Andrew Chen Archives

I have a Google Analytics report on my top referrers (and search keywords) mailed to me on a weekly basis, and I thought I’d share the results below. Note that this is visitor-only traffic, and doesn’t include RSS feed readership. Either way, blogging continues to be a very high effort-to-pageview ratio, is very inefficient, as I mentioned in a previous post Is blogging worth it? What’s the ROI?

As might be expected, the top traffic comes from a few sites:

• Techmeme
• Google
• Twitter
• Friendfeed
• Hacker News

In particular, the top 5 make up the vast majority of the traffic, as one might expect from seeing the Power Law curve all over the place.

I personally find that Twitter and Friendfeed being high on the list is kind of a funny thing. It’s one of the reasons why I’ve started to get more active on Twitter, since at least for my particular audience, people seem to use it quite a bit. (Follow me on Twitter if you already haven’t)

The other interesting point is that a bunch of my traffic comes from aggregators in the form of Hacker News, Techmeme, Google, and others. Excepting A-List bloggers like Robert Scoble, these guys tend to drive more traffic than individual blogs – they can also be more consistent in driving traffic from week to week.

I finally decided to make a page listing all the reasonable essays I’ve written over the last 2 years on one page, which you can find here.

For the lazy folks, here’s a snapshot of the essays as of today (July 30):

Viral marketing and user acquisition

• Adwords is not enough for success on the consumer web
• Are your SEO efforts working, or failing?
• Bridging your traffic engine with your revenue engine
• Facebook viral marketing: When and why do apps “jump the shark?”
• Is your site really viral? Viral Branding versus Viral Action
• Social network marketing: Getting from zero to critical mass
• Viral marketing is not a marketing strategy
• What’s your viral loop? Understanding the engine of adoption
• 10 obvious strategies to ruthlessly acquire users

Engagement and product design

• 10 signs you’re a product fanatic
• 25 reasons users STOP using your product: An analysis of customer lifecycle
• Are people like lab rats? Using reward schedules to drive engagement
• Do you ever say, “MySpace is sooo ugly?” This blog’s for you…
• Does Facebook reflect your true friendships? How about e-mail?
• Facebook Apps: Why they’re focused on fun instead of utility
• Is your website a leaky bucket? 4 scenarios for user retention
• Public and private spaces, and why YouTube comments are so awful
• Social gaming design – Bartle types versus Web 2.0 participation pyramid
• Social network death spiral: How Metcalfe’s Law can work against you
• Technology always changes, but people always stay the same
• The design of social spaces
• User retention: Why depending on notification-driven retention sucks
• Users, customers, or audience – what do you call the people that visit your site?
• Why your friends list get polluted over time
• Your site will succeed or fail in the first 10 seconds

Online advertising and social network monetization

• 5 factors that determine your advertising CPM rates
• 5 things that make your social network monetize like crap
• Data portability: Is the social network data you’re hoarding treasure or trash?
• How NOT to calculate ad revenue
• Online advertising during a recession: 5 key trends for ad-based startups
• Vertical ad networks: What are they, and why did Cox just buy Adify for $300MM?
• What’s the value of a user on your site? Why it’s hard to calculate lifetime value for social network audiences
• Your ad-supported Web 2.0 site is actually a B2B enterprise in disguise

Metrics

• 5 steps towards building a metrics-driven business
• Are you misusing Alexa numbers? (Probably)
• Lessons from the casino industry on engagement metrics and lifetime value
• Obama and McCain: How political marketing has evolved from offline to online
• omg I’m just a startup, I can’t do those fancy analytics!
• Recency Frequency and Monetization (RFM): Optimizing your notifications strategy

Media and games

• From analog dollars to digital pennies: The crisis in traditional media
• Game design tutorial at the GDC
• MySpace versus Facebook: Analysis of both traffic and ad revenue, using Google Trends
• What every Web 2.0 entrepreneur should know about virtual goods
• Social Gaming Summit: Recap and observations

Entrepreneurship and startup life in San Francisco

• 10 tips for meeting people at industry events
• 5 ways to break past the San Francisco echo-chamber
• Are Web 2.0 startups wasting their time with Web 2.0 early adopters?
• Couple quotes on Facebook in Wired, Fortune, and NYT
• How do you find a badass co-founder, Part 2
• How do you find a badass co-founder?
• Is blogging worth it? What’s the ROI?
• Moving to SF and joining the tech community – Lessons from my first year
• What’s an Entrepreneur-in-Residence?
• What’s broken about online dating?
• What’s broken with online travel?
• What is your W2SAT* score? (*Web 2.0 Startup Aptitude Test)

That’s funny:

From the incredibly funny FAIL blog. (unsurprisingly, run by the same guys that run ICanHazCheezburger)

Around the bay area, I hear a lot of derogatory comments about brand advertisers and agencies about how they just “don’t get it,” how “TV is dead,” and other assertions. That may be true one day, but the traditional market is still quite big and it’s an uphill battle today.

There was recently a great AdAge article called $80 Billion? Online Display Market Is Being Overhyped that I want to pull some quotes from.

On the perception of where online ad spend fits into the overall marketing budget:

The inconvenient truth is that for all its new-media spin, display
advertising is “old” media — a commercial message to be placed next to
editorial or entertainment content. And we know by now that
measured-media growth has pretty much ground to a halt as marketers
continue to increase their dollars in unmeasured disciplines such as
web development, public relations and database marketing at the expense
of paid advertising. Ad spending among the top 100 U.S. advertisers
last year grew a paltry 1.7%, with measured media only up 0.3%.
Measured-media spending is in decline in Japan, and it’s not much
better in the U.K.

On how much money, percentage-wise, that brand advertisers spend online:

The question is: Should the fact Procter & Gamble spends only 1.5%
of its marketing budget on display ads be viewed as a warning signal by
online ad sellers, or as an opportunity? (Even Unilever, Ad Age’s
Digital Marketer of the Year, spends little more on display, allotting
it 2% of its budget.)

On their perspectives on other media channels to reach consumers:

Of course, part of why large companies such as P&G spend so little
on the web is because of the feedback they get from the marketing-mix
models they still use to determine media outlays: TV and other old
media still work. (P&G increased its magazine budget by 7% last
year.)

Ultimately, for startups that are trying to tackle the advertising space, the reasons above are a lot o the reasons why it’s hard to change agency behavior – either to make them use your self-service interface, or to use a different set of metrics to evaluate their spend, etc. The amount of dollars they’re spending online, while often strategic and very much growing, is simply not large enough to justify redoing their entire business model.

Read the whole thing here.

Reader comments on user retention post
In my previous post on user retention strategies from the catalog marketing world, I received a number of comments commenting on the difficulty of implementing analytics systems when you don’t have the resources of a F500 company.

Another Andrew Chen writes:

I agree with the general sentiment of the post, but how would you suggest a startup deal with the problem? Without the marketing budgets of larger companies and without the time to do detailed analysis of its customers, how can a startup find the best messaging and segmentation?

Similarly, Rachanap writes:

RFM is a good idea in theory, however, even in traditional marketing world, like in CPG, companies don’t have the bandwidth to adopt it, let alone successfully implement it. Implementing such a truly effective and scalable marketing system needs a tool in place for segmenting the data, an then group the users (often needing expensive software) as well as additional infrastructure to capture that data, neither of which is an easy task. For startups this would be difficult, given their low bandwidth.

In essence, the question is, how do you take advantage of all of these different analytics systems given the constrained resources of a startup. Good question. Let’s tackle this below.

The role of analytics in startup decision-making
In general, a philosophy on the role of analytics within a startup is:

If you’re not going to do something about it, it may not be worth measuring.

(Similarly, if you want to act to improve something, you’ll want to measure it)

Don’t build metrics that aren’t going to be part of your day-to-day operations or don’t have potential to be incorporated as such. Building reports that no one looks at is just activity without accomplishment, and is a waste of time.

So instead, I recommend a “layers of onion” approach on figuring out what analytics you require. Early on, your goal may be to focus on creating a solid product that people like and stay engaged on. Obviously you could slap in Google analytics, but at the very least I’d recommend cohort-based analysis to get an actual feel for how well your products are retaining people. Similarly, you might reach a point where you want to be focused on traffic, in which case you’ll want to make sure you properly instrument to capture your viral loop. Later on, you’ll want to do the same for your ad inventory, to figure out what segments of audience and what sections of your site monetize the best.

The point is, develop the necessary metrics alongside whatever feature development that makes sense, don’t do any more than you need. Now when you are far enough along that segmenting your users based on behavior matters – likely this only because relevant once you hit a certain user acquisition threshold – then it may be important to implement RFM-based segmentation. Or not. It just depends on your product goals.

Metrics as a “product tax”
In fact, one way to view analytics is that they are a double-digit “tax” on your product development process because of a couple things:

• It takes engineers lots of time and development effort
• It produces numbers that people argue about
• It requires machines, serious infrastructure, its own software, etc
• Fundamentally, it slows down your feature development

As a rough estimate, I’ve found that it takes between 25-40% of your resources to do analytics REALLY well. So for every 3 engineers working on product features, you’d want to put 1 just on analytics. This may seem like a ton (and it is), but it throws off indispensible knowledge that you can’t get elsewhere, like:

• Validating your assumptions
• Pinpointing bottlenecks and key problems
• Creating the ability to predict/model your business to make future decisions
• It tells you which features actually are good and what features don’t matter

Question: Is it better to build 10 features where you don’t know what worked and what didn’t, or is it better to build LESS features but have a clear sense for what and why something worked? In my opinion, you want to learn as much as you can so you can “run up the score” on the features that work.

Prioritizing metrics development
The key to this philosophy is figuring out how to prioritze the metrics that you build relative to your features. Again, you want to only develop the analytics that you need to build out your product correctly – no more, no less.

In fact, it’s often wise to make a distinction between Operational reports versus Investigative reports,
each of which have their own goals and structure. The operational reports should reflect all the issues you care about in your business, and the investigative stuff generally satisfies curiosity (which is always a good thing).

So for folks with startups, I’d encourage you to ask: What are the outcomes that you care about? What are the assumptions you are making? If you’re a startup that’s spending copious amounts of time building features X, Y, and Z, what are you making the assumption of? That these features will make people want to extend their engagement times on the site? That these features will build word-of-mouth? What are the metrics that would prove you right or wrong in your assumptions?

Let’s discuss an example of a sample roadmap for a online photo-site.

Example product roadmap
I’ll close out this post with an example roadmap for a product that roughly had the same featureset as Imageshack.us. You may end up making these product decision out-of-order of what I have them, but the philosophy remains the same: Build analytics only when you need them, and align them to the key efforts behind your product development process.

Here’s an example sequencing of product development:

1) Core product and features

• Obviously, you want people to be able to upload a photo and give a URL for it
• These photos then can be displayed on other sites

1a) Analytics for core product

• First add Google analytics since it’s free :-)
• Build out a cohort matrix that tells you how many users join each week, how many come back, and what they do during their visits
• Where are these images being uploaded to? A breakdown of image displays by the domain they were displayed on would be nice

2) Working on growing traffic

• Once you have the core product done, perhaps you want to make some whizbang features to grow traffic
• You might make a photo slideshow, or some awesome photo effects, etc.
• Also, you might want to make one-click integration with Typepad/MySpace/etc via something like Gigya

2a) Analytics for traffic growth features

• One key issue to measure is how much additional traffic is gained by these different methods. You may want to start annotating visits that come to your site based on what kind of widget or photo created it. Do sparkly photo galleries generate the most visits? Why? Make a report
• Second feature might be an A/B testing framework. If you divide two groups, A and B, and show them different featuresets to see how the traffic grows for each

etc.

UPDATE: Thanks to Jeremy for the link and additional thoughts on spec’ing out metrics in the product process. Check them out.

Hello all from Seattle!

After much procrastinating and complaining about Typepad’s yearly subscription, I finally decided to pay for the Pro account and try out Disqus. We’ll see if it’s worth the money and upgrade.

I think for a lot of the products out there pitched at content creators – Google Knol being the latest one – there’s a misplaced emphasis on making money. As a blogger, I don’t really care about making a buck, since it’s not my full-time thing. I just want to write what I want to write and see what people think. Products like Disqus, Lijit, MyBlogLog, and other blog-related products I like all cater towards my interest in getting more interaction from my audience and knowing that they aren’t just anonymous web visitors. I think it’s important for folks working on these kinds of products to never forget that.

Anyway, I’ll have more essays later next week when I’m back in San Francisco. Talk to you guys then.

I’ve gotten more active on Twitter recently – you can find my profile here.

I recently noticed on Summize aka Twitter Search that there’s a lot of people who blog the full name of my blog. You can see the results for a search on “Futuristic Play” here.

Thus it inspired me to try an experiment :-)

If I add @andrew_null to the name of my blog, will all the auto-linking that sites/apps do link more users back to my profile? We will find out!

If anyone else tries this out, let me know and I’d be interested in learning the results!

Preferred program for Facebook apps?
There’s been some recent discussion around the tiered system that’s going to be put into place for Facebook apps to give them the right incentives to be a good citizen within the Facebook economy. I think this is a great start, and you’ll have plenty of apps and startups that are likely to want to participate.

That said, my thought would be that it doesn’t significantly change the dynamics on the platform since a human-based solution to the problem will inevitably cause significant gray area. In my estimation, the major issues around app behavior on Facebook all pretty much center around one thing: How much each app uses and abuses “viral channels” within the platform, which degrades the user experience.

Maximizing local happiness versus global
The problem is that each app, working in its own world, will NOT pursue the global maximum for user happiness. They simply don’t know what the other apps are doing. What this creates is a classic tragedy of the commons situation, where the commons is your Facebook newsfeed/notifications/e-mail inbox.

Proposal for a Facebook notifications point system
So here’s my proposal:

• Each user session on an app is scored for engagement – meaning, pageviews/time-on-app/revisits and any other metrics that would be useful
• The app creator then gains “points” for creating more engagement with their users
• They can then use these points for different kinds of notifications. Some notifications that are more obtrusive cost more points (like emails), and others which are less annoying cost less

Then from a global context, Facebook can regulate the end-user experience by figuring out if their users are getting too many e-mails or too many notifications. If so, they can just raise prices so that notifications are more expensive to buy.

More analysis needed
I’ll be the first to admit I haven’t thought through all the implications of a system like this. In particular, here are a couple issues worth thinking about:

• What are all the point-generating activities? Engagement, positive reviews, % retained install rate?
• What are all the point-costing activities? Sending notifications? Uninstalls? Report as spam?
• Will a secondary market emerge? Is it a good idea to let people pay for notification points?
• What are the ways people will cheat the system? How do you counterbalance that?

Suggestions and comments welcome :)

Notifications strategy

Every startup has to think about their notifications strategy – it’s not enough to blast out e-mail whenever anyone on your site does anything, or to send out weekly newsletters. Notifications are an important part of how you manage your userbase’s lifecycle, and is a key part of any retention effort your business has.

I’ve often thought that online advertising folks are pure-plays for user acquisition. And that (traditional) games people are pure-plays for engagement. The question is, what’s the pure-play for retention? I’ve come to believe that businesses that focus on managing churn – be it telecom/wireless, catalog, financial services – are the guys who are the furthest ahead in understanding these concepts.

Learning from the catalog marketing world
I’ve recently been doing research in the retail and catalog marketing part of the world, where companies have thrown billions into understand when it’s a good idea to mail someone something and when it’s a bad idea. Unlike the online world, there’s generally a cost associated with sending out a “notification” and there’s usually a high LTV attached to each person, so the stakes are much higher.

Traditionally, companies in the catalog marketing world use a segmentation system called RFM:

• Recency
• Frequency
• Monetization

Basically every user in your database is graded from 1 to 5 across each variable from a quintiles basis, where 555 is the best.

The idea here is that the higher the numbers, the more likely the recipient is to respond to an offer. Thus, 555 customers are more likely to mail back something than 455, and Recency also plays a higher factor in response than the Frequency of that customer. (Which is why it’s RFM and not FRM)

But how do you know when someone would have responded anyway?
An interesting problem then occurs because what if all of your 555 customers would have responded anyway? Then you’re sending them catalogs but it’s pointless. I want to point at a great paper on “uplift marketing” that answers exactly this question. I attached it as a Scribd embed below, but if you’re reading this in an RSS reader, you’ll have to click through to this blog.

Anyway, the authors from a company called Stochasic Solutions divide the world into 4 groups:

1. Persuadables
2. Sure Things
3. Lost Causes
4. Sleeping Dogs

The idea is that Persuadables are the ones who are affected by your marketing (and notifications), whereas Sure Things would have embraced your products anyway.

Then the Lost Causes are never going to respond, no matter how much marketing you send their way.

And finally, an interesting group are the Sleeping Dogs, who are likely to use your product but as soon as you’re reminding them (especially too often), then they are likely to quit your service. Ouch. (Gym memberships anyone??)

The point is, the Persuadables are the ONLY group who can improve your business. Everyone either costs you dollars by expending marketing budget that didn’t need to get spent, or would quit your service upon remembering they ought to cancel.

Don’t assume that more notifications is better
I’ll let you guys read the document yourself, but I think the overall point is that first off, segmenting your audience based on their responsiveness is a smart idea. You’re able to figure out key variables that drive their participation, which leads to some nice strategies on the retention side. On the other hand, don’t forget that the Persuadables are the true audience that can be retained via notification. Everyone else is negative, and if you’re overly aggressive, it’s easy to turn those Persuadables into Sleeping Dogs.

The full document below:

Cookie cutter go-to-market strategies

I run into a lot of startups that have identical strategies for getting to market. When you talk to them, a lot of them will talk about the same questions:

1. When are you launching?
2. What do you do to get on Techcrunch/Venturebeat/DEMO/etc.?
3. How do you think Twitter/Friendfeed/etc got their successful launches?

I think there are some big assumptions that go into the questions above, which we’ll discuss in this post. But let me first show you a very famous diagram.

The traditional “Crossing the Chasm” curve

The “technology adoption” curve above was popularized by Geoffrey Moore’s Crossing the Chasm book, and mostly deals with enterprise software. (I had the pleasure of spending some time with him while I was at Mohr Davidow, where he is a venture partner)

People often have the same image in their minds when thinking about go-to-market strategies for consumer internet as well. The general idea is to go through the typical flow:

1. Get a bunch of early adopters (aka Techcrunch readers) excited about your product
2. They blog, twitter, and promote your product to their friends
3. Eventually this process will reach the mainstream and you’ll get the wider market

I also want to bring up the definition used by Moore to describe a market, which is a bunch of folks that reference each other when making purchasing decisions. In this case, it’s the bloggers and alpha nerds that are the market.

But what if this is NOT the starting point for your market? Who are the other early adopters and visionaries?

Redefining enthusiasts and visionaries
The major point I will make here is that Techcrunch and related blogs reach an audience of early adopters, but these may not be the earlier adopters that you want. After all, what’s the point of launching a music startup on Techcrunch, for example, if your startup is primarily for the teen mass market?

I want to point out a great article posted by Malcolm Gladwell (of Tipping Point) years ago, called The Coolhunt, which you can read here. The article discusses the emergence of bottoms-up “cool:”

Once, when fashion trends were set by the big couture houses-when cool
was trickle- down-that wasn’t important. But sometime in the past few
decades things got turned over, and fashion became trickle-up. It’s now
about chase and flight-designers and retailers and the mass consumer
giving chase to the elusive prey of street cool-and the rise of
coolhunting as a profession shows how serious the chase has become. The
sneakers of Nike and Reebok used to come out yearly. Now a new style
comes out every season. Apparel designers used to have an
eighteen-month lead time between concept and sale. Now they’re reducing
that to a year, or even six months, in order to react faster to new
ideas from the street. The paradox, of course, is that the better
coolhunters become at bringing the mainstream close to the cutting
edge, the more elusive the cutting edge becomes. This is the first rule
of the cool: The quicker the chase, the quicker the flight. The act of
discovering what’s cool is what causes cool to move on, which explains
the triumphant circularity of coolhunting

Where Gladwell uses the term “cool,” the people in the technology industry use the phrase “early adopter.” Within every target market, no matter how mainstream, there are early adopters or “cool” people who are more likely to uptake these new products and have friends reference them for decisions.

Where are your “real” early adopters?
And thus as a corollary, if your market is moms, there are cool moms that are likely to try out the new technology. And if your market is Asian immigrants, there are cool members of that group who are trying out new technology.

My point is simply this:

In 99% of all cases, the Techcrunch early adopter crowd is probably NOT the ideal early adopter crowd to go after – your target market lives somewhere else

The exceptions I’ll make to this are B2B tech startups like Gnip, or companies primarily trying to target VCs in their announcements.

So where are your early adopters you want to be going after? I don’t know, but that’s the kind of research that you should be doing to create a compelling, differentiated go-to-market strategy that anything but cookie cutter.

One last thing to think about… where did LOLcats and the FAIL meme start? Start by reading about 4chan. Also check out SomethingAwful, Genmay, Encyclopedia Dramatica, and all the other sites that expose some of the darkest underbellies of the internet ;-) Between these sites, Yahoo Groups, IRC, and other old-school communications platforms, I’m guessing a large number of internet memes are generated there by early adopters of some kind.

Silicon Alley Insider sums it up:

• Bankrate implosion
• Valueclick implosion
• Declining CPMs
• Financials, autos, and real-estate advertisers pulling back
• Google underwhelms, and
• Big MSN miss

Ouch. Better start turning those widget companies into virtual goods startups…

Attending the O’Reilly Foo Camp
This last weekend I attended Foo Camp, which is a yearly O’Reilly event. It was a lot of fun because of the crowd – an eclectic mix of artists, philosophers, geeks, writers, and business folks. Special thanks for Dave McClure for letting me hitch along in his car and connecting me to the O’Reilly folks. Also, Bryce from OATV was kind enough to let me crash some of the Startup Camp sessions.

I wanted to link to a couple of the blog posts and photo galleries out there about the event:

• Techcrunch – Foo Camp is Shangri-La for Geeks
• Joi Ito Photo Gallery
• Laughing Squid Photo Gallery

Summaries of Foo Camp activities
I went to a large number of sessions – there were something like a dozen rooms with 10 sessions throughout the day, so over 3 days there were a ton of speakers and activities.

Anyway, here are some summaries of what went on:

Camping at the conference
Grab a spot to sleep in the O’Reilly offices – it’s cold and wet outside

Session on distributed social networks
Everyone at Foo wants data portability, companies resist it, and consumers don’t care

Session on economics not being a branch of physics
Lots of borrowing + forcing banks to mark-to-market the value of their assets + borrowing restrictions that are depending on assets means that banks catastrophically dump their assets in a spiral of death if anyone in the ecosystem has any problems

Showering facilities
With a half dozen showers at the conference and 350+ attendees, the only time to shower is at weird hours, like 2 or 3am

Session on granular measurement of carbon footprint
We’re all screwed unless we reduce our carbon footprint to 2500 somethingaruther

Session on Playboy’s existential crisis
 Hugh Hefner got brought back as part of the playboy brand because of Viagra, but when he dies the brand will get hurt unless they appoint George Clooney as the next Hugh Hefner, kinda like James Bond

Day 3 of the conference
With a half dozen showers and 350+ attendees, a lot of people seem to choose to not shower

Werewolf
If someone has a grin on their face when they are telling everyone else they’re a villager, it means they are actually a werewolf since no one could be that happy to be a villager

Session on the future of news
Journalism is in danger because consumers want celebrity gossip and they won’t pay more for investigative reporting – Rupert Murdoch is to blame and Seymour Hirch is the best writer ever!1!!1!!

Session on hiring great people
No one in san francisco can hire anyone locally, it’s all about importing smart people from outside the city

Session on corporate sing-a-longs
No matter how many people you invite to attend a corporate sing-a-long session, none of them will sing

Conclusion
OK, please tell me if I missed anything ;-)

I’m going to a wedding in Seattle next weekend, and will stick around a couple days to catch up with people. If anyone would like to meet up while I’m back there, shoot me an e-mail.

In particular, I’d enjoy meeting:

• smart engineers and future entrepreneurs
• advertising people (agency, ad network, etc)
• database marketing and stats folks
• startup entrepreneurs, especially the ones who are looking to go BIG! ;-)

Shoot me a note at voodoo [at] gmail!

One of my top 25 search queries is “recession advertising” so I thought I’d expand on this topic a little bit, since important parts of the economy continue to implode and the folks who are thinking about business models should be worried.

Ultimately, the dynamics here are complex and uncertain, but here some of the key trends worth watching if you’re an advertising-based startup:

1. Accelerating movement of offline to online ad spend
2. Brand areas weak, direct response will be less affected
3. Weak areas to watch: Video, social networks, communication, etc.
4. Rise of direct-to-consumer revenues?
5. Timing is everything

Let’s dive into these topics more below…

1) Acceleration movement of offline to online ad spend
The first key issue revolves around the fact that advertising spend is already shifting online from other types of media. In the direct response sector, classifieds are obviously moving from newspapers to services like Monster and Craigslist. In brand advertising, dollars are moving from TV onto high-quality publishers on the internet. An article from AdAge last year articulates this theory:

Many analysts now agree that when marketing budgets come under pressure
in a stressed economy, those sectors that can best document their
connection to ROI, such as search-engine advertising, are far more
attractive to corporate chiefs than other kinds of less-trackable
traditional advertising.

The point is, when your marketing wallet shrinks yet the market gets even more competitive, then companies in crisis will start incorporating methods other than the tried-and-true. Even though a lot of brand-based advertising has horribly opaque measurements – clickthroughs, surveys, and other gross metrics don’t provide much – it’s still better than the TV ad sales guy who asks for huge upfronts without providing much in transparency.

So consider this movement of dollars from offline to online a big plus for any ad-based startup.

2) Brand areas weak, direct response will be less affected
Of course, as the quote above alluded to, the strength of a company’s online advertising revenue has a lot to do with the kind of advertising that the company enables. For companies that are focused purely on brand advertising, there will still be hits in budget as the typical reactions – a flight to quality, a flight to metrics – affect brand-oriented startups.

So if your world is focused on engagement, eyeballs, and branding opportunities, things may still get worse before they get better.

On the other hand, the more transactional and close-to-the-money your company is, the more you can expect your revenues to grow and maybe even thrive during this time. These include companies in the following lines of business:

• ecommerce
• search
• classifieds
• shopping comparison
• remnant ad networks
• lead generation
• product reviews
• etc.

No matter how bad things get, from a relative standpoint the above businesses are still much better than direct mail, yellow pages, newspapers, and the like. The competitive pressure may make these industries shine – and Google will only get stronger!

3) Weak areas to watch: Video, social networks, communication, etc.
Unfortunately, some of the weakest areas for online spend during a recession are also some of the hottest spaces for startups right now. In general, startups based in video, social networks, and communication applications are some of the most brand-dependent companies out there. The problem is that generally, they have a hard time monetizing pageviews because users aren’t in a buying mindset when using the products.

Because of this, you need to be at a critical mass point to be relevant to agencies – and of course, this bar can be expected to rise over time in the case the economy is sputtering. Why spend a dollar with a no-name publisher when you can buy premium inventory for relatively cheap CPMs?

This is not to say that there won’t be significant opportunities in this space. For example, I remain quite bullish on web properties like MySpace and Bebo, even as they’re brand-focused, because they are attached to organizations that know how to sell brand-based advertising. Similarly, the trends in vertical ad networks provide an interesting opportunity for startups to partner with more established media companies to drive higher revenues as well.

4) Rise of direct-to-consumer revenues?
In the case of a long period of recession, another key opportunity will be for brand-oriented properties to transition their businesses into direct-to-consumer opportunities. Does it surprise you that YouTube is looking into affiliate-based revenue ideas? Or that Slide is thinking about direct-to-consumer opportunities as well? These are smart folks, and they understand that unlike brand advertising, if you can get direct monetization to work, it’s stable, scalable, but just very very hard.

And of course, virtual goods fits into this as well, but you all knew that.

The difficult part about these approaches is that unlike ad-based models which allow you to monetize 100% of your audience in one fashion or another, transactional revenues can usually only squeeze cash out of 1-5% of your audience – so what do you do with the rest of them? Are they just loss leaders?

Similarly, it seems that the best transactional revenue models have to be “productized” into actual features within the web property. Building a virtual goods infrastructure is not an easy task, nor is it simple to convince users that all those digital bits actually have value. It’s not something that’s as easy as copying-and-pasting some Javascript code onto a page to display ads.

5) Timing is everything
And finally, I’d like to close this post with the observation that in the advertising world, particularly in new media channels like online advertising, timing is everything. The brand-oriented web properties that exist today were built in the 2003-2005 era, when brand advertising wasn’t so healthy. Similarly, Google was created during a period where online ads was out of vogue, and they had to figure out a model that works.

For the new startups that are building their business plans from scratch today, I think there remains tremendous opportunities in the advertising-supported model. It pays, as many investors can attest, to be counter-cyclical. Perhaps the startups being incorporated this year who reach scale 3-4 years from now will be the ones that really kill the TV ad market by doing things we can’t even imagine today.

Good luck! I’m going to YPulse tomorrow – Foo was great – and will be back blogging in no time.

I’ll be at Foo and YPulse over the next week or so. If anyone else is going, please give me a shout and we’ll meet up! In the meantime, expect little to zero blogging.

If I’m not too lazy, I may log into twitter or blog a bit about the events.

You have Twitter too? If you’re feeling bored, you can follow my tweets here. Or the main Foo conference chatter is here. (Note that with the 140 character restriction, it’s hard for me to type out my usual essays!)

Yahoo BOSS is a neat toy for mashup fans, but doesn’t help where you need it to
There’s recently been a spate of articles about Yahoo’s cutely named BOSS program (Build your Own Search Service) at Cnet, Techcrunch, GigaOm, and others. Techcrunch’s headline is that “Yahoo Radically Opens Web Search With BOSS.”

Yet when I read more about the program, it seems pretty bland IMHO:

BOSS allows developers to submit queries (and their associated
parameters) via an API to retrieve up to 50 web, image, news, or
spelling results in XML or JSON format at a time. Per Yahoo’s policy,
developers will be required to display its ads next to, or within,
their results (although this requirement won’t be imposed until later,
Yahoo plans to offer CPM fees as an alternative, and academics will be
exempt from any such attempts at monetization completely).

To me, this seems like a neat little service, but it won’t change the world- this will just let companies do neat search mashups. Given all the hype around APIs and mashups in recent years, can you think of one mashup company that was commercially successful? I challenge the readers of this blog to name some examples ;-)

The problem is, how will the companies that implement this cool technology end up with any traffic? Seems like this program is a recipe for a bunch of neat PR-generating techie projects without real traction, which is arguably not what Yahoo needs right now.

Search engine result pages as Platforms
I mentioned in a previous blog post on Google’s second click that ultimately, the search engine results page is the “platform” on which these portals build. After capturing the first click, via search, they can start building out products to capture subsequent traffic, for example driving address queries into Google Maps. The power in this approach is that huge amounts of traffic go through the SERPs, which then drive traffic to related properties.

Now compare this approach to what Yahoo is offering through BOSS, which lets you harness their infrastructure but doesn’t provide any traffic to back you up.

Opening up Yahoo Search traffic, not just the APIs
The extreme approach – well not even that extreme these days, given Facebook – would be to let developers build extensions to the search engine that actually run on top of the *.yahoo.com domain. They can provide an API, do app approvals, and direct only small bits of traffic to each app to test them out – then ramp up the ones that perform better than anything else. There are difficult pieces necessary to make this work, but if done well, it has the potential to change the search game by letting developers target small groups of queries the way that advertisers have been able to.

Maybe in the scheme of things, this is too risky of a move for Yahoo at a time when they are focused on smoothing out revenue growth so everyone can keep their jobs ;-) So perhaps a better player to try something like this out would be Ask, Looksmart, or even Microsoft!

Thoughts and suggestions welcome…

UPDATE: I was pleasantly surprised to hear that the ideas above are implemented in early form by Yahoo SearchMonkey, which I heard about but clearly need to dig into. It looks like these search add-ons go into a clunky gallery that users have to add to their results, which means they still need to work on helping developers get better distribution among the Yahoo search users. You’d think that one of the lessons from the Facebook platform would be that platforms need to build distribution channels into their product above and beyond the APIs that are provided. Thanks to Oren for illuminating me on the SearchMonkey point.

I had previously posted a poll for the folks reading this blog to vote on a poll for how they’d launch a new product, and here were the results (as of this afternoon), ranked in order:

How do you launch a new product or service?

1. Start with a site, then add app(s) later 56% (102 votes)
2. Start with app(s), then add a site later 21% (38 votes)
3. Destination site only 10% (19 votes)
4. Social network app(s) only 8% (14 votes)

There were also a couple votes for “Other” which, from the comments and emails, seemed to be people who launched with both at the same time, or people looking at iPhone development, etc.

Frankly, I’m surprised by the results!

I really expected that there would be more folks to be emphasizing app and widget development rather than destination sites. Another way to look at this is that 66% of the votes had you starting with a destination site first, with apps being an afterthought.

Perhaps with all the Facebook and OpenSocial excitement that I’m exposed to in the Bay Area, it’s easy to perceive that *everyone* is working on apps when in fact there are many more traditional approaches out there.

Google Launches Virtual World Called Lively.

I’m actually impressed by the fact that it’s so…. not Google. It seems like something a media company would be more likely to make, not a product made by a company of PhDs. Maybe it’s all those Yahoo refugees that are working there now?

UPDATE: Some more details from this informative article from Venturebeat. The product was created by one of the early founders of IMVU, and is much more directly positioned against that company than SecondLife. It’s built mostly as super-rich chat, has a focus on conversations rather than walking around a world, etc.

How the core competencies of distribution-focused media companies are different than digital media websites
In this blog post, I’m going to discuss some random thoughts on about the evolution of media – I’ve recently been inspired by the conversations going on about the difficulties of transitioning from traditional media to the digital world. I thought I’d write down a couple notes on the media landscape and the idea that the skillsets of “pipes” companies – businesses that thrive on dominating distribution – are at a fundamental disadvantage relative to web businesses that promote interactive experiences.

Let’s get started with a rather famous person these days…

Miley Cyrus dominates because Disney dominates distribution (but for how long?)
For those that don’t follow the celebrity gossip blog as closely as I do, the girl above (who was born in 1992, which makes me feel old), is Miley Cyrus aka Hannah Montana. The Wikipedia article on her states:

Miley Ray Cyrus is an American child actress, singer, and songwriter. She is known for starring as Miley Stewart, “Hannah Montana” on the Disney Channel series Hannah Montana.

Cyrus became an overnight sensation after Hannah Montana debuted in March 2006.

Following the success of the show, in October 2006, a soundtrack CD was released in which she sang eight songs from the show. In December 2007, she was ranked #17 in the list of Forbes Top twenty earners under 25 with an annual earning of US$3.5 million.

What do Miley Cyrus, Britney Spears, Justin Timberlake, Christina Aguilera, Shia LaBeouf, Hillary Duff, Keri Russell, and the cast of High School Musical have in common? I mean, other than having ridiculous “pop” careers? Well, they were all, at some point, part of the Disney marketing machine that takes in normal kids and spits out billion dollar franchises.

And when you want to understand how this marketing machine works, you have to look at how all-encompassing the Walt Disney Company really is – here are the companies that all fall under the Disney umbrella:

ABC, ABC Family, ABC Kids, Walt Disney Distribution, Walt Disney Motion Pictures Group, Disney Channel, ESPN, Jetix, Walt Disney Studios, Walt Disney Parks and Resorts, Walt Disney Television Animation, Walt Disney Records, Walt Disney Pictures, Touchstone Pictures, Miramax Films, ABC Studios, Playhouse Disney, Disney Consumer Products, Pixar, Soapnet, Disney Interactive Studios, Muppets Holding Company, Disney Store, Toon Disney,  New Horizon Interactive, Hollywood Records

And with 137,000 employees and >$35B in yearly revenue – well, if you want to make a little girl like Miley Cyrus famous, turns out you can!

Media consolidation and vertical integration go hand in hand
The point is, Disney and the many companies that would be considered its peers (Viacom, Fox, Sony, Vivendi, and the like) own the entire value chain from start to end in traditional media. In the “content is king” model, the focus is on producing content, but then owning the marketing, the distribution, and everything in between.

Does it surprise you that Time Warner both makes movies, and publications that promote movies, as well as a cable company that can distribute them on-demand? Or that one of the driving forces for Rupert Murdoch to buy MySpace was to use it to promote its movies, as discussed in this informative article in Hollywood Reporter? The saying, “content is king” means that when you’re the only game in town, you’re able to use your considerable cross-channel leverage to boost whatever you want and make it popular.

The problem is, where does that leave the customer?

If media companies are ultimately “pipes” companies – ones that primarily focus on distribution – what is their incentive to serve the consumer? I think that in the tech world, when we’ve seen this happen with Microsoft when it achieved superior distribution leverage relative to all its competitors. It creates perverse incentives to to try to squeeze whatever you can out of consumers, rather than innovating new products to serve them. And I’d argue that a lot of what we see in the entertainment industry – endless sequels, manufactured pop bands, child-actor-to-paparazzi-bait actresses – are all indicators that this is already happening. Why take content risk when you can just out-distribute and out-promote whatever you want?

Is the Mummy 3 the entertainment equivalent of Windows Vista? (I guess I shouldn’t be too harsh, after all the movie hasn’t released and I haven’t seen it yet – maybe it will be good!)

How vertical integration weakens with the internet
Of course, this vertical integration strategy starts to fall apart when you’re talking about digital content on the internet. The reason is that it’s hard to dominate it in the way that you can dominate offline distribution. It’s hard to be the only game in town. When the game is to own cable wiring, satellites, movie theaters, radio towers, and all that jazz, then the big guys have a natural advantage – scale is rewarded, and the bigger you are, the easier it is to own a bunch of infrastructure and operate it efficiently.

But on the internet:

• Anyone can set up a website
• It’s easy to copy, pirate, and otherwise separate your content from your distribution mechanisms
• With the advent of UGC, the engagement around media is also being captured off branded media sites as well
• Passionate vertical web communities are more engaged and can serve their specific audience better
• … and any entrepreneur with a couple hundred grand might end up with a website bigger than anything the old-school media companies can put together

So if you assume, at runrate, that any media you release will quickly (and virally) spread itself across the world, with or without your approval, and that people are likely to watch it at destinations you don’t own, then the traditional model starts to break. Things that you don’t expect to take off suddenly do, and the well-orchestrated launch of a “official” website for content might fall flat on its face. The problem is that the traditional source of power for media companies, the vertically integrated apparatus of content, marketing, and distribution becomes broken up into little pieces on the internet.

To this, I make the observation:

With the distribution efficiency of the internet, it becomes harder to control your consumers, and that’s a good thing :-)

So let’s talk about what companies might succeed in this new world…

The core competencies needed to succeed in digital media
If content becomes increasingly commoditized, and fragmented among many distribution vehicles, then what happens next? I’d argue that the new skills required to succeed in this era are NOT:

• Understanding how to best own/operate pipes, like cable systems, satellites, radio towers, etc
• Strong-arming partners and distribution to lock content into place
• Finding media synergies to cross-promote content and “make” hits

Instead, I’d argue that the new skillsets will be around serving the consumer, not pushing them. This means that media companies will need to grok:

• The economics of syndication and monetizing content off of “branded” media destinations
• Search, browse, and other aggregations of media content
• Personalization, recommendation, and social filtering

Will the traditional media companies make the leap? Or will they retreat into content, letting new players own the distribution layer? That seems to be what’s happening with YouTube, iTunes, and other strong players in the digital distribution world. The jump from controlling consumers versus serving them may be too big for these companies to make, but only time will tell.

Suggestions and comments welcome!

I hugely enjoyed Fred Wilson’s blog this morning, where he discussed Three Statistics That Lie. In particular, he singles out:

– RSS subscriber numbers
– Facebook app install numbers

– Follower numbers on Twitter, Friendfeed, Tumblr, or some other social media service.

He points out the fact that RSS numbers show subscribers, but this number never goes down even though some people never actually read your blog – they just subscribed eons ago. Same with Facebook apps, and Twitter followers.

The point is, what are you really trying to measure?

In the Facebook case, the reason why “installs” feels like it’s not a great metric is that ultimately, value is generated by revenue, which is generated by ad impressions and CPMs, which are ultimately generated by active users. And active users obviously correlate with total installs, but it’s not a great correlation depending on how old the app is.

I would even break those active users down to users you can expect to retain, versus people you’re just dumping in and don’t expect to see again. (For example, RockYou’s Super Wall app recently had its viral channels taken away, and it showed that only 30% of the users were “retained” users versus people who come back because of notifications and such)

Anyway, numbers are numbers and they are meaningless if they’re measuring the wrong thing. So start with the business questions, which likely revolve around value generated as defined by an engaged audience that comes back and the revenue they throw off, and begin your model from there.

I recently read about Amazon’s new recommendation widget and I’d try it out. I think it’s another neat example of why even though Amazon’s business is almost all retail, they are really more of a technology company at heart.

What?? A political post?
I’ve never blogged about politics before, and I’m not going to start :) This post is 100% about the evolution of marketing in the world of politics, not about any political positions. Anyway, I’m compelled by the fact that I’ve been encountering article after article about Obama’s mastery of the internet, and before that Howard Dean’s.

In particular, there was a great article in The Atlantic Monthly called The Amazing Money Machine with the subtitle “How Silicon Valley made Barack Obama this year’s hottest start-up.” In it, there are some great passages on how the Obama campaign has used technology to their advantage:

To understand how Obama’s war chest has grown so rapidly, it helps
to think of his Web site as an extension of the social-networking boom
that has consumed Silicon Valley over the past few years. The purpose
of social networking is to connect friends and share information, its
animating idea being that people will do this more readily and
comfortably when the information comes to them from a friend rather
than from a newspaper or expert or similarly distant authority they
don’t know and trust. The success of social-networking sites like
Facebook and MySpace and, later, professional networking sites like
LinkedIn all but ensured that someday the concept would find its way
into campaigning. A precursor, Meetup.com, helped supporters of Howard
Dean organize gatherings during the last Democratic primary season, but
compared with today’s sites, it was a blunt instrument.

And of course, you can’t forget Obama Girl, who now has 8.8 million views, or the Obama Facebook group which has over a million supporters now. Overall, pretty amazing stuff.

But as I mentioned above, this isn’t the first time that the Internet played a role in politics, since the Howard Dean supporters aggressively used services like Meetup and the MoveOn website to organize their efforts. Here’s an article from Wired magazine in 2004 describing the Howard Dean run.

Republicans and their direct mail expertise
Of course, back in 2004, another big story that played was the mastery the Republicans showed of direct marketing, particularly by Karl Rove who previously spent many years in that industry. In another article from The Atlantic, called Karl Rove in a Corner, there are some choice passages on how he thinks about targeting and direct marketing:

When Rove arrived in Alabama, in 1994, his clients were initially
puzzled as to why he was having them campaign in rural and less
populated parts of the state rather than the urban areas they were
accustomed to. It turned out that he had run an electoral regression
analysis on each of the state’s sixty-seven counties, and for
efficiency’s sake he put his four judicial candidates together on a bus
trip to the counties with the highest percentage of ticket-splitters.
“Karl got us focused on the fact that it was a matter of convincing
Democratic voters who were already conservative to vote for Republican
candidates,” Mark Montiel, a candidate on the trip, explains, “because
that was who best expressed their views.”

… snip …

As with direct mail, Rove was skilled at reaching specific voter segments with television commercials, buying air time only during programs that he believed would attract the audience he was trying to reach. In his Alabama races he was known particularly to withhold advertising from The Oprah Winfrey Show and similar afternoon programming—”trimming a media buy,” as it is known in the trade. Bill Smith, who worked on a series of close races with Rove in Alabama, says, “There’s a real overlap in what he specialized in professionally and what you need to do in a tight race.” Whether he is seeking donors in a direct-mail fundraising campaign or manipulating a particular demographic sliver to win a close race, Rove’s professional goal has been strikingly consistent: to reach the right people.

There’s also another great article on the attempts for Mitt Romney, a Harvard Business School grad, to do this for his (ultimately failed) presidential campaign in the Post covered here. The point is, they were very smart about the process of collecting a vast database of data, using advanced marketing techniques like cluster analysis, machine-learning segmentation, regression analysis, etc. This is good stuff!

That said, in almost every article I’ve read about the subject, the focus of the Republicans seems emphasize direct mail – perhaps that’s a better vehicle for their demographic, or perhaps because that’s just the skillset they have developed over the last 10 years. However, there’s many studies about the efficiency of internet advertising versus offline, and politics is no exception – let’s take a deeper look at this:

Comparing direct mail to internet
There’s some interesting numbers comparing direct mail and internet-based donations in an article from the American Enterprise Institute, which states:

It is not just that he has built this
veritable army of contributors, most of whom will follow with him
through the fall campaign and beyond, if he is able to win the White
House. Having this base of small donors through a process that is
incredibly inexpensive to run, with fundraising costs that are 5 to 10
cents on the dollar (compared with 95 cents for direct mail), frees
Obama from the punishing, time-consuming burden of attending scores of
fundraisers and making thousands of phone calls to potential donors.
(Of course, Obama is not at the same time ignoring the $2,300 donors
and bundlers, which may create more flak for him through the rest of
the campaign. But he will certainly spend much less of his own time
courting donors than will McCain.)

(I bolded the sentence above). Wow! 5-10 cents on the dollar versus 95 cents for direct mail – what an amazing statistic. If you believe that, then it means you are almost 20X more efficient with internet marketing than direct mail, which is a huge number.

I’m not following the political campaigns that closely, but I’d be interested in a couple broad questions about how the approaches of the two parties are shaking out, from a macro-perspective:

• First off, are the Republicans majorly lagging in their ability to use the internet as a political vehicle?
• Similarly, do marketing channels like broadcast media and direct mail – which are “push” – fundamentally different than interactive media, like Facebook apps, YouTube UGC, etc.
• Can the same techniques that Rove used back in 2004 be re-applied to the internet? Is the DNA there, and it’s just a matter of time before the GOP cracks the nut for online marketing as well?
• For online marketing in politics, how quantitative are the approaches right now? Or is the offline-to-online opportunity so ripe that the qualitative stuff works without much thought?

Anyway, if anyone has any opinions or insight onto this, I’d be very interested to know. Comments and suggestions always welcome!