Video Content in a Mobile World: Diet-Sized and Distributed

100 Calorie Snacks

While the tech industry was buzzing over Facebook’s $19 billion acquisition of WhatsApp, the social network’s original blockbuster deal, Instagram, was quietly making some interesting news of its own. Action-sport channel Network A, a property of next-generation media start-up Bedrocket, announced the launch of a first-of-its-kind video series called ‘#goodstuff’. The lifestyle series, which focuses on event and product reviews in its first installment, will be exclusively distributed on Instagram over the course of ten, 15-second episodes.

Instagram Video, which only launched this past June, has had a couple of other ‘firsts’ on the branded, short-form content front in recent months. In December Mass Appeal launched the first animated video series on the app followed by the launch of Instafax, a news-clip series from BBC, in January. While watching videos over the internet has become commonplace thanks to YouTube, Netflix and others, these three video series are the first to be created specifically for a mobile-first social networking audience. The combination of Instagram’s photo/video sharing experience with user engagement and growth figures that exceed those of Facebook, as well as those of rival mobile social networking apps, makes the company and it’s 150 million-plus user platform a logical place to experiment with new forms of atomized content creation and distribution.

The typical process for distributing video content online usually includes developing a branded destination website and accompanying YouTube channel to garner views. That won’t work in mobile, where apps are preferred by users and competing for attention is further challenged by siloed experiences and navigation constraints relative to the web. Instead of introducing yet another app for consumers to hopefully download, content creators have the opportunity to leverage the popularity of the most engaged social apps to efficiently reach their intended audiences.

In a day an age where smartphones have enabled content consumption to proliferated (just look at music video site Vevo’s recently revealed 2013 viewership stats), some mobile applications have imposed functional constraints (Twitter’s 140-characters, Instagram’s 15-second videos, SnapChat’s disappearing content, etc.) to create unique, and successful, user experiences. Without these limitations on the web, content creators have never had to consider developing stories to fit this new mode. While Netflix has shown us that a full season of House of Cards (about 13 hours) might be the upper-limit for online video storytelling, consuming this type of content is still best suited for TVs and laptops. Mobile devices, with their smaller screens, slower data connections and app-centric usage already lend themselves to content ‘snacking’- so why not experiment with optimizing production for these mobile confines.

The onslaught of webisodic content during the aughts, which launched such companies as Blip.tv and EQAL, eventually proved to be overly optimistic. But the issue might have been one of timing more so than anything else. The social-mobile generation is more likely to trade quality for content brevity and platform convenience in a world of streaming digital distractions.  Recasting webisodes to fit the realities of mobile could enable such experiments as lonelygirl15 to succeed longer-term. If the right content experience can be created for audiences, the quality will follow. If ESPN’s SVP of Product Ryan Spoon comments are any indication, users are willing and ready. The question is- can you successfully condense something like Modern Family into 3-minute seasons?

Time will tell if the ‘mobisode’ makes its way into your stream.

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Automobiles: The Ultimate App Machine?

BMW_Harman_App_PlatformThe most interesting theme to emerge from all the announcements at CES last month was that of the automobile becoming an app platform. The Big Three all released information about their respective efforts towards this, ranging from Chrysler enabling internet radio apps to stream on its Uconnect system to Ford and GM both announcing app development programs for their respective in-car software platforms. Not to be outdone some of the leading consumer mobile tech companies also provided updates on their continued integration efforts with the automobile manufacturers including: Pandora naming Chrysler as its 20th auto brand partner and Hyundia and Kia joining 3 other car companies in working with Google to integrate Maps capabilities into their respective car connectivity systems. Add to this the recent announcements regarding the incorporation of Siri Eyes Free into specific Acura, Honda and Chevrolet models following Apple’s announcement of this initiative last year, the availability of Amazon’s Cloud Player in select Ford vehicles and Facebook’s hiring of a Head of Automotive, you can see why the next great battleground for audience attention is taking place right behind the steering wheel.

And why not? The automobile is the last physical space where Americans spend an inordinate amount of time (18 ½ hours on average per week according to a 2009 Arbitron national in-car study) that hasn’t been infiltrated by the internet. With time spent in cars continuing to rise (an average increase of 31% for weekday driving since 2003 according to the same study) the opportunity to replace the current analog automobile experience with apps is only getting bigger.

The in-car digital experience will differ from how we currently interact with apps and the greater web on desktop and mobile computing devices in one dramatic way- the user interface. Since driving requires focus on the road, hands-free controls to both navigate and consume content will be the default setting in automobiles. With Apple’s Siri-based iPhones and Microsoft’s Xbox having become mainstream consumer devices at this point, the learning curve for performing voice-activated commands won’t be an issue. Instead, the limitation will be on the content side where audiobooks, internet radio, music, podcasts and voice navigation systems are the only categories already in a format that can leverage this opportunity, leaving text-based media to be adapted in order to participate. This creates a new market for speech and text conversion technologies like Nuance to be the provider of voice navigation controls at the automotive platform level or apps like iSpeech that convert articles and books from text to speech.

Not surprisingly, local radio station owners and navigation system manufacturers are the most likely to be disrupted in this evolution. Without the technical limitations of terrestrial radio signals, consumers will be able to access local programming from anywhere in the country through apps like iHeartRadio or national programming without any additional in-car hardware from SiriusXM Radio. Subscribers will also have the ability to create their own music stations via Pandora or listen to the exactly what they want using apps such as Spotify. As audio consumption continued to increase online, so to will the allocation of local ad dollars as marketers will have access to audience-related metrics that aren’t available through traditional radio including actual listener numbers, not estimates, and the ability to target ads to the zip code, not just the station.

From the perspective of navigation systems, apps like Google Maps and Waze will continue to take the place of built-in and after-market navigation devices with their ability to provide current mapping data and crowd-sourced traffic updates via their respective networks. This is a much more compelling solution than paying the auto manufacturer to send you a CD every year just to update the in-car mapping data (which is my car’s case).

Pandora Media has the potential to be a big winner in the digitalization of the automobile experience but not for the expected reasons.  Pandora’s viability as an internet radio service has been questioned because of the cost structure challenges presented by the music industry. But with more than 1,000 partner integrations, including 85 vehicle models and 175 aftermarket automotive devices, Pandora could evolve into a platform service, much like Amazon did with Web Services, that would allow other developers to leverage these automobile-related hardware integrations to allow their apps to connect with vehicles and related devices as well.

Google_Maps_MenuNo matter how the battle for the next digital screen plays out, Google is one of the best positioned companies because of its existing portfolio of technologies. With Google Maps slowly getting integrated into various vehicles experiences, Google will have its Trojan Horse for offering up services beyond just mapping and traffic data. By looking at the additional data layers offered in Google Maps you get a picture of this: Navigation provides turn-by-turn directions, Local identifies nearby retail establishments, Latitude find people you know that are physically near you and History stores information on the places you’ve been. This provides Google with contextual data around where you go and with whom which can feed newer services like Google Now, which uses machine learning to predict the information you might be interested in (like when to leave for a meeting, activities you could do nearby or sports schedules for your favorite teams), to enhance the user experience across all screens. Add to this Google’s quickly improving natural language capabilities for voice commands and Android-based in-car app platforms being developed by the likes of Harman, one of the largest suppliers of in-car technology, and you can see why Google is so well-positioned to dominate the in-car content experience going forward. Either by consumers using its apps, or better yet by automotive-related manufacturers using its mobile operating system to enable apps, Google will continue to capture an increasing amount of data on consumers, which in turn makes its services smarter and more useful to people, which brings more users to Google’s platform in a self-fulfilling cycle. If all else fails, Google could simply provide the driverless car technology it has been testing and own the entire digital automotive experience itself.

With over 105 million solo drivers on the road in the U.S. the digital dashboard opportunity goes beyond just enabling subscribers to consume more information and have access to better in-car utilities. It also creates an opportunity to give advertisers access to a very targeted, but maybe more importantly, captive audience. By marrying registration and demographic data of the driver with their current location, via GPS, along with intended destination, via maps and navigation, content providers and advertisers will be able to incorporate much better audio ads, using real-time ad-insertion technology, and digital offers than ever before. And because of the linear nature of consuming audio content, advertisers should expect a better return on their marketing expenses because drivers won’t be distracted by anything else.

It’s reasonable to believe that we will see the fruition of these early in-car efforts over the next 2 to 4 years. Now imagine 2020, when the first driver-less cars are expected to hit showrooms (although if Google had its way, it would happen sooner). The experience of driving a car will become obsolete and everyone will become a passenger so the content consumption and advertising-related opportunities will expand as former-drivers can focus on other activities in earnest turning the car into a portable living room.

Maybe then Bill Gates’ famous quote comparing the computer and auto industries, and subsequent rebuttal from GM, might actually have some truth to it.

Why Viewable Impressions Won’t Matter

Reading the increasing velocity of articles written on the topic over the course of last year, ‘viewable impressions’ has displaced ‘ad verification’ as the hot delivery topic in the adtech industry for 2013. But when you start to consider how the media consumption habits of internet users are changing, does trying to determine which approach is the most accurate in identifying whether ads are being served within a viewing pane really going to matter in the near future?

Consumers are spending a growing amount of time on social networks- more than any other category of sites on the web and as such are becoming accustomed to a content consumption experience that differs from typical website content management systems. The traditional web page is an adaptation of legacy print media which pieces together multiple columns of static content with blocks of ads in a portrait layout. Led by Facebook’s News Feed, social networks are popularizing a different approach that displays standardized units of content, in the form of text, links and images, from a user’s social graph in a single column that updates with new information in real-time.

Quartz_AppThe pace of adoption of mobile devices is furthering the spread of this stream-based approach to presenting content, as digital media companies attempt to package all of the information embedded on a traditional web page into a mobile app or website which is limited by the smaller screen sizes of smartphones and tablets. An early example of this has been Atlantic Media’s launch of Quartz in September, which is a digital only business media property built specifically for the mobile web that just announced that it has already reached 1.4 million unique visitors as of December.

Facebook_SponsoredStoriesThe reason the adoption of a new digital consumption experience matters to the viewable impressions conversation is in how the content and associated ads are being presented to users. Both Facebook and Twitter have shown how this combination can work in the age of social streams and mobile devices with Sponsored Stories and Promoted Tweets respectively. Both ad units are integrated into the content feed from a look and feel perspective and targets users based on their social graph relationships. The ad units themselves can be fixed in the flow of the content stream, moving down the page as the feed refreshes with new updates, or fixed at the top of the feed. In either case, since the content cascades down from the top of the app or web page the ad is always being presented, and thus seen, in the user’s viewing area.

The stream-formatted approach to content presentation is also starting to make its way on to traditional digital media websites like ESPN which launched the beta of its SportsCenter Feed in September. ESPN, which has traditionally been an early adopter of digital technologies and experiences, is taking a similar approach as Quartz in delivering a real-time, ad-supported, news feed with the added capability to consume subsets of the stream via content-specific tabs as well as the ability to add skins to the background that further promote the content sponsor.

ESPN_SportsCenterFeed

In all of these stream examples, the ad creative is muted compared to the typical bright and flashy ad unit and consists of a single advertiser. So what the advertiser loses in ‘wow’ factor (or ‘ow’ from the user perspective) with a traditional ad experience is made up for in relevance (hopefully) and singular attention by not having to compete with other advertisers on a page and by being presented front-and-center to the user- ensuring the ad is seen. As the real-time news feed approach to presenting media proliferates, it will alleviate the need to utilize delivery verification services for viewable impressions for digital media entities adopting this new approach.

Remember, it wasn’t that long ago that the adtech industry was consumed with a different delivery issue- ad verification, with the likes of AdSafe Media and DoubleVerify raising over $50 million combined over the course of 2010-2011 to build a business around solving for this issue. In 2012 both AdSafe and DoubleVerify replaced their CEOs while AdSafe also underwent a rebranding as ad verification became commoditized at the ad server level and smaller problem, especially related to premium content publishers, than the industry led everyone to believe. Let’s not go through this again with viewable impressions.

Photo image source for Quartz: @erichfranchi

The Valuation Disconnect in Mobile

Well before the media anointed mobile the Next Big Thing, venture capitalists saw its potential. Consumers have rewarded VCs for their foresight by how quickly they’ve adopted non-voice mobile services over these past couple of years. The result has been a number of high-profile liquidity events this year starting with mobile ad network Millennial Media’s IPO followed by Facebook’s acquisition of Instagram for an eventual price of $736 million and record levels of gaming sector acquisitions led by mobile. With all this positive momentum it’s not surprising that VCs continue to allocate an increasing share of deals and dollars to mobile startups as the overall number of investments has reached its highest levels since the dot-com days.

In contrast to this optimism in the venture community, Wall Street is down right negative towards mobile. Google’s third quarter earnings announcement was met with a 8% drop in share price in part due to the increasing number of search queries being performed on mobile devices which is causing a deceleration in the company’s revenue growth. And while Facebook’s most recent quarterly earnings report resulted in the stock rising 20%, the company’s market capitalization is still only at 60% of its peak value from its first day of trading. This is in largely due to concerns over Facebook’s ability to monetize their growing mobile audience, which now consists of 600 million users, including 126 million of which use Facebook mobile exclusively.

The Typical Relationship

So why the disconnect in how these investors value mobile? It can be partially explained by how each type of investor evaluates investment opportunities to begin with. Venture capitalists, especially early stage ones, typically look to buy private, and thus illiquid, stock in pre-revenue companies with nascent, but potentially market-disruptive, ideas. As such, these investments may take up to 10 years to realize a return for their VCs, if at all. Contrast this with public market investors, such as hedge and mutual funds, which focus on the predictability of earnings and revenue growth relative to a company’s market value and reevaluate their investments in real-time based on news and quarterly earnings reports since liquidity is readily available in these stocks.

So when VCs invest in start-ups, especially consumer-oriented ones that are ad-supported, they are betting not only on a company’s potential to execute on their business plan but also on the formation of a rapidly growing market. Due to this, the focus is usually on customer acquisition and market share growth- not revenues. As a market begins to mature in size and opportunity, monetization solutions are developed, usually by other start-ups, allowing the entire market to benefit from the creation of new revenue streams. Companies that don’t get acquired and can show they have a path to profitability have the opportunity to go public and in the process become industry bellwethers, using their new capital infusion and stock shares as currency to further enhance their market position.

Why Mobile Had Been Different

In the case of mobile, a couple of things happened that has affected the usual relationship between the private and public markets. First, the consumer adoption of mobile has outpaced any other technology in the history of the U.S.- including radio, TV and the internet. As such the native monetization solutions that were developed alongside these other technologies have been slow to scale in mobile because (1) the ad formats currently being used are largely re-purposed ad technologies from the desktop internet, such as banner and rich media ads, which were easy to launch with in an effort to capture mobile revenue early on and (2) advertisers have been slower to allocate advertising budgets to mobile than previous technologies due to this speed of growth- funds that would be used to help spur innovation in ad experiences on mobile devices.

The economic realities of increasing supply of mobile ad inventory coupled with relatively low demand for quality ad experiences thus far has resulted in effective CPMs that are 1/5th the price of desktop internet advertising. This disparity in monetization capabilities between mobile and desktop is forcing public investors to reevaluate consumer tech investments where mobile is becoming impactful enough from a usage perspective to potentially affecting earnings. With Millennial Media, a pure-play mobile ad network, and Pandora Media, whose ad-supported internet radio audience is now 75% mobile, still not profitable as publicly-traded companies, investors will continue to discount the mobile businesses of public consumer technology companies for the foreseeable future.

Without having proven their business models to Wall Street yet, Millennial and Pandora can’t be considered mobile bellwethers, which is needed to preserve the private-to-public valuation relationship. Companies such as AdMob and Instagram might have achieved bellwether status if they hadn’t been acquired before realizing their potential as stand-alone public companies. As such it might be left to existing ad-supported consumer internet tech leaders who are able to make the audience and business transition into mobile to perpetuate the ecosystem. Facebook, which has faced scrutiny over its performance as a public company in part due to mobile, has the momentum in user growth and sheer audience size to accomplish this transformation if they can prove their various mobile ad products can profitably scale. Because of this you could argue that Facebook actually went public too early, instead of too late, if you look at it as a mobile-first company. Probably the best positioned public company though is Google which acquired what is now the most popular mobile operating system in Android, largest mobile ad network in AdMob and is seeing mobile growth in its core search business as well as across YouTube.

Mobile is Really Two Different Experiences

The second part of the answer to the valuation disconnect is in the definition of mobile. When research companies forecast trends and investors talk about opportunities they always speak about mobile as if it were one cohesive distribution channel when in fact it is composed of two distinct experiences- smartphones and tablets. Being able to differentiate between the two is critical because of the activities each device is best suited for based on the physical limitations of each display as well as their monetization opportunities.

Smartphones

While Apple might be credited with ushering in the consumer mobile era with the launch of the iPhone in 2007, it was the launch of the App Store the following year that enabled smartphones to properly leverage their mobility as the physical limitations of mobile phone screens (3 to 5 inches in length) required task-specific applications be built instead of all-encompassing web experiences. Because of this, the most successful app experiences, as Benchmark Capital’s Matt Cohler eloquently describes it, mimic a remote control in that they are easy to use and provide a specific utility to consumers. In turn, advertising on mobile phones need to abide by these same principles in order to be valuable.

Rare Crowd’s Eric Picard described the current mobile ad format problem in a recent article while also presenting a possible solution for smartphones that is interruptive without being intrusive- and can be delivered at scale. For app developers that have large enough user-bases though, creating native experiences, especially ones that can leverage location, will always result in better value for both the advertiser and consumer. Expanding on sponsored ad units that Facebook (via Sponsored Stories) and Twitter (via Promoted Tweets) have popularized in the social activity stream and more recently on mobile, location-based social exploration platform Foursquare launched Promoted Updates for local merchants this past summer and crowd-sourced traffic app Waze launched its own self-service advertising platform earlier this month that focuses on solving users’ location-based needs.

Tablets

Like smartphones, Apple can also be credited with jump-starting the tablet market a mere 3 years ago. The company was prescient in introducing the iPad as a tool for consuming media as users have made watching TV shows, playing games and reading the primary uses for the device. This makes sense when you consider the screen size of tablets (ranging from 7 to 10 inches) allows consumers to replicate the offline experience of reading a magazine or watching television in a more convenient and personal format than traditional computers allow for. Because of this, advertising on mobile tablets can be interruptive like traditional media and less concerned with other vectors such as location since most people are using their tablets at home and as a second screen complement to watching television. That means online video and rich media interstitials, which are higher-valued ad units than traditional banner ads, will work with minimal refactoring compared to smartphone ad experiences. That doesn’t mean there isn’t an opportunity for companies to innovate around the ad experience as start-ups like Kiip are proving by rewarding user engagement and retention within mobile apps with real world rewards.

When It’s All Said and Done

With tablets expected to outsell PCs by next year, focusing efforts on this part of the mobile market might be the most prudent move for consumer tech companies with mobile audiences since the advertising experience most closely resembles the desktop internet from both a format and value perspective. The smartphone advertising market will take longer to scale simply because of the utility-oriented nature of the user experience.

As these advertising solutions sort themselves out though, so should the discrepancy between public and private market investor valuations around ad-supported business models. As start-ups fill these gaps in the consumer mobile space with monetization solutions that prove to be effective, so to will public investors get comfortable with the long-term value mobile users have to offer, which, at the end of the day, will benefit everyone involved in growing the value of the mobile industry.

Not All Users Are Created Equal (For Ad-Supported Consumer Businesses)

Facebook’s first earnings announcement as a publicly-traded company last week was not well-received by investors, as the company’s stock hit new all-time lows after only being able to meet analysts’ already lowered financial expectations.

Most of the discrepancies between Facebook’s growth trajectory and stock performance can be summed up in these two slides from the company’s earnings release:

While directionally these charts look good, going up and to the right, a closer look reveals a growing problem in the relationship between Monthly Active Users (MAUs) and Average Revenue Per User (ARPU). The MAUs chart shows quarter-over-quarter user growth in each of Facebook’s four geographic regions over the past two years. The largest of these regions, Rest of the World, is growing the fastest though (at 9% over last quarter) while US & Canada, which is the smallest region in terms of MAUs, is growing the slowest (at 2%) which is an issue since Facebook is able to monetize US & Canada users over seven times better than Rest of World users on average according to the ARPU chart. Optimizing per user monetization is further exacerbated when you consider that growth is increasingly coming from mobile-only users where advertising is still in its infancy.

Facebook’s ability to attract and monetize a large U.S. audience is what has enabled the company to go public. Whether Facebook becomes a successful publicly-traded company will rest largely on how quickly it’s able to reduce the ad monetization gap between U.S. users and every other region of the world. Until then, the financial markets will continue to recalibrate Facebook’s valuation (downward) to reflect the realities of the company’s current revenue capabilities.

This situation isn’t unique to just Facebook though. For example Twitter, the second largest social network out there, recently passed the 500 million account mark according to analyst group Semiocast, which also saw the proportion of U.S. user accounts decline relative to the rest of the world since the beginning of the year and identified Jakarta, Indonesia as the most active tweeting city- statistics that have a similar looking trend to what Facebook has experienced, growing but mostly in less mature advertising markets. As any free consumer tech services starts to grow quickly, they too will eventually face this same situation.

If you’re fortunate enough to be involved with such a consumer product that is gaining millions of users, focus on growth in countries where advertising is a mature industry so mobile will also be monetized more quickly (places like the U.S., Japan, Germany, and U.K.) and also accessible (so not China). If growth takes off in less-mature ad markets, but sizeably populated countries such as India or Indonesia, find a local advertising partner with strong ties to large conglomerates and marketers in the region before committing resources.

So when Josh Elman, venture capitalist at Greylock Partners, blogs about getting meaning from growth numbers provided by startups, we should probably add users by region to the discussion for ad-supported consumer start-ups in order to better understand the real opportunity and value being created for investors.

With the Acquisition of Instagram Facebook is Only Halfway Done in Mobile

So Facebook decided to one-up its own IPO proceedings last week with the news that it had acquired the photo-sharing mobile application Instagram. By any conventional metrics, the $1 billion price tag for a company with no revenues, 13 employees and 30 million users at the time makes little sense. On a relative value basis though, the move is a brilliant one by Facebook. The company essentially paid 1% of its market value for Instagram which is well on its way to surpassing 100 million mobile-only users by the end of the year. To put this growth into perspective, it would make Instagram 1/10th the overall size of Facebook and potentially 1/5th the size of Facebook’s mobile audience by the end of the year- not bad for a company that’s been around for less than 2 years. More importantly though, by acquiring the most popular free app in Apple’s App Store, Facebook adds a critical capability that extends its platform experience in mobile.

Facebook was a child of the now officially-ended Web 2.0 era, so its website was built to be experienced on personal computers. Now thanks to smartphones an app economy has emerged that has enabled companies like Instagram to optimize the user experience of their applications solely for mobile phones. Alongside the acqui-hire of the team from mobile messaging app Beluga last year (which subsequently built Facebook’s Messenger app) Facebook now has apps that bring the company’s core features from facebook.com, photo-sharing and communications, to a complementary set of stand-alone mobile user experiences.

These acquisitions don’t solve all of Facebook’s mobile needs though. Since Facebook Messenger and Instagram, as well as Facebook’s own apps, are built specifically for smartphone operating systems half of the mobile subscribers in the U.S., and an even a greater percentage in the largest European Union countries, can’t access these apps because they don’t own smartphones. Even with sales expected to cross 1 billion devices worldwide in 2014, smartphone penetration will still only reach 15% of mobile users, meaning Facebook can’t rely on smartphones reaching a tipping point in the near-term to address the risk factors associated with its growing mobile audience.

As Facebook reaches market saturation in many developed countries, the company will need to rely on emerging markets for the majority of its future growth from a user acquisition, and eventually, a monetization standpoint, as the primary means of accessing the internet in countries such as Brazil, India and Russia will continue to be through mobile devices. That means creating mobile experiences that are ubiquitous across devices and not tied to any specific operating systems is paramount for Facebook to scale its mobile offering. The Instagram deal notwithstanding, Facebook has spent the past year putting the pieces into place to address the other half of the mobile landscape.

Starting in March 2011 Facebook acquired Snaptu, a provider of smartphone-like usability on feature phones for an estimated $60 to $70 million to expand the capabilities of Facebook for Every Phone. Then in October the company announced the release of its mobile app platform that enables social discovery of HTML5 and native apps. Facebook followed this up with the acqui-hire of the team from HTML5 app platform Strobe and the hiring of a head of Mobile Developer Relations from Strobe competitor Sencha in November. Since then Facebook has continued to support the launch of their mobile platform with a series of mobile hack days and the open-sourcing of their browser test suite, Ringmark, for building apps on the mobile web. With 1 billion HML5-capable phones expected to be sold in 2013 the open, mobile web will be just as important as native smartphone apps to Facebook’s success.

With Facebook’s IPO now expected to take place a month from now on the heels of a booming advertising business, the company is well positioned to support a $100 billion valuation. But for Facebook’s stock to continue to perform well one of the key non-financial metrics investors will focus on is active user growth. As the company’s mobile user penetration trends past 50% of its overall user base towards 100% due to increasing smartphone adoption and emerging market user growth, extending the Facebook platform capabilities in mobile will allow the company to create natural revenue extensions in mobile for both its advertising (like the recently announced Reach Generator) and payments businesses that leverage both apps and the mobile web. But with international representing a growing portion of Facebook’s revenue mix, developing an ecosystem around the mobile web will be especially important for the company to continue to drive engagement and revenues.

If Facebook can execute on the assets they have put in place now, the company can turn the most over-analyzed aspect of its S-1 registration statement into its biggest growth story. In the process Facebook just might be able to answer the question- who’s going to be the Facebook of mobile- with itself.

Photo image source: Johan Larsson on Flickr

Is Path (2.0) Mobile’s Path?

One feature of the recently announced Nike+ FuelBand, Nike’s new activity measuring wristband, is its social integrations that enable users to share their activity data on Facebook, Foursquare and Path. With over 800 million and 15 million people using Facebook and Foursquare respectively these tie-ins make sense for Nike. For Path though, which re-launched its app a mere 2 months ago, this represents a big coup considering it just passed the 2 million user mark. It also highlights the early stages of a user experience in mobile that mimics the content creation and consumption cycle on the wired web.

Path 2.0 incorporates a set of activities- Photos, People, Places, Music, Thoughts and Sleep/Awake status- that users can post to their timeline and share with their network. By initially focusing on these social services, Path’s mobile functionality either super-sets (in the case of Places and Thoughts) or competes with (for Photos and Music) some of the most popular mobile apps available:

  • Photos: The basis for the original Path app, Photos, which incorporates image-filters as well, competes with many other photo-sharing apps including the wildly successful Instagram.
  • Places: Popularized by location-based social networks, Path also offers check-in services inside its app and allows the location data to be posted to a user’s Foursquare account.
  • Music: Giving users the ability to insert song clips into their Path timeline competes directly with the relatively new but popular SoundTracking app.
  • Thoughts: Like any social network, commenting is a core functionality which Path supports and allows to be shared to both a user’s Facebook and Twitter accounts.

By leveraging design, for which the company has received rave reviews, Path has created a differentiated mobile user experience that consolidates these services into a single app. While competition between content creators and aggregators for audience attention is a relatively new phenomenon in mobile, it has played out over several cycles on the wired web already. Yahoo became a very popular web 1.0 destination by providing an online directory through which the initial content creators on the web could be found. Over time Yahoo evolved from being just an aggregator to a creator of content as well- launching successful finance and sports content verticals in the process. As the web matured, traditional media (magazines, newspapers and television networks) began bringing its offline content online, shifting consumer attention back towards these properties. Then came Google who re-aggregated the content experience for audiences by providing a better way to discover exactly what people were looking for through its search engine. Google has also tried leveraging its audience by acquiring (i.e. YouTube) or launching (i.e. Gmail) content and services that keep these consumers engaged with Google’s properties. When web 2.0 came along the balance of attention started to shift to socially oriented sites like MySpace and Photobucket where the users became the content creators. As last week’s S-1 filing reminds us, Facebook won the battle for social networking supremacy as they created a platform that not only aggregates individual content creation but enables professional content to be curated in the same experience as well. In the process Facebook took the aggregation idea one step further than in previous cycles by allowing other companies (such as Zynga) to build applications directly on the platform, thus ensuring users continued to engage with Facebook.

The ushering in of the mobile app economy by Apple has led to the development of hundreds of thousands of task-specific apps- from games and content apps to personal utilities and social networking services. Relatively few of these though have been built to aggregate individual app experiences. Path is attempting to do this, and take it a step further at the same time, by creating its own set of services (Photos, Music, Sleep/Awake status) alongside super-setting such well-established apps as Facebook, Foursquare, Twitter and now Nike+ through the use of APIs. A consistent, mobile-only experience throughout Path’s app allows users to still participate in these underlying networks but aggregates the engagement within its own app, which if successful, would allow Path to eventually drop their connection to these underlying social networks.

How valuable consumers find the aggregated experience versus using activity-specific apps will determine Path’s success ultimately. And while design may very well continue to win over users from competing web and mobile services, Path will need to grow beyond the Valley’s A-List of users and connect with the average American already using Facebook if it’s going to win the first wave of mobile app aggregation. If not, which companies stand to benefit in this cycle?

Time for Television Ratings to Get Social

The start of the current fall television season has highlighted the importance of social media in driving awareness and tune-in for new and established TV series as audience consumption habits continue to fragment across device and social platforms. With multiple apps being promoted by shows, networks and even TV service providers for checking-in to these broadcasts as well as fan pages and hashtags used to centralize the conversation around each episode, there is a growing need for audience measurement beyond the traditional Nielsen ratings.

The Nielsen Company is the de facto provider of the ratings system used to determine how the 60 billion in television advertising dollars are allocated amongst broadcast and cable network line-ups. The company relies on the behavior of 50,000 Americans across its sample of 25,000 households to extrapolate ratings for the nearly 115 million households with television sets in the U.S.  The resulting ‘share’ of audience Nielsen attributes to each TV episode on a nightly basis ultimately effects which series get renewed or cancelled (for a great primer on how Nielsen’s TV ratings system works, check out this ESPN-style animated video on the topic from local Washington, DC creative agency JESS3).

Though with the number of households with television sets dropping for the first time in 20 years, on-demand video platforms taking viewing time away from traditional television and multi-tasking across multiple screens a growing reality, traditional means of measurement are failing to capture this evolving consumer behavior. While Nielsen is working on ways to aggregate this distributed viewing audience through its ‘extended screen’ initiative, the company isn’t measuring the actual activity on the social web occurring around the episodes being watched. This represents an opportunity for services that provide a platform for social engagement as well as companies that aggregate TV show-related conversations from across the internet to address this information gap. While both Facebook and Twitter have their own media-related initiatives that allow fans to interact with one another as well as with the shows and their stars, neither network focuses on quantifying this engagement on an industry-wide basis.

Services like BuddyTV, GetGlue, Miso and Tunerfish, on the other hand, have been built in a manner that can address this need. Having ridden the check-in wave popularized by location-based service Foursquare, these event-based social networks (EBSNs) capture when consumers are tuning in to watch television and aggregating the activity being generated around each show within their respective apps and websites. GetGlue, the largest of these services, already has more users checking-in to the most popular shows on its platform than the size of Nielsen’s entire sample audience, making it statistically valuable to the ratings conversation.

Even though the demographic make-up of EBSN users is not representative of the overall U.S. population (which Nielsen does try to mirror in selecting its households), check-in services make up for this by highlighting the actual activity of the most desirable audience to advertisers (18 to 49 year-olds) and not just projections. For advertisers this represents a unique opportunity to target these consumers in a highly engaged environment by extending their TV advertising for particular shows to the equivalent social web channels and mobile devices. To bring the desired scale to this type of opportunity though, these social environments need to be aggregated somehow.

That’s where companies like Bluefin Labs, General Sentiment, Social Guide and Trendrr come into play by not only aggregating publicly available social commentary but filtering and normalizing this data from disparate sources (EBSNs, Facebook, Twitter, etc.) to identify the underlying sentiment of a broader range of web users. This provides a more complete view of the engagement associated with shows across the social web in real-time as well as beyond the initial airing time slot of each episode. The resulting findings might be just the data set necessary to become the de facto social television rating to rival Nielsen.

Even with Nielsen’s recent ratings calculation glitch, it’s unlikely that the company will be replaced as the ratings system for the television advertisers industry in the near future. But as audiences for traditional TV continue to disperse across more mediums and content experiences, the need to compliment the ratings discussion, and ultimately how advertising dollars are allocated, with additional data will only continue to increase. This creates an opportunity for actual engagement-related metrics to gain equal footing with passive stream and tune-in projections over time.

So how do we get there?

While results from a recent NM Incite (a Nielsen/McKinsey company) study confirms the correlation between social activity and TV ratings, the opportunity for social television start-ups is in identifying and explaining the variations in popularity between Nielsen’s most highly rated shows and those series being discussed online and how to benefit from it.

The combination of tune-in and conversation activity make EBSNs the most compelling data set for social television ratings. The challenge is that the company that popularized the check-in, Foursquare, only recently passed 10 million users worldwide itself, a far cry from Facebook’s 150 million users in the U.S. alone. For EBSNs to reach Facebook-like adoption, they need distribution and a more automated process for socializing around TV shows (beyond the manual download of apps and checking-in to services). While BuddyTV and Miso have partnered with AT&T’s television service offering U-verse, GetGlue and Miso have integrations underway with satellite television provider DirecTV that enables subscribers to check-in to shows through DirecTV’s remote control. Other companies, such as Dijit, are by-passing traditional TV service providers entirely and competing for consumers with their own universal remote that layers in check-in functionality.

What social analytic companies lacks in proprietary data, they make-up for in business model by already working with advertisers and media companies to help them understand the volume and sentiment of chatter occurring online about their brands and shows across the social web. Gaining access to data on an exclusive basis from EBSNs and other social communities would be a key differentiator in winning the battle for advertising and media clients- the same companies that subscribe to Nielsen’s television ratings data. With so many companies vying for client dollars and mind share, the social analytics provider that can get the right media outlets partnerships to adopt and distribute their version of social television ratings can become the industry standard through sheer perception and market momentum.

Based on these factors, Trendrr, which launched a TV industry-specific real-time dashboard before the start of the fall television season could be that company. Considering Trendrr’s breadth of data sources (Facebook, GetGlue, Miso and Twitter) and how well they’ve embedded themselves into the online media landscape (partnering with the likes of AdAge, Lost Remote and Mashable to distribute their data and findings), the company is best positioned to become the social television ratings provider of the future.

What are the most likely outcomes?

Absent Trendrr or another one of these start-ups gaining the necessary client or user clout to grow into the de facto social TV ratings provider, the most likely outcome for the companies with the most traction in this market is an acquisition.

If either Facebook or Twitter decided to focus on providing analytics as a value-add to their advertiser and media clients, they would make ideal acquirers of these types of companies. For Facebook, adding a media-oriented check-in service to their massive user base would fit nicely with Facebook’s recent overturns towards the television industry and turn the acquired ESBN into the immediate and undisputed winner in the social television data game. Twitter on the other hand would benefit from acquiring one of the leading social analytics companies, as it would fill a large analytics hole in their offering. Even though the company recently stated its intentions to stay out of the enterprise market, the opportunity might prove to be too lucrative to stay out.

Beyond Twitter, The Nielsen Company is a natural acquirer of a social analytics company since it compliments Nielsen’s existing ratings and research business. With the company having held an initial public offering at the beginning of this year, Nielsen also has the necessary capital to do this.

Beyond these entities, media companies and television platform could benefit from owning one of the EBSNs by leveraging these services to gain insight into user activity and drive additional tune-in for themselves or partners. Yahoo was the first to act on this, acquiring 12-week old IntoNow earlier this year and releasing an iPad app last week that integrates into Yahoo’s Connected TV framework. For GetGlue and Miso, who have raised capital from Time Warner and Google’s venture arm respectively, they already have likely acquirers in the fold. That being said, with the variety of relationships GetGlue (most recently with FX) and Miso (most recently with Showtime) have established with different broadcast and cable networks it’s not out of the question that one of these media partners tries to acquire either company to be their underlying social TV platform. The engagement data would be very valuable to any company negotiating with advertisers during the ‘upfront’ season as a way to justify advertising rates (beyond Nielsen’s rating data) for the next television season or provide brands with a new way to advertise to their intended audiences (for an additional cost or as a make-good).

Stay tuned. This market will only get more interesting.

Social Isn’t a Transaction

In late April Facebook celebrated a birthday as the ‘Like’ button turned one. The adoption (2.5 million websites) and engagement (250 million people) of the thumbs-up icon over those first 12 months has provided Facebook with a treasure trove of additional data related to its users’ interests. Combined with the social graph, this data can be leveraged by advertisers to target consumers on Facebook in a manner not available through any other web property or advertising medium. And with web surfers now spending more time on Facebook.com than any other website in the U.S., companies are taking notice, enabling Facebook to double its share of the online advertising spend domestically between 2009 to 2010. Beyond just delivering impressions though, marketers are looking for ways to stay connected with these users, which the Like button has enabled by allowing brands to re-message their ‘Likers’ within the Facebook News Feed. The goal of connecting with as many consumers as possible has led to the emergence of an entirely new sector of online advertising dedicated to helping corporations drive more ‘Likes’ to their brands’ Facebook Pages.

The result? Contests, giveaways and promotions of all types are requiring ‘Liking’ the company as part of the entry process. So what began as an opportunity for brands and fans to find and connect with one another in a social setting has turned into a competition between entities to see who can compile the most Likes in a 24-hour period. So thank you Frito-Lay, you’ve helped turn social into a transaction.

The socialization of the web was the most important development to come out of the web 2.0 era. The advent of blogging platforms and social networks allowed the internet to evolve from a read-only medium to a read/write experience for consumers who quickly became comfortable with blogging, posting and tweeting about every topic imaginable in the process. Inevitably some of these conversations turned to discussing experiences with, and opinions about, products and services, which corporations were not prepared to deal with, since advertising had traditionally been broadcast through a channel that didn’t allow for real-time user feedback.

To justify the time and money being allocated to understanding and managing this social activity, corporate departments, along with their agencies and social media consultants tasked with this job, have turned to quantitative measures such as number of friends, followers, Likes and subscribers as a way to validate their respective effectiveness in addressing the social web. As a consequence, advertising across social environments has quickly become a $2 billion business according to local media advisory firm BIA/Kelsey, which also forecasts that social media-related spending will grow to $8.3 billion in the U.S. by 2015.

The problem with this approach, as Steve Rubel, SVP of Digital at public relations firm Edelman, pointed out at The Next Web Conference earlier this year, is that social isn’t an industry, it’s a behavior. So instead addressing consumers at a personal level, web users are being treated as a metric by advertisers looking to fill their social media quotas. The difficulty for most companies in trying to adopt a customer service-oriented approach to social is that they don’t know how to quantify the return on investment for this type of activity (if you are interested in understanding the right approach to communicating with consumers on the social web I’d suggest reading The Thank You Economy, the most recent book from author, video blogger and wine enthusiast Gary Vaynerchuck, or watch him speak, as I recently had a chance to, about the ROI of his mother).

Worse yet, from an advertising perspective, these user metrics can be easily inflated, as there are plenty of companies that can acquire social connections in bulk for brands to show high Like counts. With the amount of time being spent by consumers in their Facebook News Feed, the ability to re-message these fans and the viral potential of content distribution through the social graph the Like has started replacing email as the most desirable means of communicating with potential consumers. Combined with low open rates, spam filters and unsubscribing options in email, the Like also become more valuable to marketers, leading to pricing of up to $1 per Like from social ad networks.

Buying Likes is the wrong means to building relationships with consumers though, as it is akin to offering kids on the playground gum to be your friend- it makes you feel good about yourself at that particular moment but doesn’t actually change the dynamic of the relationship. Certain users will use the Like button because they generally appreciate the brand, while others will use it in order to receive discounts and promotions, so paying for these types of fans doesn’t make sense, and in the long-term, could end up damaging the relationship between brands and consumers on Facebook.

Many consumers migrated from their initial ISP email accounts because of email spam resulting from signing-up for free services or giveaways, rendering these accounts unusable. By cluttering users’ News Feeds companies risks annoying consumers in the same manner and potentially causing users to leave Facebook over time for newer, less spammy social networks.

So where are the investment opportunities in social?

While Likes are a form of social currency, the business models being built around driving social connections are highly questionable. That’s because the continued growth and success of companies providing social cost per action pricing is predicated on finding the next great social action to arbitrage before advertisers lose interest in paying for Likes because of the lack of quantifiable return on investment.

Salesforce’s acquisition of Radian6 for $340 million earlier this year, to tackle social CRM, does highlight the value of being able to decipher the conversations occurring across the social web. Beyond just monitoring consumer chatter, start-ups need to help brands understand the sentiment of these conversations (both positive and negative), the change in velocity of the discussion associated with the sentiment and the influencers behind these topics. Only then can start-ups provide real value by automating some of the activity around information gathering and distribution across social platforms.

A couple of companies with recent announcements are trying to address this need for clients on the advertising and distribution side of the market as well. Taykey, which just came out of stealth mode with its $9 million Series B announcement, provides advertisers with ways to reach audiences across the social web in real-time by identifying users who are displaying an active interest around a product, service or topic at any given time. SocialFlow, which recently hired an online industry-veteran as President after raising $7 million in April, focuses on solutions for publishers and media companies who want to increase engagement with their audiences by putting new content in front of consumers at the appropriate time.

The automation being provided by these types of companies is intended to deliver better value to consumers and not de-humanize the social experience on the web (which is a risk for Taykey since they do provide cost per action Likes as part of their offering). Since the Like is here to stay, my only hope is that advertisers and consumers both engage with the button at the right time, and for the right reason- like in this ad.

Facebook’s Effect on Consumer Internet IPOs

Regardless of whether or not you believe in the long-term viability of Demand Media’s content creation platform (more widely referred to as a “low-cost content farm”), one thing is certain: there is a healthy demand for consumer internet stocks. Having priced its offering above the expected range of $14 to $16 per share last week, Demand Media (trading under the ticker symbol DMD on the New York Stock Exchange) ended up 33% on its first day of trading, valuing the company at $1.5 billion- the highest market capitalization for an internet company since Google’s IPO in 2004. Neither the company’s questionable account practices around how it amortizes its content costs, nor Google’s announcement that it would take stronger action against low quality content sites and content farms (which could also include the ability for consumers to blacklist these domains) appearing in search results seemed to dampen investors’ appetite for the stock (according to Demand Media’s S-1 filing, Google made up 28% of the company’s revenues in the first 3 months of 2010).

So why does this matter?

Investing beyond Facebook

Interest in stock of consumer internet companies needs to exist beyond just Facebook for the overall health of the capital markets. Facebook, which recently confirmed that it had raised $1.5 billion in an oversubscribed round led by Goldman Sachs that included $1 billion from non-U.S. clients, will most likely not file for an IPO until the end of April 2012 when it has to begin disclosing its financials to the public due to the company exceeding the 500 shareholder threshold this year. Investors are left with the decision to either wait for Facebook’s offering or participate in the overall growth of the consumer internet sector by buying into other companies” IPOs. Even if Demand Media is a beneficiary of pent-up demand for Facebook stock, the fact that investors are buying up shares in the open market is a positive sign, especially for the likes of LinkedIn (which filed its registration statement the day after Demand Media went public) and Skype (which has already filed its paperwork and is expected to go public in the 2nd half of this year) which have healthier overall financial profiles than Demand Media.

Market opportunity validation

The phrase “a feature not a product,” which has been attributed to friend and venture capitalist Chris Fralic of First Round Capital as it relates to investing in start-ups, is a concept than can be extended to evaluating potential IPO candidates as well. Over time, the public markets are the most effective way to determine whether an entity is “a product line not a company”. The consumer internet, like other sectors, needs public companies to validate whether or not capital being deployed by venture investors in a particular sector is warranted or not. The validation comes by way of each company’s financial performance and associated market capitalization as well as that of the entire sector- public data points that do not exist in tandem in private companies (even though secondary markets do exists for shares of private company stock, in companies such as Facebook, LinkedIn and Zynga, there is no accompanying financial disclosure requirements as with public companies).

It’s this market validation that keeps venture capitalist investing in start-ups that compete with Google in search for example, even though the company holds an ever-increasing grip on the U.S. search market. AdWords, Google’s  search advertising product, represented the majority of the nearly $20 billion in revenues the company earned from its own websites in 2010.  The validation of search advertising’s market size by Google enables companies such as Blekko to raise $24 million in funding even though their goal of reaching third place in the search business sounds modest, though worth billions of dollars in revenues.

Acquisitions, which are a much more common type of liquidity event for start-ups, don’t provide the same type of market proof because they are completed for a variety of reasons, some of which are not purely economic or accretive to the acquiring company (i.e. acquiring companies for the talent, for access to a particular customer or as a defensive measure against a competitor).

Business theory versus reality

Whether Demand Media deserves to be worth more than the New York Times makes for entertaining debate (especially after it was revealed that the New York Times almost bought into Demand Media over three years ago), but it misses the point. What Demand Media’s public offering is really about is whether or not the theory behind the internet being a more efficient, scalable way to do business is a reality for the content creation business. If Demand Media can prove skeptics wrong and build a sustainable, profitable business as an online media company, it will open up opportunities for other pure-play online media companies such as The Huffington Post to go public and keep venture capitalists investing in the sector.

With Facebook’s revenues on track to exceed $1.5 billion and net income to reach nearly $500 million in 2010 investors are correct to anoint the company the darling of this consumer internet class as Facebook’s financials and growth story far exceeds anyone else’s in the industry (Groupon doesn’t factor into this conversation because it is an e-commerce company). In the process Facebook has also validated the business opportunity around social networking, which LinkedIn will benefit from in its upcoming IPO. For Skype, which provides a different type of social communication utility, their public offering will put one of the most often  used business models existing on the internet today to the test, the “freemium” model, along with trying to fulfill on the business promise of paying for communication over the internet (which Vonage never really was able to accomplish). The success or failure of Skype’s business model of charging consumers for only premium services and giving away the rest for free to users will have a major effect on start-up funding across the entire consumer internet sector going forward.

With the countdown to Facebook’s inevitable IPO having already started, the company  has indirectly provided other private consumer internet companies with a chance to leverage the demand and go public themselves (granted  they meet some of the traditional financial metrics of approximately $100 million in revenues and profitable). This is a short-term opportunity though as companies that are able to complete their IPOs in the months before Facebook goes public or starts disclosing its financials should do so to benefit from the investor appetite for consumer internet stocks but do it far enough in advance to not be drawn into direct comparison to Facebook’s financial success. In addition to the aforementioned companies, several start-ups that have benefited directly from the success of Facebook’s platform over the past several years, namely Buddy Media and Zynga, could benefit further from the Facebook effect by going public in 2011.  The clock is ticking.

Photo credit: David Kirkpatrick/The Facebook Effect