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Social networks — Possible and fatal flaws

How long for the social network bubble to burst? Market forces are working on it. First, last year’s fiasco of Beacon — Facebook’s behavioral advertising system, massively rejected as soon as introduced. Then, audience numbers reach a plateau, at least for MySpace, still the leader of the pack. Now, uncertainties about the business model are looming, with the increasing suspicion of a triple flaw.

One is the tendency to replicate ill-fated online models: Compuserve, early AOL, Prodigy. They were walled gardens, not interconnected systems. They simply died of it, as recalls this opinion piece in The Economist (the business magazine is not exactly embracing the social network frenzy). That’s why platforms like Open Social, the setup conceived by Google poses a threat for current social network players that won’t adopt it. An example: Facebook applications must be written specifically for the platform, using its own markup language, its own query language (see here a demo on how Open Social works ).

The second question addresses the notions of network / applications / features. See what Charlene Li from Forrester Research says in the Economist: The destiny of most services embedded in social networks is to become simply web-based and no longer be tied to a specific network. “We will look back to 2008 and think it archaic and quaint that we had to go to a destination like Facebook or LinkedIn to be social. [Future social networks] will be anywhere and everywhere we need and want them to be.”

The third flaw is simply time allocation. It is a fact that the use of a social network tends to drop fairly quickly after the discovery phase. Only the flow of newcomers helps to sustain growth in pageviews. But as the web is becoming deeper and richer, who wants to spend hours a month to have a virtual beer with a pal? How long will last the novelty effect?

That leads to the business model questions: if the users, in a flash of common sense, reject the behavioral-powered ads; if the applications tend to work outside the proprietary platform; if the click-through rates keep falling… How sustainable is the bizmodel?

Smartphone: Huge market – but where are the business models?

This was an important week for carriers: first the $19 billion spectrum auction announcement and then Verizon opening its network. Great, the trillion dollar market is in sight! But do we see any good advertising business models in there? Today, I’m optimistically embarrassed to admit, I don’t.

The market:
John Sculley was right, after all. Shortly before his ouster in a palace coup, Apple’s CEO is ridiculed for predicting a trillion dollars PDA market. This is in 1993 when launching the Newton. In the space of 15 years PDAs gradually become smartphones. In 2008, with more than 3.3 billion cell phone accounts, we’re approaching the magic trillion dollars, $25/month ARPU and we’re there. And that’s just network revenue — which gets us to today’s question: smartphones enjoy a cornucopia of new applications, but do they run any good advertising business models?

The dream:
Let’s yield to the breathless enthusiasm for a moment. Not all phones are smart today but look at the Blackberry and the iPhone, they’re the trendsetters, sure to be followed by legions of imitators. As we wrote here a few weeks ago, cell carriers are going the way of the landline ISP: flat fee regardless of carried content. And, just last week, Verizon embraced its fate instead of fighting it: it will no longer dictate what phone you use or what application you run on its network, mostly. This is a cultural revolution and is likely to force everyone (AT&T, Sprint…) to follow. Add the $19 billion spectrum auction. Smartphones are hot. They are the new PC, only smaller, in size, and bigger, in numbers, precisely because of size, mobility and rising computing power, and applications, and…

iPhone for later:
We’ll leave the study of the iPhone business models for another week, they are very… Apple, they may set widely imitated examples or they may be unique or insular, depending on your views of Steve Jobs ways.

Smartphones advertising dollars? Back to today’s mundane world: Google proves the value of Web advertising. Does this translate to smartphones?

A possible answer comes when we replace Web, The Cloud, by PC. Today’s Web advertising billions are PC advertising dollars. Does that money flow to smartphone? Not today. The small screen doesn’t show much. SMS? Users are asked to pay for the ad, they’re upset. So much so there’s legislation afoot to ban SMS spamming. This leaves most everyone, and that includes us VC philanthropists, some call us visionary sheep, looking for ways to replicate the PC advertising bonanzas. Original thinkers that we are, we forget what happens at every turn of the techno-cultural wheel. Yes, the new generation borrows from the old but it actually is a new genre with new rules. The mini, in spite of its name, wasnt a small mainframe. The PC was wrongly called a micro before the P in Personal won the day. We know, the natural tendecy is to first see the smarphone as a PC, only smaller. Yes, it now navigates the Web and does e-mail like a PC, but its mobility, size, ubiquity, proximity to our body makes it a different genre. Different rules we don’t understand yet. Being the optimist, I expect happy surprises. I just wish to be among the first one to have a retroactive flash of the obvious…
–JLG

Is the e-book reader a product or a feature?

November 2007, the Amazon’s Kindle is born, rivers of ink flow — electronic and conventional. Today, the riverbed is dry: a Google look at “Kindle sales” shows no new stories since January, highly unusual. Amazon itself has gone quiet and doesn’t brag about Kindle sales.

What is the problem: the e-book reader concept, or the execution, the Amazon Kindle?

My opinion: the flaws in the Amazon execution mask the problem in the concept of a specialized e-book reader. All factors peeled apart , I think of the e-book reader as a feature of smartphones and ultra-mobile PC — as it already is on personal computers.

Why?
Sony has been making e-readers for more than 15 years now, one commercial failure after another.

Amazon comes to the scene with strong advantages: The on-line book seller, a strong customer service reputation. Kindle is a wireless device, independent of a PC.Sony requires a PC to download the ebook, and a cable to move it to your eReader. Amazon has the most titles, more than 100,000. You walk down the street, search a title, click, you turn the street corner, bing, avoid the lamppost, and the ebook came through the wireless (Sprint) network, no connection fee. Speaking of the street, the display technology (shared with Sony) allows reading outdoors as well indoors.

The bad news start with the high price: $399. How come Amazon doesn’t follow the classical model: inexpensive razors and high-margin razor blades, like HP with its inkjet printers and cartridges? $399 is the price of a smartphone or an eeePC, the Kindle-size UMPC. Then we have the gazillions of free e-books available for download on smartphone or browsers. Or I can buy books e-books for smartphones, including my Blackberry. Surprise, one source is Mobitext, an Amazon company… Next, Kindle’s design: the clumsy suede cover, the keys, the user interface all have a “Made In Seattle” feel, say Silicon Valley critics. Microsoft and Amazon live there. But Valley wags are wrong, the Kindle was designed in Cupertino, Apple’s hometown. Neighbourliness is no holiness…

So…Consumers are either cats or dogs. The cat disdainfully tiptoes around the new cat food and, after trying your patience, may condescend to sample it. Dogs joyously stick their nose into the new and improved chow. But does the dog come back the next day? This dog isn’t going back to the Kindle. After reading a three books, Le Monde and the NY Times for two weeks, uploading a Word book manuscript, I stopped using my Kindle.

Back to the question: what’s wrong, idea or execution?

This dog doesn’t mind reading mail, news and blogs on two smartphones: Blackberry and iPhone, this after years of Psion and Palm. I used to religiously read four newspapers everyday, much less now, also because of my laptop. I still love books, they’re here for a long, long time but they no longer hold the same place in our hearts, minds and… wallets.
This said, Amazon can come back with a more elegant, colorful and less expensive Kindle. More likely, the iPhone and its competitors will include e-readers and offer several screen sizes. In other words, smartphones and pocketable tablet computers (UMPC) will dominate e-book reading.
-JLG

Social networks — Fed up with the ad deluge

Question : how acceptable would it be for you, to log on a social network site and get a flurry of ads about what your acquaintances are reading or buying ? OK, interesting… for few weeks, and then — get out of my sight. That’s seems to be happening with MySpace. Its user base remains huge, but it is slipping, from a peak of 72m in October 2007 to 69m in December. Overall, advertising on social networsk is not performing well : a click-rate only the fifth of average website at best. Behavioral targeting is definitely not the magic bullet. Pushed to the extreme, it even seems to backfire.
> story in Business Week Nevertheless, prices remain high for this market segment : AOL will acquire Beebo, n°3 of the sector, for $850m. Based on 2007 results, that’s a ridiculous 42 times revenues and 160 times EBIDTA, according to the tech site AllThingsD. Even if, overall valuations should fall saysVenture Beat

March 11, 2008 : a new era in the internet advertising sector

The European Union had the power to prevent Google’s acquisition of DoubleClick. Last week, the regulator unwittingly set a milestone in the history of the Internet. They greenlighted Google’s absolute supremacy over Internet advertising, a position comparable to Microsoft’s domination of PC operating systems, Windows, and applications, Office. To get a fresh read of the kriegspiel, Monday Note spoke last week with Alain Levy, CEO of Weborama a fast growing player in the European internet ad sector. Some excerpts follow:

On the EU’s motives for approving the deal, Alain Levy : “European regulators undoubtedly performed a very thorough investigation before making their decision. They sent us a detailed questionnaire; however, it was limited to pure competitive considerations. Issues such as privacy, the protection of personal data, where not addressed. To me, these remain key questions. Microsoft’s attitude contributed to the outcome : first denouncing the deal as the quintessence of anti-competitive behavior, and then bidding for Yahoo. In doing so, Microsoft killed most of the arguments against the DoubleClick acquisition. It is quite possible Microsoft had a clue about the upcoming decision of the EC”.

On the monopoly issue and consequences for others players: “…I can’t think of a better definition of a monopoly than the new position assumed by Google in the ad-serving market. The tremor will be felt in many areas. Google will control critical parts of the business. Advertisers will lean to go with them more than ever. Agencies will be squeezed by Google’s propensity to talk directly to advertisers. I don’t buy Eric Schmidt’s [Google's CEO] statement about its willingness to preserve the brand-agency relation, we already have many indications that they will do exactly the opposite [see below].

Even the rules of merger and acquisition will be effected: “…Thanks to its unprecedented access to market data — CPM, market share, revenue structure, demographics — Google now has the ability to assess in an instant the value of almost any player in the market, on the ad side, as well as on the publishing side. This is a decisive advantage when looking at potential targets, especially with a current market cap of (still) $137bn… Conflict of interests are lurking everywhere — especially in a totally non-regulated business. Today, all media companies and communication groups — internet and non-internet — are thinking: How do we position ourselves, how do we adjust our strategy in light of this acquisition?”.

Is there still room for independent players ? “…Oh, yeah! More than ever, actually. From now on, any brand using Google’s ad serving does, in fact, give up its entire inventory; those who work with Google for media buying deal with someone controlling 40% to 60% of the market. And advertisers who are already DoubleClick’s clients become totally transparent for Google. In such an imbalanced environment, yes, we have a lot of room to grow”.

Further readings :

These figures are amazing : every month, for each visitor, Yahoo collects marketing data 2520 times ! For My Space, the figure is 1229 times, for Google: 578 times, the New York Times, only 45 times per visitor and per month. This also shows what’s really at stake with the Microsoft/Yahoo battle : Yahoo is able to get data on 400 billion events per month, Microsoft only 51 billion.
> This article in the New York Times, reveals the depth of advertising-related data sites are able to harvest.
> and here on NYT Bits

Here is why the entire advertising food-chain has good reasons to be worried : “Google’s strategy is to have advertisers load their entire ad budgets into Google’s system, which would allocate spending across media whether online or offline”. Says who ? Tim Armstrong, Google’s president for advertising.
> more here

Google waited no more than three days after the decision of EU regulators to launch its Google Ad Manager. This is a crystal clear indications of Google ambitions : sterilizing the market, not with Microsoft-like intimidating practices, but simply by giving for free what others will charge. For Google, giving away some ad serving features is simply a way of generating new streams of cash. Thanks to its gigantic infrastructure, the “price” of the gift is marginal. And for the site publisher, choice between being limited to a midsize Ford for free or paying full price for a Saab is simply a no-brainer. As for Google Analytics that gives access to powerful traffic tools for free, Google Ad Manager will prove to be the lethal weapon to capture market share.
> see how Goolgle it works How big Google display advertising business could be ?
>Here are some answers.“There Will Be Blood” : collateral damages will be serious in the wake of the DoubleClick acquisition.
>read some self-explanatory quotes of Google’s CEO Eric Schmidt in Silicon Alley Insider. and a more PR polished version, his interview in Portfolio.

Quick Links from Monday Note #26

Magazine — The Wall Street Journal to launch a glossy

Rupert Murdoch is joining the pursuit: big ad dollars in glossies. The Anglo-Saxon market is crammed with such magazines (Condé Nast’s Portfolio, Robb Report, FT’s How to Spend it, The Economist’s Intelligent Life, etc.). For the Wall Street Journal, it is a logical step : the average household income of a WSJ subscriber is $253,000.

> this story in the Washington Post explains Murdoch’s strategy about synergies. His message to the Journal: We don’t want to cheapen your brand.

Social Networks — FT courts students via Facebook

The Financial Times is launching a new application that will give student access to FT.com. They will be able to apply for a free subscription for a maximum of four times. Nice bargain. (FT.com has claimed an average of 5.7m unique visitors a month in 2007, a jump of 30% from the previous year).
> story in Press Gazette{/content}

classifieds — Craigslist’s traffic still growing

The overall traffic of the free classifieds website is still growing at full throttle : +93% year-to-year, for the first week of March, according to Hitwise. Measured in the classifieds category, the growth is even better.
> details on Hitwise

monopoly — Google to get EU approval for DoubleClick acquistion

Good week ahead for Google : according to Bloomberg, it will get the approval from European regulators for the planned $3.1bn acquisition of the main ad serving company DoubleClick. Ruling could come as early as March 11. This green light was critical for the takeover. Google was always clear: if the deal is blocked by EU, it will be dropped. This gets Google to an absolute dominant position in the ad display business. > story in Bloomberg

Yahoo/microsoft  — Waging the war from the inside

Microsoft is contemplating the idea of reshaping Yahoo’s board from the inside through a proxy fight, rather than launching an all-out war. According to Business Week, a proxy action would cost Microsoft $20m to $30m. In contrast, each dollar-per-share increase in Microsoft’s bid would add $1.4 billion to the takeover tab.
> story in BW

Microcredit — In New York, the sub-sub prime lender

{What sort of sign is that ? As America is on the verge of a recession thanks to a bitter credit-crunch, the global role-model of microcredit, Muhammad Yunus has launched in January Grameen America. Grameen lends money to the poorest tier of the American population, those with no credit, and no collateral. And thanks to the peculiar way in which Yunus handles credit, these borrowers are not the last ones to repay the loan. Last week, the Wall Street Journal devoted an entire page to a Muhammad Yunus interview.
> story here

User-generated-content — The tyranny of the minority

The online magazine Slate (build in 1996 on old but reliable principles of journalism), is bashing up the illusion of a Web 2.0 “democracy”. In users generated sites like Digg or Wikipedia, a tiny fraction of users are actually creating most of the edits.
> story in Slate{/content}

French press — Sarkozy boosts magazines sales

In 2007, French magazines published 252 cover stories about Nicolas Sarkozy, as candidate or new president, on both the political as well as the people angles. A real boost for the industry: sales increased 6.77% last year. The biggest gain (+34%) was for Marianne, the most “anti-Sarko” newsmagazine.
> story in Le Monde

Journalism — 10 trends that transformed the job

From “the rise of the amateur”, to measurability of websites, or the use of databases in reporting, the editor of the Online Journalism Blog (OBJ) Paul Bradshaw outlined ten trends that changed news gathering.
> story on the OBJ

Newsroom — The World Editors Forum launches a global barometer

How do editors feels those days ? Together with Reuters and Zogby International, the WEF began collecting data for the second annual Newsroom Barometer, a global survey of chief editors about their attitudes and strategies in the multimedia age.
> details on the World Association of Newspapers
> More infos about the barometer at this email
> And on the Editors Weblog, read the updated series of analysis about the future of journalism.
Internet programming — Did Michael Eisner found the right algorithm?

When he left the chairmanship of Disney in 2005, nobody was ready to bet a red cent on Michael Eisner’s new whim : Internet content. Now, he’s currently producing his second Web show. And it works.
> story in The New York Times

Intercept — Skype : too hard do break

Skype, the free phone service, is driving crazy cybercops all over the world. One, there is the volume of data its 275m users are generating ; two, the digital packets it uses are encrypted ; three, the network is used in 28 countries on a P2P architecture (no servers farms). All combined, it makes the most privacy-friendly network ever built. No wonder why the FBI, the British MI5 and the German secret services are asking Skype to figure out some back door to allow legal intercepts. So far, the network is not complying.
> story in The Economist

Steve Jobs, The Rule Breaker

Oh my god! Steve Jobs breaks rules…

Fortune magazine cannot see the difference between artists and bean counters.

Steve Jobs is on Fortune’s cover again: Apple has become the most admired company in America. Is this another PR job of “oral gratification”? If it is, it comes with bite marks or, in politically correct terms, “balance”. As a counter to the effusive praise, we find a piece where Peter Elkind outlines in great detail what he calls The Trouble With Steve Jobs. To their (author and magazine) credit, the piece is well researched, it provides a good overview of Steve’s orgins and career. The writer ostensibly aims high: “It may be instructive, then, to consider what drives the Steve Jobs adventure.” Unfortunately, instead of insights we get is a compilation of Jobs’ known or alleged infractions, couched in a tone by turns righteous and salacious. Perhaps the writer will understand if we turn the ad hominem argument around and look at his publicly documented appetites: a book about the Enron scandal, another about a murderous pediatric nurse in Texas, and magazine articles covering Wall Street malfeasance. Is Steve Jobs to be nailed by this kind of hammer? Yes, Steve looks like he’s running a business, and the numbers are terrific. But no, he’s a creator, an artist, not a business manager. Yves Saint Laurent made tons of money but couldn’t be accused of being a businessman. And the couturier’s behavior… Steve can’t even begin to approach Yves’ well-documented collection of deportments. (Alicia Drake’s book on Saint Laurent and Lagerfeld is a terrific and instructive read.)
Contemplate for a moment Steve’s unequaled string of creations: the Apple ][, the Macintosh, Pixar (think Ratatouille), reviving the Mac and Apple, iTunes and the iPod, Apple stores and the iPhone. How can we expect such creator to be normal, to follow rules? Musicians, painters, couturiers, designers, where are the normal ones? Creativity is breaking rules, it doesn’t belong to the realm of reason.
Contemplate again: For shareholders, Apple’s stock went up about 20 times in a little more than 10 years. Customers flood Apple stores driving up profits and market share. Employees feel part of a successful company and, through options, partake in the shareholders’ good fortune. On the topic of employees, we hear the tales: Steve Jobs is impossible, he makes people cry, the stress there is unbearable. And the turnover? Negligible. Insert you favorite winning team cliché here.

Apple is a 30 years-old company. How do you keep it fresh? (compare with Microsoft, only 2 years older.) You need the desire, the fire of an unreasonable, un-ruly creator. Mr. Elkind is confused, he forgot to Think Different — the Jobs 2.0 slogan. Artists aren’t bean counters. Yves Saint Laurent isn’t Michael Dell.
-JLG

> Further reading: Steve has had brushes with failure and death as movingly recounted in his 2005 Stanford Commencement Speech (text here, video here).

Magazines — The Economist’s contrarians approach to readers

On the US market, The Economist is quietly eyeing the one million mark in copy sales. it did it by targeting smart people, says MarketWatch media columnist Jon Friedman. > read of MarketWatch
> If you want a good insight on the Economist, watch this 2007 video interview of John Micklethwait made available by Stanford University’s Hoover Institution. Here (it’s a 45′ segment).
> And I you want more, read his profile in the Independent

Finance — Behind the subprime crisis : an equation that went wrong

The subprime crisis and the subsequent cascading effect to other credit instruments could have one single origin: the total failure of the portfolio insurance system and the underlying mathematical model that powered it, The Black-Scholes equation. To make it short (so to speak), the model applied to a portfolio of any kind of securities, was supposed to limit the effect of a market drop through the use of options. Except that, when the real crash arises, the model no longer works and it added fuel to the panic it was supposed to prevent. In this excellent piece of explanatory journalism, Michael Lewis (well know author of The New New-thing or Poker’s Liar), details the black-hole equation. The short version: the Black-Scholes formula relies wrongly on the past volatility to predict the future. It only works when things are stable…
> story in Porfolio