Polygraph Media Blog

AOL, the Huffington Post, and the assault on local

Today is a watershed day in new media, whatever it is that we're calling it in 2011.  Why?  Because AOL is now truly doing something interesting in the content business by buying one of this cycle's best content properties, the Huffington Post, for $315 million.

Sure, AOL spent 40% of its available cash on the property.  Yes, there will be a culture clash as HuffPo is integrated into AOL.  And of course, we've heard of issues with AOL's integration of TechCrunch.  

But this isn't the same AOL that distributed tons  of these discs via mail for more than a decade.  It's a company led by someone with experience at a market leader who has a vision for the future.  That vision requires that AOL repeatedly produce profitable content -- something that old media has certainly struggled to do lately.

The TechCrunch and now HuffPo acquisitions, however, tell me that AOL has determined that it is a better strategy to buy great properties than to build them.  Why?  I'd posit three reasons:  1) these are properties that have discovered how to create quality content sustainably, 2) these properties make money, 3) AOL's experiments with Patch and Seed likely have not succeeded as they've hoped.

But the last reason isn't necessarily a criticism of AOL.  If you look at business across the United States, one megatrend that we're seeing is that big, relatively antiseptic brands are winning the war for $$ and mindshare against local businesses with local/regional flair.  Like it or not, eyeballs and attention flock to Chili's, the HuffPo, and the NFL instead of Billy Bob's Bar & Grill, the Smalltown Gazette, and high school football.  The American experience is homogenizing right before our very eyes, and as such brands that specialize in products with mass appeal will likely win in the long-term over local providers that struggle to effectively reach a local audience.  Niche businesses will survive, but a vast majority of local businesses are going to continue to suffer as the local experience gets more corporate.

I'd argue that these trends are driving the content business and will continue to do so.

We will see what happens with AOL's play -- one that puts it in Demand Media's neighborhood and clarifies competition with old media.  It's on.  I think the early advantage is in companies like AOL & Demand who are driven by the unit economics of creating content far more than old media as a generalized whole.

Old media has two other distinct disadvantages: 1) significant overhead, and 2) traditional "journalistic" standards.  But as an industry it is much, much larger than AOL or Demand Media and can still compete if meaningful changes are forthcoming.  And you can argue that neither AOL nor Demand Media have quite yet figured out how to scalably create great content for profit.  It will be an interesting battle to watch in coming years.  Consider also that of the major tech players only Apple, Yahoo, and Amazon have made major content plays.  Are Google, Facebook, and Microsoft next to jump in?

It's possible that as old media continues to be disrupted, that content is the next bubble.  We'll see how the industry responds.

Strengths and Weaknesses

It's funny how the greatest things in the world all have one thing in common -- their greatest strength begets their weakness. It's a pattern that repeats itself everywhere.

The United States' great strength is personal freedom, but that's also its greatest weakness in the age of terrorism.

Microsoft's great strength was creating great software for computers, but that thinking kept the company from innovations in the Web and mobile devices.

Google's strength in search helped to revolutionize the information age, but is now being threatened because the very algorithms it uses to determine search relevance are being gamed by content farms and people/consultants doing search engine optimization.

Twitter's strength is in simplicity, but that's also its weakness. Facebook is a comprehensive social graph, but I'd contend the reality of that will begin to get scary for a lot of users in 2011 and beyond.

And now we have Quora, which is the latest social media darling. It was built on several social platform weaknesses: the simplicity & 140 character limit of Twitter and the inability to effectively interact with people who have similar interests on Facebook.

It is way too early to know whether or not Quora will become mainstream -- or what its weaknesses are. But it does underscore the weakness of the Web 2.0 era, namely that most major players find a business process catch that encourages virality. It can work for a leader as much as it can work against it and allow competition to emerge overnight that can slay the beast.

Social successes are business process innovations -- it's the strength and weakness of this era.

5 Ways Facebook Places Changes the LBS Game

I think just about everyone in the local advertising halo is digesting Facebook's announcement that they are jumping into LBS with two feet.  The LBS folks knew this was coming, yet the proposed "co-opetition" still scares the hell out of them.  In fact, I brought up this very point at a panel in May with Josh Williams of Gowalla.  The entrance of a major player with a HUGE audience is a massive gamechanger for the startups that popularized things like check-ins, mayorships, location-driven game mechanics, etc.

If rival tech giants such as Google, Yahoo, AOL, Microsoft, and Apple haven't considered Facebook a competitor yet, they're probably now realizing that, yes indeed, Facebook is perfectly willing and able to compete in the local advertising arena and they're a major, major threat.

Overall this is obviously a really big deal and a seismic shift in the LBS business, in local advertising, and perhaps in social networking in general -- although it will take several years to play out.

In May, I shared some thoughts about LBS on Mashable and followed up here on my blog.  I thought I'd spend a few minutes today talking about what I think the latest news means for the sector:

1) LBS startups forced into building an ecosystem like never before -- I have written before about how LBS startups have been riding the wave of popularity & innovation but have also to some degree tried to control how third-parties interact with their systems.  For instance, even today only foursquare allows write access to their API.  LBS startups are not by any means dead -- in some circumstances they will remain the "consumer front end" for LBS.  But to stay relevant, they will need to be a lot more aggressive fast about building an ecosystem that helps justify themselves long-term.

2) Legitimacy to LBS -- LBS startups have done a great job of exciting the early adopter market and showing the world the possibilities of local, mobile services.  But none have yet made it to the mainstream.  Why?  Because it is a HUGE undertaking.  Reaching moms in Kansas is just tough.  Facebook changes all of this significantly because they have such a huge audience.  150 million+ people are on Facebook Mobile and over 500 million experience Facebook on the Web.  Now those are mainstream audiences.

However, I do think that this is a situation where the "rising tide raises all boats."  This will legitimize the existing LBS startup players as well.  In fact, I think in the short term foursquare, Gowalla, MyTown, and others will experience growth.  The bigger question, of course, is the long-term impact for the LBS startups.

3) Facebook, the aggregator -- With this move, Facebook aims to be the center of all location-based activity.  The existing players are presently invited to "read" data from the Facebook Places API but will also be allowed to write data to Facebook.  What a great way for Facebook to build a robust database off the backs of the startups that popularized the sector.  I think the golden rule needs to be changed from "he who has the gold rules" to "he who has the users rules."

4) Twitter, the afterthought -- Twitter just gets a little more marginalized each day.

5) The Cold War begins in earnest -- There is absolutely NO WAY that this move will go unchecked by Google, Apple, Yahoo, AOL, and other major players who are eyeing the location sector.  To some degree, this move really forces relatively quick action by these companies who will need to do something to be relevant.  Otherwise, Facebook will own it.  I suppose you can argue that Facebook is already well on its way -- they have the audience, they are about to have a ton of data, and they've delivered an immersive experience to users so far.

We live in interesting times, that's for sure.

The Real Story behind the Facebook Privacy Backlash

A few quick thoughts this evening on Facebook and their privacy crisis.  Recapping the last few weeks:

1. f8 happened and Facebook announced its ambitious vision to more or less take over the Web
2. People got uneasy as more evidence surfaced that Mark Zuckerberg maybe can't be trusted
3. Some influential folks decided to quit Facebook
4. An open-source alternative, Diaspora, has raised almost $200k in donations in just a few weeks
5. The meme has spread so much that there is now a Quit Facebook Day on May 31
6. Nonetheless, Facebook is set to announce its 500 millionth user soon

So what the heck is going on here?  My theory is that you're seeing the confluence of a few interesting things all at the same time.

Historical Precedent

First, Facebook has gotten too big for everyone's comfort.  But we've seen this before.  Microsoft was a novelty until they became dominant on the desktop.  Google was fascinating until they owned search.  And now Facebook has social media on lockdown.  All of these great companies were loved until all of a sudden, they were too big to love.  Just wait until Apple gets there, because it *will* happen in the mobile device category once Apple products are offered by all mobile carriers.

Facebook - The "For Profit" Utility

As Facebook has come to own the social media space, it has asserted itself as a for profit business although it is also at the same time a utility as others have pointed out. But when in doubt, the perceived profit maximizing approach wins out.  This involves an IMO inevitable rewriting of the terms of service to allow for more aggressive use of data.  Again, this is not new.  How many times have you received bank statements or innocuous terms of service updates from your favorite web sites?  It happens because, much like software, businesses don't anticipate how they'll use data in advance.  In other cases, businesses can't get away with using data as a small company but they really want to do so as they become an important utility.  Are you listening LBS providers????? ;-)

But back to this case, I think it is pretty obvious that Facebook wants to use data more aggressively to grow their business more rapidly.  I don't necessarily blame them for this -- most of us would do the same if we were in the same position.

While I'm empathizing with Facebook, let me also add that privacy is complicated when you have a platform as immersive as Facebook.  There are an infinite number of possibilities when you consider the various classes of friends you have, the types of content you share, etc.  It's even worse when you assume that users will need to set privacy themselves.  Most users want something easy and effective.  Facebook privacy settings are not easy and they are not effective -- although the tools are more or less available to every user.

What Facebook Could've Done Better

That said, rewrites of Facebook's privacy policies have taken place wayyyy too often.  It's happened so often, it's hard to give them the benefit of the doubt now.  It's a paradox of Web 2.0 -- agility is respected and almost expected of any promising company today.  But if you're too cavalier & too big, it's seen as irresponsible... ESPECIALLY when a chat transcript surfaces calling the earliest adopters "dumb f*cks".

Not cool, Mark.  Even if it was said years ago and in a different context, it's too smug.  It's arrogant.  Overall, it gives people the impression that users are not respected, their wishes are not represented, and they're valued more or less for their data.  Use of that data is paramount while security of that data is in some way secondary.  This is why a number of pundits have left Facebook.  It's largely symbolic right now -- many of these folks do quite fine on the blogosphere, Twitter, and elsewhere.  But there are some cracks in Facebook's foundation -- I don't think anyone can deny that.

User lock-in is significant but Facebook has alienated a lot of people with its handling of the privacy issue.  It's worse because most of the data that drives Facebook is provided by its users, many of whom log in to Facebook every day.  So something must be done because this one likely won't just blow over like all the other encroachments of our privacy that have taken place in the era of the Web.

Where We're Headed

Diaspora got a lot of coverage for their funding of an open source social network.  And maybe somebody buys Diaspora right now while they're cheap & helps market the service to ultimately make it viable competitor in the social media space.  But I personally think this story got a lot more play than it should because of two sexy words "open source".  Very few "for profit" entities act altruistically.  Heck, very few non-profits act altruistically either for that matter.  ;-)

The real winners here in the short-term are Facebook's competitors:  Twitter, myYearbook, maybe Orkut, and to a lesser extent MySpace.  But the window to act effectively is small and execution is key for any of these to make a dent in Facebook.  My guess is that none of these can do lasting damage to Facebook by being the "good guy" alternative on the privacy issue.  At the end of the day, a lot of people care about privacy but not enough to make an inconvenient change to a Facebook competitor.

Although I think Facebook is as vulnerable as they have been, there is also not a viable alternative out there today.  So I think Facebook will be fine.  They'll capitulate a little and announce a few changes.  They'll more or less try to make people forget about the issue altogether.  Competitors will remind people of the privacy question, but they'll sound increasingly desperate as the tactics don't work.  All the while, Facebook will continue to grow and become that much harder to ignore.

Quick Hits - February 10, 2022

It's been too long since I've made some random, unsubstantiated observations.  Lucky you.

• I have used Google Buzz for just a few hours, and I'm already convinced it's a game-changer.  Watch out Twitter... and Facebook, you'd better not get too comfortable.
• I really do think I could make a compelling argument for you that Twitter's best bet is for AOL or Yahoo or Microsoft to buy them.  Not that any of that would be inherently bad, but I just don't see Twitter surviving and thriving as an independent business over the next few years.
• Social media "fatigue" really seems to be an increasing trend among younger people who have used things like Facebook for awhile.  I spoke at an event at Texas A&M recently that really reinforced this point.  It will be interesting to see if this is a limited case or something that marketers will have to deal with in coming years.
• I have given up on working with my neighborhood association.  It involves the worst elements of  government, bureaucracy, volunteering, politics, incompetence, ego, and personal fiefdoms -- and very few benefits.
• Lots of people out there are willing to give advice to early-stage entrepreneurs... but if they haven't created an early-stage startup themselves, be careful how much you internalize.  There is nothing like starting a company from its earliest stages, and it's a very, very unique business experience.
• Writing a book while starting a company is hard.  At some point, I'll share the story of how I got this opportunity, how I made it work, and why I'll never do the two things at the same time again.  It's a rewarding life goal achieved, but everything has its costs.
• Facebook is a particularly tough topic for a book, since the platform and/or the rules change about every 3 weeks on average.
• The Austin Technology Incubator has significantly improved its portfolio in my opinion, and is rebuilding its brand around substantive member companies.  You heard it here first.
• I'm increasingly of the opinion that networking for the sake of networking is a really bad idea for early stage entrepreneurs.  I know this goes against conventional wisdom, but I have a good argument.  Later.
• Location-based services are in their v2 with foursquare, Gowalla, and MyTown.  No offense to the good folks in those companies, but I really think the act of "checking in" is too hard and lacks enough of a consumer value proposition for any of those services to "win".  You'll know you see a winner when 1) there is a real compelling reason for consumers to check in, 2) a lot of it is automated in some way, and 3) there are reasons to do so that will appeal to "Joe Public."  These are very much early-adopter technologies today.
• Speaking of location-based services, can Apple really get away with removing apps that surface location-based ads from the App Store?  I know they make their own rules, but that's unreal.
• I love the potential of Google Android.  My wife has one & it's a pretty neat device.  But it isn't quite there right now.  Let's see how it evolves before handing it the future. ;-)
• We're told that the economy picked up quite a bit in Q4 in the US... yet capital efficient startups are still in vogue.  I'm telling ya, this frugality thing is here to stay for a decade or more.
• Finally, I finally yesterday met the first woman I know who likes the iPad branding.  Ultimately, I think after the shock wears off it will be OK.  But gosh, how obvious is it that Apple's branding team is lacking???

Reviewing my 2009 predictions

It's time for the self-assessment of my predictions for the previous year.  Here goes...

Government 2.0 -- if the Obama administration earned a mandate of any kind, it is in the area of government intervention in the free market.  There will be opportunities in not just the modernization of government data systems/infrastructure, but also in helping government operate more efficiently and helping government help business.  I expect to see billions of public dollars move into areas where Web entrepreneurs can benefit.  This may be the biggest story in our industry in 2009.

Grade -- C 

Yes, modernization of government has been a key agenda item for the Obama administration.  But a few things made this somewhat of a non-story in 2009:

• Bigger problems in the economy and in unemployment,
• Government inertia despite the mandate,
• Policies driven to inject money into the economy quickly which (sadly) is counter to doing it efficiently.

The cycle begins to refresh -- the prospects for early-stage startups should improve throughout 2009.  Why?  We'll collectively snap out of the panic of 2008 and time will pass.  We'll all look ahead more optimistically to the future.  Remember, a lot of this panic has been the destruction of capital -- but a lot of it also has to do with capital sitting on the sidelines.  It will be increasingly unleashed throughout 2009.

Grade -- A-

By and large, I think this has happened.  Advances in real-time, social gaming, and social networking technologies have continued.  Economic value has been created.  In fact, a second tier of startups is emerging from these new platforms.  I don't think things have gotten crazy, but I do think that startup people are a lot more positive today than a year ago.

Forks in the road -- I don't remember a time when the major players in our industry all had tough strategic choices for the future.  Google needs a second trick.  Microsoft needs a way to make progress in advertising.  Facebook needs a business model.  Twitter needs a business model.  Loopt needs an acquirer?  Yahoo needs an acquirer.  Apple needs diversification beyond hardware.  Some will find the answers and there will be some consolidation.  The choices these major players make will determine quite a bit about the future of the Web.

Grade -- B-

Facebook and Twitter have largely figured out their business model issues.  Reportedly, Twitter is now profitable on the basis of the search engine deals and Facebook is rumored to be in a position to do $1 billion in revenue in 2010.  If that's true, WOW.

But the major players haven't really impressed me with their responses.  Clearly, Google is out in the front of the pack with a few innovations in local search and advertising that could respond to actions by the emerging social media giants.  Microsoft, Yahoo, and Apple have all done some rather incremental things to take advantage of social media in a big way -- but none have made big, bold moves to compete.  I am similarly waiting for Amazon to jump into the pool as well -- we shall see.

The cloud computing platform & developer attention fight intensifies -- "Use my API and host it on our cloud platform"  OK, I don't think we'll get to that point in 2009.  But the proliferation of web services and cloud computing platforms will only continue this year.  Open data has won just about everywhere on the Web.  Amazon Web Services will be joined by competitive offerings from Google and Microsoft.  What is common across all of this?  The need to win over early stage startups.

Grade -- C+

This has happened to some extent, although the battleground has been over social/local/geo data from startups and relatively new market entrants.  I do expect the battle over web application hosting to intensify -- just later.

All told, if I'm calculating my performance like a semester in school, I come up with a 2.68 GPA for 2009.  Eh.  The biggest issue here is my timing -- I was optimistic yet again about things happening fast.  We'll see.  Have a great remainder of your holiday!

Don't confuse me for a social media zealot

I have had a few conversations with colleagues, ex-colleagues, and current clients that lead me to believe that they think I'm a social media zealot.  While a lot of what I do is tied in some way to social networks, I find it necessary to set the record straight tonight.  Here's what I believe:

• Social media is old technology, but mainstream adoption of it is a new phenomenon.  Nobody knows for sure if it is the next wave of computing or a fad.
• I *think* that Facebook has a few big advantages that make it the leading contender for social media dominance.
• But it is entirely feasible that the great advancement of the social networking age is not social networking, but rather the mainstream adoption of real-time data/information.
• Should things move in this direction, Twitter is undeniably in the lead here as they truly own (shaky as it is) the infrastructure for this along with a fairly large user base.  But it's too early to tell whether or not they'll actually win because switching costs are relatively low and Twitter is probably still a little too buggy to be considered "reliable infrastructure".
• I would not be shocked at all to see a major player (Microsoft, Google, Amazon, Yahoo!) launch and have some success with a Twitter-like product.
• The combination of blogging, micro-blogging, and social media have created a truly democratized platform that allows anyone to be a publisher.  This has been discussed ad nauseum by people in technology and observers.  However, changes to consumer behavior as a result of these things have made the dissemination of information far easier for "trusted" sources.  Very few things actually need to be printed anymore now that the infrastructure has caught up to consumer behavior.  Or is it the other way around?

Perhaps most importantly, all of this means that Internet Marketing has gotten a lot more complicated.  At one time, you just had to rank high on search engines.  Then the opportunity came about to buy space at the top of search engines.  Now to be totally effective, you have to do both of those *plus* make strategic decisions & execute on social media, Facebook, Twitter, employee blogging, and "real-time" customer service.

We don't have new social media opportunities today, but we do have new internet marketing opportunities.  Social media opens up bi-directional communication with previously anonymous customers.  It's an evolutionary, not revolutionary, change that requires you to think more holistically than ever before.

Another thing on the Yahoo-Microsoft Bing search deal

Think of this one from the internet marketer's perspective.  Just a few years ago, internet marketers exclusively focus on Google to conduct just about any internet advertising campaign.  Then Facebook emerged.  You could still ignore Microsoft and Yahoo because the two systems were different, difficult to master, and only offered an incremental gain in audience.  With the new partnership, you'll just have to log into AdCenter to run ads across both the Yahoo & Microsoft networks.  With 30%+ market share right out of the gate, it's easy to justify now. 

Google AdWords is a mature auction model whose prices may have been artificially high because of the lack of competition.  Now internet marketers have three viable options:  Google, Facebook, "Binghoo".  Two are much cheaper than the third, and both also now have a big enough audience to matter.  And I am making no assumptions yet about Twitter, which could become a 4th viable internet marketing option in coming years.

Overall, I expect margin contraction for Google.  Price/demand will gradually drop as internet marketers investigate and begin to use other viable opportunities.  This has been coming for awhile, but it's here now.  Google officially needs a new trick and fast.

The Surprising Market Reaction to the Microsoft-Yahoo Search Deal

Disclosure:  I don't own shares in Microsoft or Yahoo (yet).

Maybe I'm missing something, but I really think the Microsoft-Yahoo search deal makes a ton of sense for both companies.  I was very surprised to see Yahoo's stock take a huge hit in the days following the deal.  Maybe it's a case of "buy the rumor, sell the news".

As a result of the deal, Yahoo gets out of the "search technology" business altogether.  This is a cost center that was a losing battle for Yahoo in my opinion -- going up against Google and Microsoft is and always will be a losing proposition for most large companies.  Besides, it isn't Yahoo's primary business.  Today, Yahoo is in the business of operating a large network of web sites with tons of users.  And although they run the risk of becoming the "next-generation AOL", that isn't necessarily a bad place to be.  There is a lot of money to be made in the long-tail of Internet users who don't use the latest, greatest Web sites and services.  The most interesting part is that Yahoo retains 88% of revenue by partnering with Microsoft on search technology.  As Ballmer said last week (paraphrasing), Yahoo stays in the search business and retains 88% of revenue with no COGS and no R&D.  Not bad for Yahoo at all IMO.

Microsoft gets several things out of the deal.  They learn by getting a ten year license to Yahoo's search technology.  They also all but kill Yahoo as a search technology competitor... ten years from now, search will have evolved significantly I'm sure.  Old, unmanned technology is pretty much useless.  Bing gets adopted by a much larger customer base -- so Microsoft is effectively buying market share.  Finally, Yahoo will serve as the worldwide marketing and sales force for Microsoft AdCenter and the combined search advertising offering.  This is an area that Yahoo really knows well, certainly better than Microsoft.

Overall, I like the deal for both companies because each get to focus on their core strengths.  There are certainly some efficiencies gained from the deal that both sides will enjoy as well -- you have to figure there is cost savings coming for both companies now that they are working together.  As with any partnership, the key is going to be in the details of how two self-interested companies manage to work together not when executives deal, but when middle-management makes decisions in real customer scenarios.  And can the two companies act quickly to capture emergent opportunity.  If it is relatively clean, I think this will be better than "two dogs getting together".  It will be a significant change to the landscape of internet marketing.

Microsoft & Newspapers/Local Media - more alike than you'd think

A few weeks ago it occurred to me that, at least conceptually, I have seen the problems faced by the newspaper industry before... at Microsoft.

Both face classic Innovators' Dilemma challenges.

Microsoft is trying to hang on to huge annuity streams from client software, which is a tougher business than ever in 2009 and one that isn't getting any easier.  So Microsoft is forced to straddle the fine line between hanging on to the client and "Modernizing" with Web business models, which I've argued for some time are at least a mildly deflationary force thanks in large part to Google.

The newspaper/local media business is in exactly the same place.  Old advertising models, which are today characterized by inefficiency and questionable effectiveness, are becoming less and less popular with advertisers.  Everything is moving to the Web, where monetization is similarly questionable.  Better monetizing the Web is critical to the future of the newspaper/local media industry, yet it can't quite replace the revenue provided by the old business model.

I suspect that Microsoft and Newspapers/local media businesses will find that the easiest path to success is in being aggressive... by devoting a meaningful but not overwhelming % of available resources to experimentation.  Take two examples I am very familiar with for example:  work done by the Austin American Statesman around Twitter, and alternative Web properties and the Dallas Morning News around "big media" hyperlocal.  These are organizations that place a premium on learning and experimentation -- two major keys to getting the Web.  Veterans in the Web business know that experimentation pays off with serendipity.  You don't know where your experimenation will pay off, but you commit to the process because you know that it will eventually create business opportunity & create shareholder value, even it isn't immediately apparent.

So if you're looking to see how things will go for these incumbent businesses challenged by disruption, pay close attention to signs of experimentation and innovation.  Typically, a success story or two are right around the corner.