Internet Web Help

We have been fascinated by virtual goods ever since reading more pieces of furniture were sold online in Korea in socnets like Cyworld than in real life. You may also recall that a number of companies experimented with virtual goods in 2nd Life (c’mon, you can’t have forgotten 2006 – unless you were one of those 2nd Life marketeers ). Anyway, hey ho we are off again.

…..some large companies are testing whether they can raise awareness of their brands — and sell more actual goods — by creating and offering their own pretend merchandise. Volvo Cars of North America, the clothing retailer H&M and MTV Networks are among the diverse brands entering the market for virtual goods — the make-believe items offered on social-networking games, smartphone apps or fantasy Internet sites.

…………….

So far, the virtual goods market largely consists of micro-purchases. Consumers typically pay $1 to $3 while playing games like FarmVille or Mafia Wars, both created by the social-gaming company Zynga, to get a jump on game rivals. Users also can give a gift, like flowers, or build a collection of items — just as collectors do in real life.

Those impulses will be worth nearly $2 billion in revenue or more this year, according to ThinkEquity, a financial research firm in San Francisco. Its analyst for new media and games, Atul Bagga, said his research found that the market could reach $2.6 billion next year.

……………..

To succeed, “branded virtual goods have to be identifiable and have a real world relevance,” said Ravi Mehta, vice president for products at Viximo, a social gaming platform provider. “They are driven by the relevance to the purchaser. Paris Hilton has people who buy her virtual goods because they are fans and want to identify with her, her hair, her place in pop culture.”

I think he is actually serious about Paris Hilton…..

Actually, we’ve been arguing for a while that this is the best model for Facebook, but whether people will buy virtual trainers etc on SocNets any more than they did(n’t) on 2nd Life is still an open question. Those “decorate your own room” socnets have largely passe’d away. All the evidence is that virtual goods are bought in pursuit of another (typically game based) objective, not “real world relevance” – unless maybe they can be converted into free drinks, like 4square mayoralties at Starbucks.

I await with fascination to see if Nike will be selling under-armour gear on World of Warcraft, and Wilkinson Sword will sell…… but I think this is far more likely to be more akin to the 2nd Life experience, as corporate clumsiness leads to egg on faces and rivers running with red ink…..

Still, as these goods cost nothing to make and distribute, they could be the last hurrah of Freeconomics

Two totally different views of the Future Of The Internet crossed my desk within hours today.

Firstly, Tom Coates at dConstruct banging the Romantic Future drum (as noted by One Man and His Blog):

[Tom] was drawing a parallel between the work of King Darius in the year A Long Time Ago BC, who built a new transport network across Persia, and transformed the country as a result. (Prior to that, princes of Persia had to jump across roofs to get around). 

Today, we’re in a similar situation, as we evolve the web from a place where each site was complete unto itself, into a place where the interaction of sites, through the exchange of data creates a new network that will reshape the world. Lanyrd.com is an example of something that was built quickly and easily from data from other sites. (But it isn’t the semantic web that’d driving that. The top-down approach has been superseded by a more organic approach to building links – which is orthogonal to the efforts of the key semantic advocates.)

Aside: he built a slide with 150 transitions in 30 seconds. I am in awe….

That network is beginning to extend beyond the world of sites, into network-enables devices. He gave a range of examples from the Boris Bike to parking in San Francisco, but I’m going to focus on the Internet-connected scales. You could scan Twitter for the tweets from the scales, and do trends and maps… OK, back to the parking then – by tracking use and networking the data with traffic information, they can vary parking prices to ensure that there’s always one parking space per block, and thus make traffic flow more efficient… Interconnected data opens up the possibility of positive changes to a physical living environment.

And that’s what brings us back to Darius. We’re building the inromation network that the next generation will build on to change the world.

And in the Pessimism Corner, the Economist noting that the roses in the garden are starting to smell a bit off:

Three sets of walls are being built.

The first is national. China’s “great firewall” already imposes tight controls on internet links with the rest of the world, monitoring traffic and making many sites or services unavailable. Other countries, including Iran, Cuba, Saudi Arabia and Vietnam, have done similar things, and other governments are tightening controls on what people can see and do on the internet.

Second, companies are exerting greater control by building “walled gardens”—an approach that appeared to have died out a decade ago. Facebook has its own closed, internal e-mail system, for example. Google has built a suite of integrated web-based services. Users of Apple’s mobile devices access many internet services through small downloadable software applications, or apps, rather than a web browser. By dictating which apps are allowed on its devices, Apple has become a gatekeeper. As apps spread to other mobile devices, and even cars and televisions, other firms will do so too.

Third, there are concerns that network operators looking for new sources of revenue will strike deals with content providers that will favour those websites prepared to pay up.

The Economist notes that:

[many of] the incentives that used to favour greater interconnection now point the other way. Suggesting that “The Web is Dead”, as Wired magazine did recently [broadstuff take on that is over here], is going a bit far. But the net is losing some of its openness and universality.

That’s not always a bad thing. The profits which Apple harvests from its walled garden have enabled it to provide services and devices that delight its customers, who may be happy to trade a little openness for greater security or ease of use.

Now, the Economist is obviously for the Free Trading ideal, but is noting that it is no done deal and that instead a Balkanisation is breaking out, simply because it is easier to make capital gain (financial, social or political) by walling off rather than interconnecting.

So – who is correct – the Coatesian Romantic or the Rational Economic Pessimist?

Well, of course they both are – to an extent. Coates is telling us what is possible if you follow the technology, the Economist is pointing out what is probable if you follow the money.

I would like to believe the former, but incline to the view that the latter is increasingly more likely as, to borrow a point by Edmund Burke, “All that is necessary for the triumph of evil is that good men do nothing” – or in the case of this industry, that so many people use the walled garden services with such joyful abandon is actually worse than “doing nothing”.

We can only hope, as does the Economist – ironically for a Free Trade rag – that outside entities (Good Guy Governments and Corporates that Do No Evil) can come in and lead by example or even stir things up a bit. After all, it has always worked before…..

From TechCrunch:

Facebook is currently trying to register the word “Face” as a trademark. (It already owns the trademark on “Facebook”). Facebook took over the trademark application for “Face” from a company in the UK called CIS Internet Limited, which operated a site called Faceparty.com

It is also trying to patent the word “Like”

They are also going after companies with similar names like Placebook etc now, just because they have the pockets. (Whoever owns Phasebook.com, Faecebook.com and Fazebook.com – watch out!)

Maybe this is the way for Olde Media to make money again – use their cash to trademark all the popular words and then charge everybody for using them. If I recall correctly, to trademark something in the US is about $5k, so if I trademarked “and” and then charged every US media source $.001 a pop for using it, I reckon I’d be a gazillionaire by dinnertime.

Sadly, in the US they will probably get away with it, the whole US IP/Trademarking scene is (too often) essentially a “who pays, wins” game, irrespective of prior usage, legal rights or whatever.

Grauniad remembering nothing and forgetting nothing from the DotCom boom methinks:

Facebook is now being valued at more than $33bn (£21.3bn) as investors try to secure a stake in the social networking site in anticipation of its flotation on the US stock market.

The latest data shows that shares in Facebook are changing hands for up to $76 each, more than double their value at the start of this year. While Facebook is still privately held, shareholders are able to sell the company’s stock through “secondary market” trading.

By buying at these prices, some investors are calculating that Facebook is worth more than eBay or Dell, or nearly twice as much as Yahoo!.

Secondary market trading can artificially inflate the value of a private company, as the relative scarcity of its shares may encourage a buyer to overpay.

In essence the article is somewhat like a cigarette ad – warning you that this stuff can seriously damage your wealth, while nonetheless pumping up the value. But those of less tender years will have seen all this before in the DotCom boom. And here it comes again:

Forgetting Nothing – that very small amounts of illiquid shares trade at stupid prices above real value.

Remembering nothing – that very small amounts of illiquid shares trade at stupid prices above real value.

Another snippet readers may want to look at relating to this – some, ahem, “assertively entrepreneurial” companies see this as a marvellous opportunity to add value in a way that bankers call “arbitrage”

Here we go again, time to throw the pensions into the bonfire of the vanities – and the meedja is leading the charge?. But in The Old Days you got pre-flotation shares at pre-flotation prices, not at a secondary market price driven by scarcity and speculation. Another notch on the post for flat earth news it would seem perhaps? Those who cannot remember the past.…..

Last time round Netscape’s IPO started it all off. On the strength of this, guess who we’re tipping this time.

The Maths of Fooling People using Pareto’s 80/20 split

Umair Haque has a theisis that if companies tried to treat their customers correctly, then that would be better than trying to fool and screw them. He notes:

Despite what many boardrooms believe, counting on your customers’ ignorance isn’t a great business model. It’s more like russian roulette.

His basic hypothesis is that today people are both more savvy and yearn for a more genuine relationship with suppliers, and that there is far more data around so any attempt to behave un-ethically will eventually be strategic suicide. You can see more of his writings here at HBR.

I would love to agree with him, but sadly I can’t – I have encapsulated my argument in the chart above, which is a high level result of my lifetime’s empirical research into the behavioural economics of consumers, which says that by and large 80% of us are sheep 80% of the time.

Thus, as you can see, roughly 2/3rds of the time all consumer sheep can be fleeced all the time. In other words you can build a very sound busness by fooling people, and the (probably more costly) approach of Being Good only impacts about 20% of the market (the right hand side)

Let us hope that Umair is right, and that this number decreases due to all the information washing around, but my (again, empirical) observation is that the dis-information washing around online is growing at a far faster rate – just look at the typical Page 1 results you get on Google when you search for any consumer good these days. And there is a good resaon for that – a lot more money and time is going into dis-information these days, and the web is a cheap place for it.

I think there was a Golden Age when early bloggers etc, who were mostly the genuine, ethical sort, were the only ones really using these new media mediums, so there was a flowering of honesty. But now a quick look at any aggregator like Techmeme or on Twitter will show that PR Spin is inexorably increasing to Olde Media levels.`Greed, of course, is always with us along with death and taxes.

Sadly, that is why we have had to invent regulation and legislation in the past…………..

An opportunity to understand the economics of online influence - Mashable:

Virgin America has partnered with Klout, an analytics service that tracks users’ influence on Twitter (based on variables such as the quality and number of followers and retweets), to extend free flights (plus tax) to influencers in Toronto.

The offer includes free round-trip airfare (Wi-Fi included) between Toronto and San Francisco (SFO) or Los Angeles (LAX) between June 23 and August 23. Those who received invitations for the offer — whether or not they decide to accept the flight that comes with it — were also invited to Virgin America’s Toronto Launch Event on June 29.

……………

We spoke with one person who received (and plans to accept) the offer — Breanna Hughes, a dating blogger and Product Manager at Artez Interactive in Toronto. Hughes has nearly 3,000 followers and a Klout score of 42 on a scale of 100. She kindly shared a snapshot of her Klout profile and the offer e-mail, which we’ve posted below.

A quick look at expedia show that a return flight from Toronto to San Farncisco in the period is betwee £500 and $600, and if we use Breanna Hughes’ 3000 followers thats about $0.17 to $0.2 per follower.

Of course, that is the market value – the cost of filling those seats, assuming as I do that they are probably empty otherwise, allows two observations:

(i) Firstly, the actual cost to the supplier is minimal – those planes are flying anyway so the marginal cost of a blogger bum on an otherwise empty seat is a fraction of theticket value – say 20% tops for all direct costs incurred – so its about $0.034 to $0.04 per follower. Lets assume that Breanna is at the low end of the folllower count and she is 80% of the mean, this allows us to assume its about $0.025 per follower – about half a nickel in US speak, about two pence (tuppence) in UK speak

(ii) Secondly, this is the way influencers will be rewarded in the short term – bartering between a dubious metric (Klout’s “influence” metric is one of many and its impossible to tell who is right at the moment) and people who have surplus assets that have alarge arbitrage between face value and marginal cost.

Now, what I don’t know is how many jollies per annum Breanna will be offered, lets assume one a month, so that follower value rises by about an order of magnitude – about a dime in US speak, or 20p in Uk terms

Now, the newswires are full of Google buying the global online advertising industry – buying Admob being the latest – but that is not the most interesting Googlestory today.

No, the most fascinating is that Google’s getting into the financial trading business – Businessweek:

Google, it turns out, has launched a trading floor to manage its $26.5 billion in cash and short-term investments. The hoard is the third-biggest cash pile among U.S. tech companies, after Microsoft (MSFT) and Cisco’s (CSCO).

One of the company’s goals is to improve the returns on its money, which until now has been managed conservatively. Google doesn’t disclose its rate of return on investments or the targets it has set, but analyst Aaron Kessler of ThinkEquity estimates the company’s 2010 return (including interest income and realized and unrealized gains before tax) at around 2.5 percent.

Strangely enough, of all the other things Google is trying, I think this one is in many ways more closely aligned to their skills – lots of quant needed, handlig large nimbers of transactions very well…plus, its a growth industry and is featherbedded by taxpayers in tough times

Google’s trading room opened in January. The plan is to keep the war chest growing safely and ready to be deployed should the right mergers-and-acquisitions opportunities arise. The investment team has grown to more than 30 people, up from six three years ago. Many of the new arrivals are former Wall Streeters who left lucrative careers at Goldman Sachs (GS), JPMorgan Chase (JPM), and other banks. The man in charge is Brent Callinicos, Google’s 44-year-old treasurer, who joined from Microsoft in 2007, back when Google had $11 billion in cash. “This isn’t fast money, this is patient money,” he says. His crew works in a recently remodeled finance building on the company’s corporate campus in Mountain View, Calif., complete with a rock climbing wall, massage chairs, murals of tropical sunsets, and bamboo wall panels. In a second-floor space accessed by key card—the trading room—the Wall Street vets tap out trades at desks with six computer screens.

One of the things we’ve been watching with interest over the last 2 years is the growth of Internet based “Non Bank” banks – by and large totally unregulated entities dealing with large amounts of funds. We also suspect, as regulation catches up with the last cycle’s Private Equity pirates, this area will only grow and grow.

Not that we think Google will behave with anything less than total integrity of course, as they are doing with the “accidental” WiFI data they collected

The 2 Sided Facebook Market Dynamic creates tension between user and funder

Last night (UK time) Facebook announced its new privacy settings. Much has been written about it – tactically, operationally, and practically.

In summary, Facebook has given the absolute minumum ground it needed to in order to get major policywatch bodies off its back in the short term, and only yielded after extreme pressure, and still has the system sharing lots of user data as the default option. And this is just one battle, not the end of the war (to use the Harvard Business Review analogy) and Facebook has not been routed, but has retired from the field in good order – for now.

What I want to do in this post is explain is why this will not be the last run-in that users will have with Facebook about privacy. To do so its useful to understand these two statements by Mark Zuckerberg in his announcement last night. First, on their blog:

I am pleased to say that with these changes the overhaul of Facebook’s privacy model is complete. If you find these changes helpful, then we plan to keep this privacy framework for a long time. That means you won’t need to worry about changes. (Believe me, we’re probably happier about this than you are.)

And, in the press conference he said:

“It’s not about the money. It might seem weird, we’re not doing this to make more money. For all the people inside the company that could not be more true. It’s such a big disconnect that we’re doing this for the money.”

This is what makes me sceptical about the Facebook Official Future, because he is being knowingly disingenuous in my view – and that tells us a lot to start with. It is about the money – Facebook needs to generate real revenues, sufficient to justify not just the existing $15bn valuation but also the monster IPO that its backers are looking for.

And thus Facebook has two totally competing objectives – the system dynamic diagram at the top explains this. What they have done today by rescinding some of their “un”privacy moves is try to create a more virtuous circle on the user side – increasing privacy increases trust, so users generate more data. This replaces the Vicious Cycle I wrote about yesterday, wherein reducing privacy reduces the amount of useful data that users will share.

The problem now is, after these changes Facebook makes less money than it did yesterday, and is less able to mine its user data and pass that on.

And as the diagram above shows, Facebook is actually operating in a 2 sided market in which one side – the Users – consume the service but pay nothing. It’s real stakeholders – its backers – are Funders and Advertisers, and they want Facebook to make money (the former party) and get good user data (the latter party).

Even more worryingly, in both the vicious and virtuous cycles, Facebook potentially makes less money. The difference is timing. Facebook makes less money almost immediately it institutes increased privacy. However, if it removes privacy it makes a lot more money until the users catch on and the next furore starts and they then retreat from that position.

So the obvious thing to do is advance in miles and retreat in yards, as late as possible.

So the one thing we can predict with certainty is that the changes to Facebook’s privacy model are not complete – because its about the money. Which is why we predict we will see – again and again – Facebook will make great strides in privacy removal, wait as long as it can, try and contain the fallout, and then try and retreat as little as possible. But we do suspect they will change their modus operandi – there were too many people coming out the woodwork to check on them this time, so we predict from now on in it will be a far more stealthy erosion.

System Dynamic of Facebook’s continual ratchet back of user privacy

The Harvard Business Review makes a point we made several days ago with respect to the problem with Facebok’s business model:

Facebook’s imbroglio over privacy reveals what may be a fatal business model. I know because my students at Parsons The New School For Design tell me so. They live on Facebook and they are furious at it. This was the technology platform they were born into, built their friendships around, and expected to be with them as they grew up, got jobs, and had families. They just assumed Facebook would evolve as their lives shifted from adolescent to adult and their needs changed. Facebook’s failure to recognize this culture change deeply threatens its future profits. At the moment, it has an audience that is at war with its advertisers. Not good.

To understand this war we use the system dynamic model above. What it shows is that Facebook is essentially involved in a vicious circle in its business model. The initial condition is that Facebook set up a fairly secure environment for people to share data with their immediate social network, but has then steadily opened it up to try and monetise it. In doing this they are storing up the seeds of their own demise.

The underlying problem is that the average revenue per user on a social network from straight up Ads is very small – certainly not enough to justify a $15bn plus valuation! Thus they have to explore every facet of datamining possible to maximise that tiny revenue stream and potentially open up others.

So, what happens is this – initial condition is a fast growing and secure private social network. What they then do (starting with Beacon) is ratchet up the “unprivacy” scale (“Start Here” on the chart). Their aim is to expose more data and thus monetise it

The problem they have is that the user data on Facebook is not a static thing – it is managed by another agent in the system aka the user. The user (with a time lag, and in different ways) slowly – and over time more rapidly starts to get nervous about this, and starts to react. This takes the form of some or all of:

- no longer sharing as much data
- falsifying data
- interacting less with the system, slowly resetting their privacy controls etc
- no longer clicking on Ads
- as a last resort, exit (Facebook may well keep the data but it still loses value over time

The net effect is, en masse, to reduce the average value of the user to Facebook’s real customer – the advertisers (A “customer” is someone who pays you money, a “User” doesn’t and gets used – never confuse these two in a FreeConomic model)

The problem Facebook then has is that it needs to open up the privacy even more to extract the same amount of value. This is why we see the steady erosion of user privacy (see the diagram below to see how much they have moved since 2005)

Facebook rolling back the user’s privacy (blue shows the public areas)

But this action brings a user reaction, as more users get more skittish and more start to ratchet back on the data they display, thus reducing their value further. To prevent this Facebook tries to implement things like its Byzantine Privacy System but this in itself prompts further distrust, and so it goes on.

In other words a “vicious cycle” has opened up. This can to an extent be mitigated when there is still new user growth as the value of new users added hides the losses from old users ratcheting back – but unless broken it will ultimately be net value destructive for Facebook. It starts to rear its head above the waterline as new user growth slows, and/or if new users are more savvy and enter Facebook with all the privacy safeguards on high.

Their calculation right now must be about where they will be at the time of their IPO. Can they keep growth going at such a rate, and keep ratcheting down on the privacy, so that they can IPO before the vicious cycle becomes visible in the numbers.

To this end, they need attempts to regulate them to do “Opt In” approaches and to simplify the user privacy settings like they need a hole in the head. Little surprise then that the recent brouhaha has finally forced their hand and they have had to promise to essentially regulate themselves by changing the privacy settings rather than risk outside interference. Whether it, together with their lobbying Washington, will be enough remains to be seen – as they are being closely watched now from all over.

By the way, I always thought Facebook’s best option would be to sell online goods that allow one to play the “game” of Facebook better. That is a far more benign way of monetising than strip-datamining.

Economics news from two companies we cover…Twitter and Google:

Twitter first – they are signalling that they too have to exit the Freeconomic world and make real money, and – as we (and, to be fair, many others) predicted at least a year ago, they will tax those companies who are trying to make their own fortunes by riding on top of Twitter’s ecosystem. Not only that, but they will not let these 3rd parties insert their own Ad-clients into the stream – the rotters!. The only surprise is that anyone is surprised.

More amusing though is a lesson in Googlenomics – plus a video from their Chief Economist, Hal Varian. Googlenomics can best be defined as taking all the benefits (and I mean all….) and ignoring all the costs. They can’t get away with that for their own accounts of course – accountancy rules see to that (everyone tries, of course – Enron ring a bell?) but when it comes to measuring your economic impact on the economy to try and charm Washington’s legislators to look the other way, they make some claims that even a Web 2.0 PR would blush at:

….we conservatively estimate that for every $1 a business spends on AdWords, they receive an average of $8 in profit through Google Search and AdWords. Thus, to derive the economic value received by advertisers, we multiply our AdWords revenue on Google.com search results in 2009 – what advertisers spent – by 8.

So what’s wrong with this picture, I hear you ask?

The argument made here – and pretty much throughout the report, in essence is that if you advertise on Google lo and behold then customers come and spend money with you, and Google counts that money you made as value they added all on their lonesome. They have been “conservative” in merely multiplying the Ad dollar’s impact by 8. Their argument has 5 main holes:

Firstly – That claimed 8 fold impact is not on revenue, mind you – but on profit! Profit is what I have after I have deducted costs from my revenues. So adding $1 of Google Advertising COST generates 8 fold more PROFITS. Hell, that is a perpetual money making machine (or, as I strongly suspect, Googlenomics doesn’t actually recognises costs and treats revenue as the same thing as profits )

Secondly, its a zero sum game – if I spend my Ad dollar elsewhere, presumably that outfit can also claim an 8-fold increase in impact. Big picture – Ad spending is a fairly constant % of GDP (1-2% depending on the country) and this number is changing very slowly year by year. So, if Google is taking that Ad dollar all it means is someone else is losing it.

Thirdly, its double counting. If everyone who supplies services to my company claims they therefore have an 8-fold knock on impact on my revenues (never mind my profits) because I can serve my customers , its a perpetual GDP-growth machine (better known as Greeceonomics ).

Fourthly, it pays absolutely no attention to, ahem, the costs of being a Google. Lets have for starters:

- An uncompetitive market for online Ads, run by in effect an operational near-monopoly. If there was more competition, Ad prices would be lower – now that would be a real benefit to my company.

- The reduction in revenue from all the content based industries that Google search and its other tools have hollowed out, never mind the digitisation of copyrighted books. While its been great for me to catch up on all that stuff on YouTube for free, don’t kid yourself that its not a real but unaccounted for loss – or “market externality” as its called by economists – to someone else.

- As with IBM and Microdsoft before it, its sheer scale, use of its muscle and so on is actually probably having a value reducing effect on some new and high value markets. How many startups has Google bought and throttled? How many ideas have died as a piece of Google vapourware hits the A List blogs?

Fifthly, there is the cost to an economy of dealing with rogue companies. Google is no longer a “Do No Evil” company, the episodes with the WiFi sniffing, User Data holding despite EU orders, Buzz and email etc tell you that this company is going to cost a lot of money for regulators etc to watch and restrain.

Interestingly, they also count the (far smaller) donations to not-for-profits they have made, but interestingly enough do not claim a multiple impact here (odd that, if anything I would have thought it was easier to argue as most of those services would not exist otherwise).

What can one say – I just think its laughably ham fisted, if they were really trying to convince they should have put in a few negatives, the odd market externality or two.

Afterthought – What is really odd though is that they have not counted the impact of their major service – search – on reducing friction in transaction costs, which probably has had a huge impact – that is in my view wher the real impact is. The Ads and underlying datamining are actually the cost to the user of using the services where Google really adds value. But then, as I noted above, Googlenomics doesn’t count costs….