Advertising 2.0 and Facebook’s Valuation

The news today that Facebook has accepted $200 million from a Russian investment group, valuing the company at $10 billion, has revived the question of what exactly is Facebook worth.  Much of that discussion has focused around the ability, or lack thereof, of Facebook and other social networks to sell advertising and delivering advertising results.  I think this discussion totally misses the point.  The question isn’t how advertising will work on Facebook but rather how Facebook and social networks change advertising.

I’m loathe to introduce yet another 2.0 moniker but if ever an industry needed to be 2.0-ized, it’s advertising.  Almost a century ago, retailer John Wannamaker is purported to have said “half of all advertising works, I just don’t know which half.”  (This quote is often attributed to PR maven David Ogilvy but my quick persual of the Googlesphere seems to show Wannamaker significantly predating Ogilvy.)  Today, that 50% goal may even be wildly optimistic.  On the Internet, clickthrough rates have fallen precipitiously as clutter has replaced clarity.

I think we’re on the verge of a major rethink of the fundamental premises of advertising.  We have long understood that in addition to challenges in measurement (what works), we also have had challenges in credibility.  Consumers typically rate advertising as their least credible information channel.  However, sellers continued to invest in advertising because they could compensate for the lack of credibility through broad distribution and high impact creative.

Today, however, that equation has been shattered.  Word of mouth/peers have consistently been rated the most credible sources of information but, as the name implied, the distribution model was limited.  Those of you old enough may remember the Clairol ad that showed 2 people who told 2 people such that by the end of the commercial, there were 64 faces on screen.  Today, 1,000 people tell 1,000 people and very quickly the message has reached millions of people.  Credibility now has a channel for mass distribution.  If you don’t think that has profound implications for how we “advertise,” you’re just not paying attention.

The mass distribution of credible information sources will transform advertising.  In fact, early indications show that the impact may even be larger in that people are finding “people like them” who they don’t know are as credible as the people they do know.  In other words, if I’m, say, a CIO, I’ll find the opinions of other CIOs whom I’ve never met every bit as credible as the ones I know.  Maybe more so, in that I’m less willing to denigrate the opinions of people I don’t know whereas the people I know…well, I know their shortcomings and inadequacies.

While no one has cracked the code on this yet, I think there are a few things one can point to:

  • Facebooks’s Connect and other similar technologies allow people to bring their social map as they traverse the Internet.  If you haven’t thought yet about how you might incorporate the social map into the way you deal with customers and prospects, call me.  This is going to be huge and the opportunities are immediate.
  • I’m a big fan of Loomia’s SeenThis Facebook application.  While a Facebook application, I actually “use” it elsewhere.  In particular, on the Wall Street Journal, you’re probably familiar with the boxes that show what stories other Journal readers have read.  This “most read” designation is rarely interesting to me and generally reflects the editorial judgment of the WSJ editors and what stories they promote.  However, I see an additional box, showing me what stories my Facebook friends and groups have read.  This is a much more interesting designation to me and generally I end up clicking through on most or all of those articles as the “recommendation” from my peer group is much more interesting and relevant to me than the recommendations of the general WSJ readership or editorial board.

Some other time I’ll talk about the overlay of location with social, which is going to further transform advertising.  However, for the sake of today’s discussion, I think social networks are going to transform the way companies communicate with consumers and potential consumers in profoundly interesting ways.  As such, questions of Facebook’s valuation are at best mildly amusing to me.  If Facebook indeed is in the vanguard of transforming the way companies reach consumers, $10 billion will some day seem laughably small.  And it’s not a question of whether this will happen.  It’s only a question of when, how and who.  And as for when, it’s already happening.  Consumers are voting with their clicks that social networks matter.  It’s up to the advertising industry to remove its collective head from its collective, um, sandbox and enable and exploit this transformation.

Saving Newspapers? Amazon Introduces a New Kindle

Let’s get this straight right away.  The new Amazon Kindle DX has nothing to do with solving the root causes of the problems of newspapers.   The top 5 reasons the Kindle is not the solution:

  1. At a price of $489, this is a niche subset of what remains a niche category.
  2. Newspaper subscriptions are only available in areas where the paper editions are not available.  Yes, this is clearly early and is likely to change but that tells you what the papers are thinking about things now.
  3. The existing Kindle (cheaper and more broadly available) already offers subscriptions to 37 newspapers at $10/month.  Form factor is not the only reason keeping these versions from being a success.
  4. Amazon keeps 70% of the revenue from newspaper subscriptions.  It takes a LOT of subscribers at $3/month to make money.
  5. Articles on the Kindle do not display ads.  This too will/must change.

Let me note that the DX may be a revolutionary product for its other market, college textbookss.  I’m not going to cover that here.

I think all the discussion on the future of newspapers has missed a critical point.  Much of the discussion has focused on the broad availability of content from multiple sources and also mention the growth of “citizen journalism,” be it blogs or Twitter.  So what does this discussion miss?  There are two related issues which combine to fundamentally attack the business model, not the product or content.

First, how do people get their news today?  While some of us go directly to newspaper sites on the web or get their electronic summaries in our inbox, news is more commonly found via web portals (e.g., MyYahoo or iGoogle) or via a Google web/news search.   When this happens, the first monetization opportunity comes not to the news source but to the aggregator.  Google and Yahoo have seized the upstream revenue opportunity and have diffused the downstream opportunity by making the “choice” of news source less relevant.  You go not to the source you favor but rather the one that appears highest in the search rankings.  You may even never make it to one of the downstream sources, instead going to your portal’s newswire feed from a source like AP or Reuters.  Ultimately, a considerable portion of the audience never makes it to the newspaper site.  Newspapers, Google is not your friend.

At the same time, the core monetization engine of newspapers — advertising, not subscriptions — is under assault from many angles.  When the obituary of newspapers as we know them is written, the first major illness should be listed as Craigslist-itis.  Category after category of listings has moved on to the web where things are cheaper, more timely and more effective.  And if you think the bad news is over, you’re mistaken.  Another staple of newspapers — legal notices — will find its way to the web sooner or later, probably sooner.  Already some heavily regulated marketplaces (e.g., drug advertising) can use web notices in lieu of print lineage.  It’s only a matter of time before governments realize that web listings, while not universal, are every bit as “available” as print notices and are more “accessible”.  In other words, the affected audiences are more likely to find this information on the web than they are in the newspaper.

Are newspapers doomed?  In their current state, yes.  Period.  How would I reinvent the industry?  Here are a few thoughts:

  • Local is not your salvation.  Niche audiences are very hard to monetize.
  • Digital paper is important.  When the price point of a newspaper-like device falls under $100, you’ve got a market.
  • Look at what’s going on in the netbook space.  Not so much from the point of view of a cheap device — that’s obvious — but rather the emerging discussions with cellular carriers where, much as is the case with today’s cell phones, the carriers will subsidize the price of the device to drive network usage.  I’m not sure what Amazon’s revenue relationship is with Sprint, the network carrier for the Kindle, but there’s clearly money there to be divvied up.
  • Two models:  Hulu and The Week.  What these both have in common is aggregation.  Curiously, the best vision in this regard, The Week, is a weekly print publication.  I find it a compelling read as it looks at the top news of the week from the perspective of multiple newspapers.  A single story might give me regional US slants, a European snippet or two and something from an Arabic perspective.  What makes these two sources compelling is their aggregated nature.  From a consumer’s perspective, it’s a single destination where I’m likely to find what I want.  From an advertiser’s perspective, it’s an aggregated audience.  The bigger the audience, clearly the better the monetization opportunity.  If a site can achieve a critical mass (which I’ll leave undefined for the purposes of this discussion), it can broaden its advertising base and achieve some independence from Google or the advertising networks.  Newspapers have largely not done that.  Aggregation may be their only salvation.
  • eBay partnership.  eBay has its own challenges.  At some level, Craigslist has delivered an important localization the eBay hasn’t.  When the shipping price of a product is greater than the price of the product, you’ve got a market inefficiency.  By making things local, Craigslist has become the first destination for many products that otherwise would have ended up on eBay.  I know I said “local is not your salvation.”  However, it’s a start to monetization.  Leverage the eBay opportunity and combine it with the aggregated opportunity I talk about into a fundamental redefinition of your revenue model.  Much as bricks-and-mortar retailers have one-upped dedicated web retailers by offering physical pick up and return, so to can newspapers combine the benefits of local with the benefits of global.

 The newspaper is dead.  Long live the newspaper.  Digital paper, aggregation and savvy partnerships.  These three can redefine the newspaper.