Taking the Social Revolution Back From the Marketers

Facebook recently bought Microsoft’s advertising platform, Atlas, as it seeks to offer greater functionality and insights to its advertisers.  This was a subject of great discussion in the Internet Oldtimers  group of which I’m a member.  Friend and fellow member Tom Cunniff made a provocative statement which encouraged me to respond. While the rules of the group are “what happens on the list stays on the list” — we are free to talk “out of school” — Tom was gracious enough to let me reprint our exchange here. (By the way, if you’re an advertiser or publisher looking for deep insights into the whole advertising space, on- and offline, Tom is your man.)

Tom:

According to CNET, “The deal could help Facebook develop its own one-stop shop for advertisers and agencies to buy, sell, optimize, and track ads across the Web. The idea is to help Facebook give marketers tools to target ads based on social habits that it captures, and to better understand how social activity influences consumer purchases. (…)

The expectation (is) that Facebook will create an ad network that lets it sell ads outside of (FB). Facebook is already plugged into tons of Web sites through Facebook Connect, and each time people share or “like” an item on a site, Facebook’s data trove gets a little bigger. Facebook can connect that data with the information from within Facebook — the social graph — to create a social ad network that is potentially more effective than Google’s AdSense.”

Personally I don’t believe social activity influences consumer purchases much at all. It has value, but no more or less than a billboard: it’s drive-by media.

Boy, that last line got my blood boiling.  So I responded:

Tom, you’re absolutely right and you’re completely wrong.  And we’re about to ignite a debate that should get us a keynote at ad-tech or even better.  :)

You’re right that  today’s social activity doesn’t influence much consumer behavior.  Even worse than the drive-by billboard — that has some value — it’s more like somebody giving you the hard commercial pitch during your cocktail party.  Not only do you not want to hear it, it probably produces some negative brand value.  Marketers may be able to gain some deep insights but, channeling my inner Nassim Taleb, I’m not sure that this increased data produces improved selling.  But that’s a discussion for another day.

But here’s where you’re wrong.  I have believed for a long time now, over five years, that the ultimate expression of the social revolution is that the consumer will gain increased power.   Today’s consumer is largely at the mercy of marketers.  The marketers have all the goods, all the insights, all the power.  And how are they using that?  Among other things, price discrimination.  There used to be things we all saw (largely) the same price on — things at the supermarket, things in the department store — and things that we all saw (largely) different prices on (cars, hotels, airlines).  There was some price discrimination — the same item might cost different at Neiman Marcus and Walmart — but many things were very similarly priced.  Now, with the “advances” of online, the things that were priced differently are being driven closer together while paradoxically the things that were priced similarly are now being priced differently.
As to the latter, we’ve seen the recent exposes that Amazon, Staples and many others charge different prices based on competitive calculations.  The price you see likely isn’t the price I’ll see.  But I don’t think that’s durable.  Look at what’s happening to those items that were priced differently. Take cars.  I can’t vouch for the accuracy of the data (or my memory) but in the pre-Internet days something like half of all cars were sold at sticker price.  You didn’t know what someone else paid for the same car and dealers were able to exploit that lack of information.  Now the price you pay for a car is much more close to that which another person pays and some manufacturers are even dabbling with no-haggle pricing, basically saying you’ve got enough market information that you’re going to be able to negotiate effectively and therefore we’ll just bake that realization into our whole approach to pricing.  Take hotels and airfares.  Some of the booking engines will automatically give you a lower price if someone else makes a reservation at that price.  There are whole web sites now devoted to this kind of thing.  Yapta’s one and while I can’t remember it, there’s one hotel site that has you send them your reservation and they’ll actually shop it around to get you a lower rate.
I think the real power of the social revolution is that it will actually give consumers a more equal footing.  We’ll have more information and while the marketers won’t get the value of their increased information, because they’re asymptoting to no more value, we’re still on the steep part of the curve.  In fact, I believe this is where the “Facebook killer” will come from.  Facebook had an opportunity to be the champion of the individual as contrasted with Google’s championing of the marketer.  But they made the easy monetization choice and cast their lot with the advertisers.  Someone’s going to step into that role.  It could be a visionary startup.  If I were Steve Ballmer at Microsoft, thinking I’ve missed the social revolution, I might make that play, hedging bets with their Facebook relationship/investment.  It could even be someone like IBM, effectively an arms dealer equipping both sides of the battle.  They’re actually the leading player in the whole Open Social movement these days, taking over when Google inevitably lost interest. (It didn’t rule the world in the first 72 hours.)
Tom:

In my opinion, we routinely make the mistake of confusing direct response (DR) with brand marketing and try to make them the same. But, they are fundamentally different.All the pricing stuff you referenced is absolutely right in commerce but doesn’t have much at all to do with brands. In a transaction, more information is almost always a good thing — “you can buy the same thing across the street for less” is literally worth something to know.In a brand relationship, more information is often neutral or even slightly negative (“yeah, I know you prefer jalapeno ketchup but I hate jalapeno so…”).There are many things in our life that are not a considered purchase, and that’s actually an *awesome* thing. I can walk around the supermarket tossing stuff in the basket without thinking about it. I can either zone out — “hmm, with a better drum track this Muzak version of Live and Let Die would be really good” — or I can invest my time in thinking about something else.

In social, there’s this weird illusion that because Jonathan “likes” jalapeno ketchup his friends will somehow “like” it too, because he’s an influencer. But the reality is that at best — at the very best — a friend who hasn’t had jalapeno ketchup in awhile might see that you “liked” the brand and think “what the hell, I’ll pick up a bottle”.

Again, I’m not saying this has zero value. It just doesn’t have much more value than a billboard. It’s drive-by media.

Me:
I’ll accept your premise that DR and brand marketing are different, or at least that’s an argument for another day.  I could be provocative and say we’re getting closer to that thing to which every brand marketer pays lip service to but secretly laughs at:  your brand is what your customer says it is.  I believe that to a point but for the sake of this argument, I want to go in another direction.
Where I want to go is declaring that social/big data/mobile is moving us towards a world where DR components are increasingly prominent.  In the good old days, I was a loyal United customer.  Now I’ve got price comparison ability, unbundled services and shared experiences and what before was a brand/loyalty purchase is  +today, for me, much more of a DR-like transaction.  The “loyalty” programs are being devalued and instead we have new loyalty providers.  I get my points less from an airline or a hotel but from a credit card or from Founders Card, effectively a collection of like-minded customers who have banded together to achieve collective economic power that may not have been available to us individually.  We’re growing more DR-like and the brands we’re loyal to are those who aggregate our clout across the brands to which we once might have been loyal.
Tom:

The idea of brand loyalty was largely cooked up by ad agencies and embraced by marketers who want to believe it.In reality, in nearly every product or service category there are two or three “acceptable” brands a consumer might buy. Most customers have a preference, but can easily be swayed by a coupon or other offer.

More than anything, your brand is the product. Apple isn’t cool because of its ads — its ads have been cool because the products have been cool. The iPhone and iPad launch ads were basically product demos. Here’s the product and a hand using it, on a white background. And some cool music.

The closer a brand’s products are to being a commodity, the harder it is for advertising to differentiate them and the lower brand loyalty is.

But I would argue that the real reasons deals are becoming more prevalent are because:
A) that’s what marketers were erroneously taught that this is what “digital best practices” are; and
B) most companies over the past three decades have become much better at taking costs out of products than at putting innovation into them.

Tom again:

More than anything, my argument rests on efficiency — both for the marketer and the consumer.Let’s start with marketers. There is no doubt that word of mouth is effective, and that social media mentions have value (even as drive-by media). The question for marketers: what is the most efficient way to generate this?

I would argue that the two most efficient tools to generate these are:
1) Superior products; and
2) Mass marketing

Consider Apple vs. Dell. Apple has invested zero in social media. ZERO. Dell has been a poster child as an early adopter of social media.

Apple has invested heavily in creating superior products and in mass marketing. Dell has invested heavily in social media.

Which brand has more positive word of mouth and social media mentions?

Now, let’s consider consumers. There is no doubt that there are more ways than ever to research products, and that advertising is generally viewed with skepticism and sometimes derision.

However…

Deeply researching only those products that are in your kitchen would take a large number of hours for scant return. It’s just not efficient. So, how do we choose? We know what the big brands are because they advertise — which also ensures they are the ones we can easily buy at our local store. All of these brands have some sort of reputation, good or bad.

Typically, a quotidian purchase gets very little consideration at all. And this is *good*. The downside risk of choosing the wrong brand is scant, and the upside reward of choosing a better brand at the supermarket is marginal at best.

This flips *entirely* for high-consideration purchases. Trust me when I tell you my wife and I researched our new kitchen appliances to death. Same for our car, same for travel. Why? There was big upside to getting it right and big downside to getting it wrong.

Despite all this, a problem for Facebook — and for all of social media — is that there’s only so much consumers can hear before they stick their fingers in their ears. Personally, the more people I follow on Twitter, the more unusable it gets. The more feeds in my RSS reader, the more unusable it gets.

Attention is scant, and fragmented. On a fundamental level, I get that being “always on” makes it more likely that a customer will randomly bump into my message. But when everyone is “always on” it’s also damned noisy.

The final word
It’s my blog.  I get the last word. :)  Tom and I perhaps agree more than we disagree.  The current forms of “social advertising” are fundamentally flawed.  The reason why Google is so wildly profitable is that its advertising space is highly contextual.  When I search, the fact that someone will actually pay to put their message in front of me means they think they have something to offer to me.  In a social context, you may have great information about me but the context is wrong.  I’m not on Facebook to be advertised to.  Advertisers are not enhancing my social interactions.  We’re still years away from it but I believe the social revolution will flip the relationship between marketers and customers in profound ways.  But that’s enough for today.
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1:1 Marketing is Wrong

[Quick note:  I'm going to experiment with what I call some short-form blog posts.  Being an analyst, I tend to want to explain my reasoning in depth.  Sometimes, however, I just want to get out a sharply worded position or observation, so I'm going to intersperse my longer pieces with some of these quick hits.  Let me know what you think.]

Some 20 years or so ago, in the early days of the Internet, marketing consultants Don Peppers and Martha Rogers came up with the notion of 1:1 Marketing.  The core proposition behind it is to treat consumers like individuals.  Sounds good, right?  Well, I think it has been a fool’s chase and I can’t begin to imagine how much money has been spent in its pursuit.  And the more data we accumulate, the further we get from being able to realize this “vision.”  What’s wrong with the vision?

  • From a marketer’s perspective, you don’t need to get to 1:1.  Let’s use beer as an example.  What do you need to know?  Probably just my gender and IQ.  To make a gross generalization:
    • If female, then light beer.
    • If male and IQ>93, then imported beer.
    • If male and IQ<93, then Budweiser.
  • From a consumer’s perspective, do you really care to have that close a relationship with your deodorant or your automobile?  At some point, it even gets creepy.  It’s just a deodorant for God’s sake, not a lifestyle expression (unless you use Axe).

Instead of 1:1 marketing, we — both sides of the equation — want sufficiently meaningful differentiation.  I’m not going to ® that term.  It’s not particularly catchy.  But that’s what serves both marketers and customers very well.  We don’t have to drive to deeper and deeper levels of differentiation.  We just need to get to some degree of meaningful differentiation.  Light beer or not?  Import cars or domestic?  Museums or baseball?  As brands drive to get finer and finer, bad things happen:

  • Costs go way up to accumulate and process all the unnecessary data.
  • You slow down your decision-making because you’re considering too many variables.
  • You get further away from what the customer self-identifies as their relevant affiliation.  I’m a Mets fan (I know, I know) and identify as a whole with that group, not an upper-middle class, educated professional with two kids, a dog and, occasionally, a job.  When you differentiate me from the rest of the group on some vague 1:1 notion, you diminish your attractiveness, not enhance it.

As a consumer, I generally identify as part of a tribe.  Identify those meaningful tribes and market to them, not some ridiculous notion of 1:1 that we’ll never achieve and would never deliver on its promise even if we could.  It’s time to say “the emperor has no clothes” to this whole 1:1 marketing thing.  Social media has given it new life.  Stop it now.

Social Ennui: Presaging the Real Revolution

A friend this morning did it.  He set me off.  His offense:  calling social media “old wine in new bottles.”  (And why is this a pejorative anyhow?  Isn’t old wine better??  At least for my readership.)  I couldn’t disagree more violently.

Before, however, I get into the heart of my rant, let me observe that it’s going to be harder to prove that in 2011 than even in 2010.  Why?  Because I think a state of “social ennui” is setting in.  For those of you who are unilingual, ennui is French for “boredom.”  Gartner would call this phenomenon the “trough of disillusionment.”  Everyone’s on the social media bandwagon now.  You’ve got 1,000 Facebook friends, you’re a social media consultant.  Social media will solve disease, global warming, make us all happier, richer and more content.  Better looking, too.  People are way overpromising and underdelivering.  But, as I’ve observed earlier in this blog, that’s the nature of technological change.  We overstate the impact and benefits in the short-term.  God, is that going on here!  But interestingly, we understate the impact and change in the medium-term.  And I again fully expect that to be the case with “social media.”

Social media is in the still very early stages of something that’s going to end up flipping relationships and changing others.  No, we’re not going to throw out everything we know.  The new rarely ever does that.  Yes, we still ride horses.  But the advent of the automobile changed what and how we use horses.  The most earnest horse supporter would point out “but the Amish still live without the car” or “well, I could use the horse if I wanted to.”  Meanwhile, the rest of us would just humor, or ignore, them.  More importantly, though, the car didn’t just change the way we use horses.  It changed the way we live and work.  Distances were expanded.  And gaps were closed.  The suburbs were created.  At first, people probably observed “now I can get from point A to point B faster.”  That’s the stage we’re in with social media.  Only later did people say “or for the same amount of time, I can now go a lot further which changes where I can live.”  And the really smart people said “this is going to change the nature of our society and I can build products and solutions that capitalize on this newfound mobility.”

So, what is “social” going to change?  PR is in the early stages of changing radically.  I have made the argument for over a decade now that while we called the discipline P-as-in-public-R, it had largely become M-as-in-media-R as the pathway to the public was through the media.  PR firms were evaluated based on their friendships with key reporters and their ability to secure covers on Forbes and Fortune.  The Internet was already in the process of changing public relations (if not the PR industry).  What is a press release, anyhow?  The idea was to tell your story to intrigue a reporter who would write about it and tell the public.  But Google indexes press releases.  The public is seeing that release.  Don’t write for the reporter, who’s overwhelmed by these outreaches anyhow.  Write for the public.  (No, most aren’t even doing that.)

But there’s more.  Social media changes “public relations” in profound fashion.  Not only do you have a direct path to the public, and your customers and competitors also have those same direct paths, your paths to the “influencers” have been augmented in significant ways, and new influencers have emerged who influence both traditional influencers and your buying public.  Yeah, that’s a lot of change.  I won’t get into the whole social media “you’ve got to be part of the conversation” discussion here.  First, that’s a whole other post.  Second, if I hear one more person say “you’ve got to be part of the conversation,” I’m going to slap them.  That’s exactly why we’re suffering from social ennui.  Lastly, the whole discussion is already over-discussed.  You don’t need yet another perspective, however nuanced, from me.

But we still haven’t scratched the surface of the change to come.  Longer term, I am fiercely interested in the emerging discipline known as VRM.  Vendor relationship management.  Its most powerful advocate is Doc Searls, he of the Cluetrain Manifesto (can you believe that was almost 12 years ago?!).  I actually arrived at the concept independently.  I was asked a few years ago to do a presentation on Social CRM.  I talked a little about how “social” provides new insights into the customer relationship equation, providing new insights previously unavailable.  I went on that putting “social” in front of everything reminded me of Internet 1.0 when we put an “e” in front of everything.  eBusiness.  eMarketing.  eThis.  eThat. Until we realize the distinction was no longer differentiating and in fact no longer valid.  (It’s interesting.  Even my spell-checker wants to flag eBusiness as a typo.)  It was business.  It was marketing.  And so ultimately SCRM is just the next iteration of CRM.  But, I hypothesized, the big change came when users flipped the relationship and started managing their vendor relationships the same way the vendors manage their relationships with us.  SCRM leads to VRM.  When after the presentation, someone told me about existing early thinking about VRM, I was both disappointed (I thought I was about to invent my first category) and thrilled (there’s momentum!!).  As an analyst, this is an important moment.  We can do all the theorizing we want but unless someone’s actually building this stuff, it’s not terribly interesting.

While VRM is far from mainstream now (for many, this will be the first time you’ve even heard of the notion), there’s an interesting community growing up around it and some large retailers are dabbling and monitoring.  The concept here is twofold.  One, the big vision for the field, is that tools will be developed that will enable customers to manage their relationships with vendors and that the relationship is ultimately owned by the customer, not the vendor.  CRM will never give a full view of the customer because the customer deals with multiple channels and providers.  VRM is the only way that picture can be developed…and customers will share that view with vendors who offer value in return.  At its most extreme, imagine an easy-to-create-and-manage iRFP (individual request-for-proposal) process.  Yes, it’s hard to imagine and even harder to do but if done, wildly powerful.  The more selfish view for retailers, as I heard another friend express to a major retailer, “what if you knew what a customer was looking for when they walked in your store.  What if you really knew?”  Today, at best you’re making a guess based on past purchase patterns, incentives you’ve provided, etc.  But if you know the totality of what they were looking for, you could sell solutions, not products.  You could upsell.  You could target.

You might argue this is hard and will never happen.  I won’t argue with the first part but I will argue with the second part.  On second thought, I will argue with the first part.  The pieces are all out there.  Assembling them isn’t very hard.  At its most basic level, Groupon and LivingSocial are VRM 1.0.  Assemble large numbers of customers and demand a deal.  That model has been proven reasonably successfully.

You might also argue that “this isn’t social media.”  I don’t want to get into the “this is or isn’t social media debate” but I would say that this is only possible with the existence of social media.  We’ve made it very easy for people to create, assemble and manage their buying preferences and signals.  Wish lists, tweets and Facebook statuses, GetGlue updates, FourSquare checkins and Quora questions can be combined to put together an interesting picture of what you’re doing/thinking.  When meta-tools evolve  to assemble these into coherent solutions, tying together product discovery, acquisition, utilization and support, we will be on to something exciting.

You might argue that consumers are lazy and that they don’t want to manage their relationships.  OK, you’ve got me there.  You’re right.  This is the real stumbling block.  The tools had better be REAL easy to use with REAL economic value in exchange for participation.  This will require serious software work that assembles what consumers are already doing with social media, parsing and assembling it and making reasonable suggestions and solutions out of our piecemeal, bottom’s-up approach to information sharing.

There are already real players in this space.  Look at Kynetx.  I pick them not because they’re totally on point with VRM, although they can and will get there.  I pick them not because they’re necessarily the best solution out there; I haven’t spent enough time looking at vendors to make a Magic Quadrant.  I pick them because my old friend and foil, Craig Burton (VP of Marketing for Novell, when Novell owned PC networking 23 years ago) told me about them a year ago and brought me in to meet them.  The problems they’re trying to solve are real and exciting, and great for us users.

VRM is the next big thing.  Even as social ennui sets in and we wonder what all the hype was about, there’s real change coming around the corner.  This isn’t old wine in new bottles, or at least it won’t be.  If I were a mainstream marketer, I might take the old wine position for now.  I wouldn’t want to try and sell my company on this from the inside right now.  They’d look at your strangely.  (Well, they probably already do that.)  But in my role, as outside provocateur, I’m going to yelling this one louder and louder.  A decade ago, we were yelling that the Internet was going to change everything.  Pets.com and Webvan died.  The naysayers snickered.  And then we went and changed everything.  We’re going to do it again.  Come along for the ride.

Facebook’s $50 Billion Valuation: That Sounds Reasonable, Even Cheap

2011 has begun with news that Facebook has secured a new round of funding which values the company at $50 billion.  I actually think that’s a reasonable valuation (although in another post later today or tomorrow, I’ll talk about my expectations of a social ennui in 2011, as we come to realize the fundamentally flawed approaches most brands are taking towards the notion of social engagement; yes, I know, a provocative statement).  In fact, I believe there’s still room for growth in Facebook’s valuation nor do I expect this valuation will cool the private trade in Facebook shares.  Many early commentators seem to the valuation is insanely high.  I actually engaged in a Twitter exchange with two analysts I hold in the highest esteem — Sameer Patel and Esteban Kolsky — around 2:30 this morning on this very subject.

My points:

  • Google’s market cap is nearly $200 billion.  Is Google really four times more valuable than Facebook?
  • Users now spend more time on Facebook than they do on Google, Yahoo…or any other web property.  Somewhere that’s monetizable (although that’s a post for another day soon).
  • Users are not only exchanging information about where and what they eat, social platforms are becoming an increasingly important way of discovering information, augmenting and, yes, replacing search in that regard.  (Where did you find out about this blog post?)
  • It is much easier to for a user to replace Google than it is to replace Facebook.  If you want to replace Google, you go to Bing.  Period.  You might even find the experience better.  OK, it’s a little tougher than that.  You might have to exchange tool bars, change a couple of preference settings on your computer and update a few links and passwords.  Those of you reading this blog are probably more sophisticated than most so you have a few more things to change but also the technical wherewithal to do so.  You could do it today and wouldn’t miss a thing.  I’ve even seen a few friends announce their New Year’s resolutions as going Google-free this year.  (Well, some of them said Google- and Facebook-free although ironically they made this proclamation on Facebook.)  Anyhow, you could reasonably go Google-free and have a completely adequate replacement by the end of the day.  How would you replace Facebook, however?  This assumes, of course, that you think there’s any value in a social platform, and I’m not going to try to defend against the argument that you don’t need to replace Facebook.  Facebook is so much more than a listing of who’s doing what but also categorizes my relationships (business and professional), captures activities (and serves as the log-in) to/from many third-party web sites and has otherwise become an important piece of the connective tissue.  Replacing Facebook means rebuilding your social connections, likely across multiple platforms involving multiple acts of outreach to friends on the disparate platforms.  Rebuilding your social graph is time-consuming and likely to be incomplete.  “Substitutability” is one component of the economic definition of a commodity.  Google is highly substitutable, Facebook is not.

Sameer and Esteban also suggest that Facebook is just the flavor du jour and that they’re due for a fall.  I do not believe this is an issue in the horizon over which this valuation must be justified.  Yes, in the early days of key technology platforms, we burn rapidly through a number of them before sticking on one for a variety of complex reasons, usually beyond the control of the platform owner itself.  How many search engines were your favorite/default?  I count Yahoo, Excite, Ask Jeeves and Alta Vista as past favorites before sticking on Google.  Similarly, I used several social platforms before Facebook achieved its prominent and dominant state.  500 million users gives you a pretty strong base from which to retain market leadership and even competitors are now being forced to embrace Facebook’s role in the “ownership” of the social graph (witness MySpace’s recent concession; TechCrunch has a particularly amusing take on it).

    I hasten to acknowledge that Google has done a much better job of monetizing its position and that in fact is the enduring genius of Google.  As I and others have often observed, Google may really be just a one-trick pony…but it’s a damn good trick.  Facebook is nowhere near as mature as Google when it comes to understanding, or inventing, how it’s going to monetize its commanding position.  I think, however, that represents as much a failing of brands and consumers as it does of Facebook.  Maybe if they hadn’t handle the whole Beacon initiative in such ham-handed fashion, we’d be much further along…but there’s no turning back that clock and besides, Facebook has continued to make boneheaded moves in maintaining the critical user trust although, critically, I do not believe it has even approached the status of irreparably damaging that trust.  People just haven’t abandoned the platform despite all the posturing and hand-wringing.

    Anyhow, I believe profoundly in the ability to monetize social platforms and their tremendous power in transforming the relationships between brands and customers, customers and customers and among brands themselves.  Today’s blather about “being part of the conversation” is most assuredly not the answer.  A few years from now we’ll look back on today’s efforts and laugh at just how immature, ineffective and ultimately misguided they were.  In fact, I think this will lead to a bit of what I call social ennui (that’s French for “boredom”), which I actually believe will be a dominant theme in social media in 2011.  Again, I’ll write about that today or tomorrow in my look-ahead blog piece.  For now, I’ll just leave it that a $50 billion valuation for Facebook sounds actually quite reasonable and that it’s not evidence of a bubble (although Groupon’s walking away from $6 billion may be).

    Happy 2011, friends.

    Groupon: TFM

    Groupon has apparently turned down as much as a $6 billion acquisition offer from Google.  They’re thinking that if they grow their business out a little more, an IPO or subsequent acquisition could bring them as much as twice as much.  I have three letters for them:  TFM!!!

    What, you say, is TFM?  Some of you may remember Pointcast.  It was a darling of the very early Internet days.  In fact, it was a pre-Internet company, providing dial-up access to its information resource.  I actually was a delighted user of their screen-saver product (and still wish I had something like it).  Rumors had it that Rupert Murdoch and News Corp. had made a $450 million offer to acquire the company.  I was on the advisory board of ad-tech at that time and we had Chris Hassett, Pointcast’s CEO, on stage and asked him about the rumors.  He wouldn’t confirm them nor deny them, indicating that there was a lot of discussion about how best to maximize their value and saying that he believed it would be best maximized via an IPO.  “IPO?,” someone in the audience called out, “TFM!!”  “TFM?,” Hassett replied.  “Take the f***ing money.”

    Two-and-a-half years later, Pointcast sold the company.  For $7 million.

    Do you really believe that Groupon’s position is so unassailable and their approach so unrepeatable that there’s no risk to their future opportunity?  Would you turn down $6 billion??

    Groupon, TFM!!!

    UPDATE 1/14/2011

    It boggles my mind but maybe it was a good idea to turn down the $6 billion.  If, that is, you believe these rumors of a $15 billion IPO.  I admit to not having looked at any financial models but my sense of this valuation is that it’s totally insane.  On the one hand, you’d think that there’s some barrier to entry in this space, with the requirement to build out a local salesforce.  On the other hand, I already get at least five or six discount offer emails a day, some with a local focus (e.g., LivingSocial), some with a national focus (e.g., Woot) and some (e.g., Thrillist) which bridge the two.  And the people who do those mailers (e.g., Valpak) are getting into that business as well.

    There’s a lot of competition from entrenched players already.  There’s going to be growing competition from big players (e.g., Google, Facebook).  Pretty soon, everyone is going to be playing this game.  Is Groupon really the killer implementation?  Or are they getting out just in time?  Again, I’m no valuation expert but I think these numbers are just wild.

    UPDATE 2 1/14/2011

    Interesting take from Greylock, one of the VCs investing in Groupon.  They say two things for why they invested in Groupon:

    1. The power of data.  I’m not convinced Groupon has any inherent advantages or different slants on this subject to merit a stratospheric valuation.
    2. This is a winner-takes-most kind of market.  I see no justification for that assertion.  On any given day, I’ll peruse a few of these offers and purchase based on what’s most interesting to me, not the source which originates them.  I don’t think they have any inherent advantages in offer acquisition that make their offerings any better than anyone else’s.  There are so many local merchants that consolidation in merchant acquisition is unlikely to occur.  I can think of no example where there has been this consolidation other than maybe Craigslist and eBay, and their approaches (zillions of items) are different than Groupon’s and others’, where they offer one or several deals a day.  I think there’s room for many players and that you will actually see aggregators step in and consolidate multiple offers from multiple sources in a single email.  (Come to think of it, I should start that business.)

    Technology Change: Slower than I Think but Faster than You Think

    Last week, I gave a presentation to a “traditional” publisher on the impact of new technologies on their business.  This is someone who has a very successful and profitable “dead trees” business and my mandate was to come in and challenge their thinking with regards to the impact of technology on their business.  Their managers feel no sense of urgency to do anything about new technology now because the existing business continues to thrive and despite the prognostications of industry pundits, they have yet to feel an impact on their current business and thus are in no rush to actually invest in new approaches (even while it’s fun to think and talk about them).

    This caused me to reflect on the technological change I have seen in my lifetime.  I have spent 31 years focused on “disruptive technologies.”  I started working on PCs in 1979 — two years before IBM launched its PC — and I’ve witnessed some amazing technological change in those 31 years.  As an observer of, and advocate for, those changes, I’ve come to an interesting and important realization.  As optimistic as I am about the pace and depth of technological change, I’m usually over-optimistic about the time frames in which it happens.  This was the case in the early Internet days and I believe is once again the case with regards to a new set of disruptive technologies.

    While I was never a wild-eyed proponent of Pets.com or Webvan, I am certainly guilty of feeding into the hype that led to their elevation.

    So, we technology pundits are overly optimistic.  No big news there.  However, there is big news:  while we may be overly optimistic in the short-term, we’re actually overly conservative in the medium-term!  Ten years ago, the Internet bubble was about to burst.  All those wildly optimistic claims about how the Internet was about to change everything were going to be laid to waste.  Yet here we are, ten years later, and the truth is that the Internet has changed everything.  It has reached a point where, if you lose your Internet connection at work, you just go home or go somewhere where you can get that Internet connection because without it, well, you just can’t do your job.  And it’s not much different at home.  When I lose my cable TV connection, well, there are lots of other ways to entertain myself and, short of a major sporting event (on the level of the World Series), I feel no obligation to leave the house.  Lose my Internet connection?  I may wait around an hour to see if it comes back but anything longer than that and I’m contemplating a run to Starbucks or Borders or somewhere else where I can grab a Wifi connection.

    The truth is that the Internet revolution is more profound than even we wild-eyed optimists thought it might be a decade ago.  We had the timing wrong but, even more significantly, we had the impact wrong, and weren’t wild-eyed enough.  And guess what?  We’re doing it again.  And this time again, it is going to happen more quickly than you think…and more quickly than the Internet took.

    So, what is “it”?  Regular followers know that I have been talking about the “perfect storm” of disruptive technologies — social, mobile and cloud — for over three years now.  My premise is that each of these, while an interesting phenomenon in their own right, actually serve to amplify each other such that the overall market impact is greater than if any one of these phenomena were occurring in isolation.  That amplification effect is one reason why I think that the medium-term impacts of these technologies tend to get understated.

    There are two other unique characteristics of these new technologies that I think will cause their impact to be so significant more quickly:

    • Pace of change
    • Economics

    With regards to pace of change, the fact that we’re heavily Internet-connected enables us to embrace new capabilities much more quickly.  In the early Internet days, we were faced with the daunting challenge of upgrading connectivity models from dial-up to broadband and to deploying new software (the browser) on a large number of machines.  Having done that now, we’re in a position to embrace new Internet models of distribution (e.g., cloud computing) with very little friction.

    Mobile also has some radically different market dynamics than the desktop that enables, and leads to, a faster pace of change.  First of all, we’re embracing the mobile Internet even faster than we did the desktop Internet, as famously called out in a Morgan Stanly report.  In fact, they project that the number of mobile Internet users will pass the number of desktop users in the next 3-4 years.  The dynamics of the mobile market are also very different than those of the desktop, enabling more rapid change.  First of all, this is a much larger market.  Cell phones of all kinds (not just Smartphones) are shipping approximately 1 billion units per year, or about 4x that of the desktop market.  These will rapidly shift to Smartphones across the entirety of the market as prices plummet (in Moore’s Law fashion).  Even more striking, the average lifespan of a desktop or laptop computer is in the 3-5 years range whereas the average lifespan of a mobile device is 21 months.  That means we are changing over the installed base of a multi-billion unit market every two years or so.  There is very little installed base drag in the mobile marketplace!  And this perhaps understates the pace of change.  Granted, we’re in a period of software immaturity but the leading mobile software platform providers (e.g., Apple, Google, RIM) are upgrading their software platforms with significant new capabilities (both software and form factor) every 3-6 months.  That contrasts sharply with the desktop, where software advances are measured in 3-7 year cycles and are often met with significant market resistance because of the cost and disruption of upgrades.

    Bigger market, faster turnover, greater pace of change.  Yes, the impact is going to be felt faster than you think.

    Economics are also contributing to a faster-than-you-think impact of new technologies.  I refer particularly here to the impact of cloud computing.  In the past, for businesses to embrace this kind of technological change would have required massive capital investments on their part to deploy infrastructure to exploit the new platforms.  Cloud computing now enables companies to embrace new technologies in a much more flexible fashion, requiring little to no capital investment and as a result, much faster and more scalable implementations.

    I don’t want to get into an argument here about cloud computing.  That’s a discussion for another day.  Security?  Red herring.  In fact, I posit that over time you’ll find cloud computing solutions will have better security than on-premises solutions because the cloud computing providers have greater incentive to provide that security.  I have come across many CIOs who have an immediate negative reaction to the cloud.  I’ll ask them “if you were starting a business today…” and usually before I can complete the question, they’ll go “well, of course then I wouldn’t own infrastructure.”  The question therefore isn’t whether or not to do cloud but rather how and when.  But I digress.

    Bottom line, the flexible economics of cloud computing enable a more rapid embrace of new technologies than would be the case if companies had to make massive capital investments to support new software platforms like social and mobile.

    It’s easy to ignore we proponents of massive technological upheaval in the early days.  Yes, we’re probably overstating how impactful these technologies will be in 2010 and maybe even 2011.  However, ignore our forecasts for 2012 and beyond at your own peril.  And if you wait until then to start embracing the change, you will find the pace of the market change then to be so fast that you’re unable to keep up, let alone catch up.  My advice to that publisher was this is absolutely the best time to be embracing technological change, while you’ve still got a successful business to fund that change.  If you wait until your existing businesses start to feel the impact from technological upstarts, you might find yourself in a very uncomfortable position, akin to the way Barnes & Noble and Borders feel about Amazon.  It’s not inconceivable that one or both of them will be out of business within a year.  They didn’t feel the urgency to get involved early — and probably saw the demise of Pets.com as validating their thinking — but when things happened faster than they thought, they had already lost the innovation edge and, more importantly, the customer.

    We overstated the timing but understated the impact before.  I think we’re doing it again, and this time the change is going to be even greater, and so should your urgency.

    What We Can Learn from Circuit City

    With the announcement today that Circuit City has been unable to find a buyer and is therefore going to be forced to close its remaining stores, lost in their demise could be one of social media’s more significant lessons.  E-commerce is a sufficiently small piece of their business that no amount of success as an e-tailer would compensate for their shortcomings as a retailer in this gruesome economy, but don’t throw out the baby with the bathwater.

    Circuit City was one of the early retailers to make what at the time was a highly controversial decision.  These retailers make big bets on inventory, stocking large volumes of products that they think are going to be successful and even going so far as to strike preferential deals with manufacturers to secure allotments of hot products.  Given these bets, you would imagine that it would be highly controversial to open up their corridors to dissenting opinions.  However, Circuit City was one of the relatively early brick-and-mortar retailers to host user opinions.

    And what did Circuit City discover?  They found that people who read user opinions on their site were 2-5x more likely to purchase than those who didn’t read the user opinions.  Of course, this is a complicated equation that raises all sorts of cause-and-effect questions.  It isn’t a simple matter of getting people to read user opinions.  Those who read such opinions are probably already more inclined to purchase.  Whatever the relationship, however, Circuit City experimented with and capitalized upon the power of their user community to their benefit.

    No, it wasn’t enough to save the chain but in these tough times, when retailers are questioning whether the hassle of user-generated content is worth the outcomes, it’s worth remembering the outcomes Circuit City produced.  Those would put their heads in the sand, pretending that if they don’t support engagement with their users and  buyers that it somehow doesn’t exist, are only kidding themselves.  If we all haven’t figured out the ultimate power of social networking and how to harness it in the advertising and selling cycle, early pioneers have already demonstrated that there are tangible returns to be achieved.  Let this perhaps be Circuit City’s lasting legacy.

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