Annals of Advertising

One of the reasons Google makes so much money is targeted advertising. When you’re searching for “digital camera” on Google, chances are you’re looking for a digital camera. At that point, you’re much more receptive to an ad for a camera than when you’re waiting for the next episode of House to load on Hulu (my DVR hates me).

But you can use this intent in other interesting ways. Alec Brownstein was searching for a job at an ad agency last year. He figured out the names of suitable high-ups, and bought Google search ads to be displayed when those people searched their names. The implicit assumption was that people would search for themselves on the internet- indeed, he had a couple of job interviews (and an offer) within weeks. Better still, this entire campaign apparently cost him the princely sum of $6.

Facebook has now converted this into a mass industry. When you buy an ad on Facebook, you can choose what ‘networks’ you want your ad displayed to. The intent was that if you’re a small store in West Philly, you might want to only advertise to UPenn students. Instead however, my friends working at Google woke up this morning, logged in to Facebook, to see an ad that read: “Hi, I am [redacted]. I graduated with an MBA degree. My dream is to work for Google. Can you help make that happen? Click to see my resume.” Somehow, I suspect this won’t be quite as effective as the original. If you want a job at Google, the least you can do is use AdWords…

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The 30% Rule

The powers that be have decreed that all subscriptions bought via Apple’s iStore must pay the piper to the tune of 30% of the take. My question concerns, very simply, why?

Indeed, credit card companies routinely take 2-5% of net receipts of sellers, a small ‘convenience fee,’ and there is nary a whisper about this part of their business (though this might be changing). Groupon, from industry murmurs, takes 50% and people are either wildly positive or negative about that. All said though, the Groupon value proposition is that businesses can/should convert those first time customers to repeat customers without paying the Groupon tolls.

The 30% Apple Tax appears to be too large to fit into the former ‘convenience fee’ category. And since it charges repeat business too (e.g. if I sell a monthly subscription via the iStore, I owe Apple for every month), it doesn’t quite fit the Groupon ‘large upfront cost for customer acquisition’ model. So, indeed, what is it?

My suspicion- this is a ploy to make the apps that compete with Apple’s walled garden less competitive- in particular Kindle (v iBooks), Netflix/Hulu Plus (v iTunes video), Pandora and so on. All the 30 percents in the world wouldn’t make a dent on Apple’s large revenue streams, and wouldn’t be worth the bother in and of itself. Dressed as a move to herald and improve consumer choice is potentially an interesting variant on Apple’s standard walled garden- if you have content we approve of/ you hand over to us (via say iBooks), we sign you a potentially better deal. Otherwise, you pay us a crazy percentage.

Now you might say- crazy conspiracy theory, but where is the evidence? As with all conspiracy theories, I don’t have any. I do offer one potentially telltale sign though. If this control freakiness is, indeed, the root of Apple’s decisions, then they will potentially reduce the investment on the one part of their system they cannot control- the Browser. So how much will Apple invest in their browser- mobile safari? It already seems strange that for a platform so otherwise well put together, their browser is painfully slow, under-innovative, and generally a pain to use. If it falls further behind whenever Honeycomb makes the leap from vaporware to reality and the iDevice 2011 edition responds, I think we have an answer…

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Of Turkeys and Eagles…

By the time this post is up, Nokia will have announced its new strategy to go with Windows Phone 7 in some shape or form. With the HP/ Palm marriage consummated, this will leave us with 4 major platforms in the smartphone space  (I’m assuming that the two Nokia OS’s will soon be put out of their misery). So here are my thoughts on how this will play out-

• With WinP7 now tied to Nokia, I suspect the other manufacturers will slowly bow out of that platform- one dominant OEM is bad news for smaller OEMs. If that happens, a lot of their joint future depends on how fast Nokia can get competitive WinP7 devices to market.
• HP/Palm will win several awards for the best product brought to market roughly 6 months later than needed to be seriously competitve. There’s something to be said for just getting stuff out the door.
• Android Manufacturers will win the award for worst executed vision- a special commendation to Motorola for Xoom pricing and the Atrix Dock. Android Jalebi launches late December 2011, bringing some much needed Indian representation to the high tech industry.
• The iDevice behemoth will hopefully, at some point, slow down (try the 2:50 mark). More realistically, I suspect they’ll continue to sell millions of devices to people like these. John Gruber will exult on how this shows how truly individualistic humans are.

To summarize, the carriers win as all 4 camps make concessions to get carrier support for their device(s). Apple makes lots of money, Google makes a fair bit on mobile, Microsoft continues to dump money in the general direction and HP makes the most beautiful printers anyone’s ever seen.

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David v Goliath Narratives

The world of tech journalism seems to divide neatly into two genres: in-depth technical reviews and superficial pieces on an area/technology/platform. I enjoy the former, perhaps due to my preference for reading something aimed at a select club rather than the hoi polloi.

The latter, on the other hand, is almost always an attempt to spin a narrative via tortured analogy. We wrote in the past about what appears to be an overwhelming human need to organize facts into narrative. For tech journalists, it has be a specific narrative:. lean, smart entrant vs previously successful but now bumbling incumbent. We have 3 complaints about this:

Firstly this leads to a repetitive sequence of articles. In the mobile industry, for example, something to the tune of “Will X destroy Y?,” with (X,Y) =(RIM, Nokia), (Apple, RIM), (Android, Apple), (Windows Phone 7, Android) in that order in the previous few years.

Secondly, anything that doesn’t fit this template is systematically ignored. For example, Nokia and RIM have been thoroughly ignored for the past year as the Apple v Android rivalry took centerstage in the mobile world.*

Finally, and most importantly, this isn’t a zero sum game. There are winners and losers, yes. However, contrary to the what the narrative would have you believe, the losers are still pretty well off. For e.g. Yahoo still generates upwards a billion dollars in annual profits. They’re probably not getting to two billion anytime soon- but also probably not plummeting to zero.** And for all the hype (and site visits), Facebook still purportedly makes less than twice that in annual revenues.

So calm down everyone and take a deep breath. Check out the landscape, all the new technology and its applications. Secretly enjoy the Jobs v Gundotra sniping. Just be sure is that if tech companies spent all their time obsessing about competition like the journalists who cover them, rather than focusing on technology, our world would be more Flintstones than Jetsons.

*The RIM/Nokia-baiters would argue this is because they haven’t done anything worth covering, but the Nx/Blackberry Whatever are probably more interesting than whether AT&T Iphone cases fit the Verizon Iphone.

** Carol Bartz’s rather entertaining press conferences notwithstanding.

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Tough Questions

This blog likes to think of itself as perched somewhat uneasily near the cutting edge of Web X.O technology (where X is a magic content free number, currently 3 but really moving so fast its best to use a placeholder).

Even so at least half the authorship of this august site must confess to be somewhat baffled by the raison d’être of a born again genre of web startup – Question and Answer sites (socially enabled, heavily funded and often invitation only).

Now Q&A sites have been around for a while, with services such as Yahoo Answers completing the difficult task of both attracting a massive user base and providing no apparent social value whatsoever. Or almost no social value – a good meme is not to be scoffed at.

Stellar examples such as Yahoo notwithstanding, the powers that be in Silicon Valley have evidently fallen in love again, and Q&A startups such as Quora, Aardvark are all over the place. Raking in millions in venture funding, earning column inches in the best kinds of blogs, and throwing parties for everyone in San Francisco. Quora in particular has been praised for creating an exceptionally high quality seed community, albeit one that is both small and more than slightly unidimensional. More and more, Q&A sites have been called the future of search.

Yet think about it. If you want to know something that is already documented somewhere, or can be worked out from information documented someplace, a traditional search is probably your best bet. Given a reasonable search query and a good search algorithm (and a lot of work has gone into the latter), many many ‘questions’ have an answer available instantly. Speed is therefore not the strong point of sites such as Quora – even if you get a good answer relatively quickly (by which we mean a few hours here), you probably want to give things a few days to get the most out of the community.

Now lets say search won’t cut it because your question requires an expert. And lets assume you’ve managed to get a huge population of users to sign on, so that any given question can in theory be mapped to someone who knows their stuff. Lets even assume they actually see your question – a very hard matching problem in the first place.

Even so, its unclear what the incentive is for anyone to spend the time needed to give good answers (remember they need to beat what the person asking could find using a web search). This is especially true where the question is uncomplicated and thus a little boring (to the expert). I’ve heard people point to Wikipedia to prove that users will volunteer high quality information on a wide range of topics. Perhaps, but the demands being placed on the community here are even higher – volunteer information *and* do it when someone else wants you to, not when you feel like it.

Quora, with its flourishing and tiny community of Silicon Valley techies endlessly discussing startups, business plans, technology and the bay area, isn’t a good place to get answers to questions in general. It is a good place to have a conversation, initiated by prompts, if you’re a particular type of person. Its hard to see the difference between whats going on within Quora and the back and forth chatter – often also initiated by questions – on the Android forums or a Linux Users discussion board or the Cricinfo facebook page or World of Warcraft discussion boards.

In other words Quora seems a Q&A site thats really just a super successful specialized online forum. There’s a place for them and you can find them in many shapes and forms – its the oldest internet application around.

But look long and hard at Quora and the chaotic (but large) Yahoo Answers and  you understand why the important task of enabling information retrieval in general will require better search, better semantic algorithms and better content matching. Its not going to happen by hoping some amorphous, omniscient community in concert with a little special social sauce will come to the rescue and do the work for you.

I could be wrong of course. Its been known to happen.

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Funny Money (Revisited)

There’s a third reason that wasn’t covered this morning- Making ecosystems that develop within Fbook stick inside Fbook.

For example consider Zynga (the people who make Farmville and all those other games I can’t imagine why anyone plays). At this point, Zynga can potentially get people from Fbook, and move them to their own Zynga ecosystem, collect their billing details and all. Facebook gets neither the x% cut, nor the incidental traffic/ spillovers these people generate- Zynga keeps it all. By contrast, if all their users had signed on using Fbook Credits, the people would likely stay within the Fbook family.

Apple has successfully done this already (App Store, Itunes store)- and is now defending its turf. Google is moving to make its checkout option more attractive to developers and convenient to end users. Of course, Xbox Live has long had a vibrant credits community. So in short, welcome to the party Facebook!

As an aside, today’s piece also raised the quirks of mental accounting, and how people spend too much in small increments . I figured I’d pick up my karma points for the day by plugging a new website that uses these powers for good (i.e., the good of society, not its own). The Philanthroper offers a $1 deal a day, a la Groupon, to a selected charity. It uses a micropayments system that guarantees that roughly 99c makes it to the charity rather than disappearing into amorphous ‘administrative fees.’ Visit them and donate. Drink fewer 3$ lattes if you must.

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Funny Money

A very interesting part of Facebook just left beta – their virtual currency, Facebook Credits. The idea is to have a common unit to use across all applications (games and otherwise) within Facebook, so that you can buy your farm animals or your virtual birthday presents or your zombie killing weaponry or additional scrabble tiles using the same Facebook Credits (TM).

Of course the term ‘virtual currency’ is interesting because there is nothing fundamentally virtual about it. In much the same way as the things you can buy with credits (so called ‘virtual goods’) are of course no different from any other type of good. Bricks and bytes are different but not in any fundamental economic way and anyone making money in the multi-million dollar market in virtual goods knows this. Of course for the present they remain legally different, so Facebook Credits cannot legally be used to buy so called real goods. The fact that the law here distinguishes between the indistinguishable should be obvious when World of Warcraft characters are sold on E-Bay or the fascinating and complicated virtual economy within Second Life crashed taking hundreds of thousands of real dollars with it. (As an aside you’d think that virtual economies would provide a lovely sandbox for useful research by economists keen to understand how the real economy works.)

So why does Facebook want a virtual currency? Why does Second Life?

The reasons you hear most often are first, that gambling laws occasionally make it difficult to freely allow dollar payments within these applications.

Second, that this is an attempt to lower transaction costs for the user. Facebook is kind enough to create a single currency, convertible to dollars only through a few restricted channels. That saves us the trouble of having to provide credit card details to many vendors. Now of course for this service they also charge massive (30 percent) transaction fees, a pound of flesh far exceeding what a credit card takes. Arguably there is no lowering of transaction costs – instead only a conversion from time costs to money.

But really this is not about making transactions easy (Paypal provides a single payment portal anyway) or even archaic gambling legislation (most applications wouldn’t be affected). In fact, its all behavioral. The reason to do this and the reason why everyone makes money is that virtual currencies exploit the mental accounting quirks in most people – where funny money isn’t the same thing as coins you can feel or even charges on a credit card. At least for a while, spending a Facebook Credit is going to be a lot easier than spending a dollar. And so we do it more.

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Cloud Polling

I confess to using twitter, facebook and buzz (maybe not so much buzz) as a primary source of gossip, news and serendipitous discovery. Many of my more enlightened friends also use statuses (statii?), tweets and buzzes to broadcast their opinion on everything that matters and much that does not.

It only seems sensible then as tweeting goes mainstream to take real time marketing and data analysis to the next level. Crimson Hexagon does just that and indeed seems to have done pretty well (well at least not terribly badly) on election poll data as well – that graveyard of social forecasting. Equally interesting is the idea that firms could use tools like this to predict ex-ante the effects of planned marketing decisions.

So could we run a social media analysis and answer the pressing question: Are androids just like electric sheep?

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North American Airlines and The Harakiri Complex

Long term strategic excellence is not hallmark of the airline industry. Their wince-worthy choices are a staple for MBA case-studies on winning the battle and losing the war. E.g. the old joke- Q: How do you make a small fortune in the airline industry? A: Start with a large one.

Recently, after some he-said – she-said, American Airlines fares no longer appear on Orbitz or Expedia. To the world this appeared a time-perfected shoot-yourself-in-the-foot move. To academic economists, this was a cunning ploy to use the Diamond paradox in their favor. The truth, as always, lies somewhere in the middle.

The Diamond Paradox in English- standard price competition leads to low prices. But suppose we add a small search cost. A company can now raise its price by a small amount, since people would rather pay the slightly higher cost than pay to search. The competition can now raise it’s price as well. But our original company can now raise prices again- and so on. This ‘raveling’ stops when all companies are at the monopoly price, even though we have competition with only a small search cost.

The AA play is not to be only available on AA.com- indeed they were the pioneers behind the idea of a computerized global distribution system originally. My explanation: They want to use their newer direct connect feature to better sell ancillaries, e.g. baggage, seat upgrades etc on online travel sites. This removes an asymmetry: the old GDS’s are just not built to handle it, the direct websites (AA.com, Delta.com are). Since most of their lowest base fare customers come from these online websites- selling them these add-ons is critical. Cutting double marginalization- incidental benefit.

Why do I think it isn’t a Diamond paradox play? North American airlines are low on cash. Unilaterally withdrawing from a cash generator is a bad idea- the competition is happy to watch while you haemorrhage. Airlines’ actions are always short-term cash generating- and as a “push up search costs for everyone” strategy, it definitely isn’t.

And why do I think it isn’t a classic shoot yourself in the foot move? Oh it probably is, it just has a subtle, almost plausible logic to it. As always.

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Competing with Amazon, Nietzsche style

While browsing the interwebs, I found a startup that fills what I thought was the biggest competitive advantage that Amazon has (had?) over other web companies that try to sell you ‘real’ products: competitive shipping. See Amazon has this thing, Amazon Prime – sign up for it and most stuff on Amazon has 2 day free shipping. It makes everything on Amazon more appealing. The real problem most places have competing with Amazon isn’t people finicking about leaving their credit card details around (pay pal/ google checkout solved that a while back). It isn’t sites’ privacy policies (people barely care about where they park their e-mail apparently– see their answer to FAQ 2). It’s probably not even filling out a form (while I agree this can be a bit troubling, most modern browsers autofill decently).

I suspect, of course, that this solution by itself won’t be enough to usurp the overwhelming dominance of Amazon. It’ll first need some sort of wrapper navigation button/bar that immediately enters shipping and payment details (a la the 1-click shopping button on amazon). It’ll then need to invest heavily in a state-of-the-art inventory system to keep costs low, and competitive with the big A. It would then need to cut consumers’ search costs by implementing deep search across all its partner websites. Final efficiency gains could be realized by investing in a homogenous UI, to make it easier for users to navigate across partner sites. At this point a sort of aggregator landing page for users to start from would help. Put this all together and we have… Oh wait. Another Amazon.

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