Decoding the new economy

Valuing Facebook

Is Facebook really worth fifty billion dollars?

After over a year of speculation, Facebook has finally announced the terms of its US stock market float, valuing the company at $50 billion dollars according to Facebook’s SEC filing.

The financial details that we’ve speculated over are now public and we can now make more than informed guesses about what Facebook is worth.

What jumps out when first looking at Facebook’s financial figures is the exponential growth in their revenue from 153 million dollars in 2007 to $3,700 million last year. A twenty-fold increase over four years.

Expenses though haven’t grown at the same rate going from 277 million to 1.95 billion over the same period. Like all bigger social media and web 2.0 companies, sales and marketing is the biggest expense.

The Google Experience

The closest comparison to Facebook is Google’s float in 2004. Google floated at a market capitalisation of 23 billion dollars on a reported revenue in their SEC statement of 389 million.

At the time, Google’s profit margins were substantially lower with costs coming in at 234 million. These figures alone indicate Facebook today is a better prospect that Google was at the time of being floated.

Google today is valued at $190 billion on a revenue of $38 billion and a profit of $25 billion. On those measures, Facebook investors will be expecting that exponential growth to continue.

Growing Income

How Facebook continues to grow their revenue is the big question. Currently over half of their revenue comes from advertising in the United States and the bulk of the rest from Canada, Australia and Western Europe.

If online advertising continues to grow spectacularly, as a 2010 Morgan Stanley research paper illustrated then Facebook, as the biggest social medial platform, will get a large slice of that $50 billion global market opportunity. This in itself would justify their valuation.

One of Facebook’s biggest growth opportunities comes from games. Already Zynga, the developers of Farmville and Mafia Wars, contribute 12% of Facebook’s revenues.

The global games business is valued at 60 billion dollars and much of this market is moving to web based, online platforms. Facebook’s 30% cut of income from games on their service is another lucrative revenue stream with few operating costs.

While advertising remains Facebook’s main income stream, other payments from games and online payments went from almost 0 in 2010 to nearly 17% of income at the end of 2011.

The threats

This isn’t to say Facebook doesn’t face any threats in their businesses. The concentration of income from North America, Europe and Australia exposes how the service is a first world phenomenon, although they have high penetration rates in some countries like Chile and hope to achieve similar in India.

Social media though is a fast moving field and there are plenty of opportunities for upstart businesses to displace Facebook just as MySpace faded away.

In their established markets there’s the question of how sustainable social media as an advertising platform is; until recently social media was a novelty to most households and still is to businesses and advertisers.

User fatigue is possible in the mature markets and Facebook – along with other social media services – not achieve the advertising revenue they hope.

Privacy issues are also another concern; as users realise the value of their private information it may be that they demand more for it than seeing where their friends are drinking or playing an online game for free.

Overall though, Facebook does appear to be worth the 50 billion dollar valuation when compared to other similar businesses like Google and is probably more sensibly priced than recent other IPOs like Groupon and Zynga.

Whether the service will deliver on its promise remains to be seen, but those are the risks when investing in new industries.

Can you trust your friends?

Does showing social results hurt search?

I remember the first time I heard about Google, it was in the run up to the year 2000 and my radio segments were mainly discussing if computers would blow up, dams collapse or aircraft fall from the sky as computer systems failed to deal with the change into the new millennium.

Despite the risk of impending disaster, I had a play with Google search and found the results to be far better than the established sites like Yahoo! and Altavista. Millions of others agreed.

Quickly Google became the definitive search engine. If you were serious about finding information on the web then Google was the way you found it.

For a while we wondered how Google would make money, it turned out that linking advertising to the search results was immensely profitable and the company quickly became one of the richest in the world.

Today, Google’s decided their searches will be something else. Rather than being a trusted source they’ll tell us what our friend think.

Which is great if our friends are trusted sources on Aristotle, post colonial South American politics, how to book sleepers on the Trans-Siberian or the best pie shop in Bathurst. But it’s kind of tricky if they aren’t.

As much as I love and enjoy the company of my friends both online and offline, not many of them are authorities in anything – except possibly pie shops.

This the flaw at the heart of integrating search and social media, they are two different things and we have different expectations for them.

As Pando Daily’s MG Seigler puts it; “Evil, Greed, And Antitrust Aren’t Google’s Real Problems, Relevancy Is.”

For most of my online searches, my friends views and ideas aren’t relevant. If they are, I already know how to find them.

The prediction is that tinkering with search will not end well for Google, it’s hard to disagree if we lose confidence in their results.

The Internet’s cold war

Should we align our businesses with the online empires?

“We’re designing exclusively for Android devices,” the software developer confided over a beer, “we don’t like the idea of giving Apple 30% of our income.”

That one business owner is making a choice that software developers, newpaper chains, school text book publishers and many other fields are going to have to make in the next year – which camp are they going to join in the Internet’s cold war.

As the web matures, we’re seeing four big empires develop – Google, Apple, Facebook and Amazon which are going to demand organisations and consumers make a choice on who they will align with.

That decision is going to be painful for a lot of business; each empire is going to take a cut in one way or another with Apple’s iStore charges being the most obvious.

For those who choose to go the non-aligned path – develop in HTML5 and other open web standards things will be rocky and sometimes tough. At least those on the open net won’t have to contend with a “business partner” whose objectives may often be different to their own.

Over time, we’ll see the winners and losers but for the moment businesses, particularly big corporations and publishers should have no doubt that the choices they make today on things as seemingly trivial things like reader comments may have serious ramifications in a few years time.

Consumers aren’t immune from this either; those purchases through iTunes, Amazon or Google are often locked to that service for a reason.

Probably the development that we should watch closest right now is Apple’s push into education publishing; those governments, universities and schools that lock into the iPad platform are making a commitment on behalf of tax payers, faculty and students that will affect all of them for many years.

For many, it might be worthwhile hedging the bets and sticking to open standards. A decision to join one or two of the big Internet empires is something that shouldn’t be made lightly.

Book review: The Information Diet

Clay A. Johnson describes how to manage information overload

We all know a diet of fast food can cause obesity, but can consuming junk information damage our mental fitness and critical faculties?

In The Information Diet, Clay A. Johnson builds the case for being more selective in what we read, watch and listen to. In it, Clay describes how we have reached the stage of intellectual obesity, what constitutes a poor diet and suggests strategies to improve the quality of the information we consume.

The Information Diet is based upon a simple premise, that just as balanced food diet is important for physical health so too is a diverse intake of news and information necessary for a healthy understanding of the world.

Clay A. Johnson came to this view after seeing a protestor holding up a placard reading “Keep your government hands off my Medicare.” Could an unbalanced information diet cause a kind of intellectual obesity that warps otherwise intelligent peoples’ perspectives?

The analogy is well explored by Clay as he looks at how we can go about creating a form of “infoveganism” that favours selecting information that comes as close from the source as possible

Just as fast food replaces fibre and nutrients with fat, sugars and salt to appeal to our tastes, media organisations process information to appeal to our own perceived biases and beliefs.

Clay doesn’t just accuse the right wing of politics in this – he is as scathing of those who consider the DailyKos, Huffington Post or Keith Olbermann as their primary sources as those who do likewise with Fox News or Bill O’Reilly.

The rise of opinion driven media – something that pre-dates the web – has been because the industrial production of processed information is quicker and more profitable that the higher cost, slower alternatives; which is the same reason for the rise of the fast food industry.

For society, this has meant our political discourse has become flabbier as voters base decisions and opinions upon information that has had the facts and reality processed out of it in an attempt to attract eyeballs and paying advertisers.

In many ways, Clay has identified the fundamental problem facing mass media today; as the advertising driven model requires viewers’ and readers’ attention, producers and editors are forced to become more sensationalist and selective. This in turn is damaging the credibility of these outlets.

Unspoken in Clay’s book is the challenge for traditional media –their processing of information has long since stopped adding value and now strips out the useful data, at best dumbing down the news into a “he said, she said” argument and at worse deliberately distorting events to attract an audience.

While traditional media is suffering from its own “filter failure”, the new media information empires of Google, Facebook, Apple and Amazon are developing even stronger feedback loops as our own friends on social media filter the news rather than a newsroom editor or producer.

As our primary sources of information have become more filtered and processed, societal and political structures have themselves become flabby and obese. Clay describes how the skills required to be elected in such a system almost certainly exclude those best suited to lead a diverse democracy and economy.

Clay’s strategies for improving the quality of the information we consume are basic, obvious and clever. The book is a valuable look at how we can equip ourselves to deal with the flood of data we call have to deal with every day.

Probably the most important message from The Information Diet is that we need to identify our biases, challenge our beliefs and look outside the boxes we’ve chosen for ourselves. Doing that will help us deal with the opportunities of the 21^st Century.

Clay A. Johnson’s The Information Diet is published by O’Reilly. A complimentary copy was provided as part of the publisher’s blogger review program.

The end of the PC era

Why the personal computer is fading away

This morning a graph appeared on the web from analytics site Asymco showing the stalling of PC sales and the rapid catch up of Android and Apple iOS systems.

Such graphs starkly illustrate how the industry is changing as people start using tablet and smartphones instead of their PCs but there are some caveats with making blanket comments about the death of the Windows based computer.

Sales are still huge

One important thing about the chart shown is it has a logrithmic scale – a doubling in height indicates ten times the sales.

That point alone shows just how massive the lead Windows had over 15 years from the mid-1990s, something that is shown in a previous Asymco chart.

Despite Gartner’s reported 1.4% fall in PC sales – the basis of the Asymco graphs – there are still 92 million personal computers sold each quarter so it is still a massive market.

Tethered devices

One of the weaknesses with smartphones and tablet computers is they are still tethered to the desktop. If you want to get the best experience from your phone or iPad you have to synch it with your home or office computer.

For the moment that’s going to continue for most users, but not forever and the extended life of PCs means customers are using older computers to connect.

Extended life cycles

A bigger problem for the PC manufacturers is the extended life cycle of personal computers.

Since the failure of Microsoft Vista, PC users have been weaned off the idea of replacing computers every three to five years and nearly half the market is using systems that are more than ten years old.

On its own that indicates fundamental problems with the Windows and PC markets for Microsoft and their manufacturing partners.

The irrelevant operating system

One of the effects of increased computer life cycles is that the operating system has become irrelevant. Customers no longer care about what they are using as long as it works.

This is one of Microsoft’s problems; the virus epidemic of last decade and various clunky versions of Windows Phones has left customers perceiving PC and Windows software as being clunky and buggy.

Not yet dead

While the PC market is now shrinking, it’s far from dead. There’s still a huge demand to cater for although the big growth days are over.

For manufacturers whose business model has been based on fighting for market share in a growing sector, they now have a problem. They have to identify profitable niches and generate innovative products.

Unfortunately for the PC industry, the market has moved on. Apple have captured the bulk of the high margin computer sector and the industry’s response of pushing “ultrabooks” to capture the MacBook Air customers isn’t going to resonate with consumers trained to buy cheap systems.

Watching the PC industry over the next five years will be fascinating. Some companies will adapt, others will reinvent themselves and many will fade away as they cling to a declining business model.

Despite the personal computer industry only being 30 years old, it’s already in decline which is something older industries should ponder upon.

Why the Microsoft Faithful are wrong about Windows Phone

Is it too late for Microsoft beat Apple and Google in mobile phones?

Late last year an event organiser recounted how she’d been told to only approaching Microsoft for event sponsorship if the occasion was related to mobile telephony as “all of our marketing budgets are focused on Windows Phone.”

So it wasn’t a surprise to read at the beginning of this year that Microsoft were allocating $200 million for marketing Windows Phone in the US alone.*

The Consumer Electronics Show is the high temple of tech journalism with thousands flying in from around the world to breathlessly report on the latest wide screen gizmo or mobile device

At the 2010 show, 3D television was going to be the big consumer item while at the 2011 event it was going to be Android based tablets that were going to crush the Apple iPad.

Despite the millions of words written and spoken about these products, both flopped. So it was no surprise we were going to see plenty of coverage of Microsoft given the budgets available and it being the last time Microsoft’s CEO, Steve Ballmer, would give the CES keynote.

Microsoft’s CES publicity blitz kicked off with a rather strange profile of Microsoft’s CEO in BusinessWeek which if anything illustrated the isolation and other worldliness of the company’s senior management.

The PR blitz worked though with Microsoft tying for first place in online mentions during the show according to the analytics company Simply Measured.

After the show the PR love for Microsoft continues with Business Insider having a gorgeous piece about why Windows Phone will succeed and criticising tech blogger Robert Scoble’s view that the mobile market is all about the number of apps available.

Scoble replied on his Google+ page explaining why apps do matter and adding that most of the people he meets hate Windows Phones, the latter point not being the most compelling argument.

The most telling point of Scoble’s though is his quoting Skype’s CEO that they aren’t developing an app for Windows Phone as “the other platforms are more important, so he put his developers on those”.

Microsoft spent 8.5 billion dollars buying Skype and intends to lay out over $200 million promoting Windows Phone. Surely there’s a few bucks somewhere in those numbers to pay for a few developers to get Skype functionality on the new platform.

Since writing this, Robert Scoble has issued a correction from the Skype CEO stating a version is being built for the next version of Windows Phone

The fact Microsoft can’t organise this seems to indicate not all senior executives share the vision for Windows Phone. It’s difficult to image Google or Apple having this sort of public dissent on a key product.

Management issues aside, Microsoft’s real problem are they are late to the mobile party and don’t have anything to gain attention.

There’s nothing wrong about being late to the party – Apple were late to enter the MP3 player, smart phone and tablet markets – but in each case they bought something new that changed the sector and eventually gave them leadership of each sector.

With Windows Phone, there’s so far little evidence Microsoft are going to deliver anything radically new to the sector. With Apple’s iOS and Android dominating, it’s going to be a tough slog for Microsoft and they are going to have to have to carefully spend every cent of that big marketing budget.

At least Microsoft’s PR team is doing a great job, the challenge is for the rest of the organisation to sell it as well.

*As an aside, it’s interesting the author of that article about Microsoft’s marketing budgets boasts how he “been sitting on this information for weeks so that Microsoft can make its big announcement at CES this coming week”. It’s good to know where Paul Thurrott thinks his responsibilities lie – certainly not with his readers.

Has Google peaked?

Does altering a business’ core product destroy trust in a business?

This article originally appeared in Technology Spectator as Google’s Wavering Trust Presumption.

Google revolutionised the Internet when the service appeared just over a decade ago, the search engine’s clean and reliable results saw it quickly capture two thirds of the market from then competitors like Altavista and Yahoo!.

One of the keys to that success was trust – Google’s users had a fair degree of confidence that the service’s results would be an accurate representation of whatever they were looking for on the web.

With the continuing integration of social media services, local search, paid advertising and travel services into those search results, it’s time to ask whether we can continue to trust what Google delivers us.

Google’s attempt to become a social media service is seeing results being skewed with by Google Plus profiles. Search Engine Land’s Danny Sullivan yesterday illustrated how Google+ profiles are changing Google’s search results.

One thing that notable in these searches – and Google’s behaviour in enforcing “real names” on its Plus social media service – is the importance of brands and celebrities.

It’s no coincidence in the example Danny Sullivan shows above that typing “Brit” into a Google search comes up with the instant suggestions of Brittany Spears and British Airways.

More troubling is Google’s foray into travel with the purchase of travel software company ITA. The travel industry site Tnooz recently looked at how searches for flights is now returning results from Google’s own service before the airlines or other travel websites.

Another of Google’s search strengths was the clean interface. When advertising was introduced, most users accepted this was the cost of a free service. Today a search result on Google is cluttered with Google+ suggestions, local business locations, travel results along with the ubiquitious advertising.

Suddenly Google’s search results aren’t looking so good and when you do find them, you can’t be sure they haven’t been skewed by the search engine’s determination to kill Google, Facebook or the online travel industry.

If it were only search and online advertising that Google was tinkering with, we could excuse this as being an innovative company experimenting with new business models in a developing industry, but a bigger problem lies outside its core business.

The purchase of Motorola Mobility – which is still subject to US government approval – changes the game for Google. Motorola Mobility employs 19,000 staff, increasing Google’s headcount by 60%.

Even if Google has only bought Motorola for the patents, closing down or divesting the operations and laying off nearly twenty thousand staff would be a big enough management distraction but there is real possibility though that Google want to make phones.

Google as a phone manufacturer, their previous attempt with the Nexus One wasn’t a great success, creates the problem of channel conflict with its partners who sell mobile phones with the Android operating system installed.

Right now those partners are having great success selling phones through mobile telcommunications companies who desperately want an alternative to the iPhone given they perceive, quite correctly, that Apple is taking their customers and the associated profits.

Apart from Apple the incumbents of the mobile phone industry are failing as Motorola have given up and are selling themselves to Google while Nokia are desperately seeking salvation in the arms of Microsoft.

Microsoft’s failure to take advantage of Google’s missteps is also instructive. Microsoft seem to be unable to capitalise on the conflicts in the mobile handset industry with Windows Phone while their competing search engine, Bing, seems to following Google’s cluttered inferface and anti-competitive practices.

With Microsoft largely out of the way with as an innovative competitor, it has fallen on newer business to challenge Google.

In social media we clearly have Facebook and Twitter while in phones Apple is by far the biggest and most profitable opponent, something emphasised by Google giving Android away for free.

The biggest question though is who can replace Google in web search, while there are worthy attempts like DuckDuckGo, Blekko and even Microsoft Bing, it’s difficult to see one of these displacing the dominant player right now.

Which isn’t to say it can’t happen; as we see with the examples of Nokia, Motorola and possibly Microsoft, the speed of change in modern business means empires fall quickly.

For Google, the lack of management focus on their core businesses may well cost them dearly in the next few years if web users stop trusting the company’s search results.

Category: Internet