Outside Innovation

Are You Interested in Complex Decision-Making, Organic Computing, Meme Management, and Episodic Parallel Processing?

2012-05-30T11:00:00-04:00

Patty’s Pioneers met in Boston May 16th and 17th. And it was one of our best meetings yet! I believe this was our 18th spring meeting (since our group started in 1994). Early members were technology architects who were pioneering in distributed object computing. There is something truly amazing about evolving a shared mental model over a couple of decades about what’s going on in technology and how that affects our business strategies.

What I notice is that each of us has a way in which we view the world—a set of filters and lenses that is persistent. Each time we meet (every six months), we observe some new patterns or amass some evidence that contradicts what we might have thought to be “true.” These emerging patterns either challenge or reinforce our collective sense-making apparatus. What makes us long-time colleagues is that, despite the fact that we fall on very different ends of the political spectrum and range in age from our 40s to our 80s, our nervous systems are all “wired” in similar ways.

Calling for the Next Generation of Pioneers. As one of our younger members pointed out, we are now in danger of becoming curmudgeons. (In fact, at least two of our members already consider themselves both curmudgeons and renegades). So, we’re now at the point where we’re looking for the next generation of thoughtful, insightful pioneers. We want their fresh perspective, but we also don’t want to abandon or neglect our love of recursion and pattern-matching over time. Everything new that happens in technology tends to be a replay of patterns we’ve seen before. We believe that historical context is probably valuable to the current group of really smart technology pioneers. So, if, after reading my public notes from our last meeting, you think you’d fit right in, and particularly if you are under 40, please ping me! (pseybold at customers.com).

What’s Happening in IT and What’s on Our Radar?
Observations and Trends from Patty’s Pioneers’ Spring Meeting
By Patricia B. Seybold and Patty’s Pioneers, May 24, 2012

Why Facebook’s IPO Bombed

2012-05-29T11:00:00-04:00

By Peter Horne (Reprinted with permission from Pete’s blog, Echoed Thoughts)

I Just Have to Run Faster than You…

And so the Facebook IPO has happened… and the bear has been unleashed on the stock.

What a shock!

Come on… as early as January 2011, Facebook looked like it was starting a “pump and dump” exercise.

Remember when a well-known investment bank took a stake in Facebook and made a market in the shares for private shareholders? Investment banks don’t invest; fund managers invest. Investment banks take risk on to their balance sheet because they think they can make money on the turn. They take it on… they need to get it off at a profit. Time to…
Pump.

Remember when the same investment bank sailed so close to the SEC rules when doing a placement that they had to raise capital outside the US and could not offer the placement to US investors?
Pump.

Remember when there was a steady information flow of private trades that slowly but surely indicated how valuable the stock was in the private market which surely indicated how valuable it was when it finally got to IPO?
Pump.

And what about the breathless press, managed to perfection, who wrote in awe of the second coming of the tech boom?
Pump.

And then finally in the last week pre-IPO – OMG it’s worth so much more than what we initially said and so the IPO price went up.
Pump.

And then the existing shareholders dump their stock on the new shareholders.
Dump.

A friend told me a story about two people running away from an angry, hungry bear. The first says to the second… “Do you think we can outrun the bear?” The second replies… “I don’t have to outrun the bear; I just have to outrun you”.

The private investors in Facebook just outran the public.

It was just so obvious.

And the gamekeeper sleeps.

Cheers,
Pete

What Are You Worth to Facebook Investors?

2012-05-17T16:47:34-04:00

Facebook’s IPO is scheduled for May 18th, 2012. I have no doubt that it will be fully subscribed. If you are a Facebook user, and if the stock is sold at the planned price of $38/share, YOU are worth $115.43 to investors. That’s what Facebook is selling: Us!

Facebook is selling the details about our lives and access to us to advertisers. Advertisers would need to agree that access to us and information about what we and all of our friends are doing is worth that much to them over our lifetimes.

So, here’s my question: Am I worth $115 to a Facebook investor? The stock price reflects the net present value of the future PROFITS Facebook expects to reap in selling ads and/or information about me and/or commissions on physical or virtual purchases I make through Facebook to companies who want me to buy their wares.

There’s a huge discrepancy between the $1/profit per active monthly user Facebook currently earns and the $18 of profits Facebook would need to earn on me in order to justify the current valuation. So the question to advertisers is: Will I buy enough based on Facebook advertising to be worth spending $75/year to Facebook in advertising to me? If I buy a car, maybe. If I buy books or coffee, not so much.

What Am I Worth to Advertisers? That’s why it was interesting to me that General Motors announced that it would not be advertising on Facebook in 2012. Of the $40 million GM spends on its Facebook presence each year, apparently $10 million is spent on actual advertising of its brands to the target market for those brands. That’s the part of its budget that GM is cutting. On the other hand, GM apparently does spend $30 million/year on maintaining Facebook pages, running social media campaigns for its brands, and on developing Facebook apps and/or Facebook-connected apps. That’s quite a lot of money. But how much of that revenue goes to Facebook? None. Most of it goes to the digital agencies in the Facebook ecosystem that design and maintain GM brands’ Facebook pages and develop GM’s Facebook apps.

What Am I Worth to the Facebook Ecosystem? If I were a GM customer, I might value an application that lets me keep track of my car’s mileage and maintenance, remind me when I need to get the oil changed, give me coupons for those oil changes, schedule them, and keep track of the fact that I actually did them. I might not mind if that application were connected to my Facebook profile if that enabled GM to tell me how well my mileage compares to others who drive like me and have similar cars and to alert me if there are ways I could be getting better gas mileage.

So that raises the question: how does Facebook earn money on Facebook-connected applications? The answer: it makes money when people actually buy things using Facebook payment systems. So, if I pay for my oil change using Facebook currency (highly unlikely), the service station would pay a commission to Facebook.

Notice that, in the GM example, the Ecosystem players who actually reap the revenues are the digital media agencies who specialize in building Facebook applications and maintaining your social media presence. Maybe those are the companies people SHOULD be investing in?

Am I Actually Worth $115?

How much of my future discretionary spending, or how much of my total share of my future wallet, will be influenced by what I see on Facebook? (My answer: very little—in fact a lot less than when I search on Google or Bing, because when I search on Google, I’m looking for something.) How much of my total share of wallet is influenced by what my friends do, like, and talk about on Facebook? (My answer: somewhat more). How much of my total share of wallet is influenced by where I am when I want or need something—e.g., food, gas, cash, quick oil change, hat, dog toy? Right now, not a lot; eventually, when my smartphone suggests things to me based on my current location—like “you have time to get an oil change; here’s a coupon for the service station around the corner, they have an opening, there's a dog park around the corner, it's sunny, but there's a hat shop across the street, and a pet store down the block”—a bit more. That’s a marketer’s pipe dream. It’s probably not how I would manage my life!

Paying $100 or so for actual consumer acquisition for a consumer who may buy many things with you over their lifetime is a very reasonable price. But, remember that $115 is the net present value of 10 years of Facebook’s PROFIT on what it sells you for. It’s not what the advertiser paid for that information and access. It’s Facebook’s profit on what they paid for that information and access.

If Not Me, How Many More of Me? Can Facebook Assume Continued Customer Growth?

The discrepancy between the stock price and the net present value of the profits per user can only be accounted for by assuming that Facebook will continue to grow its number of active users at the current 39% per year rate. This is a point I made in The Customer Revolution, when I discussed the concept of “customer momentum”—the growth in the value of your customer franchise based on referrals and word of mouth. But they already have close to 1 billion customers, and the current population of the globe is only 7 billion.

App Stores = Markets; Cloud Platforms = Customer Ecosystems

2012-05-15T11:24:00-04:00

There’s clearly a stampede going on to combine app stores, digital downloads, and cloud storage/back-up as ways to create competing and coopetive ecosystems. Amazon, Apple, Facebook, Google, Microsoft (which just invested in Barnes and Noble’s Nook e-Readers) all now have such similar business models and ecosystem strategies, it’s no longer surprising when one of them makes the next move. Their goal: create a comfy “place” for us to hang out and DO everything we need to do in order to live our digitally-connected lives, from downloading music and videos and books, to chatting with our friends, to keeping our important digital assets, email and files backed up, to strutting our stuff and selling our wares.

In his Forbes article, entitled Facebook's App Store Heats Up Convergence of Big 5, Haydn Shaughnessy writes:

“Facebook’s App Center will be a mega-shop for Apps from all operating systems, with a rating system based around engagement. Facebook will not take a cut if it directs people to iOS or Android but will be encouraging developers to do more for Facebook, where it will take 30%.

The most remarkable thing to note is the large areas of convergence. Underlying all these developments is, in fact, a converged business model: platform and ecosystems. Skimming this morning’s news reports nobody is questioning Facebook’s ability to sell apps or to replicate Apple’s success as a platform and ecosystem business. Platform and ecosystem businesses seem to be uniquely able to launch major new initiatives, with ease.

Right now the top 5 or six American companies in these respective domains [Amazon, Apple, Facebook, Google and Microsoft] are working their way towards a new corporate form, a new way of organising resources and creating wealth. It pays to take note of it. Platforms and ecosystems will rule.”

~ Haydn Shaughnessy, Forbes Contributor and co-author of
The Elastic Enterprise: The New Manifesto for Business Revolution

It’s true that there’s usually a convergence between these 5 players’ cloud platforms and their app markets. But I believe that it’s important to point out that an App Market or Store is “just” a marketplace. It’s a convenient place to go to find and buy something. That’s not unimportant, but it’s not as compelling as a customer ecosystem that is designed to help us get things done, beyond buying things. We believe that true customer ecosystems probably require cloud capabilities—so we never have to worry about losing “our stuff.” But, in order to truly win the hearts and minds of customers, customer ecosystems also need to make it easy for us to manage our stuff and to get things done. It’s not clear to me that the Facebook ecosystem is doing that yet.

Facebook Tries to Capture Mobile App Market

2012-05-10T11:01:00-04:00

Facebook’s new App Center has been the center of quite a bit of buzz this week as Facebook readies its IPO. Before May 9, Facebook had a place you could go to find and download and/or access Facebook Apps—including games, mobile apps, and Facebook-enabled Web sites. Now, Facebook has “launched” an App Center that focuses primarily on mobile apps—those that you can download onto your iPhones or Androids (Blackberry apps are noticeably missing).

Facebook-Aware Apps Track Everything. As we cautioned in our whistle-blowing article, Facebook’s Timeline: Seductive and Dangerous, apps that are Facebook-aware are dangerous to your privacy. Everything about you and your friends and your activities can be tracked, analyzed, and viewed.

Why Does Facebook NEED to Know What Mobile Apps You’re Using? It might seem like an innocuous, convenient, and logical next step for Facebook users to look for apps on the Facebook App Center, downloading those their friends like and value based on reviews. And, once you find an app you want, you still go to the Apple App Store to download an iOS app, or to Google Play to download an Android App (note that there are no explicit links to Amazon’s Appstore for Android!). But, in order to be listed (and reviewed) in the Facebook App Center, you need to implement Facebook Connect for your app. That means that users’ activities and their friends’ activities will be tracked and logged. So think twice before you let yourselves be seduced into using Facebook Connected apps.

Facebook Stands to Lose Ad Revenue from Mobile Apps. I like Chris Davies’ analysis of why Facebook made this move, particularly right now in its pre-IPO stage. In a SlashGear post entitled, Facebook counts on App Center to solve mobile crisis, Chris excerpts telling sections from Facebook’s amended SEC Filing:

“Facebook’s IPO roadshow is putting a positive spin on the social network’s potential, but it’s in an amended SEC filing that the company spills its mobile concerns:

‘We believe this increased usage of Facebook on mobile devices has contributed to the recent trend of our daily active users (DAUs) increasing more rapidly than the increase in the number of ads delivered. If users increasingly access Facebook mobile products as a substitute for access through personal computers, and if we are unable to successfully implement monetization strategies for our mobile users, or if we incur excessive expenses in this effort, our financial performance and ability to grow revenue would be negatively affected’

The company warned of the precarious mobile situation back in February, spilling details of its huge mobile userbase but confirming that it currently has little in the way of monetizing them. In fact, mobile Facebook users grew by 76 percent in 2011 and are expected to continue to increase in 2012. Facebook also namechecked Android and iOS as possible barriers to future profit, should it not manage to cement its position on mobile devices:

‘We are dependent on the interoperability of Facebook with popular mobile operating systems that we do not control, such as Android and iOS, and any changes in such systems that degrade our products’ functionality or give preferential treatment to competitive products could adversely affect Facebook usage on mobile devices’

… .it’s unclear whether acting as a middleman will be sufficient to ride those climbing user numbers to a higher IPO result.”

~ Chris Davies in SlashGear

Bottom line: by throwing a lasso around ALL mobile apps that Facebook users use on any device, Facebook can monitor and monetize users’ activities through targeted advertising. If we all slip into the ether and use apps on our mobile devices that are not Facebook-aware and Facebook-connected, Facebook loses the ability to track our every move and to deliver targeted, location-based ads to us on the go.