Tag Archive for 'growth'

Misinterpreting Kuznets

For years I’ve been thinking that something just doesn’t feel right with the world. It started with when I joined PricewaterhouseCoopers in 2005 and would observe how we’d always be ‘growing’ by 15% a year. Little things didn’t feel right like despite growing, people felt strained; and who cares if we grew that much? Growth in business is justified on the basis of economies of scale whereby the bigger we got the more efficient business was, but fresh out of university, I couldn’t help think about the other side of that theory: diseconomies of scale, where the bigger we got the more *inefficient* we were.  And if we grew, what would that mean? A pay rise? Well, it better because if my salary grew below the inflation rate, I’d be effectively getting paid less. Our society was set up like this never-ending tread mill. Make more money, get to spend more money; spend more money, need to make more money.

Two years I go, I admitted I didn’t know the answer but I knew the end goal was “happiness”. And instead of measuring success based on wealth, I’ve come to appreciate success comes from wellness. We don’t just want an increased standard of living, which related to the definition of wealth, is about the accumulation of capital and generation of income. No, what we human’s want is quality of life, which like the concept of wellness, is about allowing us human’s to be at our optimum.

And I’m not the first to realise that.

The US Congress commissioned Simon Kuznets to create a system that would measure the nation’s productivity in order to better understand how to tackle the Great Depression. Despite this, he immediately said not to use it as a measure for welfare. He invented the concept of GDP to do this, and had this to say in his very first report to the U.S. Congress in 1934: “…the welfare of a nation [can] scarcely be inferred from a measure of national income…”. In 1962, Kuznets stated: “Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and long run. Goals for more growth should specify more growth of what and for what.”

Everyone knows GDP has weaknesses. First of all, it doesn’t count the things that can’t be measured. Externalities like pollution, which during my university days a decade ago were justified as not being included in the economy because they couldn’t be measured, simply were ignored in economics as if they didn’t exist. (And thank God Australia is leading the way with the carbon tax, to help correct this fundamental flaw in economics.) But also just as problematic, is the fact unpaid labour isn’t counted.

Why does this matter? Because policy decisions are being made, and it biases activity that can be measured. Spending money on pollution cleanup, is seen as a much better way to operate than preserving the environment which doesn’t lead to income. This simplistic way of measuring not only will divert wealth creation (as true costs are not measured, distorting appropriate decisions), but it also doesn’t discriminiate on the inputs to production so that true quality of life value is created rather than just standard of life which chases income generation.

As this great piece six years ago by The Atlantic states:

Politicians generally see this decay through a well-worn ideological lens: conservatives root for the market, liberals for the government. But in fact these two ‘sectors’ are, in this respect at least, merely different sides of the same coin: both government and the private market grow by cannibalizing the family and community realms that ultimately nurture and sustain us.

I think what we need to do is realise, that wealth creation and its associated metric GDP, is simply one dimension to us being happy as humans. A second is our health, because without being alive and able to enjoy life, then what’s the point? What value is there in society if you’re dead before you get to contribute to it? And so with that, why isn’t life expectancy considered a core part of the measurement of our society’s progress, equal or even above what GDP is?

A third however, is something I know but still can’t place my finger on yet. I don’t know what to call it, other than perhaps the pursuit of happiness. When we manage to feed ourselves and keep a roof on top of our heads, then what? We need to be engaged in the mind, always looking to grow internally. We want to learn and experience the world, and always feel like we are progressing. Life’s a journey to Ithaca, where we “pray that the road is long”. And the science backs this up: our dopamine levels are at its highest at the signal of a reward (as opposed to simply the pursuit and then the actual achievement of it).

This is not me trying to push a solution to a problem that doesn’t exist. The problem does exist and it matters: we’re using growth as a proxy for our progress, and yet damaging the environment that keeps us alive which is one side affect of this approach. Our whole system of measure is GDP growth which is fundamentally predicated on the basis of a rising population, but in the next 50 years we’re going to see the western world’s population stagnate which will de-accelerate GDP growth. What are we going to do when we stop growing? We’re operating on a house of cards.

Most pressingly, we are now experiencing one of the biggest financial crises of our collective conciseness with our political leaders unable to decide or able to execute a solution to get out of the mess. Which is ironic, because the concept of GDP was invented the last time we experienced global economic turmoil.

It makes you wonder that maybe the solution isn’t just action, but an entirely different way to how we see ourselves.

Platform growth over user privacy

Facebook announced that data about yourself (like your phone number) would now be shared with applications. Since the announcement, they’ve backed down (and good work to ReadWriteWeb for raising awareness of this).

I’ve been quoted in RWW and other places as saying the following:

“Users should have the ability to decide upfront what data they permit, not after the handshake has been made where both Facebook and the app developer take advantage of the fact most users don’t know how to manage application privacy or revoke individual permissions,” Bizannes told the website. “Data Portability is about privacy-respecting interoperability and Facebook has failed in this regard.”

Let me explain what I mean by that:

This first screenshot is what users can do with applications. Facebook offers you the ability to manage your privacy, where you even have the ability to revoke individual data authorisations that are not considered necessary. Not as granular as I’d like it (my “basic information” is not something I share equally with “everyone”, such as apps who can show that data outside of Facebook where “everyone” actually is “everyone”), but it’s a nice start.

http:__www.facebook.com_settings_?tab=applications

This second screenshot, is what it looks like when you initiate the relationship with the application. Again, it’s great because of the disclosure and communicates a lot very simply.
Request for Permission

But what the problem is, is that the first screenshot should be what you see in place of the second screenshot. While Facebook is giving you the ability to manage your privacy, it is actually paying lipservice to it. Not many people are aware that they can manage their application privacy, as it’s buried in a part of the site people seldom use.

The reason why Facebook doesn’t offer this ability upfront is for a very simple reason: people wouldn’t accept apps. When given a yes or no option, users think “screw it” and hit yes. But what if they did this handshake, they were able to tick off what data they allowed or didn’t allow? Why are all these permissions required upfront, when I can later deactivate certain permissions?

Don’t worry, its not that hard to answer. User privacy doesn’t help with revenue revenue growth in as much as application growth which creates engagement. Being a company, I can’t blame Facebook for pursuing this approach. But I do blame them when they pay lipservice to the world and they rightfully should be called out for it.

Facebook’s no longer a startup

Facebook pokeFacebook announced today that they became cash-flow positive in the last quarter. This is a big deal, and should be looked at in the broader context of the Internet’s development and the economy’s resurgence.

The difference between a start-up and a growth company
There are four stages in the life-cycle of a business: start-up, growth, maturity, and decline.

In tech, we tend to obsess over the “start-up” – a culture that idolises small, nimble teams innovating every day. Bu there is a natural consequence of getting better, bigger, and more dominant in a market – you become a big company. And big company’s can do a lot more (and less) than when they could as startup’s.

Without going too much into the difference between the cycles, it’s worth mentioning that a functional definition to differentiate a “startup” business from a “growth” business is its financial performance. Meaning, a startup can be one who has revenues and expenses – but the revenues don’t tend to cover the operating costs of a business. A growth business on the other hand, is experiencing the same craziness of a start-up – but is now self-supporting because its revenues can over its costs.

This makes a big difference in a company, lest of all longer term sustainability. When a business is cashflow negative, it risks going bankrupt and management’s attention can be distracted by attempts to raise money. But at least now with Facebook finally going cash-flow positive, it has one less thing to worry about and can now grow with a focus less on survival and more on dominance.

Cash register

Looking at history
Several years after the Dot Com bubble, I remember reading an article by a switched on journalist. He was talking about the sudden growth of Google, and how Google could potentially bring the tech industry back from the ashes. He was right.

Google has created a lot of innovative products, but its existence has had two very important impacts on the Internet’s development.

First of all, there was adsense – a innovative new concept in advertising that millions of websites around the world could participate in. Google provided the web a new revenue model that has supported millions of content creators, utility providers, and marketplaces powered by the Internet.

Secondly, Google created a new exit model. Startup’s now had a new hungry acquisition machine, giving startups more opportunities to get funded as Venture Capitalists no longer relied on an IPO to make their money – which had now been effectively killed thanks to the over-engineered requirements of Sarbanes Oxley.

Why Facebook going cashflow positive is a big deal
Facebook is doing what Google did, and it’s money and innovation will drive the industry to a new level. Better still, its long been regarded that technology is what helps economies achieve growth again, and so the growth of Facebook will not only see a rebuilding of the web economy but also of the American one. The multiplier effect of Facebook funding the ecosystem will be huge.

And just like Google, Facebook will likely be pioneering a new breed of advertising network that benefits the entire Internet. And even if it fails in doing that, its cash will at least fund the next hype cycle of the web.

So mark this day as when the nuclear winter has ended – it’s spring time boys and girls. We my not have a word like Web2.0 to describe the current state of the Internets evolution, but whatever its called, that era has now begun.

The information age is still filling up its rocket with fuel

Today, the Wall Street Journal published an article by a fund manager who suggested the Internet is now dead in terms of high growth. While I can respect the argument from the financial point of view (although he’s still wrong), it also shows how widespread and unsuspecting even the educated are for the transformation the Internet is preparing us. Yes, ladies and gentlemen – we ain’t seen nothing yet.

But I won’t get into the trends right now that are banging around my head, making me willing to change careers, country and life to position myself for the future opportunities. Let’s instead start with his core thesis:

The days of infinite margins, 1,000% productivity gains, and growth of market throughout the universe are long over. Internet companies now should be treated, at best, like utility companies that get bought at about 10 times earnings and sold at 13 times earnings. Even then, I’m not sure I would give the Internet sector the same respect as the monopoly-protected utility sector.

I am glad that was said, because this is more of a world-wide problem we have, that has lead us into the Global Financial Crisis (GFC). The ridiculous false economy generated over decades of speculative growth – where fundamental asset values were supported by unreal cash – is something we need to stop. The best thing the GFC has taught us, is that valuations need to be supported by independent cash flows with markets not manipulated to inflate their true value. And I can’t wait to see the technology sector (who along with their partners in crime in banking and property) use some basic accounting skills, and come to the rude awakening that, in the real world, that’s how things roll.

Where he is wrong however, is in the innovation that is creating new ways of generating revenue. More importantly, what we are seeing is a stabilisation in technologies invented half a century ago. The Internet and hypertext (the web is an implementation of a hyptertext system) have all been in development for 50 years – and it’s only *now* that we are coming to grips with the change. So to say this is a fad that’s now over, is really ignoring the longer term trends occurring.

As identified in the article, the biotech market will be massive, but I was told by the head of the PwC Technology park Bo Parker in March 2009 that it’s only just resembling Information Technology in the 1970s. However, when in comes to information, things are ramping up for a lot more as the industry has had a lot more time to evolve.

Where do I see things going? Oh man, let’s get a beer and talk about it. Data portability, Semantic Web, VRM, Project Natal, the sixth sense, augmented reality – try that to get your imagination started. I call it the age of ubiquity: ubiqitous connectivity, ubiqitous computing, ubiqitous information – where we have those separate things accessible anywhere and everywhere and when combined will change our lives. Information and communications, after all, are a fundamental aspect of being human that underlie everything we do – and so its impact will be more broadly applicable, obvious, and transformative.

Where’s the money in that? Are you kidding me?! The question is not how many dollars these changes can generate, but how many new industries will they spawn. We seriously don’t know what’s about to hit us in the next two decades for information technology, and clearly, neither do the Fund Managers.

Organisations need to be a size 12

Last week at the top 100 web applications launch, Ross Dawson made a brief remark that I feel should not go ignored. He said that technology aside, companies like the ones in the top 100 list have a huge impact on our society; They are redefining our society as a whole, with new ways of doing things such as how organisations are structured. On that same panel Duncan Riley was crying out foul about the problem with Australia is that venture capital money is nothing like how it is in the US (which is offered for riskier ideas, at a quicker turnaround, and with bigger amounts) – but a retort made by Phil Morle brought this common whine in the Australian industry to a different level: “You don’t need to be a billion dollar company to be successful.”

In the context of the discussion, this can be taken in several ways about the state of the venture capital industry and its interaction with Internet start-ups, but take a step out of that mindset and instead explore the opportunity with the point made by Ross. Organisations, like incorporated companies of today, are something we should and can re-examine because a billion dollar company is not what the goal should be. Why? I’ll show you.

(Dis)economies of scale

Economic theory proclaims that the larger a company, the better. In the literature, this is regarded as ‘economies of scale ‘ whereby things become cheaper the bigger firms become. For example, the cost of capital is cheaper for a large a company (for those without a financial background, that simply means things like the interest on a bank loan or how much a shareholder expects as a return in dividends or share-price growth) . Operating costs can also fall, which if you think about how retailers will offer discounts on bulk buys – if you are a bigger company, you buy more and therefore get those deals (as well as have influence to create those deals).

Even if you don’t have an economics background, I am sure you are familiar with the concept given the ‘growth’ obsession we have in our world: bigger is better or more is more. However something we should be equally aware of is the ugly cousin: diseconomies of scale . Even economic theory recognises that you can get to a stage where you are just too big, where in fact each extra increase is no longer creating economies but the opposite. It’s a bit like trying to carry the shopping from your car boot: some people can carry a half dozen bags to save on multiple trips; however there is a point where they are carrying too many bags, and the extra benefit of less trips back to the car is in fact outweighed by the increased risk of dropping the bags and hurting their back.

We live in a world, where the growth obsession of our world fails to recognise the ugly cousin. We constantly hear about growth, but what goes up must come down – we never seem to hear when a company is “big enough”. Building on Ross’s point, maybe the answer to that is not that we need to identify the point on the continuum where the diseconomies kick in; instead, the new opportunities offered by technology can instead determine how we can organise resources with the least amount of size.

I have a client that is regarded as one of the biggest advertising agencies in the world. I’m sure anyone with experience with the internal operation of ad agencies will recall how damn complicated they can be – which I think has to do with the ego prominence of the creative industries. Everyone needs differentiation in those industries (and so, the one company is in fact a group of multiple agencies like their own mini empire or stand alone business unit). The complex organisational structure that my client operates in, made me think this is what modern day socialism is like: create a large organisation that becomes so complex, that no one understands it – and in the process, have multiple over-lapping jobs filling functions that are not needed. Giving people jobs for the sake of it. As a case in point, one of the guys in the finance department told me how there was a girl that no one knew what she did. One day she resigned, and whilst one would expect strain on a group with one less staff member, what actually happened was that no one noticed any difference in the output of the team!

Little did I realise however that soon afterwards as I performed a internal (non-client facing) role that this advertising agency wasn’t unique with its socialism. Aside from the fact I’ve met people at my firm that I still couldn’t tell you what they do, my experiences had me see another bigger negative about a big organisation that can be summed up in one word: people. And just like how people by nature are complicated, so too will my answer as to why.

My firm employs 140,000+ globally and about 5,000 in Australia. Whilst that is a high number, more remarkable is the fact it’s a professional services firm: we are not talking about 140,000 high school drop outs but a well educated work-force. As a consulting firm, client facing staff like myself can be in a group as big as 200 people (in each city). There are effectively another dozen or so people with exactly the same skill set and job role as me, but we are just resources that go out to different clients, so ultimately we are doing the same work. That side of my job at my firm has seen me experience a very efficient, lean machine with the fundamental economic concept of “allocating scarce resources” brutally evident with the language of how we run our projects (I even just called myself a resource above, not a employee). However it’s that internal role which had me see the supporting ecosystem for client-facing groups like mine and which made me realise the weaknesses of a big company. I couldn’t tell you how many of the 140,000 people are supporting the client-facing professionals, but I would hazard a rough guess to be about 20%. The nice way of saying it, is that in Porter’s model , that 20% are the support staff to help execute our primary revenue-generating activities. Another way of putting it: that 20% are the overhead.

Overhead matters for two reasons in this discussion: it slows down an organisation (ie, decisions) and it can definie its existence (ie, costs). Each of these points are worth looking at separately.

lego men

“Frustration” defined: the sum of all people you need to work with to get something done in the last month

People and decisions

That internal role I discussed above, was about implementing a new technology at my firm. I could write a book about the experience, but suffice to say I can recall one incident which is a perfect reflection of something I learned about getting something done in a big company.

This particular technology allows you to add extensions that can drastically alter the functionality of the product. These ‘plugins’ are remarkably simple – we are talking about uploading a single file that is perhaps 50kb (smaller than a typical word document) – and once uploaded via an admin interface it can be activated for immediate effect (with documentation fully provided on the web). Indeed, in the early days of the technology’s roll out, I would often add new plugins as I felt the need arose, but that quickly ended when I was forced to concede that’s not the right way to do things (as it’s not my job). So therefore, if I ever wanted a plugin, I would have to e-mail the IT guys, who would then review it, test it, and then upload it. This is fair enough because adding a plugin could destabilise the system losing valuable data.

I might also add whenever I sent those e-mails after I no longer installed those plugins myself, I would follow up a few weeks later only to find no one had got around to doing it.

Why the significance of this story? Something that I could do in 30 seconds instead takes weeks because I work in a large organisation. For example:

– write an e-mail asking for the request explaining why: 30 minutes

– following up on the status of my request: 60 minutes of e-mails, listening to justifications for inaction, etc

– escalating to a superior when I felt things were taking too long: 60 minutes of meetings and e-mails, as I stressed the importance of a particular plugin for the productivity of one of our pilot groups

…And that’s in raw effort. That’s not accounting for the time stretch of a few weeks (actualy months in one of the cases).

Even though I had the skills, understanding, access, and ability to do this – I couldn’t due to lines in the sand of what I was allowed to do. And because I couldn’t, what would take 30 seconds for a small start-up using the same product, it would in fact take me hours upon weeks to get another few people whose “job” it is to do it.

This example is more humourous than harmful, but when it comes to large organisations, it’s a perfect characterisation of how things get done. I can assure you, all big companies work like this – by definition, a company that is Sarbanes Oxley compliant has so many segregation of duties it will make you cry with laughter. If I shared with you some other stories, that laughter will turn to shock, when you come to the truth of how companies actually operate.

People and cost

At another one of my clients, they have been undergoing some massive growth over the last few years, with a large organisational re-shuffling as this rapidly growing company took shape. A guy I’ve got to know that’s been there a while (and which I might add, we have no idea what’s he actually does as a job despite his title) told me something quite funny. His observations over the years, is that as a company increases in size, so does a corresponding increase in headcount irrespective of any other factor. By example, he explained that lets say a new person is appointed to lead a new team – they now require a personal assistant. And that new team now needs a dedicated IT guy. And then an HR representative. And the list goes on – rather then a company consolidating on its size (ie, merging job roles to avoid duplicity), what he thinks is that as the company has grown over the years, there is always a corresponding increase in head count regardless without any obvious reason why. It’s almost like a natural externality of growth is headcount.

Payroll is a significant cost for any company which can be up to 80% of the total expense of an organisation (my former headmaster told me that, that being a knowledge intensive organisation: a school). So as my above discussion highlights, I obviously find it amazing how such a significant cost is not controlled because management don’t actually understand what staff they have (and as an aside, current enterprise social networking technologies specifically target the real need of documenting what expertise a company’s staff actually has because no one knows). Whilst this may seem like an important point from a controlling costs point of view, I wish to raise it’s actually a hell of a lot more significant.

Let’s say a company needs one million dollars a week to pay for things like wages, electricity, office rent etc. In other words, a company needs sales of minimum $1million a week purely to stay alive – to pay for the stuff that in theory is meant to help it make money in the first place. This is without regard to meeting profit targets as expected by a company’s owners and other such factors. If that company can’t cover that $1million, it is technically insolvent. Meaning, jail time for the directors and senior management for running such a company.

So if a company has these commitments, it ties their hand. They suddenly become very risk-averse; where experimenting with a better way of doing something may threaten their ability of making that $1 million a week. Couple that with the fact that most organisation’s single biggest expense is payroll, with lists of employees that no one person exactly knows what they are doing, and it makes you wonder. Companies effectively exist to cover their expenses, but if they actually dug down, they’d realise those expenses may not even be something that require. In effect, a company’s entire strategy and positioning in the market (ie, prices that take into account enough to cover overhead) may be dictated by something that might not be needed. A big company exists purely to feed the beast, making decisions that may not be what a company should be making if it didn’t have to worry about its overhead.

small is the new big

Small is the new big

The power of 12

Going back to how technology is enabling us new ways of organising, if the only reason why a company needs to get big so it can get economies of scale, why don’t we flip it? We no longer live in the industrial era where economies of scale are the goal. Instead, the biggest cost we have now is time; if the expertise is in the people we employ, we need to scale operations so as to give them money and working conditions that suit their lives. This isn’t relevant only for professional services, but for any web service – the fact you provide a service and not a manufactured good means its driven by people not metals.

Of course, a company’s strategy can either be cost-competitive (like Dell) or differentiation (like Apple). But this doesn’t negate the fact, that a company should only have costs that directly add value for the customer (which is why we have innovations like activity-based costings which allocate overhead directly to customer activities, but that’s another story). Given that people are the biggest expense in companies now, we need to question, do we really need that many people to provide that value?

I have a rule I follow in life which has grown out of my experience with how things go wrong: complexity. The more factors, the more likely something is going to fail. For example, if you are driving to a wedding – the more traffic lights, the more likely it is going to slow you down. The longer you have to drive, the more likely you will get involved in a car accident. If you need to drop something off on the way to the wedding venue, if you need to make two separate stop-offs, the more likely you will be late as opposed to one drop off (regardless of the distance, but based purely on unforeseen variables). So basically, you need to minimise the ‘nodes’ in the line. Even when things look they are fine, the more variables to success, the increased risk of something happening that will distract that goal.

However, I am willing to concede, you can’t be a minimalist for everything, which is why I am settling for the number 12 – keep your variables, especially people, to a maximum of 12. Aside from religious connotations which makes the number so omnipresent in our lives, the reason I like it is for the same reason it’s the base number of measurement systems used through history , like the still dominant imperial measurement system. That reason being, it’s one of the most versatile numbers. Versatility and agility to the market is what success is now; not economies of scale.

If designing an organisation, you want a core team of 12 people. Those 12 people together, should be able to do everything that needs to be done to meet the needs of the customer. And if the organisation needs to scale for whatever reason, then those 12 people should have specific functions that they own. The number 12 is magical, because for the same reason it was used in the measurement systems in the past, it is so versatile: you can re-group your 12 people into even teams of two, three, four or six. Don’t underestimate the impact team dynamics like that can have – or using a term that Mick Liubinskas says as often as a nun does her Hail Mary: it emphasises the importance of “focus”, in an agile way that can easily adapt to situations. Yet at the same time, you will find with 12 you can get almost anything done if you truly have a talented team. Still don’t get 12?

The number twelve, a highly composite , is the smallest number with four non-trivial factors (2, 3, 4, 6), and the smallest to include as factors all four numbers (1 to 4) within the subitizing range. As a result of this increased factorability of the radix and its divisibility by a wide range of the most elemental numbers (whereas ten has only two non-trivial factors: 2 and 5, with neither 3 nor 4), duodecimal representations fit more easily than decimal ones into many common patterns

Source: Wikipedia

There are dozens and dozens (whoops, was that 12?) of companies that are small but successful . Challenge yourself: does world domination really equate to a 15,000 person workforce? Focus on getting 12 highly capable people, and you will avoid entering the trap of the big companies today that are slaves to their own existence. We have technology today that could design a radically different organisation in 2010 completely foreign to how traditional business operates. If you explore what smart people have said to complement what Ross originally meant by his comment, you now might also realise that those top 100 web applications represent more than meets the eye.

Advertising on the Internet needs innovation

On the weekend, I caught up with Cameron Reilly of the Podcast network , and he was telling me about his views on monetising podcasts. It got me thinking again about those things I like to think about: how content can be monetised. Despite the growth in online advertising which is tipped to be $80 billion, I think we still have a lot more innovation to go with revenue models, especially ones that help content creators.

Advertising is a revenue stream that has traditionally enabled content-creators to monetise their products, in the absence of people paying a fee or subscription. With the Internet, content has undergone a radical changing of what it is – digital, abundant, easily copied – whilst the Internet has offered new opportunities for how advertising is done. However, the Internet has identified the fundamental weaknesses of advertising , as consumers can now control their content consumption, which allows them to ignore embedded advertising altogether. Content on the other hand, still remains in demand, but means of monetising it are slipping into a free economy which is not sustainable. I make that point to illustrate not that professional content creation is a sunset industry – but rather there’s a big market opportunity as this massive industry needs better options.

time mag

"Hey man, there’s this new thing called the Internet. Sounds pretty cool"

One of the biggest innovations in advertising (and enabled by the Internet) is of contextual search advertising. This has been popularised by Google, which now makes 98% of its $17 billion revenue from these units. This advertising dominates online advertising (40% of total) because of its pull nature, whereby key-words stated by a consumer in effect state their intention of what they are interested or would like to purchase. Whilst this is a highly efficient form of advertising, it also has its weaknesses – for example, it is not as effective outside of the search engine environment. Google makes 35% of its revenue from the adSense network , where these contextual ads are placed on peoples personal websites. Evidence from high traffic bloggers suggests they barely make enough money through this type of advertising. Another point to consider is that aspects of the Google network include significant partnership agreements like the one with AOL which accounts for 10% of Googles revenue (this is a 2005 figure which has likely changed, but Google does state in their 2007 report "Our agreements with a few of the largest Google Network members account for a significant portion of revenues derived from our AdSense program. If our relationship with one or more large Google Network members were terminated or renegotiated on terms less favorable to us, our business could be adversely affected.". AOL most recently reported for Q1 2008 half a billion dollars largely from search advertising ).

Other attempts at creating more efficient advertising which have existed for over a decade, have come in the form of profiling or behavioural tracking. However, these forms of advertising has also highlighted the growing awareness of consumer privacy being eroded, and is under heavy scrutiny by activist groups and government. Facebook is a company that is best posed to deliver new forms of advertising because of the rich profiling data it has, but it itself has faced massive backlash .

My view is that the majority of online advertising for successful individual publishers at least, has largely come from traditional approaches to advertising – a masthead blog with a sales team that uses display advertising. How effective this display advertising is is debateable with widespread banner blindness and consumer control over their content, but it would appear that this is more a case of advertisers seeing this as the least bad on the overall scale of opportunities. The fact it replicates the mass media approach of number of unique consumers viewing the content, and not the types of users, means this isn’t anything new other than being done in a digital environment.

Digital content is in need of a better monetisation system.
Targeted advertising is the most efficient form, yet consumer privacy is a growing force preventing this. What we need, is not a new advertising technology, but a new way of thinking about advertising – in a way that can help the content economy rather than riding on it without giving benefit. Contextual advertising sounds great in theory as it calculates key-word frequency of words on a website, to match it to a key word ad – but it’s proving in practice these ads are not very relevant. Yet trying to think of a smarter way to advertise, may be the wrong question – perhaps half the problem itself is advertising as a concept?

perspective

Are we running down a tunnel, only to find there is nothing there?

Content which comes in the form of news (historical and breaking), analysis, and entertainment can be monetised via a persons attention or through a transaction (ie, subscription, fee, etc). Both this approaches have different barriers.

– Attention: The key driver is increased dollars per unique person, over a period of time. The barriers to this approach is the challenge of identifying the individual in a way that gives advertising that is highly relevant and will result in a conversion. In other words, privacy privacy privacy.

– Alternative payment: Requiring consumers to pay for content is a barrier due to the paid wall. What is more problematic for digital content, is that the ability to replicate it freely makes it not just easy to do for the masses but has created a culture of if it’s not free, it’s not worth purchasing unless its really necessary. There needs to be a strong value proposition for a consumer to purchase content, and in the absense of a brand and marketing, the restriction of what value the content offers is a barrier for consumer demand as they don’t know what they are missing out on.

So as you see above, content creators are in a difficult position. Charging people reduces their opportunity unless they are really established, but even then, due to the digital environment they don’t have any control over subsequent distribution (with rampant piracy). Yet advertising is fraught with being irrelevant and hence not effective (so advertisers go to other forms) and any attempts to make it more relevant, gets held back by the concerns of privacy advocates (and rightly so). Whilst the Internet parades itself as an advertising growth machine, it’s growing in new areas but not the old areas that have traditionally been the medium for advertisers.

This advertising growth is largely being driven through utility computing products that aim to make information retrieval more efficient (ie, search). However, the growth for the content creators, is not happening. As Cam was telling me, in a market like Australia – small content organisations like TPN and Bronwen Clune ‘s Norgs , don’t have access to the big end of town for a sales team. And he didn’t have to tell me, those Google ads for the smaller guys, are not enough to pay the bills. That small to middle end is not being really catered for.

But before you jump on the phone and create some mid-tier advertising network that caters for a niche, think about the real problem: content creators need a better solution to monetise their content. But advertisers also need a better way of selling, other than some slick-talking sales person who can sell ads on pageviews (a broken model with weak alternatives ) They need advertising that is suited for their product, but the market now includes other products media outlets never had to compete with like marketplaces now happening online and utility computing products. Whilst the technology community obsesses about search , let’s also remember we have yet to see a new way to monetise content that is superior to the old world. Contextual advertising of text is the latest new thing area, but that technique is nearly a decade old. As I prove above, outside of the search environment, it is showing to not be that effective.

Where is the innovation going to come from? Not through technology but with a new paradigm shift like how content creators operate . New ways of thinking about the way we ‘sell’ like what the VRM Project is challenging. But perhaps more fundamentally, is an understanding that the holy grail of targeted advertising has got a speed hump called privacy – and that may actually be a sign of not going faster towards better targeting, but changing the vehicle all together.

Facebook users: more and more in just four months

I am currently doing some research for an analyst report at work, and I thought I might update my November findings of how many Facebook users there are.

The total is within the ballpark figures of total users (Mix08 panel indicates around 65million from memory) so listing seems fairly complete, with maybe less than million missing for small countries not listed.

I found some of the results impressive, especially given the user growth in less than four months- even in countries like the US and Australia which I’d thought would be peaking. Sweden appears to have a bit of Facebook fatigue with canceled accounts, and looks like fundamentalist Saudia Arabia has a bigger userbase then tech-savvy Russians showing.

facebook users march08 update

Pageview’s are a misleading metric

Recently MySpace, the social networking site that once dominated but is now being overtaken by Facebook, sent me an e-mail informing me that a friend of mine had a birthday. What is unusual, is that although I have received notifications of this type when I had logged into the site, I had never been e-mailed.

Below is a copy of the e-mail, and lets see if you notice what I did:
birthdayreminder

It doesn’t tell me whose birthday it is. In fact, it is even ambiguous as to whether it was just the one person or not. Big deal? Not really. But it very clearly tells me something: MySpace is trying to increase its pageviews.

Social networking sites are very useful services to an individual; they enable a person to manage and monitor their personal networks. Not only am I in touch with so many people I lost contact with, but I am in the loop with their lives. I may not message them, but by passive observation, I know what everyone is up to. Things like what they’re studying, where they work, what countries they will be holidaying in, and useful things like when they have their birthday.

Social networking sites are not just a website, but an information service, to help you manage your life. However as useful as I find these services, the revenue model is largely dependent on advertising, with premium features a rare thing now. So when you rely on advertising, you are going to be looking at ways of boosting the key figures that determine that revenue stream.

Friendster’s surprising growth in May was due to some clever techniques of using e-mail, to drive pageviews. And it worked. E-mail notifications, when done tactfully, can drive a huge amount of activity. Of the what seems like hundreds of web services I have joined, e-mail at times is the only way for me to remember I even subscribed to it once upon a time. Combine e-mail with information I want to be updated with, and you’ve got a great recipe for using e-mail as a tool to drive page views.

…And that is the problem. MySpace has very cleverly sent this e-mail to get me to log into my account. A marketing campagn like that will at the very least, see a good day in pageview growth. But the reason I am logging in, is just so I can see whose birthday it is. Myspace now to me is irrelevant: those pageviews attributed to me are actually, not one of an engaged user.

Pageviews as a metric for measuring audience engagement is prone to manipulation. Increases in pageviews on the face of it, make a website appear more popular. But in reality, dig a little deeper and the correlation for what really matters (audience engagement) is not quite on par.

So everyone, repeat after me: Pageviews – we need to drop them as a concept if we are ever going to make progress.

Climate change: forget the science, it’s real for the market

I recently sat through a two hour presentation on climate change at work. My employer this year (a big four firm) has been mobilising to respond to the market with a climate change solution for our clients – and the things happening are amazing. They want to be first-movers in what is a huge business opportunity. Even through I have had dealings with people on the climate change team, it wasn’t until I sat through this presentation that a few things clicked for me: climate change is real. And I am not talking about the science – it’s real for the market economy.

I wouldn’t be doing any justice if I attempted to explain what I learned, however I will explain something that was a big realisation for me. This guy that spoke is a world expert, and he reckons more has happened in the last eight months of his career regarding climate change than it has in 25 years of his career. To understand why, is to understand the realisation of the markets.

Increasing shareholder value

If it’s one phrase that sums up corporations working within the framework of capitalism, it’s about “increasing shareholder value”. It’s a term that is mocked because we are sick of hearing it, but it essentially explains the market: investors make money by putting their money where they can generate more value for their buck. Value creation is the centre of everything – a start-up company generates value through innovative new products that people buy; a tax agent generates value by reducing your tax expense; a real estate agent generates value because they can sell your property at a higher valuation. In the context of corporations, people make money in companies through returns: a higher share price means a higher value of that share or piece of property. Companies are judged on their profits because more profits reflect a higher return an investor gets from that entity; just like a home being sold, it reflects the additional value they can generate from that piece of property they own.

Profits reflect shareholder returns, which come in two forms.

1) dividends, which are cash payouts from profit distributions to shareholders. An investor wants higher profits, because it means more cash for them on their existing shareholding – it reflects a better return on their investment.

2) retained earnings, which is when a company doesn’t pay the dividend but holds it so they can fund future growth. More profits, means extra cash to invest to generate more growth in the entity, which ultimately means more value. If you buy a share for $1, and the company grows and your share is now $2 – you are a happy chappy because you’ve effectively doubled your money.

How climate change now has a price

Lets say we generate x amount of carbon tons a year. The objective of climate change, is that we can reduce the amount of x with time, and then get to the stage where we can grow sustainably, which means for every x we generate, we can offset that bit of carbon so as to to generate a net of zero on the environment. That’s called sustainable economic growth.

Lets say y is the amount it costs to remove a ton of carbon dioxide. Meaning y represents the expense of generating carbon. So if you times x with y – that equals the amount it will costs to remove the carbon dioxide we generate so that we have a net impact of zero on the environment (or at least, the cost to reduce emissions). If the government forces you to reduce your emissions, like they force you to pay taxes, that expense has now become very real.

How much a ton of Carbon Dioxide will cost is a big issue yet to be settled, but as you can tell y is an important number because it determines how much it costs for you to reduce your carbon footprint. A very conservative estimate is that it costs 25 US dollars to remove 1,000 tonnes of carbon. The reason I say conservative is because more recent evidence suggests it is actually a lot more than that (I think he quoted 40 euros). Using the $25 figure, he said that it will cost us $15 trillion to remove carbon dioxide. There is so much pressure on governments from voters, lobby groups and the like, that governments (like here in Australia) are going to mandate that you offset your carbon emissions each year. The Kyoto agreement is saying a 60% reduction from 1990 levels by 2050 for example.

Now as an investor, I am thinking my investments have a share of the pie of a $15 trillion expense that they have to pay each year. That’s expensive. Expensive stuff reduces my profit. Reducing my profit means lower returns for my investments (ie, lower dividends, lower retained earnings to fund growth). Holy crap – this climate change thing is eroding shareholder value. Crap crap crap – I want to start knowing what my investments are doing to tackle this future expense. I want more accountability, alongside the financial reports that companies are mandated to provide (and which tells us about profit).

And that is exactly what the investors that control $41 trillion dollars – one third of the worlds money -are currently saying.

So much more to say, but I just want to share that point: climate is real economically and the environmental cost is being built into the market mechanism. There are a lot of issues that are yet to be resolved, but you’d be stupid to start ignoring the massive developments occuring, because its getting nearer to an agreement where it will affect every transaction we make in our economies.

5 observations of how social networking (online) has changed social networking (offline)

Just then, I had an image get shattered. A well respected blogger, whose online persona had me think they were a very cool person offline, is infact, a fat geek with an annoying voice. I can pretty much cross off the list that he can relate to experiences of how Facebook is mentioned in trendy nightclubs on the dancefloor.

Another thing I have noticed: all the major commentators & players of the Internet economy, are usually married, in their 30s or 40s, and almost all come from an IT background.

Don’t get me wrong – the industry has a lot of people that are a goldmine with what they say. They challenge my thinking, and they are genuinely intelligent. But although they are users of web services like Facebook or MySpace – just like the rest of society – they are people experiencing these technologies in the bubble of the technology community. Their view of the world, is not aligned with what’s actually happening in the mainstream. No surprises there – they are the early adopters, the innovators and the pioneers. It’s funny however, that comparable to other services (like Twitter) the adoption amongst the tech community for Facebook has been slow: it was only when the developer network launched that it started getting the attention.

What I want to highlight is that most commentators have no way in the world of understanding the social impact of these technologies in the demograghic where the growth occurs. We all know for example, Facebook is exploding with users – but do we know why it’s exploding? A married man in his 40s with a degree in computer science, isn’t going to be able to answer that, because most of the growth comes from single 20 year olds with an history major.

So what I am about to recount is my personal experience. I am not dressing it up as a thought-piece; I am just purely sharing how I have seen the world take to social networking sites and how it has transformed the lives of my own and the people around me. I’m 23 years old, the people in my life generally fall into the computer clueless category, and I have about 500 Facebook friends that I know through school, university, work, or just life (about ten are in the tech industry).

1) Social networking sites as a pre-screening tool
Observation: I randomly was approached by a chick one night and during the course of our conversation she insisted I knew a certain person. Ten minutes, and 20 more “I swear…you know xxx” – I finally realised she was right and that I did know that person. For her to be so persistent in her claim, she had to be sure of herself. But how can someone be sure of themselves with that piece of information, when I had only met her 30 seconds earlier?

I then realised this chick had already seen me before – via facebook. I know this is the case, because I myself have wandered on a persons profile and realised we have a lot of mutual friends. In those times I would note it is bound to happen that I would meet them.

Implication: People are meeting people and know who they are before they even talk. They say most couples meet through friends. Well now you can explore your friends’s friends – and then start hanging around that friend when you know they know someone you like!

2) Social networking sites getting you more dates
Observation: I met a chick and had a lengthy chat with her, and although she was nice, I left that party thinking I would probably never see her again as I didn’t give out any contact details. That next day, she added me as a friend on Facebook. In another scenario, there was a girl I met from a long time ago and I hadn’t seen her since. We randomly found each other on Facebook, and I’ve actually got to know the girl – picking up from where we left off.

Implication: Social networking sites help you further pursue someone, even though you didn’t get their number. In fact, it’s a lot less akward. Facebook has become a aprt of the courtship process – flirtation is a big aspect of the sites activity.

3) Social networking sites helping me decide
Observation: There was a big party, but I wasn’t sure if I would go because I didn’t know who would go with me. I looked at the event RSVP, and I to my surprise found out a whole stack of people I knew were going.

Implication: Facebook added valuable information that helped me decide. Not knowing what people were going, I probably wouldn’t have gone. Think about this on another level: imagine you were were interested in buying a camera, and you had access to the camera makes of your friends (because the digital photos they upload contain the camera model – as seen with Flickr). Knowing what your friends buy is a great piece of advice on what you want to buy.

4) Social networking sites increasing my understanding of people I know
Observation: I found out when a friend added me on myspace, that she was bisexual – something I never would have realised. Being bi is no big deal – but it’s information that people don’t usually give up about themselves. Likewise, I have since found out about people I went to school with are now gay. Again – no big deal – but discreet information like that increases your depth of understanding about someone (ie, not making gay jokes around them). I know what courses my contacts have studied since I last saw them, and what they are doing with their lives. I also know of someone that will be at one of my travel destinations when I go on holiday.

Implication: You are in the loop about the lives of everyone you’ve met. It’s nothing bad, because these people control what you can see, but it’s great because there are things you know, things you know you don’t know, but now you can find out things you didn’t know that you didn’t know.

5) Social networking sites as a shared calendar
Observation: My little sister is currently going through 21st season – back to back parties of her friends. One of the gripes of 21sts when organising them, is overlap with other peoples. Not only that – but also the physical process of contacting people and getting them to actually RSVP – it’s a pain. However unlike my 21st season experience from a few years ago, my sister has none of these issues. This is because Facebook is like one big shared calender. Another example is how I send my congratulations to birthday friends a lot more than I have in the past because I actually know its their birthday- due to fact our calendars are effectively pooled as a shared calendar.

Implication: Facebook has become an indispensable tool to peoples social lives.

6) Bonus observation – explaining the viral adoption of Facebook
I have a few friends that don’t have Facebook. You can almost count them on the one hand. And when you bring it up, they explode with a “I’m sick of Facebook!” and usually get defensive because so many people hassle them. In most cases, they make an admission that one day, they will join. The lesson here is that Facebook is growing because of peer pressure. The more people in someone’s network, the more valuable facebook becomes to them. When they say 40 million users, it’s actually 40 million sales people.

God bless the network effect.