Microsoft Tries to Derail the Barnes & Noble Juggernaut (!?)

In the legal morass that is Android comes the latest news that Microsoft is suing Barnes & Noble, alleging patent infringement.  Think about the surface absurdity of that one.  Microsoft suing Barnes & Noble.  Even The Onion hasn’t contemplated this scenario.  So, what’s really going on here.

At a macro level, here’s what’s happening:

  • These kinds of patent lawsuits are so common that I’ve almost stopped looking at them altogether.  Usually it goes like this:
    • Someone sues someone else.
    • The someone else counter-sues.
    • The two companies exchange patent cross-licensing agreements, usually with one side or the other having to kick in some cash.
  • There’s a slight twist to the whole Android scenario, again though one that’s not uncommon.  Most of these patent lawsuits have focused on Android licensees and not the deep-pocketed Google.  It only makes sense to go after the weaker players, albeit ones with sufficient funds to pony up.

What are all these people suing in the Android space trying to accomplish?  It’s real simple.  If you’re trying to sell an operating system into a market where Google is giving it away, you need to make the OS appear not to be free.  In other words, you may not pay for the OS but by the time you factor in legal costs, your free OS all of a sudden isn’t so free.  Somewhere along the line, Google is probably going to have to ante up to help its partners by resolving all of these patent infringement issues.  It probably means Google’s going to have to write a check.  The good news:  they’ve got $34.9 billion in cash on hand and are printing more each quarter.  So much for the chilling effect on Android licensees.

What’s particularly interesting about the Microsoft/Barnes & Noble case is that presages interesting competition in the tablet marketplace.  Why should anyone be worried about Barnes & Noble or, by extension, Amazon?  The Barnes & Noble Nook e-reader actually runs on Android.  In effect, they’re selling a specialized Android tablet for $249.  How can they do that when the rest of the Android tablet marketplace is horribly overpriced as I’ve recently blogged?  Welcome to the new world of ecosystems and razors and razor blades.  Amazon and Barnes & Noble can sell these devices at low (or no) margin because the economics of incremental margin on the razor blades (books and other digital content) is so compelling and predictable that it pays to seed the market with devices.  That’s another reason why Apple, asides from supply chain efficiencies, can sell the iPad so competitively.  It can count on a reasonable income stream from the AppStore while in the Android space, those margins go to Google.

Yes, I know that the Nook and the Kindle are not general-purpose tablets.  Today.  But the color Nook is pretty darn close.  The Wall Street Journal’s Brett Arends even recently told readers how to turn their Nooks into tablets.  He overstated his case to make a point:  Barnes & Noble can do this easily and likely will.  If not, they deserve to follow Borders into bankruptcy.

Netting it out:

  • Google is likely to have to share some of its profits with its ecosystem to cover legal exposures.
  • Google is likely to have to share some of its app store revenues with partners.  Otherwise, the situation with competing app stores (already a fracturing standard) is going to get (much) worse rather than better.  They need to do this one quickly.
  • In other words, Android tablets need to get cheaper and Google will have to share its app and advertising revenues to make that happen.
  • Players like Barnes & Noble and Amazon can become strong players in the tablet marketplace because they have the economic model and ecosystem to compete with Apple.  Selling hardware alone is not much fun these days, and is only going to get worse.
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Facebook and Amazon Change the Streaming Video Marketplace

The entries of Amazon and Facebook into the streaming video marketplace stand to change the economics and dynamics of watching video online.  While shortcomings and constraints will slow their impact in the near-term, make no mistake about it:  the economics and approaches have changed.

It’s easy to dismiss these solutions in the short-term.  No, Amazon doesn’t have the library of a Netflix.  No, the Facebook experience isn’t optimized for long-form video consumption.  If, however, you dismiss these two based on these shortcomings, you’re missing the point.

Let’s look at Amazon first.  For Amazon, this is a shrewd, and necessary move.  Amazon Prime, which offers free two-day shipping for all Amazon purchases for $79/year, is increasingly irrelevant as Amazon’s book sales move to digital.  By the middle of last year Kindle sales on Amazon surpassed hardcover books, by the four quarter that extended to paperback books as well, and on Christmas day Amazon sold more e-books than physical books combined (although that number may certainly have been skewed by the number of people opening Kindles as presents that day).  Thus, it is clear that Amazon had to do something to enhance the value of Prime for its most valued customers.  Of course, Amazon sells much more than books so Prime still has considerable appeal even for those who consume their books digitally.  Amazon wins either way.  If you get value because of the free shipping offer, the availability of streaming video for no extra cost is a compelling value-add.  And if you’re evaluating the competing streaming video options, Amazon is cheaper than Netflix ($100/year) and offers more than just streaming.  (Here’s an interesting analysis of the customer overlap between Netflix and Amazon.)  What’s most notable about Amazon’s offer:

  • It’s cheaper than the market leader, without any other considerations.
  • It’s bundled with other value, making it appear free to a significant range of customers.

Facebook’s entry is much more limited and complex but longer-term perhaps more impactful.  Much more limited.  A single movie at launch, The Dark Knight (incidentally, one of my 10 favorite movies of all time).  But this one is much more potentially transformational.  So what’s interesting about Facebook’s entry here?

  • While initially a standalone experience (and probably a sub-optimal one at that), given its market position I expect Facebook’s movie-viewing experience to rapidly evolve to a social experience.  From a marketing perspective, that talks to the viral potential.  More importantly, though, from a viewing experience, you could envision how Facebook could leverage its platform to increase the social elements in movie viewing in both synchronous and asynchronous fashions.  For instance, you might not only chat with other friends in real-time while you’re both watching a movie, you might also see the comments from other friends appear at the same point in the movie even if they’re not watching it at the same time.  Facebook can significantly shape the social movie viewing experience in a way that doesn’t exist today.  Twitter leads the real-time synchronous market today (e.g., we all Tweet during the Academy Awards) but the non-real-time and asynchronous markets are very much in play and Facebook can lead the way here.
  • The role of Facebook Credits in paying for movies is very interesting.  I have long been a believer of “count down” models vs. “count up.”  A count-up model is one where you pay for each purchase.  Every transaction counts up the amount of money you’re spending on the particular activity, and thus is an individual purchase decision.  In a count-down model,  you have a pool of credits you can “count down” against.  In your mind, the money is already spent and it’s just about how you’re going to spend the money.  With Facebook Credits, users will have a variety of ways to spend their currency (games, movies, other products and services) and a variety of ways to acquire it (you can even buy gift cards at Target).  This will make it easy to make an impulse buy of a movie (whereas Netflix and Amazon at their price points are considered purchases).

For different reasons, the entrance of Amazon and Facebook into the streaming video marketplace change the landscape.  The net result is that the marketplace has new competitive requirements.

  • Movie viewing alone may not be enough to sell a movie service.
  • The social experience of watching a movie online is in its infancy but is likely to change very quickly.
  • The payment models for video consumption are expanding, and will include:
    • Subscriptions
    • Virtual payments
    • Bundling with other services

Microsoft: Putting the Inmates in Charge of the Asylum

I received a Tweet the other day from a former client, the always-insightful John Taschek, VP of Strategy at Salesforce.com, asking for my take on this news story about a rumor that Microsoft CEO Steve Ballmer is going to make significant management changes, elevating people with engineering backgrounds at the expense of those with marketing backgrounds.  There are so many ways this is just troubling when it comes to what ails Microsoft.  Let me outline just a few of them:

  • Putting engineers in charge of anything is generally a bad idea.
  • If bad marketing is Microsoft’s problem (and it’s one of them), putting engineers in charge of things does not solve that problem.
  • Microsoft’s biggest challenges are generally neither related to bad marketing nor stifled engineering.  They’re related to bigness and the innovator’s dilemma, as expressed by Clayton Christiansen.  (I find it personally exciting that this is discussed in the Wikipedia article on “disruptive technology.”  While I wasn’t using the term in 1995 when it was first ascribed by Christiansen, it has been my career since 1979 so I guess I owe a debt of gratitude to him for giving definition to my life.)

Those of you who like typical blog posts can stop now.  Those of you who know me, however, realize that these call for further discussion.

So why is putting engineers in charge a bad idea?  The best way I can explain it is through an old joke.

Talking frog

A man was crossing a road one day when a frog called out to him and said: “If you kiss me, I’ll turn into a beautiful princess.”  He bent over, picked up the frog and put it in his pocket. The frog spoke up again and said: “If you kiss me and turn me back into a beautiful princess, I will stay with you for one week.”  The man took the frog out of his pocket, smiled at it and returned it to the pocket. The frog then cried out: “If you kiss me and turn me back into a princess, I’ll stay with you and do ANYTHING you want.” Again the man took the frog out, smiled at it and put it back into his pocket.
Finally, the frog asked: “What is the matter ? I’ve told you I’m a beautiful princess, that I’ll stay with you for a week and do anything you want. Why won’t you kiss me ?”  The man said, “Look I’m a software engineer. I don’t have time for a girlfriend, but a talking frog is cool.”

Engineers are brilliant at what they do.  Understanding what users want is not one of the things that they’re brilliant at.  I’m often asked why, in a coming up on 32 year technology career, I’ve never lived in the Bay Area.  Oh, I’ve visited there a lot, almost certainly over 100 times in that time span.  The way I always explain it?  Silicon Valley’s hometown newspaper, the San Jose Mercury News, I say, has technology on the front page of the paper five out of seven days.  My hometown newspaper, the New York Times has technology on the front page of the paper five times a year, twice after an Apple product introduction and three other times…when something goes catastrophically wrong.  Engineers are great at figuring out what’s possible.  Marketers, at least good ones, are supposed to be great at figuring out what users want.  The intersection of the two is where magic is made.

Steve Jobs is not an engineer.  Steve Wozniak was Jobs’s original technological guru.  Jobs has a remarkable understanding of what consumers want, usually before they know they want it themselves.  Steve Ballmer is a marketing guy from way back.  Putting the engineers in charge is perhaps the most damning thing he could ever do.  I have known SteveB since 1987 and have been a staunch defender of his for a long time, even when it wasn’t popular, both early in his reign and lately.  If this is his strategy for returning Microsoft to its former glory, well…Steve, you just lost me.

So, what is Microsoft’s bigger issue and how do you solve it?  Microsoft does not lack for technical excellence nor innovative ideas.  The Kinect is a great example of what Microsoft can do and the business rewards it can result in.  It’s also instructive in how Microsoft works.  Microsoft has been doing research about alternative input approaches for decades.  Yet all we had in the market was the keyboard and mouse.  Oh yeah, Microsoft did tablets too.  We see where they took that.  But I digress.  How is it that the Kinect came to market?  You can bet that if Nintendo hadn’t invented the Wii, the Kinect might not have seen the light of day for another decade.  Microsoft was threatened.  Someone else had asserted market leadership and, with it, sales success.  Only then was Microsoft able to identify technologies it had that could return the Xbox to sales competitiveness.

This has been Microsoft’s response for way too long.  When threatened, they innovate…or at least get competitive.  The browser is another great example of that.  Threatened by Netscape, they came up with the competitive Internet Explorer (and used anti-competitive measures to bring it to prominence).  Almost every subsequent browser innovation from Microsoft has been spurred by, or copied from, alternative browsers.

I am aware of way too many Microsoft products and technologies that were quashed or watered down, not because of marketing, not because of engineering, but because of internal politics.  This is not a recent phenomenon but has been a Microsoft “sickness” for over a decade.

Witness Microsoft’s response to the cloud.  They have been reasonably aggressive when it comes to server-side cloud initiatives with Azure.  That’s because Microsoft’s upside is larger than its risk.  Yes, self-impact is a concern but if they can further damage Oracle/Sun, IBM or Salesforce, well, then Microsoft’s upside potential is great and the strategic beachhead is important.  Whither, however, Office for the cloud?  Oh, yes, they’re getting around to it.  They’re hardly, however, aggressive about it.  Why?  Because Office is one of the great cash cows in the history of technology and they’re in no rush to gore that cow while no one else is really threatening them.

What do you think we’d have now if Steve Jobs were in charge of Microsoft and Office?  Do I really even have to answer that question?

No, Microsoft’s problem isn’t that the marketers were in charge and now the engineers will come in on their white steeds to save the day.  Engineering and marketing have to work in concert, driven by a compelling vision that unifies the two, often warring, groups, espoused by a leader with the strength of character to make these groups work together when their individual priorities and incentives are not necessarily aligned.  Apple does that beautifully.  Google does that occasionally well.  Throwing a bone to John, who motivated this post in the first place:  Salesforce does that pretty well too.  Microsoft?  Not so well.

There was a time when Microsoft faced a challenge from the Internet.  Almost 16 years ago now, Bill Gates issued a famous memo, a call to arms.  That is what Microsoft needs now.  A definition of what it is and, more importantly, what it needs to be.  Again, if this were Apple, Bill Gates would make a triumphant return, leading the company back to its former glory.  But Bill has other priorities on his mind and the world is a better place for that.  Is Steve Ballmer the man for that task?  I honestly don’t know.  And that’s perhaps the most damning statement of all about Microsoft.  I don’t know.

QuiBids and SkoreIt: A New Way to Auction or Online Gambling?

In the last couple of months, I’ve heard a number of radio ads on ESPN’s Mike and Mike in the Morning for SkoreIt (more information here), a new kind of auction site.  Today I dug a little further into QuiBids another similar auction site that I happened across.  These sites raised a couple of troubling questions in my mind, most notably how should I feel about a web auction where there’s one winner (that’s typical) but where everyone else is a loser (i.e., they’ve spent and lost money) and where the auctioneer is the biggest beneficiary of all?  Is this brilliance or is it preying on people’s inherent greed in a most unseemly way.  Is this an auction or is it gambling and should be regulated as such?

Auctions have gone through several iterations, starting with the classic auction site eBay.  Since then, we’ve seen offshoots of that model including today’s hot sites, Groupon, LivingSocial and others of its ilk.  To the classic auction, they’ve added things like getting your deal free if enough of your friends buy in and getting a lower price the more people who are in on the deal.  In all of these models, you’re risking nothing or very little up front and your downside is readily predictable (e.g., you get the price at the time you bid, and nothing lower).  Some of these models offer really good deals (LivingSocial recently offered a 50% off deal on a $20 Amazon gift certificate; I got one) but many auctions give limited discounts because they effectively match supply and demand, arriving at a “fair” price.

Along comes QuiBids and others of its ilk, with a come-on suggesting you can get products at 80% or more off of retail.  And they seem to actually deliver!  So, how do they do it?  In QuiBids’ instance, every time you bid it costs you $0.60.  The auction continues until no one has bid for 10 seconds, at which time the last bidder wins.  Every bid resets the clock and ups the bid price by a penny.  Looking at some recent bids, a margarita blender sold for $12.53, a set of Callaway golf clubs went for $57.44, a Toshiba laptop computer went for $28.49 and the bidding for a 64GB 3g iPad was at $81.81.  Great deals…for the winners.  For everyone else, well, let’s look at the numbers.

The bidding starts at a penny.  Every penny increment after that cost someone 60 cents.  That means every dollar in the price of the item put $60 in QuiBids’ coffers.  That $28 laptop?  Over $1,600.  The golf clubs?  Over $3,400.  The iPad?  $4,800 and counting.  Sure, the individual who wins is getting a great deal. And QuiBids’ economics support these “great” prices as compared with traditional auctions that better mirror supply-and-demand.  But is this really how we want to conduct commerce?  At $81.61, that means there have been 8,161 individual bids on the product.  We don’t know whether that’s two people each betting 4,130 times or 8,161 people each individually betting once.  Probably somewhere in between, but we don’t really know.

In effect, QuiBids is running a high-stakes game of chicken and I might even argue that what they’re doing here is not selling things, they’re not an online auction but rather inducing people to gamble at $0.60 a bet.

QuiBids would probably respond in their specific instance “but we offer the customer a safety net.”  That safety net says that if you’re not the winning bid, you can apply all of your bids against a “buy me now” price of the product.  There are several issues with this approach:

  • The buy me now price is generally not as good as you could find even through traditional retail channels.
  • Unless you’re prepared to actually buy the item, this offers you no protection.  In other words, if you’re only in this because you can get an iPad for $50 and were not prepared to buy one right now for regular retail prices, you have no protection.
  • At least with gift cards, on which they offer bidding, if you have to buy it, you’re getting dollar-for-dollar protection and “real” pricing if you end up having to buy it.

I’m somewhat torn over this approach.  The winner’s getting a great deal.  However, unlike traditional auction models, where there’s one winner and everyone else is neutral, this one is a situation where that one really big winner is subsidized by all the other people who lose real money along with losing the auction.  Even if it’s just pennies on the dollar for each bidder, in aggregate this adds up to real money.  “What’s wrong?”, some might say.  After all, the bidder goes in with full knowledge of the risks of their bid.  Well, not so fast there.  You don’t have full knowledge.  At $81.61 for that iPad, that means there have been 8,161 individual bids on the product.  We don’t know whether that’s two people each betting 4,130 times or 8,161 people each individually betting once.  Probably somewhere in between, but we don’t really know.  You don’t know who you’re betting against or how many of them there are.  At least in Las Vegas, I have some general understanding of the odds of rolling a 7 or of any particular number on the roulette wheel.  If I’m a card counter, I can actually play the odds in my favor at blackjack.  Here, however, I’m gambling blindly.  I won’t even get into the potential for abuse here.  Could the house have people bidding up the prices on items past a point of profitability?  Of course they could.

As you can tell, this one troubles me.  The approach makes me feel dirty.  Am I overreacting here?  What do you think about QuiBids and this general approach which has been undertaken by a number of other sites?  Take my survey and also share your thoughts with me in the comments.

 

Demand Media: Click Troll

Demand Media went public today in one of the largest and most successful Internet IPOs in a long time.  That has to be good news, right?  We all want Internet companies to prosper.  We all want the financial markets to open up so we have more exit options.  Well, without getting into the financials of the whole deal (if you want a good analysis, read here), let me just state that I find the whole Demand model to be bizarre and unfortunate.

First of all, if you’re reading this blog, you’re probably not very familiar with Demand Media.  That’s because you’re generally smart enough to search and browse the Internet.  If you’re not so smart, well, Demand is looking for you.  Their business is really quite simple.  They accumulate a lot of domain names.  They populate those domains with low quality content created by a legion of freelance writers.  They then search engine optimize the heck out of that content so that it appears high on Google page rankings.

Here’s where it gets really insidious.  They then rely on the P. T. Barnum effect to drive revenue.  You know…”there’s a sucker born every minute”?  It’s actually important to Demand that the content be of low quality.  They don’t want you spending a lot of time with the content.  In fact, they’d be very happy if you never read the content.  What they want you to do is find nothing of interest on the page but find a link in an ad on the page that takes you where you actually wanted to go in the first place or really, just someplace else.  When that happens, kaching.  They get paid by Google for that ad click.  That’s their source of revenue.  Period.  Oh yes, they’re also a domain registrar but they do that not because it’s such an interesting business but because it gives them inside access to expiring domain names that they might like to own.  It’s also important for them to have a really good source of information on what people are searching for so that they can best satisfy that need with their content and domain names.

Google also benefits from this dirty little arrangement because Demand generates so many ad clicks that might otherwise have gone to organic search results.  Here’s though where it gets dangerous for Demand.  Let me hasten to note that the problem I’m about to talk about is not of Demand’s making.  They’re just a shrewd beneficiary.  Have you noticed that Google search results are getting worse and worse?  Most of you probably don’t even notice but right on the Google search screen, there’s a button that says “I’m Feeling Lucky.”  If you enter a search term and click that button, it takes you right to the first result of the Google search.  No search results page, just the first piece of content.  There was a time when that actually was a good choice.  Google’s search algorithm was so good, or so they represented, that you could just click that button and save yourself an extra click.  When was the last time you did that?  And what did you get?  Well, if you did it, you probably got a Wikipedia page (and if you wanted Wikipedia, wouldn’t you have gone there in the first place?).  Increasingly, though, there s a chance that you got not the information page you wanted but rather someone who did a great job of search engine optimizing (SEO).  There’s a whole industry around SEO.  I do Google searches these days that return such bad results that it’s not until the second page or later that I actually get to some content related to what I was searching for and not some Google-optimized retail “opportunity.”

Somewhere soon, Google is going to have jiggle with its indexing algorithm to push these “click trolls” further down in the results page so that the high quality content that you’re searching for actually appears back on that first page.  Whether they explicitly punish Demand Media, I have no idea.  Probably not.  But the net result should be that people who are trying to trick the search engine into presenting you their page when it really isn’t what you’re searching for should end up lower down in the listings.  For those of us trying to use Google as a vehicle to find information, this is great news.  For Demand Media, not so good.

Demand has built a business that today is valued at over $1 billion by gaming the system.  Good for them.  Not so good for us.

Live from NRF: The Dismal State of Retail Technology

I’ve spent the last day and a half at the big National Retail Federation’s 100th annual conference in New York.  (No, there is no truth to the rumor that I covered the technology at the first conference, although I did learn to type on a manual typewriter in 1971 or so.)  I was one of the people behind Gartner’s designation of companies as Type A (aggressive technology adopters), Type B and Type C and as I walked the floor of the trade show and listened in on keynotes and sessions, I’m struck by how hard it is to characterize retail and many retailers.  On the one hand, technology is ubiquitous and you can’t pretend to be a retailer of any scale without a massive IT investment.  On the other hand, the ability to invest, and even more to innovate, when dealing with such tight margins can be constrained.  Netting it all out, I’m struck by how far behind the technology curve the retail industry seems to be.

A few observations from the show:

  • Peter Sachse, the CEO of Macys.com appeared on a panel run by Alison Paul, head of Deloitte’s Retail Practice.  (As an aside, this was a really well-done panel, which is all too rarely the case.  This wasn’t scripted and the panelists did an admirable job of refraining from the sales pitches that ruin so many panels.)  Sachse talked about how Macy’s is working hard to get a 360 degree view of the customer.  My take:  good luck with that.  The only person with a 360 degree view of the customer is the customer themselves.  No matter how you integrate the data you have and obtain, you will have at best an incomplete picture of the customer and at worst a misleading view.  I do, however, believe that’s a laudable goal but that retailers don’t have nearly enough vision nor understanding of the impact of social technologies to realize that vision in a meaningful way.  More on that in a bit.
  • Coming as it did a week after CES, where every gadget known to man (and lusted after by me), is shown, the show floor here is not nearly as exciting.  I mean how many booths can you see with barcode scanners or keyboards.  Yes, keyboards!  I understand they’re important to the speed of a retail transaction but somehow soft-configurable keyboards just don’t get my heart racing.  By far the most interesting booth to me was Intel’s, where they were demonstrating not some far-off fantasy retail environments but rather things that are possible today (and are already in limited deployment).   While Apple has virtually no presence at the show (they’re not here and I only saw one vendor who was hawking Mac solutions), their influence on retail interfaces is pervasive.  Everything looks like an iPhone/iPad, and that’s a good thing.  User familiarity with touch interfaces will likely lead to their much wider deployment in retail settings.
  • Everyone’s using iPads to demonstrate their wares.  It actually makes for an interesting conference experience, with the human interaction enhanced by technology rather than the somewhat sterile approach of presenters standing around their monitors and kiosks.
  • For an industry that just came through a lackluster holiday season and is facing more tough times ahead, the mood around is actually upbeat.  Whether they’re rearranging deck chairs on the Titanic or otherwise, high energy and increased attendance is actually refreshing.

Now, however, for the zinger.  If I hear one more retailer talk about “listening to the customer,” I’m going to puke.  What’s worse, generally when they say that, they mean “I’m listening for the customer to express even the slightest receptivity to getting a marketing message so that I can blast them with my multichannel outreach program.”  I have found the discussions around social media and mobility to be horribly shallow and maybe even misguided.

On the mobility front, there were actually people debating whether customer-accessible WiFi was a good idea in retail environments.  There’s a legitimate question there but the tone of the discussion was more like “do we want to enable customers to price shop while they’re in our store?”  Let me introduce you to these things called SmartPhones, 3G and 4G.  The genie is out of that bottle.  Customers do have access to competitive pricing and thus the question must become “how can we leverage consumer technologies to increase the likelihood of a purchase” or even “how can I use the consumer’s expressions of interest to sell them more stuff.”    You have to assume radical transparency and that an increasing percentage of your retail traffic is going to have good information, maybe better than the retailer has and certainly better than is known on the front lines.

And then there’s social media.  I really fear that too many — dare I say most — retailers still think of social media as a vehicle to dump messaging to customers who are eager for that messaging and have in fact invited it.  Exhibit #1:  just look at the Tweetstream for the event:  http://search.twitter.com/search?q=%23nrf11 .  Maybe I’m spoiled by tech events where attendees use Twitter as a vehicle to discuss issues raised in sessions or the news of the day, but this is appalling.  The stream is dominated by vendors screaming “come to my booth,” “win an iPad.”  Sure, @Teradata has generated a lot of retweets.  Do you think any of those people are actually interested in hearing anything from Teradata other than “you’ve won”?  I keep saying I’ll be writing about it, and I promise I will soon, but I think social media in its full expression inverts the relationship between retailer/brand and customer.  It isn’t about a 360 degree view of the customer; rather, it’s about my expressing my needs, interests and criteria, enabling people and companies to deliver solutions to me.  If you think social media is just another channel to enable you to dump marketing messages onto willing potential customers, you’ve got it way wrong.

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.