Andrew Chen Archives

Wow, what an interesting announcement on the OpenSocial standard that’s coming out. As always, Marc Andreessen has some insightful commentary here.

I wanted to give some context on this entire thing from the app developers I’ve talked to:

RockYou and Slide in the lead at Facebook, developers looking for other channels
Overall, the app developers I’ve talked to feel like Facebook is somewhat of a lost cause, if you are writing a new app. Now that Slide and RockYou are fully entrenched as the top apps (just look at the leaderboard), they’ve been able to sustain their lead by cross-selling applications. For those who haven’t been following that, basically it means that with millions of installs, RockYou and Slide can easily cross-promote a new app through an existing one. This is done either at a feature-level, providing links to the new apps, or when you are installing the popular app, it takes you to an interstitial that asks if you want to install the new one.

Being able to launch quickly is important because your viral growth is dictated by:

new installs = existing installs * viral coefficient

They can build a bigger “seed” of existing installs, and thus, they can get more new installs. With the same product and the same viral-ness (determined by the coefficient), they will still pass you, no matter what.

Interestingly enough, of course, Slide and RockYou are listed as launch partners on OpenSocial, and it may be likely that they are gearing up to do it again.

Looking at other platforms
As a result of this, app developers have been looking for other social networking platforms to build on, some of which are included in the group announced, which include:

• Orkut
• Salesforce
• LinkedIn
• Ning
• Hi5 [Note: my employer MDV has an investment here]
• Plaxo
• Friendster
• Viadeo
• Oracle

This set of publishers is really fantastic, and encompass a huge number of users – from a unduplicated, registered users standpoint, you are talking about hundreds of millions of users overall.

That said, this group is also very different from each other – you have different demographics of users with different sets of goals, with different usage patterns located in different areas. In particular, it strikes me that LinkedIn, Oracle, Plaxo, and SalesForce are in one big lump of US-centric business audiences versus Orkut, Ning, Hi5, and Friendster, which is more consumer-oriented and substantially international.

I think this means that even if OpenSocial is able to allow widgets/gadgets/apps to function technically, it doesn’t guarantee that you can build in one place and not “localize” it to the target social network, and that you can get strong traction without understanding which platform you are getting yourself into.

Let’s look at how that might affect viral growth:

Maximizing growth and virality
One of the fun exercises that you can do to understand viral marketing is to install all the top Facebook apps and see how they drive a viral loop. In particular, which ones try to get you to invite right away, and how many try to get you to fill something out before you invite, etc.

A particular lesson you can glean from this is that virality is deeply ingrained inside consumer psychology. One example is Boozemail, which is run by my friend Adam Rifkin and his company Renkoo. A couple observations on Boozemail:

• The fundamental emotion it’s hooking is “reciprocity” (like gift giving)
• Thus, when someone buys you booze, you feel compelled to “buy the next round”
• Unlike gifts, however, booze can be bought for many people at once
• Booze is also something you buy regularly (not one-time, or for special events, like gifts)
• Also, booze is something that is uniquely college-oriented and 21+
• As a result, Boozemail is uniquely viral because when you receive a drink you want to send one back, but when you get to that screen, you can feel comfortable buying A LOT of people booze

Looking at this, you can learn that real world analogies matter a lot! And also that all the subtle hooks in the app – how it’s positioned, what emotion it hooks onto, how comfortable you feel sending it on, etc., all play into the viral loop.

From a user perspective, of course, Boozemail might work quite well in the US college-centric audiences, but bring it to Salesforce, and it might hold a different connotation.

Write-once-run-anywhere? Or Write-once-succeed-anywhere?
So returning to OpenSocial, if I were a developer on this platform, the problem that it’s solving is to ensure that I wouldn’t have to do a bunch of annoying things like use new markup languages or new API structures for every network, but ultimately, this is a “write-once-run-anywhere” proposition but not a “write-once-succeed-anywhere” proposition.

I think that for anyone who is developing applications, one very smart thing to do would be to understand the respective userbases of the companies participating, and ultimately choose one or two to focus on. In the cases where you are talking about audiences in the Philippines (Friendster) or Brazil (Orkut), it might be worthwhile to spend a lot of time trying to understand what internet paradigms work over there and why, and then focusing a series of apps to own that audience.

Either way, it’s a very interesting step, and it’ll be fun to see how things will develop.

Max is one of the best tech entrepreneurs in the Bay Area right now. Definitely worth reading this profile from the NYT: After First Succeeding, Young Tycoons Try, Try Again.

I guess this also goes hand-in-hand with the recent pictures from Valleywag on the PayPal mafia.

Here’s the list (I’m such a hater):

• Podcasting
• Blog search engines
• Semantic web
• Vertical search
• Google Maps mashups
• Social shopping

… and now, 2-D e-mail, which has been replaced by 3-D email:

Winner-take-all categories: YouTube as King of the Hill
I was recently chatting with a friend and the topic of YouTube-like exits came up. In that version, it’s winner-take-all and the #1 leader gets bought for $1.6B, and everyone else is worth much less. Similarly, Skype might be an example of this since they were bought for so much, yet other folks in the category didn’t cash out as well.

Compare that to something like CRM, where back in the day, you had dozens of vendors hawking their own versions of products, and you had many different winners worth lots of money. In addition to Siebel, SAP, Oracle, Salesforce, Microsoft, etc., you also have tons of consulting firms who generate lots of money as well.

Ad networks in 2003
Now in 2003, ad networks were around, and a couple had already exited for a fair amount of cash, yet at the same time they were considered pretty undifferentiated and low-margin. Between lead generation companies, comparison shopping engines, affiliate networks, and ad networks, the entire online advertising space was just a morass of noise without a lot of technology.

It was also not clear that a player like Google wouldn’t end up with a winner-take-all outcome. The thought was, if they were able to aggregate more advertisers (200k+) than everyone else, then they should be able to pay more dollars for inventory, which would lead to them picking up more advertisers, and so on. It’s a virtuous cycle of lock-in that has driven a lot of revenue.

The big surprise (for me)
So of course, in 2003, it would have been considered fairly dumb to start a new ad network, right? You might say the same thing for social networks right now :)

But truth is, a couple interesting things happened in the remnant advertising world:

• There was a huge jump in remnant inventory led by UGC sites
• Leadgen, SEMs, and other big advertisers were running out of high-quality search inventory
• CPC didn’t turn into a silver bullet to address inefficient ad buying

So interesting enough, all three of these factors came into play, forcing advertisers to continue exploring for good inventory out in the long tail of the internet.

The first one is obvious – sites like MySpace, Facebook, YouTube, etc are all still very hard to monetize. The second one is less obvious: Because search was such a great thing for ROI-driven advertisers, they would buy it until they were bidding so much that all their margins disappeared. As a result, they’d have to start buying cheaper (and more experimental) types of inventory to find positive ROI businesses. Thus, they’d be more likely to experiment with new publishers and new types of advertising, just to see what happens. And finally, CPC is great, but there’s a lot of uncertainty in the equation. Publishers want guaranteed revenue (via a CPM), advertisers want guaranteed revenue (via a CPA), and CPC is just a mid-point solution.

Of course, all this inefficiency made it so that many different ad networks could co-exist with each other, by constantly grabbing onto new publisher ad inventory, then losing it, then grabbing it later on. The instability of all of these relationships, coupled with the willingness to experiment by all parties, made it easy for a lot of new ad networks to break into the market and get to a critical mass.

One statement that started a $10B+ buying spree
And finally, it only took one signal by Google to set off the big buying spree: Display advertising is important.

After that, Blue Lithium, Right Media, Doubleclick, 24/7, aQuantive, Tacoda, etc. were all several hundred million to several billion dollars acquisitions based on the premise that all the vendors with relationships and who have gotten traction in the market are worth a ton of money. Even though the ad network business looked like a low-margin, commodity business, along with ad serving and other types of infrastructure, it was irrelevant because it grew out of a winner-take-all business where revenue was speculative. Pretty interesting how that worked itself out…

My overall lesson from all of this is that a lot of times, people view things as "winner take all" and sometimes it is that way – but in this case:

mature industry + real revenue + adjacent space heating up
= huge outcomes for everyone

Worth looking at what else is out there with that kind of model brewing.

Good summary in the NYT today about how hard it is to get good numbers in online advertising: How Many Site Hits? Depends Who’s Counting – New York Times.

How many people visited Style.com, the online home of Vogue and W magazines, last month? Was it 421,000, or, more optimistically, 497,000? Or was the real number more than three times higher, perhaps 1.8 million?

The main discussion ends up being around comparing the panel-based numbers (Nielsen, ComScore, and others) versus the server logs that people have.

In truth, the panel-based folks should probably offer a pixel to publishers to get even deeper counts – panels can be very off, which works in TV because there’s no other options, but not in online advertising.

On another note, I’m getting my wisdom teeth out this afternoon so I won’t be blogging for the next week or so. Wish me luck!

InsideFacebook has a great article on Facebook’s recent effort to standardize application invites:

Since the beginning of the Platform, Facebook has had to tweak the
invitation rules a few times to limit the impact spammers could have at
large. At first, Facebook had no limits on invitations – apps could
spam all your friends every day, and many apps had little behind their
full page of checkboxes with no skip button, yet were able to grow to
millions of users in a matter of a couple of weeks. After that,
Facebook limited the number of invitations a user of an application
could send to 10 per day – and later to 20 per day, though only 10 at
once.

Nevertheless, that didn’t stop developers from still using
borderline tactics. Because invitations are such a vital part of the
user application experience, Facebook ultimately decided to bring more
of the UI in house to prevent poor experiences from becoming common
amongst Facebook applications.

This standardization brings to an end one of the most interesting things I was seeing on Facebook, which was "invite targeting." That’d mean targeting invites based on attributes like:

• Demographics
• Other apps installed
• Interests
• Friend relationship strength
• etc

If you think of every invite as an ad for the application, and you only have 10 per day to send out, you’re going to want to target the invites to the people mostly likely to click through and install it. Thus, if you’re making a movies app, you want to make sure you are sending to people who don’t already have the application, list a lot of movies in their interests, etc. Then you can start to A/B test which attributes are the most important, track stats and conversions, and other sophisticated things.

Net/net, it may actually be a good thing for Facebook to track conversions for invites, and make reward applications that are good at inviting the right people – this targeting process is likely a useful thing that enhances the experience, not detracts from it.

The leader in online advertising tries to monetize social network inventory
Great article from the WSJ on the issues Google has faced monetizing user-generated content. Here’s a couple excerpts:

Then, when Google tried putting ads on the site, it ran into trouble.
Critics in Brazil released a report showing advertisements on Orkut
alongside pictures of naked children and abused animals. Google
immediately suspended the ads, but the Mountain View, Calif., company
is still grappling with the fallout from critics’ Orkut campaign.

And of course, for brand advertisers this is even more embarrassing because just one ad can cause a lot damage, versus direct response guys who just lose out on reduced ROI:

Liquor maker Diageo PLC of London says it stopped advertising on all of
Google’s properties after learning that its ads ran alongside
pornographic images on the site. Spokesman Stuart Kirby says Diageo
didn’t realize that ads for its Johnnie Walker brand had appeared on
Orkut, where many users are below legal drinking age.

… and more:

On Aug. 17, Mr. Tavares sent an 18-page complaint to Brazil’s
advertising watchdog, known as CONAR, documenting cases of embarrassing
juxtapositions: advertisements for Diageo’s Johnnie Walker whiskey next
to pornographic images; a pet store pitch on a community dedicated to
stabbing animals with knives. In the report, Mr. Tavares alleged that
Google’s "flagrant illegalities" had resulted in ads appearing next to
"barbaric" content.

Key obstacles for UGC + brand advertising
The intersection of issues that cause this come down to three key points:

1. UGC content means some percentage leakage of inappropriate content
2. Blind ad networks mean that advertisers don’t know where they are buying
3. Brand damage can happen via one single false negative – it’s not about % of leakage

This, in addition to users not being in a buying mindset is what causes social networks to be so hard to monetize via brand advertising. The only way to solve this is to use a direct ad sales team that is selling a very transparent ad unit on a page with no UGC content (editorial pages, section homepages, etc.). Of course, this means that all the profile views end up being managed via remnant ad networks, which is no good either.

Of course, this also means that anyone who can figure out how to make this inventory safe is sitting on a billion dollar+ business.

It’s been a couple hours since the CommunityNext conference got started – and things have been going smoothly so far.

The first day is focused on developers – you can see the schedule here. Akash, CTO of Hi5 kicked off with a great discussion of scaling up to 70 million registered users, and how to architect a system that scales up. Since then, there’s been a bunch of demos from successful app/widget creators.

The room is completely full, with a standing room only audience with overflow out the door:

Here’s the scene right outside of the main presentation room, with lots of people with laptops out, PuTTY terminals and IDEs open.

… More updates soon.

I got a couple quotes in articles recently on the Facebook apps frenzy:

• Wired: Selling ads on Facebook is a risky but tempting business
• Fortune: New ad outfit targets social-networking sites
• New York Times: Swarm of software developers creating features for Facebook
• Business 2.0: The Facebook economy

I end up being one of the skeptical voices in the articles, but my intention is matter-of-factly describe the hurdles the sites have to overcome on the advertising side in order to succeed. I think it’s possible, yet will take some time. These are lessons I learned from Revenue Science, trying to monetize traffic on several of the top social networks in the world including MySpace.

The specific issues that pop up from the monetization side shouldn’t detract from the fact that adding deeper hooks is something that every network should do, and Facebook has done it with incredible execution. They are a visionary in the category.

However, that still doesn’t mean it’ll be easy for the entrepreneurs to make money :-)

Other blogs on this topic:

• How much is a Facebook user worth, anyway?
• Inside Facebook interview
• 5 things that make your social network monetize like crap
• Inventory glut in social media

Are the social networks making tons of money?
People have been very excited about the advertising prospects of social networks lately. First you have announcements from MySpace about an 80% rise in CTR through profile targeting, as well as some claims of Facebook’s going rate CPMs being $4. Furthermore, the recent gold rush in Facebook apps has led quite a few folks amassing large userbases with dreams of incredible monetization. It’s quite easy, with all the profile information that social networks have, to automatically assume that this information is the same type that drives Google-like revenue and monetization.

So let’s talk about this… Are social networks making money hand over fist? Why or why not?

To aid this discussion, I’ll go through a couple of the critical challenges that affect social network monetization:

1. Engagement is inversely correlated with CTRs
2. Inventory isn’t homogeneous, it’s a pyramid
3. Don’t confuse interest with intent
4. CPMs are driven by underlying value, not just targeting
5. Brands are a big wild-card

Understanding the CPM formula
Before we jump in, let’s talk about how CPMs are generated. For the purpose of this discussion, I’m going to focus on direct response advertising, rather than branding (which we’ll get into later).

Ultimately, CPM is a simple calculation that is determined by:

CPM = Clickthrough Rate * Price Per Click * 1000

For example:
1,000,000 impressions * 0.5% clickthrough * $0.25 PPC
= $1250 per 1 million impressions = $1.25 / 1000 impressions
= $1.25 CPM

This is from the publisher side – if you have a good CTR or PPC or Impressions, you make more money. Now from the advertiser side, you need to figure out what the underlying value is. After all, even if you get a ton of clicks, if you can’t convert them on your side and have a good transactional value at the end, you won’t want to pay a PPC.

CPM = Clickthrough Rate * (Value of Action * Conversion Rate) * 1000

Conversion rate means the percentage of people who do the desired “action” that drives value for you. That might mean the % of people who buy from your e-commerce store, or who fill out your mortgage lead form, or whatever. You could also substitute this for Lifetime Value for your social network, or LTV for your virtual goods-driven casual game, or whatever.

Now let’s jump into how different dynamics on your site drive these different variables…

1. Engagement is inversely correlated with CTRs
You know how MySpace and Facebook just encourage you to click-click-click and log in every day and are just incredibly sticky? That’s great engagement, and it helps with a lot of things, particularly growth and competing in strategic areas.

However, the drawback is that the more pageviews people have your site, the lower the clickthrough rate gets. Here’s a great diagram:

You should read the rest of the article on MikeOnAds, it has some other great data on there. This issue of engagement negatively correlating with clickthrough rate is well-documented, and happens at every network.

So how bad are the clickthrough rates, exactly? I’d guess that across all the social networks, something from 0.01% to 0.05% is pretty standard. You might have some higher CTRs in some very specific areas, for example right after a user completes an action (composes an email, friends a person, etc) but in general, they will be quite low.

There’s some evidence for Facebook’s CTRs being about 0.04%, documented here:

2. Inventory isn’t homogeneous, it’s a pyramid
Sometimes you might hear the CPMs for one of these social networks is X dollars. And that’s true, it’s exactly the price that SOME people are paying for the inventory. But in general, that’s not how publishers end up managing their inventory. Instead, if you take the impressions for a user across their session, you’ll instead get something like this:

• The first US impression in a session has the most value ($10)
• Then impressions 2-5 have some level of brand value or high CTR value ($3-5)
• Then after that, you’re hitting ad networks selling on category ($1)
• Then eventually, you hit remnant ad networks ($0.50)
• Finally, you hit pure CPA remnant networks ($0.10)

These are just example numbers. Now the problem is that while people often quote the premium numbers, the majority of the impressions happen in the low CPM remnant numbers. The premium ads happen on the homepage, major channel pages (like Music, Games, etc), but not in the most popular pages like forums, profile pages, etc.

I’d expect the top inventory (let’s say 5-10%) end up generating 50% of the overall revenues.

So in your financial forecasting, don’t expect to be able to multiply a big CPM against your ad inventory. Instead, you need to be nuanced about the different sections of your site, and how they sit relative to the ad inventory pyramid.

3. Don’t confuse interest with intent
Now to the profile data – how much is this worth? You might expect that by looking at profile keywords like “skiing” or “travel” or topics like that, you could make a ton of money on social networking sites.

Every page should be like Google, right? Wrong. (unfortunately)

The reason is that interest in a topic is different than having intent. Having “skiing” on your profile is completely different than searching for “ski tickets.” The latter means you’re ready to buy, whereas the former simply means that you sometimes buy. This is GREAT for brand advertising, but really doesn’t help on the direct response CPM formula.

Having high intent typically drives a higher conversion rate (driving up the PPC) as well as driving up the CTR. Having interest but not intent should theoretically be better than nothing, but there might be other effects, like having more “looky-loos” click on your ad just out of interest, but not actually buy the product there.

4. CPMs are driven by underlying value, not just targeting
Furthermore, you really have to look at the underlying value of the transaction to figure out how the CPMs will turn out. After all, the underlying value drives the PPC, which then drives the overall CPM. In order words:

Mortgage leads trump contextually relevant ads because Mortgage leads can be worth 50X more than a non-transactional site.

This is how a mortgage lead generation site might work: Person enters their contact info, which then gets sold to 4 lenders, which then call the person to work out the loan. Each lead might be worth $10, but because it’s sold to 4 different companies, it’s worth $40 total.

Now a ski ticket might be more contextually relevant service. Or maybe a music subscription service. Or some other mass consumer good. But the increase in clickthrough rate COMPLETELY offsets the powerful value of the mortgage lead, all you will see is LowerMyBills psychedelic peacock ads.

Now targeting really does help advertisements, but the problem with display advertising which shows as you are using a site is that the effects are not going to be as strong as high-intent areas.

In this case, targeting might increase CTRs and conversion rates, but it’s unlikely that it’s so powerful it’ll completely offset the value decrease. People are mostly interested in things that don’t generate lots of money, and because of that, you have to compensate.

5. Brands are a big wild-card
Of course, the real wild-card is brand advertising, because it really follow the CPM formula. Brand advertising is really not priced based on any logical way that follows a formula like that. Instead, it’s based on relationships, prestige, audience metrics, and other intangibles. So as the audiences for brand advertisers migrate from TV to the internet, you will see a tremendous amount of brand dollars move as well. These brand dollars will simply follow whatever’s “hot” – thus, because the major portals seem to be growing pretty slowly and/or actually losing engagement, you’ll see brand dollars chase the social networking sites.

However, unless your name is Tom or Mark, you’re unlikely to get your hands on too many of these dollars. And the reason is that brand advertising is sort of a “winner take all” game, where only the largest sites can afford large sales teams that can develop the deep relationships required to sell to Madison Avenue brand ad agencies.

The current hurdle is that advertisers don’t like UGC (er, CGM content) because it requires them to let go of their brand. So until that changes, through technological means or an attitudinal change, the brands are preferring buying video on mainstream media sites.

What’s next?
Now, it’s not all bad for social network ad monetization. The place in the CPM formula that’s really driving revenue is that impressions are getting bigger and bigger. What these sites can’t make up via advertising efficiency, they are making up through pure bulk. That’s why you can build sites with 100s of million in revenue, and it’s growing every day. The brand shift is also going in their favor.

More interestingly, I’m looking for native ad units to develop on the site which do work for advertisers. Months ago, I had written about “tag along widgets” which has quickly materialized as the Cost Per Install ecosystem on Facebook. Here’s the excerpt from “What’s a Facebook user worth, anyway?”

Another option would be for some sort of deeper integration to happen
as hooks to another widget. For example, I could imagine a company
(let’s say Apple) creating their own widget. If you as Mr. Travel
Widget, when installed, would try to convince the user to also install
an Apple widget, I think that’d be an interesting model. Basically
tag-along widgets which advertisers pay some amount for every user that
is brought along.

As these native ad units mature, I’d expect some new revenue opportunities to be built from scratch. Let’s see how it goes – it can’t be worse than display ;-)

UPDATE: Fixed CPM formula.. note to self: never add changes at 6AM when your brain is asleep!

Update from New York
I’m still alive and kicking in NY – I’m hanging out with some folks from Union Square Ventures, IAC, Massive, BuddyLube, etc. I’m also spending time with some interesting bloggers and entrepreneurs – including Darren Herman from IGA (in-game advertising) as well as Linkshare, and Bronte Media, and some other advertising pepople.

First, an intro to Diner Dash
I had the pleasure of spending about an hour last week to get an early preview of the Diner Dash team – thanks to Gus, Kirem, and John for setting that up. They showed me the new release of Diner Dash that came out this week that incorporates a lot of interesting social features.

First off, though, if you haven’t tried Diner Dash, please go to the site and check it out: Download Diner Dash. It’s a fun game, but more importantly, it’s an example of an extremely successful casual game that generates real non-advertising revenue (whoah!). They’ve had 1 million customers who have paid to play the full version of the game, which is very impressive. I also recall they said they’ve had close to 100 million downloads of the game overall, which is also incredible.

Casual games like this, being targeted at the 30+ women audience, often evade the attention of Bay Area geeks because it’s not really targeted at them, and while a social networking site with 500k non-paying users that generates marginal ad revenue might get a lot of attention, a property like this is ignored. I think that’s a mistake.

Casual games going social
The new features the team showed me go hand in hand with becoming more social overall. As you might expect, they are adding user profiles around the game, allowing people to pick and choose avatars, among other innovations. It’s a good step in the right direction.

They are still keeping the downloadable aspect of their game, although their strategy has been to build a web property around the download. So although you need to run the game to play, you can still do things like build avatars, play around with your profile, etc. This combined strategy will be interesting relative to the soon-to-be onslaught of casual MMOs that are coming out which are 100% on the web via Flash.

Furthermore, their downloadable client strategy is also quite interesting – as many folks know, although the disadvantage of a client is decreased conversion rates, the advantage is that people rarely uninstall applications. It’s often stickier, especially if you can justify getting the app to start up when the computer does. They are updating the game within the client automatically, so that people can go into the Diner Dash world and when new properties are launched, they appear as "NEW!" signs within the world map. That way, they can incorporate dynamic updates from the web while still keeping the download.

Entrenched casual games versus Flash casual MMOs
My main questions I have, after seeing the demo, is comparing their
approach to those of the casual games that are coming out. If you are
building one these days, you are likely to:

• Choose Flash for the technology platform
• Start by building an undirected "sandbox" experience
• Rely on chat, avatars, and messages for entertainment
• Use advertising and virtual goods as the business model

You can think of Club Penguin, Habbo Hotel, and the myriad of other properties as the first generation of these sites.

However, if you’re coming from the traditional casual games market you are likely to have a different situation:

• Created as a downloadable game built in C++
• Often a very directed game experience
• Users play the game as a single player experience
• Usually pay $20 to have the download

Now, if you are moving from the downloadable games, you are really going bottoms-up: You have a great core game experience, and now you need to layer on social features. This is in contrast to the new casual MMOs, which are typically ALL social features to start with some basic activities, followed by a deepening of that experience.

Which way is the right approach? Only time will tell, but my guess is that long-term engagement will win out – and thus the game designers have a great chance to succeed – as long as they can overcome the user acquisition hurdles of using a downloadable game.

Thanks again to the Diner Dash team for the great discussion, and good luck!

Mitch Kapor will be keynoting CommunityNext: Platforms
I’m pleased to announce that Mitch Kapor will be keynoting the CommunityNext: Platforms conference.

Mitch brings a unique perspective to the recent social networking platforms debate through his experience as the founder of Lotus. Through the Lotus 1-2-3 product, Mitch built a successful company on top of the Microsoft platform, creating the "killer app" that would revolutionize the PC industry of the 1980s. Of course, the Microsoft platform ultimately created their own competing application, Excel, which serves as a useful lesson for both the advantages and drawbacks of building on an existing platform.

I look forward to the lively discussion, and to see what the newest crop of entrepreneurs can learn from an experienced veteran on the platforms topic.

Other CommunityNext speakers
In addition to Mitch, we’ve compiled a fantastic list of panelists and speakers, including:

– Don McLagan, CEO of Compete
– Jonathan Mendez, CSO of OTTO / Offermatica
– Chris Moore, Partner at Redpoint Ventures
– Jesse Farmer, Co-Founder of Adonomics (formerly Appaholic)
– Joe Hurd, VP Business Development, Videoegg
– Keith Rabois, VP Strategy & Business Development, Slide
– Scott Rafer, CEO, Lookery
– Vineet Buch from Bluerun Ventures.
– Bret Taylor, EIR at Benchmark and former GPM of Google Maps
– Chris Conway, Senior Product Manager, Trulia
– David Troy, Creator of Twittervision
– Stephen Benedict, Director AIM Developer and Consumer Services
– John Dunning, Yahoo Messenger, Yahoo!
– Martin Green, VP Business, Meebo
– Alex Payne, Twitter
– Lindsay Blake, FORTUNE magazine
– Rob Hayes, First Round Capital
– Andrew Braccia, Accel Partners
– Naval Ravikant, HitForge
– Lars Leckie, Hummer Winblad
– Matt Marshall, VentureBeat

Registration link
The conference will be held on October 5-6 in Sunnyvale, CA

We’re almost sold out, so here’s the link:

REGISTER NOW

Brief diversion… ;-)
Just a couple random observations from my first day at MIXX, which as a NYC advertising conference, is probably exactly the opposite from a SF web 2.0 conference. I used to come to these things all the time for Revenue Science, but recently I haven’t been back for a full year or so.

Some things have changed, and some haven’t.

Here’s a brief rundown on the top 5 differences:

1. Jackets, slacks, and ties
2. Pens and paper
3. "CGM"
4. Women
5. Facebook?

Jackets, slacks, and ties
At the most superficial level, people look very different than your typical Silicon Valley conference. The number of folks that are wearing jeans here can be counted on one hand, and the youngest people are in their 30s. You would not be overdressed here wearing a full-on suit, with handkerchief and all. Just leave the ascot at home.

What you won’t see here are rows of 24-year old Web 2.0 entrepreneurs wearing jeans and flip-flops. It’s all business here, which might have to do more with advertising than NY, but either way the intersection is powerful.

Pens and paper
Another thing you won’t see if lines of people with Apple Macbook Pros and digital cameras live-blogging and surfing the internet as the speakers go. Instead, people are just writing down notes via pen and paper. (Shocking, I know)

CGM
This one was sort of unexpected – people don’t call things User Generated Content (aka UGC), they call it Consumer Generated Media (CGM). In fact, there’s a bunch of people whose titles have CGM in them. Weird!

I think ultimately, it has to do with the fact that the tech entrepreneur crowd in SF is mostly focused on creation of new inventory – they need to convince USERS to come to their site and generate content, whereas for people who are typically on the advertising site, they see these people are CONSUMERS. Either way, it’s an interesting and subtle distinction that shows the differences in perspective.

Women
There’s a lot of women here, of all ages, all ethnicities, and all advertising job functions. ‘nuf said.

Facebook
It actually took a full 3 hours for someone to finally mention Facebook. Instead, the hot topic was integrated media, aka how to handle buying media on both traditional and interactive channels. Also, video is really hot – everyone wants to figure out the right angle, and in particular they talk about how there isn’t enough "good" inventory.

And of course, what they mean by "good" inventory is stuff that’s not UGC. Er, CGM. They want well-polished content to place their media next to, where they can be sure that it won’t harm the brand.

Anyway, it was a fun day – more to come later.

I’m off to NYC next week for a conference called MIXX – here’s the agenda.

Speakers include brand ad agencies, marketing executives from F500, like:

• John Hayes, Chief Marketing Officer, American Express
• Carla Hendra, Co-CEO of Ogilvy North America
• Saul Hansell, Editor, New York Times
• David Rosenblatt, CEO, Doubleclick
• Seth Godin, Bestselling Author
• Charlie Rose, Journalist

I’m speaking on a small panel called "2 Legit 2 Widget" on the second day:

2 Legit 2 Widget? – The Next Generation of Applications for Targeting, Personalization, and Advertising
The pages and paths approach is giving way to a world where the
delivery of relevance to drive engagement rules. No where is this more
evident than in the rise of widgets and applications. Next generation
widgets and applications are already being developed that use
quantitative data to optimize and target the delivery of contextually
relevant content across experiences. In Social Media, this creates a
viral effect.

For publishers, the rise in engagement metrics enables a
more detailed discovery of user behaviors resulting in deeper more
valuable segments. For advertisers, this means better targeting. This
workshop will focus on the applications, strategies, measurement and
benefits that can be expected in this emerging medium that looks to be
transforming the web as we know it.

MIXX is one of those conferences that Web 2.0 people rarely go to, since it’s really a conference revolving around the New York City advertising scene. But for people who care about brand advertising, and want to hear how companies that are spending hundreds of millions in ad dollars approach the marketing world, it’s an important experience.

If anyone wants to meet up, shoot me a note at voodoo [at] gmail [dot] com.

I want to show some link-love to Jim Larrison of Adify: KnowVertical Blog. He’s been writing some great stuff related to the fragmentation of ad networks.

Every internet startup goes through a couple phases in their advertising:

1. Throw up some Google AdSense!
2. Ad networks like Ad.com, BlueLithium, etc.
3. Hiring a rep firm
4. Creating your own in-house sales team
5. Becoming Rupert Murdoch

It’s a big, big step between #2 and #3, because that’s when you start making trips to brand ad agencies to sell them your wares. Adify is in a cool business that creates a new step, called "Join/start a vertical ad network" which belongs right around step #2, which allows you to potentially gather the ad impressions you need to talk to a big advertiser, without giving all your margin to the large ad networks. It’s a cool business.

Advertising nerds take note! ;-)

Read this and get smarter: blog.pmarca.com: The three kinds of platforms you meet on the Internet.

The fastest summary:

• A Level 1 platform’s apps run elsewhere, and call into the platform via a web services API to draw on data and services — this is how Flickr does it.
• A Level 2 platform’s apps run elsewhere, but inject functionality into the platform via a plug-in API — this is how Facebook does it.  Most likely, a Level 2 platform’s apps also call into the platform via a web services API to draw on data and services.

• A Level 3 platform’s apps run inside the platform itself — the platform provides the "runtime environment" within which the app’s code runs.

And which companies are working on Level 3 platforms, other than Marc’s Ning?

• Salesforce.com
• SecondLife
• Amazon (through AWS)
• Akamai

I think the really interesting part of a Level 2 and Level 3 really has to do with user acquisition – they allow you to absorb a huge torrent of traffic if your application is designed to hook into their API deeply enough to create viral loops of your own.

The invite email
I was recently invited to Mash (thanks Randy!) and took a quick spin around the site. I’ll leave it for others to explain the whole experience, but I wanted to focus on the viral marketing element of the site.

First off, here’s the invitation e-mail:

From: Yahoo! Mash
To: Andrew Chen
Subject: Randy made a profile for you on Mash

Andrew Chen,
Randy started a profile for you on Mash!  It’s good to be loved! ;)

Check it out!
http://mash.yahoo.com/profile.php?inv=[keyremoved]

Thanks,
The Mash Team

Note: Sent to [email removed]. This invite expires in 10 days.
Click below to block future messages from Yahoo! Mash:
http://mash.yahoo.com/reg/dnc.php

First off, I have to be impressed that they used the hook "Randy made a profile for you on Mash". I think it’s a great hook, although I probably would use the full name Randy Stewart rather than Randy, since if the name were something more common (like John) I would have discounted the value of the invite.

Overall, every viral hook ends up being a very simple phrase between a Person A to a Person B. That might be "Check this out" or "Here’s a holiday card" or "Take this quiz and see if you can beat me" – these simple phrases coming from your friends are fundamentally what compels people to check out links.

The reason why "Randy made a profile for you" is a good hook (assuming you know as well as I do how nice of a guy Randy is), comes from:

• An appeal to curiosity, since you’re curious what Randy made
• An appeal to narcissism, since it’s about you!
• An appeal to reciprocity, since Randy just did some hard work, and you should accept the gift either way
• An appeal to social proof, since if Randy’s doing it, you should be too

They could make a couple of these appeals stronger, but ultimately it’s a pretty good hook IMHO. For the folks that want to read more about a structured way of examining persuasion make sure you buy Persuasion by Cialdini.

Watered down addressbook importing
The next part is the most interesting: Now it’s clear that someone at Yahoo was doing their homework, and knows that addressbook importing can be a very powerful part of every social network. However, rather than using it as a mechanism for two goals:

1. Drive more connections between friends
2. Invite new friends from off the site

.. instead, they just focus on #1. When you import your friends, you are really "finding all the others" on Mash, and while it’s opt-out (everything’s checked at first), it doesn’t encourage you to invite people from off the site.

While this might build engagement in the long run, the problem is that it also kills the viral loop :( You really need to get new people coming in, and for those new people to bring in more new people, in order for the site organically.

That said, this is run by Yahoo so as long as they can keep the users going, perhaps sticking it on their homepage, integrating it into Mail, and other initiatives might be enough for getting the site to grow quickly.

What’s Mash’s viral loop?
So the question is, what is Mash’s viral loop? Let’s go back to my quick definition from before: To define the viral loop, you can think of it as…

The steps a user goes through between entering the site to inviting the next set of new users

So in the case of Mash, you are looking at:

1. Getting an invite that Randy set up a profile for me
2. Going through addressbook importer screen
3. Agreeing to accept/reject Randy’s changes
4. Setting up my profile, etc.
5. Putting a friend’s e-mail into the invite form
6. Then my friend gets an e-mail (with notice that I set it up for him)

Now, in general, I think this is a very reasonable loop, except for the fact that with watered-down addressbook importing, and dependence on a user to set up other peoples’ profiles, the "branching factor" on the viral loop is not that great.

I mean, how many friends’ profiles are you going set up? You’d have to recall their name/e-mail, then type it in, then set up their profile. You might do this with 3 or 4 or 5 users, but beyond that?

The strength in a "spray and pray" e-mail method is that although the conversion rates are low (<5-10%), you are typically importing hundreds of contacts in one shot. Compare that to Mash’s method, which might have a better conversion rate, but it’s doubtful that it’d be more than 2-3X better, IMHO, due to peoples’ fatigue in social networks, etc.

Anyway, from this work, I know the guys at Yahoo are thinking hard. There’s lots of innovative ideas within Mash, just from first glance. This honestly surprises me, so I’m confident the same folks who came up with those ideas will be able to make something interesting happen.

Link: An "adult" joins Club Penguin.

Couple fun excerpts, first, on the incredible power of customizable avatars:

The first thing you notice is that everyone is really dressed up. When
you click on another penguin, their "Player Card" appears. This shows
all of the pins, hats, props, and accessories that the penguin has
acquired by completing various missions and shopping at various stores.
The net result is that a lot of penguins end up looking like Elton
John. (As Emily Yoffe points out, you must have a paid subscription to Club Penguin to properly outfit your penguin.) 

…
then, how having an avatar body (rather than a profile picture, for
example) gives you more types of customization, for example dance moves:

You might do a little dancing to the booming rock soundtrack (penguins
can acquire special dance moves) and then go your separate ways. After
all, there are constant parties to attend.

…
and finally, the continuing emergence of machinima, where I’ve been a
ridiculous number of YouTube videos that combine in-game footage with
music, and then it’s called a "music video":

Club Penguin regulars seem to enjoy their outlaw status, posting videos on YouTube of how they got the boot. Better yet are the tribute videos to banned penguins. This one uses the Puffy Combs ode to Biggie Smalls, "I’ll Be Missing You," as a soundtrack.

In fact, here’s a cute one:

Jeremy Liew just blogged about a great topic:
Viral marketing, randomness and the difficulty of controlling growth in social media.

Stop and read the post before you read the rest of mine.

Anyway, I wrote him a quick e-mail after, with slight edits below:

The gist is that viral marketing often leads you astray, heading into countries like Brazil or Turkey or India, where you don’t plan to be.

Part of what seems to make these sites like Orkut start to "converge" in certain languages, demographics, and localities has to do with the fact that they all offer various types of "open browsing" like the type that MySpace has. This makes the entire social network a "public space" that ultimately makes newbies auto-select themselves into or OUT OF that tribe, based on language, content, etc.

So when a huge group of Brazilians invades Orkut, even people in mountain view feel it, when they get a bunch of invites, and all the comments for stuff happen in Portuguese.

One of the things I’ve been fascinated with in regards to "private" social networks like LinkedIn and Facebook, where it’s much harder to browse globally, is that the network right around you is less likely to be affected by changes elsewhere in the network, and a huge influx of Brazilians or Canadians might not impact the experience much.

This sorta implies that a closed network is likely to grow more slowly, yet have some strong ability to be resilient to demographic changes elsewhere on the site – except for all those old people in your region joining FB ;-)

So for the people who are interested in not having their networks completely converge, you should make it REALLY REALLY hard for people from one region to see people from a different region. That means not having public displays of things like:

• Featured users
• Featured pictures
• Featured content
• Featured comments
• etc

… as they are all things that make people self-select either in or out of your social network. They are all "public space," which results in convergent results. Instead, you want to segment and target all of your content to wherever the user is coming from.

As a corollary to this, you end up needing to collect some personal information about the user’s network before showing them any content on the site. In Facebook’s case, they were smart enough to use the ".edu" namespace to automatically carve out college students into their own segmented areas, where they found other similar people easily.

I recently found this ridiculous list of Web 2.0 naming ideas: Phonetical misspellings & orthographic wordplay. Sadly, I found this on News.YC, which means some poor kids are using it to name their new photo hosting company fauxtowhost.com :(

Basically it’s a bunch of misspellings that create phonetic confusion. Here are some examples:

C = CK, K
Sparc – Customizable startpage – Startpage
Tracbac – Share, comment, revise & collaborate – Knowledge

E, EE = I
Comeeko – Create & share photo strips – Publish
Radeo – Compile & share playlists – Audio

EEZY, ESY, EZ = EASY
Brusheezy – Photoshop brushes for download – Design
Esy – Content management system – Software
Ezfind – Meta search – Search
Ezpublish – Content management system – Software
Vecteezy – Get vector graphics from top artists – Design

FX = EFFECTS
Messengerfx – Instant messenger – Communicate
Pikifx – Edit your photos – Images

If people are passionate about your site, and tell their friends about it, you want them to be able to spell it. I don’t think that’s too much to ask.

Doesn’t everyone remember the UTube versus YouTube hilarity?

The always wise Paul Kedrosky blogged a intern reading list for Bear Stearns:

• Barbarians at the Gate, by Bryan Burrough and John Helyar
• Beyond Greed and Fear:  Understanding Behavioral Finance and the Psychology of Investing, by Hersh Shefrin
• Confessions of a Street Addict, by Jim Cramer
• Den of Thieves, by James B. Stuart
• Devil Take the Hindmost: A History of Financial Speculation, by Edward Chancellor
• Fooled by Randomness:  The Hidden Role of Chance in Life and in the Markets, by Nassim Nicholas Taleb
• Liar’s Poker, by Michael Lewis
• Monkey Business: Swinging Through the Wall Street Jungle, by John Rolfe and Peter Troob
• Reminiscences of a Stock Operator, by Edwin Lefèvre
• The Mind of Wall Street, by Leon Levy
• The Predator’s Ball, by Connie Bruck
• Wall Street Meat:  My Narrow Escape from the Stock Market Grinder, by Andy Kessler
• When Genius Failed: The Rise and Fall of Long-Term Capital Management, by Roger Lowenstein

I’ve read a random smattering of these during my undergrad days, when I briefly entertained the idea of pursuing a career on Wall Street.

What would a similar list of books for the Venture Capital and Startups look like? I’ll take suggestions and then contribute my own recommendations in a later post.

I’m at the airport waiting for my flight. For those of you guys that are curious to read some transcripts of the Austin Game Developers Conference (AGDC), here are a couple good sites:

• Raph Koster
• Gamasutra
• Virtual Worlds News

The stories will move past the front page soon, so you’ll want to look through those links and bookmark anything interesting fast. In particular, I enjoy Raph Koster’s talk on Designing for Everywhere (click link for slides) which compares the engagement models for sites as diverse as Habbo, HotOrNot, Facebook Zombies, and everything else.

I was also able to catch a fun movie, called "King of Kong" about the competitive retro-gaming rivalry between two hardcore folks over the original Donkey Kong arcade game. Definitely worth watching.

YouTube version of trailer here.

More blogging when I’m back.

I’ll be out of town this week at the Austin Game Developers Conference, but should get some fun lessons out of the experience. I’ll blog about it after.

If anyone’s going, please shoot me a note at voodoo [at] gmail and give me a shout.

Here are some of the interesting sessions that I might or might not attend :)

Embracing Web 2.0: Applying Web 2.0 success to the MMO space. 
An
exploration into the tools, techniques, and ideals that helped Web 1.0
transform into Web 2.0, and how these transformations might be adapted
to improve the infrastructure and services behind MMO Gaming.
This Session will explore in detail what Web 2.0 is and what Web 2.0 is
not, how Web 2.0 can be leveraged to improve existing methodologies and
processes within MMO infrastructure and services, and how Web 2.0 can
help reveal untapped resources and opportunities within the gaming
community.

Combining Conventional MMO Gameplay with a Mini-game Mindset 
If
you are developing a MMO and want to do something "new" without
reinventing the wheel, our solution combines existing concepts in novel
new ways. We take the strong motivational and entertainment style of a
conventional MMO and combine it with Flash and other Web 2.0
technologies. The game provides seamless interaction between the
virtual world and web based content, community and interaction. The
presentation will focus on an in development game built on this type of
hybrid gameplay. In the game, players take on the roles of explorers,
builders, scientists and colonists on the Moon in an alternate future.
By showing their knowledge of physics as presented in mini-games,
players are able to level up, gaining access to new regions, skills and
gear.

Is It Fun Yet? 
At
each stage of an online game’s development, designers have asked
themselves the age-old question: “Is it fun yet?” Feedback on this
question comes from many different sources: from the development team,
QA, focus groups, and online beta testers. All of these are important
sources of feedback, but the one that is the least understood and
utilized involves player metrics from online beta testers. This session
focuses on using player metrics to analyze the “fun factor” in a game,
and provides concrete examples of how metrics can be useful in
identifying key areas in which the game can be improved.

The New Kids on the Social Networking Block 
A
recent study revealed that 76% of Americans trust the recommendations
of their friends while only 11% trust what companies tell them. This
single statistic reveals a turning point in the relationship between
advertisers, entertainment companies and the public. Each entity is
trying to cope with the changing realities of the new age of social
media.
This panel takes a close look at the residents of the next generation
of social networks and virtual worlds and examines what they have to
teach game developers and marketers. Who are the people behind these
avatars? Why are they there and what are they doing? How can you engage
them? Why should you care?

Many times, viral marketing is seen as a “marketing strategy” that is interchangeable with other methods of acquiring users. That is, you go through three steps:

1. Develop your product
2. Think through a plan on how to make people use it
3. Declare viral marketing is one of N approaches (along with SEO, SEM, PR, etc.)

Or perhaps you already have an existing product, and you have gotten interested in using a Facebook widget or something like that to make it “viral.” If you are in this boat and think of viral marketing as a compelling marketing strategy, you’re in trouble.

Successful viral products don’t have viral marketing bolted on once the product has been developed. It’s not a marketing strategy. Instead, it’s designed into the product from the very beginning as part of the fundamental architecture of the experience.

Roelof Botha, the venture capitalist that backed YouTube, says:

Forget about adding “viral” to your marketing to-do list after your
product is already on the market. You need to bake it into your
business model from the very beginning. “Viral isn’t something you can
just make happen,” says Botha. “It has to be inherent in your product.”

Viral marketing is not a product feature
Similarly, no single product feature determines the viral success of a business. I’ve seen several product pitches where the business is described as “viral” on slide 10 of the presentation, because of a particular feature, like:

• “Tell a friend”
• Widget embeds
• Addressbook importing
• … or whatever.

No single feature determines the virality of the product – instead, it’s part of a viral loop that connects a disparate set of functions into a cohesive motivation for the user to tell their friends. If the fundamental product doesn’t drive a viral motivation from its users, then it’s very hard to force it.

Viral marketing is a fundamental product design discipline
So what happens when you try to start a new viral product from scratch? Ultimately, you ask the reverse question of what most folks do. Instead of:

We have product X, how do we virally spread it?

… we ask:

We have viral loop X, what’s the right product to put into it?

Once you have that question in mind, it becomes a lot easier to start brainstorming compelling experiences that might be inherently viral.

It might feel really weird to you to have this constraint. Why allow something like this to arbitrarily affect your product experience? Well, it’s true that it’s yet another constraint, but you are dealing with plenty of constraints already, like:

• Keeping things free (or making premium subscriptions)
• Making it web (versus hardware)
• Having it support some browsers (versus better ones people should be using)
• Keeping the site fast (rather than slow)

… and more. These are all things that motivate and constrain your product decisions, and adding (or substituting viral marketing) can be a very very smart idea to have a successful business rather than a successful product.

The skillset for effective viral marketing
Because of the above issues, “viral marketing” is not really something that ought to be in the domain of soft-skill folks like PR, advertising, and marketing people. Nor is it in the world of hardcore technical folks that can architect systems but not consumer interactions.

Instead, it’s something that needs to bridge both soft and hard skills. You need an interesting combination of skills, including:

1. Understanding the motivations behind user behaviors
2. Understanding and exploiting the technical loopholes to create viral loops

I think that the fundamental compartmentalization of these two skillsets is what ultimately drives huge companies being worse at viral products than startups.

4 years of education in 1 sentence
I’ve been told that you can boil down your entire undergraduate degree into one statement. For me, I majored in Applied Math (with a focus in Economics) and if I had to pick one statement, it’d be:

Any attempt to mathematically model the world is flawed.

I suppose this is a timely subject given the recent market implosion led by quant hedge funds. But I suppose the above statement lacks in nuance since having flaws doesn’t mean it’s still not ultimately useful. So instead, you might revise the statement to be:

Any attempt to mathematically model the world is flawed (yet still incredibly useful).
The skill is in determining where the models work, and where they break.

Math books disguised as other stuff
To that end, I wanted to highlight a couple of my favorite books on my shelf that talk about this subject:

Moneyball is the most approachable and popular book on this topic, I think. After all, the entire book is on something fun and not boring: Baseball. The entire approach of using mathematical modeling to find undervalued assets (baseball players, in this case) is a great introduction to this type of thinking.

Calculated Bets is a great book that not a ton of people have read – it’s about one guy’s obsession with creating a model to beat everyone else on jai-alai gambling. It’s a really great book because he explains the entire rules of the sport, and then starts to disassemble all the pieces, and shows you all the data. It’s technical enough to be interesting to anyone who has a quantitative background.

Thinking Strategically is a bit more academic in nature and gives a high-level overview of Game Theory without too much in terms of real-world application. It’s also technical enough to be useful for folks with quantitative backgrounds. The most interesting part is how the book deconstructs complex multi-party interactions into algebraic equations and approaches tackling the problem.

Better is completely driven by anecdotes and real-world applications, making it a close cousin to Moneyball. Instead of theories, instead, it focuses on 5 real-world case studies around the world of healthcare and medicine. One of the main arguments of the book is something I deeply believe – that change doesn’t come in huge quick shifts, but rather by careful repetitive measurement of metrics that you care about, and fighting for small percentage improvements every day is what makes the difference.

Fooled By Randomness is a great book, much better than its sequel Black Swan. In it, the author does some very philosophical reflection on logic and when you can determine causality or not. After all, the most common mistake that people make (particularly the MEDIA!) is confusing correlation with causality. Most of the book is about finance, which is particularly interesting in light of the recent quant fund blowups. Another good book on the limits of mathematical modeling is When Genius Failed, a good discussion about the failure of the giant hedge fund Long-Term Capital Management.

Jim is so smart
Jim Young, a co-founder of HotOrNot, commented on the recent blog I wrote on reward schedules. It’s so insightful that I wanted to highlight it.

Jim writes:

Good insights- you nailed this one
on the head. With regards to HOTorNOT, the primary reward the next
photo to be rated. The post-rating screen communicates the community
aspect- "what others thought", "last checked their score X minutes
ago".

You can also consider the rewards schedule to be variable ratio,
since the next person isn’t guaranteed to be hot. :) If you have ever
played with any of the HoN clones that only show attractive people all
the time, you will find the experience is less addictive.

The second paragraph is incredibly interesting. I think a typical developer building a HoN clone might think that rewarding the user with the hottest matches constantly gives the best experience, because they look at HoN as a goal-driven website rather than an entertainment experience.

HotOrNot as a functional app
If you think about HotOrNot from a completely functional standpoint, then MATCHING RESULTS are the key driver. The goal is to present the user with hot people, as to reward them as quickly as possible. The best possible experience is to have the user show up, burn a couple pageviews looking at the "best" people, and then leave the site.

HotOrNot as an experience
But if you think of HotOrNot from a user engagement standpoint, then it’s not the matching results that are key, but rather TOTAL # of RESULTS or in other terms, more pageviews = better. This also, of course, aligns with the goal of advertising revenues.

In that case, then you want to throw some mediocre-looking folks in with the good ones, to keep people guessing and clicking away. Instead of showing 10 super-attractive people in a row, you spread them randomly across 50 profile pictures, thus increasing your engagement by 5X.

The entire switch here is to think of these websites not as collections of features or products, but rather manufactured experiences that are designed to be compelling wastes of peoples’ time ;-)

Press button to WIN
The entire conflict between engagement and functional usability can be encapsulated by the following statement (which I’m stealing from someone, I don’t remember who):

If you handed a game over to usability folks, they’d make a big red button that said, "Press button to WIN"

That is, if you optimize for helping people accomplish a task as quickly as possible, you start missing out on the entire path of accomplishing the goal, which is what drives engagement. Maybe where I should reference the cheesy self-help quotation: "Life is a journey, not a destination"

Why do users get addicted to games?
A couple months ago in BBC there was an article called Korean Man Dies After Games Session:

A South Korean man has died after reportedly playing an online computer game for 50 hours with few breaks. The 28-year-old man collapsed after playing the game
Starcraft at an internet cafe in the city of Taegu, according to South
Korean authorities. The man had not slept properly, and had eaten very little during his marathon session, said police.

When you read this stuff, it’s not hard to see the parallels to B. F. Skinner’s work on the so-called “Skinner Box” which trained poor little lab rats based on different reward schedules. In general, the Wikipedia page on reinforcement is quite enlightening.

And in fact, the entire MMOG = Skinner Box meme is an old one. Just look at the Google results which mention them all over the place.

In fact, for anyone studying user engagement, you might say that:

The science of user engagement = The science of addiction

That is, if you can figure out what makes people get addicted to gambling, video games, and other “psychological” addictions (rather than physical ones), you might be able to port that over to your shiny new Web 2.0 website.

The Science of Addiction
First, let’s jump into “reward schedules” which describe how often (and how frequently) a user is made to feel “good.” You can make people feel good in a bunch of different ways, such as the ones listed below:

• Currency rewards: the acquisition of a game resource that can be spent represents a fairly universal reward system… giving the player shops to spend currency rewards can be effective, provided there is plenty in the shops to choose from. (Note that the shop can be a ‘meta-shop’ – it need not be a literal shop in
  the game world).
• Rank Rewards: like currency rewards, but ratcheted – the player gains benefits from acquiring points towards an eventual step up in rank. The classic example is level in a class and level RPG, although in video games, Elite’s (entirely cosmetic) Rank system demonstrates that a Rank reward can motivate even without mechanical
  benefits. A draw for Type 1 Conqueror and Type 2 Manager players if expressed in verbal terms, but if the ‘Rank up’ is accompanied by sufficient fanfare its appeal can be more universal.
• Mechanical Rewards: such as increases in stats that the player can feel the effect of. Highly motivating for many players – but the mechanical increases must maintain relevance to the play. Effective for Type 2 Manager and Type 1 Conqueror players in particular.
• Narrative rewards: a little narrative exposition is effective for certain players as a reward. A cut scene can be a bigger reward than dialogue – when used well. But overlong or irrelevant cut scenes quickly become devalued. Effective for Type 3 Wanderer and Type 4 Participant players in particular.
• Emotional rewards: related to the above, but applicable when the player feels they have done something for someone in the game. Animal Crossing’s present giving, for instance. A draw for Type 4 Participant players.
• New Toys: anything new that can be experimented with is a ‘new toy’. Although primarily a mimicry reward, there may be mechanical benefits of well – a new weapon in an FPS is a new toy with mechanical rewards, for instance. Especially of value to Type 3 Wanderer players.
• New Places: like new toys, new places are a mimicry reward for players driven to explore (a common drive!). Especially of value to Type 3 Wanderer and Type 1 Conqueror players.
• Completeness: perhaps only a drive for the Type 1 Conqueror player (or the Rational player), achieving completeness (chasing 100% for instance) can be a reward in itself.
• Victory: defeating a challenging foe (or a boss) is purely agonistic reward, especially appealing to Type 1 Conqueror players.

(This is stolen/paraphrased from the blog Only a Game)

As you can see, the term “reward” is used very broadly. In the case of a site like HotOrNot, you might even argue that the post-rating screen that shows you someone’s score and thus validates/invalidates your thinking is a “reward.”

In the games industry, people have spent a lot of time talking about reward schedules. After all, too many rewards, and the experience might peak too quickly and seem boring. And not enough rewards, the site might seem boring.

This Wikipedia article already goes into a pretty deep discussion of the different reward schedules, but just to break down some examples quickly:

• Fixed interval: Every X minutes, reward the user
• Variable interval: Randomly reward the user, but with average interval X minutes
• Fixed ratio: Every X reponses from the user, reward them
• Variable ratio: Randomly reward the user, with average X responses to trigger it

Variable ratio schedules will pwn you
In the analysis, the article further discusses:

• Ratio schedules produce higher rates of responding than interval schedules
• Variable schedules produce higher rates and greater resistance to extinction than most fixed schedules
• The variable ratio schedule produces both the highest rate of
  responding and the greatest resistance to extinction (an example would
  be the behavior of gamblers at slot machines)

As stated above, “variable ratio schedules” are the most effective in getting lab rats engaged. And of course, slot machines are invoked as a great example of highly addictive experiences. With a slot machine, you don’t always win (that’d be too predictable and boring) but you win enough of the time to keep you in the loop. Furthermore, you sometimes win big, but more frequently, you win small, which keeps you interest level.

So how do you apply this to web applications?
From this perspective, you can look at web applications in a completely new light. You end up with two categories to think about:

• Actions: Viewing, commenting, rating, friending, messaging, etc.
• Rewards: New features, feedback/responses, messages from friends, compliments, new content, etc.

So from a user experience standpoint, the “out of box” experience of trying a website for the first time should be one where you can try stuff out, get a reward randomly, try new things, and get more rewards. And you need to be able to get into the reward schedule from the FIRST SESSION.

The other important angle that games are great at developing is the idea of progression, where as you use the site more, your rewards change through leveling up. Similarly, in MySpace (arguably one of the most addictive sites created recently), expert users use the site very differently than novices and receive different kinds of rewards. For example, they might receive more compliments from friends over their awesomely pimped out profile instead of feeling good just from having someone message them back.

So to summarize, looking at addiction implies a couple interesting questions:

• How do you think about your site as a series of action/responses that span over time, not a collection of features?
• What are the actions on the site? And what are the rewards?
• How do you think of your reward system, and how do you get the rewards to progress and expand over time?
• How do you break down the “out of box” experience with users, and what action/reward loops immediately get them hooked?
• Why are lab rats so cute?

Why functional apps are often boring
It’s also clear from this that it’s easy to do things the “wrong way” and make your site completely boring and unengaging. From this reward schedule context, you can do it by simply removing rewards from your system. Or if you have rewards, make the action/reward loop really long.

Here are some examples of bad things:

• When the user executes an action, don’t reward them
• Don’t tie rewards to actions, just tie them to some time interval
• Make things predictable and reduce randomness

Sound bad?

Well, it turns out that if you think of your product as a collection of features that functionally accomplish something, it’s doesn’t sound so bad, because you are trying to ALWAYS deliver some solution to a problem, not introduce randomness into the equation. You’re also often letting the functional result (seeing a resume, reading a message, scanning through a search engine result page) be the end reward, and you might not try to stick intermediate rewards in the mix.

That’s why, when I look at something like LinkedIn, the site has a ton of potential but is completely not engaging at all. First off, when I do things on the site, there’s no possible way for me to get a reward except days later when people write me back or approve my request. It’s also completely functional and deterministic, and I’ve never been surprised on the site. Compare that to MySpace or Facebook, where at least I’ll be amused by some new layout or application or a funny joke someone wrote on The Wall.

Have fun!
Hopefully this was an interesting discussion – there’s a lot to be learned from psychology and game design in web apps, and I’m not the only person following this. I’d encourage you guys to read more from Daniel Cook, Amy Jo Kim and also Raph Koster.

I was recently quoted in the last issue of Business 2.0 – fun ;-)

Link: The Facebook economy – Aug. 23, 2007.

Not everyone is drinking the Kool-Aid. Andrew Chen, an entrepreneur-in-residence at Mohr Davidow Ventures, thinks the revenue opportunity is still unproven. "The question is whether large-brand advertisers will feel like it’s a good idea to buy space on still relatively small pieces of real estate," Chen says. "I would imagine they’d want to deal directly with Facebook." The company, after all, already generates an estimated $150 million in ad revenue on its own.

UPDATE: Doh, it looks like there will be one more. Somehow getting a quote in the next to last issue doesn’t seem as cool!

Congratulations to my friend Nabeel, who just raised $5.5MM from Charles River and Prizm.

For those who have been following casual MMOG space, it’s been clear for a long time that it was inevitable that a huge purchase like Club Penguin would be both inevitable and transforming. These casual MMOs combine both the advantages of online distribution, in the form of widgets, SEO, and advertising – as well as the deep engagement of online games.

Executing a product in this space requires both a deep background in online communities, distribution, as well as the ability to design compelling game experiences. Nabeel’s team has both.

Congrats to Nabeel and Susan for the start of a great partnership!

Platforms, not platform
It strikes me that given the deep emphasis that people have had on the Facebook platform, it’s important to explore what other opportunities are out there to build compelling experience off of pre-existing social information and traffic.

Over the last couple months, I’ve become very interested in branching out from my understanding of Facebook, and looking at other APIs that are available, like the Firefox browser, MMOGs (and Second Life), Instant messaging, Maps, and other platforms.

Putting together this conference has been a good way for me to learn about the topic.

Early preview of speakers and attendees
The conference is coming along quite nicely, and we now have a great group of folks attending, including:

• 15+ Facebook developers consisting of tens of millions of application installs
• AOL
• MSN
• Google
• Twitter
• Offermatica
• Compete
• VideoEgg
• Meebo
• First Round Capital
• Benchmark Capital
• Elevation Partners
• Mohr Davidow Ventures

10% discount (but only for 48 hours!)
Here’s a discount code to the conference for the readers of my blog. Hope you see you guys there!

Click to register for CommunityNext

What I’ve been up to
I’ve been working hard with Noah Kagan on an upcoming conference on our favorite topic… Below is a quick blurb about it.

PS. Apologies for the light blogging – I’m definitely going to get back on the horse here.

The premier event on social network Platforms and APIs is here.
Over 300 entrepreneurs, developers, and marketers unite for a 2-day
deep dive featuring dozens of speakers and developers. Special guests
include developers of top 100 Facebook applications we are flying in from all over the country. October 5-6th is sure to be revolutionary!

What are the topics?

• Nuts to bolts guidelines for developing successful apps
• 0 to 60 case studies from the top developers
• Drive viral growth through design, metrics, and strategy
• Make money from ad networks, affiliates, and other strategies
• Create real-world community through maps and local features
• Scalability, integration, and other technology best practices
• [See the Schedule]

And the perks?

• Free food
• Open bar parties
• Redbull, coffee, and other caffeine consumables

The first 20 tickets are hugely discounted, so get in early:
http://platform-andrew.eventbrite.com/

UPDATE: I lost. And bought Arjun a new iPhone. Congrats Arjun!

The bet: Which social network will be bigger?
Oh this will be fun ;-) My friend Arjun (ex-Amazon, currently at Zillow) and I had the following conversation when we were talking about widget development:

Andrew: why not be more excited about the myspace integration possibilities? that’s like a 5X bigger ecoysystem

Arjun: yuck.

Andrew: ??

Arjun: myspace already has too many issues
their UI is so cluttered that it would be impossible

Andrew: i think you might just be techno-elitist

Arjun: facebook is already getting cluttered

Andrew: which biases your business calculations

Arjun: yeah, that’s probably true..

Andrew: i mean, are you separating your business evaluation and your personal evaluation?

Arjun: but myspace is dead, man.

Andrew: thats so wrong lol
myspace is growing super fast

Arjun: facebook will be growing faster
dude, i’ll bet you that in 1 year facebook will be larger than myspace

Andrew: holy shit
absolutely
i’ll take that bet
what are we betting?

Arjun: haha, are you serious?

Andrew: absolutely

Arjun: anything, what do you want
cash, fame

Andrew: iphone

We later decided that the evaluation function would be:

Comscore numbers for 1 year from now, July 23rd 2008 12:28am
Monthly unique users for MySpace and Facebook

The current snapshot of numbers
And for those that are curious, here’s the current numbers stolen off a post by Eric @ VentureBeat: MySpace is over 2X larger (109MM instead of 47MM), the Facebook growth in the last month was 22% whereas MySpace’s was about 4.3%. If this rate were to continue, then Facebook would pass MySpace in about 7 months.

I’m betting that the growth slows considerably – in fact, I might have even taken this bet out to 18 months or more, whereas Arjun is betting that it’ll continue or accelerate.

What do you guys think? Which side of the bet would you take?

UPDATE: Couple more numbers: MySpace vs Facebook: MySpace declares Victory from Mashable and also Top social networks for engagement from Jeremy Liew

Link: McAfee Phishing Quiz.

Wow this was really hard! I got 10/10 but I’ve been doing some reading on Phishing lately. Try it out and tell me what you get.

What’s a “viral loop?”
A term I’ve heard tossed around frequently in real life, but not in the blogosphere is the term “viral loop.” In fact, when googling it, I only saw one mention from Jia Shen (cofounder of RockYou, with $120M raised from Sequoia/Softbank), a very smart guy:

“The viral loop of people inviting each other to most social networks revolves around a user posting a widget to their page and having friends see their page.

The viral loops for Facebook (there are multiple) revolve around the news feed, the mini-feed and the invite request. Not around people coming to your page and interacting with it”

Anyone who cares about this topic should read the entire VentureBeat article Q & A with RockYou — three hit apps on Facebook, and counting. And of course Jia is speaking at the upcoming Viral Marketing conference put on by Noah Kagan of CommunityNext.

To define the viral loop, you can think of it as:

The steps a user goes through between entering the site to inviting the next set of new users

Simple enough? Well, because this core loop is repeated so many times over generations and generations of users, getting it right is incredibly important.

What’s an example
Now let’s look at the viral classic, YouTube.

1. Again, the first encounter will probably be a video embedded in a page
2. If they like it, at the end of the video there’s an embed code that can be directly copied
3. Or, if they don’t want to embed or e-mail that video, other videos are recommended at the end of the process so that people can try those, and potentially embed a different one

… and so on.

Building your own viral loop
Ultimately, viral loops are like induction proofs in that you are jumping to a steady state situation in which your viral widgets/emails/messages are already out there, and you are optimizing some set of steps that users have to jump through. Then, once you get this right, then you are figuring out how to build “on-ramps” into your viral loop so that you bootstrap the entire process.

1. What’s your viral media?
The first (and last) choice you have to make is where people are going to receive an entryway into your viral loop. That might be e-mail, Facebook newsfeed, or blogs. The main factors to evaluate here are how difficult it is to integrate your entryway into their surface, and the response rate. The first factor, integration, is obviously important because a difficult integration means that perhaps fewer people will see your messages, or your messages will be filtered out altogether. The second factor, response rate, depends on how in-your-face your messages are (think Facebook invites versus e-mail spam), and how competitive the medium is. Obviously, viral marketing is about a compounding viral growth rate, and if your response rates are low, that will mean a huge difference in outcomes.

2. What’s your funnel design?
The next choice to make is the design of your viral “funnel.” First off, you want it to be short and as accessible as possible, since each page is a barrier you’re asking your users to leap over. Assume up to 80% to 90% attrition if you are asking them to register for a username/password, for example. So if you can make it very short – 2-3 pages at most – with progressive commitment of personal information, you’ll get further along in your design. And obviously, you’d ideally want to test for drop-off at each point, and optimize each step as if it were a landing page.

As stated above, viral growth rate is a compounding process, so the difference between a 80% dropoff and a 50% dropoff is huge spread over 1000s of viral loops.

3. What’s the viral hook in your product?
Another important choice is product, of course. At the end of the day, a bad product can adversely affect your viral experience, because a poor slideshow (or a widget that no one wants) will lead to very few embeds. So picking something that is either a deep personal expression (music, avatars, slideshows, celebrity posters, etc) or a communication mechanism (voice messages, text, etc) are all great for getting people to WANT to put the apps on their homepages.

4. What are the onramps to your viral loops?
Once you’re done with a very tight viral loop, then it’s time to create the on ramps. In this case, you are looking at places like your website homepage, paid advertising, traditional marketing campaigns, SEO, etc, to create places where users can discover your viral loop and begin the process

That’s it!
Those are the basics of thinking through a viral loop. The best way to understand them is to browse MySpace or get spammed by invites to social networks, and then break down exactly the “funnel” they are trying to put you through.

IMHO, Tagged.com has a fascinating one to analyze, since they won’t even let you use the website without entering in your e-mail addressbook information. Definitely check out that one. They definitely short circuit the entire viral process by turning it from:

Register -> Use Product -> Evaluate Product -> Tell friends

to:

Register -> Tell friends -> Use Product -> Evaluate Product

In their case, it’s really irrelevant how good the product is – instead, the focus is just on getting that viral loop to be fewer than 2 pages, and increasing your “branching factor” by using addressbooks rather than asking users to recall their friends’ emails. Anyway, check that out and also try out some of the other very successful social networks.

See you at the conference!

UPDATE: Removed Slide.com widget example now that the links no longer work :(

A new acronym brought to you by Chris Smoak
My friend Chris Smoak came up with a great acronym today, called “SNAP” meaning Social Network Application. I thought it was clever, so use it ;-)

I much prefer it over the “widget” terminology because widgets strongly underplay their sophistication and potential of what developers can create. I agree with Max’s idea that one day, someone will build World of Warcraft (or something of that complexity) into a social network.

SNAP: The next generation of UGC?
Social Networking Applications are the next evolution of User Generated Content.

In the first generation, it was all about text and graphics that were authored by users, going as far back as mailing lists and Usenet and eBay and all of that. Today, you still see a steady progression of that in richer and richer contexts, via video and slideshows, etc.

In the next generation, widgets are BOTH content and application logic, all rolled into one. It used to be that you would e-mail only pictures to people, but now on MySpace, you can message someone a YouTube video that has a mini-version of the website embedded into the player.

It strikes me that User Generation Content is opening up into User Generated Interaction, facilitated by these full-blown applications.

Functional apps versus decorative apps
One big distinction that has been enabled by Facebook (but arguably not from MySpace) is that there’s a new class of widgets that are functional in nature versus decorative.

MySpace widgets were all about pimping your profile – adding new decorations, glittery text, moving photos, and the like.

Facebook widgets, however, allow deeper integration points as to allow substantially different applications to be built. For example, let’s look at the list of applications tracked by Appaholic, a fantastic service that tells you what the most popular widgets are:

1. Top Friends
2. Graffiti
3. iLike
4. Fortune Cookie
5. Horoscopes
6. X Me
7. SuperPoke!
8. Video
9. Free Gifts
10. Movies

Of these, most of them are decorative or about “personal expression” more than anything else. I left those unhighlighted. The idea there is that people are likely to use them with or without close friends on the site, and it’s just about publishing to a 2 inch by 1 inch and that’s that.

What are functional SNAPs?
The ones that I highlighted, Graffiti, X Me, Superpoke, and Free Gifts are enabling new featureset on Facebook that has never been available before. These are truly user-generated interactions rather than purely content. It’s not just about a new way to present personal content, they are true applications.

And of course, I’m a huge fan of MySpace and love to argue with haters. In general, it’s true that a lot of the apps getting released on Facebook have existed, or could have existed, on MySpace for years. However, simply condoning widget developers rather than offering them a deep API to integrate into, they are missing the boat on a new generation of new functionality, rather than purely content.

The future of SNAPs
One random wild guess on the future of SNAPs will be that the social networks will hand over more and more control to people. Here would be the evolution:

• Allow people to put UGC data into templates (think eBay)
• Allow people to put UGC data onto their own pages
• Give people some small real estate to display applications (widgets)
• Give people entire pages and controls to display applications
• Let developers author entire sub-websites that run as apps?

Of course, this all assumes that these apps end up living as walled gardens within sites like Facebook. An equally interesting idea is if social networks become more distributed in nature, providing an underlying platform of user data, infrastructure, monetization, and other services – then you might be going to sites that are secretly Facebook widgets, but you’d never know as the user.

… if anyone wants to try it out. Just e-mail me (voodoo [at] gmail) and I’ll send it to ya!

Hope everyone had a great weekend ;-)

Intro to the CommunityNext Viral Marketing conference
I’m very excited to be advising a conference that my good friend Noah Kagan is putting together, sponsored by my current employer, the venture capital firm Mohr Davidow Ventures. So here’s a lengthy plug for the conference.

But first, let me cut to the chase:
10% discount on registration for the CommunityNext Viral Marketing conference

Here’s the schedule, which includes folks like:

• Jason Feffer, Former VP Operations for MySpace, and CEO, Sodahead: 0 to 90+ million users
• Jia Shen, CTO and co-founder of RockYou: 0 to 150+ million widgets
• Joe Greenstein, CEO and co-founder of Flixster, 0 to 20+ million users
• Ramu Yalamanchi, CEO and co-founder of Hi5, 0 to 50+ million users
• Jonathan Abrams, CEO of Socializr and ex-founder of Friendster
• Timothy Ferriss, NY Times Bestselling author of "4-hour Workweek"
• Eric Nakagawa, creator of the blog juggernaut, icanhascheezburger.com
• … and many others

What an amazing, amazing lineup.

Every web 2.0 entrepreneur needs viral marketing to succeed
Quite simply, EVERY internet entrepreneur should come to this conference. If your model is based on advertising, to make a real business you need massive scale in terms of traffic and users.

Real scale means 10s of milions of users, which you simply can’t buy. To use Google AdSense to buy as many users as you need, you’d be spending 10s of millions to acquire them, which is too much. Paid advertising simply doesn’t work there, which means you need huge, daily, organic growth.

Learn how to engineer viral growth
Viral marketing can be engineered. People are building custom analytics against repeatable viral processes (and "viral loops," as they call them) in order to drive that organic traffic. If you think that acquiring users is about making a great product, or just about making widgets, you’re missing out on the systematic techniques that the companies at this conference have used to drive tremendous traffic.

Distribution often beats quality product
In fact, in many cases the product is less important than how you get it out there. Take something like MS Paint or Notepad. These tools are ubiquitous, and millions of people use them even though there are FREE, better products out there, simply because they are the standard. In fact, that’s really what being "the standard" means – you have such great product distribution that you don’t need to worry anymore.

See you guys there!

The new web paradigm?

Before, in 2006:

Take desktop apps and turning them into websites

Now, in 2007:

Take websites and turning them into Facebook widgets

I’m saying this half-jokingly, of course, but it’s a fun idea nevertheless.

It’s easy:

When you first meet them, this is what old Google employees (the ones with real options) say:

um yeah, I’m a software engineer for a company in Mountain View

whereas new ones say:

I’m a product manager at Google

Just a random observation :)

Add on to this drawing or make your own at Sketchfu!