Dumb Phones are the Future of Advertising
Mobile phones have been called ‘the single most transformative tool for economic development”. Moore’s law has helped put six billion mobile phones in the hands of a global population of seven billion. Jana CEO Nathan Eagle points out in Wired that “In Colombia, Egypt and Indonesia, the mobile penetration rate has surpassed 90%; in Brazil, Russia and Vietnam, it’s more than 100%. Even households that don’t have electricity often have mobile phones, with pay-per-use mobile recharging stations becoming increasingly common.” As BC students learned during a Jana visit last year, airtime is a currency and even sub-$20 feature phones have become bank and wallet replacements and conduits for compensation. Using a system from Jana, organizations can connect with and compensate ‘bottom billion’ mobile users at over 230 carriers worldwide, reaching a potential population twice as big as Facebook! Sample a soap? Fill out a customer survey? Jana’s system will load you up with airtime. Big brands like P&G and Unilever are in. Danone Indonesia doubled sales for a type of yogurt by providing airtime incentives. And the handset is the new ad platform. Jana found that in Brazil 74% of customers were willing to view ads on their phones in exchange for free airtime. “Dumb phones are essentially enabling the targeted e-coupon in the huge swathes of the world with neither deep smartphone penetration or Sunday circulars.”

Third party firms operating from Southeast Asia to sub-Saharan Africa provide kiosks that swap airtime for real-world currency, too. The scheme is an end-run around heavy governmental banking regulation, and a real economic lubricant, especially among rural poor with neither the access nor the savings for a conventional bank account. Another bonus – in nations like Zimbabwe where hyper-inflation makes holding conventional cash risky, airtime can be a useful hedge. And these funds are flowing cross-border. “The value of international airtime transfers has doubled from $350m in 2011 to $700m in 2012.”

Google Avoids U.S. Monopoly Sanctions
Does Google have an unfair advantage, favoring its own properties like Maps and Zagat over rivals in search? After a nearly two-year probe, one of the biggest investigations in history (generating over 9 million pages in testimony), US Federal Trade Commission essentially said “no”. “The five-member commission voted unanimously to close its investigation without bringing charges.” The ruling concluded that Google’s practices improved search for the benefit of users and that “any negative impact on actual or perceived competitors was incidental to that purpose.”

Google does face some minor concessions from the FTC’s work. Firms, like Yelp, can opt out of having their results scraped by Google and incorporated into search results. Google will stop offering contractual restrictions preventing ad customers from advertising on competing search platforms. And Google must allow firms (including rivals) to license some of its key mobile patents when offered fair compensation (a noteworthy development that Apple and others should keep an eye on).

The Future According to Larry Page
Google has been on a roll – stock’s up, Android is the dominant non-Apple smartphone platform by a seemingly unbeatable margin, innovation is flourishing, and it has once again been named the Best Company to Work for by Fortune. Google’s 39 yr. old co-founder and CEO, Larry Page may well be our time’s Edison. Writes Fortune: “it was Page who was known for championing the craziest [ideas], like photographing every inch of every street to create a digital replica of the real world, scanning every book ever printed to assemble the world’s largest library, and building a machine that could translate between any two languages (4,200 pairs of languages to date)… Almost everyone agrees that Google is running more cohesively and faster than when Page took over.” Says outspoken Valley VC Ben Horowitz “It’s fairly shocking how well he’s done.”

It’s hard not to get goosebumps when reading the Fortune piece on Page and Google. Take the once-crazy, now licensed-in-some-states idea of driverless cars. The cars, free of human-error and text-while-driving recklessness, are safer. Productivity of former drivers can be unleashed (why drive when you can work during your commute?). There’s a real-estate case as well. Page claims new parking spaces at Google cost $40K in pricey Mountain View. Why not have the car park itself in low-cost sardine-style storage after dropping passengers off? New apps like the ‘needs sensing’ Google Now can fetch the car when you’re ready to leave. To further make driverless cars a reality, Google recently hired the deputy director of the National Highway Traffic Safety Administration to be the project’s Director of Safety. Think what self-driving cars could do for ZipCar (Avis’s new half billion dollar appetizer). And a guy like me who can’t drive (bad eyes) will no longer pay a king’s ransom to live on a postage stamp simply because its the only option with good schools and walk-to public transportation. Sure we don’t have moon colonies and flying cars, but the Page-wagon is seriously Star Trek! Says Page, “I don’t think there’s an example from history [of a firm that could] say, ‘Why don’t we just do that?‘ ”

Desktop search brings in around 80% of Google revenue, but many of the firm’s other businesses are growing, and that’s key since the stock price will only continue with growth and the development of new, multi-billion dollar markets. Positive signs? Display ads (mostly YouTube), are a $5 billion annual business, while Mobile ads bring in another $8 billion.

Facebook Job Board: Recruiting May Never Look the Same
According to Facebook, half of U.S. employers leverage social networking for new hires. And 54% of firms on Facebook say they’ll up their use of social for recruiting in the future. Given this, Facebook’s launch of a job board seems a natural. The firm will aggregate 1.7 million opneings from recruiting firms already leveraging Facebook. These include Monster, BranchOut, Jobvite, DirectEmployers, and others. The announcement follows a yearlong Facebook Social Jobs Partnership with various U.S. government agencies.

How Deloitte Made Learning a Game
Gamification is one of the hottest buzz-words in the digital space. The concept attempts to use game-concepts (fun, play, competition) to drive real-world behavior. Think exercise-games that encourage health-plan members to walk more (BC is using just such a program and has given away Fit Bits to any staffers who participate). Garnter predicts that by next year 70% of the Global 2000 will be leveraging a gameified application or system, and that by 2015, one quarter of redesigned business processes will leverage gamificiation.

For insights on how firms can create an effective gamification platform, look to the Deloitte Learning Academy (bonus incentive: Deloitte is a top employer for our students). DLA found that by making training more game-like, the thousands of participants in its learning academy were more likely to complete the online training programs. Weekly users returning to the site are also up 37%. DLA content includes videos, “in-depth” material, and self-assessments such as tests and quizzes). Content is drawn from leading b-schools worldwide. Badges, missions, and leaderboards drive the fun and competitiveness. Rewards may be garnered through individual or group achievements, and these incentives may be stated up front or offered as surprises that further delight users and heighten engagement.

One interesting finding: conventional leaderboards were “counterproductive”. Says a DLA exec, “The same consistent top users, with astronomic scores, turn off everyone who knows they have no chance of beating them.” Instead, DLA has top-ten leaderboards at each level, and the board resets each week so anyone can hunker-down and be a top-achiever – no permanent penalties if work or vacation gets in the way of one’s learning schedule.

HBR Today advises would-be gamifiers to think in terms of business improvement, focusing on key questions such as:

• What are your business goals? Clearly define the business problem the system will address. Since techniques and technologies are emerging, users are also well served to benchmark similar initiatives and best-practices used by others (pro-tip, social media like a wiki can get everyone on the team sharing as they find useful examples).
• Who is your audience? A learner-centric view is key to finding what works. Successful efforts aren’t about manipulating users. Instead they leverage behavioral science and social technologies for results that users and organizations can clearly see.
• How will you track success? Examples include: level of engagement, trends and numbers of users and power users, learning completion rates, satisfaction, and linking game outcomes to performance and promotion.

Amazon’s Gain is Nook’s Loss
Things don’t look god for Barnes & Noble. The firm saw a nearly 11% decrease in holiday sales, with numbers down at stores, at BN.com, and even the Nook taking an 8.2% hit. Amazon is cleaning Barnes & Noble’s clock, but competition with Apple is intensifying. While Wall Street didn’t like Apple’s slower-growth at year-end 2012, keep in mind that this was the firm’s most profitable quarter ever and the second most profitable quarter of any firm in any industry in US business history. To put Apple’s $13 billion+ in quarterly profit in perspective, consider that “since 2003, the first year in which Amazon earned a profit, through the end of 2011, Amazon has reported a total of $5 billion in earnings.” So in three months Apple earned more than 2.5 times what Amazon has earned in its entire history (note, this was written before Amazon’s holiday quarter ’12 is out, but the numbers will likely change little).

Netflix Talks a Little Trash About the Competition
Netflix got hammered at the end of 2011, but the stock is up big the latter half of last year. The holiday quarter turned a surprise profit for the firm, and CEO Reed Hastings took the opportunity to point out that there really isn’t much of an alterative to Netflix library (not yet, at least). More than 30 million subscribers seem to get the graph.

BC Students Take Hiatus to Pursue Startup [Video]
Tom Coburn, Chase Macalese, and Jonathan Lacoste, won BCVC in 2011 with their firm Jebbit. Their pay-per-question-answered platform guarantees advertisers that their message is heard, all while putting spending money in the pockets of students. Bose, Zip Car, and Coke are among the national advertisers who have run campaigns on Jebbit. The firm won additional coin in Boston’s Shark Tank, and has announced it now has raised roughly $230K total to grow to the next level. That has prompted Coburn (who had turned down acceptance to Tufts Med School) and uber-coder Mcaleese – both second semester seniors – to take a hiatus from full-time BC classes to pursue the opportunity of a lifetime. Jonny Lacoste is also lowering his scholarly duties, but we’ll bring him to network with six VC firms from Boston to the Valley in our TechTrek program this year. More coverage of the team can be found in Bostinno and Boston Business Journal. Jebbit’s success is part of a four-year track record for teams winning the Boston College Venture Competition to go on to raise six-figure seed funding rounds. While BC is not known as a place for ‘entrepreneurship majors’, it’s increasingly known as a collegiate ‘entrepreneurship powerhouse’. Perhaps it’s time to encourage rankings firms to think more broadly on how they identify ‘success’ and ‘best’ programs. Funding raised, businesses launched, admittance to top-accelerators like TechStars, YC, MassChallenge, and more all show that something very special is happening at The Heights, and it’s a direct result of a unique combination of students, faculty, and alumni creating a new learning model that fuels success.

Running Inspiration in and around Boston College
And in the ‘only cursorily related to the Week in Geek’ dept, I was pretty surprised when Runkeeper (one of my favorite apps) reached out to ask me to write a guest blog post (and I ‘really’ winced when I saw the post title), but I am a huge fan of their app. I’m not a fitness guy and wasn’t much of a runner, however when I started using the ultra-motivating Runkeeper to gamify my game, I realized I just might be able to run the Boston Marathon (albeit for charity and not as a qualifier). I’m horribly slow, but with a few back-of-the-pack halfs under my belt in 2012, I’m hoping that I might be able to shuffle over the Copley Square finish line on April 15^th. Running for BC’s Campus School is an added incentive. The link above includes several thoughts that have helped me find inspiration. If Boston-based Runkeeper can get a pudgy old bald man upping the miles, it might be something for you, too. Here’s hoping I don’t embarrass the rest of the Campus School Marathoners. Runkeeper recently released a new version of their app. For those interested in the startup life, there’s a neat video compiling scenes from the firm’s redesign process.

Jeff Bezos: Fortune’s 2012 Businessperson of the Year
Amazon’s stock is up 10 fold in six years, although net income is down & last quarter the firm posted a $274 million loss. For CEO Jeff Bezos, some red ink is acceptable – the firm invests for the long-haul. Bezos has announced the profit downturn is driven by investments in new businesses (cloud, Kindle). Short sellers were burned badly when Amazon decided to turn up profit harvesting a few years back, so you’ll find few betting on an AMZN slide today. Despite a nosebleed PE topping 100, as one analyst puts it, “Now you are either long term on Amazon or on the sidelines.”

Today’s Amazon sells more electronics than books. The firm is also in the midst of a big fashion push. The new amazon.com/fashion looks nothing like the conventional site, and the firm’s Gilt-like myHabit and high-end shopbop extend the haute-play. Amazon’s the firm to beat in cloud services (even offering a low-end database alternative to Oracle). Amazon will pioneer new businesses, buy them when it makes sense (taking key competitors off the table with acquisitions like Zappos and Diapers.com), or mimic growth opportunities when it feels it’ll win. The firm is not always right (it famously invested in Pets.com and the firm’s stake in LivingSocial is tanking), but Bezos is perhaps our boldest billionaire. He’s also a stakeholder in space-flight company Blue Origin which recently passed a launchpad test.

Investments are driven by customer-focus. Says Bezos “When [the competition is] in the shower in the morning, they’re thinking about how they’re going to get ahead of one of their top competitors. Here in the shower, we’re thinking about how we are going to invent something on behalf of a customer.” For an example of customer-focused loss-tolerance look at streaming, where Amazon competes with Netflix (and may be losing as much as $1 billion a year), but also provides much of the Netflix streaming infrastructure. Says NFLX CEO Reed Hastings “Jeff is a manic competitor, a delightful human being, and a trusted supplier”.

Tablet competition with Apple exposes radically different approaches. Apple’s operating margins of 31% last year compare with 2% at Amazon. The Kindle Fire is sold at break-even. Prior generation Fires are still sold for $159, the HD starts at $299, and low-end Kindles are $69 (Apple’s low-end cheapest iPad mini starts at $329). A favorite Bezos saying “Your margin is my opportunity.” To be clear, Amazon is a distant second to Apple, but this is a battle where Bezos can’t afford to miss out. Amazon’s physical media category is vanishing – if it loses the tablet screen it loses the store and all of the key competitive assets – switching costs & distribution channels – that go with it. Amazon’s Silicon Valley outpost, Lab126, hosts 1,500 employees, some with offices that can see Apple buildings from their windows.

Scale efficiencies and outright penny pinching help keep costs low. Employee desks are wood slabs, mimicking the firm’s early days where new hires had to build their own desks from inexpensive door lumber. Base salaries are anemic. The highest salary is only a reported $165,000 for the VP of the N. American consumer business. Don’t feel bad for him, he holds restricted stock grants valued at roughly $20 million. Amazon has also been a wonderful partner for my University, hiring many of our former students, hosting TechTreks, and we welcome their opening of a new Boston-area office.

Amazon Studios: Crowdsourcing for Films & TV

Amazon’s publishing disruption has been far deeper than discounting. The firm has created its own imprint lines with aggressive author royalty terms (publishing titles that rivals often refuse to carry). And Amazon has helped promote new formats like short-form Kindle Singles and episodically-released Kindle Serials. Now the firm hopes to bring a unique, crowd-sourcing twist to film and television production, too.

Amazon Studios allows artists to upload scripts and production pitches where they can be evaluated and commented on by the public. The effort in artistic crowdsourcing has 22 movies and 12 TV series in the early stages of review and development, though none have reached the point of being filmed. The jury is still out on quality – one project is called Zombies vs. Gladiators, although that work is being developed by one of the genre’s big names, Clive Barker. When titles do come out, they won’t be Amazon-exclusives – releases are targeted at theaters and television distribution, although you can be sure they’ll show up as Amazon-streamed content, too.

The Man who Wants to Destroy Amazon
Also in the Amazon piece in Fortune, is a profile of Rakuten’s Hiroshi “Micky” Mikitani, the Japanese billionaire who runs the world’s third largest e-commerce site. Rakuten means ‘optimistic’ or ‘positive spirit’ in Japanese, but the competition is seriously sharp-elbowed. The firm has bought and re-branded Buy.com, recently made a major investment in Pinterest, and sports a US headquarters in Boston. Mikitani showed up at the Tokyo book fair handing out camo-patterned t-shirts with “Destroy Amazon” written in Japanese. Looks like he’s serious – Rakuten also recently bought the Canadian e-Book reader biz Kobo for $315 million. Mikitani plans to launch Kobo in 27 countries by next year and have a full Rakuten e-commerce play operating with a similar footprint within five years (this despite a failed effort in China, which led to a dissolution of a joint venture with China’s search-leader, Baidu). For comparison, Rakuten’s 2011 sales in Japan tallied $4.75 billion vs. Amazon’s Japan unit’s take of roughly $1.9 billion. Past BC students had the special opportunity to visit Mikitani at the firm’s Tokyo headquarters on our IME Asia field study program.

Facebook: The Making of 1 Billion Users
On September 14, a counter on second floor of Building 17 of Facebook’s headquarters turned over with three commas. Facebook had hit a billion users worldwide – one-seventh of earth’s population – a phenomenal achievement considering Facebook isn’t even in the world’s most populous country.

As for the next billion, look for that to come largely from feature phones — a.k.a. “dumb” phones. Telcos in emerging economies often compete by offering Facebook as a free service. Says Kenya-based tech guru Erik Hersman, “That means that for those people in Africa with mobile phones but likely no computer access, Facebook is their Internet.”

The next billion might not bring comparable riches – APRU (average revenue per user) is $14 in the US, but only $3 elsewhere (note, reported ARPU figures vary widely, but the big gap between US and global is a consistent feature of all reported numbers).

It takes some serious hardware to serve a billion people. As BusinessWeek reports, “each day, Facebook processes 2.7 billion ‘Likes,’ 300 million photo uploads, 2.5 billion status updates and check-ins, and countless other bits of data”, using one of the biggest of the world’s ‘big data’ hauls, to customize user feeds, estimate which ads to serve up, and help developers refine and improve the Facebook experience.

The key to improvement is the A/B test, experiments (and at any moment Facebook may be running tens of thousands) that compare options and collect data for later action. Placement, wording, and mapping ad-characteristics to profile activity are all part of the relentless data-dive. As one example, tests revealed that users “got stressed out and left the site when they were asked if they wanted to ‘reject’ a friend request.” The new button carries the wording “not now”, and reportedly keeps users on the site longer.

Geeks rule on “Hacker Way” (the main drive on Facebook’s campus). The mantra “Move fast, break things” is visible throughout the firm’s new headquarters. Everyone has equal access to most of the code in the live site – even new engineering hires in the mandatory six-week engineering boot camp go hands-on with the actual site. And yes, sometimes things break. A little less than two years ago, one engineer accidentally released all of Facebook’s top-secret projects. Oops!

Code releases are internally referred to as ‘the push’, starting first with Facebook employees, then via small percentages of Facebook users, all to make sure things run more or less smoothly. Sometimes crashes occur, but that’s to be expected in Facebook’s “no-beta” culture. Pushes occur daily at 4:30pm HQ time, and may include up to 300 modifications. Large scale changes occur on Tuesdays, often including thousands of changes to Facebook’s code. Like Google, Facebook also has its own proprietary, air-cooled server farms dotting the globe from Oregon to Sweden, packed with hardware sourced from cheap commodity parts and built to the firm’s own specifications. Want a job? Facebook plans to add hundreds of new engineers to its already 1,000-strong staff (a remarkably small number when one considers the firm’s reach). Starting salaries for top tech grads top $100k.

Google Throws Open Doors to Its Top-Secret Data Center
Wired’s Steve Levy was provided unheard-of reporter access to Google’s data centers and he has penned a story chock-full of geeky awesomeness. From photos of Skittles-colored piping to video tours of the racks of brawny, custom-designed hardware, the piece offers great insights for those using the Google Chapter in my textbook. And Google’s new Data Center site offers even more facts and multimedia – a goldmine for students and profs.

Last year Google was America’s 18^th most profitable company. The firm’s multibillion dollar infrastructure enables the firm to index over 20 billion web pages a day, handle 3 billion queries, auction ads in real-time, offer 425 million free Gmail accounts, serve over 100 million YouTube videos each day, and accept 48 hours of video uploads each minute.

Google owns at least six US data centers and three in Europe, with three Asian and one South American center acknowledged as under construction (Lenoir, North Carolina; Council Bluffs, Iowa; St. Ghislain, Belgium; Hamina, Finland; Hong Kong and Singapore among them). They’re also pricey – Google’s facility in The Dalles, Oregon cost a reported $600 million.

Much of that gear is custom-built. How much does Google buy remains a mystery, but as one indicator, consider that Google is now Intel’s fifth largest server chip customer after the likes of Apple, Dell, and HP. Yes, Google is one of the world’s largest hardware manufacturers. Why shell out for standard boxes that include unnecessary extras like graphic cards, keyboard ports, or cases? Google (as well as Facebook, Amazon, and other firms running the biggest server farms in ‘the cloud’) also builds its own super-fast networking gear.

Google has a carbon-neutral commitment, but being green also saves greenbacks. By some estimates, data centers collectively consume 1.5% of the planet’s power. Efforts for low-cost cooling help keep costs low and motherboards from frying. Belgian facilities cool with recycled canal water. Google Finland uses the Baltic sea. Google needs to prevent the power from going out, but instead of having remote backups, batteries are near servers cutting energy leakage and cooling and saving 15% over conventional architectures.

To give you an idea of how green Google is, Wired reports that the on the PUE (power usage effectiveness) scale where 1.0 = no energy loss, the standard for data centers is a rating of 2.0 (meaning only half of power is actually put to use). Google’s score of 1.2 is considered “unprecedented” in its efficiency.

The Google-owned server farms are supplemented by colocation (co-lo) facilities scattered around the globe. It makes sense to place high-volume, low-latency traffic, such as the most popular YouTube videos, in leased racks on someone else’s real-estate (at ISPs like Comcast or AT&T, or via carrier-neutral sites like Equinix). Watched Gangnam-style? It’s likely served up at a super-secret location so close you can drive there today. While my students get a personal tour of the Equinix facilities in Silicon Valley, courtesy of the firm’s Chairman, a BC alumnus, we wouldn’t know Google was there. Google says its co-lo installations are lights-out so no one can see. Technicians service boxes with miner-style headlamps.

Google’s stock has soared since IPO because the firm has been on a global growth tear, but at some point the firm’s business will mature, putting more pressure on the efficiency wizards dishing up free services. Earlier this year, and for the first time ever, total search volume declined.

Flatworld Drops Free
On January 1^st, 2013, publisher Flatworld Knowledge will begin charging for the online version of all of its textbooks (mine included). For six editions I’ve been proud to offer my textbook via browser, free to all. It’s been wonderful to see the text used at hundreds of universities worldwide and I’ve been humbled and grateful to those who wrote with thanks. I’m also grateful to Flatworld for providing vital services: editorial, layout, graphics work, copyright clearance, hosting, and more – and I want to see them stay in business. The initial freemium model seemed great – free to all, but the more convenient print version would be offered at a very low price point. Enough students would want print versions that Flatworld could earn a living and authors like me could earn royalties to justify the enormous commitment for first version and continued revisions needed for a high-quality textbook.

It hasn’t worked out that way. I don’t know Flatworld’s economics, but it’s clear that a continued rise in commodity prices (paper, ink, and transport fuel) have put tremendous pressure on ‘dead tree’ edition costs. A hyper-efficient market for used textbooks also hurts in that no used sales benefit the firm or its authors. This likely caused Flatworld to stop offering printed texts in bookstores this past fall. Adding to that,the free online version was just ‘too good’ – there was little incentive for students to pay up for other digital products, while few wanted to wait to order a printed book mailed direct-from-publisher. There’s also an important faculty perspective: while my textbook is likely the most discipline impacting (and certainly the most gratifying) scholarly work I’ve produced, at a Tier-One research university this kind of work won’t get you promoted (I’d very much like to see this change, but I’m not optimistic that this will happen any time soon). The unfortunate reality is that in any model without significant incentives, high-quality work will struggle to get produced. An official Flatworld statement is available online. and there’s been widespread coverage of the change in the media.

So starting next year my text will cost $19.95 online (for other options, such as course-packs, and to provide feedback to Flatworld, please contact them at help@flatworldknowledge.com). I hope that students and faculty will find the price to be fair. It’s still less than one tenth the price of many management texts (yes, for those not in school, the $200+ business textbook is the norm). The cost is even cheaper than rental services such as Chegg. I will continue to offer my personal lecture slides, podcasts, exercises, and other course material free to all at http://gallaugher.com/chapters. So with Flatworld’s change, here’s hoping the good guys in the white hats now have a model to thrive as we move toward a tablet-based, atoms-to-bits future.

Student Success

Sunday morning offered unexpected professor pride. While making breakfast for the family, the NPR broadcast I tuned into featured Deckard Sorensen, co-founder of BCVC ’12 winner NBDnano, discussing the bio-mimicry water-collection innovation he developed with BC classmate Miguel Galvez. Then when opening up the Sunday Boston Globe, I saw that CEO Miguel was in full-color on the front-page of the business section, headlining a piece on the coolest companies to come out of Boston’s accelerators. In just a few short months, NBDnano has gone from the Boston College Venture Competition to raising over half a million dollars in seed financing. Their firm’s low-cost, low-power method of harvesting water from air was inspired by the Namib Desert beetle (NBD = Namib Beetle Design). If successful, it could revolutionize thousands of products and bring clean drinking water and irrigation to millions.

I had the good fortune to see Miguel debut at TechStars Boston Demo Day (and if you follow me on Twitter you’ve seen some photos). The elite accelerator program has a roughly 1% acceptance rate for worldwide applicants. Admitted teams get 100 days of mentorship and modest capital in exchange for an equity stake. It’s a rocket to future funding and a better-than-MBA experience for most. And while 13 teams were in this most recent TechStars class, three sported Boston College CEOs. Wymsee, a firm made up of BC ’11 and ’12 grads, most of whom went through BCVC with different ideas on separate teams, announced SyncOnSet, a product that coordinates the massive pen-and-paper inventory management task conducted by set designers. In just a few short months the team has product in use on-set at over a dozen TV and feature film products, including “30 Rock” and “Boardwalk Empire”. Why is this a big deal? Because data for what’s on screen can directly fuel all sorts of revenue from product placement to television-driven commerce.

And while BCVC can’t claim 90s-era BC alum Jeff Fremont-Smith, his firm ImpulseSave was also named one of the coolest firms in the TechStars class. The firm’s app gameifies savings. Enter a goal (say paying down debt, or squirreling away enough for a Hawaiian vacation) and see the app’s graphs grow as you ‘ImpulseSave’ instead of reaching for that pair of shoes you don’t really need.

BCVC teams also made up two of the six teams invited to participate in the “Boston Shark Tank”. NBDnano and 2011 BCVC winner Jebbit both raised notable angel cash from the panel of Boston-area tech luminaries. In recent years, BCVC-affiliated teams have gone on to TechStars, Y-Combinator, Summer@Highland, MassChallenge; they’ve won at MIT and Yale; and they’ve raised millions in capital while launching several businesses. An enormous thanks is due to the alumni, executives, entrepreneurs, and investors who have so regularly and repeatedly helped BC build one of the strongest undergrad entrepreneurship success stories in the country.

And finally, the intellectual life at BC is by no means limited to entrepreneurship. I have the tremendous good fortune to advise BC ESS (Education by Students for Students). The organization runs BC Splash (on-campus short-courses taught by our students to hundreds of visiting high-schoolers), and BC Talks (TED-style talks by accomplished undergrads). Missed the most recent BC Talks? Watch this wonderful highlights video offered on the Boston College YouTube channel.

More than half of Facebook’s active user base log on via mobile

The gift platform is rolling out in select cities via web and in mobile (Android users get it first). Friends can give a gift from the newsfeed or from a friend’s timeline. Givers pay right away or when a gift is accepted.  Recipients get a virtual card with animated ‘open’, see the gifts, click on whether they accept it, and if so, tell Facebook where the gift should be shipped.  Gifts can be private or public (no doubt Facebook hopes the latter will cascade a peer-induced gift-giving pile-ons tied to life events, birthdays, weddings, and more). Facebook collects payments via credit card using the same system leveraged to pay for Facebook games. Facebook will keep a percentage of sales, which it won’t reveal, and which will vary by partner.

The gift selection is pretty broad, with over 100 retail partners at launch.  There are gift-cards galore (the Uber car service and Starbucks will be popular).  Food items include Magnolia cupcakes (for givers who want to get their Lazy Sunday on), and there are flowers, kids gifts, and the quirky (Star Wars character USB drives).

Facebook is deeply integrated with partners – equipping them with Facebook branded packaging, handling product photographs, writing gift ad copy, and tracking and reporting deliveries.

Commentary: New revenue streams are needed as the firm’s stock continues to languish and new reports suggest that Google is on track to surpass Facebook in display advertising. Facebook Gifts won’t accept PayPal, either (Facebook says its margins for real gifts are too thin to share the additional cut PayPal takes).  By grabbing your credit card, Facebook could position itself for broader commercial payments plays, perhaps even competing with Square, LevelUp, and others. Lots of interesting points to bring up for those discussing our Facebook Chapter.

Reed Hastings Interview
Lots of interesting nuggets are revealed in the WSJ’s recent interview with Netflix CEO Reed Hastings (great facts for those using our Netflix Chapter).  In the most recent quarter, Netflix lost 850,000 DVD subscribers, but added 1.09 million users for streaming.  This growth is good, but DVD subscribers are more profitable than streamers, so Netflix needs to multiply streaming customer acquisition.  Netflix sees growth in global streaming.  It’ll be in 51 countries by year-end and expects to be “almost everywhere other than China’ in 10 years.”

The firm’s content budget is 3x Amazons, and they’ve got about triple the content, too.  So far Hastings says “no” to any revenue model other than unlimited flat-fee streaming.  “We want Netflix to be a very simple experience: one price, a clean proposition… That’s why we don’t have pay-per-view video and we don’t have ad-supported video… It’s just too complicated.”  Hastings also sees Netflix as becoming the “entertainment service everyone wants”, especially as new, exclusive content comes online, like the new Season 4 of the former Fox and now Netflix-revived comedy, Arrested Development.

Commentary: As of June, Netflix had 27.5 million streaming customers and 9.2 million DVD-by-mail subscribers.  Despite all of the griping about Netflix migration away from the DVD biz, the reality is that DVD-by-mail is mature and declining, and Wall Street was set to punish this stagnation (especially at the nosebleed three-digit PEs of Summer 2011. As of this writing, NFLX still has a rich PE of around 30, nearly double that of growth juggernaut Apple).  Migrating to a new business with different (and escalating) cost economics, with new and disparately motivated competitors is a delicate and challenging dance.  There’s no “good” playbook here, despite the ham-handed “Qwikster Debacle.”

While there may be competition in global markets, Netflix sees the barriers to entry as being high.  Content acquisition costs are heavy, especially for firms seeking local licenses of enough content to make a service attractive.  And new competitors will have to market hard.  All this seems to favor an early mover (first to build brand, first to build switching costs, quickest down the path to profitability that will lead to sustaining the business).  DVD-by-mail is a non-starter in most markets, since few nations have postal services as reliable and inexpensive as the USPS (yes, despite much public derision of US Mail, it has been an efficient partner vital to Netflix DVD-by-mail success and one that’s impossible to profitably replace in most other nations).

Most Powerful Women in Business
Looking for motivation to get half the undergrad population to study tech? Check out Fortune’s most recent issue of the “Most Powerful Women in Business”. It’s loaded with women running tech firms.  IBM’s Ginny Rometty tops the list, but Yahoo CEO, the ex-Googler Marissa Mayer, gets the cover (right).  With HP’s Meg Whitman, Xerox’s Ursula Burns, and Facebook’s Sheryl Sandberg, tech has five of the top ten slots.  Finance?  Just one (Fidelity’s Abby Johnson).

Who Wants to be a Billionaire?
This post was written two days after the publication of “The Launchpad”, but doubtless many of my students have already read the book about Y-Combinator, Silicon Valley’s elite accelerator (the link above is an excerpt from Vanity Fair). For those not in the know, thousands of teams of mostly twenty-somethings apply at an about 3% acceptance rate for a slot in YC.  Firms get $11,000 and $3K per founder in exchange for 7% equity, but other guarantees mean most graduates of the program leave with six figures in backing. Past Y-Combinator graduates include Dropbox, Airbnb, OMGPOP, and WePay.  Y-Combinator is the brainchild of Paul Graham, the entrepreneur who built and sold Viaweb to Yahoo for $49 million.

Y-Combinator teams live in Mountain View free of the distractions of hipster San Francisco.  Says YC’s founder Paul Graham, “They just sleep, eat, exercise, and program.”  Demo day attracts well known Valley angels & VCs, and even some celebrity investors (Ashton Kutcher has a stake in Airbnb, among others).

Many teams pivot, and are encouraged to do so as ideas don’t work out. When addressing startups, Graham says “In general, do not hide your disasters. We’re not going to take the money back… Here, we don’t fire you. The market fires you. If you’re sucking, I’m not going to run along behind you, saying, ‘You’re sucking, you’re sucking, come on, stop sucking.’ ” For an example of YC pivots and persistence consider OMGPOP, which started in the program as the dating site iminlikewithyou and struggled until Draw Something was a hit earlier this year.  Zynga bought OMGPOP for a reported $180 million, making it the second-most-successful exit to date for a Y.C.-backed company.  Breakout success in the world of startups is never certain, even with the resources and attention of the world’s most elite program. “The most valuable of non-acquired YC graduates is worth more than the next 199 companies combined, the number two is worth more than the next 198”, etc.  When considering 208 YC teams from 2005 through 2010, five were acquired for over $10 million each, and 20 more had been sold for less. The 21 most valuable Y.C. companies that had not exited totaled about $4.7 billion, but of that comes from two privately-held biggies – Dropbox and Airbnb.

“The Launchpad” is written by NY Times writer Randall Stross, who, in the dot-com days, wrote “Valley Days” about Benchmark Capital.  Paul Graham calls Stross’s book “remarkably accurate.” The WSJ published an interview with Stross, offering a few more insights.  YC, by its nature, is an accelerator that prizes hacking skills.  Most of the teams are heavy on techies.  Stross says founders are less interested in chasing billions than they are in driving their own projects.  It’s autonomy that’s the big motivator. The WSJ has also reviewed the book.

How Boston College is Quietly Building an Entrepreneurship Powerhouse
It’s great to see BC’s programs getting such press.  The Boston College Venture Competition has emerged as a rocket-ride to success, with past teams scoring slots in elite accelerators (TechStars, Y-Combinator, Summer@Highland, MassChallenge), winning at leading competitions (MIT, Yale), launching several successful businesses, and raising millions in capital.  The kindness and generosity of our alumni in integrating with our programs and mentoring and teaching our students has been key (see the recent “Silicon Valley Comes to the Heights”, featuring BC alums Peter Bell and Dan Nova of Highland Capital, Bill Clerico of WePay, Pat Grady of Sequoia Capital, and James Reinhart of thredUP as an example).  Our award-winning TechTrek programs (Boston, NYC, and Seattle/Silicon Valley) have inspired scores to pursue tech and startup careers, while our IS curriculum not only led to a four-fold-in-four-years increase in students studying tech, it has also led to the publication of an award-winning open-source text used by leading programs (Carnegie Mellon, Maryland, Michigan, NYU).  Innovation recognized by the likes of Apple and Entrepreneur Magazine, Boston College continues to rise.  Thanks to all who continue to help us grow and help spread the word.  Keep at it!

Apple’s Samsung Victory and the Future of Innovation
The world’s most valuable company claimed that Korea’s Samsung, which sells more mobile phones than any other firm in the world, infringed on Apple’s patents, and it took a nine-person panel just three days of deliberation to pretty-much agree. The panel found that Samsung infringed on all but one of the seven contested Apple patents presented (Cupertino lost a claim on the physical design of the iPad – it seems the color black is tough to patent). The panel, however, didn’t support any of Samsung’s claims that Apple infringed on their work. The Wall Street Journal offers a nice scorecard showing the jury rulings for utility, design, standards, and feature patents. Also for those keeping score, while Samsung outsells Apple two-to-one in mobile phone units, Apple takes home three out of every four dollars in mobile industry profits.

The panel awarded Apple $1.05 billion in damages – about half of what it was asking for, but still enough to rank as the fourth largest ruling in US history. In the coming weeks, a judge will consider blocking the sale of Samsung products that infringe on Apple patents – a potentially devastating blow if it occurs. Of course, the case is far from over. Samsung will appeal and the case will likely take months, if not years to fully shake out.

While Apple targeted Samsung, this was really about going after Google. Experts think the indirect war against Google, targeting firms that use Android is most effective in chilling the Android market. But some also wonder if the ruling might actually help Microsoft and it’s Windows Phone, “which looks almost nothing like the Apple software for iPhones and iPads” but has garnered substantial praise from the press, even though it’s so far a sales dud.

There are strong arguments on both sides praising and deriding the verdict. On one hand this ruling protects the rights of true innovators from blatant copycats. It’s tough to argue that Apple’s designs haven’t radically rebooted what we consider a ‘phone’, setting ease-of-use standards in the process. If pioneers can be ripped off without protection or punishment, then this could lower the incentive to lead with innovation. On the other hand, tech firms face a “minefield” of patents held by competing entities, causing many to second-guess whether they can even bring a product to market. The need to cross-license patents prompted several otherwise-rivals (including Apple, Microsoft, RIM, and Sony) to pay billions to secure and share Nortel’s patents last Fall. But the patent issue is particularly chilling for startups, which begin life with cash constraints that’d torpedo most young firms if faced with a well-funded, lawyered-up rival with a stack of patents (the average patent case can cost $5 million). Some claim the scales were tipped away from startups last Fall by the passing of the “America Invents Act”, which is scheduled to take effect next March. The current US patent system relies on “first to invent” principles, where rulings establishing invention date are based on things such as “lab notebooks, e-mails, and early prototypes”. The new regime will switch to “first to file”, awarding patents to the first to submit their ideas to the US Patent and Trademark Office. A lone techie in a garage and with no law background is further disadvantaged when competing against well-resourced firms that become patent filing machines. Big companies automatically submit the musings of their engineering team, raising the hurdle for the creative little guy who may actually have started first. Critics also contend that the “America Invents Act” gained wide bipartisan support, largely because of massive lobbying efforts by deep-pocketed firms eager to further tip the scales in their favor – yet another way the system is stacked against startups.

Google’s Audacious Bet of Fiber
Kansas City (Missouri and Kansas) rejoiced when Google announced they were coming to town, and towing high-bandwidth, glass cables with them. Larry & Sergei’s firm is offering up 1 gigabit Internet (about 500x faster than what much of the country can get from cable providers) for $70 a month, and all with no bandwidth caps. Another $50 gets you dozens of high-def cable channels. Under Cable-guy-Google, a consumer can record up to eight shows simultaneously, and download a single high-def movie in seven seconds (versus 22 minutes for a 5mbps connection). Google gives you a free terabyte of cloud storage, and even throws in a Nexus tablet as the remote control. Just one week into the offering, Google signed up more than 5% of eligible homes. Three weeks in, some neighborhoods had nearly 40% of residents opting for Google (noteworthy, given many residents are likely tied up in existing contracts with other providers).

Could Google really become a legitimate player in home broadband? The firm has deep pockets (over $43 billion in cash), which it’d need given Verizon’s claims that rolling out FiOS has cost it $23 billion (reports claim the KC experiment is costing Google $500 million). Cable firms also have entrenched relationships with content providers, and Comcast outright owns NBC and Universal. Existing firms aren’t likely to make it easy for their content to show up on a rival Google pipe if the search sovereign threatens their lucrative, existing relationships and revenue streams.

But imagine what Google could do if it became your cable provider. A chunk of TV advertising might be streamed and targeted per user. Ads could become more interactive (“answer this survey and watch a movie for free, or the rest of the show commercial-free”). As owner of Motorola, Google-owned boxes power more cable than anyone else – most boxes don’t yet have GoogleTV software, but that could change. And if Google’s cloud might become your default storage location for all of your media (photos, music, app documents, PC backups, and more), that’d create a hammer-lock switching cost others would struggle to beat. This isn’t something that’ll emerge overnight, but Google, a firm that’s working on all sorts of future-fodder from Internet glasses to self-driving cars, has the cash, patience, and willingness to experiment to be a credible rival to today’s ISPs.

Starbucks Schools Other Retailers in Mobile Payments
The Seattle coffee giant launched it’s iPhone mobile payment app in January of 2011 and it’s been a huge success. Now available on a variety of platforms, the app allows customers to wave their phone at the register and pay instantly. The phone replaces a conventional Starbucks card and can be reloaded from the phone or automatically. Users see loyalty points accrue as stars tumble into a Starbucks cup, and deals keep customers coming back. It’s estimated that Starbucks customers will make over a quarter of a billion dollars in mobile payments this year. That’s only about two percent of revenues, but it’s growing rapidly and has other benefits, as well. The app’s speed checkout, making store lines move 10-20% faster during high-traffic hours, and that can boost revenue by up to 1%. Our students were privileged to meet the app and loyalty teams at Starbucks HQ earlier this year – something made easier since one of our MBA program alumni is one of the Starbucks mobile app geniuses.

Starbucks has also invested $25 million in San Francisco startup Square, a firm that also offers a card-free mobile payment system (as well as a fob that allows smartphones to accept credit card payments from others). Square processes about a million transactions as week, and Starbucks may be rocket fuel to propel the firm’s platform to be adopted by even more merchants,

One of the major reasons to go-mobile is the prospect of lowering merchant credit card interchange fees. Stores can pay 2% or more in fees for every credit card transaction. But firms that consolidate credit card payments using apps can pay a lower rate. Square claims it can process Starbucks payments at a lower rate than some other payment networks. Those sorts of savings have prompted Target, Best Buy, and Wal-Mart to team up and create their own mobile payment app. Wal-Mart’s margins are only around 6%, so cutting credit card fees while speeding lines could substantially push profits north.

LevelUp Offers Merchants Zero-Interchange Fees on Mobile Payments
The boldest move in lowering processing fees may be coming from Boston-based SCVNGR. The firm’s LevelUp app allows consumers to link their phones to a credit card and pay by waving their phones at thousands of vendors in cities nation-wide. The app has a built-in reward system, so users save money by returning to merchants (bonus: check in the app’s settings for a “Give $5, Get $5” promo where everyone wins through viral marketing – here’s my code if you haven’t yet signed up). LevelUp claims customers are saving an average of about $37.50 a month using the app.

Payment systems are two-sided markets (a critical mass of ‘buyers’ and ‘vendors’ are needed for success) and merchants have big reasons to love LevelUp, too. This summer the firm announced it was eliminating the credit card interchange fees for any purchases made through LevelUp. LevelUp claims its growing scale allows bundling transactions that lower rates for merchants, so it is willing to effectively give back the cut retailers pay credit card firms (provided, of course, that the payment was made through TheLevelUp app).

The firm needs to make money somehow, and that happens when LevelUp takes a cut of the loyalty programs it offers vendors. Sure the vendors are paying for promotion, but the firm claims every $1 invested by its business customers through LevelUp results in an average of $18 in additional revenue. Programs are trackable in real-time, so vendors can see the level of engagement they get through the app, and LevelUp only gets paid when it brings in new or repeat business. Like Google’s AdSense, LevelUp delivers immediate ROI – no results, no payment.

LevelUp has been growing like gangbusters, hiring over 100 this past year, growth well out-pacing the firm’s first offering, the mobile location-based gaming platform, SCVNGR. Founded by the now 23-year-old Princeton dropout Seth Priebatsch, the firm has raised over $40 million, with backers including Highland Capital, Google Ventures, Balderton Capital, and the founders of Discover Card. Priebatsch, who delivered the keynote at the 2011 South by Southwest conference will be the closing speaker for BC’s Entrepreneurship Week on Friday, Sept. 21^st, 3pm, in Fulton 250. Want to hear from Seth now? Check out the video from Bloomberg where he discusses the firm’s role as payment and loyalty revolutionary.

Watch Out PayPal, WePay Drops Prices & Rolls Out White Label API
Last year Bill Clerico and Rich Aberman, the BC alums behind PayPal competitor WePay, were named to BusinessWeek’s list of Young Tech Entrepreneurs of the Year, and since then the Y-Combinator alums have continued their rocket-ride growth. WePay has now raised nearly $20 million in capital and TechCrunch reports the firm is processing “hundreds of millions of dollars” annually.

Credit WePay’s API as a key to growth. The API allows websites to easily integrate WePay services into their offerings. It accounts for about 25% of WePay business and is the firm’s fastest growing revenue contributor. Over 1,000 firms are using the tools to bake WePay payments into their sites (WePay is especially popular with crowdfunding efforts, including GoFundMe and Fundable, as well as small businesses seeking a PayPal alternative).

This summer WePay introduced improved API tools that allow firms to create a “white label” service, meaning WePay expertise & security can power a site’s payments, but the entire experience looks like it’s coming from the vendor you’re buying from. Need another incentive? Rates have dropped from 3.5% to 2.9% + $0.30.

CEO Clerico (who is a TechTrek alumnus and also co-founded the Boston College Venture Competition) will be featured in two BC talks in September: “Silicon Valley Comes to The Heights” (also featuring Peter Bell of Highland Capital Partners and Pat Grady of Sequoia Capital), Thu. Sept. 20, 6:30pm, in the Fulton Honors Library. And Bill will be the 9am speaker on our final day of Entrepreneurship Week, Fri. Sept. 21, 9am, Fulton 250.

Eagles in the House as TechStars Boston Announces Fall 2012 Class
The digerati know TechStars as one of the nation’s leading accelerator programs. Based in Boston, Boulder, and NYC, TechStars firms have raised an average of $1 million in funding per company. 90 of the 104 firms that have gone through the program are still active, and 9 have been acquired. That’s a pretty sweet success rate given the brutal reality and low success of entrepreneurship overall. Firms receive modest funding for giving up a 6% stake in the firm, but the real benefit comes from mentorship. TechStars mentors include Dennis Crowley (Foursquare), Fred Wilson (Union Square Ventures), Bijan Sabet (Spark Capital), Dharmesh Shah (HubSpot), Wendy Lea (GetSatisfaction), and scores more. “Demo Days” have become the hot ticket for the startup set, with teams presenting like rock stars in major venues (e.g. the Wilber Theater in Boston, Webster Hall in NYC) to hundreds of potential investors (students in BC’s Information Systems Academy were thrilled to attend last May’s Boston event, where we saw my former student, Mike Nugent pitch BISON Alternatives to rave reviews).

Boston College entrepreneurship has even more to celebrate. Two of the thirteen teams admitted to the Fall TechStars Boston class have BC pedigrees. NBD Nano, winner of the 2012 Boston College Venture Competition announced they’d also raised some $200k total this year. They’re joined by the stealthy Wymsee, launched by a tech-talented team of 2011 BC graduates. Congratulations to our young alumni as BC’s continued success prove the school, programs, alumni involvement, and unique offerings create steroids for accelerating quality student entrepreneurship.

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Boston: A Capital of Innovation
Hardworking NewTV intern Nick Klein put together a documentary on tech entrepreneurship in Boston. It’s a nice overview featuring a bunch of insightful comments on the red-hot local startup scene. Feel free to check it out, if you can endure the comments from a particular bald & bearded professor

Greenpeace and Friends Punk Social and Mainstream Media with Shell Oil Spoof
Corporate social media gaffes have become commonplace (McDonald’s McDStories and Kenneth Cole’s insensitive Arab Spring tweet being just two examples) and these often result in a sort of geek Schadenfreude with ridicule ricocheting around the online echo-chamber and mainstream media (for advice on avoiding gaffes, “Get S.M.A.R.T.”). But in a high-profile attempt to manipulate media, Greenpeace and the ‘culture jamming’ group the Yes Men, have used virility and the hair-trigger pile-on instinct of the Twitteratti to protest Shell.

The elaborate campaign included several components: A fake social media campaign and bogus Shell Arctic Ready site featured a social ad-generator (with submissions gallery) inviting the community to caption ‘Arctic Ready’ images from Shell (sample: ‘Why go solar when you can drill polar’). The Twitter handle @ShellIsPrepared, manned by a bogus Shell Social Media Team, offered up mock ham-handed responses such as the all caps ‘PLEASE DO NOT RETWEET ANY OF OUR TWEETS’. And co conspirators such as Occupy Seattle spread a YouTube video of a mock Shell PR event gone horribly wrong when a drink dispenser shaped like an oil rig malfunctions. Writes Forbes, “Greenpeace has apparently discovered that it’s far more effective to ram Shell online than it is to send Greenpeace boats out to protest or to handcuff themselves to drilling equipment in the snow.”

Here’s a key question, “is this a successful parody, protected by free speech, or a case of corporate identity theft?” The line is a murky one. U.S. courts often judge that a site would be considered a parody if it announces itself as a joke and isn’t clearly confused as something originating from the trademark holder. It’s not clear if the Shell protesters would pass this test. Several media outlets also appear to have fallen for the hoax, reporting it as an actual Shell PR disaster. Shell, so far, has not pressed charges in the case, so we might not see how the courts rule on this one.

Zynga Q2: “Just About Everything Went Wrong at Once”
The one-time second-most-valuable video game firm in the country saw its market cap crater 40% after reporting worse-than-expected second quarter results. The NY Times offers a laundry list of problems: Zynga’s competitor to EA’s Sims, titled “The Ville”, had been delayed longer than expected; Mafia Wars II was panned; the once high-flying app “Draw Something” (acquired via Zynga’s roughly $200 million purchase of OMGPOP earlier this year) shed users, appearing to be more fad than franchise; and many classic titles saw their audience shrink. One big reason for the drop – Facebook tweaked its News Feed algorithm and launched its new App Center in a way that favors new titles over older ones. These changes can benefit Zynga as it comes out with new games. For example, Zynga’s “Bubble Safari” and the eventually-released “The Ville”, were both chart-toppers, with the latter breaking a record for installs of a new Facebook title. But the change also led to what several online referred to as the “Farmville Dustbowl”. The game moved from smash hit to out-of-sight and out-of-mindshare. Farmville represented 29% of Zynga’s recent quarter revenue, but went from 80 million players in March to just 20 million in July.

Also concerning – fewer users are paying up. The average daily amount Zynga takes in from the small number of users who pay for extra features in games dropped 10%, even while the overall number of users increased. The firm is still growing, revenue is up 19%, but that’s way below the 32% growth enjoyed the previous quarter. Zynga lost $22.8 million on quarterly revenue of $332 million (it would have been profitable save for a one-time charges on accounting for stock awards).

Look for the firm to place more of an emphasis on mobile games, advertising, and to aggressively explore online gambling. While the latter has not been approved in the US, the firm’s CEO, Mark Pincus, has stated that Zynga’s first real-money-gambling products could appear as early as 2013, pending always-sketchy prospects for government approval. Zynga’s real genius has been its prowess as a data-driven analytics company, and the ability to grow revenues by applying big-data insight. Caesars Entertainment (formerly Harrah’s – see mini-case in our textbook) has shown that data analysis can drive massive results in casino gaming. Zynga may have the skill and resources to pull in profits driven by Big Data, if they get the gambling green light.

Netflix Competitors About to Get in on Exclusives
For years our students have studied Netflix‘s DVD business as an example of strategic, tech-driven disruption. But we also study the shift from DVD-atoms to streaming-bits as an entirely different business model, with different economics, legal regimes, competitors, partners, and other dynamics. Here’s more fuel for those analyzing the challenges that Netflix faces as it shifts to streaming.

The firm previously enjoyed exclusive content from the Epix pay-TV channel, controlled by media conglomerate Viacom. This brought in blockbuster titles such as the latest Transformers movie, Captain America, and next year will include the Hunger Games and Avengers. But the exclusivity clause of the Epix deal sunsets at the end of August, and Netflix competitors are lining up to use Epix to make their streaming tails longer. One new competitor, Redbox Instant (which includes backing from Verizon), will launch next year with the complete catalog of Epix titles.

And there’s more bad news on the Netflix customer service front. For years the DVD-business Netflix ran was tops in customer satisfaction. But in streaming, Consumer Reports ranks NFLX sixth. Some quibble with Consumer Reports’ methodology, but there’s no way to see this as a good sign for a firm used to ranking best-in-class in nearly all other surveys.

Top Schools Move to Offer Free Courses Online
Innovation is flourishing in online education, and one high-profile effort, the for-profit, Mountain View, CA-based Coursera, has attracted an international roster of world-class university partners and over $22 million in venture financing. Coursera was founded by Stanford Computer Science Profs Andrew Ng and Daphne Koller. Ng gained fame last fall when his online machine-learning class attracted an audience of over 100,000.

Coursera has seen over 900,000 students enroll in the firm’s free online course offerings. Dubbed MOOCs by some (Massively Open Online Courses), the firm’s catalog will swell to 111 courses by year end, covering a surprisingly broad topic range (one title: “Equine Nutrition and Contraception”). I’m particularly excited about Penn professor Kevin Werbach’s upcoming Gamification class. These kinds of courses could be rocket-fuel for life-long learners, and a boon to anyone seeking to re-skill in an economy pummeled by consistent and accelerating change. Coursera even hosted a BBQ for students, attracting over 600 to a Bay-area meetup.

Coursera lectures are streamed online, and videos pause roughly every 10 minutes for a quiz assessing understanding. Institution partners include CalTech, Duke, Georgia Tech, Johns Hopkins, Princeton, Rice, UCSF, the University of Illinois – Urbana-Champaign, the University of Michigan, the University of Pennsylvania, the University of Washington, and the University of Virginia (where, notably, tensions over the school’s pace at adopting online ed. led to the ouster, then reinstatement of the school’s president). International partners include the University of Edinburgh, the University of Toronto, and the Swiss École Polytechnique Fédérale de Lausanne.

The schools develop courses while Coursera provides the platform. Right now this is a big, uncertain experiment, but you’ve got to hand it to top-tier schools that are willing to try things in such a public way. Right now no fees are exchanged between Coursera and partners, and all courses are free, but the firm is exploring multiple options for revenue sharing with schools. These could include student fees for premium content, certificates, or other certification, and providing data to recruiters on the hunt for a given talent pool.

Coursera is not the only high-profile player in the game. Other big online ed efforts include Udacity, started by Stanford Professor Sebastian Thrun; venture-backed 2tor, which runs online courses from USC, UNC, and others; and the non-profit edX launched by MIT and Harvard (and which recently attracted UC Berkeley as a partner).

Commentary: Hand-wringing about online ed. displacing four year college or graduate degrees is premature and I believe misplaced. The changes brought about by these platform should be welcomed. Classroom education, even when done well, can almost always be improved. Several studies show students learn better when ‘doing’ rather than in passive attendance mode. A reliable and excellent archive of online courses would allow universities to emphasize and leverage their inherent and tough-to-match advantage of bringing students and faculty together for deeper, more valuable interactions. Many talk of the classroom being flipped, with lectures delivered online and classes reserved for discussion, coaching, and group-enhanced problem-solving. Migrating to this model will take time with uneven results, and it’ll challenge faculty (and Ph.D. programs where faculty are trained) to craft an entirely new skillset. As a management professor and advisor to student entrepreneurs, I’m especially excited about how new approaches might allow our courses to accelerate student learning from theory to application. The cloud, the app store, 3D-printing, and other technologies have ushered in a golden age of collegiate entrepreneurship. While it’s naive to assume that all or even most of our students will (or even should) become conventional entrepreneurs, there are now a multitude of ways for students to more immediately apply what they learn in school. And these experiences can be combined with the residential magic that happens on campus, leveraging the outside-the-classroom learning opportunities that drive so many to conventional colleges in the first place. Done right, the model should accelerate critical thinking, deepen knowledge retention, and even create an environment where more of our students become true partners in research and knowledge creation. Sure the transition will be tough, but bring on the pain – the potential upside is massive and can have a huge impact that makes us all better.

College Degrees Designed by the Numbers
In efforts that are cheered by some, and that creep out others, many schools are now extensively tracking students and automating advising in ways that borrow from Netflix, Amazon, and other personalization tools.

Those at elite universities may be shocked to learn that, among students at US public four-year institutions, only 31% of students earn a degree within four years, and only 56% graduate within six years. Some claim technology can help improve these numbers. Arizona State, the nation’s largest public university, has credited an eAdvising system with improving retention rates from 77% to 84%. The ASU system monitors student major selection, course progress, makes sure classes are selected in sequence, and keep students on-time to graduate. ASU even offers a Facebook app that mines an enrollee’s profile and suggests friends among the student body of 77,000.

Tennesee’s Austin Peay State University has students interact with “a robot adviser” prior to course registration. The software examines a student’s profile, gathering data and assessing things such as interests and past academic performance, and then presents a list of “Course Suggestions for You”. Apparently the system guesses well and is persuasive – last fall 45% of scheduled classes were from the top 10 recommendations, and 57% from the top 15.

UNLV is among the schools using a system called Knewton, which will attempt to analyze data to identify “engagement metrics” and provide recommendations based on things such as the time of day when a student may best learn math, or what materials and delivery styles most engage a given student. Publishing giant Pearson has announced it is working with Knewton to create more adaptive learning content for students (think alternate formats such as video, audio, textbook, or Socratic-style quizzes).

Some call this the Moneyball approach to Higher education. While schools filled with data-driven scientists can appreciate the quest to find truth through numbers, The Chronicle of Higher Education points out a host of new tensions created by these sorts of systems. “What role does a professor play when an algorithm recommends the next lesson? If colleges can predict failure, should they steer students away from challenges? When paths are so tailored, do campuses cease to be places of exploration?”. Do these systems ruin the serendipity and broad exploration that many liberal arts institutions pride themselves on? And might these systems (for better or worse) migrate students to high-prospect professions rather than a pursuit of one’s passions? Critics of data-mining also point out that it is often done incorrectly, using bad data or making questionable assumptions on causality or on the impact of decisions based on algorithmic output.

Tech You Should Know: GitHub Explained
Savvy coders and sharp tech students should already know GitHub, but the firm’s recent $100 million series A investment from Andreessen Horowitz (the only VC money it’s accepted so far) has caused others to take notice.

GitHub started as a site where geeks could publish and share code. GitHub provides support for incorporating community-submitted project updates (version control). The network effect is in effect, and GitHub has become the top repository for open source code (or as Forbes puts it, GitHub is the “Library of Alexandria of code examples”). If you want to share with the largest community of active coders, GitHub is the place to go. The site has also moved beyond coding and supports all sorts of collaboration, from group work on PowerPoint presentations to movies made with Apple’s Final Cut software.

Users can create their own copies of existing projects, “forking” into separate versions for editing. If a user wishes to share their work, they can submit a “pull request” to a project’s owners, requesting that their changes be “merged” with the original project. Social features allow groups to discuss and comment on any proposed changes, creating what many call a “true meritocracy” based on “what you do, not who you know”. Importantly, member profiles list activity, building GitHub cred and creating a sort of on-line resume that speaks for itself (note to students – start contributing, even if it’s simply improving product documentation. Wanna dive in? Code School offers a free “Try Git” course). GitHub profiles also act as a switching cost that creates a barrier to entry for GitHub rivals. If someone has proven coding chops on GitHub, then they’re unlikely to go to other sites where they’ve got little cred. GitHub also offers additional social features such as feeds, following, and wikis for repositories.

The easy-to-use GitHub is based on Git, which itself is an open source project created by Linus Torvalds, the Father of Linux.

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Faculty Friends: I know many schools bring in outside faculty for their short-term executive education programs. I’ve enjoyed being involved in such efforts (see my profile for a partial list of past consulting & exec. ed. work), and I’d welcome an opportunity to be considered for exec. ed. faculty or other opportunities outside of Boston College. Inquiries are most welcome!

• Growth is global – the 10 markets adding the most Internet users in the past year were (in order) China, India, Indonesia, the Philippines, Nigeria, Mexico, Russia, USA, Iran, and Turkey (the lack of South America in the top 10 is surprising).
• Global 3G penetration is only 33% – so there’s lots of upside for related growth.
• iPad is growing way faster than iPhone did. 29% of American adults own a tablet or eReader (vs. less than 2% three yrs ago). Android is also growing 4x faster than iPhone did (but that’s in units since launch, remember iPhone is older).
• Prediction – within five years more than half the world’s mobile phone users will use a smart phone.
• Mobile is 8% of US e-commerce and Global mobile traffic is 10% of all Internet traffic (vs. 2% in 2008).
• Only 29% of mobile monetization comes from ads, 71% of mobile monetization comes from app purchases.
• The time users spend online vs. the percentage of ad spending targeted online is finally getting to parity. But while 10% of Internet time is spent on mobile, only 1% of ad dollars are spent on mobile (so there should be lots of upside).
• Mobile ad channels are revenue slackers – Effective CPMs are five times lower on mobile than on the desktop & ARPU (avg. rev. per user) is 1.7 to 5 times lower on mobile than on the desktop.
• Google paid click growth is accelerating (39% year on year in first quarter vs. 17% a year ago) but cost per click declined 12% as lower-monetized mobile clicks became higher percentage of revenue. Look for same thing from Facebook, where MAUs (monthly active users) are 54% from mobile up from 42% a year ago. Annualized ad ARPU at Facebook growth has slowed.
• Japan shows mobile ARPU can rise quickly and in some Japanese markets mobile ARPU has exceeded desktop ARPU. Japanese game maker GREE has $24 mobile ARPU up from $6 in 2009. We’re still figuring out how to monetize mobile eyeballs, but some are getting this to work. Remember – mobile has a lot going for monetization upside – low-cost app purchases, in-app purchases, and increasing numbers of phones tied to a credit card.
• Facebook Open Graph distribution & Apple App Store are ‘fire hoses’ of distribution. Viddy was highlighted in Facebook’s newsfeed and got 17 million users in 17 days. Daily active users haven’t kept up, but the rise is astonishing.
• There’s a really interesting and provocative subset of slides on a broad set of tech-induced changes, with Meeker-estimating a $36 Trillion market for ‘re-imagined’ industries. One shocking stat from niche media: Glen Beck has 300,000 subscribers on the web and he’s making more money than he was making at Fox News.
• Of recent large Internet IPOs (Facebook, Zynga, Pandora, Groupon, LinkedIn), only LinkedIn has moved north. LinkedIn was often thought to be a bubbly IPO in Spring 2011 at $45 a share (raising $353 million), but there’s been little coverage of the firm’s follow-on offering in November at $71 a share (raising $714 million) – brilliant (some might say lucky) move!
• In Tech, 2% of companies that went public have created all of the wealth creation (1980-2002).
• Not on slides: Apple’s China business may be bigger than the US business by 2015.

Out of Africa: A Whole MEST of Startups Emerge
It’s always great when a BC grad appears in TechCrunch. Kevin Schuster, BC ’11, merited a brief mention as a faculty member at the hot (figuratively & literally) Ghana-based Meltwater Enterpreneurial School of Technology (MEST). The school is the brainchild of Jorn Lyseggen, a Norwegian adopted from Korea whose SAAS/social analytics firm, Meltwater Group, has grown into a $100 million revenue powerhouse.

Wanting to give back, Lyseggen founded MEST in Ghana’s capital, Accra, in 2008 (video in the link above offers a tour of the grounds & accelerator space). A combination training program and accelerator, MEST is described as “the world’s earliest early stage startup” since some of the otherwise brilliant students arrive before they’ve learned to code, or have even touched a PC. The MEST EITs (Entrepreneurs-in-Training) get three squares a day and a small stipend but no salary. They’re preparing for the hardship of entrepreneurship. That said, the two-year program is a hothouse of creativity and opportunity. After two years, some five ideas are pitched to potential investors (many visiting from the west). Those that ‘pass’ enter an accelerator for another year. Average seed funding request at this stage runs about $90K, with a range of $30K-$200K (MEST maintains a $20 million investment fund to support the effort). The nonprofit MEST retains a 15% stake in the investment, with upside to be plowed back into the program. One of the graduates, Retail Tower, is “now one of 6 Amazon preferred partners”, and remains based at MEST in Ghana. Other graduates and accelerator firms are summed up in the link above. Those students that don’t graduate with a fundable idea are still highly-sought after for the region’s fast-growing economy (Ghana grew 10% last year and is considered to be a sub-Saharan standout with a high degree of political and economic stability). And think how app-stores will tap into new markets and unleash the brainpower that has otherwise struggled to find a big market. Consider that within five years most Africans will have smart phones. And beyond smart-phones, the WSJ recently profiled the rise of the African-eReader. BC’s Schuster is joined on faculty by top-notch talent including former Sun CTO Jim Kaubisch and Motorola vet Richard Tanksley.

Time for an African Silicon Valley?
Sub-Saharan Africa is finally gaining the tech-attention the region deserves, and TechCrunch sees the rise of several sub-Saharan tech hot-spots. Prior WiGs (and my courses) have covered M-Pesa, the wildly successful mobile payments effort from Kenya’s Safaricom. Kenya is also the base for the Savannah fund from i/o ventures, a $10 million accelerator effort based in Nairobi. i/o co-founder Paul Bragiel, i/o EIR Mbwana Alliy, and Erik Hersman (co-founder of the award-winning global crowdsourcing tool Usharidi and Kenya’s startup accelerator, iHub) help launch the effort. Five early-stage i/o firms will receive $25K and three to six months of acceleration space and mentoring for a 15% equity stake. Those that prove themselves in Kenya may also move on to San Francisco to a sister accelerator that will help them further scale. Investors include valley investing elite Dave McClure and Tim Draper, plus vets of Yelp & Zynga, and local Kenyan entrepreneurs such as Karanja Macharia of Mobile Planet.

Other sub-Saharan funds fueling Africa’s tech boom include: The 88mph seed fund from Human IPO in Nairobi (10-15 investments a year); Umbono a Google accelerator in Cape Town, South Africa that makes $25K to $50K seed investments; ActivSpaces, a Buea & Douala, Cameroon effort backed by a $1 million fund linked with Sanaga Ventures; and Mara Launchpad in Kampala, Uganda.

Commentary, Request, and Opportunity: The Boston-area has seen several efforts tied to sub-Saharan African, from MIT $100K and MassChallenge winner Saner.gy (a non-IT effort bringing clean sanitation to Kenya’s slums), to Jana (an $8.5-million funded baked-in-Kenya, based-in-Boston effort). This past year, my students heard talks from execs at both of these firms. Those interested in learning more about the economic climate in Africa might also check out the Economist’s “Africa Rising” cover story from several months back (a sharp contrast to the “Hopeless Continent” headline that ran years ago), and Knowledge@Wharton’s recent Africa Collection. The global growth engine is clearly revving in long-neglected regions, and the savvy, opportunity-seeker should read voraciously. Most of the Africa-based execs mentioned above (including Stanford MBA Mbwana Alliy; or Usharidi’s Erik Hersman), blog and are on twitter, and can point you to others who deserve attention and are great learning resources.

Request: Last year I had the great pleasure to keynote the African International Business and Management Conference (AIBUMA) in Nairobi, Kenya. It was a tremendous opportunity, and while an Africa newbie, I very much want our students to experience and learn in the region. Plans are rough now, but I will spend the summer exploring the possibility of building a “Tech in Emerging Markets” course that includes field visits to Nairobi, Accra, or both. All insights are most welcome – please don’t be shy about sharing what you know, or connecting me to those in-the-know. Leads on firms/individuals to visit, and nitty-gritty on local logistics would all be very helpful!

Opportunity: for BC students in the area that are interested in sub-Saharan Africa, Kevin Schuster of MEST will be in town. I can bring a small group of students to have dinner with Kevin in downtown Boston on Tues, July 12, 2012, at 6:30pm. If you’re interested, contact the IS Dept. Secretary, Ashley LoBue.

Hadoop: A Primer on a Key Big Data Tool
For decades, tech professionals have relied on the SQL (pronounced ‘sequel’) database standard. SQL is in use at every major corporation in the world, it fed the rise of Oracle (among other firms), and cemented Larry Ellison as one of the richest people on the planet. These classic tools are great for creating containers of defined data – bank transactions, retail invoices, student grades. But today’s world is creating lots of data – it’s unstructured (think a firm’s gaggle of divergent documents, the breadth of input from social media vs. the neat and orderly line items on your credit card bill). About 80 percent of corporate data is the unstructured type. So the data analysis opportunity is big – really big and growing! According to IBM “every day, we create 2.5 quintillion bytes of data — so much that 90% of the data in the world today has been created in the last two years alone.“ Creating a data warehouse filled with clean, structured data takes time (often years at large firms), and these systems aren’t usually flexible enough to quickly respond when managers want to add a deluge of new data with a structure that doesn’t jibe with what’s in the existing warehouse. So how do you manage all this? Enter Hadoop.

Hadoop is riding the “big data” wave, that a report by Cowen & Co. suggests “presents a growth opportunity that will be significantly larger” than the $25 billion relational database industry. Hadoop is a collection of open-source technologies for big-data management. It offers the ability to process massive amounts of data – think datasets of 100 gigabytes or far greater – regardless of structure. Hadoop processing can be relatively cheap since it can be done with commodity servers that can be clustered together in huge numbers for really big jobs. Hadoop is fault tolerant. Cheap hardware will fail, so redundancy is built in, and systems chug along without a significant hiccup when a drive or other hardware fries. And Hadoop tech is accessible to even smaller, less-resourced firms since cloud vendors like Amazon and Rackspace provide services that can be rented on top of their brawny hardware.

Hadoop got its start in an academic paper published by Google, then Yahoo took up the charge, creating and releasing a collection of software. The code making up Hadoop is often offered in an open-source distribution (like Linux). The Apache Foundation is one of the chief coordinating bodies for Hadoop development (the name ‘Hadoop’ and pachyderm mascot come from an elephant stuffed toy favored by the son of developer, Doug Cutting.) Today a variety of Hadoop-related services are offered by startups like Cloudera and HortonWorks, as well as established firms like Amazon, IBM, Microsoft, Oracle, and VMware. For those interested in some of the geekier details, here’s a quick summary of key terms and technologies distilled by O’Reilly, courtesy of Forbes:

MapReduce offers the ability to process large datasets by dividing up a task and run it in parallel over multiple nodes. The technology was developed by Google (sounds like how Google’s massive server farms do search, right?) and MapReduce shows up in non-Hadoop offerings, as well.

HDFS, the Hadoop Distributed File System allows each server in the MapReduce cluster to have access to the data. HDFS ensures data is replicated with redundancy. Unlike relational databases, HDFS accepts all sorts of unstructured data. Making sense of the data is the responsibility of the developer’s code.

Zookeeper software offers the distributed coordination of computing resources (synchronization, configuration, and naming). It acts as a sort of traffic cop that keeps track of machines as they come and go, knowing where to access services and how they should be configured.

Pig and Hive are tools for programing Hadoop and accessing data.

Pig is a programming language simplifying tasks like loading data, manipulating and transforming the data, and storing results. It’s a tool more likely to be used by traditional software developers. Pig functionality can be further extended using the Java programing language.

Hive makes Hadoop operate more like a traditional data warehouse. It can superimpose a structure on HDFS data and allows managers to go at it with a syntax similar to SQL (and these features help make Hadoop accessible to the traditional business intelligence crowd). Hive can also be extended.

Also keep an eye on tools like Mortar Data, which our students saw present at TechStars Boston Demo Day last spring. Mortar makes Hadoop data more accessible to managers by offering simpler-to-understand python and SQL derivatives, rather than the heavy programming required from other tools. (Also mentioned in this GigaOm recap of TechStars big data firms is Bison Alternatives, which, while not Hadoop, was started by my former MBA student, Mike Nugent. Be sure to check out Bison Alternatives if you’re in the market for easily accessible, far-reaching investment data!).

Mahout helps make sense of unstructured data through machine learning (e.g. letting the computer find patterns in massive data that might not be apparent to human investigators alone). Mahout offers a libraries for things like collaborative filtering (think Netflix and Amazon recommendations), clustering, and classification – classic data-mining stuff.

Another Hadoop overview is offered in IBM Big Data’s “What is Hadoop?” video. Remember, the big deal is four-fold: Hadoop is scalable (can process increasingly big datasets), flexible (eliminating rigid data structure requirements of SQL/relational databases), cost effective (thrown together on cheap servers or in the cloud), and fault tolerant (one server breaks, no big deal – redundant systems mean no data loss and systems keep plugging away). Want to learn more? There are several resources online, including Big Data University and IBM Big Data. And Teradata has long supported the Teradata University Network for students and academics.

Morgan Stanley Takes on Big Data with Hadoop
The above offered some pretty geeky definitions, but here’s a usage case that’s a bit more accessible. Morgan wanted to do some portfolio analysis that used massive amounts of data – so much that it choked the firm’s traditional databases and fairly advanced grid computing systems.

So the firm’s director of enterprise information management started experimenting with Hadoop, stringing together an initial cluster of just 15 end-of-life servers. The exec praises Hadoop for pattern recognition in huge, otherwise unmanageable unstructured data sets. Hadoop systems hunt for undetected patterns for things like improving portfolio results, with managers later following up on what machines uncover. In this way, Morgan uses Hadoop to create a resource for key competitive insights from a latent, unused asset. The firm also uses Hadoop to trace out in near real-time, which users, systems, and events trigger system delays or other problems. And the firm hopes to eventually use Hadoop to improve its risk management.

Here’s a great quote from a Morgan exec that’s likely familiar to anyone who’s ever worked trying to get data in a form useable by managers: “The way it has typically been done for 20 years is that IT asked the business what they want, creates a data structure and writes structured query language, sources the data, conforms it to the table and writes a structured query. Then you give it to [users] and they often say that is not what they wanted. Since Hadoop stores everything and it is schema-less, I can carve up a record or an output from whatever combination the business wants. If I give the business 10 fields filtered in a certain way and they want another 10, I already have those and can write the code and deliver the results almost on demand.” Look for Hadoop to pop up everywhere, from retail and web analytics to genomics to operations problems.

Apple at WWDC – New Macs, iOS6, OS X Mountain Lion
The 23 year old Apple WWDC (world wide developers’ conference) is the largest and longest running developer conference in the world. And this year Apple opened up slots for coders as young as 13. Have a geeklet to inspire? The WSJ offers video profiles of app coders too-young-to-drive. For more inspiration check out the inspiring video on life-changing apps at minutes 7 to 15 of the keynote video.

Apple continues to post freakishly big numbers. A quick rundown:

• The app store has over 650,000 iOS apps, and has generated over $5 billion in revenue.
• There are 400 million app store accounts, reaching across 155 countries – undoubtedly making Apple the farthest reaching software & digital media purchase channel on the planet.
• Apple has sold 365 million iOS devices (iPhone, iPod Touch, iPad).
• There are now 125 million iCloud users.
• Mac sales have tripled in five years and now top 66 million. For the curious, among incoming BC freshmen, Macs outstrip all Windows machines combined.
• Mountain Lion (Apple’s eighth OS X release) will have over 200 new features and 1,700 new APIs. These include “AirPlay mirroring” so Mac users can wirelessly move whatever’s on their PC to an Apple TV-connected television. Mountain Lion will also include support for voice commands and dictation (but not full-blown Siri), and a “Power Nap” that keeps Macs current during sleep mode; downloading software updates, syncing calendars, and harmonizing iCloud across devices. It’ll sell for $20 and be available mid-July
• More than 10 billion tweets have been sent from iOS. 47% of photos posted to Twitter come from iOS devices. Now Facebook gets a chance, with iOS 6 integrating Facebook into photos, contacts, sign-on, messaging, and Apple offering likes in the App Store.

iOS 6 will be out this Fall and will bring Siri to iPad 2 & higher. Facetime will run over the cellular network. Apple will also nudge out Google, favoring Apple’s own, new Map service. The new Apple maps offer local search, turn-by-turn instructions, and 3D flyover models for major metropolitan areas. iOS 6 will also include a new wallet-targeting feature called Passbook, which holds the equivalent of loyalty cards, airline boarding passes, movie tickets, and more. Starbucks, United, and Fandango were among the firms displaying Passbook integration.

As for the hardware, it was all Mac: MacBook Airs got a refresh. The 13” high-end model is a screamer that can be packed with half a terabyte of solid-state storage. And there are now two formats of MacBook Pro. The less expensive 13 & 15” Pro models look like prior versions and still have hard drives & optical drives, but with speedier processors & ports, and higher-res cameras. But also under the same “Pro” brand is a new, slimmer, lighter, 15” MacBook Pro with Retina Display. The Retina tech, already used in iPhones & iPads, offers resolution so high that the pixels in optimized apps & fonts are indistinguishable by the human eye. Resolution is 4x greater than current & lower-end MacBooks. The Retina Pro sports a solid-state drive (up to ¾ of a terabyte) and drops the optical disk, getting weight down below 4.5 lbs and at .71 inches, it’s nearly as slim as the fattest part of the MacBook Air (and skinnier than your index finger). Solid-state storage has no moving parts so they fail less than hard drives, plus they’re faster and suck less power. The days of hard drives as the dominant storage choice for laptops appear to be numbered.

Analysis: The Apple platform juggernaut continues to expand into all sorts of new markets, and it’s striking to see how deeply Siri and iOS have penetrated search. Ask Siri a wide swath of questions: sports stats, weather, or restaurant reviews, and Apple will return results rendered inside a beautiful walled-garden, pulling data from top-tier domain partners like Yelp and OpenTable. So you might say the Apple Search Engine is here and it’s name is Siri. Apple is already a player in mobile wallet and Passbook pushes this further. Earlier this year Apple TV users could sign up for Netflix from their devices via their Apple accounts – more payment options from the TV are a near certainty. Apple’s even broadening its search partners, offering Baidu as an option for Chinese iOS users. And Apple will get a cut of Baidu search revenue from iOS searches. Doc syncing in iCloud and new features in iOS and Mountain Lion encroach on Google and other firm domains. BusinessInsider put together a “Kill List” of products that new Apple features compete with or seek to replace. Apple’s integrated platform marches on. The reach and impact of a design champ with more cash than any rivals shouldn’t be underestimated.

Why Microsoft’s Surface Tablet Shames the PC Industry
Microsoft has been relying on the PC industry to match Apple’s elegant designs, but the result has been, as BusinessWeek describes, “a parade of hapless, copycat products” and “the Great Stagnation, during which PC makers have been throwing smartphone and tablet designs over the wall, only to see them ignored en masse”

Microsoft is now showing the hardware guys how it should be done – launching its own tablet, a 9 mm thick, 1.5 lb. ARM device in a sleek, vapor-deposited magnesium skin (see video of the launch keynote). The press raves about the design, that includes a kickstand with a crisp snap-out that sounds like “a luxury car door” closing, and a solid cover that doubles as a keyboard. The tablet, dubbed “Surface”, will be joined by a larger, Intel-powered, stylus-sporting sibling that’ll run full-blown Windows 8 and PC software. The smaller tablet will run a Windows version dubbed “RT” that can’t run older Intel code.

Ballmer says “We took the time and effort to get Surface and Windows 8 right”. The Surface with Windows RT contains over 200 custom-designed parts. No pricing was offered at launch, and the product will be sold “only through Microsoft channels.” Some speculate that rather than seeking to take away the tablet market from hardware partners, Microsoft may be goading them into doing a better job on design and execution. If not, Microsoft seems ready and able to fill the gap if the alternative is to risk losing a multi-billion dollar market to Apple (remember the iPad biz was so big in just its first year that if it were a separate biz, it’d be ranked in the middle of the Fortune 500).

Microsoft Shows Smart Glass
Microsoft also introduced a new cross-platform technology that integrates phones, tablets, and PCs with an Xbox-controlled TV, allowing mobile devices to stream media, work as game controllers, display supplementary content, and more.

The goal is to allow the Xbox to “communicate with whatever glass surface you have,” and this includes not only the nifty new “Surface” tablets above, but also via apps on iOS and Android devices. The experience is billed as allowing devices to seamlessly knit themselves together to improve the user experience. Examples shown in this video demo include an Xbox streaming “Game of Thrones” via HBO Go, which triggers a tablet to show a map where the current action occurs (shown above). A browser session can also be thrown up on a TV screen, responding to tablet-driven pinch & zoom gestures. Another demo shows play selection (including football line drawings) done on a tablet but responded to on TV. One can also imagine sports broadcasts triggering additional stats (Microsoft has signed Xbox deals with ESPN), and commerce opportunities seem a given. Redmond has a Disney-on-Xbox license, too. Imagine having Disney songs, videos, toys, theme-park deals and more, all popping up on credit card-linked phones and tablets, while kiddie content shows up on the big screen.

Smart Glass offers an alternative to the forthcoming Nintendo Wii U, which will feature a tablet-like controller.

Glass & the Wii U were announced during E3. This WSJ article includes side-bar coverage of E3 games, including a South Park role-playing game, a near-movie quality Tomb Raider, and a spooky new Halo.

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Some BC Tech/Entrepreneurship News

• Success has its challenges. BCVC winners behind Jebbit were just sophomores when they won and spent last summer as the youngest team in Highland Capital’s Summer@Highland incubator. Now the novel ad-alternative has launched, has members in hundreds of schools nationwide, and has national partners that include Zip Car and Bose. Now the entrepreneurs are faced with a tough decision – finish their BC degrees or dedicate 100% of their effort to growing a promising business. Entrepreneurship is always a high-risk endeavor. We hope to have Jebbit share their experiences with students this fall, regardless of their final decision.
• BCVC 2012 winner Namib Beetle Design gets some coverage from the local CBS affiliate.
• And it was nice to see the Week in Geek get a shout-out in Online MBA’s list of Best Blogs by Business Professors. The WiG has been published since 1997 and was hard-coded in HTML before the term “blog” was even coined. Format’s a bt clunky as a result of this “lots of news released at once” legacy, but I’m delighted that so many of you find the WiG useful. Thanks to all who regularly share kind words & forward the WiG on to colleagues!

Also – a quick word for those using my textbook. Version 1.4 has been submitted to my publisher and should be available by the start of the Fall Semester. Check with Flat World Knowledge to be sure your bookstore has ordered the most current version. As always, the structure, theory, and bulk of the content remains consistent, but there are constant updates to make sure facts, details, and developments are all more current than any other IS textbook. You’ll also find some potentially important additions, including coverage of Hadoop (see above), and recent changes to Google’s search and advertising platform. I hope you like it! Do share your feedback on publication alternatives, notifications, and schedule – positive and thoughts on improvement – with Flat World. And do share your content feedback with me. Thanks again for helping to spread the word with colleagues. Looking for summer reading for your tablet? Version 1.3 is now in the Kindle store (submitted Dec. 2011).

Faculty Friends: I know many schools bring in outside faculty for their short-term executive education programs. I’ve enjoyed being involved in such efforts (see my profile for a partial list of past consulting & exec. ed. work), and I’d welcome an opportunity to be considered for exec. ed. faculty or other opportunities outside of Boston College. Inquiries are most welcome!

What is Facebook Worth?
Since many Week in Geek readers are either studying or teaching the Facebook chapter, I offer some extensive analysis of the IPO, plus current & future outlook for the firm. At IPO, Facebook priced at $38. Just two days before trading, the firm upped by 25% the number of shares offered. Facebook raised some $16 billion, the IPO initially valued the firm at over $104 billion, and the offering clocked in as the biggest technology IPO of all time and the third largest IPO in US History (trailing only Visa & GM).

$38 is the price big investors got the stock for. Trading for the masses opened at a bit north of $42 and closed around $38.23. In one respect this is good for Facebook. The firm raises its money at the $38 share price, so a big first day ‘pop’ would have meant that public markets valued $FB higher than the price iBankers set, and money would have been “left on the table”. But the price slipped and by the second day of trading shares had already fallen below the issue price. Hype and uncertainty often conspire to make IPOs bad investments. Google is actually an exception. Initially undervalued by Wall Street and for roughly a month post-issue hovering at near its IPO price, Google became a growth monster. Even though early PEs were high and shares were up more than 2x by the end of its first year as a public firm, earnings kept going up and to the right, initially expensive shares grew into (and beyond) lofty expectations, and shares quintupled in in less than four years. If you bought GOOG any time in its first year and held the shares, you’ve trounced the market.

Time for some analysis:

Comparing Numbers: FB, GOOG, and AAPL: Is Facebook the next Google? So far Facebook’s growth looks sketchy. Facebook Q1 growth rate was 45%, down from 55% the prior quarter, which was down again from triple digit growth the prior quarter still. Still-growing Google now trades at 13x 2013 EPS. Facebook IPO’d at a nosebleed 65x 2013 EPS. While Facebook’s market cap is about half of Google’s, in the business where Facebook & Google most closely compete (display ads), Google’s business is growing faster. Google also has more cash than Facebook has revenue. Facebook’s free cash flow is actually negative (blame the cost to build data centers – you’ve gotta put all those photos somewhere). Apple shares offer a less fair comparison, but consider that Apple trades at 10x estimated 2013 EPS, the firm’s revenues have consistently grown in the 70% range, and the Apple has a decade-long, rock-solid track record of blockbuster product introductions with no sign of a stumble in sight. By these measures the Facebook issue price seem like a whole lot of speculation.

Outlook & Opportunity: What about upside? Facebook is lean – it has very small sales force (in the prior year Google hired about 8,000 employees, or about 2.5x Facebook’s total headcount at IPO. Now that the firm has billions in new capital, expect Facebook to go on a hiring spree. Many of these new employees will be sales reps tasked with bringing in new business.

An Ad Network More Valuable than Google’s?: Most coverage of Facebook’s opportunities for expansion has been terrible, so let’s look at this in more depth. One easy opportunity is the ad network. Google earns about 30% of its revenue from ads that run on websites Google doesn’t own (it targets ads, collects coin from advertisers, and splits the take with website operators, see the blue area on the chart above). Facebook doesn’t have an ad network yet, but turning one on is technically trivial. Ramping up the rollout so it’s not a privacy debacle and doesn’t lead to a deluge of scare headlines will be the tough part. Analysis that shows Facebook ads perform far less effectively than Google ads is all true (see the ARPU or avg. revenue per user chart below, as well as “The Hunt vs. The Hike” metaphor from our course material). But a Facebook ad network could actually perform better than Google’s. Google targets ads on other websites based largely on keywords found on that page + browser history. Facebook can do all this, but can also add in data from your social activity, your personal profile, and other insight that lies in the “dark web” that Google can’t see. Here’s a simple equation: AdSense <; AdSense + FB social + FB profile + other data from the FB dark web.

Mobile – Not a Good Near-term Payout: Facebook will also roll out mobile ads. Mobile represents about 40% of Facebook use, but brings in virtually zero in revenue. Offering ads on mobile will be easy – getting users to pay attention to them is the tough part. Google should bring in about $10/Android user, but targeting ads on search is way easier than social (again see the The Hunt vs. The Hike‘ in the Facebook chapter). Not wanting to lose mobile is one reason Facebook spent $1 billion for Instagram, a 18 month old firm with 13 employees.

Keeping Advertisers Satisfied: There will also be a lot of tinkering with ad formats, and there is great upside potential. Facebook took in only $3.2 billion in advertising last year (for ref, Google’s revenues were about 12 times that), and many top-tier advertisers have $1 billion+ overall ad budgets. But some suggest Internet advertising will always be valued less expensively than offline counterparts, and that unit prices are likely to drop (Michael Wolf’s piece in Technology Review is especially pessimistic). Others also question the value in social ads. In the days before the Facebook IPO, GM pulled a $10 million account with Facebook saying Facebook ads don’t work (Note that GM is also pulling ads for the 2013 SuperBowl).

Longer Bets – Payments & Television: Longer term two of the more interesting potential areas for Facebook growth are payments and television. Linking credit cards to everything from splitting a restaurant bill to renting a video seems like a Facebook natural (Zynga’s early value of $10 billion was based largely on the sale of virtual goods over Facebook). And as the Week in Geek has argued before, Facebook almost certainly wants to play a starring role in your living room, making the TV a platform for all sorts of activity: video chat, serving targeted ads, social entertainment recommendations, games, and all sorts of commerce. Navigating the tensions of bandwidth capping cable guys, channel owners, and hardware firms keen to build their own platform, will also be tough. But Zuck has Reed Hastings on his board – as much as he’s been derided this past year, no one has built a further reaching platform with consumer electronics firms than Netflix.

Global Growth: Nice, but Lower ARPU: All these new products will be far more important in the mid term than Facebook’s expanding user base. The firm is already approaching 1 billion users, and those users will only be valuable once their income, standard of living, and attractiveness to advertisers goes up. A growing user base in the developing world is a great human-empowerment story. But right now the ARPU (average revenue per user) of notably poorer new Facebook users isn’t going to have anywhere near the impact we saw from the firm’s prior user growth. By the way, for ideas on how to up ARPU for low-income, developing nation mobile users, see the amazing work being done by Jana a firm we visited on a Boston TechTrek last semester.

Morgan Stanley Criticized for Facebook IPO
Wall Street’s reigning champ of the tech IPO is Morgan Stanley. The firm not only led Facebook’s debut, it was also lead underwriter on LinkedIn, Zynga and Groupon. Since the beginning of 2010, Morgan Stanley’s largely Valley-based tech banking team has generated $1.2 billion in fees. That’s a quarter billion dollars more than #2 player JPMorgan Chase. These tech deals generated 13% of Morgan’s overall i-banking fees, vs. 7% at JPMorgan and 9% at Goldman.

Critics say Morgan Stanley mismanaged the Facebook offering, by either signing off on a price that was too high, or agreeing to sell too many shares in the deal. But let’s be fair – Facebook was oversubscribed and it was by far the most eagerly anticipated IPO of the decade. Just about all pundits predicted a substantial pop. With Zuck controlling voting rights he can take a long view, he’s been clear he’s not going to chase quarterly performance figures, and everyone getting into FB knew this’d be the case.

I wonder if the auction market of OpenIPO by iBanking legend Bill Hambrecht (shown here in an earlier meeting with my students & holding the “tombstone” from taking Apple public) may have helped. Hambrecht thinks Facebook should have offered users a stake, first. The institutions that are in on the IPO often look to flip for quick profits during the pop. Many of those investors also report quarterly results, so there’s little incentive to hang on to a stock during a correction. But if the issue price was crowdsourced via auction, there may have been a greater chance that long-view investors willing to buy & hold would have gotten in, reducing the allocation to the flippers & short-term skittish.

Several agencies are also “looking into whether Morgan Stanley and other bankers broke rules when the firms’ analysts cut their earnings forecasts on Facebook just days before the IPO” and are examining whether Morgan provided advice to some but not all of its clients (which would violate provisions against “selective disclosure” if this did indeed happen).

If Morgan looks bad, so does the Nasdaq, which experienced a series of software glitches resulting in the “unexpected delay at the start of trading, missing trade execution messages and, at one point, orders that were filled by hand”. When Facebook bumped up the shares issued, it created larger than expected allocations among institutions, leaving Nasdaq unprepared for a high number of order cancellations that came in while the exchange was trying to calculate the FB opening price. Finance guys, we’ve got a number of examples where software rules your world, for better or worse. Also remember events two months ago where “exchange operator BATS Global Markets was forced to withdraw its initial public offering on its own market after being plagued by software errors.”

Add to all of this the circus leading up to events, which included Michael Pachter of Wedbush Securities issuing a public scolding of Zuckerberg for wearing a hoodie during the roadshow. Sorry, Pachter, but you don’t have the cred to make that kind of call-out. He was the guy who said that Netflix at $11 was headed for $3 (the stock spent the next five years steadily climbing ‘til it was above $300, and even post Qwikster debacle, NFLX still trades at about 25 times Pachter’s target).

Etsy Seeks Scale without Losing Its ‘Street Fair’ Aesthetic
Etsy is a juggernaut. Last year sales grew 67% and the firm pulled in north of $525 million. Etsy hosts more than 800,000 “stores” that collectively sell over 13 million different items. Etsy generates more than 39 million unique visitors a month (US traffic ranks ahead of Target, Groupon, or Best Buy). Etsy is also the most “pinned” site on Pinterest. The firm makes money on a 20 cents an item listing fee, and takes a 3.5% cut of an item’s sale price. Driven by network effects, the site now seeks to maintain its quirky feel and dedication to the small artisan, craftsperson, and vintage clothing vendor without succumbing to the soul-stealing lure of mass marketers. Huge thanks to BC alum & former student Chris Cosentino, payments guru at Etsy, for hosting our students and arranging for a master-class on-site with CEO Chad Dickerson.

PayPal Rival WePay Raises Another $10 Million
Congratulations are in order for BCVC co-founder and TechTrek Alumnus Bill Clerico, and his Boston College co-founder Rich Aberman, on raising a $10 million Series B round for their payments startup, WePay. WePay’s early VCs, August Capital and Highland Capital Partners are joined in the Series B round by Seattle’s Ignition Partners. Early angels include PayPal co-founder Max Levchin & super-angels Ron Conway & Dave McClure, and the firm has raised a total of roughly $19.5 million. An alum of the elite Y-Combinator accelerator program, WePay has emerged as a legitimate and more nimble PayPal competitor, known for great service and dead-simple products. WePay tools focus on four use cases: selling products online, selling tickets, accepting donations and sending bills to request payments (the latter is great for clubs, PTAs, splitting up roommate & vacation bills, group gifts, and more). WePay also allows merchants to create their own online stores and embed stores in their own sites.

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Also some brief BC-related updates:

• The 2012 winner of the Boston College Venture Competition is Namib Beetle Design, a firm that is developing a biomimicry technology to extract water from the atmosphere. Team includes Miguel Galvez, BC ’12, who is also a TechStars Fellow. [See coverage in Bostinno & The Heights]
• The first winner of BC SEED’s Social Entrepreneurship competition is Maji Bottles, a firm that has already sold enough water bottles to give over 100 people clean drinking water for life. [See coverage in Bostinno #1 & Bostinno #2 ]
• BusinessWeek has ranked the Boston College Information Systems Department #4 in the U.S., the highest ranking of any of the Carroll School’s departments [Interactive Table].
• BC IS Prof. Sam Ransbotham was recently interviewed by MIT’s Sloan Management Review. Our own ‘Big Data’ expert will be offering a new undergrad business analytics course this Fall.
• TechTrek East (Boston & NYC) is a finalist for the MITX Award for “Best Contribution to Innovation by a University”. Come out to the awards ceremony on June 12.

And a reminder – if you’re a Boston College alumnus in the Boston (East) or Silicon Valley / Bay Area (West) and you’re not a member of the BC Technology Council, then you’re really missing out. The May dinner featured a student entrepreneurship showcase, student presentations on tech & entrepreneurship innovation at BC, networking, and a phenomenal talk by Nikesh Arora (BC Alum), Chief Business Officer at Google. To get on BCTC’s events mailing list simply e-mail bctc@bc.edu. I hope to see you at future events!

Inside Facebook
Our students have had the good fortune to visit Facebook’s new Menlo Park campus twice this year, and now Fortune offers a peek for everyone else in their cover story, “Inside Facebook”.  Facebook’s new headquarters are the former Sun Microsystems digs (earlier TechTrek courses had been to this location several times for master-classes with then Sun boss, Scott McNealy).

Facebook currently has 2,000 of 3,200 total employees at the new HQ, but the campus can hold (and will almost certainly eventually staff) about 10,000. The road around Facebook’s new campus is named “Hacker Way”, concrete letters are being poured into a central courtyard, spelling the word “HACK” (BC trivia – a former student & his family construction biz is doing this work). There are two free-food cafeterias (a few of these are former Google gourmets), and the campus sports a bar called “The Shady Lady”. Graffiti-laden walls underscore that Facebook is a creative and edgy place, and slogans like “Done is Better than Perfect” and “Move Fast, Break Things” are cultural signposts that direct staff to keep an eye on what has helped make the firm successful.  This is, after all, a business built on network effects, and in Facebook’s world, it’s either be quick or be dead. Side note: in 2005, Facebook’s graffiti artist took equity for payment and stands to make $200 million at IPO.

Coding at Facebook can be an exhilarating white-knuckle ride.  Says one engineer, “it’s terrifying to ship code to Facebook and realize that there are a billion people out there using the service.”  Engineers can be “geek vampires” participating in occasionally mandated all-nighters. At Facebook, “code wins arguments” and dissent is encouraged. Facebooker’s regularly claim that Zuck is happy to be proven wrong, but Zuckerberg-thinking is also at the center of the firm’s future.  Facebook holds boot camps to teach staff to “Think like Zuck”. Every new employee also takes the Clifton StrengthsFinder test to uncover hidden talents. To keep the creativity flowing, staff are often forced to switch projects midstream.  Every 18 months employees are required to leave their teams and work on something different for at least a month. Getting people into new groups helps the firm’s geniuses more broadly share their knowledge, generates idea-flow, and prevents managers from developing fiefdoms. The firm also runs legendary hackathons, all night sessions with one key rule: no one is allowed to work on what they normally do. Engineers blue-sky innovate on something new and show it to Zuckerberg and a senior staff brain trust, who then decide which projects go forward. Zuck also holds hour-long chats each Friday, engaging in deep Q&A with staff.  The anti-social loaner depicted in “The Social Network” is, in fact, radically different from the real guy who’s piloting the tech industry’s biggest IPO ever. Faculty, be nice to your brightest students.  Zuck’s former Harvard TA is now a Director of Engineering and stands to clean up when the firm goes public. Of course, for Zuckerberg it’s never been about the coin. The firm’s mantra is “we don’t build services to make money, we make money to build services.”

Zuck’s business-side foil is Sheryl Sandberg, the firm’s Chief Operating Officer, soon-to-be billionaire, and one of the most powerful women in business. Sandberg, who built Google’s ad biz before being wooed by Zuckerberg, is also co-chair of the “ultra-powerful meetup”, the Davos World Economic Forum, she has become a leading spokesperson for a “new generation of women in the workplace” (her powerful TED Talk on ‘why we have too few women leaders’ is a must watch) and she is often thought to have deeper, post-Facebook, political ambitions (her pre-Google career included time as Chief of Staff of the U.S. Dept. of Treasury under Larry Summers). And tech is all in her family – husband David Goldberg is CEO of SurveyMonkey. Fortune credits Sandberg with creating the business-focus that drove Facebook to $1 billion in pre-IPO profits, and in fostering much-needed staff stability.  The piece notes that while Google lost virtually none of its senior staff until after its IPO, Facebook lost one president, two CFOs, a COO, and all of Zuckerberg’s cofounders. Facebook senior management style under Sandberg is described as having “more coaches than bosses, more facilitators than gatekeepers.” Fortune also profiled Facebook’s CFO David Ebersman, who has a pretty amazing bag of tricks. He was Genentech’s head of product development, he ran the biotech giant’s manufacturing, and he was CFO during the acquisition of the world’s largest biotech firm by Roche (he also worked under Genentech CEO Art Levinson, who himself has been a board member at both Apple and Google).

Commentary: Two tech firms with radically different corporate cultures and wildly successful recent histories are within a short drive of one-another: Apple and Facebook.  Infinite Loop is perfectionist and secretive. Hacker Way is free-wheeling and open.  Management strategists will spend years picking apart these highly successful and divergent innovation models, hoping to figure out which one ‘works best,’ and under what conditions.  Here are some thoughts: Apple’s hardware products can’t fail at launch. Massive hardware ‘fixes’ typically can’t be pushed out through ‘the cloud’, so the firm must be perfect. But Facebook can hit a reset & make any updates instantly available to its entire user-base (or a testable sub-set).  Facebook’s speed-focus is understandable.  Theirs is a space others could have won but lost because they were slow with features (‘true’ user identity, feeds, an open apps platform, ‘like’, the open graph). As a result, users flocked to Zuck, tipping the bulwark, winner-take-all, strategic assets of  network effects and switching costs to craft a Goliath now used by one in eight of the planet’s citizens (and remember, China-blocked Facebook isn’t even allowed in the world’s biggest nation).  MySpace, Friendster, what you could have been had you paid attention and had a bit of hacker ethic at the top! This is a pattern we’ve seen before when Google blew past Yahoo!  Weaker thinking interprets this as there being no first mover advantage but that’s not it at all. Instead the early movers FAILED to match superior products that they COULD have copied. Facebook and Google aren’t houses built on patents (despite Yahoo’s recent claims) – instead these new rivals had a time lead on better, unmatched efforts that created durable advantages that currently seem insurmountable.

The innovation/culture question will be fascinating to watch.  Fortune asks, “Can Facebook keep this edge, or will it get soft with the relentless pressure of quarterly earnings, sheer size, sudden wealth, and mounting legal concerns as it becomes a big, rich target for everything from patent litigation to zealous lawmakers and privacy advocates.”  Stay tuned for the status update!

Twitter: The Startup That Wouldn’t Die:
Now that Facebook is going public, Silicon Valley job-hoppers seeking an IPO payday are orbiting Twitter. About 10% of the firm’s 900 employees are former Googlers. Twitter’s prospects are looking good, as it tries to grow into the $8 billion valuation pegged following the past summer’s investment by “Russian moneybags” DST.  A host of new ad products has attracted A-list advertisers and has the firm on pace to earn $260 million in 2012.

Twitter hashtags (keywords following the ‘#’ classification symbol) are now becoming a key part of the marketer playbook, right up there with URLs,  Facebook ‘Like’, and SEO/SEM.  The White House released a transcript of the most recent State of the Union speech full of hashtag annotation. And this year’s Super Bowl television ads boasted hastags in eight of the 42 commercials (last year only Audi showed a hashtag).

Like many social media services, corporations can contribute content along with other users, free of charge.  That creates a bit of a ‘free rider’ problem, where firms benefit from a platform without directly paying for the resources they use.  But corporate use can make Twitter more valuable to users who opt-in to ‘follow’ brands in their Twitter feed.  And Twitter-hooked advertisers can pay to more prominently feature their messages. “Promoted Tweets” are ads that appear on top of the user’s feed. Advertisers pay only when a user “engages” the tweet by retweeting or clicking a link.  Like Google’s AdWords, Promoted Tweet appearance is performance-driven – the more clicks an ad receives the more it’ll show up. Engagement stats are strong – averaging  3%  to 5% vs. less than 0.5 percent for banner ads. Promoted Tweets appear in the browser as well as desktop clients like Twitter-owned TweetDeck, and they’re rolling out on mobile devices, as well (pushing Twitter ahead of Facebook with a mobile advertising product). Political ads have come to Twitter, too.  As part of the Feb. GOP debate in Arizona, Gingrich campaign bought a promoted tweet with a link to a petition that occurred any time a user searched for either “Newt Gingrich” or “Mitt Romney.” A Gingrich consultant says the Twitter ads are “the best rapid-response tool that exists in politics right now.”

There are also “Promoted Trends” that appear on trending topics lists (avg. cost for a US run? About $120,000 for a day).  Use example: Disney bought a Promoted Trend as part of the Toy Story 3 premiere. Twitter also sells “Promoted Accounts” to anyone that wants their Twitter handle featured as a recommendation to for users to follow (a move advertisers can use to announce they’re on Twitter & potentially pump up their follower count).

Advertisers are still learning the ins and outs of the Twitter free-for-all.  Among the tips you’ll find in the social media slides I share with my class, Twitter works well for: real-time promotions, time-sensitive information, firms with ‘enthusiast’ customers, and firms that can and should have a conversation online.  It can be important to think through how a campaign might be received by everyone online.  A January attempt by McDonalds to encourage users to share #McDStories saw the hashtag raided by critics and pranksters tweeting about “food poisoning, weight gain, and poor employee hygiene.” Yikes!

Twitter lacks the kind of accurate profile information of a Facebook, which often knows your name, gender, relationship status, musical tastes, and more.  But Twitter’s CEO describes the firm as targeting the “interest graph – the set of characteristics that can be gleaned from users’ followers and what they click on. “ Twitter is much smaller than Facebook (100 million active users vs. 840 million on Facebook), but BusinessWeek quips that Twitter has “become the pulse of a planet-wide news organism, hosting the dialogue about everything from the Arab Spring to celebrity deaths.” Use has shot up following tighter integration with Apple’s iOS, and links with Macs are on the way with the recently announced “Mountain Lion” OS X upgrade (Twitter CFO is Ali Rowghani, who was previously CFO for the late Steve Jobs at Pixar). Twitter CEO has also received coaching from former BC Football Coach, Apple board member & Intuit Chair, Bill Campbell. Another BC connection? The firm received funding from Spark Capital’s Bijan Sabet, a Boston College alum!

Seeing Red – Vanity Fair Profile of Netflix
The second half of 2011 was costly for Netflix.  Vanity Fair calls the split of a unified product into higher-priced DVD and streaming products  and the subsequent Qwikster debacle “one of the worst self-inflicted corporate disasters in recent memory”, a series of events that wiped out over $12 billion in firm value. Netflix CEO Reed Hastings saw his salary cut by $1.5 million and has been contrite, admitting that he “slid into arrogance.” The firm also recently raised $400 million in cash, $200 million in a secondary offering at $70 a share, and $200 million from longtime investor TCV. Doubtless it’d have been nicer for Hastings to have done this a few months earlier when the firm’s stock price was a nosebleed-high $300+.

But with all the outrage and ridicule (did you see the SNL apology parody and another featuring a bogus Hastings with Zuck and Arianna Huffington?), Netflix remains a darling of the movie studios because it is a paying distribution channel that can milk the otherwise idle asset of a firm’s back-catalog of films.  CBS CEO Les Moonves, says Hastings and Netflix Chief Content Officer Ted Sarandos “are two of the smartest people in the industry”. “We welcomed Netflix into the marketplace… they’re paying us in a brand-new way that opens up many horizons for the future.” CBS might even start producing original content that appears first on Netflix.  The CEO of Viacom, Philippe Dauman, says They continue to be a good partner for us… When you have the resources they have and the reach that they have—we’re all looking for new revenue streams—they’re the newest and most exciting, and biggest.”  Ron Meyer, the head of Universal Studios, says “On a scale of 1 to 10, they’re a 10.”

Critics also gripe that Netflix is propping up profitability with “accounting gimmicks” that more slowly amortize the cost of streaming licensing, while doubling its account payable period.  But Netflix has fired back against these arguments and posted the best comeback of all, a better-than-expected Q4 2011 in which it announced a profit of $52 million and over 220,000 new streaming-only customers.

The next year will be tough.  As detailed in a chart in the Netflix Chapter of my book, the streaming business has vastly different economics and competitive dynamics than subscription discs via mail.  Amazon, Hulu, and Blockbuster (through its parent Dish Network) have all launched Web video subscription services, but none has created what can be considered a credible rival, offering the selection and price of Hastings’ offering. AllThingsD says that even Comcast Streampix, called a ‘Netflix Killer” by some, isn’t.  Comcast execs refuse to offer the streaming service outside the firm’s customer base, claiming they can’t profitably do it for $8 a month and can’t understand how Netflix can, either.

How Target Figured Out A Teen Girl Was Pregnant Before Her Father Did
A data-mining expert from the retail giant Target told a New York Times reporter “Just wait. We’ll be sending you coupons for things you want before you even know you want them.” No waiting required, it seems the firm has found a way to “data mine its way into the womb”.

It turns out, an irate father recently stormed into a Minnesota Target, demanding to see the store manager, and clutching coupons that had been sent to his daughter. The coupons contained ads for maternity clothing, nursery furniture and pictures of smiling babies. “My daughter got this in the mail!” said the dad, “She’s still in high school, and you’re sending her coupons for baby clothes and cribs? Are you trying to encourage her to get pregnant?” The manager apologized and phoned a few days later to reiterate. But by then the father had a bit of his own intelligence that, it appears, Target was able to glean in advance from analyzing purchasing habits. Said dad, “I had a talk with my daughter. It turns out there’s been some activities in my house I haven’t been completely aware of. She’s due in August. I owe you an apology.”

How did Target know?  It turns out that some habits can be gleaned from women on the baby registry that also apply to those who haven’t signed up: for example, moms-to-be load up on unscented lotion at the beginning of their second trimester. Another data run showed that about 20 weeks into their pregnancy, women up their vitamin supplements. A switch to scent-free soap and extra-big bags of cotton balls is another sign there’s likely a little-one on the way.

Those engaged in ‘predictive analytics’ are keen to pay attention to pregnancy because, as one researcher put it, there are “brief periods in a person’s life when old routines fall apart and buying habits are suddenly in flux.” During these times (and pregnancy and the arrival of a new baby is one of them) “shopping patterns and brand loyalties are up for grabs.” Opt-in registry signup may be later than some firms want to wait. Says one marketer “if we could identify them in their second trimester, there’s a good chance we could capture them for years.” But step over the unclear line where a firm shows that it has learned a bit too much about customers, and you get a major privacy creep-out.

Target tends to be conservative in complying with privacy laws, but they also realize they need to back off to avoid the creep-out factor. Says one exec “we learned that some women react badly. Then we started mixing in all these ads for things we knew pregnant women would never buy, so the baby ads looked random. We’d put an ad for a lawn mower next to diapers. We’d put a coupon for wineglasses next to infant clothes. That way, it looked like all the products were chosen by chance… We found out that as long as a pregnant woman thinks she hasn’t been spied on, she’ll use the coupons. She just assumes that everyone else on her block got the same mailer for diapers and cribs. As long as we don’t spook her, it works.”

The Times piece reveals that Target tries to assign customers a unique “Guest ID number,” and links this to things like credit card use, trackable coupons, surveys, mail-in refunds, phone calls to the firm’s help line, web use, and e-mail promotion response.  Demographic info is also linked to the Guest ID: age, marital status, whether or not you have kids, which part of town you live in, distance from the store, estimated income, whether you’ve moved, credit cards used, and some web information.  And while the Times didn’t confirm that Target looks at this, there are third-party databases that can be purchased and linked to existing customer information, including: ethnicity, job history, magazine subscriptions, catalog buying history, financial history (bankruptcy, home purchase and foreclosure), college, brand preference, political leanings, charitable giving, auto ownership, and more.  Yup – you’re for sale and there’s big bucks in building a targetable, digital-you!  Math geeks interested in working as data-miners are in huge demand.  Says a former Amazon Chief Scientist: “Mathematicians are suddenly sexy.”

The longer New York Times piece about the events above, titled “How Companies Learn Your Secrets”, is a highly-recommended read for faculty teaching data mining, and great discussion fodder for class conversations on possibilities, ethics, best practices, and the implications of technology use.

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And a quick thanks to all who continue to support my Textbook project.  The book “Information Systems: A Manager’s Guide to Harnessing Technology” has won a 2012 “Textbook Excellence Award” (known as the “Texty”) from the Text and Academic Authors Association.  My publisher, Flat World Knowledge, my students, and all of the adopting faculty and friends of the project have been wonderfully helpful in the book’s continued and sustained impact on our field.  thanks so much for your support and for sharing information about the project with others!

So how do Facebook & Google compare? Facebook is going public as an 8 year-old – Google went public after 5 yrs. Pre-IPO Facebook revenues are $3.7 billion, about 2.5x the $1.5 billion in revenues of pre-IPO Google. Facebook brought in $1 billion in profits last year, about 10x Google’s pre-IPO profit of $106 million. And Facebook’s post-IPO market cap is currently estimated to be between $85-$100 billion, around 4x Google’s post-IPO value of $23 billion. But the comparison isn’t Apples-to-Apples (no pun intended). Roll the clock back & 5 year old Facebook (roughly the age of GOOG at IPO) actually lost $56 million on revenues of just $272 million. Google as an eight year old brought in $10.6 billion in revenue and $3.5 billion in profits, and sported a market cap of over $150 billion. The 8-year old comparison also isn’t quite a fair one since capital raised during the IPO & a secondary offering helped fuel Google growth over those three years, but still, 8 yr. old Google made about as much profit as 8 year old Facebook did in revenue. As TechCrunch points out the 5-year compound annual growth rate for each firm’s revenue during comparable periods (2002-2006 for Google, and 2007-2011 for Facebook) was almost exactly the same: 89% a year. I put together the table below for easy side-by-side comparison:

If you’ve been working for Zuck for a couple of years or more, then you’re probably golden (or about to be). Facebook’s IPO is expected to create between 500 and 1,000 millionaires – roughly 1/3 the firm’s workforce. Among the Facebook investors that will cash out – Bono. The rocker/activist is a partner in VC firm Elevation Partners and his share of the firm’s take from a public Facebook may earn him well north of what he’s made during his entire career as U2’s front man. However, if Elevation is like most VCs, it’ll give 80% of its Facebook stake upside back to limited partners (the institutions it raised its fund from), and it’ll then split up the remaining 20% among Elevation’s team. That means Bono’s take is almost certainly quite a bit less than the widely reported $1 billion.

COMMENTARY: So is Facebook worth it? Advertisers in the United States alone spent $36 billion to reach online audiences in 2011, up from $26 billion in 2010. Facebook currently brings in about $4.39 per user (useful acronym – ARPU for ‘average revenue per user). For comparison, Google’s ARPU is above $30 (there’s also a nice ARPU comparison chart in the Facebook chapter of my book that I’ve recreated below). 85% of Facebook revenue comes from advertising, about 15% from online payments, and just one firm, Zynga, is responsible for about 12% of Facebook’s revenue (Zynga CEO Mark Pincus owns about .5% of Facebook – not a bad post-IPO haul after taking ZNGA public last year). Facebook keeps 30 cents of every dollar users spend on Facebook credits, and game firms like Zynga have to use Facebook’s currency.

Facebook nation has swollen to 845 million monthly users. More than half visit each day, spending about 20 minutes a day on Zuckerberg’s site. Mobile is a huge growth area, with 425 million people using Facebook’s mobile app on all major smartphone systems. But it’s also currently a major challenge since, according to Facebook’s filing, the firm “has not yet developed any meaningful stream of revenue from mobile advertising or other mobile products”. Here’s more concern: new growth in emerging economies is far less valuable than past growth. Consider that Indonesia is a “Top 3” nation by Facebook use, but most of these consumers access via mobile (many via text-based non-smartphones). That means this massive customer base earns the firm almost no money. Moore’s Law will make phones more robust & open up more revenue opportunity, but lifetime customer value for high-income nations doesn’t necessarily mean the same can be expected in the short-term from Facebook’s emerging markets march. Also – China (about 1/5^th of the world’s population) still remains out of Zuck’s grasp.

Bechmark VC Bill Gurley offers a compelling argument as to “Why Facebook Belongs in the 10x Revenue Club”. The underlying strategic factors are covered in depth in the Facebook chapter of my book. But surprising in discussions of Facebook’s value – few mention the potential of two items: An ad network and Facebook TV. An ad network seems obvious given that ads outside of Google-owned sites generate 30% of Google revenue. Advertisers should like Facebook’s ad-targeting rifle-scope. Consider that a Facebook campaign aimed at adults between the ages of 25 and 49 “had a 95% accuracy, compared to the industry average of 72%.” More accurate ads should be a magnet for both advertisers, as well as content sites that are often paid based on ad performance (e.g. PPC, targeted impressions served). Longer term, what about Facebook TV? Netflix CEO Reed Hastings is on Facebook’s board – imagine a Facebook social platform being baked into hundreds of consumer electronics products just as Netflix is today. There could be a “Like” from your remote with the potential for Facebook to: deliver targeted video ads, offer up questionnaires, become a middleman for living room media consumption, generate revenue from on-demand streaming, act as a subscription gate keeper, gather massive amounts of targeting data, and more.

As my TechTrek students know, those visiting Facebook’s new digs (the firm’s third new HQ in three years) will see a sign that says “this journey is 1% finished.” Look for an exciting 99% in the years ahead.

All Hail Emperor Zuckerberg
Mark Zuckerberg initially controlled 3 of 5 board seats. He could do this because he could demand the terms – his firm grew fast (network effects), the demographic of Facebook users was hugely attractive, and he didn’t need that much capital to get started (big chunks of Facebook are based on open-source software). All that meant he could demand more favorable terms from the VCs that fell over themselves to fund subsequent rounds of private investment. Now it seems even publicly traded Facebook will have Zuckerberg’s authority firmly cemented. Slate states: “When it goes public, Facebook will be conducting an experiment in corporate dictatorship nearly without precedent for such a large and high-profile company.”

Mark Zuckerberg will own 28% of post-IPO Facebook. That’s a huge chunk when you consider that the largest shareholder in Exxon Mobile (mutual fund giant Vanguard) holds only 4.19% of that firm. But Facebook also has two shares of stock – Class A shares, and Class B shares. The latter have 10 times the voting rights of the former. Zuck’s Class B shares (along with proxies he controls) give him voting rights that amount to 57% of firm control. Bill Gates had less than 50% of post-IPO Microsoft, and Apple’s five largest shareholders aren’t the Jobs Estate, they’re institutions (mutual funds and hedge funds). The deal isn’t entirely without precedent. Together Sergey and Larry control the majority of Google voting rights, but the Google Duo claim they’ll cede majority rights by 2014.

Zuck’s control may actually increase over time. This is because if the relatively few owners of non-Zuckerberg Class B shares sell their stock, they transform into Class A shares with 1/10^th the voting rights. Class B insiders cash out? Zuck’s degree of control goes up! There’s even an estate planning clause where Zuckerberg’s Class B shares can be transferred to a person or entity designated as his successor. As Slate says “absolutely nothing—up to and including death—is going to dislodge Zuckerberg from control of his firm.”

Amazon’s Performance: A Mixed Bag
There is a stellar new infographic on Amazon’s massive growth and impact. (example, Amazon has 5x the unique user traffic as eBay, with web sales that are 5x Wal-Mart.com, Target.com, and Buy.com COMBINED). Amazon’s Q4 revenue rose to $17.43 billion, up 35%. That’s killer growth for a retailer in a down economy, but about a billion (with a ‘b’) short of what analysts were hoping for. Profits were down sharply from a year ago, too (the money-losing Kindle no-doubt contributing), but unlike the revenue shortfall, the profit drop was less steep than expected. Lower performance aside, that still puts Amazon’s annual growth at a staggering 47% vs. the still respectable 15% for all of U.S. e-commerce. Again we see Internet dynamics in ways that seem to defy the rule of large numbers – the big get bigger, faster! Amazon also warned that it might lose $100 mil to $200 mil in the current quarter. That guidance hurts, but the firm is still trading at a lofty P/E that hovers near 135.

E-commerce only makes up about 5% of all U.S. retail spending, so Amazon expects lots of growth and is building accordingly. The firm currently has 69 warehouses worldwide, and it added eleven new fulfillment centers in 2011. Nomura Securities estimates that Amazon will add the equivalent of 450 Costco stores from 2011 to 2016. To put that in perspective, Costco, itself has just 592 stores worldwide.

The only specifics on the Kindle shared by Amazon stated Q4 sales were up 177% over the prior year. Analysts estimate as many as six million Kindle Fires plus “millions more” traditional Kindles were sold. For comparison, Apple’s quarterly freak-show-of-growth claimed 15 million iPads sold over the holiday quarter. More perspective – Amazon’s operating margins are 1.3% while Apple’s are about 30%. One last curiosity in the most recent Amazon financials – the daily deals site & Groupon competitor LivingSocial lost $558 million on revenues of $245 million in 2011 (AMZN owns 31% of LivingSocial).

Amazon Wants to Burn the Book Business
BusinessWeek serves up a provocative cover story chock full of tasty nuggets of disruption (a great class read & great fodder as I write an Amazon chapter for the next edition of my book). Consider that overall U.S, sales of paperbacks and hardcovers fell 18% between 2010 and 2011, the former #2 chain, Borders, is gone, and most remaining booksellers are struggling. Amazon, however, is still the clear leading player in both e-books and print, and today sells 105 e-books for every 100 dead-tree titles. Nearly 30% of all Americans claim to own at least one digital reading device – a market where the Kindle is king. Amazon is a sales juggernaut, but now Amazon might also be an unstoppable competitor to big publishing houses. Amazon’s success may be good for many; Slate recently ran a provocative story that stated “Buying books on Amazon is better for authors, better for the economy, and better for you.”

Think like a strategist – what does the move to become a publisher get Amazon? Exclusive content, the ability to capture middleman (publisher) revenue that it can pass on to authors as higher royalties and customers as lower book prices. Plus no other retailer manages inventory as efficiently as Bezos – cutting out much of the loss in unsold shelf-stock that is the bane of both publisher & bookseller operating costs.

Forrester estimates that traditional publishers offer authors roughly 20% royalties (on avg. publishers take 50%, booksellers 30%). With Amazon Publishing authors will get 45-50% of the selling price. And with “almost infinitely deep pockets for spending on advances to top authors,” expect Amazon to pony up for content. As an example, Amazon’s publishing arm recently spent $800,000 for the rights to the memoir of actress/director Penny Marshall. As one insider put it, “Publishers are selling drinks on the Titanic. They are doing so much to protect their paper industry that they are disregarding the needs of customers and are treating authors poorly.” Another quoted in PandoDaily is even more blunt: “Long-term there’s no future in printed books”.

Publishing is an industry that’s already an oligopoly, with the majority of bestsellers controlled by the “Big Six”- Random House, Simon & Schuster, HarperCollins, Penguin, Hachette, and Macmillan). And five of the “Big Six” are currently being investigated for eBook price-fixing. Look for more tensions among “frenemies” that are both partners and rivals. Barnes and Noble and other chains are refusing to carry print versions of titles from Amazon Publishing. Barnes and Noble also pulled 100 DC Comics graphic novels after DC offered Amazon an exclusive for its comics, bypassing the Nook. Several publishers are refusing to participate in library e-book lending programs, prompting protests from the American Library Association. Amazon offers customers of its Amazon Prime two-day-shipping service a one-book-at-a-time free lending download, and initial feedback suggests the program actually increases not just buzz, but overall sales of participating titles (yet another benefit to authors). One last shocker – Amazon seems to be preparing to open its first-ever physical store in Seattle. Suspect something more akin to a Kindle-centric Apple Store clone than a Costco-sized big box.

Let the Robot Drive
I can’t drive (poor vision), and while it’s still unclear if I’ll have a robo-chauffer during my lifetime, Wired’s cover story on self-driving cars offers hope to all. Driving is dangerous and it takes up time. Human errors are implicated in 93% of automobile crashes and the average American commutes 52 minutes each day. Those are huge improvement opportunities to target. Says Anthony Levandowski of Google’s self-driving-car project “The fact that you’re still driving is a bug, not a feature”.

Fears of catastrophic software crashes, four-wheel viruses, and other nightmare scenarios will likely make it quite some time before we can let go of the wheel and grab the Kindle and coffee, but the building blocks of self-driving cars are already being baked into the devices in showrooms and garages. Today’s premium-class automobiles run 100 million lines of computer code, more than Boeing’s new 787 Dreamliner. Mainstream commercial motor vehicles can parallel park themselves, drive under cruise control, warn drivers when they’re at risk for collision, take control of braking, among other things (all that tech also means that auto-industry IP lawsuits are on the rise, too).

The self-driving car is really about big-data. It’s “hack-driving”. The car constantly gathers inputs, mines the dataset that is the road & its environment, and algorithms perform AI-based machine-learning to constantly improve performance. Google isn’t so much “teaching” its computers how to drive as it is letting the patterns reveal themselves as cars drive 200,000 road miles (and climbing). Mercedes is building pedestrian-recognition software based on over 1.5 million samples of real and “virtual” people. Going global also requires cultural tweaks. In Germany, a Mercedes can alert drivers to the presence of speed limit signs contained within a quite-detectable red circle. In U.S., however, square signs can look a lot like billboards or buildings, generating all sorts of false positives. We’ll also have to re-write the law. In 2011, Google helped Nevada draft the first legislation to allow autonomous cars to hit the state’s roads. But in most states it’s not clear who’d get the ticket for any robo-driving mishaps.

The “connected car” can also lead to new and creative revenue models. If airbnb can turn any house or apartment into a rentable property (5 million nights booked so far), RelayRides will allow you to “pull an Avis” and turn your car into a cash-generating rental asset. Sound farfetched? GM has inked a partnership with RelayRides. The firm’s OnStar system can even be used to allow customers to unlock vehicles and eliminate the need to exchange keys. See the Wired article above for cool video, photos, & interactive graphics.

OpenTable’s rise and fall is a cautionary tale
Fortune’s coverage of online reservation firm OpenTable’s 2011 performance is a good read for b-school students, covering several issues including industry competitiveness and market expectations. OpenTable went public in May 2009 and consistently delivered, beating analyst estimates by a wide margin, quarter after quarter. The stock hit $118 in April of last year, and as a Net stock with post-IPO performance & upward momentum, it likely helped contribute to demand for many of last year’s Internet IPOs including LinkedIn, Pandora, Groupon, and Zynga. But over the next 8 months OPEN gave back about 2/3 of its value – trading around $39 when this Fortune piece was written. As the magazine points out, when a stock loses two-thirds of its value that quickly it’s usually a sign of a terrible misstep, scandal, or financial collapse. That’s not the case here. OpenTable is still in heavy growth mode – revenue is expected to swell 40% in 2012, and operating margins are a healthy 17%.

So what happened? In part, we saw a correction. Momentum investors pushed the stock to the point where it was trading at a PE well above 100 (compared with the historical market overall average PE of around 15 – about where Apple trades today). Side note: while many cite Netflix’s summer-to-fall missteps as the primary reason NFLX dropped, it’s also important to note that this summer, Netflix was also sporting a nosebleed triple-digit PE before the pricing fumble. Stocks priced for perfection risk a looming reality – nobody’s perfect.

The May departure of OpenTables CEO for VC firm Andreessen Horowitz likely contributed to the stock slide. Another concern for OpenTable is competition from credible rivals. Europe’s Eveve online reservation system claims to have nabbed 20% of OpenTable’s bookings during a four-month Minnesota-invasion. Europe’s Livebookings also smells opportunities in the U.S., and offers free reservations along with premium analytics & e-mail marketing. OpenTable may still have a great business. Network effects, brand, and the switching costs all created by its early-mover status may give it a sustainable edge. But the future is uncertain enough to have smacked the “momo” cheerleaders back to a reasonably priced reality. Key lessons to remember as market improvements and new IPOs seem likely.

The Cloud Goes Hollywood
DVD sales peaked at $15.5 billion in 2004, but they’ve been cratering ever since, down roughly 20% during the first half of last year. Meanwhile streaming and kiosk sales were up over 40% in the same period. And the takedown of Megaupload shows piracy lingers, even on a celebrity-endorsed site.

In an effort to extend the lucrative DVD buying window, Warner Bros is doubling the time that Netflix and Redbox need to wait to receive DVDs from 28 days after discs go on sale to 56 days. Redbox says it’ll fight back, acquiring Warner DVDs via ‘alternate means’. HBO has also said it will stop selling discount discs to Netflix DVD-by-mail business, and it continues to refuse to provide its original titles to Netflix or other streaming sites. Hollywood realizes its future is in access-anywhere digital, so it has finally stepped into the cloud, but in a way that encourages higher revenue ‘ownership’ rather than subscription streaming or rentals. UltraViolet is a standard that stores purchased content on remote servers that can then be streamed to different devices as long as you can verify your purchase. Many new DVD and Blu-ray titles come with Ultraviolet digital rights, and some 750,000 households in the U.S. and Britain have already set up UltraViolet accounts. With Fox expected to announce UltraViolet support, soon, that’d leave Disney as the lone big-studio holdout. Disney backs its own effort called KeyChest, and the studio’s ties with Apple also remain tight. The Steve Jobs estate remains Disney’s largest shareholder, a result of the firm’s purchase of Jobs’ Pixar.

In its current form, UltraViolet lacks polish. Customers first create an UltraViolet account. To watch movies they then need to log into Flixster, a movie site operated by Warner Bros. But expect UltraViolet bundling to become standard, soon. Blu-ray is almost certainly the last physical media format used for mass-market sales. Viva la Cloud!

Netflix Bounces Back, but Says Amazon is Coming
Analysts expected Netflix to earn 54 cents a share last quarter – the firm actually came in at 73 cents a share. Subscribers were also up 600k for the quarter. The firm ended the year with 24.4 million U.S. subscribers, up 25% from the previous year. Not bad despite the Qwikster debacle. The current subscriber breakdown is as follows:

• Domestic streaming: 22 million subscribers
• Domestic DVD: 11.17 million subscribers
• International: 1.86 million subscribers

Still, the firm warned it may lose money in 2012 as streaming costs soar. Netflix is also seeing stepped up competition. Amazon cut a deal with Viacom so that Amazon Prime customers will now be able to stream shows from Viacom networks MTV, Comedy Central, Nickelodeon, TV Land, Spike, VH1, BET, CMT and Logo. Amazon says it now offers some 15,000 streaming titles vs. about 20,000 that stream over Netflix. Verizon and kiosk-firm Redbox also plan a streaming venture later this year.

WePay Grows Revenue 10x in 2011, Plans Mobile App
Kudos to my former student Bill Clerico and his BC co-founder Rich Aberman on completing a killer year. The duo was named to BusinessWeek’s “Best Young Tech Entrepreneurs” list, and their online payments firm, WePay (the ‘banker’ for Occupy Wall Street and now cited as a legitimate PayPal competitor) grew ten fold last year, and is now processing several million dollars in payments each month. The firm’s API allows the WePay engine to power payments beneath the hood on other sites (like GoFundMe, which replaced PayPal with WePay last year), and new WePay services like ticket sales and stores have greatly expanded on the firm’s original peer-to-peer payments base. While the firm’s compound monthly growth rate of 30% is impressive, look for even more revenue rocket fuel as the firm expands into mobile payments this year. The photos below show Clerico lecturing to my students at the firm’s Palo Alto HQ on January’s TechTrek, and Aberman speaking at the BC Presidential Scholars dinner earlier this month. WePay’s brain trust also includes two other former TechTrek students of mine – Clerico’s classmate, Tyler Gaffney (a GE vet and sales god), and Sophie Monroe (a brainiac who could have graduated in just 3 years, yet decamped before earning her sheepskin to build the firm’s widely praised service team). Keep at it, folks, we’re hugely proud of you!

The Other Side of Open Textbooks (A Conversation with a Bald Man)
Apple is all-in on textbooks and the effort will be spectacular for iPad-only environments. MIT is also offering a free online course, and Rice is in the game, too. But it’s nice to see our efforts get a little bit of coverage (we’ve been sharing content online for well over a decade, and my free-in-browser open text is in its fifth edition). I hope this interview is useful for anyone considering either writing or adopting an open-source textbook. Continued thanks to all for helping spread the word about my text. Also thanks to MBAPrograms.org for naming me one of the “Top 50 Business School Professors to Follow on Twitter“.

Now Every Company is a Software Company
David Kirkpatrick, author of the Facebook Effect, writes in Forbes: “The era of separating traditional industries and technology industries is over—and those who fail to adapt right now will soon find themselves obsolete… Regardless of industry, your company is now a software company, and pretending that it’s not spells serious peril.”

As an example, Kirkpatrick (who also runs the excellent Techconomy conference – video excerpts here) cites Venkatesh Prasad, a senior technical leader at Ford who increasingly sees the auto giant as a firm that produces “sophisticated computers-on-wheels.” Today’s Ford cars are mobile Wi-Fi hotspots.  Software manages fuel efficiency and safety systems.  Sensors and software combine to automate parallel parking. Tech runs systems from navigation to entertainment. And data from smart vehicles not only feeds actionable performance data in real-time (tire pressure, breaking, and more), data fed from cars back to Ford also provides direction for engineers designing improvements for new models.  Still have doubts about that ‘computer-on-wheels’ analogy?  Ford is mailing out a quarter-million USB devices containing a new interface upgrade for vehincles.  Now think beyond Prasad’s statements – what does this mean for today’s manager?  All of a sudden issues of security, privacy, the implications of technology failure, the ability to digitally partner with others, and opportunities to create platforms for new industries – all enter the modern executive playbook.  The manager who can’t think in these terms is ill-equipped for leadership in today’s environment – period.

Kenya Has Mobile Health App Fever
50% of all Kenyan banking is done on mobile phones, and many Kenyans enjoy pay-by-mobile services unavailable to most Americans.  During an August visit to Nairobi I noticed that it was common to see everyone from shop keepers to cabbies swapping virtual cash via SMS text messages over the M-Pesa system offered by billion—dollar local telecom provider, Safaricom (while in Nairobi I was extremely fortunate to have had an opportunity to keynote a conference that also featured Safaricom CEO, Bob Collymore, and I’m a huge admirer of the firm).

But Kenya-tech isn’t just about banking – Technology Review points out that Kenya is paving the way in other areas, including potentially high-impact mobile health apps. MedAfrica from Nairobi-based Shimba Technologies (co-founder Steve Mutinda Kyalo is pictured) offers critical tools to a nation where only 7,000 doctors serve a population of 40 million. The MedAfrica platform offers up real-time health information, aggregating multiple sources such as first-aid treatment and health alerts from local hospitals. The firm also plans to tap into data from NGOs and the national Ministry of Health to support coverage of disease outbreaks and exposing counterfeit drugs. And customers can use the app to find medical practitioners in their area. MedAfrica hopes to keep services free and ad supported, with for-fee premium services offered in the future.  The app is currently being downloaded at a rate of about 1,000 new users each day, with 60% reporting active use.  And a partnership with Safaricom, Kenya’s leading mobile provider, will help bring the effort to the nation’s 25 million mobile phone subscribers.

Safaricom is also working with the startup Call-a-Doc, which allows the telecom firm’s 18 million mobile subscribers to make advice calls to ­doctors for about two cents a minute.  Another effort, Mpedigree, is rolling out an SMS-based service at health-care centers to provide a way to check serial numbers on drugs so that counterfeit meds aren’t used. And don’t forget Boston-based Sproxil (where one of my former students works), also a key player in combating drug counterfeiting. Beyond Kenya, Africa Aid offers MDNet – a system that has logged over a million free voice calls (texting is also supported) linking patients with a network of 1,900 physicians in Ghana. Moore’s Law fuels cheap cell phones and just might extend life spans by providing the equivalent of a doc in the pocket of millions that are currently under-served.

Facebook vs. Google
Social networking is now the world’s No. 1 online activity, occupying 20% of online time.  Four years ago, that figure was just 6%. And the war over social is fodder for a recent Fortune cover story on Facebook vs. Google (bonus at link above: scroll for video of Google exec Marissa Mayer on privacy, & Facebook’s Mark Zuckerberg topping the ’40 under 40’). Both firms are surging, and each is building a rock-solid set of strategic assets.  Says Fortune “rarely has there been a battle as competitive as the raging war between the web’s wonder twins.”

The overwhelming majority of profits from both firms come from ad dollars. Google is a behemoth- taking in some 41% of the U.S. online ad market.  Facebook’s estimated $4.3 billion in ’11 revenues are less than half the $9.6 billion Google brought in last quarter, and Larry Page’s firm is estimated to snare $38 billion in ‘11.  But Facebook’s revenues more than doubled in size in 2011, while Google’s should grow by 30%.  That’s slower growth, but in dollar terms, Google is still growing by adding more than an entire Facebook’s-worth of revenues in 2011.  These are remarkable numbers given the horrendous global recession, but at some point all markets mature and as one analyst says, it’s highly unlikely that either firm “could grow by the billions that investors expect… without engaging directly and stealing market share from the other.”

Google search is a rifle-scope targeting ads when you’re on the hunt for information.  But Facebook is a microscope exposing who you are and what you’re up to. If we opt into Facebook’s deep integration with other apps, we tell Facebook what we’re doing – listening to tracks on Spotify, watching videos on Netflix, using RunKeeper to train for that 10k – and all of that is advertising gold.  Even worse for Google – most of the content on Facebook is in the ‘dark web’, un-crawlable by Google’s search spiders because it lies protected behind a Facebook login. Developers dig how Facebook helps spread the viral love of their new offerings, and with each new adoption, it’s an opportunity for Facebook to reveal even more of you under that microscope.  It’s worth noting that Facebook’s login credentials are becoming a real catalyst for web innovation.  One might bail on a new site if it required a new password, but might try a site if it accepts the Facebook login.

The importance of social isn’t a new realization for Google – but nearly all of the firm’s prior efforts were dismal failures. You’ve likely never used (or perhaps even heard of) Google’s Orkut unless you were in Iran or Brazil – two of the only places where it dominated.  Google Buzz was a poorly-tested, privacy-exposing failure that prompted an FTC investigation.  And the much-touted Google Wave bombed – pulled within months of launch.

But the June launch of Google+ is described by Fortune as “a network that cloned much of what people like about Facebook and eliminated much of what they hate about [it]”. Google+ users get profile pages, games, photos, status updates, and a +1 that mimics Facebook’s “like”. But Google also offered features to manage privacy & share updates only with “circles” of contacts that you curate (e.g. posts for groups like friends, family, co-workers, or the public).  And while Facebook charges app developers 30% of revenue, the Google vig is just 5%.

Google’s approach to innovation has been widely criticized, but Larry Page sought to lead the effort top-down, and create accountability for social. “Page moved his office and much of the executive suite to the building where the Google+ team was sequestered”, and he tied a significant portion of employee bonuses to metrics tracking the success of social.  Page even made demands on design – pushing simplicity like one-button photo uploads.  Says Google’s other co-founder Sergey Brin, the firm still wants to be flexible enough that a thousand flowers can bloom, but “once they do bloom, you want to put together a coherent bouquet.”  Google+ has been growing like gangbusters.  Already at 60+ million one bullish report suggests it’ll be at 400 million users by next year if the firm can keep up with the current pace of adding 625,000 users a day.

Facebook didn’t stand still. Shortly after the debut of Google+, Zuckerberg flicked a switch on the pink neon “lockdown” sign at Facebook’s HQ, signaling the troops to “work around the clock” pushing Facebook’s rollout forward and cutting off some of the edge some saw in Google+.  By September, Facebook had rolled out a group-curation tool to counter Google Circles, plus a whole slew of enhancements designed to embed Facebook at the center of the social web.  This shows the challenge of competition on the social front – technology can be easily matched, so unless it comes with a way to create or counteract advantages of user base (e.g. network effects, data) then upstarts will struggle to displace incumbents.  Google has a vast ad network serving ads from sites ranging from BusinessWeek to small-time blogs, lots of cash, and killer platforms for integrating & distributing social (search, Gmail, YouTube, Android, and more). Whether or not this is enough to create an enduring reason to spend more time outside the Facebook social monopoly remains to be seen.  But Google may not need to win outright –a strong second-place showing in social could still mean more data for better ad targeting and improved services throughout the firm’s properties.

The battle is also playing out in a talent war.  Over 10% of Facebook employees are so-called xooglers (ex-Google employees), including four of Facebook’s top eleven executives, as well as the Google engineer considered the father of Google+’s Circles feature.  Still, Google remains one of the most sought-after employers, and the firm has added nearly as many employees in the recent quarter (2,600) as Facebook has on its entire staff.  Facebook will soon lose a key weapon in the talent war – the chance to get a slice of pre-IPO equity and the possibility of liquidity-event coin. Once Facebook goes public, the firm’s stock price will be subject to market whims just like Google (which, incidentally, is up about 7.5 fold in the seven and a half years since going public). Hot-money heat-seekers may follow the next big IPO candidate (Twitter? Xooglers are about 13% of their workforce).

Facebook vs. Google is a very fun place to research and write about. Those interested in diving in with more details can see the January 2012 release of the Facebook and Google chapters in my textbook.

Why Netflix Customers Who Haven’t Bailed Probably Won’t
For those thinking Netflix has backed off plans on its full-steam-ahead streaming future, check out CEO Reed Hasting’s comments from last month’s UBS Media Conference: “We’re going to try to not hurt [the DVD-by-mail business], but we’re not putting a lot of time and energy into doing anything particular around it… We’re focused on, how do we take advantage of this incredible global streaming opportunity.” Even if you used to get both DVDs and streaming videos from Netflix, the company will only tell you about its streaming plan in its “come back!” emails, as far as Netflix marketing goes, it’s as if the DVD biz doesn’t exist. And the firm no longer allows you to ‘gift’ someone a DVD subscription – gifts are streaming-only. Hastings has even called DVDs “Old fogey discs”.  Sure DVDs are a billion-dollar-a-year business servicing millions of subscribers, but its days are numbered.

It’s been a tough year for Netflix.  The firm’s stock price plummeted from $300 to below $80, and it’s customer service rank (which regularly topped leading surveys) has plummeted.  The most recent Forsee index ranked rival Amazon as number one (although it’s worth noting the survey compares a firm’s entire e-commerce offering, so it’s not just a streaming-to-streaming comparison). Some 900,000 Netflix customers bailed the prior quarter.  Those numbers are grim, but a Citigroup survey of customers remaining with the firm suggests most will stay and that growth should be looking up.

57% of current customers reported they were either “extremely satisfied” or “very satisfied” with Netflix.  ‘Extremely satisfied’ customers are down to 18%, from 50% in May. But the survey also reveals that most of the firm’s customers don’t see many other decent options.  Only 15% of Netflix customers report using Hulu to view movies or TV shows – no other site cracks 10%.  These results echo a similar study by PC World showing that even with the price hike, Netflix was still the best value in both video streaming and DVD-by-mail.

That latter stat also made it into the January ’11 update of the Netflix chapter in my book.  The update also includes a chart comparing the DVD-by-mail and streaming businesses – I hope you find it to be a good teaching aid for fueling class discussion around atoms-to-bits shifts and technology disruption.

Bonus: those following Netflix will likely find talks by the firm’s engineering honcho (who tweets at @adrianco) to be fascinating.  The blog post “How Netflix gets out of the way of innovation”, offers a number of gems below – they’d likely generate useful class discussion as well as insights for the entrepreneur.   Nuggets from the blog post cover “how did we keep making big strategic moves, from DVD to streaming, from Datacenter to Public Cloud, from USA only to International, all in very short timescales with a fairly small team of engineers.”  Other highlights:

• “Netflix is now one of the largest sites that runs almost entirely on public cloud infrastructure. We have become a poster child for how to build an architecture that takes full advantage of the Amazon Web Services cloud.” Recent problems are blamed on ‘Roman Riding’ – still having a foot in old data-center architecture while migrating to the cloud.
• “It’s the things you don’t do that make the difference. You don’t add innovation to a company culture, you get out of its way.”
• “Who has junior engineers, graduate hires and interns writing code? We don’t. We find that engineers who cost twice as much are far more than twice as productive, and need much less management overhead.”
• “Reducing management overhead is a key enabler for an innovative culture. Engineers who don’t need to be managed are worth paying extra for.”
• The firm doesn’t have an architecture review board or centralized coding standards.  Instead, engineers are free and responsible for figuring it out for themselves. Peer pressure helps keep quality high.
• On the cloud “AWS takes about 5 minutes to allocate 100 servers, it takes longer than that just to boot Linux on them.”
• “We don’t pay bonuses. We don’t have grades other than senior engineer, manager, director, VP. We don’t count the hours or the vacation days, we say “take some”. Once a year we revise everyone’s salary to their peers and current market rate – based on what we are paying now to hire the best people we can find.”
• “We also have what sounds like a crazy stock option plan that grants options every month, vests the same day, and they last 10 years even if you leave Netflix.”

Those interested in engineering and public cloud topics might also hunt out Adrian’s talks on on YouTube.

Last bit of Netflix news (of particular interest to my students who are visiting with our alumni connections in the Xbox group next week), a new version of streaming over Xbox 360 allows users to use voice and gestures to control the app.