ThinkLocal

An interesting Web 2.0 Service

2005-12-23T09:24:00.000-08:00

Here’s an interesting Web 2.0 service that enables media sharing among groups of friends. It hasn’t been released yet, but you can check it out here and sign-up for their free beta.

While it enables the free-for-all media sharing of a service like Flikr, it also allows sharing among defined groups or individuals. It is built into Firefox, making it seamless. I can’t wait to try it.

More on Googlebase and Automat

2005-11-10T14:50:00.000-08:00

I feel like the modern day equivalent of Paul Revere riding through the newspaper industry yelling "Googlebase is coming, Googlebase is coming!" Googlebase is going to hit the newspaper-based classified ads hard. Revenue from newspaper classified ads has already been hard hit by Craigslist and eBay. Google’s forthcoming Googlebase will kick it up a notch.

Just about any search you do on Google these days results in an ad for eBay. In fact, I just tested this by searching for "dog crap" and yes there was an eBay ad. Man they sell everything at eBay. Anyway the forthcoming "patent pending" Automat from Google will place the Googlebase ads next to the AdWords ads integrated right into users' search results.

As I mentioned in my previous article on Googlebase, its real advantage is in providing structured forms for various types of goods to ensure: (a) more complete information on items/services for sale; (b) the ability to find exactly what you want and filter out the junk, since you can search by field. This will further decimate newspapers' classified revenue.

What can newspapers do about this? Well there are three options: (1) Throw in the towel on classifieds and simply milk that cow dry; (2) Jump in bed with LiveDeal; (3) Launch your own Googlebase with a classified ad solution we will be releasing soon. You can see an almost complete implementation at www.southland.la the mapping of ads will be added within days.

The LiveDeal option is tempting. This has no upfront costs and you get a branded site pre-populated with content. The downside is that your ads are pooled with everyone else. So if you spend $10M promoting your site and building up ads, I can open one just down the street for free and have all of the same ads. In essence you aren't building your own base of advertisers, you are building LiveDeal's base of advertisers. Then there is some revenue sharing for all of the money you generate through your traffic. This isn't too different from receiving affiliate revenue from sending your customers to eBay. But, I’m sure that this will do well for LiveDeal, because the quick jumpstart is tempting.

Our classifieds provide more structure, like Googlebase. There are specialty forms for every subcategory just like the forthcoming Googlebase (see description of the benefits above). We provide a mapping of all ads too, which Googlebase will probably have or add shortly after launch. But the benefit of our solution is that you own it. You can do whatever you want with it. You get the source code and you can make changes or we can. For example, we are also adding scraping to go out and spider websites to pull in ads. Maybe we'll scrape Googlebase once it goes live.

If you run a media property and see the tsunami of Googlebase on the horizon following the pounding you've already received from Craigslist and eBay, you might want to jumpstart your online classifieds. LiveDeal and ZiXXo are your best options, consider them carefully.

Tags: Googlebase Automat Classifieds Classified Ads Newspaper

Is Knight Ridder the First Domino?

2005-11-07T14:55:00.000-08:00

In the time since I wrote Plotting a Course for Newspapers (Part 1), there have been a few moves that have sent shockwaves through the Newspaper publishing world. I’m referring to major investors Private Capital Management, Harris Associates and Southeastern Asset Management calling for Knight Ridder to be sold. In explaining their rationale, they point to “limited revenue growth across the newspaper industry”. This indicates that Knight Ridder is the first, but probably not the last newspaper company to face such pressure. Knight Ridder has responded by hiring Goldman Sachs to explore a possible sale.

I have followed the travails (including declining circulation) of the newspaper industry in this blog for some time now, so this clearly comes as no surprise. Knight Ridder owns 84 newspapers (31 dailies and 53 non-dailies). I doubt that the new media barons (Google, Yahoo, MSN, AOL) are interested in shelling out $6B to buy KRI, only to cannibalize the papers with their online offerings, but who knows.

Alternately, the company could be broken into pieces and sold, but that doesn’t solve the underlying problem. What can newspapers do to retain relevance in an increasingly Internet-age?

I don't know who will buy KRI, but since the entire newspaper industry is suffering from lack of revenue growth, is KRI the lead domino that will set-off a chain reaction?

Windows Live vs. the Web OS

2005-11-02T11:27:00.000-08:00

In a previous post titled The Web OS vs. The Desktop OS, I talked about how Microsoft was moving to evolve desktop applications by extending their functionality into the web, while the web companies (Google et al.) are evolving web application by leveraging client side functionality via technologies like AJAX.

Now Microsoft’s Live.com shows their hand in this battle for dominance of what I believe is a “hybrid platform”. It is a hybrid between the desktop and the web. If users want to edit their documents locally and then integrate that with group editing, sharing, etc. via the web, then Microsoft wins. If users want to do everything on the web, with a responsive user interface via AJAX, then the web guys win.

With Ray Ozzie as the CTO (his background being Notes and other collaboration tools), there is no question that collaboration will be increasingly built into everything Microsoft does.

Given the installed base and learning curve invested in the feature-packed Office applications, it will be hard for companies to pry users away from their desktop applications. I believe that email is a different beast because it is inherently network-centric.

Windows Live.com provides the tools to extend the functionality of their core system by building gadgets. Again, Microsoft is going for a platform play, trying to get developers to build gadgets that extend their core functionality. The old embrace and extend play directly from the tried-and-true Microsoft playbook.

On the other hand, we are finding more and more value from collaboration, social networking, etc. Do these AJAX-powered network applications provide sufficient value to usurp the network-aware desktop applications? My guess would be that a few applications will shift toward online apps, like email and calendaring, but the rest of the Office suite will continue to dominate with their growing network-aware capabilities.

What Does Googlebase Mean to the Newspaper Industry?

2005-10-26T12:17:00.000-07:00

In case you haven’t heard, Google is building a massive database for user generated content, called Googlebase. Having studied this problem for years, I believe I can offer some insight particularly with regard to the impact this will have on the newspaper industry.

It appears that Google came to a similar conclusion I did on the classified ad market. Of course, this didn’t surprise me since Google’s VP Engineering (Adam Bosworth) and I were early XML/database/structured data guys. That conclusion is that current classified ad solutions, including Craigslist and eBay don’t provide a scalable user experience.

The systems scale quite well, but as the amount of information grows, it becomes increasingly hard for users to find what they are looking for. If you want to buy a 1985 Corvette on Craigslist, a search will find everything that has the term 1985 and the term Corvette. This can include a lot of junk (parts, services, etc.).

Furthermore, when an individual creates an ad, there is little to guide them. They simply get a blank text box. As a result, the ads are pathetically deficient. For example, when listing a car for sale, many people forget to describe the interior, transmission, engine, and various add-ons.

The answer to both of these problems is to use category specific forms for both data input and search. The forms then guide the advertiser in creating the ad, and allow buyers to search by field (e.g. year = 1985, Make = Chevrolet, Model = Corvette).

From what I understand, this is exactly what Google is building into Googlebase. They provide a variety of forms based upon what you are selling and, presumably, what you are looking for.

I believe that the combination of:

Google’s traffic/brand + Structured Data Entry/Search + Free = Killer!

There are a couple of areas where Googlebase may have an Achilles heel. They still need to develop a sense of community that eBay and Craigslist provide. They could also benefit from an online transaction mechanism a la Paypal, possibly a Google Wallet. If the final version of Googlebase provides these capabilities, then watch out.

So, what does this mean to newspapers? We’ll if you thought Craigslist and eBay were tough competitors, this is your worst nightmare. If newspapers still harbor any hope of being able to charge for classified ads, this should permanently dispel those outdated thoughts. Welcome to free, now deal with it.

Newspapers can only play in this game if they: (a) provide an equivalent or superior classified solution; (b) lead the way in offering free listings; (c) move quickly; (d) cannibalize the classified ads by converting usage with a hybrid online/offline solution (reprint the free listings in your newspaper for free or very cheap).

The newspapers have a local presence, users, local business relationships and a local brand. They MUST throw all of this at drawing a line in the sand against the Google onslaught. They must capitalize on their local presence or they might as well kiss off classified ads forever.

The problem is that newspapers cannot afford to kiss off the classified ad business. They need the fresh content and usage that classified ads generate. They need that local anchor. News is good, but that is being aggregated by everyone. How can newspapers differentiate themselves as a local portal? They need a depth of services, and classifieds is a big one.

I know what I’m talking about. Our company started by building a collection of destination sites offering classified ads services in over 100 U.S. cities. We decided back in March (two months after our release) to get out of this business because we cannot compete with eBay, Craigslist, all of the newspapers and now Google. But in the process we built the best classified ads solution on the market, complete with simple category-specific forms for data input and search, advertiser ratings, everything.

Instead of competing with these big guys, we have instead decided to sell our classified ad software to newspapers and others who want to put a stake in the ground around local classified ads. Our company isn’t big enough to be a combatant, but we’re happy to be arms merchants in this battle for local dominance. If you are interested in getting into the local classified ad business and you want a “Googlebase” of your own, drop me an email and mike.hogan (at) zixxo.com.

Additoinal Insight into Googlebase is available from Greg Sterling at The Kelsey Group, Charlene Li at Forrester, John Battelle and others here too.

Plotting a Course for Newspapers (Part 1)

2005-10-12T17:21:00.000-07:00

In the past few weeks six of the largest newspapers have executed significant cuts in their newsroom staff. Between the San Jose Mercury News, Boston Globe, New York Times, Philadelphia Inquirer, San Francisco Chronicle and Philadelphia Daily News, there have been 352 newsroom jobs cut.

Joe Strupp of Editor & Publisher explains that, with the exception of the Chronicle, all of these newspapers are profitable. So these cuts seem targeted at increasing profit margins not stemming losses.

I have blogged about the dilemma facing newspapers as they confront the impact of the Internet, particularly the cannibalization of classified ads, general advertising, editorials (blogs) and news.

Anyone can point out the problems facing the newspaper industry, which requires no deep insight. The challenge is plotting a course through this changing sea that enables the newspapers to maintain their prominent role.

Before I delve into this topic, I must point out that the newspaper world has been populated by a collection of locally dominant newspapers. With a few exceptions (e.g. Wall Street Journal, USA Today and New York Times) newspapers serve a city or metro area. Of course, some companies such as Tribune, Gannett and Knight Ridder own a few such local papers.

The Internet threatens such local monopolies. More precisely, the largest Internet properties are challenging the need for local newspapers. Instead of relying on the local newspaper to provide the syndicated news, you can get that, and more, instantly online for free.

As a result, I foresee a bifurcation of the newspaper business into a very few serious national/global players and a collection of smaller local portals. The big Internet news outlets will be the Yahoo, Google, MSN and Time Warner/AOLs of the world. I believe that Rupert Murdoch’s News Corp. is attempting to position itself as a player in this space as well.

The big question is whether the pure-play model like Google (all Internet) will dominate this segment or whether “mixed-media” companies like News Corp and Time Warner can exploit those oft referenced “synergies” to provide a better user experience. If the Time Warner/AOl example is any indication, I would bet on the pure-play companies.

Yahoo is using an interesting alternative. They are a pure-play Internet company, but behind Terry Semel, they are attempting to leverage mixed-media synergies through partnerships. Yahoo provides Hollywood with a toehold in the Internet.

News Corp has bought Internet properties like Scout Media, Intermix and IGN and word is that they are attempting to acquire Blinkx. But if they really want to be a player in the Internet business (which will subsume the global/national non-TV news business) then they should consider buying Barry Diller’s Interactive Corp. The synergies would be excellent. Also, given the P/E multiples for Internet properties (YHOO: 31.7, GOOG: 89.69) they could improve News Corp’s current 21.7 P/E and IAC’s “also-ran” P/E of 12.75 by combining and providing a serious alternative to the big Internet companies.

A News Corp/IAC combination makes sense because it would create a credible competitor in the upper echelons of the Internet market. I believe that the combination would garner a higher P/E multiple for both properties; the old 1+1=3 scenario. The combination would probably earn a P/E multiple in the area of 25 or 30.

Independently, I think IAC could easily double their value if they found a home with a larger partner that can make a play at being a top-tier Internet property. While there might be some personal issues between company heads Rupert Murdoch and Barry Diller, this combination looks to me like a winner.

There is also talk of Comcast or Google buying AOL from Time Warner at a supposed valuation of $20 billion. At this price tag, which seems quite high, it is beyond the reach of all but the largest Internet properties and Microsoft.

In the future, you’ll probably get the bulk of your non-TV news from the Internet and there will probably be only 4 real players in this field. The question is who will be left standing after the partnerships dust settles.

Of course, this leaves the local newspapers out in the cold. What can they do to chart a course toward future relevance? I’ll address this in a future post.

Just for fun, my long-term stock picks are:
Interactive Corp. (IACI): $24.98/share with 12.48 P/E
Yahoo (YHOO): $33.93/share with 31.56 P/E

eBay/Skype: Royal Wedding or Royal Mistake?

2005-09-13T18:04:00.000-07:00

eBay’s ability to extract value from their Skype acquisition hinges on the following:

(a) eBay’s successful integration of Skype’s VOIP into the eBay suite of eCommerce services: eBay, Paypal, Shopping.com., Classifieds (Kijiji/Craigslist/Marketplatz/Mobile.de/Rent.com/etc.);

(b) The market evolving toward proprietary VOIP networks;

Point (a) is pretty straightforward. The synergy makes sense on paper (or whiteboard) and it is a matter of making it work in practice. Implementation on this account is largely within eBay’s control. In a nutshell:

Paypal + Skype:

Paypal is used to pay for Skype = more Paypal users = Paypal grows dominance as payment mechanism, creating barriers to entry by Google and Microsoft.
Skype taps into Paypal vendors for a pay-per-call (PPC) add-on with associated SkypeOut revenues.

eBay + Skype:

eBay taps into the Skype user base, comprised of bargain-hunting, technically savvy, early adopters (nice correlation). eBay adds PPC to improve communication, increase sell-through, enable international sales and raise barriers to entry by competing auction solutions.
Skype taps into the eBay user base of bargain-hunting, technically savvy early adopters (buyers and sellers) and introduces them to VOIP with PPC.

Shopping.com + Skype:

Shopping.com benefits from better communication, helping to grow the percentage of users who buy, versus just research and buy locally. Improved communication = improved comfort = improved sell-through rate.
Skype taps into yet another base of technically savvy bargain-hunters.

Classified Ads (Craigslist, Kijiji, Marketplatz, Mobile.de, Rent.com, etc.) + Skype:

Classified users can get additional information and schedule to meet/transact, it can all be anonymous too.
Skype enables eBay to monetize the large number otherwise free transactions by providing PPC services. And of course taps into yet more technically savvy bargain hunters.

Point (b) is a little more challenging. Will Skype continue to win the hearts and minds of users, resulting in a proprietary network/client combination? Or will something like the SIP protocol and Gizmo project or Asterisk or other such clients/PBXs using an open and interoperable network win the market?

If the telephone network is any indication, it started as a collection of proprietary networks, evolved into national networks and then the national networks worked among themselves to interoperate. Skype leapfrogs much of this with an instantly International network, but does it have the legs to remain the dominant proprietary network. Will, for example, IP phones circumvent the need for Skype? Will Skype license its solution to mobile phone companies to leapfrog POTS (plain old telephone service). This story is not yet written, and there are successful examples for both proprietary and open networks. The open TCP/IP protocol beat out Netware’s proprietary IPX/SPX despite a solid early lead. On the other hand the IM clients are all still proprietary networks.

If eBay can pull off point (a) that would be goo, but they need success on point (b) as well, in order to recoup the investment in Skype. If they also pull off point (c), described below, then the acquisition of Skype will go down in history as a great deal by a visionary company.

Point (c) is straightforward. I firmly believe that there will be a communications suite. People will use one platform for all real-time communication. That one platform should provide voice, file sharing, chat/IM and potentially even slide/whiteboard presentation capabilities. The $64,000 question is whether users will want their voice solution to handle IM or whether they will want their IM solution to handle voice. Which feature drives the user’s product selection?

Why will these features be offered in a combined platform? Because they go together like chocolate and peanut butter. Because you want to communicate with people, and communication involves all of these capabilities. I’m on the phone with someone, I want to send them a link, copy a quote, send emoticons (conference calls especially). Or I might be IMing and we get to a point that requires more verbal interaction, so we shift to voice. Also, keep in mind that Microsoft taught the world about the power of bundling with its come from behind to own the market effort with Microsoft Office.

If users want a voice platform that handles IM, Skype could dominate this field. If they want IM that provides voice, then AOL, Yahoo, Microsoft and others are in the lead position. If you ask the average person on the street, which of the two functions is most important, they will say voice. This bodes well for eBay/Skype. If they pull this off, it will be huge!

My recommendation is simple: eBay needs to buy Cerulean Studios. Their Trillion product is a meta-client for IM that operates across AIM, ICQ, MSN, Yahoo Messenger, and IRC. eBay needs to add this to Skype, in essence saying, get our VOIP solution and you can interact with any IM folks as well. Embrace and extend. Cannibalize IM with a meta-client and make everyone play on your home field: voice.

Wildcard Alert: Microsoft could also bundle all of this into their next operating system. That, of course, has the potential to reshape a market’s dynamics just as it did with the IE/Netscape market.

In short, it looks to me like it could be a great bet for eBay, given the current market conditions and resulting prospects. But those prospects could change with customers wanting voice added to IM, instead of vice-versa or with a killer Windows communication client.

The Internet vs. Newspapers

2005-09-09T14:35:00.000-07:00

I always find it interesting when a combination of seemingly independent news stories starts to unveil interesting patterns or trends. Here are a couple of interesting recent news items:

So a small San Diego newspaper is walking away from what has traditionally represented 40% of the revenue for newspapers. News Corp. is buying into non-newspaper Internet properties. And Google is looking to be a one-stop advertising solution for SMBs.

This tells me that free classified ads are a tsunami washing away everything in its path. Craigslist handles the local offline transactions, while eBay dominates the geography independent online transactions (fee-based of course). Who needs newspaper classified ads? Nobody. That’s the point.

Rupert Murdoch is no slouch. He saw the fecal matter colliding with the fan and figured, “hey if you can’t beat ‘em join ‘em.” He’s spending big bucks—$1.5 billion so far—to become a big player in the Internet. Ironically, these acquisitions are well outside the News Corp.’s traditional newspaper business.

As if undermining the profit opportunity in classified ads wasn’t enough, news is also free on the Internet. Just look at Topix, newspaper websites and blogs…all free. So if newspapers can’t make money on news or classified ads, what can they charge for? Local advertising?

Along comes Google, who’s clear goal is to become the one-stop shop for SMB advertising, both online and offline. Once Google, and others, take this advertising effort local, the newspapers are going to be in a real world of hurt.

Together these news stories begin to form a map of the trends in the intersection of the traditional newspaper and the Internet that does not bode well for printed newspapers.

Web OS: The Battle for Dominance

2005-09-08T15:51:00.000-07:00

My prior post addressed the brewing battle of the two dominant computing platforms: the Web OS vs. Desktop OS. The value of the platform is the ability to aggregate developers/applications and end-users and then make these two groups use your platform (traditionally the operating system) to access the each other. For example, if you’re an end-user and you want the largest selection of applications, you run Windows. If you are a developer, and you want access to the largest collection of end-users, you write your application to Windows.

This dynamic then feeds upon itself according to the Law of Increasing Returns (AKA the Virtuous Cycle). More developers = more applications = more users = more developers…

Traditionally, the operating system has been the chokepoint between developers and end-users. By owning this chokepoint, IBM in mainframes and Microsoft in PCs, have been able to extract tremendous value and leverage. Both companies exploited this leverage to dominate their respective markets.

We have also seen a number of competitors attempt to compete with Microsoft as platforms. Novell, Sun/Java and Netscape have attempted to define a platform alternative. All three have attempted to woo developers and end-users in an effort to assemble their own platform. All three have failed for one reason or another, not the least of which was Microsoft’s ruthless competition.

Let’s look at what it takes to assemble a platform:

1. End-users.

If you are going to knockout Microsoft, you must have either more users, or a trajectory that, if maintained, provides the promise of more users. At the very least, you need to provide access to a roughly equivalent number of users.

2. A Superior Solution for Developers

This is comprised of a number of things.

Tools: You must provide excellent tools, so that developers can work in an environment they like, and one in which they can assemble cutting-edge applications
Opportunity to Pioneer: You must enable developers to build unique and interesting applications, something they couldn’t build on the competing platform.
Opportunity to Profit: Developers—with the exception of open source—want to make money. If the costs to build, test, package, promote, sell and support their product is too high (as with mainframe software) they will look for a less costly business opportunity.

[Note: Clearly, the operating system isn’t the only platform. A good example of a non-OS platform is Oracle’s database. It followed the formula described above, by building both an end-user base and a developer base. This then started the virtuous cycle that has fueled the company’s growth.]

The big question is whether the web now provides the characteristics necessary to become the dominant platform. The answer is yes. The web has the user base. The web provides developers with the opportunity to pioneer, especially in the areas of community, social networking, collaboration, etc. There is also the opportunity to profit on the web because your web application has access to a tremendous web user-base, while virtually eliminating traditional costs associated with publishing, distribution, marketing and support. Any kid with a computer and a broadband connection can now launch a web application.

The ability to both pioneer and profit are demonstrated by web start-ups like Yahoo, eBay and Google that have become multi-billion dollar companies.

The current web application development tools are server-centric. And building server-centric applications on the web has been sufficient, until now. Now the game is shifting. Now applications, in an effort to battle head-to-head with desktop applications, must be more graphically appealing, more responsive and more powerful. In short the user experience needs to mimic the user experience of desktop applications.

For this reason, web development tools (languages, IDEs, frameworks) need to: (a) provide more desktop-like functionality (e.g. drag-and-drop); (b) facilitate client-side processing. This is happening. In some respects, it appears to be a race. Microsoft is racing to leverage web resources, while the web developers are racing to leverage client-side resources.

Handicapping this race is interesting. Microsoft has the edge in user-base, but the web is closing fast. This is a new and unique challenge for Microsoft. Microsoft’s tools and developer programs still lead, but there are some very good tools emerging on the web side. Where the web has the edge is in the opportunity to pioneer and the opportunity to profit.

People are building very cool web applications that you could never envision on the desktop. Applications like Flikr, Del.icio.us, Facebook, various mashups, this stuff is really new, unique and interesting. The killer advantage of the web is its low cost structure and the ability to build something cool and watch it spread, simply by word-of-mouth. This results in a tremendous opportunity to profit.

Web development tools are evolving. They are beginning to enable developers to leverage client-side processing more easily. This will result in even better and cooler applications. As a result, the web will evolve as a platform that more directly competes with Windows.

The question is whether one company will emerge as the owner of this platform. By virtue of the web’s distributed nature, it looks like we won’t have a single chokepoint on the web platform. Instead we’ll have alpha-dog companies, like Google, who will lead and influence the evolution of the platform, but there won’t be a single owner of the platform.

The Web OS vs. The Desktop OS

2005-09-06T12:33:00.000-07:00

As Microsoft has demonstrated, and IBM before them, owning the platform standard is computing’s equivalent of boxing’s undisputed heavy-weight title. Owning the platform means that you own that critical juncture between developers and users. Users must use your platform to operate their applications and developers must program to your platform in order to access the users.

IBM owned the platform back when the platform was the mainframe. The mainframe, as a platform, had both pros and cons. When the mainframe was king, computers were large, expensive and complex. Maintaining them centrally offloaded the pain and expense from individuals, while sharing the benefits across a large group of users.

As the costs and physical dimensions dropped, computing became personal. The real driver of personal computing was economics. Anyone could afford a PC and so the barrier to entry by users and developers dropped precipitously. This, in turn, led to unprecedented innovation. It also meant that while the mainframe remained an important platform, the desktop operating system merely became a more important platform.

The Internet has resulted in a sea change once again. The Internet lowers barriers to entry yet again for both users and developers. Users can promiscuously try any number of applications on the Internet, often for free. Developers can build and release applications without the typical production, advertising and distribution costs.

Now, the two predominant types of applications are desktop applications and web applications. Both have their pros and cons. I look at some of the pros and cons from a user’s perspective. (Note: There are also pros and cons from a business’ and a developer’s perspectives, but I don’t address those here.)

Desktop Applications
processing occurs on the desktop

Pros:

Disconnected operation: continues to function without Internet connectivity
Responsiveness: responds more quickly, you don’t have the latency caused by loading pages
Rich Functionality: enables things like drag and drop, real-time spell checking, type-down suggestions, cut & paste, etc.

Cons:

Turns every user into a systems admin, managing the operating system, applications, upgrades, conflicts, spam, etc.
Turns every user into a security specialist, managing firewalls, back-ups, etc.
Application functionality evolves more slowly, according to release cycles
Weak in providing interactivity and community benefits (e.g. group editing)
Not integrated with the rich data on the Internet

Internet Applications
processing largely occurs on the server

Pros:

Very powerful interactivity and community benefits
Hyperlinked to rich data throughout the Internet
Rapid application evolution and bug fixing
Managed services offload system admin and, to a lesser degree, security functions.

Cons:

Requires connectivity, doesn’t work when disconnected or mobile
Less responsive, more latency as pages are loaded
Less rich functionality, lacking things like drag and drop

Hybrid or Shared Processing

Recent developments are enabling a blending of processing, or a hybrid processing model. Internet applications are shifting some of the processing to the client, using methods like AJAX. This approach reduces the latency in web applications, because the applications aren’t refreshing whole pages, instead they send small pieces of information that can be processed locally.

An example of this is Gmail’s type-down capability. When you compose an email you start typing the recipient’s email address and Gmail offers you suggestions based upon the letters typed. It does this without refreshing the entire page.

At the same time, Microsoft and Apple are adding more Internet functionality to their operating systems. For example, Vista, the future version of Windows will provide an RSS platform. This will make web-based data available to applications through a common API. Imagine, for example, using Outlook to set-up a meeting with someone out of state. Outlook might automatically offer flight options, weather information, hotel and car information, and more, without requiring you to request that information, but merely selecting from what it finds on the Internet.

In short, operating system companies are embracing the Internet and exposing it through their OS platforms. At the same time, the Internet companies are processing more and more information on the client to provide desktop-like application functionality. This hybrid approach moves the processing dial somewhere into the middle between server and desktop processing.

This is nothing new. We’ve had client-server architectures in the past that shared processing between, well the client and the server. We’ve seen applications like Half-life’s Counter-Strike. Counter-Strike relies on server-based data management and local processing to create multi-user virtual worlds with incredible responsiveness.

The press and Silicon Valley act like Don King promoting the next heavyweight battle with a fresh contender going up against Microsoft for control of the platform. Which of course, means battling for the hearts and minds of users and developers. We’ve seen failed efforts before, is the webOS destined for success?

There are several unanswered questions that will ultimately handicap this battle.

Generally speaking, where is the right balance of processing between the server and desktop?
Is connectivity sufficient to support a webOS model?
Will a standard local suite like MS Office suffice for most disconnected requirements?
Can web development leverage its speed and cost advantages to own the hybrid computing “platform” or will Microsoft leverage its installed base (developers and users) and resources to overwhelm the web upstarts?
Can a generalized engine, possibly the Java VM, browser, etc. satisfy the local processing needs of all web applications?

Let’s hope this isn’t yet another quick knockout in the early rounds. This sort of battle can be hell for developers (think OS/2 versus Windows), but it is great for consumers.

GoogleNet, Echoes of Orwell

2005-08-18T21:57:00.000-07:00

Is Google building Googlenet, a free national Wi-Fi network, in an effort to leapfrog the telcos and cable companies? If so, what would it mean?

Could Be
There are rumors about them building such a network. They recently said they want to raise about $4 billion, and the domain name wifi.google.com returns a server error instead of a “server not found”, meaning it is a placeholder.

This is consistent with prior moves by Google. They want to be your start page. They did a deal with T-Mobile to be the start page on mobile phones, and they pay to be the start page and default search engine on the Firefox browser. They are taking a page right out of Microsoft’s playbook: own the user interface.

Besides, Google is only an innovation or two away from being surpassed in search by someone else. Their best barrier to entry is to become the entry point, or access point, to the network.

What Could It All Mean?
Well, like anything, this development could have some very nice advantages and some very scary disadvantages.

The Good:
• Free broadband for all (helps education, the poor, commerce, etc.)
• Mobile broadband…anywhere (enables killer mobile applications like VOIP)
• They can triangulate your location enabling them to instantly provide more relevant location-based information

The Bad:
• Google locks itself in as the start page stifling innovation by others (echoes of Microsoft)
• Google could leverage this into domination of developing areas (e.g. VOIP, TV over IP, etc.) where innovation is stifled again

The Ugly:
By owning the access points, through which all data flows, Google would be in a position to analyze huge amounts of data about you. They could learn where you go physically and what sites you visit on the Internet, what you do, what you buy, from whom, when, how you pay, everything. Some people are concerned about the massive databases assembled by credit card companies or the carnivore project, well this would make them look like child’s play!

You might say, oh, they wouldn’t do that. Well, if you use Gmail, they are already analyzing your email. They are already analyzing what you search for. So what’s to stop them from analyzing your every move on the Internet? It sounds pretty Orwellian, but hey they would need to recoup their multi-billion dollar investment in building this huge network. By collecting and using, or selling, information about your every move on the Internet they could make a fortune. I guess your perspective on this all depends on whether you believe Google’s credo “don’t be evil”.

p.s. If Google announces a free Googlenet, short the telcos and cable companies they would be roadkill, especially the telcos.

tags: google, googlenet, carnivore, wifi

Will Advertising Sponsored Content Remain A Viable Business Model?

2005-08-08T13:36:00.000-07:00

On the surface, you might look at the success of Google, Yahoo and others with their advertising sponsored business models and conclude that this model IS the future. I believe that this business model faces serious near-term challenges. Let me explain why.

Yes Google, the bellwether of the advertising sponsored business model, is making money hand-over-fist. But let’s look under the covers (as far under as Google will allow us to look). Here are some basic facts:

Google’s ad views are growing considerably through: (1) increased use of their search engine; (2) expanded services (e.g. Gmail, local search, etc.) which add ad inventory; (3) an expanding base of websites carrying ads syndicated through AdSense. In short, more people are seeing more ads.

In speaking with webmasters, VCs and businesspeople I am hearing that aggregate ad views are growing much faster than ad revenue. At the same time, the prices of keywords, through the bidding process, are increasing.

What does this mean? It tells me that more people are seeing more ads, but the click through rate (CTR) per ad is dropping. The growth in number of ads displayed and the price per click of ads are growing fast enough to mask an underlying weakness in CTR on a per ad basis.

The dropping CTR is going to get worse, here’s why:

Users Are Trained to Ignore Ads:
Users know that clicking on some Internet ads can result in nothing but trouble. These ads can install adware, spyware, change your browser home page, increase your spam and result in endless pop-ups or pop-unders. As a result, users quickly learn to ignore the ads around the border of the page and focus instead on the actual content in the middle.

Granted, the branded ads like those served by Google and Overture are free from these annoyances, so the impact on these types of ads is lessened. But with users being trained to ignore all ads, even these safe text ads suffer.

Technologies Are Removing Ads:
Software such as AdBlocker removes ads on the client side, enabling users to view websites without even seeing the ads. If you cannot see the ads, you certainly cannot click on them. Clearly, this technology undermines advertiser sponsored business models.

The biggest threat, however, is the hottest wave on the Internet today, RSS. RSS is an abbreviation for Really Simple Syndication (others have begun calling it Really Simple Stealing, for a completely different reason). RSS enables individuals to extract the latest content from a website without the graphics, layout or ADs! Yes there are some programs for inserting ads into RSS feeds, but their CTR is 1/10th that of the same ads on websites.

While RSS decimates web advertising (actually killing 9 out of 10 instead of 1 out of 10 as in the etymology of the word decimate), it will get even worse. The 90% decline in CTR is based upon today’s RSS usage which is largely through RSS readers that are read by people (versus applications). What happens with Microsoft’s upcoming Vista OS where RSS becomes part of the platform and an increasing number of desktop applications consume web data, automatically stripping the ads and removing the human reader? Very simply, the CTR will drop precipitously.

Imagine, a Windows Vista desktop application that scours blog feeds and news feeds and caches the information locally as a personalized newspaper. It won’t pass through ads, those will all be stripped out. How do those content providers get paid?

Fortunately, the web is a breeding ground for innovation, and some smart people will figure out a solution. Here are a few ideas:

Other Forms of Advertising:
1. Product placement: As TiVo and other TV recording devices make it easier to strip ads from TV , advertisers have increased their use of product placement. I expect this to increase on the Internet.

2. In-situ advertising: Content creators will increasingly add hyperlinks directly into their content. Companies like Vibrant Media will embed paid links directly in the main content. However, these ads could be stripped out if they carry the important tracking code, in the same way that virus and spam Much like affiliate IDs, any sort of tracker code will alert anti-virus and anti-spam software remove hyperlinks with affiliate code.

3. Paid placement: More bloggers and websites will take money for favorable articles about companies or products. This model has been used in traditional publishing, but it typically bears the “Advertising Section” label. I’m not sure blogs will use this same mechanism, but by not using such a label they will undermine their credibility, and credibility is the lifeblood of blogs.

4. Coupon-based advertising: Coupons are the one form of advertising people actively look for. In fact, more than 43% of Sunday newspapers are purchased primarily for the coupons. There were 350 BILLION coupons distributed in the US last year. I believe that you will see the rise of coupon-based ad syndication networks on the Internet in the near future, because people won’t want to strip out coupon ads, they’ll want to find and use them.

So, using the example above where a desktop application assembles a personalized newspaper for you, it might actually add coupons for items you buy regularly. Full disclosure: My company will release a beta of our coupon syndication network solution in the August/September timeframe.

Conclusion:
I realize that the advertising sponsored business model is hot right now and it is demonstrating significant growth. I don’t suggest that it will go away any time soon. What I am suggesting is that we are in the early phases of advertising on the Internet and what we see in a couple of years could be very different that what we see today. It has taken the PVR a long time to hit critical mass, where it is reshaping advertising, but by definition, the Internet is accessed through computing devices (of all sorts) that have the ability to filter ads just as the PVR does. I’m sure that this capability is keeping entrepreneurs, VCs and Internet strategists awake at nights…or maybe it’s just me.

Tags: RSS, Google, CTR, PPC, Internet, Business, Ads, coupon, adblock

The Pending Death of Directories & Newspapers?

2005-08-05T10:44:00.000-07:00

A reader asked me which would die first, newspapers or yellow pages directories. First let me state that the leaders in both of these industries have the time and money to redefine themselves or simply buy into the new media world. I doubt that they will roll over and “die”. A good example of this is News Corp.’s acquisition of Intermix, parent of MySpace. Other examples include Gannett/Knight Ridder/Tribune acquiring Shoplocal and Topix.net. Clearly the newspapers are feeling the heat from Internet upstarts and they are actively partnering and acquiring companies to fill that need.

The publishers of directories are not yet feeling the heat to the degree newspapers are. They have seen Yahoo’s Internet Yellow Pages take a dominant leadership position, but the printed side of the directory industry has not yet felt the Internet breathing down their necks like the newspapers have.

The traditional directory publishers have teamed up among themselves in an effort to make their yellowpages.com the leader in the space. Yellowpages.com has also partnered with AOL and Switchboard to better enable them to go after Internet Yellow Pages (IYP) leaders Yahoo and Verizon/MSN.

The fact that they are focused on distribution and internal partnership, instead of attempting to buy outside technologies, is an indication that the directory business is not yet feeling the heat from the Internet, like newspapers are. They aren’t as desperate and seem to be moving more cautiously. There are other factors to consider as well.

Shelf-life/Contract Cycles:
Two factors, which go hand-in-hand, are the shelf-life of the product and the length of the advertising contracts. Newspapers have a one-day shelf-life, while directories have a 12 month shelf-life. This is further reflected in their advertising contracts. The majority of the advertising contracts for newspapers range from daily (one-time) to monthly. This means that advertisers, presented with a better solution, can switch rapidly to exploit Internet solutions. For directories, the contract runs 12 months. Advertisers are locked in to the contract, so switching isn’t as quick.

Switching/Testing Costs:
A newspaper advertiser can easily test an Internet alternative, because if it fails to meet expectations, that advertiser can easily re-engage the newspapers advertising again, getting into the following day’s paper. However, if an advertiser declines to advertise in the printed yellow pages, they must wait 12 months before they can get back in. Because of this, directories have higher switching/testing costs.

Instead of leaping into an Internet alternative to the printed directory, the prudent advertiser might scale back their directory ad, say from a half-page to a quarter-page, while they try Internet alternatives. This has a buffering effect on the financial impact on directory publishers.

Competitive Threat:
The competitive threat to newspapers is very high, because the user experience is dramatically better online. The news is fresher, typically free, classified ads are more comprehensive (often times including pictures) and in many cases free, coupons are more convenient (and improving), Blogs provide more detailed and hyperlinked information from specialists in the field. Basically, everything a newspaper offers is much easier and better online.

The improved online user experience is taking its toll on the newspapers. For example, look at the classified ads segment. In 2003 there were 120M classified ads in newspapers in the US. At this same time, there were 602M listings on eBay. Craigslist and others present a growing threat to printed classified ads, so newspapers are facing an immediate threat.

Directories don’t have that level of threat yet. The experience is not yet that dramatically better online. Yes search is nice, being able to link to their website is nice, but the user experience with a printed directory isn’t too bad. As a result the competitive threat isn’t that serious yet. But it is coming. Search engines are all testing local search, and local search is the new front-end to directory information. Local search must keep the traditional directory folks awake at night…it should.

Tipping Point/Event:
There is often an event that wakes people up to a new technology and enables that technology to achieve critical mass or mass mindshare. For Blogs, it was the combination of the Rather-gate scandal and the 2004 election cycle. In both of these cases, the blogs had the news well ahead of the mainstream press and provided more detail than the press. As a result, people woke up to the entire concept of getting news and editorial from blogs. Combine this with feed subscription a la Bloglines and people can assemble their own ad hoc newspaper.

We haven’t seen an event that will provide a tipping point for online directories just yet. The integration of local search into general Internet search may be that tipping point. Adding some significant value such as a large number of online coupons or some other capability or event is needed to push Internet directories to their tipping point, otherwise it will take some time.

The confluence of these factors means that the impact to newspapers is more of a clear and present threat to their printed revenue streams today. This is accelerated by declining readership of newspapers, a 20 year trend. At the same time, these factors describe why I have suggested that directory publishers are probably 3 years out from feeling the impact of the Internet on their bottom line.

The Speed of the Transition:
But there is another aspect of this question that demands consideration, and that is the speed of the transition from print to digital content. In other words, once the transition to online solutions starts, or even once it hits the tipping point, how quickly will it siphon readers away from its hardcopy brethren?

We have seen a fairly rapid transition for classified ads, with Craigslist and eBay soaking up most, almost all, of the growth. This will continue to grow and printed classifieds will soon start declining. But newspapers offer a diverse set of offerings. Having seen the impact on their classifieds, they are learning and applying this knowledge to other areas, including coupons, city guides, editorial content/blogs, etc. This diversity and their painful lessons in classified ads, and news, are helping them make the transition to diversified local portals.

The yellow pages don’t have this luxury. They are, for all intents and purposes, one-trick ponies. When the Internet starts to siphon readers away in earnest, what do they do? They are trying to build a local portal, much like newspapers, but the newspapers are way ahead. When online directory information is available through your mobile phone, VOIP phone, PDA, iPod, Internet search engine, etc. and it provides richer information such as hours of operation, areas of specialty, user ratings, user reviews, coupons, etc. and it hits the tipping point, the impact on directory publishers will be more rapid than the impact on newspapers.

So while I don’ predict the death of the industries or even the companies, I believe that both newspapers and directories will, over time, shift to a predominantly online delivery mechanism. I believe that the newspapers will feel the impact sooner, and have felt it sooner. But once it starts to really impact printed directories in earnest, their fall from leadership will be more precipitous.

…but hey, I could be wrong. What does your crystal ball say?

BTW, I was on vacation, but I'm back and will be puiblishing more frequently again...

Tags: localadvertising internet business, IYP, yellowpages, newspaper, strategy

Yahoo Accelerates Classified Ad Cannibalization

2005-07-12T15:40:00.000-07:00

Yahoo recently announced that they would add job posts, spidered from other job sites and company job listings on the Internet, to their HotJobs. This might seem like a simple way for the #3 job board to address the critical mass issue and leapfrog the competition. But the ramifications are far deeper and should scare the hell out of online classified ad companies and, more importantly, newspapers.

In a previous post, I mentioned that owning the customer is far more important than owning the advertiser. Well HotJobs seems to agree. As the number three job board, they decided that they wanted to become the #1 destination for job seekers at the expense of cannibalizing the entire segment.

It is a classic approach of cannibalizing the market in order to leapfrog the competition. Become the leader, then make money through additional features. Retailers used to call it the loss leader that generates customer traffic. I’m sure this scares Monster and CareerBuilder, but the people who should be quaking in their boots are the newspapers.

Let me explain: In 2004 online employment generated about $1.2 billion in revenue. But printed employment ads generated $4.6 billion for newspapers. That represents 27.7% of their total classified ad revenue, which was $16.6 billion in 2004. It is one thing for Craigslist and their bohemian classified ad board to offer free ads (and even they charge for job posts in some areas), but when a major portal tells companies that instead of paying to list their ad with a job board, they can put it on their own website and Yahoo will aggregate it for FREE, that is a game changer.

So what is the next shoe to fall? Housing and Automotive are the other two of the big three revenue generators for newspapers and online classified ad companies. Are they next? In my opinion, it is just a matter of time before these two segments are also spidered into an early death. It’s enough to give newspapers a serious case of arachnophobia.

Sure some little job boards were already aggregating job posts for free, but Yahoo has now made it the standard. They have created a slippery slope and it’s the newspapers that are sliding down it. Printed classified ads only provide a listing. Yahoo is making that free in order to sell add-on services. On top of this, online classified ads provide a far superior user experience than printed ads. So how will newspapers compete with free?

I wrote a while back that basic classified listings would become free, Yahoo has now made it official. No doubt Google will be right behind Yahoo, and then the floodgates will fly open.

Craigslist has been a thorn in the side of newspapers, now Yahoo puts a stake right into their hearts. By cannibalizing online employment, they have started down a slippery slope that will send newspapers into the abyss where their $16.6 billion in classified ad revenue begins drying-up.

tags: classifieds, yahoo, jobs, craigslist, newspapers

Look Ma No Ads!

2005-07-07T13:39:00.000-07:00

tags: ads, advertising, adblocker, coupon

A brief history of consumer behavior:
Spam got annoying, consumers got spam filters
TV commercials got annoying, consumers got TiVo to skip commercials
Internet pop-ups got annoying, consumers got pop-up blockers
Now, Internet ads are annoying, consumers are getting ad blocking software

Do you see a pattern? I think there’s a message here. Unfortunately, we consumers often overreact and throw the baby out with the bathwater. I’m sure there are TV commercials that would interest me. My spam filter catches real emails and offers that might interest me. Some pop-ups add value, but they too are caught by pop-up blockers. But once my annoyance level gets too high, these inconveniences become a small price to pay for my sanity.

In the 1970’s consumers viewed 500 ads in an average day, that number is now over 3,000 ads a day. With my surfing habits I would say my screen sees probably twice that number. I say my screen, because advertisers have trained me to ignore ads. And that points to a real problem that is brewing for the Internet. Advertisers, through their behavior, are training users to ignore ads.

What Internet surfer hasn’t been duped into clicking a banner, often disguised as a shooting game, only to be barraged by one banner after another? Or maybe the advertiser infects us with adware or spyware, the gifts that keep on giving. That negative reinforcement does wonders for training people NOT to click on ads. Hell, negative reinforcement works on dogs, what makes you think you can pull one over on people?

So how do advertisers respond? They make their ads flash like multi-colored strobe lights. I guess these advertisers aren’t targeting the epileptic demographic (strobe lights set off epileptic seizures). So, I hit the stop button on my browser to stop the pulsating fluorescent strobe effect. Advertisers learn from this and modify their strobe-ads so that they are impervious to the stop button.

These rogue advertisers live by the motto: carpe diem. They don’t care about the long-term effects this consumer harassment has on their industry as long as they deliver a tenth of a percent higher click through rate (CTR) than the other guy.

The result is simple. Consumers are being trained to ignore ads, or anything that even smells like an ad. And there are plenty of technologies out there to help us. One is AdBlock, a nice little plug-in for Firefox. It allows you to kill ads on webpages, but takes it one step further. It blocks all future ads from that same ad server.

So what is my message to advertisers?
Create ads that add value, and serve them in context to ensure that they add value.

Google’s AdWords and Yahoo’s Overture services provide fairly innocuous text ads and embed them into search results matching the context of the search. This is acceptable, to me. In fact, sometimes it is the only way for an innovative company to get attention/traffic in order to build their organic search rank.

But you know what. Although these ads are more subtle they too are training people not to click on them. Additionally, they might be the baby that is thrown out with the bathwater. I haven’t seen any studies on this, but I would bet that as consumers become more web savvy, their personal CTR drops over time, even for these contextually relevant ads.

So what are advertisers to do? TV advertisers are inserting ads in the context of the shows. Look at the sodas TV characters drink, look at the computers they use. This is called product placement, and it’s big business and getting bigger.

Another approach is to truly deliver value. In case you haven’t noticed, the Internet is one big value shopping bazaar. Look at eBay, Craigslist, the recent acquisition of Shopping.com and Shopzilla for more than $1B combined. It’s simple: help people save money and they will beat a hyperlinked path to your door. I may be biased, OK I am biased, but I believe that coupons will become all the rage in Internet advertising. I’m talking about real coupons that achieve the advertising companies’ business objectives (see my previous post on this topic).

The bottom line is ads either need to hide in the content, like product placement, or even better they need to deliver value, real value, like coupons. Otherwise the constant effort to push the envelope, in order to build short-term CTR will bite you and your industry in the butt!

And Now for Something Completely Different: Insurgent vs. Terrorist

2005-07-06T10:36:00.000-07:00

tags: terrorist insurgent labels

I realize that this has nothing to do with local Internet issues, but it is nonetheless something that needs clarification, because it annoys me...

Print and TV media predominantly refer to the “fighters” in Iraq as “insurgents” while conservative talk radio often refers to them as “terrorists”. Which label is correct? Obviously, this is a politically charged issue, but I believe that we can cut through the political rhetoric and get down to the facts, at least in certain situations that are clearly black-and-white.

First we need definitions for these labels:
Insurgent:
noun: 1: a person who rises in revolt against civil authority or an established government; especially one not recognized as a belligerent; 2: one who acts contrary to the established leadership (e.g. of a political party, union, or corporation) or its decisions and policies.

Terrorist:
noun: someone who uses of violence (or the threat of violence) against civilians in order to attain goals that are political, religious or ideological in nature; this is done through intimidation, coercion or instilling fear. Terrorists usually organize with other terrorists in small cells; often using religion as a cover for terrorist activities.

(Note: you can look at the politically charged definitions in the Wikipedia, but the term “insurgent” was added April 11, 2004 and the term “terrorist” was added in 2001, so they are both at least somewhat suspect.)

When determining the appropriate label, one most consider the following:

1.The perpetrators – Are they local residents? How can foreigners fight against an illegal occupying force, when they themselves are not local residents? The fighters must be local residents to be insurgents, freedom fighters or guerillas. If they are foreign, they are at best mercenaries, but only if they are paid for their actions.

2.The target(s) – If the fighters target the government or the military infrastructure supporting the government, while attempting to minimize collateral damage to the indigenous civilian population, then they can be considered insurgents, freedom fighters or guerillas. Insurgents or freedom fighters will carefully avoid civilian casualties in order to build local support and recruit followers. Some people might consider government employed police forces a legitimate target for insurgents, but attacking foreign diplomats, Iraqi female civilians and the like, is clearly an act of terrorism. Terrorists tend to target civilians in order to incite terror among the populace.

3.The methodology – Are they attempting to merely kill these targets to undermine and destabilize the government they deem illegal? If they are desecrating the corpses or killing the individuals in a publicly distasteful manner and then broadcasting it, they are merely attempting to instill fear. An objective observer might consider the killing of the military support personnel in Fallujah a legitimate action by freedom fighters, but the desecration of their bodies by dismembering, hanging and burning them is clearly a terrorist act. In the Middle East, decapitating an individual might be considered a reasonable form of execution, but triumphantly displaying the severed head, video taping and distributing the video tape makes this an act of terrorism.

Based on these criteria, we should be looking at the individual acts. As I understand it from people who are in Iraq, or have been in Iraq, there are three types of homicides taking place there:

1.Ethnically Motivated Murder: Sunnis Killing Shiites and vice versa. Much of this activity is motivated by revenge for past activities of the groups. This is the stuff civil wars are made of. The Shiites kill Sunnis because of injustices caused by Saddam Hussein’s (Sunni) government. The Sunnis respond by killing Shiites, and the cycle continues. Generally speaking these are not the acts of insurgents or terrorists, they are simply murders by murderers.

2.Terrorism: As defined by any one of he following: the perpetrators (foreign fighters), targets (civilians, foreign diplomats, etc.), or the methodology (e.g. video taped decapitation that is publicly broadcast).

3.Insurgency: Must satisfy all of the following criteria: Perpetrators (local residents), targets (government or military infrastructure, while minimizing civilian casualties) and methodology (killing merely to kill or disable the infrastructure).

Then, of course, there are the gray areas. Are police considered a viable target for freedom fighters? Are Palestinians in Israel considered foreigners, because they consider it their land? The gray area is where your political perspective or objectives come into play. But clearly, we can and should be more precise about automatically labeling perpetrators terrorists or insurgents and look instead at the circumstances and use the proper term.

...Now back to our regularly scheduled programming...

Printed Yellow Pages are in Strategic Peril

2005-07-01T19:11:00.000-07:00

Tags: yellowpages, local, business

After my last post, some people in the yellow pages industry questioned some of my conclusions, so I thought I would detail them out here. First I’ll address the challenges facing the traditional yellow pages publishing industry.

Tactical Challenges:
These are significant challenges, but they don’t dramatically change the game, like strategic challenges do. In other words, the traditional directory publishers can meet these challenges by simply better executing their business than the competition:

1. Deregulation has resulted in competition from Independent publishers. These publishers are undercutting the traditional publishers pricing. As a result, they are capturing much of the growth in the industry. According to Simba the Independent Yellow Pages publishers grew 13% in 2004, while the overall industry grew only 3.9%. The Independent publishers were responsible fo the bulk of the growth in the industry.

2. As mentioned in my last post, as a result of Feist v. Rural competitors can buy national directory data for between $250K and $500K a year. This lowers the barrier to competition, resulting in more independent publishers.

3. Advertisers pay for a year of advertising. At the same time, most families throw out the old yellow pages when they receive a new one. So, the independent publishers stagger their printing cycles. The result, in a two-yellow pages town, is that each yellow pages book has an average shelf life of six months. So advertisers are paying annual prices for six months of advertising.

Strategic Challenges:
These are challenges that can effectively change the game. These challenges are the result of disruptive technologies that threaten the very need for and existence of printed yellow pages. Traditional yellow pages publishers cannot overcome these challenges by better executing their traditional business. These challenges require that the company modify, or at the least extend, its behavior to continue to maintain its role in the future.

1. Mobile Phones: When phones were tethered to the wall, a large yellow pages directory made complete sense. With mobile phones, bulky printed directories make little sense. This is compounded by the growing storage capacity of phones. It’s just a matter of time before phones come pre-loaded with local directories that are updated via the Internet. Many younger people, like my brother, don’t have a home phone; they just use their mobile phone for everything. In what must really scare the yellow pages (or at least it should) T-Mobile has decided to make Google’s search engine the default home page for their mobile phones. T-Mobile is effectively telling mobile phone users not to use the directory, instead use Internet search.

2. The Internet: The Internet provides users with an experience that is far superior to printed yellow pages. The advantages the Internet provides in terms of data freshness, richness, supporting data, etc. is overwhelming.

Let me dig a little deeper into the challenges presented by the Internet to provide a more complete picture.

User - Easier to Use:
The yellow pages rigidly force companies into predefined categories. These categories may not be intuitive to you or me. If I’m looking for in-home care, do I look under Nursing, Health, Health Services, Home Health Services, Hospice, Medical Management Consultant, Medical Service Organizations, Senior & Aging? Before long, I’m tearing my hair out…oh, hey, there’s hair replacement. In the Internet, you simply search, and in addition to the results you are presented with similar categories. Internet yellow pages are far faster and easier to use.

User – More Detailed Information:
Not sure whether that attorney in the yellow pages handles wills? Well, you have to call and ask. But with the Internet you can click on the law firm’s website, read the attorney’s bio. You can even Google the attorney to see what people say about him/her. The IYP might even have user ratings and reviews. If you’re looking for a restaurant, you can look at their menu online. The list of information available on the Internet is constantly expanding.

User – More Services:
With pay per call services Internet yellow pages can offer a call button that uses your PC speaker/microphone to call the attorney above. Or it might automatically place the call and ring your phone. You can get a coupon online. You might even be able to view the attorney’s calendar and schedule an appointment. A printed yellow pages can’t do any of these things.

User – Access:
Back in the day when we still used the printed yellow pages, I could never find it. I’d put it in a drawer and then I’d go back and it would be gone. And when was the last time you saw a complete yellow pages connected to a payphone? People rip pages out, lose it (or use it to prop-up a piece of furniture or something). I don’t know about you, but I know where to find the Internet, at home, at work, on the road, it’s always there.

Advertiser – Real-Time Modifications:
Yellow pages are printed annually, Internet pages are dynamically generated from the latest data each time you visit them. In other words, we are comparing a 12-month data refresh cycle to a real-time data refresh cycle. Seasonal businesses can leverage the Internet whereas they couldn’t take full advantage of the printed yellow pages. Real-time changes are very important in today’s fast-paced business environment. Not only can you change basic contact information, but you can also fix mistaken data and add more background information.

Advertiser – More Complete Data:
With printed yellow pages you pay according to the amount of space you use. This is because printed materials have ink, paper and distribution costs. The Internet has none of these. As a result, it is in everyone’s best interests that the advertiser put in as much information as possible to enrich the user’s experience. Advertisers can add menus, list selling points, services, inventory, specialties, include images of the people or the business itself, and much more.

Advertiser – Measurable/Trackable:
On the Internet you get a great deal of information about the visitors, what they click, where they go, etc. This is valuable information you can use to tailor your advertising. Ask any yellow pages advertiser how many responses they get to their ad. Most have no clue whatsoever.

Advertiser – Shorter or Even No Commitment:
Advertising in the yellow pages is a 12-month commitment with no guarantee of results. Advertising on the Internet, depending on the program, may have no commitment. With search engine advertising, you can try something for a few minutes, and then try something else, if you want to.

Advertiser – Costs:
A full page ad in the yellow pages can range from about $40,000 to $80,000 per year. Ads in search engines start at 5¢ to 10¢ per click. Shopping engines start at about 20¢ a click. The annual fee for the highest level listing on Yahoo’s Internet yellow pages (#1 in the industry) is $720 per city or $4,600 per metropolitan area, or between 1% - 10% of the printed directory pricing.

Conclusion:
The confluence of disruptive technologies impacting printed yellow pages presents a serious and growing threat to their dominance of this valuable market segment. As mobile phones get more sophisticated they will store more directory information locally, and they will use the Internet to supplement this information.

Internet portals and search engines will continue to integrate more services to enhance their offering. As their advertiser self-service interfaces become more user-friendly, they will dramatically improve their appeal to small businesses. Newspapers are also adding local directories to their websites in their effort to remain atop the local advertising business.

The printed yellow pages are also suffering from an aging user base. A much higher number of new businesses are turning to search engines, Internet yellow pages and other alternatives to the printed yellow pages. This is evidenced by the steadily declining growth rates of the yellow pages revenues. This is a trend that will soon start to accelerate as Internet advertising becomes more approachable and more accepted and as more companies establish websites.

“The traditional media--newspapers, radio, and television--have seen spending by local marketers erode despite improved business conditions...Ad spending on the Internet will be up 15 percent to $7.8 billion” – Bob Coen, Universal McCann

I’m sure some readers, particularly those with a vested interest, will discount these arguments by pointing to the financials of printed yellow pages companies. I’ll address this in a follow-on post. But I will add that according to Harvard professor Michael E. Porter, growing profits and sagging revenues are actually a sign a business or industry in its twilight years. There is always talk of the sales forces of the yellow pages vendors. This reminds me of modern warfare, where air superiority is everything. Simply bomb the ground forces into oblivion, then mop up the pieces. More on this later.

Owning the Consumer vs. Owning the Advertiser

2005-06-28T16:46:00.000-07:00

Tags: business, IYP, local+Internet, yellowpages

The Internet yellow pages market is shaping-up as a battle between the yellow pages publishers (YPPs), who own the advertiser, against the leading Internet portals, who own the consumer. The $100 billion question is who will win.

Owning the Advertiser
The YPPs clearly own the advertisers. For over a century, they have built an infrastructure around selling and managing one of the primary advertising channels for local businesses. The YPPs each have thousands of salespeople on the phone and on the street, building relationships with local businesses.

These salespeople, their “feet on the street”, maintain and nurture the greatest asset the YPPs have, the relationships with the local businesspeople, the advertisers.

As with newspapers, telephone directories have encountered very little regional in-market competition. Just as cities naturally evolved toward a single dominant newspaper, the local telephone company owned the directory business in markets in which they operated, with a few notable exceptions. This provided the YPPs with regionally insulated monopolies. The advertiser had other options for their advertising budget (e.g. the newspaper), but the consumer was essentially a captive audience. So by default, they owned the consumer.

The Internet has broken regional monopolies on information. As a result of Feist v. Rural, directories are now aggregated on a national basis, and local users get their own local slice of this information on demand. The typical “one newspaper town” and “one directory town” has given way to a competitive free for all. The result is that the YPPs no longer own the consumer; the consumer is a free agent.

Owning the Consumer
In the other corner, we have the challengers, Internet behemoths like Yahoo, Google, MSN and AOL. In terms of sheer numbers of website visitors, these companies clearly own the consumer. Even focusing solely on the yellow pages market, Yahoo’s IYP is the clear market leader.

An even bigger threat to the YPPs is search engines. Consumers are increasingly using search engines to find everything on the Internet. Will the search engine become the de facto local directory? That is exactly what Google’s local search engine, and every other search engine, is attempting to do.

Consumers are being wooed by portals, search engines, local newspaper sites and Internet yellow pages (IYP) sites. The YPPs can certainly buy consumer attention through Internet advertising. But that buys visitors; it is up to the YPPs to turn those visitors into loyal customers. You cannot buy loyalty, you need to earn it.

Can the YPPs deliver sufficient value to earn consumer loyalty, or will the Internet portals integrate other value-add, such as local search, coupons, voice-over-IP (VOIP), instant messaging and much more to create a more comprehensive and more compelling consumer solution?

This train of thought raises another question. In the software business we always ask whether something is a standalone product or a feature. This question must be asked of the IYP as well. Is IYP a product or a feature? And what does the future hold? Remember, WordPerfect was once the leading product, until Microsoft released the Office Suite and turned it into a feature. The once mighty WordPerfect is little more than a technology footnote now.

What Does it All Mean?
Let us assume that the Internet companies own the consumer and the YPPs own the advertisers. Given the current market shares and trajectories, this is not an unreasonable assumption. Does this create an opportunity for coopetition? We’ve already seen some relationships between Internet portals and YPPs.

Can the market settle into an equilibrium where the Internet portals own the consumer relationships and the YPPs own the advertiser relationships? The answer is short-term: yes, but long-term: no. There are two very powerful dynamics to consider in answering this question.

The first rule of advertising is: Advertisers follow consumers, not the other way around. If the consumers all choose to use Internet portals, local search engines, or newspaper websites to find contact information for local businesses, then that is where the local businesses will advertise. Another way of saying this is that owning the consumer trumps owning the advertiser.

Internet-based self-service is finally driving the long anticipated disintermediation. You may recall the early days of the Internet, when every pundit said that consumers would work directly with businesses and the Net heralded the death knell of the middleman. Instead, it created a number of new middlemen. But self-service is changing that. Just look at how the airlines have unceremoniously cut off the travel agents. The only travel agents airlines pay are the large travel sites that own consumers. Look at how companies are selling direct to consumers and businesses through eBay. Look at how people are selling directly to others through Craigslist, and the impact this has had on the newspaper classified ads. The list goes on and on. Self-service interfaces are becoming simple enough that disintermediation is starting in earnest.

Internet-based self-service is the ultimate in disintermediation. Local advertisers won’t jump to self-service right away, in fact it could take years to build critical mass. But it will happen. As self-service solutions get better and advertisers come to realize the benefits afforded by self-service, they will adopt this mode of operation.

At this time, the YPPs’ large local sales organizations are a valuable asset. As Internet portals leverage their natural cost advantages (no ink, paper or distribution costs) in combination with simple self-service interfaces, the average deal price will drop well below the level that will support inside sales, let alone outside sales. Then the large local sales forces become a liability.

While this article paints a dire picture for YPPs, it is by no means a foregone conclusion that the Internet portals will eventually displace the YPPs. The YPPs have a window of opportunity—during this transition phase—to act decisively in the Internet. If YPPs are proactive they can win. But being proactive means fully embracing the resulting price destruction that the Internet will force on the yellow pages market. It means cannibalizing huge and profitable revenue streams, and that is a tough pill to swallow. But somebody is going to do it. If the YPPs don’t do it themselves, there are plenty of competitors waiting in the wings to do it to them.

Straddling Services: Offline is the New Online

2005-06-23T13:53:00.000-07:00

Tags: straddling, IYP, business, Internet, eBay, OnlineOffline, local

I’ll pick-up the Internet Yellow Pages (IYP) thread soon, but I had a thought on a related topic and realized that if I didn’t commit it to words, it would be lost forever.

Today I was reading about eBay’s slowing growth (registration req'd), and how they are attempting to target the 95% of transactions that occur offline. They are doing this by acquiring companies, or stakes in companies, that facilitate transactions by straddling the online and offline worlds. I refer to online companies that match buyer and seller for offline transactions as straddling companies. eBay is hot to sink their teeth into the other 95% of the transactions, so they are betting big in straddling companies.

There are plenty of 1:1 and 1:n cases of straddling. For example, radio talk shows promote ProFlowers. You go to ProFlowers and there is a microphone in the upper right corner. You click on it and enter the broadcaster’s name and you receive a discount and the broadcaster gets a commission. This is a 1:n inbound straddle. It is 1:n because it involves one company, ProFlowers, and multiple broadcasters/users. It is inbound because the objective is to bring outside users into the companies website.

Advertising doesn’t qualify as a straddle because it merely promotes a website or a location. Most advertising cannot be tracked to a specific action by the user. This link to a specific action by the user is critical because only with such a causal link can it be monetized using the performance-based model that is becoming the de facto standard model on the Internet.

What is most interesting, in terms of attacking the other 95% of transactions is outbound straddles. Outbound straddles use the Web to drive measurable offline transactions. An example of a 1:n outbound straddle is online coupons, like that offered by FreshChoice. This coupon can be tracked through both clicks and redemptions, to determine how its effectiveness.

Online coupons are a straddle enabling technology, because they enable companies to straddle their online/offline worlds. Another straddle enabling technology is pay-per-call from companies like Voicestar and Ingenio. These enable the virtual world to extend into the real world in a manner that can be tracked and monetized. For example: Bob visits the Joe’s Pizza website and clicks the call button. This connects Bob to Joe’s Pizza via voice-over-IP (VOIP). Through the pay-per-call function, not to be confused with pay-per-click, Joe’s Pizza knows which website that call originated from.

There are also straddle companies. These companies operate websites that facilitate the straddling of the online/offline worlds. Examples of these companies include classified ads, yellow pages, local comparison pricing (e.g. ShopLocal). ShopLocal is an interesting one, because the company name is CrossMedia Services. With a name like CrossMedia, they get it.

eBay is salivating over the other 95% of the transactions, the offline ones, so they are buying straddle companies. They have acquired classified ad sites, a rental matching website and Shopping.com.

Now, you might say, hey Shopping.com is strictly online. People compare pricing of online stores, along with product features, reviews, etc. But then you would be missing the fact that most people, I am told by a ratio of 4:1, use Shopping.com to compare features and pricing, but they buy offline! In other words 80% of the value of Shopping.com, while currently untapped, is as a straddle company.

Next we come to straddle services. I believe that the big guys, like eBay, are all chomping at the bit to offer n:n straddle services. Maybe an example would help. Yahoo Local provides the market leading Internet yellow pages. They could go to the vendors and offer them pay-per-call services, coupons, maybe even online scheduling for services companies. This makes Yahoo the single source for straddling services for businesses. This sort of n:n opportunity is huge.

When eBay says they are eyeing the 95% of transactions completed offline, and then they buy various straddling companies, this is what they mean. They want to offer a host of services that enables businesses to straddle the online and offline worlds. Whether your business is selling online or offline, eBay wants it to go through them and they want their cut.

Straddling is obviously big business, and could lead to the next wave of Internet growth. Instead of battling over the 5% of business transacted online, they can battle over the other 95%. Straddling is all about local, since that is where the bulk of the transactions take place. Straddling is shaping-up as the battle royale for Net dominance. It is why Amazon is investing in A9’s local efforts, why every major search engine has a big local effort underway and why the newspapers and phone directory publishers, traditional local barons, are in a battle for their lives…whether they know it or not. So, as Michael Buffer would say, “Let’s get ready to rumble.”

…More on straddling to follow...after I finish my thoughts on the IYP market.

The Internet Yellow Pages Jockey for Position

2005-06-17T11:33:00.000-07:00

The Internet Yellow Pages (IYP) market is a very interesting one. While search is great for finding stuff online, when you want to buy locally the yellow pages help you find businesses to buy from, making them a key influencer of transactions. With 98% of all transactions occurring offline, this is clearly the big market. Needless to say, some big players are fighting over the market.

Here is the current market share breakdown:
Yahoo – 25.5%
Verizon/MSN – 18.4%
SBC/BellSouth (SmartPages.com & Realpages.com) – 12%
Switchboard – 7.6%
Infospace – 6.3%
Yellowpages.com – 5.4%
DexOnline – 5.2%
AOL – 5.2%
Other – 14.4%

The regional bells are playing aggressively to defend their print franchises by combining efforts through a joint venture between Yellowpages.com and the regional efforts of SBC and BellSouth, giving them a virtual share of 17.4%. They have also distribution partnerships with Switchboard and AOL giving them even broader reach. Game on!

The Kelsey Group values this market (market cap not revenues) at $100 billion. It is shaping up as the “virtual” Bells et al. against Verizon and Yahoo. Of course, virtual companies (through joint ventures and distribution partnerships) are notoriously harder to manage and less conducive to innovation than centralized companies or divisions. On the other hand, the Bells have huge sales forces on the ground meeting with and selling integrated solutions (search engine clicks, print yellow pages, IYP, etc.) to the local businesses, with whom they have existing relationships. Therein lies another question; how will the sales force rationalize selling fixed price offline advertising and less expensive pay-for-performance online advertising?

The bigger question hanging over this market is who really owns the online consumer. Because the company that owns the online consumer will, by default, end up owning the advertiser too. In other words, will consumers find businesses through search or through an IYP destination site? That is the $100B question.

If consumers decide to enter “plumber san jose” in a search engine instead of going to their IYP and searching for plumber in their zip code, then the IYPs must either partner with search engines or eventually watch their role and revenues dwindle. [Note: Google and BellSouth have a partnership]. With a $100B market at risk, buying a search engine might even make sense. The search engines would benefit from the feet on the street from the Bells. On the other hand, the search engines can buy the same basic IYP content from InfoUSA or Acxiom, and quickly jump into the market.

Of course, Yahoo has the ideal position of having the Internet traffic, search engine, leading IYP and other services like VOIP that they can weave into the mix. If I were an IYP, Yahoo would be the biggest competitor and Google would be the biggest threat.

In my next post, I’ll spell out some strategies I would recommend to the IYPs to help them bolster their ownership of the consumer. The one thing we have learned from Microsoft is that the company that owns the user interface has tremendous influence (dare I say monopolistic influence). If the IYPs cede the interface to the search engines, then they become invisible and replaceable.

Local is as Local does

2005-06-16T16:58:00.000-07:00

Tags: business, local, smallbiz

Being considered local, by local residents and businesses, is a good thing. You are part of the in crowd who are doing battle against the out-of-towners. The evil out-of-towners are perceived as siphoning money out of the community. Doesn’t everyone want their money to stay local and help the local economy? Since the vast majority of money spent is spent locally, being considered local is a good thing for any business. Of course, Walmart demonstrates that being cheap is more important than being local when it comes to consumers, but being local carries considerably more weight with business customers.

In any case, as I pointed out in my previous post, the “local” label is not black-and-white, there are shades of gray. However, perception is reality, and perception tends to be much more black-and-white than reality. If you ask people to label businesses as local or out-of-towners, there is no hesitation to convey labels. But these labels are often influenced either by personal knowledge of the people who own the business, or by a personal interaction with the business. In other words, if you know the local owner of McDonalds, you consider that McDonalds local; if you don’t, you typically consider it an out-of-towner.

This leads me to my point. The more interaction a business has with the local population, the more people begin to think of the business as local. For this reason, putting a human face on a business and getting involved in the local community and local business organizations is a great way to earn the title “local businessman” and that title is then conferred to your various ventures as well.

In fact, even company owned stores can earn the local label by putting a local human face on the employees and immersing themselves in local projects. Sponsor a little league team that bears your name. Put a human face on your business with a picture and story about the local manager. Highlight the community service of your employees. Join local business groups. Speak at local business functions. Make it a priority to buy from local vendors and make it clear to them that you are buying locally because you want to develop relationships within them. In short the more you put a human face on your business and the more you interact with the community, the more you will be considered local, and being local is good for your business, no matter who you are.

Now, I'm off to our local bar...

What is Local?

2005-06-10T16:33:00.000-07:00

[Please tag: business, local, flatworld, local+internet]

As you’ll notice, the name of this blog is ThinkLocal. I started it because I believe I have some unique and valuable insights into the intersection of the Internet and local business. But when it comes to defining “local business”, things get fuzzy very quickly. Let me explain:

Local clearly means that a business has a local presence. So, we can say that Amazon is located in Seattle, so here in silicon valley it is not a “local business”. But they have a research group (A9) in Palo Alto. Does this make them local or does a satellite office, employing a fraction of the number of people as their headquarters, fall short of conveying the local title upon them. It gets worse.

In Georgetown KY, Toyota is the largest local employer, with 8,000 employees. They seem pretty local to people in Georgetown, but are they? In total Toyota employs 36,360 people in the United States, so are they foreign or domestic? In the individual towns, I’ll bet they feel pretty local. Does the fact that their headquarters is in Japan make them less local?

If you ask a local coffee shop, Starbucks isn’t local. But Starbucks employs local people. These employees describe themselves as working at the local Starbucks. Is a single store owner-operated coffee shop more local?

So what about franchises? They are owned and operated locally. My closest McDonalds is owned by someone here in town. Sure they buy supplies from corporate and pay franchise fees to, among other things, pay for national advertising, but they are independently owned and operated. Aren’t they local? They’re certainly more local than company owned stores, but not as local as the single store owner-operated burger joint.

What other factors are considered when proclaiming yourself a local business? Is the source of the goods or materials you work with factored into the equation? Would McDonalds be considered more local than a mom & pop store whose inventory is primarily manufactured in China? Do we consider where the items come from? Do we consider who added what value in the manufacturing process? Or is ownership of the business where the items are sold the sole consideration?

OK, consider this one. I just bought a laptop from HP, a major local employer with their headquarters here in the valley. Sounds local right? Well it was manufactured and assembled in China and shipped directly to me. If I have technical problems I call an 800 number and speak to someone in India. Did I buy from a local vendor?

Does it matter whether a business is local or not? Yes, people like to buy from local vendors, to keep the money local, to support the local economy. My business makes a point of saying “Support your local vendors”. But what does local truly mean? In speaking with friends they don’t always grasp the nuance that franchises like McDonalds are locally owned and operated. They view McDonalds as a mega-corporation (that also happens to be the international symbol of American imperialism). So to them a single store burger joint is local, but McDonalds isn’t. HP is considered local because it employs so many people here in the valley, but is it?

In the end, as Thomas L. Friedman says in his book “The World Is Flat: A Brief History of the Twenty-first Century”, everything is being blended. Almost nothing is 100% local these days. Instead we get degrees of locality.

In the end, the underlying facts about what is local and what isn’t are meaningless. The real issue is whether businesses and individuals perceive a company as local. Perception is reality. So, in effect, when we say support your local businesses, we’re actually telling people to support businesses they personally believe are local, because local isn’t black and white, it’s shades of gray.

Online Shopping Engines vs. Local Businesses

2005-06-07T13:16:00.000-07:00

EBay’s recent $620M purchase of Shopping.com and Scripps purchase today of Shopzilla (AKA BizRate) are a testament to the fact that consumers are increasingly using the Internet as a bargain-hunting tool. People are using the Internet to “spend time to save money”. Studies have also shown that online content drives 4 offline sales for every 1 online sale. Based upon this, the next wave of activity will be solutions, like the price comparison engines that enable people to save money offline as well.

There is ShopLocal, but they repurpose the circulars that are sent out in the mail. They ship them off to India where the data is input into a database that powers the site. In other words it is a very manual process and doesn’t rely on self-service by the companies. For this reason, they only provide sale information for the large chains…for now.

I believe that the next wave of bargain-hunter tools on the Internet will provide offline shopping information that leverages a self-service interface, enabling local companies to enter and manage their own inventory and pricing information. This sort of “local deals” website will enable local businesses to capture online bargain hunters, instead of sitting idly by while the shopping engines (Shopping.com, PriceGrabber, Froogle, NexTag and Shopzilla, et. al) funnel these consumers to online stores.

The Mac is Suddenly So PC

2005-06-07T11:58:00.000-07:00

[Please tag: business, computing, Intel, Mac]

In 1994 I was interviewing for a job with Apple and everything was going well until they asked me: “If you were the CEO of Apple, what would you do?” Without hesitation, I responded: “I would port the Apple user interface to Windows, because once you hook the customers with the UI, you can start to build Mac services behind that and hollow out the Windows OS, becoming the standard operating system across both platforms.” Needless to say, the interview was quickly terminated and I was sent packing for my heretical statements. At least they didn’t call security.

The bottom line is that anyone who has used a Mac prefers it to Windows (except those masochistic types who enjoy the break-fix-break cycle). But the Mac has a 2% market share. Computing loves standards, and at 2% Apple isn’t even close to being a standard. But what would happen if they followed this plan:

Phase 1: Apple ports OS/X (a Unix-based OS from NeXT) to the Intel architecture
Phase 2: Apple convinces PC peripheral vendors to write OS/X drivers
Phase 3: OS/X and OS/X applications run on generic PCs

[Note: Like The Brain in Pinky and the Brain, I always enjoy a good world domination strategy.]

Apple could then operate as a platform/apps company like Microsoft, and have a separate high-end hardware company spitting out well-designed laptops, desktops and servers. Then the Mac lovers, those who used Macs in school and have been forced into adopting the PC to fit into corporate infrastructures, can once again embrace the Mac.

Close your eyes (after reading this paragraph) and imagine this. Years from now, you're configuring your new HP laptop online and they ask what operating system you would like: Windows, OS/X or Linux…hmmm.

The Businessperson's Guide to the Web: Past, Present & Future

2005-06-03T16:47:00.000-07:00

[Please tag: Web2.0, Internet, future, tagging, digitalDJ]

The future of business is increasingly intertwined with the future of the Web. Yet, most businesspeople slip into a coma when they hear techie-speak about XML, RSS, BFD. So, I thought it would be helpful to provide a non-technical review of where the Web is heading. Unfortunately, you need a little context on where the Web came from, to better understand where it is going. So, here it is, laid out much like Charles Dickens' A Christmas Carol:

The Web - Past:
"Those who ignore history are doomed to repeat it." --George Santayana

After Al Gore invented the Internet (Ha!), a guy named Tim Berners-Lee realized that we could use it to publish stuff in a machine-independent way (def. so that any machine could display it, Mac, PC, Altair, etc.). So he invented HTML (HyperText Markup Language) and some other stuff I won’t bore you with. It was really simple, it basically labeled stuff bold, italic, etc. and it also allowed links from one page to another. Thus the World Wide Web (AKA Web) was born along with that annoying www thing for webpages.

Other guys built simple applications to view all this stuff (see Netscape, see Microsoft, don’t see Netscape anymore). The Web became such a big deal and it's simple enough that now my Mom uses it to Google me (not always a good thing).

The net result of all this is that we have freed the pages from books, brochures, magazines, and other stuff to put them up on the Web where anyone can read them. Very cool stuff. As the number of websites grew, we realized that finding our way through this mess was going to be a royal pain in the ass. So a couple of guys at Stanford started keeping a categorized list of websites. This becomes Yahoo, founders David and Jerry become multi-billionaires and we become jealous that we didn't invest early enough.

Important Point #1: The Web is a mess, and making sense of it is worth big money!

Problem: Yahoo cannot keep up with the growth of the content on the Web. So search engines evolve. The search engines use machines to automatically surf the Web, so they can gather information a lot faster than a bunch of sleep deprived Yahooligans. Search engines like Infoseek, Excite, etc. make their founders rich.

Important Point #2: (a) There is so much stuff out there that even big rich Yahoo cannot manually make sense of it all. (b) Helping people find information on the Web is still worth big money.

Problem: As the amount of stuff grows, search engines lose their value because every search results in 100,000+ webpages, and you have to sift through it all to make sense. So Google figures out that they should not only index the Web, they should also figure out how many websites link TO each webpage. The idea is that the more links there are to a particular webpage, the more interesting it must be. This enabled Google to rank its search results more effectively. This made Google so popular they were able to give Wall Street the finger and IPO their way (Dutch Auction), making yet more billionaires.

Important Point #3: Provide people with a better way to find relevant information (search plus ranking) and you'll be rich enough to buy a small country. Do you see a pattern evolving here?

Problem: The amount of stuff on the web continues to grow and even with ranked search, we need to be able to better make sense of it all.

The Web – Present:
"In order to figure out where you are going, you must first understand where you are"

The Web liberated the text from books, brochures, magazines and more and put it all on the web where we can search for it. Now you can search for any term or phrase and get millions of page links. Then you can sift through this to find something of value.

Problem: Wouldn’t it be great if we could get people to add more value in terms of context and ratings? Clearly Google’s counting the links to pages helps with ranking popularity. The problem is that an older webpage may have more links to it than a really interesting new article. We’ve found that no one company, not even Yahoo, can categorize the entire web. So like the Dewey Decimal Classification, we turned to the users to add value.

1. Open Directory Project: Instead of relying on Yahoo employees to categorize the ever-expanding Web, some smart folks figured they would create a community-edited directory. At this point 68,375 people have edited this directory (Yahoo's total employment is about 1/10 of this number).

2. Wikipedia: What the Open Directory Project did for the directory, the Wikipedia did to the encyclopedia. It is a Web-based free encyclopedia where tens of thousands of users write individual articles and link to other applicable Webpages.

3. Tagging: Isn’t that what punks with spray paint do to walls, trains and buses? Yes. But on the web it means people adding their personal notes to webpages. For example, you see a Webpage about word-of-mouth marketing that mentions Gmail, you tag it with the words "WOM", "Marketing" and "Gmail". Later when you have forgotten the address of this webpage, you can easily find it by searching your personal tags using any of the key words. More importantly, you can see what other people are tagging. This is important because is provides us a window into what the aggregate group finds interesting on the Web, sort of a list of "what’s hot now" for every category. Del.icio.us, Spurl and Furl are some of the more popular tagging applications. (BTW, here is a cool application for Del.icio.us called scrumptious)

These applications demonstrate that: (a) automated solutions like search are great, but nothing beats context added by humans; (b) the only way to scale the effort of adding context to this mass of information called the Web is to encourage large numbers of users to do it.

Problem: The Web is so filled with content that a combined solution of ranked search and consumer-driven context, while helpful, isn't enough. It may be enough to make a few more billionaires (yet again) but it is by no means the ultimate answer. It is more a partial solution. The problem is that Internet is still about people "surfing" around to find relevant "pages" of information. Wouldn't it be better if your computer could find and process small bits of information, instead of you having to read many pages to extract those tidbits?

The Web – Future:
"The Web liberated pages from books, now we need to liberate information from the webpages" – Mike Hogan (just made that up, you like it?)

A fair amount of the content on the web is generated from databases. These databases store the data in well-labeled and organized fields. For example, you might have clothing, in clothing you have pants, in pants you have jeans, in jeans you have Levis. Then each pair of Levis jeans has a style, size, price, color, etc. When you flatten this out to put it on a webpage, the computer can no longer process that information, instead a user must read it. But more and more, website owners are exposing the original database content as well. This is hugely valuable.

At the same time, you have people using tagging tools to label content. You also have consumer applications that provide users with forms to enter information. This information is then presented in a structured format as well. taken together, this means that there is growing amount of structured information available on the Web.

Big deal, structure, labels, who cares? Well, now that your computer can understand what the data "means" it can do cool stuff with that data. Let me give you an example:

GasBuddy: This is a simple application that allows users to enter the gas and diesel prices at their local gas stations. You can search the data to find cheap gas near you. In essence, this community of users has created a database, meaning the information is all labeled (gas station name, address, gas price per gallon, diesel price per gallon). Pretty cool information.

Google Maps: This is a service that can place structured information on a map. Pretty cool service.

CheapGas: Essentially, this individual mixed the information from GasBuddy with the service from Google Maps, to create a new service. It enables you to search via a map for cheap gas in your area. Extremely cool solution.

Cheap gas is just one example, there are hundreds more. Another good one is HousingMaps that mixes Craigslist information with Google maps. Here is a collection of other cool sites using the Google maps. The point is that as more structured data and services are exposed on the Internet, we will see people mixing various data sources with various services to create new a cool solutions, tens or hundreds of thousands of new solutions. Just as local DJs create mixes of songs, people will create mixes of Internet data and services. The popular ones will take off, creating a life of their own.

The ability to consume structured data and mix it with various cool services is the future of the Internet. As they take off, they will drive a tremendous wave of structured data sources and services to consume them. While your computer can’t read web pages, it can process structured data. As the web becomes more structured, individual computers will start "reading the web" for us and acting on that information, leaving us to make high-level decisions.

How Can You Profit From This?
1. If you provide content on the Web, in addition to the flat webpage version, you should also expose the structured data.

2. Get your users to create structured content. This approach results in more quantity, quality and lower costs.

3. Your content is no longer constrained to your website, in fact it may only be read by computers, so find a business model that addresses this. For example, look beyond banner and text ads (sorry). BTW, if you don’t liberate your content someone else will do it for you.

4. Create simple services that consume data and offer real value.

5. Encourage "digital DJs" to mix your content/services with other content/services to assemble compelling niche solutions.

I realize that this is contrary to everything you've been taught in business school. I'm telling you to essentially give away the crown jewels in terms of content, services, intellectual property. I'm not saying this because I'm an anarchist, but because it is the future. You can try to fight it, but if you do, some 24-year old with a laptop will do it without you. Oh, I guess I should point out that this new wave will undoubtedly create a couple more billionaires just like the previous technology waves...maybe you.

The New York Times' Free Classified Ad Tabloid

2005-06-01T12:35:00.000-07:00

The New York Times recently announced that they will provide a free tabloid newspaper that will focus on classified advertisements. When they say free, they mean that it will be distributed free of charge to readers, it doesn't mean that putting your classified ad in the paper will be free, it won't be. This strikes me as a desperate attempt to increase their circulation numbers in order to justify high advertising rates in the face of superior free solutions like Craigslist.

This effort is too little too late. It is too little because online classified ads are simply much better for both the advertiser and the reader. It is too late because, as Rupert Murdoch points out, classified ads are already moving online at an accelerating pace and there is nothing newspapers can do to stop it. My advice to the NYT, if you can’t beat ‘em, join ‘em.

Word of Mouth Marketing IV: More Tips & Tricks

2005-06-01T12:17:00.000-07:00

[please tag: WOM, Marketing, Buzz, Coupons]

Here are a few more tips and tricks to make your word of mouth campaign more successful. Remember, word of mouth is all about getting people to share positive experiences with friends.

1. Focus on Women
When men socialize, they talk about facts and opinions (e.g. who will win the playoffs), when women socialize they talk about experiences (e.g. that new day spa is wonderful). Since word of mouth is all about encouraging people to share experiences, women are far more effective at building buzz than men. In fact, insurance industry statistics show that over the lifetime of a customer, women will provide, on average 28 referrals, while men will provide only 13. Women are more than twice as effective in building buzz than men, so focus on them.

2. Package User Experiences
Word of mouth is a unique medium; a spoken medium conveyed by untrained fans of your business. Keep this in mind when you craft your marketing message for this medium. Your marketing message needs to be compelling, memorable and most importantly "tellable". Your job is to craft user experiences into a tellable message.

For example: A restaurant might focus on providing a family experience. They could provide balloons for the kids, a play area, games on placemats, whatever. The key is to then package that experience into a tellable tagline, such as "A great restaurant for kids". Then what happens is two women are talking about their weekend plans. One says to the other, "I'd love to go out to dinner, but the kids can’t sit still that long." The other replies: "You should try Mike's, it's a great place for kids." When crafting your marketing message, consider the medium and act accordingly.

In packaging your marketing message for word of mouth, consider the power of testimonials that reinforce your message. Testimonials enable you to phrase the words to be spoken. Using the example above, you might have a testimonial that says: "My kids love Mike's" or "Finally a place where the kids can play and my husband and I can enjoy a meal together."

3. Use Rewards
Reward people for helping you build word of mouth, both personally and spiritually. Everyone enjoys helping people, especially women. For women, helping friends and people in need is interwoven into their socialization process. So by providing rewards you make it easier for your company to work its way into that socialization process.

There are a variety of ways to reward people:

* Reward the individual: You can reward the individual who is spreading the word of mouth. As the network marketing industry has demonstrated, word of mouth spreads 100x faster when there is a financial incentive. You can do this by rewarding referrals with a rebate or discount, for example.

* Reward the recipient: People love to help others. If you create a reward for the recipient, that person will thank that person who told them about it. This, of course, further establishes the social bond between the two people. This positive feedback creates additional incentive for that person to tell others about this wonderful reward. For example, as a deli, you could provide each customer on a specific day with a secret word, say "bubbles", and every customer who uses that word the following Wednesday gets a free drink and chips with their sandwich. People will immediately share that secret word with friends.

* Reward the community: Create a tangible or perceived reward to the community, this creates the feeling that the community shares in your success. For example, "We will donate 10% of your profits during July to the local soccer field." Every soccer parent will help you spread the word, because the community benefits from your success.

* Reward the world: Can your success make the world a better place? Donate a percentage of sales to breast cancer or the rain forest or some other worthy cause that you care deeply about. I happen to know a 5-year old boy who needs a liver transplant to save his life. If you promoted the fact that a percentage of your sales went to this adorable little boy, parents would quickly empathize and join you in your fight to save him.

There are karmic rewards and tangible rewards. An example of a karmic reward would be "We buy from environmentally friendly suppliers" while a tangible reward would be "We donate 10% of our profits to breast cancer research". Even more tangible is "10% off your first order". Trust me, the more tangible the reward, the more effective it is.

Using coupons is a powerful way to provide tangible rewards. Online coupons are more powerful than offline coupons, because you can combine this with a tell-a-friend feature. Tell-a-friend emails can spread like wildfire. The other benefit of tell-a-friend emails is that you get the chance of crafting the message that is sent to those friends. Email is also easier for your customers because they simply enter the friend’s email address and click send. Who doesn't appreciate hearing about a great discount from a friend?

I hope that you find these tips and tricks helpful and I wish you well in your efforts to use the most powerful marketing medium in the world: word of mouth marketing. If you have tips and tricks or personal experiences with word of mouth marketing, please share them with me.

Why Does an Entrepreneur Do What He Does?

2005-05-31T11:13:00.000-07:00

[tags: Entrepreneur, Pincus, VC, start-up]

Why does an entrepreneur do what he does? Clearly, there are easier ways to earn a living, resulting in a much more comfortable lifestyle. If we don’t realize this before our first start-up, we quickly learn that starting a job is very similar to the military recruiting tagline: “It’s not just a job, it’s an adventure.” Adventure is code for long hours, demanding work, emotionally demanding, poor pay, where success also requires an element of luck.

When you take a purely dispassionate look at the underlying economics, starting a company makes no sense. The odds of success are very long, the hours are long and the pay is sub-market. If your company is lucky enough and good enough to earn a liquidity event, the odds are good that your piece of that payout is small, especially if you build on VC funding. And if you take VC funding, odds are that you will be replaced as CEO by someone the VCs like better. Basically, as Mark Pincus points out, the economics of starting a company simply don’t make sense.

So, why do we do it again and again? It comes down to a simple perspective. Most people fear change. They prefer the status quo, which is no doubt more comfortable. We live in a short attention span world, where instant gratification is everything. The dream is the comfortable house, new cars and regular vacations.

Entrepreneurs are different. We embrace change and abhor the status quo. We see things the way they are and see how they could be better. Then we become obsessed with making it better. Our dream is to build something, to make a mark on the world, to bring our vision to life. We have a love-hate relationship with our companies. We love what we do, but we hate what it takes. It shouldn’t be that hard, but it is…always.

Here is the difference between a VC and an entrepreneur:

VCs see rewards; entrepreneurs see potential. VCs look at a seed and say: “But who will buy this seed?” Entrepreneurs see the seed and say: “With the right soil and nutrients, this seed will grow into a strong and productive plant that will provide wonderful food.”

VCs want productive farms, entrepreneurs are enamored with the empty plot and a sack of seeds…the potential is what excites the entrepreneur. Once you have a thriving farm, the thrill is gone.

Which of the following statements best describes you:

1. Give me a few great people and together we will beat extreme odds and build something that will change the world. If we are successful the rewards could be immense.

2. Give me a $200M fund and I’ll deliver solid returns by investing in great start-ups that already have solid products and customers. By diversifying risk I will personally make more than $1M per year over the life of the fund.

Only an idiot, or an entrepreneur, would jump at #1 over #2 every time. If you beat the long odds, you’re an entrepreneur. If you fail, history and your wife call you an idiot.

Word of Mouth Marketing III: GMail a Case Study in Building Buzz

2005-05-27T14:37:00.000-07:00

[Applicable tags: WOM, Local Marketing, Buzz, Gmail, Beanie]

Gmail was one of the best word of mouth marketing campaigns of all time. The Gmail buzz was white hot, but I think that the Tyco Beanie Babies takes the first place prize because of how long they milked their buzz. Of course, both companies used the same basic word of mouth principles to juice the word of mouth marketing into a full-blown frenzy.

Gmail, Google's free web email, was not all that special. It lacked much of the functionality and maturity of existing free webmail from Yahoo and Microsoft/Hotmail. But, what I lacked in functionality and maturity it made up in storage space, providing 1GB and later 2GB of storage, when 10MB was the norm. In addition, Google was, and is a pioneer, and people were naturally intrigued by its new service. Finally, as a new service, the plum email addresses were still available. Instead of mikeho235@aol.com you could get mike@gmail.com.

Starting with these characteristics, Google implemented a flawless word-of-mouth campaign.

Step 1: Start Rumors
Google initially started with internal users only. Of course, these people talked about it. Then when they announced Gmail, they did so on April Fools Day!
Results: This created tremendous buzz. Was it an April Fools Joke? That question alone got them 3-5 times more press than they would have received by launching on any other day. The speculation about whether it was a joke or not ran wild.

Step 2: Artificially Constrain Inventory
People want what they cannot have. Google essentially told people it wasn’t ready for launch yet, but during the test phase they could get an account through invitations from friends already using Gmail. Then they limited each user to only 5 invitations.
Results: Almost instantly, everyone was looking for a friend with a Gmail account, so they could beg for an invitation. In other words, the people seeking invitations initiated the conversations, they created the buzz. I like to call this the Golden Ticket principle, after Charlie and the Chocolate Factory, where there was a frenzy trying to find the golden tickets in candy bars.

Step 3: Reward Beneficial Behavior
Google did three things: (1) they handed out Gmail invitations to heavy users of their new Blogger software; (2) they randomly placed links to register for Gmail on their homepage, about one out of twenty pages ; (3) when the link for Gmail wasn’t on their homepage, there was a link to register for news about Gmail.
Results: Sheer genius! (1) The got more people to use Blogger, in hopes of getting an invitation, driving up their webstats. (2) They got more people to hit their website in order to find the "golden ticket" invitation. (3) They got future users to provide their contact information. So even though they hadn’t opened the floodgates, they were still collecting future users through this "registration for news".

As a fellow blogger pointed out, Chris Matthews wrote in his book Hardball, "when you've got bad news, get it all out at once, when you've got good news drag I out as long as possible." This is exactly what Google did with Gmail, and in the process they created a frenzy. People were even bartering real goods, services and money to get Gmail invitations, when there were free alternatives. I hadn't seen this sort of frenzy since the Beanie Baby craze. You might remember some of those Beanie collectors who thought they would pay for their children's college tuition with those "rare" stuffed animals…go figure.

Google was fortunate to have a platform for such an effort, by virtue of their wildly successful search site. But these same principles can be applied to any word of mouth launch.

For example, a new restaurant could remain "private" during its first three months of launch. They could invite friends and influential people to dine there free during the first week. This exclusivity will start the buzz. Then at the end of each meal give every party two "friends" coupons for an exclusive meal at 50% off the regular price; all the while restricting access to people who were referred. This will turn the initial guests into word of mouth machines spreading your coupons to their closest friends. When others call for reservations, inform them that you aren't open yet and take their contact info for follow-up (future customers).

I assure you that these activities will cause word of mouth to spread like wildfire. It will be the talk of the town: "Have you tried the new restaurant?" Meaning: Are you in the in crowd? 'Can you get me an invitation?" Meaning: Can you anoint me as being in the in crowd?

As this example demonstrates, you can proactively manage a powerful word of mouth campaign. But you must be able to back-up your word of mouth campaign with a high-quality customer experience. If you provide a great consumer experience then simply follow the principles laid out in this article. Create rumors, manage inventory and reward beneficial behavior. Good luck! More word of mouth articles to come...stay tuned.

Word of Mouth Marketing II: Preparing Your Business for a Word of Mouth Marketing Campaign

2005-05-23T17:32:00.000-07:00

[Applicable tags: WOM, Local, Marketing, Cheers]

The simple premise for preparing your business for a word of mouth campaign is to turn customers into vocal fans. That’s what word of mouth really is, fans spreading the word to their friends. Start building a fan base!

The second piece of the puzzle is to make your business worth talking about. Your business needs to stand out in some way. You need to provide an experience that is unlike anything else. People don’t talk about things, they talk about experiences, so make sure that you provide a tremendous and unique experience.

1. It All Starts with The Customer’s Experience!
If your customer experience is positive, great, you make the first cut. If you provide a poor customer experience then word of mouth marketing will bury you. The old aphorism hold true: "A happy customer will tell two friends, an unhappy customer will tell ten friends". So get it right or your efforts to stimulate buzz will help those unhappy customers tell a hundred people.

What can be done about the customer experience? The customer experience is built upon these factors:
* Good employees
* Good product/service
* Good atmosphere
* Good results
* Good follow-up (training, support)

Take an honest look at these characteristics of your business and ask yourself whether they are superior to the competition. More importantly, ask your customers.

2. Solicit Opinions, Listen, Act & Thank Them!
It is basic human nature that we want people to listen to us and respect our opinions. Yet it is rare that people actually ask for our opinions and then listen to what we have to say. It is even rarer that they then act upon our feedback.

Solicit the opinions of customers. Ask them how you can make their experience better. Ask former customers why they left and what you could do to earn their business back. Don’t argue with them, don’t try to convince them, just thank them for their insight and do something about it. Once you’ve made the change, point it out and thank them for the feedback.

Let’s say, for example that you solicited feedback, and twenty people told you to make a particular change. You make that change and then call each person individually and thank them for their wonderful suggestion. How does that make each person feel? It makes them feel good that you listened and did something. But more importantly, each of those twenty people now feels that they have an emotional stake in your success. They want you to succeed because they want their feedback to work. As a result, you now have twenty evangelists ready to spread the word for you.

3. Develop Relationships
People are used to being treated like nameless faceless customers. It just seems to be the way most businesses treat us. Now think of places you really love. Odds are they know you, they treat you like an individual, you belong. These are the places you remember and you tell your friends about. It’s like the song from the TV series Cheers "...you want a place where everybody knows your name."

The best way to develop relationships is to spend time with people, getting to know them and sharing information about yourself. Maintain a log about each customer so that you can ask about their kids, grandkids, pets, work, hobbies, vacations, talk about their favorite sports team, whatever. The more you treat people like special individuals and show them that they are important to you, the more special their experience will be. And the more special their experience is, the more they will morph from customer to fan.

Spend time with your customers getting to know them and helping them get to know you. Each time they visit get personal. For example, if you have a restaurant, start saving dog-safe bones from customer plates and place them in a branded bag. Each time a dog owner comes in, offer them a "bone for skippy". They will start visiting more frequently and they will tell their friends. You are no longer just a local business owner, you’re their friend.

Amazon is the most loved vendor on the Internet. This customer appreciation is what has enabled them to easily transition from Internet bookstore of choice to Internet vendor of choice. And why do we love Amazon? Because they collect a ton of information and feedback from their customers and use this information to make each customer’s experience personalized, fast and easy. Amazon offers 1-click ordering, personalized recommendations, customer reviews and ratings, the personalized greeting and much more. All of this is meant to make you feel like you belong. Like the Cheers theme song, they know your name. Maybe I should write a separate article on Build a Successful Business According to the Lyrics From The Cheers Theme Song...or maybe I just did.

If you can provide a great customer experience, solicit and act on customer feedback and develop friendships with your customers, your business is ready for a full fledged word of mouth campaign. In fact, whether you like it or not, taking these steps will build the buzz about your business. The next step is to implement programs and tools to take that buzz to the next level. I’ll address this in future articles.

Word of Mouth Marketing I: Word of Mouth Versus Traditional Marketing

2005-05-20T12:23:00.000-07:00

Word of mouth marketing fuels far more transactions than any other form of advertising. A McKinsey study determined that word of mouth influences “slightly more than two-thirds of the U.S. economy.” Cap Gemini Ernst & Young asked car buyers what influenced them to buy a car and 70% said word of mouth while only 18% attributed it to advertising. There are numerous studies on the impact of word of mouth and they all suggest that word of mouth is about 4-times more effective than any direct (paid) advertising.

Word of mouth works because people trust their friends far more than they trust a paid advertisement. Focus on the degree of “complete trust” in the attached graph.

Most Trusted Form of Advertising

Despite all of this evidence, companies continue to spend ungodly amounts of money on traditional advertising while largely ignoring the power of word of mouth. Why is this? There are a number of reasons as described below:

1. Control
Marketing people cannot control word of mouth marketing, like they can with traditional marketing. Traditional marketing involves crafting a message and then repeatedly slamming that down consumers’ throats at a high cost. Word of mouth marketing involves relying upon your customers to pass their messages to their friends. But you cannot control that message. Sure you can package it for them and spoon feed them, but ultimately they decide what they will tell their friends. This lack of control is very scary to marketing people whose careers are built upon protecting their brand. So the marketing folks fall back on traditional marketing in an effort to control the message and also, hopefully, influence the word of mouth messages.

Counterpoint: By investing time upfront, you can position word of mouth to succeed. Then you need to invest in nurturing it as it grows. You can reinforce the word of mouth messages through traditional advertising, but you need to find out what word of mouth marketing messages are working and then package and reinforce them.

2. Standard
Traditional advertising is the standard. Everybody does it. Just as in the old days, you couldn’t get fired for buying IBM, you can’t get fired for investing in a tried and true marketing medium. Studies show that in the 1970’s the average consumer saw 700 ad messages per day; now they see 3,000 ad messages in a typical day. I probably see (read ignore) 3,000 messages in about an hour of surfing the Net, so undoubtedly, that number needs to be updated to reflect the reality of the web. In any case, advertising is accepted as the standard. The best and most profitable companies in the world spend a ton on traditional advertising. Every company wants to be huge and profitable when they grow up, so they figure they have to invest in standard advertising too, albeit on a smaller scale.

Counterpoint: In response to this barrage of advertising messages, consumers are becoming increasingly numb to it. And as consumers become numb to traditional marketing, word of mouth marketing becomes even more appealing by comparison. This explains why advertising dollars are starting to shift from television (a push media) to the Internet (an increasingly interactive media). The interactivity of the Internet supports word of mouth marketing in a way that the TV never will. Expect more companies to shift their advertising dollars to the Internet as they come to realize what a powerful tool it can be to build word of mouth buzz, and how that translates into offline purchases.

3. Industry Support
Media sales people and advertising companies can provide all sorts of metrics about the return on your advertising dollar using traditional media. But ask them for metrics on word of mouth and they look at you like a deer in the headlights. Despite its impact on the economy there are no standard metrics for quantifying ROI for word of mouth advertising. Of course, this is because most word of mouth is free, there is no financial incentive to build these metrics. This scenario is similar to the vitamin industry. For years Linus Pauling proclaimed the benefits of high-dose vitamin C, but there were few studies on vitamin C because the drug companies have no incentive to fund such studies. Instead drug companies fund research about proprietary drugs that make them a ton of money. Advertising people are the same way.

Counterpoint: Don’t just walk into your bosses office and tell her that you want to invest a certain amount in word of mouth, because most people just assume that word of mouth is free and traditional advertising is where you spend money. Instead, build a plan for starting and fueling positive word of mouth advertising. To most people, the thought of investing in word of mouth advertising is tantamount to buying air. In later installments, I’ll explain how and why you need to invest in building buzz. In lieu of standard ROI graphs, you’ll need a comprehensive plan. Hopefully these posts will also provide supplemental support.

4. Cross Functional Demands
Traditional advertising falls largely under the control of the marketing department. Marketing can create a advertising campaign independently and then deliver it fait accompli to the rest of the organization. Word of mouth relies on a well orchestrated organization working in concert to fuel word of mouth. In some cases your preparation work will highlight organizational weaknesses that must be corrected prior to launching a word of mouth program. If they aren’t fixed they will torpedo the effort. As a result, you’ll need buy-in from the entire organization. This can be daunting, as the saying goes, kind of like herding butterflies. But the rewards can be huge.

Counterpoint: Hey, I write for the “local” market, meaning small businesses. It’s a whole lot easier to implement a company-wide word of mouth program when company-wide means 10 people, than it is when it means 10,000 people. But that aside, you need a comprehensive plan that will garner the support of your CEO, then he can sell it to the organization. If you CEO isn’t capable of doing this, get a new job, your company has no future.

While word of mouth requires a degree of faith, there are many things you can do to create a winning foundation, start it properly and then fuel it in a positive manner. In later installments I will address these next steps, showing you how to prepare your company for word of mouth marketing, launch it and nurture it. In many ways, building word of mouth is like building a bonfire. The first step is to prepare the area. Then you assemble the pieces: match, paper, kindling and large logs. Then you light the fire, not just in one area, but in several areas to ensure success. Finally, you throw additional logs on as necessary to keep it going. This installment explained the value of a word of mouth “bonfire”, later installments will explain the steps for building one.

Harnessing the Power of Coupons to Achieve Your Business Objectives

2005-05-05T11:56:00.000-07:00

Most people think of coupons as merely a discount that vendors offer consumers in order to increase their business. This perception misses the core value of coupons, which is the ability to use a special incentive to drive favorable consumer behavior.

Coupons are not merely a discount. In the heyday of the Internet bubble a company created a clean and technically savvy approach to couponing. They arranged with credit card clearinghouses to deduct a certain percentage of purchases from participating vendors. Then this Internet start-up sent email alerting these card holders that they would automatically get discounts at participating vendors. What behavior did this drive? None. The cardholders continued to shop at the same stores as before, and they would simply get a pleasant surprise that their bill was lowered through discounts at participating vendors.

In this case, the vendors offered an across the board discount to consumers, with no reinforcement that the consumers were even aware of the discount, or that it was modifying their behavior in any way. While this approach avoided the “messiness” of couponing for both the consumers and the vendors, it failed to modify behavior and was therefore a complete failure.

Now let me give you another example. Coffee shops have large fixed costs in terms of staffing, equipment and rent. They have very low variable costs attributable to coffee and cups. One local coffee shop found that they were extremely busy during the morning and evening hours, but the place was dead during the middle of the day. With a high fixed cost structure, any additional business during these slow times would go almost directly to the bottom line.

So the savvy coffee shop owner offered a coupon that deeply discounted coffee from 10am – 3pm. This offer caused traffic to increase during this time by 25%. In this case, the coupon achieved the objective of modifying consumer behavior in a manner that was very favorable for the business, without impacting the profitable business during their busy times.

Let me give you another example of the power of coupons. Amazon found that their average transaction was under $10. So they instituted “FREE Super Saver Shipping” for orders over a certain minimum. The actual threshold has been dropped from $99 to $49 to $25. When was the last time you went to Amazon to buy one book and were tempted to buy one or two more to get free shipping? They get me every time! This offer drives favorable consumer behavior. It increases the average order size from sub $10 to well over $25, and the incremental profit more than pays for the shipping. It also makes consumers feel good about shopping online since they don’t have to pay for shipping.

Amazon has recently taken this one step further by offering free shipping for a year for a flat $79. Once the consumer pre-pays their shipping, they are mentally locked into buying from Amazon for a year. Wouldn’t you feel silly paying for shipping from a competitor when you’ve pre-paid for Amazon? And when comparing prices, Amazon now has lower prices because you don’t have to pay shipping there. Frequent buyers might feel good about this bargain, but Amazon may be selling the sleeves from their vest, because of the broad use of free shipping on the Internet.

A coupon’s value, whether it involves a coupon code or a printed coupon, is whether it drives favorable consumer behavior that achieves the advertising company’s business objectives. Let me offer a quick list of business objectives and the offers that achieve them:

Grow your customer base by attracting new customers:
This is especially common with new businesses and those that have excess capacity.
• 15% Off of Your First Order
• Sign-up Now and Get 3 Months Free
• Free Introductory Lesson

Drive repeat business and increase customer loyalty:
• Your 5th Sandwich is Free
• Your Second Session is ½ Price
• Every 5th order is 50% off

Sell specific items or services:
This is used to introduce new products/services, increase sales of high-profit items, sell excess inventory, etc.
• 15% Off All Dive Computers
• 10% Off Our Gold Package
• 2004 Snowboards 70% Off (while they last)
• 50% Off Previously Viewed DVDs
• 15% Off Our New Line of Sports Wear

Increase business during slow times:
• 33% Off Midweek Rentals
• $.50 off any Coffee Drink Weekdays 10AM – 3PM
• $3 Off Haircuts Weekdays 10AM – 3PM
• Early Bird Special 15% Off All Entrees Before 5PM

Capitalize on seasonal or special events:
• Bare Root Fruit Trees $10
• Monday Night Football: $8 Large Pizza
• $1 Beers on Fight Night
• Prepare Your Pool for Summer $75

Increase your average transaction size:
This is very popular. Think “Meal deal” and “Supersize” at fast food restaurants. Maximizing revenue per customer is a proven winner!
• Free Delivery on Purchases Over $200
• Buy one Entrée, get the 2nd Entrée 50% Off
• Free Cup of Coffee with Purchase of a Bagel
• Take $50 Off Any Complete Ski Package
• $50 Off MS Office When Purchased With an HP PC

Simplify your business process with regular specials:
This is particularly relevant to restaurants because they can simplify their kitchen prep time by offering daily specials.
• Take $1 Off Our Daily Lunch Specials
• Daily Dinner Special Only $8.99

Capitalize on customer traffic from nearby events:
• Rockets Pre-Game Special $2 Beers
• Show Your Movie Ticket Get $1 Single Scoop
• Giants Lunch Box Special $4.99

Generate customer referrals:
A great way to grow your business is through customer referrals. And a great way to stimulate customer referrals is through coupons.
• Bring a friend and get 25% off your order (one discount per pair)
• Refer a friend and get a 15% rebate
• 1 month free when you refer a friend

I could go on and on with coupon offers that drive favorable consumer behavior. Best of all, consumers that receive these special deals feel special. Using coupons makes people feel like smart consumers. It also creates an appreciation for the business that is offering the discount, because they really want you to try their business. And people love telling their friends about bargains, so coupons can fuel positive word of mouth: “We had a wonderful meal at Mike’s Bistro on Harbor, and we saved $20 on the tab, you really should try it!”

Coupons also offer businesses a unique advantage over every other form of advertising. Shopkeeper John Wanamaker was famously quoted saying: “Half the money I spend on advertising is wasted; the trouble is I don't know which half.” With coupons, redemption makes it very clear what works and what doesn’t. No other form of advertising provides this level of transparency and accountability.

Obviously, coupons can be much more than a simple discount. When done properly, coupons are a powerful tool in any business’ marketing arsenal. One of the more popular uses of coupons is to introduce consumers to the company. It is important to note that coupons can be used to create customers, but it is up to the business to turn those customers into fans.

The Next Challenge Facing Newspapers: Internet Coupons

2005-05-04T18:27:00.000-07:00

Various Internet sites have been feeding upon print newspapers like sharks feeding on a dying whale. The Internet sharks have fed upon the newspaper’s franchise on news, editorials and classified ads. The next course in this meal is coupons. Can the newspapers, in their weakened state, fend off the assault on their coupons, or will this provide yet another meal for fleet of foot Internet companies?

News:
Let me just quote a few facts that paint a picture of the fate of the newspapers:

* The combined weekday circulation of all U.S. dailies has dropped from 62.8 million in 1985 to 55.2 million in 2002. That gives it the lowest penetration of any medium. That trend is accelerating due to the impact of the Internet. (Forbes)

* "Newspaper readers are dying off faster than they can be replaced," said industry analyst John Morton. "It's a trend that's been exacerbated by the Internet. It's a fairly deep problem and it's not going away."

News aggregation sites like Google and Topix have cut into the newspaper’s franchise on day-old news by providing richer fresh news for free.

Editorials:

The blogs have torn into the newspaper’s franchise in editorials. Instead of getting only the opinions newspapers deem fit for print, Internet users can get diverse opinions on any topic through blogs.

Classified Ads:

As mentioned in one of my previous postings, classified ads are simply much better on the Internet. Here are a few facts that support this point:

* According to market researcher Classified Intelligence, San Francisco bay area newspapers lose $50M - $65M in classified revenues annually as a result of Craigslist’s free online classified ads.

* In 1997 there were 141M classified ad listings in newspapers and 4M in eBay, by 2003 there were 602M listings in eBay and 120M in newspapers. (Morgan Stanley)

Media baron Rupert Murdoch spoke to the American Society of Newspaper Editors April 13, 2005 about the impact of the Internet on newspapers, and all but proclaimed the death of the newspaper as it exists today.

“…We today face the more immediate challenge of transforming our offline classified businesses into online marketplaces. And not just for the traditional cars, jobs and real estate categories. What we’re learning is digital natives increasingly are finding their dates, their plumbers and their restaurants online.”

This brings us to the next major section of the Internet to come under attack by the Internet, namely coupons. Pick up any local free newspaper and it is apparent that local advertising funds these operations, and a good percentage of the local advertisements are coupons users can clip and redeem. Coupons also comprise a significant number of the run of press (ROP) ads in major newspapers. On top of this, the coupons in the Sunday newspapers, called free standing inserts (FSI), represent a multi-billion dollar business. But coupons, just like classified ads, are much better on the Internet.

Consider these facts:

* There were about 350 Billion coupons distributed last year in the United States, with a redemption rate of about 1%.

* 77% of the US population uses coupons and there were 16 coupons redeemed for every man, woman and child in the U.S. last year.

* According to the Newspaper Association of America, 42% of the Sunday newspaper readership is due to the FSI coupons.

* Online content drives 4 offline transactions for every 1 online transaction, 98% of all commerce is offline, and 80% of that commerce is concluded within 20 miles of where people live and work. In other words, online content has a large and growing impact on local sales, which is where the real money is.

* Internet coupons currently represent less than 1% of the total coupon market, but their use grew 111% in 2002 and 365% in 2003.

The trends are pretty obvious, couponing is big business, and it is moving online at an accelerating pace. The reasons are simple, online coupons replace the entire coupon clipping, saving and management headache. You simply search for the coupon you want and print it when and where you want. If you’re at work and want a coupon to save on lunch, just print one from the Internet. What could be easier?

Until now, newspapers have acted like fish out of water when it comes to the Internet. The majority of the newspaper websites are pretty weak, and that’s being generous. Unless they start fending for themselves, newspapers will soon become lunch to yet another breed of Internet competitor attacking their local advertising and couponing franchises.

The Internet is Transforming Branding

2005-05-02T14:56:00.000-07:00

Definition of Brand: “A product, store or service with an identifiable set of benefits, wrapped in a recognizable personality.”

-- Roger Blackwell

A company’s brand is critically important, because it is their public face, it forms the consumers’ impression of the company and their products. Yet it is increasingly beyond any company’s ability to control.

Companies nurture their brand. They spend a ton of money on naming, logos, packaging, celebrity endorsement, event sponsorship, advertising, the list goes on an on. But more and more today, it is what companies cannot control that defines their brand more than anything, namely the information and buzz found on the Internet.

The Internet, combined with increasingly powerful search engines, has put the world’s information at the fingertips of the average consumer. Now instead of relying on a well crafted corporate brand, consumers increasingly get the real skinny on the Internet. Consumers can get all of the facts about the product, consumer reports, various online reviews, shopping comparison engines even put items side by side with the competition; in fact there is a flood of information about almost any item.

Brands are comprised of two main elements:

Function: the quality, price, performance, etc.
Emotion: how it makes us feel

In lieu of hard facts, consumers would traditionally rely more on feelings, or they would rely on the perception of function. For example, you might say Sony makes good quality products. Why do you say this? Because Sony has crafted their brand to reflect an image of quality. But now you can get MTBF (mean time between failure) information about various products on the Internet. So, instead of relying on advertising to tell you who has good quality, you can see it for yourself. That is the power of the Internet.

There is also the issue of the buzz on the Internet. Opinion sites, user ratings and comments, blogs and social networks can make or break just about any brand on the Internet. If Sony releases a buggy product with inferior performance, all of the money they’ve spent on building their brand takes a backseat to the buzz.

Let me provide an example:
You are looking to buy a mountain bike in the $800 price range. Which source of information carries the most weight with you?

(a) Celebrity endorsement
(b) An ad in a mountain biking magazine
(c) Branded websites
(d) Recommendations from other consumers
(e) Recommendations from trusted friend

A recent study by Forrester/Intelliseek Research found that the options above are rated in the order of importance, with (a) being the least trusted and (e) being the most trusted. Answers (a) and (b) above represent the old-school method of corporate branding (building, nurturing and controlling). Option (c) is the middle ground because it is still corporate controlled, but it focuses more on product information. Options (d) and (e), the most powerful mechanisms for forming consumer opinion, are out of the control of the corporate branding geniuses.

In short, the Internet provides consumers with immediate access to an increasing body of factual data and user feedback. This is causing a shift in power from the corporate branding gurus toward consumers. Branding is falling a distant second to functional elements. This means that inbound marketing (figuring out what people want) is becoming increasingly important relative to outbound marketing (figuring out how to sell what you have) as we become more informed consumers. The Internet is fostering a consumption meritocracy where to old adage “build a better mousetrap and the world will beat a path to your door,” is finally becoming a reality.

Murdoch Says the Web is the Future for News

2005-04-14T10:47:00.000-07:00

“Just as people traditionally started their day with coffee and a newspaper, in the future I hope that the way they start their day online will be with coffee and our Web site.”
-- Rupert Murdoch 4/13/05

Ironically, I read this quote on a website while eating a bagel and drinking a green tea (I’ve never even tasted coffee). But that irony aside, and with all due respect, Mr. Murdoch is only half right. Yes, people will start their day online with coffee and a website, but it won’t be “just as people traditionally started their day,” because the web is different.

Newspapers have traditionally been a centralized, biased, flat, stale, push media. The web is different.

Centralized:
A centralized group of individuals, the editorial staff, decides what news their readers will get. They filter through all of the news and select what they believe is important. Then they rank that importance through the prominence given to each article. Does it get the 10 column inches on the front page or 2 column inches buried in the middle of the third section? Have you heard the phrase: “All the news that’s fit to print”? Don’t make that decision for me, I’ll do that myself, thank you very much. The web breaks this model. With RSS feeds, blogs, and news aggregation sites, people can select the news that interests them. Newspapers = centralized news filter; Web = decentralized and personalized news selection.

Biased:
Don’t even try to tell me news isn’t biased, of course it is. No two articles about the same event are identical. Even when presenting facts, there is bias. The bias begins with the questions asked; each writer introduces their slant on what is important by the direction of the questions. Then there is the issue of which facts are presented and which are not. This too introduces the writer’s or editor’s bias. Only a web neophyte would claim that the web is unbiased, actually it is more biased. But you can get both sides or multiple side of each story. You can read different versions of stories along with user feedback, and develop your own conclusions. Users can also seek out writers that consistently present a bias that aligns with that reader’s sensibilities. Newspapers = 1 bias per story; Web = multiple biases per story.

Flat:
No doubt there’s a better word for this, but what I mean by flat is that there aren’t links to supporting information. Every story is disconnected from the rest of the world’s body of knowledge. On the web, articles are richly linked. While reading about Terri Schiavo you can become your own researcher and develop your own opinions by following links to videos of Terri, information on her condition, links to what dehydration and starvation do to the human body, and more. The user can dig as deeply as they want to develop their own opinion. Newspaper = flat, articles stand on their own; Web = richly interlinked allowing the reader to dig as deeply as they want.

Stale:
Newspapers provide day-old news. We pay less for day-old bagels than fresh ones. But we pay more to get day-old news in the newspaper than we do for fresh news on the web, which is free. Does this make sense to you? Hey, they call it "news" it should be new, not stale. Newspaper = day-old paid news; Web = fresh free news.

Push:
Newspapers push their information, perspective and bias upon their readers. Information transfer is a one-way street. Users can’t respond in real-time and tell the author that he has his facts wrong or is ignoring history or whatever else. Sure the reader can respond in a letter to the editor, but that too goes through the centralized filter. The web is all about an exchange of information. The web is a place for conversation. People want to provide feedback, rank articles, share their rankings with friends, and more. Newspaper = one-way flow of information and insight, Web = a conversation with ranking, sharing, socializing, etc.

Now much of the benefits of the web are almost a given with the newspapers’ move to the web. The news will be fresher. By adding a few hyperlinks in each article, users will get the richer experience of the web. Newspapers need to break down the centralized filter and allow individuals to select what they want to read, not what the editors deem important.

To be successful newspapers need to make the news a conversation with the people, and foster a community. In the process, people will select the bias they prefer. Individuals will become attached to writers, wherever they reside, not newspapers they work for. People will essentially assemble their own newspaper by selected the news and news sources they prefer. This will really shake things up in newsrooms.

The bottom line is that newspapers no longer shape public opinion; they merely provide the people with access to articles that fits their profile. On the web you no longer have “readers” you’ll have “participants”. In other words Newspapers don’t shape opinion, individual writers and their audiences will shape public opinion. That is probably the most bitter pill for newspapers to swallow, but unless they take their medicine and act soon, the newspapers may themselves be recycled.

Social Networking Will Soon Become a Core Component of Commercial Websites

2005-04-13T16:36:00.000-07:00

It is the talk of the industry; it is network enhanced word of mouth; it’s the booster rocket that launches websites into the atmosphere...social networking? Nope I’m talking about viral marketing circa 2000. (Or maybe I’m talking about MLM circa 1949 without the websites of course ;).

Back in the day, viral marketing was unique to a few websites, like Hotmail, and it powered them to fame and fortune. Now the tell-a-friend link to a canned email is a standard tool in every webmaster’s toolkit. Custom hyperlinks in signature files are also pretty common these days, especially with web affiliate marketing. Once these tools became common, they lost their ability to drive tremendous growth. In time, we’ll see the same thing happen with social networking.

At the moment, social networking is a fun, unique and powerful mechanism for growing the registered user base of websites. A year after its launch, MySpace—a generic social networking website—enjoys 23 million unique visitors a month and is one of the 20 busiest websites in the world. MySpace’s parent company has recently launched a gaming website that incorporates social networking called grab.com. Other companies have released websites that incorporate social networking in verticals like photography, schools, professional networking, chatting, movies, and more.

Critical mass, eyeballs, the tipping point, whatever term you prefer, all of these sites are using social networking to build a base of registered users, barriers to entry by competition and high switching costs for users. By encouraging people to recruit their friends, you get critical mass. Of course, critical mass and expanding networks create barriers to entry by competition. And once the users have set-up their networks of friends, they are loath to switch, meaning they have high switching costs or user lock-in. It’s a marketeer’s dream scenario.

Let me give you an example: Netflix has recently added social networking where you can link to friends who are also members of Netflix. Then you can share ratings with your network. If you find that you and a friend have common tastes in movies, and that friend highly recommends a movie you haven’t seen, you feel confident that you too would like that movie. The net result is that it creates additional switching costs, should you wish to move your business to Blockbuster Online or Walmart Online, barriers to entry by these folks and, as a side benefit, it promotes older DVDs versus new releases, which are in short supply.

Social networking is a great way to get to know someone online. People fall in love with people online without ever meeting the other person, by sharing hopes, desires, insights, favorite movies, books, etc. Remember Kip and Lafonda in Napolean Dynamite? Social networking has similar benefits. People publish the things that make them unique, their likes, dislikes, groups, friends, and they start linking to people through friends. This fosters a sense of community and trust between people.

Users of Tribe.net opened their homes to a woman they had “met” through tribe as she traveled from Florida to Berkeley. There’s a saying that “the eyes are the window to a person’s soul”. Well the modern day equivalent might be “the web profile is the window to a person’s soul”…or maybe it’s the blog.

But alas, like all good things, social networking will eventually become as common as prior differentiators like discussion forums, shopping carts and yes, viral marketing. Early adopters will ride social networking to fame and fortune, but eventually it will be ubiquitous. At some point, your social network will become portable to each site you visit. There’s an XML standard called FOAF—for Friend Of A Friend—that enables portable social networks. I’m sure that the folks running passport and browser development are hard at work incorporating social network portability as well. Some day, you’ll visit a travel site you’ve never been to and it will tell you the names of several friends, or friends of friends, who have used their services and rated them highly.

But, we aren’t there yet, so make hay while the sun is shining and ride social networking to fame and fortune now!

Social Networking & Classified Ads

2005-04-13T14:18:00.000-07:00

Just in case you’re taking the SAT exam soon, remember this: social networking is to classified ads like peanut butter is to chocolate. The two complement each other so well, that it is one of those fabled 1+1=3 combinations (don’t use that in the SATs). Basically, the two need each other.

Social networking, as brought to us by Friendster, has been looking for the killer application to give it a raison d'être. Social networking is a powerful engine for generating large numbers of users and for developing a sense of trust and community, but it needs an application to turn that burgeoning community into a fountain of value.

Having used a number of social networking websites, I register, create links to people, use it for a while and then realize that it is devoid of any lasting value. Websites must provide a compelling and dynamic environment, above and beyond developing a social network, in order to maintain the ongoing interest of its users. Social networking needs a killer application with a sustainable business model.

We’ve seen social networking companies try applications like dating, gaming, photo sharing and social networking for its own sake. Are classified ads the perfect match for social networking? Absolutely.

Classified ads benefit from the law of increasing returns or Metcalfe’s Law, which states that the value of a network increases according to the square of the number of users. The more visitors a classified ad website gets the more appealing it is to post ads. The more users who post ads, the more appealing the site is to users. The more appealing the site is to users, the more visitors it gets…and the cycle feeds upon itself. This is also known as the virtuous cycle and it is the engine behind every successful technology company from Microsoft to eBay.

Classified ad websites need something to turn the crank, or initiate the virtuous cycle, and this is what social networking provides. Without social networking to jump start the virtuous cycle, a new classified ad website would have to spend millions or tens of millions to generate the critical mass needed to develop sufficiently liquidity and value to users. With social networking it can achieve that liquidity on a shoestring…until, of course, social networking becomes a common component of most commercial websites (see my next post). A good example of the marriage of social networking and classified ads (Friendster meets Craigslist) is Tribe.net.

Meta-Search Sites & Classified Ads

2005-04-11T15:52:00.000-07:00

The recent introduction of Oogle raises the question of the role search will play in the market for classified ads. Will consumers find classified ads via an intermediary like Oogle, or any of the various local search engines? Will these search engines add sufficient value that they themselves become destinations? These are very interesting questions.

The rise of local search engines was a tremendous boon for local classified ads sites. These search engines need local data in order to provide value to their users. So they created algorithms to sift through the web using geolocation technology, zip code, address, phone information and mapping to categorize their web indexes into local slices of information.

As a result, the search engines became voracious consumers of local information. This works very well if you are looking for a bike path in Davis California. The local search engine can filter our websites talking about Geena Davis and Gray Davis, and give you information about bike paths specifically in Davis, CA. But what if you are looking to buy a bike in Davis California? In order to satisfy this query, the search engines need to start digging into local classified ad websites.

This situation results in a symbiotic relationship between local search and the classified ad websites, which are rich stores of local information. The classified ad websites need the search engines to direct consumers to their sites; while the search engines need the classified ad websites to provide more local value to their users.

But this too raises issues. When a user finds a classified ad via a search engine, they go directly to the item for sale, they don’t navigate through the classified ad’s website, so the consumer isn’t seeing their banner ads on those missed pages. This undermines the classified ad website’s revenue potential from advertising.

But more importantly, what happens when the search engines, which already cache information from the websites they spider, start adding value above and beyond the classified ad sites themselves? Google’s news site has started adding more value than the actual sources of the articles, because they offer multiple articles about the same story, giving people the ability to get the story’s details from multiple perspectives.

Now Oogle and others are starting to do the same thing to classified ad websites. Modeled after shopping sites like NexTag, Oogle provides superior navigation, searching and filtering the ads than some of the classified ad websites themselves. In essence, Oogle is using the classified ad sites as a mere data source.

The difference between classified ads and news is that classified ads are bi-directional. Consumers not only read classified ads, they also need the ability to publish them. Once Oogle and other classified ad search sites reach critical mass, they will, no doubt, want to provide a classified ad publishing model that is optimized for their data structure and UI. This is the classic “embrace and extend” perfected by Microsoft in the software world.

Another example of enhanced search of classified ads is the combination of Google maps and Craigslist classified ads. Paul Rademacher’s hack of Google Maps enables users to drill down into Craigslist listings on a map. I think you’ll see more applications like this being built on top of classified ad systems, in effect using them as a data source. And as they become more of a data source behind cool looking applications, they lose their interface to the consumer. The interface is how websites develop a relationship with consumers. If classified ad websites are relegated to being a data source behind another company’s interface, they will lose advertising revenue and they will lose the relationship with their customers, both of which are extremely important to any web-based business.

In summary, search engines and classified ad websites currently enjoy a symbiotic relationship. The classified ad sites need the search engines to drive users to their websites. The local search engines need the rich local content of the classified ad websites in order to provide a a superior local search solution. But the ultimate relationship between websites and the consumer is the browser interface. If classified ad search engines succeed at owning the interface between the user and the classified ad website, then the website becomes little more than a data source. They become invisible to the user. And on the Internet, invisibility = “replaceability”.

On The Other Hand: There is a Place for Specialty Sites in Employment

2005-04-08T16:50:00.000-07:00

There is a category in which specialty classified ad websites may remain a viable alternative, namely employment. Not general employment, but more of a headhunting style of employment. Let me explain.

I tend to segment the employment market into a few categories. First, I segment it according to employee skill level: low, medium and highly skilled. Then I classify it according to active and passive job seekers. Finally I address the job openings that are either secret or for very high-level executives. Companies will need to use different approaches to appeal to these various segments.

Low Skill or Manual Labor Employees:
Newspapers will continue to appeal to low-skill or manual jobs (e.g. ditch digging) for some time, because of the low correlation of Internet access and computer skills among this group of employees.

Medium and Highly Skilled Employees:
Young educated people (e.g. college graduates) are very computer and Internet savvy. This group of people will turn to the Internet as their primary tool in job searching. Skilled employees in mid-level and executive-level positions will also turn increasingly to the Internet to find their jobs.

More interesting is the active versus passive job seeker classification. This classification is more interesting because this is where the specialty employment websites can earn their place in the classified ad ecosystem of the future.

Active Job Seekers:
This group of people, whether employed or unemployed, is actively looking for another job. They will scour the job listings on classified ad websites, individual company job listing web pages and employment search engines. Since these job seekers are in the market, they will go where they can find the jobs that fit their profile (location, job-type, etc.). One might argue that websites that specialize on a particular location or category of jobs will standout in this scenario. But as big-box classified ad websites add best of breed functionality to address location, category, etc., this advantage goes away.

Passive Job Seekers:
Passive job seekers are those people who are happily employed and aren’t looking for a new job. However, if their dream job is presented to them, they can be pried away from their current employer. This is the bread and butter for executive search professionals (AKA headhunters, executive recruiters). An employer comes to the headhunter and says that they want someone who fits a certain mold and might come from a specific list of companies. These companies might be the hiring company’s competitors. The headhunter then approaches these individuals and tries to pry them away from their employer.

I believe that specialized websites like LinkedIn can participate in this realm if they are able to mine links to approach target employees, validate their fit and present them to the employer. Clearly, they need a way of emulating the headhunter’s intermediary role. If they can address this opportunity, they can carve out a profitable niche in the employment world.

Secretive & Highest-Level Executive Positions:
When HP was looking for CEO to replace Carly Fiorina, they didn’t list it in Craigslist. This is not the type of position you list anywhere. This is such a critical hire, that it required a team of individuals comprised of people inside the company in partnership with high-level executive recruiters.

The same thing hold true for secretive positions. If the employer has not yet informed the executive that they are looking for someone to replace them, they they need to keep the search on the down-low. A targeted solution like the LinkedIn approach outlined above could work, but to ensure discretion the employer will probably still use an executive recruiter.

In summary, I envision the bulk of the employment listings moving to large classified ad websites. There is a role for specialty sites to target passive job seekers through relationships a la LinkedIn. And the highest-level executives and secret or sensitive job opportunities will remain the realm of executive recruiters.

Consolidation of Classified Ad Websites

2005-04-08T15:19:00.000-07:00

In the old days people shopped for food at specialty stores. They went to the vegetable stand, butcher, bakery and dairy (or it was dropped at their doorstep). But now everyone goes to a supermarket. They prefer the convenience of a single location.

We've seen similar consolidation in "big box" stores like Walmart, Costco, Home Depot, Frys, etc. It just makes sense. People want to go to one place to buy a variety of things in a certain class of products.

But what about the Internet? Well, Amazon continues to grow their breadth of products. In fact, their pull down menu of product groups even has the catchall "everything else". In the world of auctions, we've seen the same thing with eBay, which promotes itself as "The World's Online Marketplace".

One could make an argument that on the Internet, a specialty store is just a click away so why is a big box webstore more convenient than these specialty shops? Very simple, every new webstore requires that the user register for an account, enter their billing, shipping and credit card information. It's a pain.

Webstores also improve with age. The more you use them, the more they get to know your interests, your preferred shipping method, your list of friends (from gifts you send them), and much more. This further streamlines the user's experience.

There is also the issue of trust. If you have a good experience buying a book, you'll trust them to sell you a DVD and ship it in a timely manner. Once a webstore earns your trust, you want to buy other stuff from them as well.

The bottom line is consumers want to be able to get everything they want in one place.

So, what does this mean for classified ads? Well right now, you have a few consolidated websites like Craigslist that address everything. But the majority of the classified activity is still on the vertical sites like Monster, HotJobs, Cars.com, Autotrader, etc. Why is this?

Well it's simple, the vertical websites provide a much more professional experience that is tailored to their specific vertical. When an advertiser enters information on the vertical websites, they do so using a form that is customized for that vertical. This approach has two distinct benefits: (a) by prompting the user, they elicit more complete information than a simple textbox; (b) the resulting data is now structured and searchable by field.

Let me illustrate the issues described above. Look at some of the car listings on Craigslist. Do they include the transmission type, interior material and color, a description of the stereo system? Most of the listings in Craigslist are incomplete. Compare this to the typical listing in any of the vertical automotive websites. The verticals are far more complete.

In addition, the verticals are easily searchable. You can search under "model" for the term "corvette" and the search results are all corvette cars. Try searching for the term corvette on Craigslist and you'll get parts, services, cars. You'll get some guy selling a Mustang who claims it is "faster than a corvette". This is because the information in Craigslist isn't structured.

Craigslist is great for people with what I call a high time-to-money-ratio. But on the other hand Craigslist does provide a cool single integrated solution that fosters cross-pollination between the various categories.

There is really no technical reason a site cannot be built that combines the single integrated classified ad experience of a Craigslist with the structure and context of specialty sites. I don't want to make this a commercial, but this is exactly what drove me to start my company.

This isn't to say that ZiXXo will dominate the classified ads business. I fully expect the newspapers, Craigslist, eBay and others to follow this same model. Hell, it just makes logical sense, why wouldn't they? My real premise here is that the vertical classified ad websites have a limited future if they remain standalone solutions. Either someone will pull an "InterActive Corp." on these sites and roll them all up into a single solution, and Yahoo has already started down that path, or they will be squashed by a company that delivers a big box environment with a vertically specialized user experience.

Classified Ads Fee or Free?

2005-04-06T17:48:00.000-07:00

The classified ad market has witnessed steady price erosion as a result of competitive pressure from online solutions. The question is whether this will continue until classified ads are universally free, as many Internet classified ad solutions are today, or will fees remain a part of the classified ad landscape forever?

If you want a short answer, it is that Classified Ads will be free. But the actual future may be much more nuanced than that. A user might post a free classified ad and then opt to upgrade, for a fee, to add enhancements, like video, onsite promotion, cross-site promotion, ID verification, and the like. Along these lines you may see the creation of classes of ads, with a basic coach class being free, while the business class and first class charge fees for add-on services.

Future usage might also dictate that fees are required to avoid the tragedy of the commons, where the free common area is abused so regularly that it becomes useless for everyone else. Imagine a single worldwide free classified ads section. Each MLM businessperson would post their “amazing business opportunity” a hundred times a day in an effort to snag customers. It’s not unlike email, we would need to install filters. One such filter is to charge a nominal fee.

Craigslist, the grandfather of free classified ads, is using fees as a filter to avoid bad actors in the New York apartment rental market. Because rental agents were abusing the rental section of Craigslist in New York, the company plans to start charging. An alternate approach, albeit one that generates less revenue, would be to establish rules of conduct and then charge an ID verification fee. If the individual violates the rules of conduct they are warned and ultimately banished from the site. Under this scenario, posting ads remains free, but there is a one-time membership fee.

Another alternative scenario involves consumers settling on a small number of market leading classified ad solutions, an oligopoly, where these businesses find themselves in the position of being able to charge small fees for posting ads, without undermining their respective businesses. This is a very real possibility and the actions of Craigslist in charging for job posts in more locations and charging for rental posts in New York City indicate that this is an obvious possibility.

So, generally speaking, the basic classified ad, AKA the coach class, will become free over time. It is simply too hard to put that genie back in the bottle. But we may see business class and first class posting packages, with the requisite bells and whistles, that involve fees. And, of course, these same bells and whistles could be sold a la carte as well.

In the near-term, the various competitors will race to one-up each other in delivering more functionality for free in order to build critical mass of users. But in the long-term the market will stabilize and we will see free basic ads with upgrades fees, category-specific fees and membership fees being part of the mix.

Classified Ads Will Move Online…It's Just a Matter of Time

2005-04-06T16:25:00.000-07:00

Newspaper vs. Internet Classified Ads

The newspaper classified ad above cost $50, the Internet ad cost nothing...enough said? There's more. Here are some more advantages:

* Searchable (some services offer field-based searching)

* Pictures

* Advertiser ratings/feedback (some services)

* Email forwarding maintains the advertiser's anonymity

* Users can save a list of favorite ads (some services)

* No paper, printing or delivery costs

These are some of the more common capabilities available through Internet classified ad services. Once you've used Internet classified ads, you will instantly see the advantages. Newspapers still have critical mass and momentum, and not all users have Internet connectivity, but the trend is clearly against the printed editions of newspapers. This is not to say that newspapers will go away, but more and more their classified ads will go online!

Website Developer Pleads for Donations to Save His 5-Year Old Nephew's Life

2005-04-06T14:21:00.000-07:00

Rainier

We've all received the scam emails asking us to send money for tsunami orphans and kids dying of cancer. They focus on kids because a story about a child in need really evokes sympathy. So, when website designer Rod Paulino heard that his nephew back in the Philippines urgently needed a $60,000 liver transplant because of a rare congenital disease, he thought he would take a page out of the scammers' playbook, but do it right. Rod created a website at www.helprainier.com to raise funds for his nephew.

Rod's nephew, 5-year old Rainier Carlos, was born with Biliary Atresia, a rare liver disease. People with this disease cannot make enough platelets, so they bleed profusely. Rainier bleeds from their nose, mouth and ears. In order to prevent little Rainier from bleeding to death, he's had all of his teeth removed and replaced with silver teeth. After fighting this terrible disease for 5 years, he has reached the point where he needs a liver transplant to survive. But unlike those in the U.S. who have Medicare and other forms of insurance, Rainier lives in the Philippines and his family has no health insurance. They've spent everything they have on Rainier's treatments and have nothing left to pay for his life-saving surgery.

Fortunately for Rainier, his uncle Rod is an accomplished website designer in the U.S. When Rod heard the news about Rainier's situation, he sprung into action and built a website to raise money through donations at www.helprainier.com. The website includes articles about Rainier, links to information about Biliary Atresia, pictures of Rainier and his family and a simple way to donate any amount with a credit card. Rod also included his email address and phone number in case you have any questions.

Rainier needs $60,000 to pay for the transplant. So the site has a thermometer that tracks the donations up to the $60,000 goal. It also has a running list of every donor and the amount they donated. And every donor receives a letter thanking them for the specific amount donated, so they can write it off against their taxes. Please visit www.helprainier.com and donate. And if you feel it in your heart to do so, please tell your friends to do the same. Rainier's life now hangs on your generosity. Thank you.