your specialty”
5. Innovation: “You challenge prevailing assumptions when warranted, and suggest better approaches ”
6. Courage: “You say what you think even if it is controversial”, “You make tough decisions without agonizing”, “You take smart risks”
7. Passion: “You inspire others with your thirst for excellence”, “You celebrate wins”, “You are tenacious”
8. Honesty: “You are quick to admit mistakes”
9. Selflessness: “You are ego-less when searching for the best ideas.”

Other Netflix core values include:

– “Great Workplace [means working with] Stunning Colleagues : Great workplace is not espresso, lush benefits, sushi lunches, grand parties, or nice offices. We do some of these things, but only if they are efficient at attracting and retaining stunning colleagues.”

– “Corporate Team:  The more talent we have, the more we can accomplish, so our people assist each other all the time. Internal “cutthroat” or “sink or swim” behavior is rare and not tolerated.”

– “Hard Work = Not Relevant : We do care about accomplishing great work. Sustained B-level performance, despite “A for effort”, generates a generous severance package, with respect. Sustained A-level performance, despite minimal effort, is rewarded with more responsibility and great pay.”

– No room for what Hastings call “Brilliant Jerks“. His verdict:  “Cost to effective teamwork is too high.”

– About processes: “Process-focus Drives More Talent Out. Process Brings Seductively Strong Near-Term Outcome.  Then the Market Shifts… Market shifts due to new technology or competitors or business models. [Then] Company is unable to adapt quickly because the employees are extremely good at following the existing processes, and process adherence is the value system. Company generally grinds painfully into irrelevance.”

– “Good” versus “Bad” Process:
“Good” process helps talented people get more done.
- Letting others know when you are updating code
- Spend within budget each quarter so don’t have to coordinate every spending decision across departments.
- Regularly scheduled strategy and context meetings.”

“Bad” process tries to prevent recoverable mistakes:
- Get pre-approvals for $5k spending
- 3 people to sign off on banner ad creative
- Permission needed to hang a poster on a wall
- Multi-level approval process for projects
- Get 10 people to interview each candidate.”

And to conclude, I love this one about vacation policy and tracking days off:

” We realized… [that] We should focus on what people get done, not on how many days worked . Just as we don’t have an 9am-5pm workday policy, we don’t need a vacation policy.
No Vacation Policy Doesn’t Mean No Vacation.
Netflix leaders set good examples by taking big vacations – and coming back inspired to find big ideas.”

And my favorite, about “Expensing, Entertainement, Gift & Travel: Act in Netflix’s Best Interest (5 words long).”

“Act in Netflix’s Best Interest” Generally Means… Expense only what you would otherwise not spend, and is worthwhile for work. Travel as you would if it were your own money. Disclose non-trivial vendor gifts. Take from Netflix only when it is inefficient to not take, and inconsequential. “Taking” means, for example, printing personal documents at work or making personal calls on work phone: inconsequential and inefficient to avoid.”

I’ll stop here. I’m sure you get the point. I prefer rules as stated by Netflix’s battle-scarred chief rather than by unsoiled scholars.

frederic.filloux@mondaynote.com

Ebooks: Defending the Agency Model

(Last of a series — for a while.)

Launching an antitrust probe against books publishers, as the US Department of Justice might do, can’t come at a weirdest time. In the two previous Monday Notes, we explained how Amazon is maneuvering itself into a position to dominate the entire book industry. The Seattle giant keeps moving up the food chain, from controlling ebooks distribution (in addition to selling print books), to competing against publishers and even agents by luring best selling-authors. No one would bet a dime on the printed book as it reaches its peak while ebooks sales keep exceeding expectations.

Then, why does the DOJ waves the threat of an antitrust action?

Five publishers –and one distributor, Apple– are in the the US administration’s crosshairs:  Hachette Book Group (a division of Lagardère Group), Simon & Schuster (CBS Corp),  MacMillan (Holtzbrinck GmbH), Penguin (Pearson PLC), and HarpersCollins (News Corp). All are said to be suspected of ebooks prices collusion. (The Wall Street Journal broke the story on March 9th).

First, some background. There are two competing distribution models for printed books, electronic books and electronic newspapers as well: the wholesale model and the agency model. Using the wholesale model, the publisher sells its goods to the distributor for a fixed price — say half of the suggested street price — and the distributor is free to decide the actual price to the public. In the agency model, the publishers set the retail price, the distributor gets a fee (30% or so) and that’s it.

Amazon is fond of the wholesale model. But, in order to effectively enter a new market, the company had to make concessions. For example, in the newspaper business Amazon reluctantly yielded to the demands of European publishers who preferred the agency model. French publishers went for this arrangement last year (but they priced their publications too high, forgetting that a real e-paper format has nothing to do with PDF facsimile or a digital edition loaded with features). In the UK, British newspapers went for the wholesale model, much cheaper for the customer: they are doing well with lower margins and much higher volumes. (Price elasticity is a proven concept for digital publishing).

In the US market, Amazon offers nothing but the wholesale model. You end up with absurdly low prices:

…While the French weekly Paris Match won’t accept any discount:

… At least on Amazon. On the Relay.com digital kiosk, the magazine is sold for €1.59 ($2.08) per copy.

When it comes to selling newspapers or books, the wholesale model doesn’t seem to favor the publisher, this for three main reasons:

The wholesale model’s primary goal is to serve the retailer’s overall strategy. Let’s assume Amazon wants to strengthen its general e-distribution market share and to increase sales of its Kindle product line. Then, the price of the primary product becomes secondary: it is in the company’s best interest to price-dump ebooks top-sellers in order to stimulate the sale of other products, or to up-sell high-margin items through its incredible recommendation engine –something Amazon is extremely good at. The entire retail sector strategy is based on a similar combination of moves.

– This makes the wholesale model is a deflationary one. Once it has acquired the rights to distribute a book (print or digital), the retailer is free to lower its margin as it sees fit, even going into negative territory (provided there is no law, such as in France, that prevents dumping practices). As a side effect, consumers gets used to low prices, ignoring the fact such prices may or may not reflect the item’s true economic value: a bestseller acquired for $14 by Amazon will be sold for a discounted $9.99. Once the the consumer bites, the retailer catches up by selling other higher margin products and/or hooking the customer into its system.

That’s why, when Apple launched its iBooks Store, publishers stuck inside Amazon’s wholesale system were willing to take their chances. They asked Steve Jobs for the agency model: price set by them and Apple taking its 30% cut. Jobs obliged, he wanted to boost iPad sales and, to do that, needed to attack Amazon’s domination of the ebook market. (Kindle formats currently accounts today for 60% of total sales). Jobs’ move put publishers in a position to go back to Amazon and ask for the same conditions.

Coming back to the DOJ’s looming antitrust action, did the book publishing industry collude in trying to pressure Amazon to change its practices? I don’t know if they acted in concert (people talk, you know) but they moved in accordance to their best interest by taking advantage of the newcomer, Apple. Now it seems the dispute over pricing has resumed: last month, Amazon pulled out 4,000 ebooks from one of the biggest books distributors in the US, the Independent Publishers Group (story in the New York Times here).

Pricing an item should be left to the one who produces it. The case of the book publishing industry is not as simple as, say, an appliance maker looking for the most potent retail channel for its hair-dryers or its toasters. The book sector is entering a painful transition: First, it needs to respond to consumers who want a large catalog of inexpensive ebooks; two, there is a plateauing but still strong print market ($73 billion worldwide). Managing a smooth decline for this segment is key to the industry’s health, especially as the ebook market yields thinner margins. Legacy publishers are culturally ill-equipped for such a difficult transition: they now find themselves competing with the agile, cash-rich, data and technology-driven players of the digital world.

frederic.filloux@mondaynote.com

Ebooks and Apps, same challenges

(Second of a series)

Last week, we looked at the ebook’s Giant Disruption. A new ecosystem in which Amazon eats publishers’ and agents’ lunch by luring authors into self-publishing.

Today, we examine the new regime’s impact on book-making and distribution processes.
The outcome will surprise few readers: Over time, the new book publishing business will look more and more like the software industry.

1/ Managing abundance. Traditional publishing’s most salient feature is the maintenance of high barriers to entry. The journey from manuscript to bookstore is an excruciating one. Publishers are deluged with books proposals; a quick glance at a few pages and the bulk of submissions is rejected. Still, far too many books get published. Several Parisian booksellers told me they sometimes have to return unopened boxes of books to distributors, simply because they don’t have enough space for them. Therefore, the 80/20 rule applies: most of the revenue comes from a small assortment of books. Digital publishing removes those barriers –brutally so: the floodgates are now indiscriminately open to every aspiring writer. This will have two effects: more difficult choices for the reader (see Barry Schwartz TED’s talk on The Paradox of Choice) and, on average, lower quality products.

Overtime, two factors will help solve the problem of the choice: search engines and manual curation. As semantic search rises, books content gets treated like data, searchable not only by words clusters, but by variations of meaning, pitch and, at some point, style. Put another way, a search engine will soon be able to differentiate and to attribute texts written by two novelists working in the same segment of literature.
Such breakthroughs will impact recommendation engines systems that already act a serious sales booster. Again, tech companies, such as Amazon (more than Apple, which does not seem to “get” search) will ride the wave thanks to their past and future investments into search and data analytics.

Semantic recommendation engines won’t kill the need for human curation. Like the app business where abundance creates a need for more human-powered guidance and suggestions (see Jean-Louis’ idea of a Guide Michelin for Apps), book sections of magazines and newspapers will have to adapt and find ways to efficiently suggest e-readings to their audience.

2/ The need for editing. The most potent selection tool will remain the quality of the product. In the iPhone/iPad AppStore, Apple guarantees the overall technical quality of what lands on its shelves. Apple’s primary motive is to avoid poorly coded apps that crash or, worse, interfere with the inner core of the iOS. No such things on Amazon. Once a manuscript is properly formatted (not very complicated), it’s eligible for sale. That’s where reality barges in. Many self-published authors insouciantly flog texts replete with grammatical errors and typos. Very few seem to rely on proper editing and proofing, this is the main divide between amateurs and pros. Editing is both a mandatory and costly process — but worth every penny. It is probably the most critical part of the value added by traditional publishers. In the digital world, it must remain a key component of the process.

3/ Segmented manufacturing. Self-published ebooks won’t escape the laws of digital economics, of decentralized and specialized crafts. Here again, ebooks publishing and the making of applications converge. The entire process will be handled by dedicated freelancers focused on specific tasks: manuscript formatting (easy for text, but complicated otherwise); cover design — it will become more important as digital bookstores gain in sophistication; editing and copy-proofing the manuscript by a competent and well-paid professional, etc.

At a higher level of complexity for a book production (rich media contents, interactive learning features and more), two forces will kick-in: cloud computing and offshore outsourcing. The most recent example is the San Francisco-based startup Inkling: last month, the company made its own cloud publishing setup Habitat available to the general public. It went a step further by relying on companies such as Aptara, a US corporation with the bulk of its 5000+ workforce located in India. Note that Aptara is a contractor for almost all traditional publishing houses such as Hachette Livre, Pearson, Oxford University Press… Inkling will bypass publishers by connecting customers and contractors through a collaborative platform that provides highly sophisticated correction and versioning tools. It is no incident that Matt McInnis, Inkling’s CEO, is an alumnus of Apple’s education division, as told in this recent Bloomberg BusinessWeek story.

Ebook publishing is often linked to value depletion for the entire food chain. Ebooks obey the other digital law: low price, high volumes. In this case, extremely low prices. But evidence shows professional authors can find their way in the new world.

Take thriller author and self-publishing advocate Joe Konrath. His blog is a well-documented plea for getting rid of what he calls “legacy publishers”. A year ago, he posted a 13,000 words dialog with his pal Barry Eisler. Eisler, is a former CIA operative; at the time, he was making headlines for turning down a $500,000 deal from his traditional publisher and taking the self-publishing road instead. I recommend reading their conversation, especially when the two discuss business strategies, such as the time-to-market problem:

— Barry Eisler: [Time to market]  was one of the reasons I just couldn’t go back to working with a legacy publisher. The book is nearly done, but it wouldn’t have been made available until Spring of 2012. I can publish it myself a year earlier. That’s a whole year of actual sales I would have had to give up.
— Joe Konrath: We can make 70% by self-publishing. And we can set our own price. I have reams of data that show how ebooks under $5 vastly outsell those priced higher.
— Barry Eisler: This is a critical point. There’s a huge data set proving that digital books are a price-sensitive market, and that maximum revenues are achieved at a price point between $.99 and $4.99. So the question is: why aren’t publishers pricing digital books to maximize digital profits?
— Joe: Because they’re protecting their paper sales.
— Barry: (…) Fundamentally, it’s extremely hard for an industry to start cannibalizing current profits for future gains. So the music companies, for example, failed to create an online digital store, instead fighting digital with lawsuits, until Apple–a computer company!–became the world’s biggest music retailer.
— Joe: I was in love with the publishing industry. It was my dream to land a Big 6 deal. And I still believe the industry is filled with intelligent, talented, motivated, exceptional people. I’m grateful to have sold as many books as I did (and continue to do.) My switch to self-publishing isn’t personal. It’s just business. I can make more money on my own.

For context, among tons of books Joe Konrath wrote, one, The List, was first rejected by a New York Publisher in 1999. In April 2009, he self-published it on Amazon for $2.99 and sold a first batch of 25,000 copies. Then he took the price further down (!) and had sold 35,000 copies at the time of the interview (March 2011). Today, The List is now available on Amazon for $11.97 (paperback, 310 pages) or $4.01 in Kindle format.

Before wrapping this up, I’ll answer a Monday Note reader who asked what would I do if I had to publish a book today. Like most journalists, I’m not short of ideas; my two most advanced projects are a global techno-thriller and an essay about internet economics. (Because of my day job, they are likely to stay untouched for quite a while…)
To me, it’s a no brainer: I’d go digital, especially if I publish in English.
Among the reasons:
Time to market: I’m not exactly the patient type who’ll wait for a release window that will fit my publisher.
Pricing: I’dont want to compete against well-established authors releasing their opus in the same format for the same price. Mine has to be lower.
Size and scope: I want to be able to publish a book with a number of pages based on the subject’s scope, as opposed to antediluvian dictates saying books should have x hundreds of pages.
Updating capabilities: for a business book, being able to quickly make a new version with fresher data (or thoughts) is a must.
Control: I like the idea of picking the professionals who will help me with editing and design; no such freedom with a traditional publisher. Same for marketing and promotion; there, given the level of frustration I often see authors endure, I’d rather go by myself, or hire the right person to do it.
Permanence: an ebook never dies; it’s as easy to find as a new release in digital bookstores. Great for personal branding.
Revenue: I’d rather bet on volume than on a small number of high-priced copies.

But I still might print a small limited edition on dead trees. Because despite all rationale I’ll always love paper books.

frederic.filloux@mondaynote.com

Ebooks: The Giant Disruption

(Part of a series)

In the last twelve months, I’ve never bought fewer printed books — and I’ve never read so many books. I have switched to ebooks. My personal library is with me at all times, in my iPad and my iPhone (and in the cloud), allowing me to switch reading devices as conditions dictate. I also own a Kindle, I use it mostly during Summer, to read in broad daylight: an iPad won’t work on a sunny café terrace.

I don’t care about the device itself, I let the market decide, but I do care about a few key features. Screen quality is essential: in that respect the iPhone’s Retina Display is unbeatable in the LED backlit word, and Kindle e-ink is just perfect with natural light. Because I often devour at least two books in parallel, I don’t want to struggle to land on the page I was reading when I switch devices. They must sync seamlessly, period, even with the imperfect cellular network. (And most of the time, they do.)

I’m an ebook convert. Not by ideology (I love dead-tree books, and I enjoy giving those to friends and family), just pragmatism. Ebooks are great for impulse buying. Let’s say I read a story in a magazine and find the author particularly brilliant, or want to drill further down into the subject thanks to a pointer to nicely rated book, I cut and paste the reference in the Amazon Kindle store or in the Apple’s iBooks store and, one-click™ later, the book is mine. Most of the time, it’s much cheaper than the print version (especially in the case of imported books).

This leads to this thought about the coming ebook disruption: We’ve seen nothing yet. Eighteen months ago, I was asked to run an ebooks roundtable for the Forum d’Avignon (an ultra-elitist cultural gathering judiciously set in the Palais des Papes). Preparing for the event, I visited most of the French publishers and came to realize how blind they were to the looming earthquake. They viewed their ability to line-up great authors as a seawall against the digital tsunami. In their minds, they might, at some point, have to make a deal with Amazon or Apple in order to channel digital distribution of their oeuvres to geeks like me. But the bulk of their production would sagely remain stacked on bookstores shelves. Too many publishing industry professionals still hope for a soft transition.

How wrong.

In less than a year, the ground has shifted in ways the players didn’t foresee. This caused the unraveling of the book publishing industry, disrupting key components of the food chain such as deal structures and distribution arrangements.

Let’s just consider what’s going on in self-publishing.

“Vanity publishing” was often seen as the lousiest way to land on a book store shelf. In a country such as France, with a strong history of magisterial publishing houses, confessing to being published “à compte d’auteur” (at the writer’s expense) results in social banishment. In the United Kingdom or the US, this is no longer the case. Trade blogs and publications are filled with tales of out-of-nowhere self-publishing hits, or of prominent authors switching to DIY mode, at once cutting-off both agent and publisher.

And guess who is this trend’s grand accelerator? Amazon is. To get the idea, read these two articles: last October’s piece in the New York Times Amazon Signs Up Authors, Writing Publishers Out of Deal, and a recent Bloomberg BusinessWeek cover story on Amazon’s Hit Man. The villain of those tales is former übber-literary agent Larry Kirshbaum, hired last May by the e-retailer giant to corral famous writers using six-figures advances. (By the way, BBW’s piece is subtitled “A tale of books, betrayal, and the (alleged) secret plot to destroy literature”, a hard-sell come-on…). Of course you can also read the successful self-publishing poster-child tale in this excellent profile of Amanda Hocking in the Guardian.

Here is what’s going on:

– Amazon is intent on taking over the bulk of the publishing business by capturing key layers of intermediation. At some point, for the market’s upper-crust, by deploying agents under the leadership of Mr. Kirshbaum and of its regional surrogates, Amazon will “own” the entire talent-scouting food chain. For the bottom-end, a tech company like Amazon is well-positioned for real-time monitoring and early detection of an author gaining traction in e-sales, agitating on the blogosphere or buzzing on social networks. (Pitching such scheme to French éditeurs is like speaking Urdu to them.)

– For authors, the growth of e-publishing makes the business model increasingly attractive. Despite a dizzying price deflation (with ebooks selling for $2.99), higher volumes and higher royalty percentages change the game. In the too-good-to-be-an-example Amanda Hocking story, here is the math as told in the Guardian piece:

Though [a $2.99 price is] cheap compared with the $10 and upwards charged for printed books, [Hocking] gained a much greater proportion of the royalties. Amazon would give her 30% of all royalties for the 99-cent books, rising to 70% for the $2.99 editions – a much greater proportion than the traditional 10 or 15% that publishing houses award their authors. You don’t have to be much of a mathematician to see the attraction of those figures: 70% of $2.99 is $2.09; 10% of a paperback priced at $9.99 is 99 cents. Multiply that by a million – last November Hocking entered the hallowed halls of the Kindle Million Club, with more than 1m copies sold – and you are talking megabucks.

Again, aspiring (or proven) authors need to cool-down when looking at such numbers. The Kindle Million Club mentioned above counts only 11 members to date — and most were best-sellers authors in the physical world beforehand.

– But at some point, the iceberg will capsize and the eBook will become the publishing market’s primary engine. Authors will go digital-first and the most successful will land a traditional book deal with legacy publishers.

Shift happens, brutally sometimes.

frederic.filloux@mondaynote.com

Next week: the editing equation and how the rise e-publishing will segment the craftsmanship of book-making.

Blog Strategies

How should large media organizations handle their blogs? As editors struggle to increase their news coverage, to generate the indispensable serendipity and raise the “fun side” (much needed for legacy media that are often too stiff), how do they strategize their use of blogs? For an online media, is there an optimal number of blogs to carry? Should editors adopt a Mao Zedong “let thousands blogs blossom” posture? Or, on the contrary, be rigorously selective?

Unsurprisingly, there is no easy answer, no one-size-fits-all strategy.

A note before we dive into the question: I choose to set aside independent professional bloggers. This is no reflexion on the quality of their work: it is often excellent, and sometimes better than what traditional media blogs offer. But I want to narrow the scope of this column.

When asked to explain what a legacy media blog should be and how it should relate to the general newsroom-produced content, I venture into the following set of requirements (in no particular order):

A Byline. Because the power of a media is often associated with the trust placed in it, readers tend to connect with “their” columnists. Moreover, the writer should provide more personal content, quite different from his/her “official” production (columns, editorial, analysis, opinion page).

Dedicated writing style. In a blog, no one wants (or expects) to find pontification — even by a celebrity author. A blog is an ideal fit for first person accounts and, if not for completely untrammeled stream-of-consciousness writing, at least for a good measure of casual, intimate stories.

A good example is Nobel Prize for Economics Paul Krugman in the New York Times: he combines a great byline, specific writing and a clear-cut editorial distinction. His weekly  column is, as expected, a neat and insightful production. And his blog, The Conscience of a Liberal, checks all the boxes. (In addition, Krugman — who builds his content without anyone’s help by adding photos, charts and video all on his own — is quite prolific: he wrote 21 posts over the last seven days!)

A concept. I always liked former Vanity Fair and New Yorker editor Tina Brown‘s phrase about the key attribute of a good story: it must be “high concept”, she said, i.e. reducible to one sentence. This property, often ignored or downplayed by editors, is at the core of our business and must also apply to blogging: if the writer’s blogging intention cannot be boiled down to a straightforward idea, maybe the idea needs rethinking.

An insider’s view. Many blogs are valued because their authors are so specialized they border on being insiders. Their access, their expertise give them plenty of material that won’t find its way into the main site structure but is a great fit for a blog. See the Guardian Defence and security blog or, on the same subject, Wired’s Danger Room or, on legal affairs, the excellent WSJ.com Law Blog.
More broadly, behind-the-scenes blogs, or reporter notebooks often produce good results. Foreign correspondents are usually the first to use the blog medium. To them, blogs are the ideal vector to write about campaign-trails, being immersed in a remote place or group, with first-hand “you are there” accounts.

An ultra-sharp angle. Blogs are good vectors for ultra-specialized views or angles. To name but a few:  The Numbers Guy in the Wall Street Journal pores over statistics, or FT’s Datablog on data-driven journalism. For lighter fare, let’s mention WSJ’s  Heard on the Runway about fashion (one of the most viewed), or WSJ’s Juggle on “choices and tradeoffs people make as they juggle work and family”.

What a blog shouldn’t be: a dump of disorderly news contents belonging to established home page sections, random bursts of disorganized thoughts, or a receptacle for journalists’ frustrations. As for the question of collective blogs vs. individual ones, I favor the individual blog: better gratification for the writer and, for management, more accountability and quality control.

Let’s now turn to metrics. Is there a rule of thumb for the quantity of blogs a news media should host?

I live and work in France where newsroom managers tend to be lax on blogs, and writers are quite voluble. The result is a record high number of blogs. To take one example, Le Monde hosts 61 blogs manned by its own staff, 26 guest blogs, and they select 30 readers’ blogs out of… 753 blogs “updated over the last 60 days” (this is more a page view strategy than an editorial one). All strong newsrooms, such as Le Monde or other prominent French newspapers, host great blogs. But, for all of them, the audience structure is a classic “20/80”, one in which a small fraction of the blog production makes the bulk of the audience. I don’t see the point in such a long tail, especially since advertising tends to price blogs at the very low end of their rate card.

Here are some numbers based on my analysis of publications I read on a regular basis:

– New York Times : 68 blogs. Its Blogs Directory shows the best possible arrangement. Those guys clearly believe in the blog medium and their news staff of 1200 provides great quality and a good mix between serious and more entertaining fare. Some are more than mere blogs: the excellent Dealbook, manned by a staff of 16, is more like a business site than a blog. Or Lens is my favorite spot for photojournalism as it rises above the level or an ordinary blog.

– The same goes for The Guardian (61 blogs) whose newsroom seems to enjoy manning its own blogosphere. Their baseline says it all: “The Sharpest Writing, the Liveliest Debate”.(Plus, OK, The Guardian hosts a small set of independent blogs such as The Monday Note…)

– High on the score (quantitatively speaking) is the Washington Post (102 blogs), with a weird focus on religion thanks to an ecumenical catalog of 13 blogs.

– WSJ.com has 54 blogs, officially. Plus what looks like a cemetery of 45 more. On the WSJ.com blogs home page, click on the Most Popular or Commented and the Latest; you’ll see which ones are the most active (Washington Wire on politics and the entertainment blog Speakeasy). This should make business pundits even more modest…

A random sample shows that a large number of blogs doesn’t equate with great quality. Too many blogs hosted by large media brands seem loose or rarely updated. That’s why a few specialized outlets prefer to focus on a small number of blogs: the FT.com (only 14 blogs) or the Economist (23 blogs) have opted for a selective approach — which more often ensures a better execution overall.

frederic.filloux@mondaynote.com

Twitter, Facebook and Apps Scams

Here is the latest Twitter scam I’ve heard this week. Consider two fictitious media, the Gazette and the Tribune operating on the same market, targeting the same demographics, competing fort the same online eyeballs (and the brains behind those). Our two online papers rely on four key traffic drivers:

  1. Their own editorial efforts, aimed at building the brand and establishing a trusted relationship with the readers. Essential but, by itself, insufficient to reach the critical mass needed to lure advertisers.
  2. Getting in bed with Google, with a two-strokes tactic: Search Engine Optimization (SEO), which helps climb to the top of search results page; and Search Engine Marketing (SEM), in which a brand buys keywords to position its ads in the best possible context.
  3. An audience acquisition strategy that will artificially grow page views as well as the unique visitors count. Some sites will aggregate audiences that are remotely related to their core product, but that will better dress them up for the advertising market (more on this in a forthcoming column).
  4. An intelligent use of social medias such Facebook, Twitter, LinkedIn and of the apps ecosystem as well.

Coming back to the Tribune vs. Gazette competition, let’s see how they deal with the latter item.

For both, Twitter is a reasonable source of audience, worth a few percentage points. More importantly, Twitter is a strong promotional vehicle. With 27,850 followers, the Tribune lags behind the Gazette and its 40,000 followers. Something must be done. The Tribune decides to work with a social media specialist. Over a couple of months, the firm gets to the Tribune to follow (in the Twitter sense) most of the individuals who already are Gazette followers. This mechanically translates into a “follow-back” effect powered by implicit flattery: ‘Wow, I’ve been spotted by the Tribune, I must have voice on some sort…’ In doing so, the Tribune will be able to vacuum up about a quarter or a third — that’s a credible rate of follow-back — of the Gazette followers. Later, the Tribune will “unfollow” the defectors to cover its tracks.

Compared to other more juvenile shenanigans, that’s a rather sophisticated scam. After all, in our example, one media is exploiting its competitor’s audience the way it would buy a database of prospects. It’s not ethical but it’s not illegal. And it’s effective: a significant part of the the followers so “converted” to the Tribune are likely stick to it as the two media do cover the same beat.

Sometimes, only size matters. Last December, the French blogger Cyroul (also a digital media consultant) uncovered a scam performed by Fred & Farid, one of the hippest advertising advertising agencies. In his post (in French) Cyroul explained how the ad agency got 5000 followers in a matter of five days. As in the previous example, the technique is based on the “mass following” technique but, this time, it has nothing to do with recruiting some form of “qualified” audience. Fred & Farid arranged to follow robots that, in turn, follow their account.  The result is a large number of new followers from Japan or China, all sharing the same characteristic: the ratio between following/followed is about one, which is, Cyroul say, the signature of bots-driven mass following. Pathetic indeed. His conclusion:

One day, your “influence” will be measured against real followers or fans as opposed to bots-induced accounts or artificial ones. Then, brands will weep as their fan pages will be worth nothing; ad agencies will cry as well when they realize that Twitter is worth nothing.

But wait, there are higher numbers on the crudeness scale: If you type “increase Facebook fans” in Google, you’ll get swamped with offers. Wading through the search results, I spotted one carrying a wide range of products: 10,000 views on YouTube for €189; 2000 Facebook “Likes” for €159; 10,000 followers on Twitter for €890, etc. You provide your URL, you pay on a secure server, it stays anonymous and the goods are delivered between 5 and 30 days.

The private sector is now allocating huge resources to fight the growing business of internet scams. Sometimes, it has to be done in a opaque way. One of the reasons why Google is not saying much about its ranking algorithm is — also — to prevent fraud.

As for Apple, its application ecosystem faces the same problem in. Over time, its ranking system became questionable as bots and download farms joined the fray. In a nutshell, as for the Facebook fans harvesting, the more you were willing to pay, the more notoriety you got thanks to inflated rankings and bogus reviews. Last week, Apple issued this warning to its developer community:

Adhering to Guidelines on Third-Party Marketing Services

Feb 6, 2012
Once you build a great app, you want everyone to know about it. However, when you promote your app, you should avoid using services that advertise or guarantee top placement in App Store charts. Even if you are not personally engaged in manipulating App Store chart rankings or user reviews, employing services that do so on your behalf may result in the loss of your Apple Developer Program membership.

Evidently, Apple has a reliability issue on how its half million apps are ranked and evaluated by users. Eventually, it could affect its business as the AppStore could become a bazaar in which the true value of a product gets lost in a quagmire of mediocre apps. This, by the way, is a push in favor of an Apple-curated guide described in the Monday Note by Jean-Louis (see Why Apple Should Follow Michelin). In the UK, several print publishers have detected the need for independent reviews; there, newsstands carry a dozen of app review magazines, not only covering Apple, but the Android market as well.

Obviously there is a market for that.

Because they depend heavily on advertising, preventing scams is critical for social networks such as Facebook or Twitter. In Facebook’s pre-IPO filing, I saw no mention of scams in the Risk Factors section, except in vaguest of terms. As for Twitter, all we know is the true audience is much smaller than the company says it is: Business Insider calculated that, out of the 175 million accounts claimed by Twitter, 90 million have zero followers.

For now, the system stills holds up. Brands remain convinced that their notoriety is directly tied to the number of fan/followers they claim — or their ad agency has been able to channel to them. But how truly efficient is this? How large is the proportion of bogus audiences? Today there appears to be no reliable metric to assess the value of a fan or a follower. And if there is, no one wants to know.

frederic.filloux@mondaynote.com