Tuesday, April 26, 2011
When there’s no such thing as too much information
INFORMATION overload is a headache for individuals and a huge challenge for businesses. Companies are swimming, if not drowning, in wave after wave of data — from increasingly sophisticated computer tracking of shipments, sales, suppliers and customers, as well as e-mail, Web traffic and social-network comments. These Internet-era technologies, by one estimate, are doubling the quantity of business data every 1.2 years.
Yet the data explosion is also an enormous opportunity. In a modern economy, information should be the prime asset — the raw material of new products and services, smarter decisions, competitive advantage for companies, and greater growth and productivity.
Is there any real evidence of a "data payoff" across the corporate world? It has taken a while, but new research led by Erik Brynjolfsson, an economist at the Sloan School of Management at the Massachusetts Institute of Technology, suggests that the beginnings are now visible.
Mr. Brynjolfsson and his colleagues, Lorin Hitt, a professor at the Wharton School of the University of Pennsylvania, and Heekyung Kim, a graduate student at M.I.T., studied 179 large companies. Those that adopted "data-driven decision making" achieved productivity that was 5 to 6 percent higher than could be explained by other factors, including how much the companies invested in technology, the researchers said.
In the study, based on a survey and follow-up interviews, data-driven decision making was defined not only by collecting data, but also by how it is used — or not — in making crucial decisions, like whether to create a new product or service.
The central distinction, according to Mr. Brynjolfsson, is between decisions based mainly on "data and analysis" and on the traditional management arts of "experience and intuition."A 5 percent increase in output and productivity, he says, is significant enough to separate winners from losers in most industries.The companies that are guided by data analysis, Mr. Brynjolfsson says, are "harbingers of a trend in how managers make decisions." "And it has huge implications for competitiveness and growth," he adds. The research is not yet published, but it was presented at an academic conference this month.
The conclusion that companies that rely heavily on data analysis are likely to outperform others is not new. Notably, Thomas H. Davenport, a professor of information technology and management at Babson College, has made that point, and his most recent book, with Jeanne G. Harris and Robert Morison, is "Analytics at Work: Smarter Decisions, Better Results" (Harvard Business Press, 2010).
And companies like Google, whose search and advertising business is based on exploiting and organizing online information, are testimony to the power of intelligent data sifting.But the new research appears to be broader and to apply economic measurement to the impact of data-led decision making in a way not done before. "To the best of our knowledge," Mr. Brynjolfsson says, "this is the first quantitative evidence of the anecdotes we're been hearing about."
Mr. Brynjolfsson emphasizes that the spread of such decision making is just getting started, even though the data surge began at least a decade ago. That pattern is familiar in history. The productivity payoff from a new technology comes only when people adopt new management skills and new ways of working.
The electric motor, for example, was introduced in the early 1880s. But that technology did not generate discernible productivity gains until the 1920s. It took that long for the use of motors to spread, and for businesses to reorganize work around the mass-production assembly line, the efficiency breakthrough of its day.
The story was much the same with computers. By 1987, the personal computer revolution was more than a decade old, when Robert M. Solow, an economist and Nobel laureate, dryly observed, "You can see the computer age everywhere but in the productivity statistics."
It was not until 1995 that productivity in the American economy really started to pick up. The Internet married computing to low-cost communications, opening the door to automating all kinds of commercial transactions. The gains continued through 2004, well after the dot-com bubble burst and investment in technology plummeted.
The technology absorption lag accounts for the delayed productivity benefits, observes Robert J. Gordon, an economist at Northwestern University."It's never pure technology that makes the difference," Mr. Gordon says. "It's reorganizing things — how work is done. And technology does allow new forms of organization."
Since 2004, productivity has slowed again. Historically, Mr. Gordon notes, productivity wanes when innovation based on fundamental new technologies runs out. The steam engine and railroads fueled the first industrial revolution, he says; the second was powered by electricity and the internal combustion engine. The Internet, according to Mr. Gordon, qualifies as the third industrial revolution — but one that will prove far more short-lived than the previous two. "I think we're seeing hints that we're running through inventions of the Internet revolution," he says.
STILL, the software industry is making a big bet that the data-driven decision making described in Mr. Brynjolfsson's research is the wave of the future. The drive to help companies find meaningful patterns in the data that engulfs them has created a fast-growing industry in what is known as "business intelligence" or "analytics" software and services. Major technology companies — I.B.M., Oracle, SAP and Microsoft — have collectively spent more than $25 billion buying up specialist companies in the field.
I.B.M. alone says it has spent $14 billion on 25 companies that focus on data analytics. That business now employs 8,000 consultants and 200 mathematicians. I.B.M. said last week that it expected its analytics business to grow to $16 billion by 2015.
"The biggest change facing corporations is the explosion of data," says David Grossman, a technology analyst at Stifel Nicolaus. "The best business is in helping customers analyze and manage all that data."
Tuesday, April 19, 2011
How new Internet standards will finally deliver a mobile revolution
As the Web experience evolves, smartphones may soon live up to their name, and every business’s mobile strategy will grow in importance.
An arcane-sounding change with potentially significant implications for consumers and businesses is under way on the Web: the shift to a new generation of HTML,1 the programming standard that underpins the Internet. Senior executives, regardless of industry, should take note; like the exponential growth of device-specific applications, this evolution of HTML will further boost the power of mobile devices, accelerating changes in the way people consume content and the potential use of smartphones and tablets as both a marketing platform and a productivity tool.
The next generation of the Internet standard essentially will allow programs to run through a Web browser rather than a specific operating system. That means consumers will be able to access the same programs and cloud-based content from any device—personal computer, laptop, smartphone, or tablet—because the browser is the common platform. This ability to work seamlessly anytime, anywhere, on any device could change consumer behavior and shift the balance of power in the mobile-telecommunications, media, and technology industries. It will create opportunities and present challenges. This article seeks to provide a primer on these changes for senior executives, who may feel the effects of the move toward “Web-centricity” much sooner than they think.
Web-centricity
In some ways, the evolution of mobile technology resembles the battle among PC makers in the 1980s. While we today take it for granted that Microsoft’s Windows operating system underpins hardware from countless manufacturers, it wasn’t always that way. Remember the operating systems that powered the Commodore 64, the biggest-selling PC of all time, or the Apple II? Before the emergence of Microsoft’s DOS and then Windows, PC users faced a tough decision about which technology to adopt, because that determined the games and utilities they could use, as well as the general usefulness of their computers. The same occurs today with mobile devices. Users must weigh the hardware and software merits and commit themselves to a technology, whether it’s a device from manufacturers such as Apple or Research in Motion, the ever-increasing array of tablets and smartphones running Google’s Android operating system, or, soon, offerings from Nokia running on Microsoft’s Windows Phone 7 operating system.
The next generation of HTML, known as HTML5, may narrow these differences between mobile devices. HTML5, the most significant evolution yet in Web standards, is designed to allow programs to run through a Web browser, complete with video and other multimedia content that today require plug-in software and other work-arounds. In theory, this will make the browser a universal computing platform: without leaving it, users could do everything from editing documents to accessing social networks, watching movies, playing games, or listening to music. Not only would any device with a Web browser have these capabilities, but consumers would also have access to all content stored remotely “in the cloud,” independent of locations and devices.
That’s the first reason Web-centricity holds particular promise for mobile devices. The second is that it helps overcome the relatively weak processing power of smartphones and tablets compared with PCs and laptops. It’s partly this lack of horsepower that has fuelled the explosive growth in applications (or “apps”) to optimize the performance of specific devices: the average smartphone user now spends more than 11 hours a month using apps, more time than either Web browsing or talking, according to a March 2011 study by research firm Zokem. HTML5 has the potential to improve the mobile experience—its specifications enable browsers to locally store 1,000 times more data than they currently do, so users can work when offline—writing e-mails, for example—and their devices will automatically update when a network becomes available. What’s more, programs and applications run faster because complex processing tasks are handled by network servers, although mobile-network capacity must go on growing to deal with heavier data demands.
Of course, not all programs are suited to running through browsers, nor is HTML5 the first would-be universal platform to emerge: Sun Microsystems (purchased by Oracle in 2010) promised that with its Java language, programmers could “write once, run anywhere.” Things haven’t worked out that way. And there’s never a guarantee that one kind of standard will prevail (see sidebar, “Winning the Web standards battle”).
The rate at which developers are writing apps and consumers buying them is dizzying, and ingrained behavior can be hard to change. Web-centricity may raise security fears among users because programs are no longer installed on specific devices and because data are stored remotely. And there could be fragmentation issues with both the standard and the browsers—after all, existing ones, such as Google’s Chrome, Microsoft’s Internet Explorer, and Mozilla’s Firefox, don’t all treat the current standard, HTML4, the same way.2
The rate at which developers are writing apps and consumers buying them is dizzying, and ingrained behavior can be hard to change. Web-centricity may raise security fears among users because programs are no longer installed on specific devices and because data are stored remotely. And there could be fragmentation issues with both the standard and the browsers—after all, existing ones, such as Google’s Chrome, Microsoft’s Internet Explorer, and Mozilla’s Firefox, don’t all treat the current standard, HTML4, the same way.2
Despite these possible headwinds, the number of HTML5 Web sites is increasing by the day. Hardware manufacturers are lining up behind HTML5, and the development community is undertaking efforts to safeguard data in the cloud at a very fast pace. We therefore estimate that more than 50 percent of all mobile applications will switch to HTML5 within three to five years—and the rate of transition could be considerably higher and faster. No matter how quickly the shift occurs, it will affect both consumers and businesses significantly.
Consumer impact
Consider a simple task many consumers currently use mobile devices for: reading news headlines. Today, that requires accessing a specific Web site—often a sluggish exercise in frustration—or separately installing an application on every device used and, for those that charge a fee, paying each time. With Web-centricity, a single application can theoretically be accessed from any device through a browser—pay once and you’re done. And because all content is stored in the cloud, billing information and preferences can be seamlessly shared and accessed, and all devices remain in sync. A consumer can start reading an article on a tablet and then switch to a laptop, picking up where she left off. In a more advanced example, she could start an instant-messaging or video-chat conversation on her desktop computer and continue it on her smartphone. The bottom line for consumers: Web-centricity represents a major step toward genuinely “smart” devices that offer the same simple, relevant, and personalized experience everywhere.
Industry impact
These changes to consumer behavior may affect the economics of industries ranging from telecommunications and media to technology and even advertising. As Web stores selling applications that can be used across devices proliferate, for example, cutthroat competition may leave ad agencies reminiscing wistfully about the days when they could claim up to 40 percent of every dollar of mobile-advertising revenue. Consider, briefly, the implications for the following players in a world where content is everywhere and the relative importance of operating systems and Web browsers for creating and distributing programs and applications is shifting.
Software developers. Application developers currently pay a fee of up to 30 percent to device makers, telecommunications operators, or operating-system developers whenever an application is sold to a consumer. In a Web-centric world, developers can avoid these intermediaries: not only can the same application be sold across all devices but anyone can set up a Web store and sell directly to users. Google, for instance, is already charging application developers a distribution fee of about 5 percent through its Chrome Web store.3 In addition, the emergence of an open platform will probably motivate bigger enterprise software companies to introduce—and quickly—mobile-based programs for managing customer relationships, marketing, and supply chains.
Telecom operators. Web-centricity may be a double-edged sword for telecom players. On the one hand, it will spur demand for mobile-Internet services, create opportunities for operators as consumers seek applications that work across multiple devices, and loosen the grip of native app stores. On the other hand, there’s no guarantee that operators can make money with new apps, the likely surge in data traffic will require significant investments in network infrastructure, and operators may face increased competition from companies offering Web-based mobile-voice and -video services.
Content providers. Web-centricity should provide revenue and savings opportunities for content providers. On the revenue side, the ease with which consumers can access Web-centric content on the go should stimulate their interest in more relevant, timely material. Moreover, the seamlessness with which consumers can access HTML5 content across devices could create more opportunities for providers, such as television and movie studios, to offer consumers programming directly or to work through aggregators such as Apple’s iTunes. Finally, advertising could support additional mobile content. Fragmented mobile platforms today make it hard for online publishers to manage ad inventories across a broad range of users. Advanced features such as consumer targeting and measurement may migrate to the mobile-Web environment. Of course, this development will no doubt attract entrants and intensify competition, making the new environment as challenging as it is dynamic.
Savings, a secondary benefit, come from avoiding the cost of converting an application from one platform to another (today, typically around 50 percent of the original development cost). Newspapers and magazines, for example, should be able to create content once and deliver it seamlessly across multiple devices, lowering production costs and increasing reach.
Device makers. Web-centricity will probably make consumers more “device agnostic,” and that will in turn reduce the ability of players to control an ecosystem of developers and could accelerate the commoditization of mobile devices. The shift does, however, create opportunities. Manufacturers will be able to better and more easily integrate software and hardware experiences within and across devices. They can try to develop compelling cross-device applications and speed up the push to make synchronizing and storing data across devices easier. Finally, they have some control (along with operators) in choosing the default set of Web-centric services and applications embedded in devices.
What it means for senior executives
Consumer uses propel many innovations associated with Web-centricity. Yet it could ultimately provide a range of benefits for companies as information technology moves to Web-centric platforms and away from the current hard-wired infrastructure and applications. These are enterprise-level issues, and any CEO who isn’t confident that the organization is grappling with them should start pushing the senior team to understand their importance.
The CMO
The emergence of the “m-dot revolution”4—the increasingly strong tendency of consumers to use mobile devices to access company and product information—will have its greatest impact on chief marketing officers. Many companies are already experimenting with innovative smartphone applications; Volkswagen, for instance, has released a popular racing game for the iPhone. Companies will be able to continue taking advantage of the enhanced power of mobile Web browsers to create compelling experiences directly for users. In addition, CMOs will need to push their teams to develop compelling mobile-advertising strategies that go well beyond merely inserting ads into applications, as many do today. HTML5 should create opportunities to use video advertising more often, for example, and the development of robust mobile capabilities may spur the evolution of marketing tactics such as the monitoring of shopping activity to deliver real-time, location-specific coupons.
The CIO
Web-centricity puts additional pressure on organizations to invest in corporate cloud infrastructure. Chief information officers should, for example, prepare for the day when consumers, employees, and suppliers all communicate and interact through the use of mobile devices that run Web applications. This phenomenon will not only extend the reach of the enterprise but also place a premium on analytics and possibly improve the competitiveness of companies that can exploit the new information and interactions a Web-centric environment provides.
CIOs will have to decide whether costs can be cut and productivity increased by introducing rich applications both horizontally, across industries (for example, enterprise customer-relationship-management systems such as Salesforce.com), and vertically, within industries (say, mobile electronic medical records in health care or smartphone-based claims processing in insurance). Web-centricity also promises smaller productivity improvements, such as allowing users to store content locally for later uploading. Employees will therefore be able to work without being connected to the Internet—for instance, when they’re on airplanes.
The CEO
From the perspective of the chief executive officer, Web-centricity should be part of a broader imperative to elevate the importance of mobile marketing in corporate strategy. CEOs will need a response when, as must inevitably happen, they are asked how their companies are dealing with the m-dot revolution, which introduces a mobile element into everything from commerce to advertising to public relations. What’s needed is not just the coordination of mobile initiatives from functional offices, however. CEOs must take a big-picture approach to the collective implications of Web-centricity, the way it redefines a company’s interactions with employees and customers, and the challenges and opportunities it presents.
Of course, Web-centricity will require spending money to make money. Organizations will have to make IT investments, particularly for cloud-based computing and mobile platforms. Employees, especially in sales and operations, will need training in the art and science of mobility if companies are to maximize cost savings and productivity improvements. Yet Web-centricity also promises to make the mobile-Internet experience more open, complex, and dynamic. It may change the way consumers and enterprises behave. Even if companies don’t understand the technical aspects of this transition, they must master the technology’s potential and possible ramifications.
About the Authors
Bengi Korkmaz is an associate principal in McKinsey’s Istanbul office; Richard Lee is a principal in the Seoul office, where Ickjin Park is an associate principal.
Monday, April 18, 2011
This Tech Bubble Is Different
Tech bubbles happen, but we usually gain from the innovation left behind. This one—driven by social networking—could leave us empty-handed
BY ASHLEE VANCE, BUSINESS WEEK, APR 14, 2011
As a 23-year-old math genius one year out of Harvard, Jeff Hammerbacher arrived at Facebook when the company was still in its infancy. This was in April 2006, and Mark Zuckerberg gave Hammerbacher—one of Facebook's first 100 employees—the lofty title of research scientist and put him to work analyzing how people used the social networking service. Specifically, he was given the assignment of uncovering why Facebook took off at some universities and flopped at others. The company also wanted to track differences in behavior between high-school-age kids and older, drunker college students. "I was there to answer these high-level questions, and they really didn't have any tools to do that yet," he says.
Over the next two years, Hammerbacher assembled a team to build a new class of analytical technology. His crew gathered huge volumes of data, pored over it, and learned much about people's relationships, tendencies, and desires. Facebook has since turned these insights into precision advertising, the foundation of its business. It offers companies access to a captive pool of people who have effectively volunteered to have their actions monitored like so many lab rats. The hope—as signified by Facebook's value, now at $65 billion according to research firm Nyppex—is that more data translate into better ads and higher sales.
After a couple years at Facebook, Hammerbacher grew restless. He figured that much of the groundbreaking computer science had been done. Something else gnawed at him. Hammerbacher looked around Silicon Valley at companies like his own, Google (GOOG), and Twitter, and saw his peers wasting their talents. "The best minds of my generation are thinking about how to make people click ads," he says. "That sucks."
You might say Hammerbacher is a conscientious objector to the ad-based business model and marketing-driven culture that now permeates tech. Online ads have been around since the dawn of the Web, but only in recent years have they become the rapturous life dream of Silicon Valley. Arriving on the heels of Facebook have been blockbusters such as the game maker Zynga and coupon peddler Groupon. These companies have engaged in a frenetic, costly war to hire the best executives and engineers they can find. Investors have joined in, throwing money at the Web stars and sending valuations into the stratosphere. Inevitably, copycats have arrived, and investors are pushing and shoving to get in early on that action, too. Once again, 11 years after the dot-com-era peak of the Nasdaq, Silicon Valley is reaching the saturation point with business plans that hinge on crossed fingers as much as anything else. "We are certainly in another bubble," says Matthew Cowan, co-founder of the tech investment firm Bridgescale Partners. "And it's being driven by social media and consumer-oriented applications."
There's always someone out there crying bubble, it seems; the trick is figuring out when it's easy money—and when it's a shell game. Some bubbles actually do some good, even if they don't end happily. In the 1980s, the rise of Microsoft (MSFT), Compaq (HPQ), and Intel (INTC) pushed personal computers into millions of businesses and homes—and the stocks of those companies soared. Tech stumbled in the late 1980s, and the Valley was left with lots of cheap microprocessors and theories on what to do with them. The dot-com boom was built on infatuation with anything Web-related. Then the correction began in early 2000, eventually vaporizing about $6 trillion in shareholder value. But that cycle, too, left behind an Internet infrastructure that has come to benefit businesses and consumers.
This time, the hype centers on more precise ways to sell. At Zynga, they're mastering the art of coaxing game players to take surveys and snatch up credit-card deals. Elsewhere, engineers burn the midnight oil making sure that a shoe ad follows a consumer from Web site to Web site until the person finally cracks and buys some new kicks.
This latest craze reflects a natural evolution. A focus on what economists call general-purpose technology—steam power, the Internet router—has given way to interest in consumer products such as iPhones and streaming movies. "Any generation of smart people will be drawn to where the money is, and right now it's the ad generation," says Steve Perlman, a Silicon Valley entrepreneur who once sold WebTV to Microsoft for $425 million and is now running OnLive, an online video game service. "There is a goodness to it in that people are building on the underpinnings laid by other people."
So if this tech bubble is about getting shoppers to buy, what's left if and when it pops? Perlman grows agitated when asked that question. Hands waving and voice rising, he says that venture capitalists have become consumed with finding overnight sensations. They've pulled away from funding risky projects that create more of those general-purpose technologies—inventions that lay the foundation for more invention.
"Facebook is not the kind of technology that will stop us from having dropped cell phone calls, and neither is Groupon or any of these advertising things," he says. "We need them. O.K., great. But they are building on top of old technology, and at some point you exhaust the fuel of the underpinnings."
And if that fuel of innovation is exhausted? "My fear is that Silicon Valley has become more like Hollywood," says Glenn Kelman, chief executive officer of online real estate brokerage Redfin, who has been a software executive for 20 years. "An entertainment-oriented, hit-driven business that doesn't fundamentally increase American competitiveness."
Hammerbacher quit Facebook in 2008, took some time off, and then co-founded Cloudera, a data-analysis software startup. He's 28 now and speaks with the classic Silicon Valley blend of preternatural self-assurance and save-the-worldism, especially when he gets going on tech's hottest properties. "If instead of pointing their incredible infrastructure at making people click on ads," he likes to ask, "they pointed it at great unsolved problems in science, how would the world be different today?" And yet, other than the fact that he bailed from a sweet, pre-IPO gig at the hottest ad-driven tech company of them all, Hammerbacher typifies the new breed of Silicon Valley advertising whiz kid. He's not really a programmer or an engineer; he's mostly just really, really good at math.
Hammerbacher grew up in Indiana and Michigan, the son of a General Motors (GM) assembly-line worker. As a teenager, he perfected his curve ball to the point that college scouts from the University of Michigan and Harvard fought for his services. "I was either going to be a baseball player, a poet, or a mathematician," he says. Hammerbacher went with math and Harvard. Unlike one of his more prominent Harvard acquaintances—Facebook co-founder Mark Zuckerberg—Hammerbacher graduated. He took a job at Bear Stearns.
On Wall Street, the math geeks are known as quants. They're the ones who create sophisticated trading algorithms that can ingest vast amounts of market data and then form buy and sell decisions in milliseconds. Hammerbacher was a quant. After about 10 months, he got back in touch with Zuckerberg, who offered him the Facebook job in California. That's when Hammerbacher redirected his quant proclivities toward consumer technology. He became, as it were, a Want.
At social networking companies, Wants may sit among the computer scientists and engineers, but theirs is the central mission: to poke around in data, hunt for trends, and figure out formulas that will put the right ad in front of the right person. Wants gauge the personality types of customers, measure their desire for certain products, and discern what will motivate people to act on ads. "The most coveted employee in Silicon Valley today is not a software engineer. It is a mathematician," says Kelman, the Redfin CEO. "The mathematicians are trying to tickle your fancy long enough to see one more ad."
Sometimes the objective is simply to turn people on. Zynga, the maker of popular Facebook games such as CityVille and FarmVille, collects 60 billion data points per day—how long people play games, when they play them, what they're buying, and so forth. The Wants (Zynga's term is "data ninjas") troll this information to figure out which people like to visit their friends' farms and cities, the most popular items people buy, and how often people send notes to their friends. Discovery: People enjoy the games more if they receive gifts from their friends, such as the virtual wood and nails needed to build a digital barn. As for the poor folks without many friends who aren't having as much fun, the Wants came up with a solution. "We made it easier for those players to find the parts elsewhere in the game, so they relied less on receiving the items as gifts," says Ken Rudin, Zynga's vice-president for analytics.
These consumer-targeting operations look a lot like what quants do on Wall Street. A Want system, for example, might watch what someone searches for on Google, what they write about in Gmail, and the websites they visit. "You get all this data and then build very rapid decision-making models based on their history and commercial intent," says Will Price, CEO of Flite, an online ad service. "You have to make all of those calculations before the Web page loads."
Ultimately, ad-tech companies are giving consumers what they desire and, in many cases, providing valuable services. Google delivers free access to much of the world's information along with free maps, office software, and smartphone software. It also takes profits from ads and directs them toward tough engineering projects like building cars that can drive themselves and sending robots to the moon. The Era of Ads also gives the Wants something they yearn for: a ticket out of Nerdsville. "It lets people that are left- brain leaning expand their career opportunities," says Doug Mack, CEO of One Kings Lane, a daily deal site that specializes in designer goods. "People that might have been in engineering can go into marketing, business development, and even sales. They can get on the leadership track." And while the Wants plumb the depths of the consumer mind and advance their own careers, investors are getting something too, at least on paper: almost unimaginable valuations. Just since the fourth quarter, Zynga has risen 81 percent in value, to a cool $8 billion, according to Nyppex.
No one is suggesting that the top tier of ad-centric companies—Facebook, Google—is going down should the bubble pop. As for the next tier or two down, where a profusion of startups is piling into every possible niche involving social networking and ads—the fate of those companies is anybody's guess. Among the many unveilings in March, one stood out: An app called Color, made by a seven-month-old startup of the same name. Color lets people take and store their pictures. More than that, it uses geolocation and ambient-noise-matching technology to figure out where a person is and then automatically shares his photos with other nearby people and vice versa. People at a concert, for example, could see photos taken by all the other people at that concert. The same goes for birthday parties, sporting events, or a night out at a bar. The app also shares photos among your friends in the Color social network, so you can see how Jane is spending her vacation or what John ate for breakfast, if he bothered to take a photo of it.
Whether Color ends up as a profitable app remains to be seen. The company has yet to settle on a business model, although its executives say it'll probably incorporate some form of local advertising. Figuring out all those location-based news feeds on the fly requires serious computational power, and that part of the business is headed by Color's math wizard and chief product officer, DJ Patil.
Patil's Silicon Valley pedigree is impeccable. His father, Suhas Patil, emigrated from India and founded the chip company Cirrus Logic (CRUS). DJ struggled in high school, did some time at a junior college, and through force of will decided to get good at math. He made it into the University of California at San Diego, where he took every math course he could. He became a theoretical math guru and went on to research weather patterns, the collapse of sardine populations, the formation of sand dunes, and, during a stint for the Defense Dept., the detection of biological weapons in Central Asia. "All of these things were about how to use science and math to achieve these broader means," Patil says. Eventually, Silicon Valley lured him back. He went to work for eBay (EBAY), creating an antifraud system for the retail site. "I took ideas from the bioweapons threat anticipation project," he says. "It's all about looking at a network and your social interactions to find out if you're good or bad."
Patil, 36, agonized about his jump away from the one true path of Silicon Valley righteousness, doing gritty research worthy of his father's generation. "There is a time in life where that kind of work is easy to do and a time when it's hard to do," he says. "With a kid and a family, it was getting hard."
Having gone through a similar self-inquiry, Hammerbacher doesn't begrudge talented technologists like Patil for plying their trade in the glitzy land of networked photo sharing. The two are friends, in fact; they've gotten together to talk about data and the challenges in parsing vast quantities of it. At social networking companies, Hammerbacher says, "there are some people that just really buy the mission—connecting people. I don't think there is anything wrong with those people. But it just didn't resonate with me."
After quitting Facebook in 2008, Hammerbacher surveyed the science and business landscape and saw that all types of organizations were running into similar problems faced by consumer Web companies. They were producing unprecedented amounts of information—DNA sequences, seismic data for energy companies, sales information—and struggling to find ways to pull insights out of the data. Hammerbacher and his fellow Cloudera founders figured they could redirect the analytical tools created by Web companies to a new pursuit, namely bringing researchers and businesses into the modern age.
Cloudera is essentially trying to build a type of operating system, à la Windows, for examining huge stockpiles of information. Where Windows manages the basic functions of a PC and its software, Cloudera's technology helps companies break data into digestible chunks that can be spread across relatively cheap computers. Customers can then pose rapid-fire questions and receive answers. But instead of asking what a group of friends "like" the most on Facebook, the customers ask questions such as, "What gene do all these cancer patients share?"
Eric Schadt, the chief scientific officer at Pacific Biosciences, a maker of genome sequencing machines, says new-drug discovery and cancer cures depend on analytical tools. Companies using Pacific Bio's machines will produce mountains of information every day as they sequence more and more people. Their goal: to map the complex interactions among genes, organs, and other body systems and raise questions about how the interactions result in certain illnesses—and cures. The scientists have struggled to build the analytical tools needed to perform this work and are looking to Silicon Valley for help. "It won't be old school biologists that drive the next leaps in pharma," says Schadt. "It will be guys like Jeff who understand what to do with big data."
Even if Cloudera doesn't find a cure for cancer, rid Silicon Valley of ad-think, and persuade a generation of brainiacs to embrace the adventure that is business software, Price argues, the tech industry will have the same entrepreneurial fervor of yesteryear. "You can make a lot of jokes about Zynga and playing FarmVille, but they are generating billions of dollars," the Flite CEO says. "The greatest thing about the Valley is that people come and work in these super-intense, high-pressure environments and see what it takes to create a business and take risk." A parade of employees has left Google and Facebook to start their own companies, dabbling in everything from more ad systems to robotics and publishing. "It's almost a perpetual-motion machine," Price says.
Perpetual-motion machines sound great until you remember that they don't exist. So far, the Wants have failed to carry the rest of the industry toward higher ground. "It's clear that the new industry that is building around Internet advertising and these other services doesn't create that many jobs," says Christophe Lécuyer, a historian who has written numerous books about Silicon Valley's economic history. "The loss of manufacturing and design knowhow is truly worrisome."
Dial back the clock 25 years to an earlier tech boom. In 1986, Microsoft, Oracle (ORCL), and Sun Microsystems went public. Compaq went from launch to the Fortune 500 in four years—the quickest run in history. Each of those companies has waxed and waned, yet all helped build technology that begat other technologies. And now? Groupon, which e-mails coupons to people, may be the fastest-growing company of all time. Its revenue could hit $4 billion this year, up from $750 million last year, and the startup has reached a valuation of $25 billion. Its technological legacy is cute e-mail.
There have always been foundational technologies and flashier derivatives built atop them. Sometimes one cycle's glamour company becomes the next one's hard-core technology company; witness Amazon.com's (AMZN) transformation over the past decade from mere e-commerce powerhouse to e-commerce powerhouse and purveyor of cloud-computing capabilities to other companies. Has the pendulum swung too far? "It's a safe bet that sometime in the next 20 months, the capital markets will close, the music will stop, and the world will look bleak again," says Bridgescale Partners' Cowan. "The legitimate concern here is that we are not diversifying, so that we have roots to fall back on when we enter a different part of the cycle."
Vance is a technology writer for Bloomberg Businessweek.
BY ASHLEE VANCE, BUSINESS WEEK, APR 14, 2011
As a 23-year-old math genius one year out of Harvard, Jeff Hammerbacher arrived at Facebook when the company was still in its infancy. This was in April 2006, and Mark Zuckerberg gave Hammerbacher—one of Facebook's first 100 employees—the lofty title of research scientist and put him to work analyzing how people used the social networking service. Specifically, he was given the assignment of uncovering why Facebook took off at some universities and flopped at others. The company also wanted to track differences in behavior between high-school-age kids and older, drunker college students. "I was there to answer these high-level questions, and they really didn't have any tools to do that yet," he says.
Over the next two years, Hammerbacher assembled a team to build a new class of analytical technology. His crew gathered huge volumes of data, pored over it, and learned much about people's relationships, tendencies, and desires. Facebook has since turned these insights into precision advertising, the foundation of its business. It offers companies access to a captive pool of people who have effectively volunteered to have their actions monitored like so many lab rats. The hope—as signified by Facebook's value, now at $65 billion according to research firm Nyppex—is that more data translate into better ads and higher sales.
After a couple years at Facebook, Hammerbacher grew restless. He figured that much of the groundbreaking computer science had been done. Something else gnawed at him. Hammerbacher looked around Silicon Valley at companies like his own, Google (GOOG), and Twitter, and saw his peers wasting their talents. "The best minds of my generation are thinking about how to make people click ads," he says. "That sucks."
You might say Hammerbacher is a conscientious objector to the ad-based business model and marketing-driven culture that now permeates tech. Online ads have been around since the dawn of the Web, but only in recent years have they become the rapturous life dream of Silicon Valley. Arriving on the heels of Facebook have been blockbusters such as the game maker Zynga and coupon peddler Groupon. These companies have engaged in a frenetic, costly war to hire the best executives and engineers they can find. Investors have joined in, throwing money at the Web stars and sending valuations into the stratosphere. Inevitably, copycats have arrived, and investors are pushing and shoving to get in early on that action, too. Once again, 11 years after the dot-com-era peak of the Nasdaq, Silicon Valley is reaching the saturation point with business plans that hinge on crossed fingers as much as anything else. "We are certainly in another bubble," says Matthew Cowan, co-founder of the tech investment firm Bridgescale Partners. "And it's being driven by social media and consumer-oriented applications."
There's always someone out there crying bubble, it seems; the trick is figuring out when it's easy money—and when it's a shell game. Some bubbles actually do some good, even if they don't end happily. In the 1980s, the rise of Microsoft (MSFT), Compaq (HPQ), and Intel (INTC) pushed personal computers into millions of businesses and homes—and the stocks of those companies soared. Tech stumbled in the late 1980s, and the Valley was left with lots of cheap microprocessors and theories on what to do with them. The dot-com boom was built on infatuation with anything Web-related. Then the correction began in early 2000, eventually vaporizing about $6 trillion in shareholder value. But that cycle, too, left behind an Internet infrastructure that has come to benefit businesses and consumers.
This time, the hype centers on more precise ways to sell. At Zynga, they're mastering the art of coaxing game players to take surveys and snatch up credit-card deals. Elsewhere, engineers burn the midnight oil making sure that a shoe ad follows a consumer from Web site to Web site until the person finally cracks and buys some new kicks.
This latest craze reflects a natural evolution. A focus on what economists call general-purpose technology—steam power, the Internet router—has given way to interest in consumer products such as iPhones and streaming movies. "Any generation of smart people will be drawn to where the money is, and right now it's the ad generation," says Steve Perlman, a Silicon Valley entrepreneur who once sold WebTV to Microsoft for $425 million and is now running OnLive, an online video game service. "There is a goodness to it in that people are building on the underpinnings laid by other people."
So if this tech bubble is about getting shoppers to buy, what's left if and when it pops? Perlman grows agitated when asked that question. Hands waving and voice rising, he says that venture capitalists have become consumed with finding overnight sensations. They've pulled away from funding risky projects that create more of those general-purpose technologies—inventions that lay the foundation for more invention.
"Facebook is not the kind of technology that will stop us from having dropped cell phone calls, and neither is Groupon or any of these advertising things," he says. "We need them. O.K., great. But they are building on top of old technology, and at some point you exhaust the fuel of the underpinnings."
And if that fuel of innovation is exhausted? "My fear is that Silicon Valley has become more like Hollywood," says Glenn Kelman, chief executive officer of online real estate brokerage Redfin, who has been a software executive for 20 years. "An entertainment-oriented, hit-driven business that doesn't fundamentally increase American competitiveness."
Hammerbacher quit Facebook in 2008, took some time off, and then co-founded Cloudera, a data-analysis software startup. He's 28 now and speaks with the classic Silicon Valley blend of preternatural self-assurance and save-the-worldism, especially when he gets going on tech's hottest properties. "If instead of pointing their incredible infrastructure at making people click on ads," he likes to ask, "they pointed it at great unsolved problems in science, how would the world be different today?" And yet, other than the fact that he bailed from a sweet, pre-IPO gig at the hottest ad-driven tech company of them all, Hammerbacher typifies the new breed of Silicon Valley advertising whiz kid. He's not really a programmer or an engineer; he's mostly just really, really good at math.
Hammerbacher grew up in Indiana and Michigan, the son of a General Motors (GM) assembly-line worker. As a teenager, he perfected his curve ball to the point that college scouts from the University of Michigan and Harvard fought for his services. "I was either going to be a baseball player, a poet, or a mathematician," he says. Hammerbacher went with math and Harvard. Unlike one of his more prominent Harvard acquaintances—Facebook co-founder Mark Zuckerberg—Hammerbacher graduated. He took a job at Bear Stearns.
On Wall Street, the math geeks are known as quants. They're the ones who create sophisticated trading algorithms that can ingest vast amounts of market data and then form buy and sell decisions in milliseconds. Hammerbacher was a quant. After about 10 months, he got back in touch with Zuckerberg, who offered him the Facebook job in California. That's when Hammerbacher redirected his quant proclivities toward consumer technology. He became, as it were, a Want.
At social networking companies, Wants may sit among the computer scientists and engineers, but theirs is the central mission: to poke around in data, hunt for trends, and figure out formulas that will put the right ad in front of the right person. Wants gauge the personality types of customers, measure their desire for certain products, and discern what will motivate people to act on ads. "The most coveted employee in Silicon Valley today is not a software engineer. It is a mathematician," says Kelman, the Redfin CEO. "The mathematicians are trying to tickle your fancy long enough to see one more ad."
Sometimes the objective is simply to turn people on. Zynga, the maker of popular Facebook games such as CityVille and FarmVille, collects 60 billion data points per day—how long people play games, when they play them, what they're buying, and so forth. The Wants (Zynga's term is "data ninjas") troll this information to figure out which people like to visit their friends' farms and cities, the most popular items people buy, and how often people send notes to their friends. Discovery: People enjoy the games more if they receive gifts from their friends, such as the virtual wood and nails needed to build a digital barn. As for the poor folks without many friends who aren't having as much fun, the Wants came up with a solution. "We made it easier for those players to find the parts elsewhere in the game, so they relied less on receiving the items as gifts," says Ken Rudin, Zynga's vice-president for analytics.
These consumer-targeting operations look a lot like what quants do on Wall Street. A Want system, for example, might watch what someone searches for on Google, what they write about in Gmail, and the websites they visit. "You get all this data and then build very rapid decision-making models based on their history and commercial intent," says Will Price, CEO of Flite, an online ad service. "You have to make all of those calculations before the Web page loads."
Ultimately, ad-tech companies are giving consumers what they desire and, in many cases, providing valuable services. Google delivers free access to much of the world's information along with free maps, office software, and smartphone software. It also takes profits from ads and directs them toward tough engineering projects like building cars that can drive themselves and sending robots to the moon. The Era of Ads also gives the Wants something they yearn for: a ticket out of Nerdsville. "It lets people that are left- brain leaning expand their career opportunities," says Doug Mack, CEO of One Kings Lane, a daily deal site that specializes in designer goods. "People that might have been in engineering can go into marketing, business development, and even sales. They can get on the leadership track." And while the Wants plumb the depths of the consumer mind and advance their own careers, investors are getting something too, at least on paper: almost unimaginable valuations. Just since the fourth quarter, Zynga has risen 81 percent in value, to a cool $8 billion, according to Nyppex.
No one is suggesting that the top tier of ad-centric companies—Facebook, Google—is going down should the bubble pop. As for the next tier or two down, where a profusion of startups is piling into every possible niche involving social networking and ads—the fate of those companies is anybody's guess. Among the many unveilings in March, one stood out: An app called Color, made by a seven-month-old startup of the same name. Color lets people take and store their pictures. More than that, it uses geolocation and ambient-noise-matching technology to figure out where a person is and then automatically shares his photos with other nearby people and vice versa. People at a concert, for example, could see photos taken by all the other people at that concert. The same goes for birthday parties, sporting events, or a night out at a bar. The app also shares photos among your friends in the Color social network, so you can see how Jane is spending her vacation or what John ate for breakfast, if he bothered to take a photo of it.
Whether Color ends up as a profitable app remains to be seen. The company has yet to settle on a business model, although its executives say it'll probably incorporate some form of local advertising. Figuring out all those location-based news feeds on the fly requires serious computational power, and that part of the business is headed by Color's math wizard and chief product officer, DJ Patil.
Patil's Silicon Valley pedigree is impeccable. His father, Suhas Patil, emigrated from India and founded the chip company Cirrus Logic (CRUS). DJ struggled in high school, did some time at a junior college, and through force of will decided to get good at math. He made it into the University of California at San Diego, where he took every math course he could. He became a theoretical math guru and went on to research weather patterns, the collapse of sardine populations, the formation of sand dunes, and, during a stint for the Defense Dept., the detection of biological weapons in Central Asia. "All of these things were about how to use science and math to achieve these broader means," Patil says. Eventually, Silicon Valley lured him back. He went to work for eBay (EBAY), creating an antifraud system for the retail site. "I took ideas from the bioweapons threat anticipation project," he says. "It's all about looking at a network and your social interactions to find out if you're good or bad."
Patil, 36, agonized about his jump away from the one true path of Silicon Valley righteousness, doing gritty research worthy of his father's generation. "There is a time in life where that kind of work is easy to do and a time when it's hard to do," he says. "With a kid and a family, it was getting hard."
Having gone through a similar self-inquiry, Hammerbacher doesn't begrudge talented technologists like Patil for plying their trade in the glitzy land of networked photo sharing. The two are friends, in fact; they've gotten together to talk about data and the challenges in parsing vast quantities of it. At social networking companies, Hammerbacher says, "there are some people that just really buy the mission—connecting people. I don't think there is anything wrong with those people. But it just didn't resonate with me."
After quitting Facebook in 2008, Hammerbacher surveyed the science and business landscape and saw that all types of organizations were running into similar problems faced by consumer Web companies. They were producing unprecedented amounts of information—DNA sequences, seismic data for energy companies, sales information—and struggling to find ways to pull insights out of the data. Hammerbacher and his fellow Cloudera founders figured they could redirect the analytical tools created by Web companies to a new pursuit, namely bringing researchers and businesses into the modern age.
Cloudera is essentially trying to build a type of operating system, à la Windows, for examining huge stockpiles of information. Where Windows manages the basic functions of a PC and its software, Cloudera's technology helps companies break data into digestible chunks that can be spread across relatively cheap computers. Customers can then pose rapid-fire questions and receive answers. But instead of asking what a group of friends "like" the most on Facebook, the customers ask questions such as, "What gene do all these cancer patients share?"
Eric Schadt, the chief scientific officer at Pacific Biosciences, a maker of genome sequencing machines, says new-drug discovery and cancer cures depend on analytical tools. Companies using Pacific Bio's machines will produce mountains of information every day as they sequence more and more people. Their goal: to map the complex interactions among genes, organs, and other body systems and raise questions about how the interactions result in certain illnesses—and cures. The scientists have struggled to build the analytical tools needed to perform this work and are looking to Silicon Valley for help. "It won't be old school biologists that drive the next leaps in pharma," says Schadt. "It will be guys like Jeff who understand what to do with big data."
Even if Cloudera doesn't find a cure for cancer, rid Silicon Valley of ad-think, and persuade a generation of brainiacs to embrace the adventure that is business software, Price argues, the tech industry will have the same entrepreneurial fervor of yesteryear. "You can make a lot of jokes about Zynga and playing FarmVille, but they are generating billions of dollars," the Flite CEO says. "The greatest thing about the Valley is that people come and work in these super-intense, high-pressure environments and see what it takes to create a business and take risk." A parade of employees has left Google and Facebook to start their own companies, dabbling in everything from more ad systems to robotics and publishing. "It's almost a perpetual-motion machine," Price says.
Perpetual-motion machines sound great until you remember that they don't exist. So far, the Wants have failed to carry the rest of the industry toward higher ground. "It's clear that the new industry that is building around Internet advertising and these other services doesn't create that many jobs," says Christophe Lécuyer, a historian who has written numerous books about Silicon Valley's economic history. "The loss of manufacturing and design knowhow is truly worrisome."
Dial back the clock 25 years to an earlier tech boom. In 1986, Microsoft, Oracle (ORCL), and Sun Microsystems went public. Compaq went from launch to the Fortune 500 in four years—the quickest run in history. Each of those companies has waxed and waned, yet all helped build technology that begat other technologies. And now? Groupon, which e-mails coupons to people, may be the fastest-growing company of all time. Its revenue could hit $4 billion this year, up from $750 million last year, and the startup has reached a valuation of $25 billion. Its technological legacy is cute e-mail.
There have always been foundational technologies and flashier derivatives built atop them. Sometimes one cycle's glamour company becomes the next one's hard-core technology company; witness Amazon.com's (AMZN) transformation over the past decade from mere e-commerce powerhouse to e-commerce powerhouse and purveyor of cloud-computing capabilities to other companies. Has the pendulum swung too far? "It's a safe bet that sometime in the next 20 months, the capital markets will close, the music will stop, and the world will look bleak again," says Bridgescale Partners' Cowan. "The legitimate concern here is that we are not diversifying, so that we have roots to fall back on when we enter a different part of the cycle."
Vance is a technology writer for Bloomberg Businessweek.
Thursday, April 14, 2011
Digital oil: What is it?
Here are two new words to add to your IT lexicon: Digital Oil.
Federal CIO Vivek Kundra is using the phrase “digital oil” to describe the current state of information technology. “What do you mean by that?” Alan Marcus, a senior director with the World Economic Forum USA, asked Kundra during a morning session at the National Institute of Standards and Technology’s Cloud Computing Forum and Workshop III on April 7.
“What I mean by digital oil is the infrastructure is as important as oil is for our broader economy,” Kundra said. “I have spent a lot of time talking about how we’ve gone from 400 data centers [in 1998] to 2,094 – the number keeps fluctuating,” across the federal government, he said.
The average utilization of servers in that infrastructure is less than 26 percent, compared to 79 percent in the manufacturing sector. And that’s a big problem since forecasts predict over the next five years, “we’re going to create more digital content than we have created content since the beginning of civilization," Kundra said.
The National Archive of Records and Administration digitizes a billion pieces of paper a year, he said. "Think about all of the content being created through blogs and video as well as aggregated content generated through the smart grid and health IT."
The demand this places on computer power, sensors and storage is going to fundamentally change what Kunda calls "digital oil." "Our current compute models are so inefficient, expensive and non-environmentally healthy in terms of energy utilization that we are going to have to fundamentally reengineer our operations to a more renewable infrastructure," he said. We’ll have to think about the impact this demand will have on the minerals used to power the society of the future, he said.
Blog
Federal CIO Vivek Kundra is using the phrase “digital oil” to describe the current state of information technology. “What do you mean by that?” Alan Marcus, a senior director with the World Economic Forum USA, asked Kundra during a morning session at the National Institute of Standards and Technology’s Cloud Computing Forum and Workshop III on April 7.
“What I mean by digital oil is the infrastructure is as important as oil is for our broader economy,” Kundra said. “I have spent a lot of time talking about how we’ve gone from 400 data centers [in 1998] to 2,094 – the number keeps fluctuating,” across the federal government, he said.
The average utilization of servers in that infrastructure is less than 26 percent, compared to 79 percent in the manufacturing sector. And that’s a big problem since forecasts predict over the next five years, “we’re going to create more digital content than we have created content since the beginning of civilization," Kundra said.
The National Archive of Records and Administration digitizes a billion pieces of paper a year, he said. "Think about all of the content being created through blogs and video as well as aggregated content generated through the smart grid and health IT."
The demand this places on computer power, sensors and storage is going to fundamentally change what Kunda calls "digital oil." "Our current compute models are so inefficient, expensive and non-environmentally healthy in terms of energy utilization that we are going to have to fundamentally reengineer our operations to a more renewable infrastructure," he said. We’ll have to think about the impact this demand will have on the minerals used to power the society of the future, he said.
Blog
Friday, April 8, 2011
Hacking Conventional Computing Infrastructure
We started a project at Facebook a little over a year ago with a pretty big goal: to build one of the most efficient computing infrastructures at the lowest possible cost. We decided to honor our hacker roots and challenge convention by custom designing and building our software, servers and data centers from the ground up.
The result is a data center full of vanity free servers which is 38% more efficient and 24% less expensive to build and run than other state-of-the-art data centers1. But we didn't want to keep it all for ourselves. Instead, we decided to collaborate with the entire industry and create the Open Compute Project, to share these technologies as they evolve.
The result is a data center full of vanity free servers which is 38% more efficient and 24% less expensive to build and run than other state-of-the-art data centers1. But we didn't want to keep it all for ourselves. Instead, we decided to collaborate with the entire industry and create the Open Compute Project, to share these technologies as they evolve.
Server Technology
Open Compute servers are designed to be efficient, inexpensive and easy to service. They're also vanity free, with no extra plastic and significantly fewer parts than traditional servers.
Data Center Technology
Designed in tandem with our servers, the data center maximizes mechanical performance and thermal and electrical efficiency. It accepts 277 volts of AC, so more energy makes it from the grid to the data center to server components.
Energy Efficiency
As a result of the Open Compute Project, Facebook's Oregon data center is now one of the most efficient in the world:
· Facebook’s energy consumption per unit of computing power has declined by 38%2.
· The new data center has a PUE of 1.073, well below the EPA-defined state-of-the-art industry average of 1.51. This means 93% of the energy from the grid makes it into every Open Compute server.
· We've removed centralized chillers, eliminated traditional inline UPS systems and removed a 480V to 208V transformation.
· Ethernet-powered LED lighting and passive cooling infrastructure reduce energy spent on running the facility.
1. Report to Congress on Server and Data Center Energy Efficiency, U.S. Environmental Protection Agency ENERGY STAR Program, August 2, 2007.
2. Facebook lab testing conducted in February 2011, under production workloads.
3. PUE calculated at full load over an 8 hour period during the commissioning stage in December 2010. We expect our PUE to fluctuate over time and will report it on a quarterly basis.
Openness
By releasing Open Compute Project technologies as open hardware, our goal is to develop servers and data centers following the model traditionally associated with open source software projects.
Our first step is releasing the specifications and mechanical drawings. The second step is working with the community to improve them.
Please take a look, tell us what we did wrong and join us in working together to make every data center more efficient.
Join Us
We worked with Alfa Tech, AMD, Delta, Intel, Power-One and Quanta to develop of the first generation of technologies. We're working with Dell, HP, Rackspace, Skype, Zynga and others on the next generation.
Learn More
Tuesday, April 5, 2011
The Coming Wave of "Social Apponomics"
The secret to profitability on the Internet has finally arrived in an innovative blend of social media, Web mobility, and creative e-commerce applications.
by Matt Anderson, Henning Hagen, and Gregor Harter
The short history of the Internet can be summed up in a few words: Attracting a crowd is relatively easy. Monetizing that crowd? Not so much.
Earlier it was (the now nearly forgotten) Netscape and (the barely memorable) Friendster that drew the big audiences. Then, MySpace surged in popularity. Now this distinction belongs to Facebook and YouTube, with their billions of active visitors. But despite the extraordinary numbers of enthusiasts they can claim, many of today’s Web giants are confronted with the same problem: no clear path to profits. Google, Amazon, eBay, and to some degree Facebook are the rare exceptions among a sea of unprofitable websites.
Still, the emergence of vastly popular community-driven sites offers a glimpse into a new business model for smart retailers and consumer goods companies that bygone Internet ventures didn’t offer: an approach we call social apponomics. By enhancing the sheer magnetic power of social media with community-based marketing and tailored applications, social apponomics affords companies a pathway for breaking down the barriers to profitably commercializing online activities, not just for individual transactions but as part of an ongoing customer relationship.
Three elements of social apponomics are critical to success. The first is social media. These interactive sites, where people can congregate to share information, ideas, and things that they’ve discovered (mundane and newsworthy) or that they have in common, are replacing broadcast channels as the primary way many people learn about products and services. It’s a perfect Internet format for companies that want to attract a “sticky” audience, particularly when Web mobility is exploited. For one thing, consumers themselves can be used to generate content and interest in products and services, as occurs with Foursquare, a smartphone application that lets people automatically alert friends to their location with GPS technology and win rewards — discounts, T-shirts, and other prizes — for recommending products and stores to their circle of online acquaintances.
Retailers can best take advantage of Foursquare by offering coupons and other promotions for purchases and by providing special offers to the most loyal customers. Consumer goods companies can tap into social media in equally intriguing ways. For example, product placement in online games like the hugely popular FarmVille on Facebook, where some simulated fields have been planted to resemble McDonald’s golden arches and a zeppelin advertising Farmers Insurance Group was recently seen gliding across the screen. As a follow-up to their successful venture, FarmVille’s creator — a gaming innovator named Zynga Game Network Inc. — has just released CityVille, which may attract advertising from more urban companies such as Starbucks or major hotel chains. (Zynga has an additional revenue stream: the sale of add-ons that enhance the experience of playing the game.)
The second element, community-based marketing, is driven by keen insight into customer behavior on retailer-created social media sites. This insight is generated not just by surveys and studies of customers, but by analysis of how consumers engage with products and services online, as well as their Web connections to other individuals. Customized offers and campaigns, supported by sophisticated data mining and customer relationship management (CRM) analytics, ensure that site visitors receive advertisements or messages of interest to them and thus are more likely to click through to a sale; this is one of the most promising sources of revenue.
Finally, tailored applications attract people by offering easy-to-use online environments that speak directly to individuals according to their interests and needs — either on websites or, increasingly, via customizable applications for smartphones, netbooks, and tablets such as the Apple iPad. Support and advice, including product reviews and recommendations, can be generated by experts on a site, but they more often (and less expensively) come from customers themselves.
Overlaying these elements is trust, without which any company will quickly lose its connection to its customers. By living up to promises, offering generous return policies, avoiding scams and bad-faith encounters, and eliminating exploitive behavior (including the actions of other customers), companies can build consumer confidence and loyalty. The most important factor in creating trust is transparency: Sites such as financial information ag gregator Mint.com, the New York Times, and Amazon are diligent about explaining policies they have instituted (such as when and why they remove offensive comments and how they use personal information).
The most profitable online retailers have deftly combined the disparate aspects of social apponomics, applying those elements to the unique needs of their business models and customers. For example, Netflix, a US$1.3 billion online movie rental service with more than 15 million subscribers, offers a fully personalized social site where individual recommendations are offered in a wholly transparent way — for example, by showing the logic underlying the choices (“because you enjoyed [a related movie]”) or by displaying ratings of the “members’ average” versus Netflix’s “best guess for you.” In addition, there is a substantial focus on community: Advice is drawn from tens of thousands of customer reviews and top 10 lists. And Netflix subscribers can filter through movie opinions by finding other customers similar to them. Technologically, Netflix takes advantage of the Web’s multimedia and multichannel capabilities by allowing subscribers to watch movies online and on demand and to manage their movie lists through smartphones and other devices. In addition, individuals who learn about films through other online media — such as RottenTomatoes.com (the review site) or the New York Times online movie reviews — can add them directly to their Netflix queues via those other sites.
Amazon is the global e-tail leader, with more than $31 billion in sales in the 12 months ended October 2010. The key to its success lies in its personalized customer experiences — a constant flurry of recommendations, related items, and new product ideas — driven by Amazon’s proprietary CRM system that enables cross-selling and up-selling based on real-time sales data and consumer browsing activities. Features include a large and active community that provides trusted customer reviews and a vast marketplace that seamlessly integrates thousands of third-party sellers. Amazon’s wish list feature (allowing users to add products found anywhere on the Web), prime membership (providing unlimited two-day shipping for a yearly fee), and one-click checkout offer maximum ease of use, and mobile access is provided through iPhone and BlackBerry apps as well as through the company’s own Kindle handheld electronic reader.
Amazon is particularly active in developing new capabilities through acquisition of other companies, often buying out emerging social apponomics competitors before they threaten Amazon’s own offerings. In 2009, for example, Amazon purchased Zappos.com Inc., a footwear and apparel e-tailer whose outsized consumer loyalty is a result of its personalized customer experience, its trustworthiness, and transparency built on social media and excellent customer service. Almost 500 Zappos employees, including CEO Tony Hsieh, are active on Twitter, ensuring an ongoing conversation with customers. In addition, Zappos uses existing multimedia sites such as YouTube to facilitate word-of-mouth marketing, and it has created an active internal community with extensive use of blogs, including one on which its senior executives post. (See “At Zappos, Culture Pays,” Dick Richards, s+b, Autumn 2010.)
Intuit, a $3 billion developer of financial and tax preparation software (such as Quicken, TurboTax, and QuickBooks) and related services for small businesses, accountants, and individuals, has built trust through its social domain Intuitlabs.com, where customers can experiment with early versions of new products and services at no cost. This use of the “wisdom of crowds” gives large amounts of real-time feedback directly to developers, enabling rapid improvement of products and services. Intuit has also fostered an active and growing online community through its Leaderboards, which recognize the top 10 current and top 10 all-time contributors, and through Meetup.com, where Intuit brings together local small business and entrepreneur groups. In addition, the Intuit website features specialized information tailored to accountants, women, and educators; a wiki on taxes written and moderated by financial experts; and classified ads.
These and other social apponomics companies enjoy benefits that elude many other businesses. They report higher sales conversion rates, reflecting the impact of customized offers, peer recommendations, and crowd-voting, as well as higher repeat purchase rates and larger average sales, the result of sophisticated database marketing and up-selling driven by personalized applications. For example, Target’s online-only consumers — many of whom use the retailer’s smartphone app that offers daily deals, store-specific promotions, and ways to share wish lists and product reviews with friends — spend on average one-and-a-half times as much as their physical store–only counterparts. Multichannel consumers using both online and offline channels spend twice as much.
In addition, customer acquisition costs are lower in the social apponomics environment, as are customer care expenses. Word-of-mouth from the online community continuously attracts new consumers, whose participation at the site elevates its best features, expanding the number of reviews, recommendations, and conversations and providing a surfeit of consumer data for the marketing machines. Meanwhile, users take over onsite troubleshooting and respond to general product questions.
Social apponomics is in its infancy. The companies that are succeeding at this approach are few and far between, and are especially innovative and forward thinking. Many of the most creative social apponomics strategies have yet to be fully developed. But even at this early stage, seven useful lessons from initial social apponomics adopters have emerged.
1. Focus on partners, not competitors. Winners should not compete with social giants like Facebook or Twitter, but rather ally with existing social media whenever possible.
2. Think local. Online solutions should be location-specific to leverage the benefits of the mobile Web, using location-based services to attract customers in the vicinity of stores where products are sold or services are offered.
3. Target each customer in multiple segments. Consumers are complex; they have identities, preferences, product histories, and social data that generate broad “cloud profiles,” and they increasingly use the same mobile devices in both their personal and business lives. Armed with the rich data available from consumers’ Web activities, companies must deftly separate the masses of information that they collect about individuals and target offers and enticements to match the specific persona that a consumer inhabits at any given time.
4. Transform pricing into a dynamic conversation. The obvious examples are sites such as Priceline.com and Kayak.com, which offer people travel deals based in part on how much they are willing to pay. But other, e-tail–oriented sites are taking this approach in more creative directions. Groupon.com offers local discount coupons determined by retailers and consumer-goods companies, among others, that go into effect only after a specific number of people have agreed to buy the product. In this way, companies can base how much they charge on a minimum sales volume, normally an unknown quantity. As a result, an e-tailer might decide to cut the price of an item by 20 percent or more, certain that the company will sell five times as many at that price as at the regular price and will improve its margins.
5. Make use of the wisdom of crowds to build more compelling Web apps and to improve customer service. Enlist users to share feedback on beta versions of applications and to be active on self-help and message boards, providing purchasing recommendations and solutions to product problems. Offer preferential rewards and status to the most involved users.
6. Humanize your company “virtually.” Allow employees to be frequent posters on social media websites in an effort to decentralize the company’s message so that it increasingly comes from the rank and file rather than only from the executive suite. Avoid giving the impression of being a command-and-control company, which is anathema to the loose-knit, unstructured, ad hoc nature of the Internet.
7. Develop forms of online credentialing of your goods and services. Your own company’s expert guidance is good and employee voices are better, but your customers’ recommendations are best.
by Matt Anderson, Henning Hagen, and Gregor Harter
The short history of the Internet can be summed up in a few words: Attracting a crowd is relatively easy. Monetizing that crowd? Not so much.
Earlier it was (the now nearly forgotten) Netscape and (the barely memorable) Friendster that drew the big audiences. Then, MySpace surged in popularity. Now this distinction belongs to Facebook and YouTube, with their billions of active visitors. But despite the extraordinary numbers of enthusiasts they can claim, many of today’s Web giants are confronted with the same problem: no clear path to profits. Google, Amazon, eBay, and to some degree Facebook are the rare exceptions among a sea of unprofitable websites.
Still, the emergence of vastly popular community-driven sites offers a glimpse into a new business model for smart retailers and consumer goods companies that bygone Internet ventures didn’t offer: an approach we call social apponomics. By enhancing the sheer magnetic power of social media with community-based marketing and tailored applications, social apponomics affords companies a pathway for breaking down the barriers to profitably commercializing online activities, not just for individual transactions but as part of an ongoing customer relationship.
Three elements of social apponomics are critical to success. The first is social media. These interactive sites, where people can congregate to share information, ideas, and things that they’ve discovered (mundane and newsworthy) or that they have in common, are replacing broadcast channels as the primary way many people learn about products and services. It’s a perfect Internet format for companies that want to attract a “sticky” audience, particularly when Web mobility is exploited. For one thing, consumers themselves can be used to generate content and interest in products and services, as occurs with Foursquare, a smartphone application that lets people automatically alert friends to their location with GPS technology and win rewards — discounts, T-shirts, and other prizes — for recommending products and stores to their circle of online acquaintances.
Retailers can best take advantage of Foursquare by offering coupons and other promotions for purchases and by providing special offers to the most loyal customers. Consumer goods companies can tap into social media in equally intriguing ways. For example, product placement in online games like the hugely popular FarmVille on Facebook, where some simulated fields have been planted to resemble McDonald’s golden arches and a zeppelin advertising Farmers Insurance Group was recently seen gliding across the screen. As a follow-up to their successful venture, FarmVille’s creator — a gaming innovator named Zynga Game Network Inc. — has just released CityVille, which may attract advertising from more urban companies such as Starbucks or major hotel chains. (Zynga has an additional revenue stream: the sale of add-ons that enhance the experience of playing the game.)
The second element, community-based marketing, is driven by keen insight into customer behavior on retailer-created social media sites. This insight is generated not just by surveys and studies of customers, but by analysis of how consumers engage with products and services online, as well as their Web connections to other individuals. Customized offers and campaigns, supported by sophisticated data mining and customer relationship management (CRM) analytics, ensure that site visitors receive advertisements or messages of interest to them and thus are more likely to click through to a sale; this is one of the most promising sources of revenue.
Finally, tailored applications attract people by offering easy-to-use online environments that speak directly to individuals according to their interests and needs — either on websites or, increasingly, via customizable applications for smartphones, netbooks, and tablets such as the Apple iPad. Support and advice, including product reviews and recommendations, can be generated by experts on a site, but they more often (and less expensively) come from customers themselves.
Overlaying these elements is trust, without which any company will quickly lose its connection to its customers. By living up to promises, offering generous return policies, avoiding scams and bad-faith encounters, and eliminating exploitive behavior (including the actions of other customers), companies can build consumer confidence and loyalty. The most important factor in creating trust is transparency: Sites such as financial information ag gregator Mint.com, the New York Times, and Amazon are diligent about explaining policies they have instituted (such as when and why they remove offensive comments and how they use personal information).
The most profitable online retailers have deftly combined the disparate aspects of social apponomics, applying those elements to the unique needs of their business models and customers. For example, Netflix, a US$1.3 billion online movie rental service with more than 15 million subscribers, offers a fully personalized social site where individual recommendations are offered in a wholly transparent way — for example, by showing the logic underlying the choices (“because you enjoyed [a related movie]”) or by displaying ratings of the “members’ average” versus Netflix’s “best guess for you.” In addition, there is a substantial focus on community: Advice is drawn from tens of thousands of customer reviews and top 10 lists. And Netflix subscribers can filter through movie opinions by finding other customers similar to them. Technologically, Netflix takes advantage of the Web’s multimedia and multichannel capabilities by allowing subscribers to watch movies online and on demand and to manage their movie lists through smartphones and other devices. In addition, individuals who learn about films through other online media — such as RottenTomatoes.com (the review site) or the New York Times online movie reviews — can add them directly to their Netflix queues via those other sites.
Amazon is the global e-tail leader, with more than $31 billion in sales in the 12 months ended October 2010. The key to its success lies in its personalized customer experiences — a constant flurry of recommendations, related items, and new product ideas — driven by Amazon’s proprietary CRM system that enables cross-selling and up-selling based on real-time sales data and consumer browsing activities. Features include a large and active community that provides trusted customer reviews and a vast marketplace that seamlessly integrates thousands of third-party sellers. Amazon’s wish list feature (allowing users to add products found anywhere on the Web), prime membership (providing unlimited two-day shipping for a yearly fee), and one-click checkout offer maximum ease of use, and mobile access is provided through iPhone and BlackBerry apps as well as through the company’s own Kindle handheld electronic reader.
Amazon is particularly active in developing new capabilities through acquisition of other companies, often buying out emerging social apponomics competitors before they threaten Amazon’s own offerings. In 2009, for example, Amazon purchased Zappos.com Inc., a footwear and apparel e-tailer whose outsized consumer loyalty is a result of its personalized customer experience, its trustworthiness, and transparency built on social media and excellent customer service. Almost 500 Zappos employees, including CEO Tony Hsieh, are active on Twitter, ensuring an ongoing conversation with customers. In addition, Zappos uses existing multimedia sites such as YouTube to facilitate word-of-mouth marketing, and it has created an active internal community with extensive use of blogs, including one on which its senior executives post. (See “At Zappos, Culture Pays,” Dick Richards, s+b, Autumn 2010.)
Intuit, a $3 billion developer of financial and tax preparation software (such as Quicken, TurboTax, and QuickBooks) and related services for small businesses, accountants, and individuals, has built trust through its social domain Intuitlabs.com, where customers can experiment with early versions of new products and services at no cost. This use of the “wisdom of crowds” gives large amounts of real-time feedback directly to developers, enabling rapid improvement of products and services. Intuit has also fostered an active and growing online community through its Leaderboards, which recognize the top 10 current and top 10 all-time contributors, and through Meetup.com, where Intuit brings together local small business and entrepreneur groups. In addition, the Intuit website features specialized information tailored to accountants, women, and educators; a wiki on taxes written and moderated by financial experts; and classified ads.
These and other social apponomics companies enjoy benefits that elude many other businesses. They report higher sales conversion rates, reflecting the impact of customized offers, peer recommendations, and crowd-voting, as well as higher repeat purchase rates and larger average sales, the result of sophisticated database marketing and up-selling driven by personalized applications. For example, Target’s online-only consumers — many of whom use the retailer’s smartphone app that offers daily deals, store-specific promotions, and ways to share wish lists and product reviews with friends — spend on average one-and-a-half times as much as their physical store–only counterparts. Multichannel consumers using both online and offline channels spend twice as much.
In addition, customer acquisition costs are lower in the social apponomics environment, as are customer care expenses. Word-of-mouth from the online community continuously attracts new consumers, whose participation at the site elevates its best features, expanding the number of reviews, recommendations, and conversations and providing a surfeit of consumer data for the marketing machines. Meanwhile, users take over onsite troubleshooting and respond to general product questions.
Social apponomics is in its infancy. The companies that are succeeding at this approach are few and far between, and are especially innovative and forward thinking. Many of the most creative social apponomics strategies have yet to be fully developed. But even at this early stage, seven useful lessons from initial social apponomics adopters have emerged.
1. Focus on partners, not competitors. Winners should not compete with social giants like Facebook or Twitter, but rather ally with existing social media whenever possible.
2. Think local. Online solutions should be location-specific to leverage the benefits of the mobile Web, using location-based services to attract customers in the vicinity of stores where products are sold or services are offered.
3. Target each customer in multiple segments. Consumers are complex; they have identities, preferences, product histories, and social data that generate broad “cloud profiles,” and they increasingly use the same mobile devices in both their personal and business lives. Armed with the rich data available from consumers’ Web activities, companies must deftly separate the masses of information that they collect about individuals and target offers and enticements to match the specific persona that a consumer inhabits at any given time.
4. Transform pricing into a dynamic conversation. The obvious examples are sites such as Priceline.com and Kayak.com, which offer people travel deals based in part on how much they are willing to pay. But other, e-tail–oriented sites are taking this approach in more creative directions. Groupon.com offers local discount coupons determined by retailers and consumer-goods companies, among others, that go into effect only after a specific number of people have agreed to buy the product. In this way, companies can base how much they charge on a minimum sales volume, normally an unknown quantity. As a result, an e-tailer might decide to cut the price of an item by 20 percent or more, certain that the company will sell five times as many at that price as at the regular price and will improve its margins.
5. Make use of the wisdom of crowds to build more compelling Web apps and to improve customer service. Enlist users to share feedback on beta versions of applications and to be active on self-help and message boards, providing purchasing recommendations and solutions to product problems. Offer preferential rewards and status to the most involved users.
6. Humanize your company “virtually.” Allow employees to be frequent posters on social media websites in an effort to decentralize the company’s message so that it increasingly comes from the rank and file rather than only from the executive suite. Avoid giving the impression of being a command-and-control company, which is anathema to the loose-knit, unstructured, ad hoc nature of the Internet.
7. Develop forms of online credentialing of your goods and services. Your own company’s expert guidance is good and employee voices are better, but your customers’ recommendations are best.
Friday, April 1, 2011
The Rise of the “Second Internet"
The Rise of the "Second Internet" and What It Means
March 31, 2011
What is the thread that ties together the rapid rise of companies as different as Facebook, Zynga, Twitter, The Huffington Post and Quora? Wedbush Securities, a brokerage firm that analyzes the valuations of private companies, says they are all players in what it calls the "Second Internet."
Wedbush says there are certain attributes that allow such players to grow and thrive while more traditional players — including some of the leaders from the early days of the Internet — fail to prosper and gradually recede into history. The most important of these attributes, the firm says, is an understanding of the value of the social web.
The social nature of this new wave of Internet companies is such a major factor that Wedbush also calls it the rise of the "Social Internet" in a new report on the sector, and says successful companies are powered by similar features, including:
- Platforms open up their API to developers
- Continuous and rapid pace of innovation (see Facebook)
- The company/brand must listen to the dialogue and participate with customers
- Customer contribution is a large percent of the value/experience
- Every customer has a personalized experience
- Social graph connections drive discovery rather than search
The report looks at the value of Facebook — comparing the growth of the company to the growth of Google — as well as the rise of other key players such as Quora, The Huffington Post and Zynga, and how each of them effectively took over from a leader of what it calls the "First Internet."
So by the brokerage firm's reasoning, The Huffington Post took over from CNN, Quora took over from Yahoo Answers — which in turn took over from Encyclopedia Britannica — Zynga has taken over from MiniClip, which took the place of former leader Electronic Arts, and Jive Software has taken over (or is taking over) from Google Docs, which took over from Microsoft Office. One of the few early Internet companies that seems to have what it takes to bridge this gap is LinkedIn, the firm says (although some might argue the opposite).
As part of the report, which also looks at the rise of players such as BranchOut — the Facebook-based business network that is trying to give LinkedIn a run for its money in that market — Wedbush also looks at Facebook's potential market value, and comes to the conclusion that the company could be worth $234 billion by 2015. That's up from a recent private-market valuation of about $75 billion and would put Facebook firmly in Google territory.
According to the analysis by Lou Kerner, who also does secondary-market valuations of private companies like Facebook and Twitter for the website Second Shares, the giant social network could actually have even higher profit margins than originally forecast (as high as 50 percent, he says), and could grab an even larger share of the growing market for online social advertising and marketing dollars (as high as 15 percent of the global market, the Wedbush analyst estimates).
There are some caveats worth keeping in mind when reading the report, of course. For one thing, some of the leaders that it identifies could easily be replaced by something else — Quora, for example, may well have peaked in terms of awareness and growth after a recent surge in popularity, and it's not clear whether it can continue and become mainstream in any real sense. And when it comes to Facebook and Zynga, the firm is part of a hot private market for the shares of those companies, and so has an obvious interest in making them appear as desirable and highly valued as possible (Kerner also owns shares in Facebook).
That said, however, reports like this one help put the spotlight where it should be: on companies that have been able to take advantage of the social nature of the web — what at one point was being called "Web 2.0″ — and how that has allowed them to grow at a speed that hasn't been seen since the early days of Google. Sometimes we are so close to these events and companies that it's easy to lose sight of how big a transformation they have helped create in our online lives.
It also helps reinforce how difficult it is for even early Internet leaders to adapt to and take advantage of these changes, as Google is trying to do by bolting social features onto its services through moves like its recent +1 launch. Leading in one wave is no guarantee that one can lead in another — and in some cases may make that even less likely to happen.
Post and thumbnail photos courtesy of Flickr user Luc Legay
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