Soap Operas & The Internet

You may not know that soap operas are called soap operas because they were originally created as a way to sell more soap.  Putting a quality drama on television during the day is a great way to get peoples' attention.  Sprinkle in some ads for soap and you have a pretty nice business model.  This is what's known as the "interruption-based" advertising model.  The viewer shows up to watch a drama and gets interrupted every 10 or 15 minutes with profitable ads.

Many of the top internet companies are beginning to look a lot like soap operas.

Facebook is covered with irrelevant display ads and requires you to install all kinds of apps to work effectively.

Irrelevant advertisements have started to pop up in my Twitter feed.

LinkedIn has gone from a super clean site to a mess.

Spotify and Pandora ads are poorly targeted and happen too frequently.

Don’t get me wrong.  I recognize that these are businesses that need to generate revenue and I have no problem with them doing so.  I guess I’m just a bit disappointed that as internet companies have evolved into real businesses, they’ve defaulted to old fashioned disruptive marketing to make money. Each of the companies above have built great products and innovated significantly.  You can't say the same about their business models. 

The Facebook IPO

Facebook is set to go public today at a $100 billion dollar valuation.  For context, General Electric is worth about $199 billion.

GE was founded by Thomas Edison in 1890, has more than 300,000 employees and is a market leader in appliances, aviation, consumer electronics, electrical distribution, energy, finance, healthcare, lighting, oil & gas, rail, software & services and water treatment.

Facebook was founded in 2003, has about 4,000 employees and is a market leader in, well, display advertisting.  

It's official.  The world has changed. 

A Couple Thoughts On LinkedIn

I’ve been using LinkedIn much more frequently over the last few weeks.  I noticed a couple of interesting things.

  1. LinkedIn shows the number of connections you have to your connections, but they cap it at 500.  So if you have 501 connections or 1,500 connections, it will show the same thing -- 500+.  This feature is very consistent with LinkedIn founder Reid Hoffman’s perspective on networking -- I read about this perspective a few weeks ago in his book, The Startup of You.  The last thing Hoffman would want is his users to use their number of connections as a status symbol, leading them to make connections with people they barely know.  Hoffman believes that people should have smaller networks of very strong connections.  Further, much of the value of LinkedIn is the integrity of its connections.  If I see that you know someone I’d like to connect with, it’s important to LinkedIn that you know that person well.  If you don’t, the product becomes far less useful.  Capping connections at 500 was a smart way to preserve product integrity.
  2. I’ve Tweeted about this in the past, but one of the most popular features of LinkedIn is the “See Who’s Viewed my Profile” feature.  You can click on it to see who’s looking at your profile.  This feature drives a ton of traffic -- users come back to LinkedIn regularly just to see who’s looking at them.  What’s interesting to me about this feature is that while it  drives a ton of traffic for LinkedIn, it would destroy traffic for Facebook.  If Facebook users knew that other users could see that they were looking at their pictures, users would look at far fewer pictures.  And because most of Facebook’s revenue comes (indirectly) through page views, releasing this feature would be suicide.  It’s an interesting paradox that illustrates a key difference between our personal and professional networks.

8 Years of BlackBerry

I've been a loyal BlackBerry user since 2004.  Since then, I've had six of them (see photo below).  I finally made the decision to switch over to the iPhone 4s this month.  The iPhone is a significantly superior product.  The operating system is much slicker and the apps are phenomenal.

Apple's App Store took the PDA marketplace to a place that RIM never imagined it would go.  As evidence of this, the last BlackBerry I bought didn't even come with the BlackBerry app store installed.  You had to go out to the web and do a tedious installation process to start buying apps.

All of that said, I'm one of the few that believes BlackBerry is here to stay (though it may require an acquisition by a larger player).  The new BlackBerrys are superior devices for corporate users and more and employees are requiring a mobile device for work.  And the lack of a keyboard puts the iPhone at a nearly insurmountable disadvantage as an email device (email is the most used app for corporate users).  

I don't think it's implausible that most corporate users will have a work device (BlackBerry) and a personal device (iPhone or Android); just as most corporate users have a work computer (very often a PC) and a personal computer (very often an Apple). 

Regardless, BlackBerry is up for a big fight.  And it'll be an interesting one to watch. 

Blackberryinsta

Pinterest

A lot has been written about Pinterest, the social photo sharing website, in the last few weeks.  Fastest company ever to get to 10 million monthly uniques.  Very impressive.  What's even more impressive is how they're monetizing these users at a very early stage with a somewhat brilliant idea.  Here's how it works:

  • I post a link to a pair of sneakers that I like from say, Sports Authority, to my Pinterest page
  • You see the image and click on the link
  • Pinterest runs an instant query to determine whether or not Sports Authority has an affiliate program
  • If they have one, the link is automatically converted to Sports Authority's affiliate link and you're sent to Sports Authority's site
  • You make a purchase from Sports Authority
  • Pinterest takes their commission

A very innovative (and frankly gutsy) idea.  Twitter and Facebook are probably kicking themselves for not thinking of it years ago.  

The Razorblade Strategy

Yesterday I wrote about how I'm long on Amazon. One of the reasons is that they’re in the process of aggressively implementing the Razorblade Strategy.  The Razorblade Strategy is when one item is sold at a low price in order to increase sales of a complimentary good.  It was made famous by Gillette -- they sell their razors for next to nothing and the blades at a high premium.  This creates a profitable recurring revenue stream, and recurring revenue is generally better than one-time revenue.  Printer companies also do this very well.  Printers cost almost nothing and Hewlett-Packard, as an example, makes nearly all of its profits on the sale of the toner (again, recurring revenue).  I remember reading that one ounce of HP print toner costs more than one ounce of Dom Perignon...

The price of Amazon's Kindle has nosedived over the last several months -- you can get one for $79.  Rumor is that they’re even losing money on manufacturing the devices.  They're hoping that by lowering the price more people will buy a Kindle and then buy the profitable digital media to put on the device.  This is a perfect example of the Razorblade Strategy at work and exactly why I believe they’ll compete well against Apple in the digital media space.

Typically, the major risk involved with the Razorblade Strategy is when the price of the complimentary good falls.  But with Amazon's scale and dominance in media there's relatively little risk for them there.

Amazon should race as fast as they can to get a Kindle in the hands of every consumer.  Good execution of the Razorblade Strategy, and a price of $79 versus Apple’s cheapest iPad at $499, is a critical and promising step in that direction.

The Big 4 Internet Companies

Someone asked me the other day if I could only invest in one of the Big 4 internet companies (Google, Facebook, Amazon and Apple), who would it be?  I didn't even hesitate: my answer was Amazon.

Without doing a true valuation analysis (I plan to do one in the coming days), here's my simple reasoning:

Facebook: overvalued due to the hype and enormous amount of un-monetized users; my sense is that with the lack of a coherent, long term revenue strategy the public markets will bring their valuation down to earth a bit when they IPO.

Google: using Warren Buffet's investment thesis of "only invest in what you know", I'm afraid of Google.  They're in too many businesses where they haven't been successful, and in too many businesses in general for me to wrap my head around.  I don't like to invest in what I don't know.  Google now has such a wide array of products that they have a website titled "what do you love?" where you can search any word -- any word -- and they'll come up with a listing of products that serve that word.  Try it and you'll see it what I mean.  They're in a lot more businesses than many conglomerates (GE is down to thirteen).  I'm not saying there isn't upside for Google, but their business is much too difficult for a casual investor to grasp.

Apple: I haven't read the Steve Jobs biography yet but I've read enough excerpts and heard enough interviews about him and it to know that he was the heart and soul of that company.  The company succeeded when he started it, crashed when he left and came back like wildfire when he returned.  See a post I wrote about his success a while back.  Surely his unfortunate passing is built into their share price at this point, but there are certainly enough reasons to believe that Apple's outrageously impressive growth curve may have peaked.  And without Jobs at the helm, they're tough to bet on.

Amazon: a fantastic management team with a long, long track record of success competing in a variety of synergistic verticals.  Amazon is steadily entering businesses that they are setup perfectly to dominate -- self-publishing being one of the most promising.  They've finally smartened up and have reduced the price of the Kindle massively, setting them up nicely to dominate digital media alongside Apple.  Amazon is so well run and at the early stages of so many fast growing businesses that I think it's a no-brainier to put my money behind that team.

So there's my very amateur, 100,000 foot view of the Big 4.  I'm planning to write a post on valuations (including those of the Big 4) in the coming days so more on this topic soon.

A Viral Marketing Framework

Uzi Shmilovici had a good post on Techcrunch yesterday on the 8 different ways one can do viral marketing.  I’ve written in the past how I don’t believe you can “do” viral marketing. But I do believe you can do a few things:

  1. Build a product or service with ‘network effects’ so people are intrinsically inclined to tell their friends: (e.g. the telephone has a network effect because it’s a worthless product if your friends don’t use it -- it's naturally viral)
  2. Build a product or service that’s so awesome that people are inclined to spread the word
  3. Make it really easy for people to spread the word about your product or service
  4. Use gimmicks to get people to tell their friends.  I don't mean 'gimmick' in a bad way but there are tactics you can use that give you a temporary bump in new customers.  Though they're not truly viral marketing activities as the increase in customers doesn't continue to spread past a few degrees as a real virus would

That said, Uzi's 8 ways of doing viral marketing are interesting.  I'd encourage you to read his post before reading on.

To help me think through his approach, I've applied his 8 methods to my framework above and included an example of each:

1. Network Effects

(1) Inherent Virality – your friends must use the product for it to work (example: the telephone)

(2) Collaboration Virality – the product is more valuable if your friends use it (example: Amazon’s ratings & recommendations system)

2. Make an Awesome Product or Service

(8) Pure Word of Mouth Virality – people tell other people because the product is awesome (example: most of Apple’s products)

3. Make it Easy to Tell People

(3) Communication Virality – include your tagline with the product (example: tagline in Hotmail’s email message stating, “sign up for a free Hotmail account”)

(5) Embeddable Virality – include a link back to your product in your content (example: link to Youtube in embeddable Youtube videos)

(6) Signature Virality – include a “powered by” link even in white labeled products (example: Intel logo on laptops)

(7) Social Virality – allow users to broadcast that they’re using your product through social networks (example: Turntable.fm forcing users to attach their account to their Facebook account)

4. Gimmicks

(4) Incentivized Virality: give users a benefit for telling people about your product (example: Living Social’s me+3 = free promotion)

As I've said before, viral marketing should be a mostly passive activity -- it's an output of building an amazing product or service.  So while all of the above are worthy activities, most of your energy should be spent building that amazing product or service that people can't wait to tell their friends about (see #8 above).

A Couple More Thoughts on Enterprise Tech Versus Consumer Tech

Two other quick thoughts on this topic... Why is enterprise tech behind consumer tech?

1. Slower development cycles: B2C companies can innovate and release much faster than B2B (often B2B product changes need multiple approvals), "MVP" as a development strategy doesn't go over well with big companies

2. Many large companies (especially banks) are still on old operating systems and web browsers -- many top banks still use IE6.  This requires enterprise providers to dumb down their products and allows for less innovation.  I don't think Facebook or Youtube are even operational in IE6

The "I'm Here" Rationale

In the offline world, once you get a customer into your store there’s generally a good chance that you’re going to get them to buy. 

They took the time to drive to the store, park, get out of the car and walk inside.  There’s a negative feeling of wasted time if they don’t buy something.  So if your store doesn't have the best price or best selection the consumer is still likely to buy: “well, this shirt isn't perfect, but I’m here, I might as well buy it".  I’ve felt this way many times as a consumer.

This feeling doesn’t exist online; if it does, it exists to a far smaller degree.

The cost of leaving an online store is less than a second (just close the browser window).  The "I'm here" rationale doesn't work.

This is an important insight as it disrupts many traditional conversion methods used by marketers.  For example:

  1. Loss leaders don’t work online: if you get someone to your site with a great deal and they miss it, they won't buy something else, they'll go somewhere else
  2. Impulse buying -- a huge offline revenue driver -- is almost impossible to replicate on the internet; you’re not stuck in a checkout line, the line moves as fast as your internet connection 

Of course there are multiple other examples.  Like so many other things, the internet is disrupting old fashioned conversion tactics and putting the consumer back in the driver's seat.  A good thing, in my view.

Usage Metrics

Most web services closely track their site usage and site conversion.  A "user" that "converts" equals $.

In e-commerce, you could describe it like this: get people into the box (drive usage) and do well for them when they're in the box (drive conversion).  

I thought I'd take a moment to clarify a few of the key terms associated with usage metrics in e-commerce as there's often some confusion around how these metrics are defined.  In a subsequent post I'll talk about some of the key conversion metrics. 

Usage Metrics:

  • Registered User: a new user, or a user that came to the site for the first time in a given period and accepted terms of use and (generally) provided the site with their email address
  • Total Registered Users: sum of all new users
  • Unique Users or Unique Visitors: the number of individual people that came to the site in a given period (only count 1 visit per person)
  • Sessions: the number of total site visits during a given period (count all visits for all people)
  • User Activity: the % of total registered users that visited the site in a given time period

To keep it simple, when evaluating a web service's usage I really only want to know two things: 1.) how many total registered users do they have and 2.) what % of those users visit them each month?

Generally, I find that usage is pretty healthy if around 25% of registered users are coming back to the site each month, though this can vary widely depending on the vertical.