Considered by many to be the industry standard for audience tracking on the Web, comScore will use a revamped yardstick that could give advertisers, software makers, and investors a better handle on just how many people are using the programs. Under the new method of calculating, almost 586 million individual Internet users viewed a piece of widget software in November, 2007, according to an exclusive look at the data comScore provided to BusinessWeek.com. That’s nearly double comScore’s estimate in July, the last month it measured using an old system. ComScore plans to release the new widget usage data in mid-January.
I am not a hard core gamer by background; more of a casual gamer. But casual gaming is now widespread; we’re all gamers now. My interest in the area has grown out of my interest in social networks and social media. I’ve long noted the increasing application of simple game mechanics to social web sites and how this can meaningfully increase the levels and types of interactions that users have with each other and the site.
As an investor in Flixster and Rockyou, both highly viral Facebook and Myspace “app” and “widget” makers, I’ve been tracking closely the spread of emergent user behaviors in these social networks. One Facebook app that really caught my attention is Scrabulous, an online scrabble game that can be played asynchronously, ie players don’t all have to be online at the same time.
Online multiplayer games have long been popular at all the big casual games portals. Multiplayer gaming can be viewed as user generated content for games, one of the drivers of Games 2.0. These games typically have a “lobby” where players can meet and match up before entering into a game against each other in real time.
Making the gameplay asynchronous fits better with the “continuous partial attention” world that we increasingly live in. The reason I never became a hard core gamer is that the serial monogamy requirements (one game at a time, total dedication, long periods of gameplay coordinated with others) doesn’t mesh well with my lifestyle. Scrabulous is a better match for the “play a little bit when you have some time, at various points throughout the day” life that many of us lead. Single player casual gaming (whether Bejeweled online or Brickbreaker on the Blackberry) has been filling that need for many players. These are fun, and at least have the “high score” dynamic, but they lack the social aspect that turn based asynchronous games offer.
Asynchronous games also make it easier to play against friends. You don’t have to coordinate to be online at the same time. Playing friends makes games more fun, and gives them a social aspect (the games have context if you have an ongoing relationship with an opponent). Playing with friends also offers an opportunity for true viral growth for the game, as players invite their friends to play.
Although these turn based multi-player games (especially those derived from boardgames) have some social dynamic, they lack the breadth of social interaction of synchronous MMOGs (not just the direct social interaction, but also the perfomative aspects of gameplay) that help make them such compelling experiences. Part of the appeal of MMOGs (whether World of Warcraft or Puzzle Pirates) is knowing that you’re “in game” with thousands of other people at the same time, each of them interacting with the same universe that you are.
So what would an asynchronous massively multi-player game look like? It can’t be turn based because most players would spend most of their time waiting for someone else to move. That’s not fun. It would have to be time based instead. Players would need to make their moves against a real world clock. Games like Duels.com (swords and sandals PvP fighting game), Manager Zone (soccer manager game) and Kings of Chaos (real time strategy game) all employ this dynamic. Massively multi-player games offer even more opportunity for viral growth because a players invitation ability is unbounded by the number of seats at a board game.
This led to me think about games using the framework below:
I think that we’ll see a lot more innovation in the two sections of asynchronous multiplayer and massively multiplayer games over the next few years. I’m actively interested in investing in these areas. What are the most interesting such games that you see?
As I said at Web 2.0 expo, building big businesses online is hard work. While it isn’t hard to start an app company, especially as a single developer ($250k in revenue) or even to support a small team ($2.5m in revenue), it gets quite hard to scale revenues to $25m/yr.
Assuming a 5% daily active rate and 3 pageviews per visit, an app developer with a $0.50 RPM would need to get to 926m installs to get to $25m run rate. Compare that to the app with the most installs on Facebook – Slide’s Superwall which has around 20-21m installs. Clearly, broad reach app developers need to develop (i) multiple (ii) high engagement apps [ie higher active rates and pageviews/visit than these assumptions] (iii) across multiple social networks to be able to get close to this revenue target. (RPMs will likely be higher for companies with a direct sales force as well, so the target isn’t quite as high, but you get the point).
Under the same activity and pageview assumptions, an app developer with a $10 RPM would need 46m installs to get to $25m in revenue. Apps with endemic advertising opportunities can easily realize this level of RPM but will still need to be in multiple social networks to get to those levels of installs. It doesn’t make sense to limit your world to being a Facebook app. Social network platforms are avenues for distribution, and app developers should be taking advantage of all of them.
One of Lightspeed‘s portfolio companies, Rockyou, is taking the former approach. Another, Flixster, is taking the latter. Both seem to be working so far.
Facebook is reportedly launching Pandemic, which is a program for advertisers to buy pages. It looks to be somewhat like a sponsored page system, and will offer an additional option for sponsored groups that advertisers can set up. The sponsored pages will have games and other applications that users can interact with.
Techcrunch says that there is more to the platform:
Project Beacon
Beacon is the internal project name at Facebook around an effort to work with third parties and gain access to very specific user data. An example may be a purchase of a book or DVD from Amazon. Under Beacon, the fact of that purchase will be sent to Facebook and automatically included in the user’s News Feed.
At the point of sale on the third party site, the user will see a “toast” popup asking them if they approve the sale information being included in their Facebook News Feed:
The feed information includes the user name, what they did (bought something), what they bought, and where.
Both sound like exciting innovations. These new forms of advertising will help close the gap between the % of time spent on social networks and the % of ad dollars spent on social networks. It is inevitable that there will be a large advertising market for social networks
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.
Facebook’s new ad platform announcements will be a great step forward for the social networking advertising market, but they are only a first step. Only if and when the rest of the social networks embrace these ad formats (in the same way that they are embracing Google’s Open Social standard) will we start to see real scalable ad sales growth. Facebook, as important as it is, is only one player in the social network ad sales market.
Breaking news tonight about Google teaming up with several social networks to create a set of standards for application developers. The NY Times says:
On Thursday, an alliance of companies led by Google plans to begin introducing a common set of standards to allow software developers to write programs for Google’s social network, Orkut, as well as others, including LinkedIn, hi5, Friendster, Plaxo and Ning.
According to Techcrunch:
OpenSocial is a set of three common APIs, defined by Google with input from partners, that allow developers to access core functions and information at social networks:
* Profile Information (user data)
* Friends Information (social graph)
* Activities (things that happen, News Feed type stuff)
This is great news for widget and app developers like Flixster and Rockyou (both Lightspeed companies) as the burden of building apps for multiple platforms can quickly get overwhelming for the resources of a small company. It’s also great news for the largely “second tier” social networks (in terms of US users) that are members of the network.
According to Venturebeat, Facebook was invited but declined to join. Not a big surprise.
Open networks like this benefit smaller players. It’s simple math. Lets say you’re a social network with N members. You’re looking to join a coalition of other social networks to create an open standard; in aggregate they have M unique users. Your benefit is proportional to M and your cost is proportional to N. So the cost is greatest when N is large (big social networks will have app developers jumping at the opportunity to develop for their users anyway) and smallest when N is small (as they probably would not get a lot of apps developed for them on a standalone basis otherwise).
This same scenario has played out whenever there have been dominant closed platforms. Windows remain relatively closed (with dominant market share) while Linux embraced openness. AOL tried to stay closed (using its proprietary Rainman programming language) while small web sites embraced the openness of the web. Anil Dash had a good post covering this history earlier
Historically, openness has taken share against (even large) closed networks because M keeps getting bigger and bigger and more developers get encouraged to write for the platform.
Also historically the biggest owners of closed platforms have been slow to embrace openness, if they ever did at all.
The other variable in this case is how friendly each social network is to app developers making money. It isn’t enough to get a lot of users on a platform if you can’t get paid. Rockyou and Slide both shifted their efforts from the larger Myspace to the smaller Facebook when Facebook opened up because they could make money from Facebook but not from Myspace.
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.”
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.
As Techcrunch, Mashable, Venturebeat and others have noted, Facebook is preannouncing a number of changes to its APIs, including a shift to user engagement as the way it presents apps in the directory:
This week you’ll see us shift our application directory metrics to a focus on user engagement. This will help inform users as they make decisions on which applications to add as well as shift developer focus to engagement rather than total users. More specifics will be available as we roll out these changes this coming week.
The focus on engagement is a reflection of how app developers are already behaving today, especially when compared to the widgets being built for MySpace.
Both Facebook and Myspace disallow advertising in the widget/apps appearing on profile pages. But Facebook allows application developers to control the canvas page and place ads on those pages, while giving access via the APIs to the social map. As a result, there are already quite a number of companies reputed to be doing over 100m “pageviews” (canvas views) per month, including iLike, Flixster, Rockyou, Slide, Texas Holdem, HotOrNot, and others. [disclaimer – Rockyou and Flixster are Lightspeed portfolio companies]. The companies with a lot of installed facebook apps are all already pursuing engagement, even before Facebook’s change in the application directory. It’s in their business interest to do so.
In comparison, Myspace is still primarily about self expression. Click through rates from widgets on Myspace are dramatically lower than on Facebook apps. And more importantly, when a user clicks through on a Mypsace widget, they stay for less pageviews than a Facebook app. Because the interaction takes place off site (off Myspace’s site) and because there is no access to the social map, the primary activity is for a new user to create their own widget. There is limited ability for a user to interact with an existing widget because there is such a low level of shared data between the widget and Myspace.
Facebook has only a third the pageviews and UU of Myspace in the US. All else equal, you would expect all of the the top Myspace add-on sites according to Mashable to have over 100m PV/month if Facebook has already been able to generate so many at that scale:
But according to Comscore, only half of the these ten sites have more than 100m pageviews/month, and in at least some cases (e.g. Youtube), the primary traffic driver is not MySpace.
Given the striking difference in engagement levels, its not surprising that all the other social networks are considering a platform strategy of their own.
I posted previously about how increased innovation in online advertising is driving up costs. Online media companies would generally prefer more standarization and less customization in online advertising; this makes their processes more scalable and keeps their costs down. However, they face a prisoner’s dilemma situation that has made it hard to drive standardization as an industry.
The prisoner’s dilemma is a staple of game theory classes. Wikipedia summarizes the problem as follows:
Two suspects, A and B, are arrested by the police. The police have insufficient evidence for a conviction, and, having separated both prisoners, visit each of them to offer the same deal: if one testifies for the prosecution against the other and the other remains silent, the betrayer goes free and the silent accomplice receives the full 10-year sentence. If both stay silent, both prisoners are sentenced to only six months in jail for a minor charge. If each betrays the other, each receives a five-year sentence. Each prisoner must make the choice of whether to betray the other or to remain silent. However, neither prisoner knows for sure what choice the other prisoner will make. So this dilemma poses the question: How should the prisoners act?
Classic game theory predicts that in a single instance of the game, the dominant strategy is to betray your accomplice. However, if the game is repeated, the best strategy for rational players repeatedly interacting for indefinitely long games can lead to sustaining the cooperative outcome.
When cigarette advertising [on TV and radio] was legal in the United States, competing cigarette manufacturers had to decide how much money to spend on advertising … cigarette manufacturers endorsed the creation of laws banning cigarette advertising [on TV and radio], understanding that this would reduce costs and increase profits across the industry.
While not advocating that we use cigarette companies as a role model, I believe that the online advertising industry currently faces a similar opportunity to reduce costs and increase profits over the issue of increasing customization in online advertising that I posted about last week.
So how does this relate to the prisoners dilemma? Rather than the police asking suspects to confess, advertisers are asking online media companies for costly custom advertising. If one media company is willing to customize and its competitor isn’t, then the customizing company is more likely to win the deal.
But if both companies customize then creative and production costs go up while the size of the ad spend does not. More money is spent on creating the campaign, and less goes to buying media. Thus both media companies suffer.
If neither company customizes, then less money is spent on creative and more goes to buying media and filling the online media companies’ coffers.
To make this situation more complicated, there aren’t just two prisoners who need to cooperate, but rather many online media companies. With many players, it can be very hard to drive towards a cooperative outcome.
For media companies, the “cooperation” case means adhering to a set of standards in creative format. While this doesn’t eliminate the costs of creative, it does at least set boundaries to help control creative costs.
While these standards exist in banner advertising, (728×90, 300x 250, 160×600 etc), they do not yet exist in other, newer forms of online advertising (including social media marketing, widget marketing, online video marketing, and casual immersive world marketing). But through the IAB, we saw standards eventually emerge in banner advertising, and hopefully we will see the IAB and other standards bodies (perhaps the newly formed Widget Marketing Association?) help set standards within the newer forms of online advertising as well.
This is a necessary but not sufficient condition for the industry to converge to a stable “cooperative” equilibrium in this version of the prisoner’s dilemma. I’ve campaigned for standards in social network advertising before.
Marketers are always looking for new and innovative ways to break through the clutter and get their advertising message across. This is true across all media. In TV, some advertisers are looking beyond the 30 second spot to sponsor a whole show, do product placement and even user generated ads on TV. In print, some advertisers are looking beyond standard 4 color full page ads and have experimented with buying out a whole issue, and even scratch and sniff ads. But in traditional media, as you can tell from the links- these events are rare enough to be newsworthy.
In online, advertisers look beyond standard ad units (buttons and banners) as a matter of course. Everyone wants to do something innovative, whether it be widgets, viral video, sponsorships, takeovers or immersive campaigns.
I’ve recently seen a few examples of this increase in innovation in online creative. At Widgetcon earlier this month, one of the panels was Widget Marketing in the Media Mix, where reps from boutique online agencies Denuo + Droga5, crayon, Organic and Fleischman-Hillard discussed their views on widget marketing. One of the most telling quotes from the panel was from Chad Stoller of Organic who said, “If you can count it then it’s not innovation, it’s not new. You have to be just as creative with how you measure something, as creative as you are with your execution.”
This novelty-seeking mindset is increasingly typical of the new, online-focused, boutique agencies. They are all looking to demonstrate their creativity and thought leadership. A couple of weeks ago New York magazine had a great article about the new guerrilla ad agencies and the viral ad campaigns that they are creating. It highlights one of the most successful viral marketing campaign to date, a viral video where Marc Ecko purportedly tags Air Force One with their “Still Free” graffiti logo.
Apparently, “including media coverage” the video has had 115m impressions. Despite its “homemade” feel, the video cost nearly $400k to shoot ($150k went towards repainting an old 747 to make it look like Air Force One). That implies a CPM of around $3.50 on production costs alone – pretty good for online video advertising if these were the only costs.
The demand for new media creative talent to make these innovative campaigns has increased salaries, and hence costs, across the board:
Salaries for digital creative directors rose 60 percent nationwide in 2006, from an average of $115,000 to $185,000, according to a survey by the recruiter TalentZoo. “We’re trying to hire two people right now,” says Charles Rosen, “and we cannot find them.” Rosen is one of the co-founders of Amalgamated, which started with six people in 2003 and has just hired its 40th employee. “People who were juniors when we left Cliff Freeman, where some of us used to work, want $250,000 or $300,000 now. ”
These increased costs are not confined to the startup boutique agencies either. At GM Planworks (the division of Starcom MediaVest dedicated to managing General Motor’s $3.2bn ad spend) the number of employees has grown from around 200 in 2000 when the group was formed to about 500 today, primarily driven by the increase in people dedicated to new media. Yet GM spent only 10-15% of its ad budget online last year. The cost of online creative and production as a percentage of ad spend is much higher than it is for traditional media, in large part because of the urge to do more innovative creative executions online.
Often advertisers and agencies don’t have the in-house capabilities to even do the creative for the “something new” that they want in new media. At the Ypulse Teen Mashup conference last week, Craig Sherman (CEO of Gaia) spoke about Gaia’s recent immersive campaign for Scion which will allow Gaia users to buy Scions, trick them out and race them. It’s an exciting embedded advertising campaign, but a significant custom integration effort on Gaia’s part.
Similarly some big advertisers have started to launch widget marketing campaigns through partnering with Clearspring. But it’s been up to Clearspring to supply the professional services to make the widgets; the advertisers don’t have that skill in house.
This custom work isn’t something that only startups have to do either. Even Yahoo and AOL have teams within their ad sales groups dedicated to doing custom creative for special sponsorships and promotions that involve non standard ad units. Often this creative work isn’t charged for but is “eaten” by the portal to sell the whole advertising package.
The quest for innovation in online advertising comes with higher production and creative costs. As the online ad industry matures, I would expect it to evolve to look more like print, TV and other more mature ad markets. In these more mature markets the majority of campaigns are more standards based and less customized, and the costs of production and creative come down as a proportion of the overall marketing budget.
I’d be interested to hear about readers’ experiences with highly customized campaigns and their costs and effectiveness.
Most of the online revolutions have been driven by new forms of communication. This started with Usenet and BBSs back before there was an internet, moved through the chat rooms of early AOL, the mainstreaming of email and the instant messaging revolution with AIM and ICQ. Communication has always been a large portion of overall time spent online because it drives both frequency of visit (people check for communications often) and depth of visit (reading and responding to your messages takes time).
Social networking is no exception, and that is what has driven the extraordinary pagesviews for the top social networks. In the case of social networks, the primary communications channels are private messages and public comments. You can see how these relate to other older forms of online communication below:
Social network private messages look a lot like webmail. Public comments on social networks are newer and more interesting. Indeed, Danah Boyd includes public comments as one of the three defining features of social networks (along with Profiles and Friends lists). Unlike message boards, public comments “belong” to a single person and are addressed directly at them. But as Danah has also pointed out (I wish I was half as smart as her!), there is also a performance component to public comments on social networks.
This is best understood with an example. Suppose it’s your birthday, and I know it. If I send you an email wishing you “Happy Birthday” then you’re happy that I remembered. This communication is part of the social lubricant on which relationships are built.
But supposed that I post “Happy Birthday” to your Facebook Wall instead. Then not only do you know that I remembered, but ALL OF YOUR FRIENDS know that I remembered as well. They may find out from the feed, or by visiting your page, but they will know that I’m a good enough friend of yours that I know when is your birthday. That is the performance element of the communication.
Indeed, Danah says that your Friends list is your best guess at the audience for whom you are performing:
The collection of ‘Friends’ is not simply a list of close ties (or what we would normally call ‘friends’). Instead, this feature allows participants to articulate their imagined audience – or who they see as being a part of their world within the site. While SNSes have millions of users, most participants only care about a handful of them. Who they care about is typically represented by the list of Friends. If an individual imagines her profile to be primarily of concern to a handful of close friends, she is quite likely to have very few ‘Friends’ and, if the technology allows it, she’ll keep her profile private. If she wants to be speaking to her broader peers, her Friends list is likely to have hundreds or thousands of Friends who are roughly the same age, have the same style, listen to the same music, and are otherwise quite similar to her. She is also quite likely to keep her profile publically [sic] visible to anyone so that she can find others in her peer group (boyd 2006).
Historically, the Wall (Facebook)/Friend’s Comments (Myspace, Bebo and others) has been the only place on a profile where another user can put something on your page. The rest of the profile has been completely under the author’s control.
However, some of the Facebook apps have changed this paradigm. A number of the most popular apps allow another user to put something on your profile, including #2 Graffiti, #7 X me, #8 Superpoke, #9 Free Gifts, #15 Superwall, #16 Foodfight and lots more. [Note: X me and Superwall are both owned by Rockyou, a Lightspeed company].
In my own experience, performance is an aspect to the use of these apps as well. I feel a certain pressure to choose something “clever” to X someone (e.g. “defenestrate”, “disdain” or “milk”), and if I’m leaving graffiti on a friends page, I try to make it good. The popularity of these apps suggests that social network users are craving more stages for their performances.
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Information set forth on this site should not be construed as investment advice or an offering of any particular investment. Any opinions or views expressed on this site are those of the author and do not necessarily represent the opinion or view of Lightspeed Venture Partners.
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