Gowalla, Foursquare and Lots of Zeroes

I just heard some great thoughts from Dave McClure on the location based service industry sector.  He jumps through a couple of quick assumptions and drops down some pretty big numbers on the value of the overall market.  In response to questions over the entire market:

…there’s at least 50 million users in the U.S. that are potentially the consumers of these services.  If you assume that each of these users is worth $5-$10  in local search advertising per year, then yeah, it’s a big number..”

…it’s a big market measured in billions of dollars and probably worth tens of billions of dollars…

After listening to Dave talk for a few minutes, I started to think that the $100 million valuation of Foursquare sounded (somewhat) cheap.  This blog is seems like a good pace to explore why, which I’ll try to do in three quick points:

1. The mobile application market is exploding

Think about the fact that three years ago there was no market for mobile applications, and that the market size is now approaching $17 Billion. The adoption of applications are signaling an eventual  decline in the use of laptops, as users can do more on mobile devices and seem to want to.  I don’t know of anyone that believes that mobile devices do not play a larger role in their lives than they ever have, and that their use will continue to grow with the improvement of smartphones and the development of bridge devices like the iPad; and if users are on mobile devices more they are certainly more likely to consume location based services.

2. Frequency marketing and coupons are massive

For a year I worked in social media strategy for an agency that marketed OTC Health and beauty products and I can say without question, that every mass market product fighting for shelf space in big box retail  uses coupons like most of us use oxygen.  In my plans, coupon downloads were consistently a strategic marketing objective for every brand that we worked with.    For getting new customers, coupons induce trial and frequency programs drive repeat purchase.  This is a market that, if location based services are able to capture even a small amount of U.S. consumers, will be worth billions of dollars.

3. Where else are ads actually useful?

If users are decreasing their dependence on desktops and laptops in lieu of mobile, then digital advertising needs to move into the smartphone.  I currently don’t get a lot of ads on my phone and, until I downloaded my first Twitter application, I don’t think I ever saw an ad on y phone (I’ve been lucky enough to never have received an SMS advertisement, which I find incredibly intrusive).  But geo-locating advertisements based on where I actually, physically exist at any given moment is a big deal; it’s useful and exciting.  Who wouldn’t want to walk into a mall and be fought over by department stores with discounts, right on their phone? Anyone in the U.S. under the age of 25 is unlikely to ever clip  coupon form a newspaper–  but they are highly likely to use digital coupons that are readily available on an LBS that they are a member of.  With enough imagination, it becomes possible for these services to do for brick-and-mortar locations what Google has done for e-Commerce sites.

You can check out Dave McClure’s interview  in this TechCrunch post and you can check out his blog at 500 Hats.

Bebo & Ning: Second Place In Social Networks

Recent developments surrounding the world of  social networks are consistently pointing to a consolidation of social networks online.  Facebook currently touts over over 400 Million users.  It’s difficult to say how any users Twitter currently has.  The last numbers I saw were about 75 million, but I may be quoting an old stat.  Regardless,  these numbers trump Myspace and every other social network that has hit the web 2.0 scene.  On one hand, this is a story about the emergence of clear winners in the battle for clear market dominance.

The other half of this story is about social networks which are starting to falter, or admitting defeat.  Last week Ning announced that it was getting rid of free services and cutting 40% of it’s staff.  In even bigger new,  AOL has also announced that, two years after buying Bebo for $850 Million, the company will sell or shut down the site.  It’s becoming clear that a lot of second-tier networks are losing their user base and becoming ghost towns.

The emergence of a winner may have been inevitable.  However, I don’t have any interest in criticizing AOL for their acquisition of Bebo.  At the time of this transaction (2008),  social networks were still anybody’ game;  I believe MySpace was just over 100 million users at the time, 25% of where Facebook currently stands. In the social networking world network effects are profound, but as recently as 2008 the space was shaping up to remain fragmented, pulling in users of like interests and/or demographics very much the way forum-based communities still do.  If you were trying to establish a social media presence,  a brand or person used to build profiles on Friendster, MyYearbook Bebo,  Myspace and others.  When I was still working with record labels on social media strategy, we used to recommend web ubiquity, putting a profile on as many as a dozen social networks.  It seems that’s all over for now.

The 2007 social network world was killed largely by the sheer volume of consumers that poured into Facebook.   400 million active accounts is pretty much everyone when we’re talking about a place to put profiles.   But I’m not sure the world was a better place with the fragmented network system that we had before (the world of MySpace, Facebook, Bebo, NING, MyYearbook, Friendster, etc.). Yes, there were more choices and less restrictions for users, but all of these options are free for individuals so there’s not a price problem for consumers.  I think this presents some challenges for advertisers and I think this presents some serious challenges for developers.  Everything is platform dependent now and I’m not convinced that this is a good thing when it comes to Facebook.    Every time you get a clear market leader like Facebook, consumers and suppliers lose choice and the world becomes (just a little) less interesting.

Google Docs Are Improving: iWork & Windows Get a friend

Google recently announced new features and improvements to their Google Docs suite.  Some of the new features look  great (I have not tried them all), but their biggest improvement for me is the ability to upload and store documents in any format.

As an enthusiastic Gmail user, I’m thrilled to have some storage space integrated with my email client in the Docs section.   Having my email client and document storage together in the cloud improves my mobility. On a side note, I’m curious to what this will do for smaller collaboration tools like Box.net.  Until now, Box was the easiest solution for sharing Microsoft Office documents (far better than Windows Live).  Now that I can store and share MS Office documents through Google, I’m going to be less likely to use an isolated system like Box.

In terms of actually moving from Microsoft Windows to Google Docs,  I don’t think I’m there yet.  I still don’t like the process of converting my Office files to Google Docs files for two reasons.  The first is that it doesn’t really work–  at least not seamlessly.  I have attempted to convert a number of Office files into Google Docs and they don’t look right when they’re up.  Yes, I can probably do some re-formatting and get them to convert more seamlessly, but I don’t want to–  I’d prefer to just keep them as office docs.  With further improvements, I believe this can be circumvented.

The second problem is a big one (and a repeated challenge): user base.  First, online collaboration is only as good as the number of people who you can get to collaborate on any given project. While it’s wonderful in theory, it’s not done in practice very much and I do not see this trend changing anytime soon.

As an MBA student, I send Document files around to a lot of people in different work environments.  The only consistently shared applications suite in Microsoft Office. Half of the students in any given group will be running on a Mac (myself included), but no one would ever share a Pages file.  And es a lot of people use Gmail, almost everyone I work with has a Gmail account, but the standard remains Microsoft Office files.

I recently bought Microsoft Office 2007 for Mac after trying to work with Google Docs, then the iWork suite.  The fact is, none of it worked the way I needed it to, so I’m back to MS Office (and I’m pretty happy there).

Peer Lending Gets Another Boost

According to TechCrunch, peer lending site the Lending Club, secured $24.5 million in Series C financing, led by Foundation Capital and joined by existing investors including Morgenthaler Ventures, Norwest Venture Partners and Canaan Partners.

Peer lending companies like Lending Club and Prosper are sites that connect lenders and borrowers in a transparent, social network style environment.  While certainly not risk free investments,  I believe these sites allow for a free-market solution to small-to-medium sized loans in an efficient way.  Through this direct approach,  these sites have the ability to eliminate layers of cost and bureaucracy that surround loans which, in theory, allows for lower rates for borrowers and higher returns for lenders.

While I do not believe that peer-to-peer lending will ever replace traditional loans, credit cards and big banks,  it’s inspiring to see a new asset class emerge that, one day, could compete with Wall Street, or at least influence the price of this amount of money.  When you consider the scalability of this model (assuming transparent information on borrowers remains available) and the extremely high APRs that credit cards can charge for small amounts of money, this outlet could potentially  become a real resource for consumers trying to lower their interest expense, or make small investments in their businesses.  If these sites reach their potential, they will become a natural anchor to credit card rates.   Additionally, with annualized returns over 9.5%, it’s not impossible for places like the Lending Club to pull in a large investment pool from a large group of small investors looking to diversify from the market and avoid paying management fees.

According to their blog, the Lending Club has issued a little over $100 million in loans since it’s inception and currently controls about 75% of the peer lending industry.  This is an extremely small piece of the lending pie,  but I’m hopeful that this industry wil continue to grow.  The real challenges that peer lending sites face is (again) one of network effects.  As a market making site, it’s important that borrowers and lenders can connect with similar risk profiles (lenders that are willing to accept risk for higher returns, and borrowers who are willing to pay higher rates with relatively low default risk).  I plan to open a (very) small account this month to get an idea of the lending process  and I’ll post again on this topic soon.

On another note,  the Lending Club website is a great example of what a startup site should look like.  The value proposition for lenders and borrowers is clear & upfront; there’s very little potential for anyone visiting the site for the first time to be confused.

Locking on Strategy: Apple & Twitter

I’ve been trying to identify a trend I’ve seen this week in my RSS feeds, told through the story of Apple changing rules on iPhone application analytics (Venture Beat), the much-discussed HTML5 vs. Adobe battle (I like this Scobleizer read which discusses it)  and  Twitter developing 3rd party applications for mobile applications and acquiring Tweetie (I downloaded the Twitter application for Blackberry yesterday and it’s excellent). It seems that the biggest innovators in technology are integrating and consolidating their channels.

It’s been interesting watching these companies shift strategies and jockey for space.  Apple has always kept a somewhat closed shop.  The recent exclusion of Adobe Flash from the iPad was a bold move on Apple’s part, but not entirely surprising considering the company’s history of being a vertically integrated firm that does not like becoming dependent on channel partners.

Watching Twitter and Facebook move around has been the more interesting story.  For the past year, Facebook has been redesigning it’s user experience to mimic Twitter’s model.  Status updates and tweets are a very similar now, and this is most likely the result of these platforms focusing exclusively on gaining advantage through network effects.   Twitter and Facebook have been dependent on content and users first, revenue second.   Now that they have both gained massive user bases and rapid adoption growth; the focus is turning towards revenue generation.

Facebook generated over $500 million in 2009 revenue, which came thorough display and performance-based advertising.   Let’s assume that Twitter is moving into third party applications in order to serve up mobile ads; is it enough to match the revenue levels that Facebook has generated?  The picture gets cloudier when you consider  the fact that Facebook made the majority of their ad revenue through 3rd party application advertisiers like Zynga.  The platform has already chalked up some revenue by licensing their search results to Bing & Google, and I believe there is more revenue down this path in the form  of brands looking for in-depth market research along the lines of what BuzzMetrics offers.

Another route is the sponsored tweet.  I’m not a huge fan of this model as a user or as a marketer–  I just think earned media should stay earned and buying people’s twitter feeds doesn’t seem like a scalable, sustainable model to me.  The fact is that Twitter is an unbelievably useful, intriguing and transformative technology. While I’m not certain what their revenue model is going to ultimately be, I imagine it will be a combination of the revenue models that we’re seeing now (some search, some mobile ads, some sponsored tweets). Regardless what their ultimate revenue solution is,  the platform is undeniably here to stay.

UPDATE: Twitter announced it’s model for rolling out sponsored tweets yesterday , and will discuss them in greater detail ad the AdAge Digital Conference, here in New York, next week.    I’m looking forward to seeing how these perform.  Clearly, opening a channel for  more mobile advertising is a big opportunity.

The Media Generation (M2) Means CPMs will Change

I really enjoyed checking out this writeup on Silicon Alley Insider about the media habits of 8-18 year-old American kids.  The study was released a few months ago by the Kaiser Family Foundation (you can see the full study here).

There are a few choice statistics in this report.  The most interesting piece to me is the amount of media exposure that tweens are exposed to today, and the exponential growth rate that they’ve experienced.  At 10.5 hours in 2009,  kids are essentially spending every waking moment consuming media.  What’s more, this represents an increase of 43% from media consumption levels from just ten years ago.  I’m unsure how kids can find this kind of time in their days.  It would seem to leave little time for anything else.

Studying is wasting XBox time (teen interviewee)

In most interviews taken, kids are talking about texting, listening to iPods, watching TV and playing video games, often at the same time.    Social networking takes up over 2.5 hours per day.  Other top time-consuming activities include playing video games and watching online videos:

I propose that this level of media exposure greatly lowers the value of advertising, in general.  Let’s look a t a 30 second television advertisement.  In a 10.5 hours media consumption day, that’s 1/1,260th of the media “real estate” that a kid is consuming today; is that worth the price of admission?

Additionally, it seems that kids are multitasking more than ever; which lowers the amount of attention an advertiser gets with their spot.  I believe this is why media buying will move further towards measuring interactions instead of impressions.  The value of simple impressions has dropped significantly in the past few years, and probably with good reason (CPMs can be purchased for less than $2 in some networks).  How can advertisers be certain anyone is even exposed to their ads if  they take up such a small piece of the attention pie?  The only answer seems to be inserting an interaction qualifier:  using QR codes, measuring clicks, using tracking URLS and other interaction-based measurements are going to increasingly become the standard.  The downside of this, as Chris Dixon points out, is that buying performance tends to rewards content light sites where users go often, and click through quickly (at least for any cost-per-click or affiliate marketing programs).  This creates new challenges for the media industry as a whole, as advertisers will continue to search for ways to become signal in an increasingly noisy environment.

TFP & Emerging Technologies

I have a macro  economics  mid-term tomorrow,  so my head is filled with international trade, emerging market growth, labor markets and so on.  Tonight I’ve gotten to thinking about the Cobb-Douglas production function, and how it applies to the things that I’m interested in: new technology.

The Cobb-Douglas production function says a lot more than I care to in this post,  but the basic equation states the following:

GDP is a function of A (Total Factor Productivity or TFP),  K (The Capital Stock), and H (Human Capital).  The little alpha takes depreciation of the capital stock into account.  So, economists start here and get into a lot more depth in analyzing how certain markets grow.

The letter “A” is the intriguing factor here.  A is total factor productivity (TFP) and it basically represents two things:

  • How easily markets can clear (generally a lack of government intervention), and
  • Technology

These two things makes labor more efficient and productive.  Without technology, economies have a difficult time growing.   This got me thinking about that VC world and investments in new technology.  Total factor productivity measures how effective technology is at helping labor become more efficient.   There have been a number of transformative technologies that have made our lives easier, that have made us more productive of transformed the way that we do one thing.  These technologies are exciting to me.  Google’s search technology is a big, obvious example.  Microsoft Windows.  The personal computer.

I read this post today from  PE Hub about venture capital returns being  below market returns,  and got to thinking about “A” in the Cobb-Douglas function.  Technologies that we invest in need to address a need and generate value for a large marketplace.  My understanding is that there’s always a focus on market size when it comes to venture capital;  the economics of the business model simply dictate that market potential be somewhere in the billion dollar plus range.   My hope tis that, in the process of vetting new investments and sizing up market size, that investors are thinking about the value that these products provide to the end-user, in the long-term and applying their knowledge of fundamental economics in their decision-making process.

I’m sure a lot of projects look like Google before the rubber hits the road.  I think that the venture capital industry provides important value to the marketplace and the global economy; I hope to see it investing and growing TFP-positive companies.

The Startup Visa and David Ricardo

I’ve been reading Fred Wilson’s numerous posts on the startup visa andthought I’d chime in with some context that’s currently relevant to me.  I fully share Fred’s views on this topic,  and I think it’s important to discuss the relevance this has on the future growth of our economy.

I’m currently taking a global markets class at Stern where we’re reviewing and analyzing Ricardo’s theory of comparative advantage. This is an economic theory that’s often used to support globalization, because it generally lowers the cost of goods for all consumers.   I’m not going to get into the theory on this post, because the information on the theory is well written in Wikipedia (above link).  I do want to mention it in the context of the startup visa, because I think this theory and the current startup visa debate tied together.

Remember when NAFTA was under debate and everyone was talking about that giant vacuum sucking manufacturing jobs into Mexico? Well, that didn’t happen.  What did happen is that some manufacturing business went south of the border (where labor was less expensive), and other industries in the U.S., like corn  production, thrived in the new marketplace.  Additionally, goods became less expensive for both Mexicans and Americans.

I mention this because I believe globalization is inevitable.  I also believe it’s a generally good thing for the world, but only if our country is strategic in its approach to maintaining competitive advantages in industries that are important and relevant.  Allowing entrepreneurs into our country to start new businesses is good for everyone and it doesn’t threaten anyone.  It’s only a net-positive benefit to GDP to have new value-generating firms in our country;  I simply do not understand the counter argument.

I heard David Rose speak last month about angel investing.  He told a story about a group of Stanford MBAs who were pitching him a website that would allow angels to bid and compete on investing in startup ideas.  David’s problem with the product was that, in all of his years investing in startups, he had never once competed to invest in an idea.   It’s easy to understand why.  The likelihood of a startup succeeding is so low that it’s not logical to invest one as an angel because the economics are simply too daunting.  In a market where good ideas are in short supply, and success in startups is a (qualified) numbers game, why would we create legislation to block the flow of new ideas in our country?
Considering our increasing dependence on service businesses for U.S.  GDP growth, and considering the fact that we are a mature country and not generating new jobs outside of the new business environment,  we are taking huge risks every time we turn an entrepreneur away.

Twitter Ad Networks: Paid-Earned Media

A Friend of mine sent me a link to 140 Proof, an ad network that serves up sponsored ads in Twitter and asked me for my onion on the network. I’m not going to link out to the network, but I would like to talk about my thoughts on this approach as a business model.

I went on the site to find out a bit more information on the company. It was interesting to click on either the “Publishers” or “Advertisers” links on the site, because they both attempted to access and update my Twitter account. I find this unusual behavior for a company who is trying to sell me ad inventory on Twitter, while simultaneously asking to borrow mine without offering any value first. Anyway, here was the email I replied with:

Hi!

Quick response:
* I don’t know anything about this specific agency, but I’ve spoken to others
* I’ve never run a paid media campaign in Twitter
* I find these networks somewhat objectionable and annoying because it’s interference marketing with very little value (I may change my opinion on this, but Twitter is so self-promotional as it is that it seems ridiculous to purchase tweets). With that said, it’s certainly gaining popularity.
* A colleague of mine purchased this type of media for {a client} and reported that it didn’t perform.

If you want to purchase this type of media, make sure it can be performance-based (number of clicks or registrations- not CPM) and understand that you will not be able to target it very well.

That about sums up my opinion of buying earned media. This type of advertising strikes me as being no different from advertorials, and brands wishing to establish relationships and drive beyond a click should be careful when purchasing media like this. Duping someone into clicking on your ad is not advertising.

Quora and the $86 Million Question (and Answer)

TechCrunch recently announced round A financing secured by Quora,  a new site  founded primarily by ex-Facebook employees.    At a rumored $86 Million valuation,  the site has garnered significant attention from the start-up, tech and VC worlds.  I recently received an invitation to join and spent the past few days playing around on it in my spare time.  Here’s a quick breakdown of how it works from my perspective:

Quora is basically a question and answer site.  Users can ask questions, categorize questions into topics, comment on questions or answers and answer questions. Users can also follow things: people (other users), topics, or questions.  Users can also endorse other users on specific topics. Quora notifies users when activities occur on the items that the user is following  (i.e. “Jimmy Smith commented on an answer to Can Brands Sponsor Questions in Quora?”).

Nothing special so far.  And yet,  Quora is an incredibly addicting user experience.   The content that’s been developing in the site is top-quality:  experts and extremely curious users post questions, comments and answers on fascinating topics.  The user  experience is also extremely rewarding.  Asking questions drives activities (interactions) and the community is incredibly fast at interacting with your questions.    So, what’s the point?  Co-founders Adam D’Angelo and  Charlie Cheever had this to say regarding their goals for the site:

The way we think about this is there’s actually a lot of information that’s still in people’s heads that’s not on the internet. And when you think about it you would say that probably 90% of the information that people have is still in their heads, not on the internet.

WHen asked (In Quora) what the long-term business plan for the site was,  Adam answered (first response):

It’s hard to plan ahead too far on the internet because things change so quickly, but there’s a good chance that advertising will end up as some component of our business. There are a lot of other options, too, but our focus as a company is on building Quora as a product, and our costs are low enough now that we can afford to delay worrying about monetization until later

I’m impressed with the environment and I think the site has a lot to offer.  I will be interested to see what the site becomes when it opens up to a larger audience; there will certainly be some pretty heavy diluting of the content (right now the site is populated witha disproportionate amount of computer scientists, entrepreneurs, web developers and designers, etc) and this will be a challenge for the site.  I have a three more invites on to the site.  If anyone is interested, drop a comment with your email address and I’ll send you an invite.