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More online videos than search (soon!) October 12, 2007

Posted by jeremyliew in advertising, business models, Consumer internet, Search, video.
5 comments

Tod Sacerdoti, CEO of the online video ad network Brightroll, notes that video impressions will soon pass number of searches.

1. U.S. video impressions will pass core search impressions in the next three months
2. U.S. video impressions will pass expanded search (meaning including Amazon, eBay, etc.) in the next twelve months.
3. Video advertising spend is being underestimated by analysts (eMarketer currently estimates video will grow from 10% to 25% of search revenue, and from 5% to 12% of total online ad spend, over the next five years)

As with all audience shifts, such as network television to cable television or television to the Internet, ad dollars will follow the audience. However, it does take time, as the network to cable transition took 5+ years and we are still in the midst of the spend movement from television to the Internet.

My bet? I estimate that video advertising will be 50% of search revenue within the next five years and will be larger than the entire search advertising business in the next ten years.

A couple of years ago, when I was running Netscape, the average revenue per search was about 2.5 cents when factoring in sponsored link click through rates and average CPCs. That translates to about a $25 CPM. Web video eCPMs may end up in a lower range than that, although premium video advertising inventory is certainly in that range today. This bodes well for Todd’s projections.

Liz Gaines at New Tee Vee weighs in with her opinion here

Big companies have led the latest surges in virtual worlds October 11, 2007

Posted by jeremyliew in gaming, media, virtual worlds.
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Virtual worlds are big and will continue to grow – over $1bn has been invested in 35 virtual worlds in the last year. A recent eMartketer report on virtual worlds notes that:

eMarketer estimates that 24% of the 34.3 million child and teen Internet users in the US will use virtual worlds on at least a monthly basis in 2007. By 2011, 53% of them will be going virtual.

Argueably, virtual worlds will become one of the dominant forms of online communication, supplanting email for this demographic, just as social networks have done.

Virtual World News notes in an interview with eMarketer Senior Analyst Debra Aho Williamson:

“I think we may well see a growth trajectory similar to what we’ve seen for social networking,” continued Williamson. “Virtual worlds can be an addictive, immersive, compelling environment. They offer a lot of things for kids and teens to do. Just over half of kids and teens will visit virtual worlds at least on a monthly basis by 2011. Already you’re seeing session times of a half hour, an hour, and ten hours a month. 2008 and 2009 are where the growth is slightly bigger than ’10 and ’11. You’ve got other media companies jumping in the game. Disney is getting aggressive. MTV and Nick are getting very aggressive. Right now what we’re seeing is a lot more development activity and figuring out how a virtual world fits into media assets. I think as we get into ’08 and ’09 is when you see a lot of traction.”

The Alexa graph below shows that Williamson’s observation about big companies jumping into the game is spot on:

traffic growth of virtual worlds

Barbiegirls signed up 3 million members in the first 60 days – it took Second Life 3 years to hit the same metric. Some say that Webkinz is pulling users from Club Penguin. And IAC is driving massive growth for Zwinktopia, as they noted in their Q2 2007 earnings call:

Zwinky.com now has over eight million registered users, spending on average 64 minutes on the site each session. The recent April launch of the Zwinky Virtual World, Zwinktopia, has led to over 15 million transactions using the Zwinky virtual currency called Z-Bucks. In addition to monetizing through search, there are clearly e-commerce opportunities with Zwinky, as well.

Two of these companies are using offline channels to drive online growth, and many other companies (including MTV, Disney etc) will be taking the same approach. While the incumbent virtual worlds like Habbo and Gaia are unlikely to be threatened, I wonder if bigger companies, using their distribution muscle to get out of the gate quickly, will make it harder for new virtual world startups. What do you think?

Valuing social media companies and Facebook apps October 9, 2007

Posted by jeremyliew in advertising, facebook, media, myspace, social media, social networks, start-up, startups, VC, Venture Capital.
11 comments

People are asking what a widget is worth, and in particular what a Facebook app is worth. Lance Tokuda, CEO of Rockyou (a Lightspeed company), received a lot of coverage when he told the NY Times that the Superwall app was worth more than $10m.

Despite my previous attempts at building a framework to value a facebook app, I now think it makes little sense to talk in the abstract about what “an app” is worth. It’s better to apply the same principles to think about what a company is worth. A company will have various distribution channels through which it reaches its users; this can include its own website, a Facebook App, a Myspace widget, a distribution deal with AOL, SEM on Google, email virality, and others. Viewed this way, open platforms, and distribution, are opposite sides of the same coin.

In the late 90s, some companies pinned their futures to a single distribution deal with a single portal, and paid up for the privilege. Others, wisely, diversified their dependency on any single channel. A company that defines itself solely as a Facebook app runs the risk of relying on a single distribution channel.

Companies like iLike and Flixster (a Lightspeed company) have built their systems as a single database; their users can access the same data regardless of if they come in from their Facebook app or from their website. As the other social networks open up their platforms, these too will become alternative channels to reach users with the same system. It’s like one kitchen serving multiple restaurants.

On this basis then, we can apply standard mechanisms for valuing a media company, but adding the virality factor that is peculiar to social media:

    Value of a social media company
    = # of users x value of a user

    = # of users x RPM x lifetime “pageviews” generated by user and subsequent invitees

    = # of users x RPM x lifetime “pageviews” generated by user x virality factor

    = # of users x RPM x “pageviews” per user per month / monthly churn rate x virality factor

(Note that I use the term pageviews loosely – these can include canvas views or any area that the company can put an ad.)

So value goes up as RPM goes up. RPM goes up depending on how targeted your traffic is; whether you’ve got endemic advertisers, demographically targeted users or just broad reach.

Similarly, value goes up as PV/user/month goes up. This argues that companies with high ongoing engagement (ie some aspect of ongoing utility) will be more valuable. Higher engagement often comes with access to the social graph through an API.

Value goes down as monthly churn goes up
. One of the factors that reduces churn and increases “stickiness” of a social media site is how much “archive” value is built on top of the site. The more you commit to adding information to an site, the stickier that site will become.

Finally, value goes up as virality goes up. Virality will be different in each distribution channel, so this will need to be evaluated separately, depending on what viral growth modes are open in each social network.

As Myspace, iGoogle/Orkut, Hi5, LinkedIn, Bebo, Tagged and others open up APIs to their platforms, I think the companies that treat each social network as a distribution channel, rather than defining themselves as an application on a single platform, will create the most value.

Wisdom of Crowd or Crowdiness of Crowds II October 9, 2007

Posted by jeremyliew in attention, Consumer internet, social media, social networks, user generated content, web 2.0.
2 comments

In May I posted about a NY Times article that showed that making popularity data public made hits bigger and that talent was only one factor in this equation – the taste of the early adopters was more significant.

A recent Wharton research paper comes to a similar conclusion. Paid Content summarizes the results:

– “One, some common recommenders lead to a net reduction in average sales diversity. Because common recommenders (e.g., collaborative filters) recommend products based on sales and ratings, they cannot recommend products with limited historical data, even if they would be rated favorably. In turn, these recommenders can create a rich-get-richer effect for popular products and vice-versa for unpopular ones. This finding is often surprising to consumers who express that recommendations have helped them discover new products.
– In line with this, result two shows it is possible for individual-level diversity to increase but aggregate diversity to decrease; recommenders can push each person to new products, but they often push us toward the same new products.
– Result three finds that recommenders intensify the effects of chance events on market outcomes. At the product level, recommenders can ‘create hits’ out of products with early, high sales due to chance alone. At the market level, in individual sample paths it is possible to observe more diversity, even though on average diversity often decreases.
– Four, we show how basic design choices affect the outcome. Thus, managers can choose recommender designs that are more consistent with their sales or product assortment strategies.”

These are largely consistent with my conclusions from May for people who run social media sites:

1. If you’re trying to iterate towards a “best answer” then keep feedback loops to a minimum, at least before users “vote” on their own. (e.g. Hotornot, espgame)
2. If you’re trying to create “hits” out of some of your content (and don’t care if it’s the “most worthy” content – you only care that they are hits), then display feedback and popularity constantly, as this will effect user behavior and exacerbate the size of the hits (e.g. Youtube, Digg, American Idol?
3. If you want to “guide” user behavior in a certain direction, provide feedback that validates or shows the popularity of that behavior. This is consistent with my prior post on game mechanics applied to social media: keeping score.

Is there really an advertising model for social networks? October 8, 2007

Posted by jeremyliew in advertising, business models, facebook, media, myspace, social media, social networks, widgets.
6 comments

One of my consumer internet predictions for 2007 was that social network widgets would find a business model. There are a number of conferences coming up over the next few weeks that will address this, including Graphing Social Patterns, Widget Summit and SNAP Summit. In my opinion, it looks like the business model will be advertising, and that it will be rolled up into the broader category of social network advertising.

Of course, not everyone is as bullish on the advertising business model for social networks. As the NY Times noted:

Andrew Chen, an advertising executive and adviser to the Silicon Valley investment firm Mohr Davidow Ventures, suggests that the Facebook enthusiasm is overblown. Precisely because Facebook is such an appealing and engaging environment, he says, Facebook users click on ads significantly less frequently than elsewhere on the Web. And Facebook members who add applications to their pages can just as easily remove or ignore them.

“It’s really hard to value these things right now except on a very arbitrary basis,” he said. “The ecosystem has to mature significantly before any sort of real revenue or value can be created.”

Andrew is a smart guy, and based on current data, he is right. But as I’ve noted before, new forms of advertising take a while to develop, and until a standard emerges, they do not scale up quickly. Today, Google is 40% of all online advertising. It’s worth remembering that Google was founded in 1998 but didn’t switch to its CPC Adwords model until 2002. Overture was founded even earlier, in 1997. So too, judging the opportunity in social network advertising based on the first 18 months is likely to vastly underestimate the market.

To understand if there is an advertising model for social networks and their widgets, you have to ask two questions:

    1. Is this a mass market medium?
    2. Is there value to an advertiser in having a user willingly affiliate herself* with their brand?

* e.g. Friending Scion in Myspace, or joining an “I love my ipod” group on Facebook, or skinning their personal photo slideshow with a Casino Royale theme on Rockyou.

The answer to these questions is clearly “Yes”. Based on that, I’m confident that we’ll see a large new form of advertising emerge over the next few years. Exactly when that occurs will largely depend on how quickly the big advertisers and the big social networks and widget companies can arrive at a standard for what form this social network advertising will take.

I’ll be moderating a panel on Monday at 2:45pm at the Graphing Social Patterns conference that will explore this question in more detail within the Facebook context: Facebook Ad Networks & Paid Distribution.

More on Facebook as a stage for performance October 6, 2007

Posted by jeremyliew in facebook, performance, social media, social networks.
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From today’s NY Times, a core Facebook (college aged) user notes:

Facebook did not become popular because it was a functional tool — after all, most college students live in close quarters with the majority of their Facebook friends and have no need for social networking. Instead, we log into the Web site because it’s entertaining to watch a constantly evolving narrative starring the other people in the library.

I’ve always thought of Facebook as online community theater. In costumes we customize in a backstage makeup room — the Edit Profile page, where we can add a few Favorite Books or touch up our About Me section — we deliver our lines on the very public stage of friends’ walls or photo albums. And because every time we join a network, post a link or make another friend it’s immediately made visible to others via the News Feed, every Facebook act is a soliloquy to our anonymous audience….

My generation has long been bizarrely comfortable with being looked at, and as performers on the Facebook stage, we upload pictures of ourselves cooking dinner for our parents or doing keg stands at last night’s party; we are reckless with our personal information.

As I’ve noted before, this is why facebook apps with a performance component are doing well.

Hat tip to Publishing 2.0 for the pointer to the NY Times article.

Good Facebook stats October 5, 2007

Posted by jeremyliew in facebook.
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O’Reilly points to a great Compete blog entry giving stats for Facebook. Note that these are US only numbers:

Of the 22 Million people who logged into Facebook in August, nearly 21 Million go on to check their profile or their friends. Beyond that, activities differ:

* 14 million people interacted with Facebook Applications in August.
* Applications are also highly engaging; capturing more time per session than any other activity on the site.
* Over 16 Million people browsed photos in August. On average, they viewed nearly 150 per month.
* Only 80,000 (or .3% of total active members) “poked” someone in August.

Check out the Compete page for a great graphic breaking down this and other popular forms of Facebook behavior.

What’s the right primary pivot for your social media site? October 4, 2007

Posted by jeremyliew in social media, social networks.
4 comments

Bokardo has a good post recently, about finding the primary pivot of your social media site where he notes:

Over time, the primary pivot of social software has shifted away from the topic thread and toward the person.

As he notes, there are three possible pivot points for a social media site:

1. The topic thread (historically the most common approach, e.g. usenet)
2. The person (social networks such as facebook)
3. Core elements of the subject (e.g. the hotel at tripadvisor)

I think we’ll see more endemic social media sites making the primary pivot around the core elements of the subject over time.

Would like to hear from readers good examples of the three classes of pivots

Search improvements are more about understanding queries better, not understanding results better October 2, 2007

Posted by jeremyliew in Search, yahoo.
4 comments

Yahoo’s new search product has just launched to positive reviews. I think it’s pretty great as well.

The Yahoo search blog outlines most of the new changes, but they can be summarized in one phrase; the new Yahoo search understands queries better. This gets instantiated in a two different ways:

    1. Yahoo recognizes certain classes of queries and brings relevant vertical search results (e.g. video, photos, news, local, music etc) back into the body of the search results. Both Ask and to a lesser extent Google (with its Onebox) also do this. e.g. try searching for evolution of dance and get the video at the top, or Justin Timberlake and get a capsule of information on the singer at the top.

    2. Yahoo aggressively helps users to refine their queries. Although average query length has been creeping upwards, search is still an iterative process for many users. People will type a search string, review the results, realize that it isn’t what they wanted, and improve the query string. Yahoo doesn’t just correct typos and suggest longer search terms that start with the same words, but it also recognizes concepts that are similar. (Ask does something similar in the left rail). E.g. try searching for King Henry VIII and get a suggestion for Catherine of Aragon. It also watches for hesitation as users type and auto-magically makes suggestions when they are needed.

As John McKinley (the ex CTO of AOL) pointed out a few weeks ago, AOL Search had this vision nailed over a year ago, but when new management came in they instituted a much sparser, more “Google-like” model instead. Henry Blodget thinks that this change tanked AOL’s search revenues in Q2, causing it to miss the quarter.

Yahoo has been rolling some of these search improvements out incrementally, and as a result, Compete found that they have both higher search fulfillment rates than Google. More of Yahoo’s search queries turn into clicks than Google’s, suggesting that users are finding what they want more often.

Search fulfillment

These improvements involve some deep technical problem solving. Finding a way to identify when to show results from a vertical search engine, and understanding related search concepts at scale are both difficult problems. You can cheat and do this with a big list, but that rapidly runs out of steam given the long tail of search queries. This isn’t just a lick of UI paint over the same old search engine.

The question will be whether this is enough. Yahoo has put a lot of time and effort into product innovation. I believe that there are three phases of competition in a consumer technology market; first distribution matters most, then product, and finally brand. Search may have already passed into the “brand” phase of competition. If people believe that Google has the best search, then they may not even try Yahoo’s search to be proved wrong. Yahoo will need to do more than ship great product (as it has done with this product), it needs to also find a way to drive trial from users who have Google as their default.

Conference Season is upon us October 1, 2007

Posted by jeremyliew in conferences.
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Well, we’re well and truly into the fall conference season. For readers who are interested, I’ll be speaking at the following conferences this month and next:

    Graphing Social Patterns in San Jose (Oct 7-9), focused on both the business and technical aspects of building apps for the Facebook platform.
    Widget Summit in San Francisco (Oct 15-16), focused on both the business and technical aspects of widgets
    ANZA Gateway to the US in San Jose (Oct 22-24), focused on bringing Australian and New Zealand startups to the US
    Digital Hollywood Fall in LA (Oct 29- Nov 1), focused on the future of media, creative content and advertising
    Defrag in Denver (Nov 5-6), focused on transforming information into layers of knowledge
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