Monthly Archives: May 2011

The inevitable disutility of networks (or why Facebook will fade)

It’s hard to believe, but the day will come when you stop using Facebook. Here’s why.

So imagine you’re on the phone with your boss and beeep a new call comes in from your spicy Argentinian lover who’s in town and then beeeeep yet another call arrives from your Aunt Mildred who used to nag you about flossing your teeth and you have to decide — quick! — whether to keep talking to your boss, or find an excuse to pick up your lover’s voice, or get reacquainted with Auntie.

And you get it. Like those calls, not all network connections are created equal. The inequality of network links is the basic flaw in Metcalfe’s law, a hypothesis by the founder of 3Com and inventor of the ethernet that as networks grow, they rise exponentially in value. Metcalfe’s math, you see, showed that the connections inside networks grow more rapidly than the number of users do — two phones make one connection, but five phones make 10 links, and 12 phones make 66. Because every additional node, or user, links to all the users before her, each addition creates waves of new linkages — and if value comes from links, then networks must scale in value. Metcalfe’s law was famously behind much of the hyperbole of Internet Bubble 1.0 in the 1990s, pushing sky-high valuations for any networked business regardless of whether it was profitable.

Humpty Dumpty sits on the wall
Of course, March 13, 2000 was not kind to pet food companies heavy in e-commerce. After the Nasdaq crash, economists pointed out that Metcalfe’s law has several gaping flaws; for instance, if larger networks are always exponentially more valuable, any firm in the world with a network of users should immediately merge with a similar business. Why would Facebook and Twitter compete, if by joining their numbers 2x they make 200x more value? In 2006 Bob Briscoe, Andrew Odlyzko and Benjamin Tilly pointed out the most famous flaw of all … if we follow Metcalfe’s law to its logical exponential-value conclusion, eventually the addition of one final user would equal all the wealth on the planet, an impossible outcome.

Briscoe and team, pondering why networks may have less value than supposed, pointed to linguist George Kingsley Zipf, who created, yes, Zipf’s law. Zipf noticed that words in the English language are used in descending order of magnitude, with “the,” the most popular expression, making up about 7% of all word uses, followed by “of” with 3.5%, “and” at 2.8%, with all other words trailing in a slow fall-off. Zipf’s law resembles the Pareto Principle that states in any collection a few resources hold the most value, and Chris Anderson spun off of Zipf’s concept with his “long tail” discussion of Internet commerce’s ability to meet diminishing niche consumer needs. Zipf’s finding means that not all network connections have the same value; your boss, lover, and aunt all are connected to you, but like the English words you use daily, you value each connection in different ways.

Humpty Dumpty took a great fall

So if networks have less value than supposed when they grow — when, conversely, does network value fade? Every network, as old as the roads of the Roman Empire, eventually falls into disrepair, replaced by something else. This disutility happens before users bail; at some point, there is a sense that the thing which made a network hot has faded, building an impetus to flee. See: AOL, Friendster, Myspace, Second Life.

Intuitively this makes sense: you can feel the itch today with your land-line telephone and the postal service, the desire to give up on these once-useful services. Other networks you still use are growing painful, too; email is cresting, a slow slog every morning over coffee, and one might suggest Twitter with its elegant 140-character tweets is a new email with less commitment. Facebook and Twitter are growing cumbersome too, one filled with silly games and the other adding complexity to its once elegant system; hipsters are moving past both to Instagram, an app that requires sharing only photographs. (Don’t think the brains behind Facebook and Twitter aren’t worried about such risks; this explains the near-constant innovation and entanglement strategies, such as Like buttons, being spread by both to stave off your boredom.)

Networks have more than a utility based on connections; they also have a shelf life. Our fundamental insight is all those connections can grow or diminish in value at once — based on the context of the network vs. its competitors. Yes, networks rise in value and build gravity to draw masses to their center. But like a planet teeming with life that begins to pollute its own atmosphere, eventually all users long for a fresh start.

Ben Kunz is vice president of strategic planning at Mediassociates, an advertising media planning and buying agency, and co-founder of its digital trading desk eEffective.

Image: Neal Fowler

Google’s slice of the credit card cake

We wrote in Bloomberg Businessweek in March that Facebook could become your future bank, or more exactly, use its lock-in as one of the top smartphone apps to get in the mobile payment processing game. Billions of dollars flow toward Visa, Mastercard, American Express and PayPal each year from the small percent of each payment they extract to help you buy things at stores or on the web, and as near field communication turns cell phones into digital wallets, all that money could go into play. Facebook has 250 million avid smartphone users and a Credits system set to transfer funds, so why not make money by expediting shopping on iPhones?

Now Google is first out of the gate, with more than a dozen Droid handsets due by Christmas with the built-in NFC payment functionality. Today, Bloomberg reports, Google will announce its first mobile-payment system available on smart phones.

How much money is at stake? PayPal makes $4 billion annually on $92 billion in online transfers (PayPal is the means of choice for about 18 percent of all e-commerce transactions). American Express, which controls about 24 percent of credit card transactions in the U.S., takes in more than $25 billion in annual revenue. Money isn’t revolutionized very often; credit cards — once called traveler’s cards — took off in the 1950s, and PayPal was able to capture the new need for secure shopping on the Internet at the turn of this century. Now with money moving to cell phones, the definition of cash has once again gone into play. There are 302 million active cell phones in the United States; think of the market if only half of them start using Google or Facebook apps to buy the morning coffee.

Ben Kunz is vice president of strategic planning at Mediassociates, an advertising media planning and buying agency, and co-founder of its digital trading desk eEffective.

Image: Domiriel

The new burden of money apps

Congratulations, Mr. Jones. Bank of America has just shifted $10 into your son’s college fund.
It’s risky to predict the future — for instance if, in 1999, we had told you soon everyone would be fascinated by typing messages to strangers via telephones, you’d say we were nuts — but here goes. Money apps are the next big thing. Mobile phones, you see, are about to include near field communication signals that turn them into portable wallets, swipe-able near any cash register, and the money apps they hold will do to currency what digital photos did to Kodak film processing.

We apologize about the Victoria’s Secret checkout wait. $30 is now waiting in your lingerie button.
Once anyone can beam funds into your electronic device, the definition of money will change, just as apps made the old-school Windows operating system obsolete. Think about this: How many apps do you have on your iPhone or Droid now? 50? And if the whim strikes you, would you download a dozen more? Of course. Apps are single-utility interfaces that help you easily check the weather, sports scores, and news, or better yet do things with photos, music, guitar tuning, and air-traffic control signals that you never could before.

Tell your friends you love the Ford Fiesta and unlock $5 in free fuel!

So what happens to money when you can do new things with it too — when electronic currency becomes as malleable as an iPhone icon? Imagine Talbots sending your wife more than a coupon — instead, $50 in hard cash, but usable only inside the Talbots Outlets stores. Groupon ain’t seen nothing yet when every retailer in the world learns to beam you currency redeemable in their retail aisles. And advertisers, of course, could buy your attention … or more insidiously send you funds on the condition you say things you don’t mean to your friends, like, gee, aren’t L.L. Bean khaki pants all the rage today?

Money has always had two utilities: storage tied to protected value, and motion tied to acceptance elsewhere. The mobilization of money on smart phones, tablets, or other portable devices will create a third value — the ability of influencers to shift funds to you immediately to direct your desired behavior. Any app could become a mini bank-vault, filled with value you unlock only if you jump through the next hoop. It will go beyond 50% off coupons — artificial discounts tied to some vague price-framing gimmick — because the money the influencers load onto your mobile gadget can be used anywhere, if you play their game. You think the points systems of Twitter followers or Facebook friends are addictive? Just wait until they include cold, hard cash.

Ben Kunz is vice president of strategic planning at Mediassociates, an advertising media planning and buying agency, and co-founder of its digital trading desk eEffective.

Image: Bichxa

The path to social media consolidation

When you plug your new iPad 2 into the wall you don’t worry the electrical system may use the wrong voltage, frying the gadget. When you fly on an airplane you don’t fret the pilot won’t be able to communicate with air-traffic control due to different radio systems, sending you into a mountain. Why? Because both use common standards.

Standards win in networked systems because they make sense. Like gravity pulling pre-planetary material into orbit around birthing stars, network consolidation is an unstoppable force … and one that will soon shrink social media to a series of winning platforms. The law of network effects decrees that large, interconnected systems consolidate power, pushing others aside. For marketers, this means the recent period of hyper-innovation in social media will soon subside into a few commodity platforms … good news for those who must listen and push memes through the emerged media channels, but bad news for the social upstarts (Foursquare, we’re looking at you) who may have difficulty breaking through.

How wide is your chariot?

To understand network consolidation, consider the railroad gauge — that is, how far to place wheel tracks from each other, a puzzle dating prior to the Roman Empire. If you make the distance between wheels too narrow, a chariot, car or train will tip over; too wide, and you incur higher costs for building roads or rail systems. Today about 60 percent of the world’s railroads have a standard gauge (distance between tracks) of 4 feet 8 1/2 inches, but this wasn’t always so. That distance was invented by British engineer George Stephenson, who wanted a “just about right” approach neither too wide nor narrow, but George had numerous competitors, including the Great Western Railway which went as far as 7 feet 1/4 inches between tracks to support heavier loads and faster speeds. Eventually, one standard won out in most countries, because it makes economic sense to allow train systems to be able to link to each other.

Any interlinked system eventually pulls users into common behavior to amplify its power. Consider these examples:

1. Entertainment and news communications are vastly centralized in our world. Geoffrey Miller noted in his 2009 book “Spent” that six global conglomerates dominate most of what consumers see in the media. TimeWarner owns HBO and CNN; Disney owns ABC and ESPN; Vivendi Universal, Bertelsmann and Viacom consolidate most other media; and NewsCorp, of course, gives us Fox News and more than 170 newspapers. If you see Time magazine promoting a new Warner Bros. movie, the fact both are owned by TimeWarner may have something to do with it.

2. The advertising world also has been consolidated into four massive power brokers controlling about $38 billion in communications influence — Omnicon, WPP, Interpublic and Publicis. See this handy chart for a history of the takeovers.

3. Computer operating systems — the software that makes your device talk to applications — have consolidated into Windows and Mac OS. But Unix, BSD, Plan 9, Google Chrome and others have all fought to get masses to adopt them, with limited success.
Networks connect things, which is useful, and connections require stability. So one or two networks always win.
Social media consolidation
So let’s turn to the newest network tools, social media. Xanga, Jaiku, Vox, Gowalla, Open Diary, Diaspora, Ning, Plaxo, Yammer, Twine, Kickstarter, Wetpaint, Trapster, Plone … what’s that? You don’t use those systems?
Of course you don’t, because winners are emerging. Facebook has more than 600 million users today; Twitter has become the de facto speed network for sharing news; YouTube has competition from Netflix and Hulu but seems to have sucked most user-generated video, the democratic future of our communications world, into its platform. The consolidation will continue until only a few platforms remain, and Facebook, with its vast ad revenue, potential to expand into commercial payments and mobile, and Like links embedded in websites the world over, seems the winner.
Want more evidence? Google Wave — with the vast billions of Google’s power and brains behind it — couldn’t crack open social media because the momentum of network consolidation was against it. (Pop quiz: What’s the difference between Google Wave and Google Buzz? Don’t know? Exactly.)

Like electricity or railroads or planetary systems, eventually users learn to plug in, ride along and rotate around only one or two major winners. Every new network invention begins with a period of rapid innovation, followed by consolidation, commercialization, and standardization. The upshot for marketers is yes, social media is an important channel … and one that will soon turn into a line item like TV, radio, and print, with simple standards for execution that don’t require reinventing the wheel with each campaign.

The irony of such a democratizing force as social media becoming a monopoly/commodity may seem depressing, but it has to happen. If you don’t believe us, feel free to debate the issue over at Friendster.

Ben Kunz is vice president of strategic planning at Mediassociates, an advertising media planning and buying agency, and co-founder of its digital trading desk eEffective.

Why not everything is social

If you haven’t seen our debates with Edward Boches, chief innovation officer at Mullen, know that we hold him and his team in highest esteem. Mullen has been on fire lately landing accounts such as Zappos and they have an interesting take on social. Yet, sometimes, we must disagree … as with Edward’s latest post “Everything is Social So Now What?” Edward suggests TV has been tied to Twitter, ads now run on YouTube, and retail is connected to Facebook, so social has become the foundation of communications. Hmm.

If I may disagree, I must. Not everything is social for a simple reason — there is more demand for marketers to push messages out than there is corresponding demand for consumers willing to have relationships.

Here’s some quick math, as an example. The typical U.S. consumer watches 5 hours and 9 minutes of TV a day (yes, less for younger demos, they’re only at 3 hours 30 minutes). Internet, mobile and social pales in comparison, at less than 1 hour a day. (Source: Nielsen in-home studies tracking eye movements of consumers in 5 cities.) So, let’s think about that — at 30 seconds a TV spot, and about 16-18 minutes of commercials an hour, the typical person is exposed to 166 television commercials a day. Now add in the scores of billboards, banner ads, print ads, social media push-out tweets, and you see a person is awash in thousands of outbound marketing messages.

Who wants to connect with all those brands? Impossible.

Of course, you could argue this means old-school advertising doesn’t work, but that is a fallacy — advertising has always been a game of what you catch, not what you spill. A TV ad unabsorbed by most of the audience can still drive financial results if a fraction respond.

The truth is relatively simple: Consumers like to spend hours being entertained; the price they pay is unwanted ad messages (with a small portion that work); and the supply of marketing fueling those ads greatly outweighs any desire by the consumer to connect with all of those brands.

I know a guy who is the voice of Hello Mello, and his consumers are passionate, reconnecting back. But the sad fact is the world of product supply is out of sync with the consumer relationship need. Not everything is social, because the laws of supply and demand decree it must be so.

Ben Kunz is vice president of strategic planning at Mediassociates, an advertising media planning and buying agency, and co-founder of its digital trading desk eEffective.

Why does Facebook avoid mobile ads? It wants to be your wallet.

Here’s a blindingly obvious puzzle: Facebook doesn’t run ads on mobile. Digiday’s Mike Shields asked why last week, noting that with 250 million Facebook users logging in from iPhones and other smart handsets, it seems curious that Facebook would skip potential millions in advertising revenue.

Why, oh, why, is Facebook missing ads on mobile? We believe it has a bigger move in mind — to become your digital wallet. Cell phones, you see, are about to undergo their hottest revolution since they got hooked into the Internet, and there are billions of dollars for the players who can be first to train consumers in the “digital wallet” marketplace. Here’s the scoop:

1. Both the next-generation Apple iPhone 4S and Droid phones will likely support NFC, the “near-field communication” short-range signal that allows consumers to wave a phone in front of a cash register to transfer payments. (Google has told its developers that it will launch dozens of NFC Android phones by the end of 2011; we can’t imagine Apple will be left behind.) Soon, instead of supporting communication, cell phones will also hold the money that supports your livelihood.

2. NFC phones will revolutionize payments. Consumers will dig them, just as you now love your iPhone camera and video instead of lugging around an SLR, and merchants upset with high credit-card percentage takes from each transaction will be open to a new, handier, lower-cost way to get paid. (Ever have a retailer turn down American Express due to its fee structure? You’ve seen the market opportunity.)

3. Yes, there will be tons of competition for the new smart-phone-wallet space. American Express launched Serve in March to tap consumer funds from banks across multiple devices; AT&T, T-Mobile and Verizon formed a joint partnership called Isis to support mobile NFC transactions; expect Apple and its iTunes payment system to leap into the space, too.

So, why could Facebook beat them all? Because of its user base. PayPal makes nearly $4 billion in revenue a year from only 94 million active users buying stuff online; imagine what Facebook could do with 250 million social-networking addicts glued to their handsets. We outlined in Bloomberg Businessweek in March that Facebook has all of the pieces in place to support financial transactions, including Facebook Credits (a virtual currency) and Facebook Payments (a payment system incorporated to support “all lawful business”).

All Facebook needs is the mobile hardware, and that’s coming by Christmas. Facebook has a choice: It could clutter up its tiny mobile interface with ads, potentially turning off mobile users, or it could include a new beneficial service that helps users make payments with cell phones, while charging an invisible, small slice to merchants. Hmm. Which would you Like?

Ben Kunz is vice president of strategic planning at Mediassociates, an advertising media planning and buying agency, and co-founder of its digital trading desk eEffective.

Image: jirotrom

In defense of the banner ad

Two leading ad gurus wrote, “Today’s marketplace is no longer responsive to the kind of advertising that worked in the past. There are just too many products, too many companies, too much marketing noise. ”

Those gurus were Al Ries and Jack Trout, and they wrote that bit in 1972 in Advertising Age. You’ll see the same talk today about Web display advertising. Banner ads, like all advertising before them, are constantly called dead well before their time. Wrong.

Fact: Banner ads still rule digital. Nielsen, which used in-home observers to track study participants’ actual eye movements, found each U.S. resident spends 49 minutes on the Web each day, 8 minutes instant messaging, and a whopping 2 minutes using mobile text. Web use outranks all other digital media consumption.

Fact 2: Banner advertising performance is good. I know, I know: click-through rates are 0.08 percent on average, which seems horribly low at first blush. But consider that direct mail, a mainstay of marketing for decades, often has response rates at 0.8 percent — for a medium you must pick up before deciding whether to throw it in the trash. It is remarkable that banner ads perform at 1/10th the level of mail, with no card on your kitchen counter.

The real question about banners is whether they drive efficient response. Yes. If you buy banners at a low $3.00 CPM – easy enough, using retargeting or ad exchange DSP buys that avoid the inflated prices of marquee site publishers — you’ll get 10 million impressions on a $30,000 budget. Achieve a basic 0.08 percent response (click-through rate), and your $30,000 in media spend nets 8,000 prospects on your web site … for an average cost per response of $3.75.

Really, people. If you can’t do something with a $3.75 knock on your digital door, you should rethink your product. This is why the U.S. online display ad industry raked in $10 billion in 2010.

Even in new areas, display ads look set to rule the roost. Facebook’s betting on them and building a huge business. Google is pushing display with a major ad campaign; DSPs are hiring like mad; iPads and their clones are unlocking vast swaths of new digital display ad space.

So why all the talk against banners? Two reasons: publishers fret that they are losing their sellable audience (which they are, as savvy media buyers move to ad exchanges to send banners directly to consumer targets, not over-priced online publisher Web inventory); and digital shops are trying to make money off of social campaigns (which pay hundreds of thousands of dollars more than banners in creative fees). The publishers who own the ad space, and the creatives who build what goes there, have financial interests to move you away from the lowly banner ad. Do you really think creative shops, alway complaining about the display “pallette,” really want to make banners? Not when they can get fatter margins on that snazzy iPhone app instead.

One mistake in marketing is to think a new tech channel trumps all others – because the truth is all ad channels work together, and the visually interruptive ones often work best. It’s no mistake that Ford launched its 2011 Explorer with a Facebook blitz seeded by banner ads; because if you don’t send invitations, people will not respond. Banner advertising fits into the technology consumers hold in their laps; beyond clicks, it creates awareness, and downstream response through Google search when the user is closer to decision.

The second mistake is to try to disguise your message by blending it with editorial. Telemarketing did this by sending phone calls into homes that, surprise, were sales; the Do Not Call list killed the industry. Email spam tries the same, and filters block most of it out. Publishers worried about revenue who degrade their content will pollute an ecosystem, and risk losing an audience. People don’t want messages that have unclear motives; the failure of IZEA to scale “sponsored tweets” across Twitter is the latest example of people wanting advertising clearly marked in its place.

The truth is consumers don’t want a relationship with your company, because they can’t possibly engage with each of the thousands of brand messages they see daily. But they can hear and see your ad. For $3.75 per response, it seems banners remain one way to get their attention.

Why 1to1 personalization hasn’t arrived (hint: media loses money)

The concept of 1to1 customer relationships, in which a marketer learns your needs and later gives you an offer tailored exactly to your whim, is tantalizing. Don Peppers espoused it back in the 1993 book “The One to One Future,” and brands as wide-ranging as Levi Strauss,, Zappos, PaineWebber, IBM and General Mills toyed with it. The idea was a clever counterpoint to the “Positioning” mass-communication strategies of the 1970s, and agencies and software companies, always ready to drink the Kool-Aid of customer focus, embraced 1to1 in the 1990s as much as they love social media hyperbole today.

Trouble is, the personalization idea never took off. No brand prepares your grocery list, picks out your clothing, or foresees what you’ll want for dinner at the restaurant Saturday night. The major impediment was not technology — true personalization requires vast inventories, efficient mass-customization of production assets, and brilliant algorithms, difficult but possible as Netflix has demonstrated with DVDs — but market incentives. Waste against the masses is usually a source of profit, and this is especially true in the media landscape.

Personalization kills media profits
Case in point: Cable television. With boxes in every home, you’d think advertising could be customized easily to every household based on your demographics, personal viewing history, even past shopping habits. It doesn’t seem hard to tie your cable box into an Experian data set to give dads with kids hitting mid-life 30-second spots for red convertibles (ahem), yet we’re not there yet. Experimenters such as Eyeview are beginning to combine audience data, advertiser assets and marketer products to personalize online video ads — in real time, showing snow or rain in the car spot based on your local weather. But that’s just a start. Personalization has become the Great Pumpkin of the ad universe, always almost here, and when it someday arrives it will be really, really big.

Personalization is a huge threat to old media empires. Truly targeting ads means you need fewer messages to get to your audience, and that efficiency is counter to what gives publishers and media giants money. Consider cable: The typical U.S. consumer watches 5 hours and 9 minutes of TV each day, enough to receive 166 30-second TV spots … and most of those are wildly off base. If advertising were truly targeted, you could receive only 10 ads a day for products you really want, and you might respond to 2 of them — enormous marketing success. But all the ad revenue from the 156 off-base spots would disappear. Online publishers, where personalization is much easier thanks to cookies that tag user computers, face similar threats as DSPs and ad exchanges begin allowing media buys that circumvent their high prices and audience control.

Most media is never seen. But advertisers still pay.
Put another way, the typical American subscribes to 130 television channels and yet “tunes” to only 18 of them (consumers no longer “surf” through channels and instead typically punch in 33 for CNN on their remote, “tuning” in to the channels they prefer). That 18 of 130 options means 86% of all programming, and its associated advertising, is never seen by each individual. The bloated waste of advertising is good for the media producers and transmitters, but not so good for advertisers who pay their bills.

Of course, consumers and advertisers want targeting. Media planners, direct marketers, and CMOs spend their careers trying to make their brands relevant; consumers rush to the malls each Black Friday looking for just the deal they crave. From the market efficiency view, personalization really is the Holy Grail — to spend production resources only against those consumers likely to respond. But it is worth noting that goal is diametrically opposed to what drives profits for the media intermediaries. Good luck, Eyeview, with those clever customized video ads; but don’t expect the marketplace forces to get behind your efficiency anytime soon.

(Bonus points: Don’t miss the 2000 press release for General Mills’ customized cereal.)

Ben Kunz is vice president of strategic planning at Mediassociates, an advertising media planning and buying agency, and co-founder of its digital trading desk eEffective.