Decoding the new economy

The allure of free data

It’s user generated, but is it worthwhile.

It looks like a nice business model, you get users to generate your content for you. Many of the new digital media empires like YouTube, Facebook and Foursquare are built upon it.

The Register’s Simon Sharwood looked at the downside of this business model – junk data.

Even the most well intentioned users makes mistakes with thing like addresses and that’s before you get mischief makers or competitors putting in false information.

There’s another aspect too, what one person thinks is relevant may not be to other users or to the people running the service, Simon cites the dozens of “mom’s kitchens” on Foursquare.

For those who’ve added their mom’s house, that’s relevant and maybe even funny to them.

All of this illustrates the downside to the free, User Generated Content (UGC) model; you have to accept what the users give you.

Which means it isn’t free – it has to be collated, processed and the noise has to be filtered out.

At worst, somebody has to make the decision what is relevant and what has to go. This isn’t easy and, as Google found with their Name Wars, can upset a lot of users if it isn’t handled well.

Nothing in life is truly free and with data becoming increasingly important to business it’s worthwhile considering the quality of that free or cheap stuff you get from the net.

When history bites

Our social media past can easily come to haunt us.

In a strange way Peter Watson, the Australian Labor Party election candidate disendorsed and expelled for his homophobic views, is a trend setter for his generation.

Mr Watson was caught out by the unsavoury views he’d posted on Facebook and other online forums. That he defended what he had written “when I was like 14, 15 years old, so we’re talking about four, five years ago” made matters worse.

Our digital footprints – material about us on the web or in social media sites – sometimes show we’ve strayed into places we’d rather admit to.

There’s plenty of others who have posted things that will bite them later when they apply of jobs or seek political office.

It will be interesting to see how society and the media adapt to our histories and the dumb stuff we did as teenagers being freely available, Mr Watson is an early casualty of that adjustment process.

One of the more disturbing aspects of the Peter Watson case is his political party’s failure to do the most basic of checks on their candidate’s background. Something that again illustrates just how out of touch the nation’s political structures are with modern society.

When we talk about disruption, we often focus on the jobs, business and social aspects of that change. One thing we often forget is that social upheaval directly affects political parties.

Political parties who fail to adapt to the needs of their society become irrelevant and fail.

So maybe Peter Watson has, through sheer dumb luck, found himself on the right side of history in being expelled from a political party that doesn’t know how to use Google search.

Scammed

Social media opens up new opportunities for conmen

“Executive-level income without leaving home” claims the Facebook page, a sign at the end of my street promises a six figure wage from your own computer and one of the lead stories in this morning’s news is the tale of retirees being ripped off by ‘boiler rooms’ offering high return ‘investments’.

We all believe we have the right to be rich so the quick, easy option and the promises of those that say we can be wealthy by simply handing over a modest amount of money or trusting our investments to someone else is a tempting offer.

Deep down we know we’re being scammed.

Right now nations are on the verge of collapse because politicians promised easy wealth, corporations skirt bankruptcy because executives were entitled to bonuses regardless of performance and in the suburbs desperate people clinging to the middle class lifestyle they believed was theirs by birthright fall for get rich quick scams.

Just as the railways opened up opportunities for snake oil merchants in the 1850s and cheap telephone systems gave rise to the boiler room ripoffs of the 1970s and 80s, social media tools open up a whole new range of possibilities for the sneaky to fool the gullible or desperate.

Naturally we’ll get the nanny goats and nincompoops demanding something be done about Internet scams – maybe a law, perhaps a treaty or a code of conduct – all of which will be as effective as stopping railways, telephones or the postal system in an effort to stamp out fraud.

Fraud is technologically neutral; fraudsters just use whatever happens to be the most effective tools available at the time.

The sad thing with the social media based scams is we get to see who among our friends and family have fallen for it. Invariably when we warn them we’re told off because we aren’t believers.

Again though this is nothing new, the same thing happened when the snake oil merchant came to town or the shaman visited the village.

In the 19th Century the phrase “there’s a sucker born every minute” was coined. In today’s hyper connected world, there’s one born every second. Don’t be that sucker.

On becoming a Captive Business

On being trapped by your suppliers or customers

I’ve been writing a lot recently about the risks of businesses aligning their interests too closely with one or another platform, last weekend The China Law Blog discussed the opposite – being a captive customer.

The term “captive customer” is new to me but it’s a familiar concept; in the IT industry most of us found ourselves hostage to Microsoft’s whims at one time or another and it wasn’t a good place to be.

Many smaller businesses and consultants fall for the trap of having just one big customer which their income becomes dependent upon.

While Dan’s point on The China Law Blog is about manufacturing, this risk is becoming even more pressing on the web where there’s a tendency to be captured by one platform or another.

Sometimes entire industries are captured – the Search Engine Optimisation sector is wholly dependent upon whatever Google chooses to with their search algorithm. To make things worse, no SEO expert knows exactly how Google’s equations actually work.

We’re seeing the mass media being captured in a number of ways – by granting licenses to Facebook, one suspects unwittingly, or developing content for Apple’s iPad.

For startups depending upon cloud services or single payment platforms like PayPal there are serious risks as we saw with the co-ordinated takedown of Wikileaks.

In nature, the animal or plant that depends on one source of food or habitat is at risk from even small changes in their environment. Be careful you aren’t a business dodo.

Paying the piper – the cost of the internet’s walled gardens

The web’s walled gardens have a real business cost

With the web increasingly dominated by four major, and many minor, fiefdoms the cost of being part of those groups is gradually becoming clear.

As part of Facebook filings in advance of their public float they published the key agreements with their developer partners including that with games provider Zygna, technology journalist Tom Foremski has a disturbing look at Facebook’s conditions that illustrate the costs and risks.

In terms of the costs, Tom identifies Clause 2.1 of Facebook’s “Statement of Rights and Responsibilities” – shown as Annex 1 in the Developers as probably the biggest price for all content creators;

… you grant us a non-exclusive, transferable, sub-licensable, royalty-free, worldwide license to use any IP content that you post on or in connection with Facebook (“IP License”). This IP License ends when you delete your IP content or your account unless your content has been shared with others, and they have not deleted it.

So by sharing something on Facebook, you grant Facebook the right to do what they like with what you’ve created. That’s something worth thinking about.

For anybody trying to make a living off Facebook, it’s important to consider they also retain the right to throw you off the service at any time. From clause 4.10 of the Statement Of Rights Annex;

If you select a username for your account we reserve the right to remove or reclaim it if we believe appropriate (such as when a trademark owner complains about a username that does not closely relate to a user’s actual name).

So get into a trademark dispute with a big corporation – and often their lawyers cast a very wide net on potential similar spellings – and your account is shut down.

There’s also the specifics of the Zynga agreement that should concern anyone investing in the games company. Right at the beginning of the agreement we see this clause;

The parties further acknowledge that Zynga is making a significant commitment to the Facebook Platform (i.e., using Facebook as the exclusive Social Platform on the Zynga Properties and granting FB certain title exclusivities to Zynga games on the Facebook Platform). In exchange for such commitment, [*] the parties have committed to set certain growth targets for monthly unique users of Covered Zynga Games.

So Zynga is closely tied into the fortunes of Facebook, we knew that on a business level but now we know just how deep and binding the agreements are.

We should be clear, all the major social media and online services have similar clauses on intellectual property and copyright infringements; there’s no shortage of businesses who’ve been caught out by eBay or Paypal and plenty of people found their Google accounts shut down by their obsession with real names.

For all businesses the message is clear – be careful before committing totally to one online platform or another. Should you end up in a dispute, or find you’ve backed the wrong service, it may be a very costly process to get your company off that platform.

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.

Tag: Facebook

Scammed

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