Worlds In Motion has a good summary of my panel today from the Virtual Goods Summit, where leaders in Asian and Western virtual goods social networks shared what lessons they had learned.

I’m speaking at the Virtual Goods Summit on Oct 29-30th. I’m moderating an all star panel including Min Kim from Nexon, David Wallerstein from Tencent, Bill Wang from Perfect World and Dai Watanabe from DeNa. Between them, these four companies generate around $1bn in annual revenues through virtual goods sales. So we should be able to learn something from the discussion!

The full program is here.

If you’d like to join me at the summit use the code “LSVP” to get a 15% discount

This is the third year that I’ve tracked my birthday greetings as they have moved from private channels to public channels, primarily facebook. As I noted previously, in 2007 and 2008;

Social networks have changed the dynamic – it isn’t enough to wish someone a happy birthday, but it is also important to be SEEN to wish someone a happy birthday. Equally, it is important to be SEEN to have a lot of people wish you a happy birthday too!

This year the shift continued but was much less pronounced, as the graph below shows:

It’s somewhat notable that despite the huge increase of Twitter usage there were no happy birthday tweets. The use case is off. The tweeter would be sending a birthday greeting to the wrong audience – to their followers, not to mine.

The other notable point is that there is an overall increase in the number of birthday greetings over 2007. This is consistent with the obvervation in a recent edition of the Economist’s Intelligent Life magazine, that we are all writers now:

Go back 20, 30 years and you will find all of us doing more talking than writing. We rued literacy levels and worried over whether all this phone-yakking and television-watching spelled the end of writing.

Few make that claim today. I would hazard that, with more than 200m people on Facebook and even more with home internet access, we are all writing more than we would have ten years ago. Those who would never write letters (too slow and anachronistic) or postcards (too twee) now send missives with abandon, from long thoughtful memos to brief and clever quips about evening plans. And if we subscribe to the theory that the most effective way to improve one’s writing is by practicing—by writing more, and ideally for an audience—then our writing skills must be getting better…

True, much of what is written online is quotidian, informational, ephemeral. But writing has always been so: traditional newspapers line bird-cages a day later; lab reports describe methodology in tedious detail; the founding fathers wrote what they ate for lunch. And the quality of many blogs is high, indistinguishable in eloquence and intellect from many traditionally published works.

Our new forms of writing—blogs, Facebook, Twitter—all have precedents, analogue analogues: a notebook, a postcard, a jotting on the back of an envelope. They are exceedingly accessible. That it is easier to cultivate a wide audience for tossed off thoughts has meant a superfluity of mundane musings, to be sure. But it has also generated a democracy of ideas and quite a few rising stars, whose work we might never have been exposed to were we limited to conventional publishing channels.

So thanks for the birthday wishes, and be thankful that we’re all writing more!

I’ve noted in the past that the four core competences of ad networks are:

Aggregating Inventory
Aggregating Data
Targeting
Sales

Better targeting has historically been one core area of competition for ad networks, especially those focused on direct response advertising. However, as Anand Rajaraman (co-founder of Kosmix, a Lightspeed portfolio company) points out, more data usually beats better algorithms. Andrew Chen recently noted that after three years of work, Netflix awarded its $1m prize to a combined team of experts for an algorithm that only improved targeting by 10.5%:

This means if you combine dozens of the best machine learning people in the world, some of the cleanest datasets, you get a measly 10.5% increase. Compare this to starting a new ad network where you end up with noisy datasets, lots of crappy traffic, and a small team looking at the problem – that’s not an easy path to disruptive change. In general, 10% is not a big enough number to counteract the other economic drivers in the ad market, which revolves around better deal terms, a larger selection of advertisers, better ad inventory, etc.

Note that this observation comes from a guy who was a co-founder of Revenue Science’s Ad Network business!

While I agree with Andrew in principle, I think that even a 10% edge in targeting can be enough to build a competitive advantage in the direct response world. Because competition for publishers is fierce, and publishers switch ad networks frequently in search of higher RPMs, a slight edge in targeting can lead to a slight edge in publisher payouts which can lead to an overwhelming win in volume.

Andrew thinks that breakout ad network performance will come from two of the other key competency areas:

I think disruptive change will come not from algorithms, but rather two other areas:

* Better ad inventory: New websites and mechanics emerge all the time, and who knows what happens when you put ads on them? It was clear, until they tried it, that with the right ads search can be >30% clickthrough rates or more, which is unheard of.
* Better data: The other big opportunity is in using specialized data to drive your algorithms – rather than basing everything off of domains, cookies, and ad impressions like everyone else, there may be ways to extend the targeting to unique datasets that no one has access to. This is what’s happening in the world of retargeting.

These are good thoughts, and well worth exploring. Better ad inventory can be difficult to defend in an age of exchanges like Right Media and the Doubleclick ad exchange. However, in some areas such as mobile, video, in-game advertising and client driven inventory, it is still possible.

Data is also improving. But because it is also becoming more of a commodity, the real question will be whether this data can be proprietary. If the proposed FTC rules on third party cookies for behavioral targeting take effect, it could give some of the big web properties access to their own proprietary targeting data that will give them advantages over third party networks. Taking offline data and using that for online targeting is also another possibility.

In the brand advertising world, I think that sales will be a real differentiator. The big brand budgets are just starting to move online. CPG, one of the core categories for brand advertising, is starting to shift online this year in a meaningful way. But brand advertisers need to be sold to the way that they want to buy. Not all online sales teams know how to do that. Facebook’s recent partnership with Nielsen to show brand lift means that now only four online media companies have the ability to show the impact of a campaigns effectiveness on brand metrics (Yahoo, AOL, Facebook and Brand.net). I expect more companies to start reporting these sorts of brand lift metrics as a matter of course if they want to take their share of brand advertising dollars as they move online.

Which new startups do you think have a breakthrough in any one of these areas of core competence?

Andrew Chen has a guest post from Gambit that breaks down who is buying virtual goods and how much they are buying.

The summary is that while teens spend substantially less per capita than people older than 20, they more than make up for it in volume. Read the whole thing and see the pretty charts here.

Virtual World News has some notes from my keynote today at the Engage Expo Virtual Goods conference

The Economist notes that the pornography industry is going through hard times:

Most of the industry consists of small private production companies whose numbers are secret, but Mark Kernes, an editor at Adult Video News, a trade magazine, estimates that the American industry had some $6 billion in revenues in 2007, before the recession, mostly in DVD sales and rentals and some in internet subscriptions. Diane Duke, the director of the Free Speech Coalition, the adult industry’s trade group, thinks that revenues have fallen 30-50% during the past year. “One producer told me his revenue was down 80%,” she says.

It’s not just the recession though. Pornography is going through the same structural shifts that are putting music, video print and other content companies under pressure:

Piracy is the main problem. And the internet, with its copious free clips, is an increasingly viable alternative to the paid stuff. Pornography in general has become “like potato chips, everywhere and cheap, to be consumed and tossed,” says Ms Hartley. It’s not the same as in the golden age when she joined. “The industry will shrink and stay shrunken,” she reckons.

Not to mention the threat of user generated content…

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Clayton Christensen introduced the concept of disruptive innovation in his book The Innovator’s Dilemma. Summarizes Wikipedia:

Disruptive technology and disruptive innovation are terms used in business and technology literature to describe innovations that improve a product or service in ways that the market does not expect, typically by being lower priced or designed for a different set of consumers.

Disruptive innovations can be broadly classified into low-end and new-market disruptive innovations. A new-market disruptive innovation is often aimed at non-consumption (i.e., consumers who would not have used the products already on the market), whereas a lower-end disruptive innovation is aimed at mainstream customers for whom price is more important than quality.

Disruptive technologies are particularly threatening to the leaders of an existing market, because they are competition coming from an unexpected direction. A disruptive technology can come to dominate an existing market by either filling a role in a new market that the older technology could not fill (as cheaper, lower capacity but smaller-sized flash memory is doing for personal data storage in the 2000s) or by successively moving up-market through performance improvements until finally displacing the market incumbents (as digital photography has largely replaced film photography).

I was recently talking to Trip Hawkins, CEO of Digital Chocolate, and he made the claim that simplicity and ease of use aimed at non-consumption is always a disruptive innovation that threatens incumbents. I think he is right. Some examples include the Flip, which disrupted consumer video cameras, and blogging which disrupted content management systems. Trip was talking about the rise of social and iphone gaming as the equivalent disruptive innovation that was causing non gamers to play games. Definitely something that incumbents need to watch.

One of the most exciting trends in e-commerce over the last couple of years has been the trend towards “shopping as entertainment”. Traditionally e-commerce has been a chore type activity. Customers know what they are looking for (a digital camera, a new laptop) and are looking for the best product and best price with a very “research” based mindset.

This is quite unlike the real world, where a customer might walk around a mall without any particular purchases in mind, and perhaps opportunistically buy something that caught their eye in their wanderings. There is no real “intent to buy” in a trip to the mall.  It is more like entertainment time which may, or may not, lead to a purchase.

We’re starting to see this sort of behavior online as well. Swoopo and Gilt are two companies that are enticing consumers to come and check out “deals” without any particular intent to buy. They are injecting the entertainment factor into e-commerce. The Economist discusses the success of Gilt, Rue-La-La and HauteLook in particular:

THE racks of expensive gowns and shoes sit, serene and mostly untouched, on the floors of Saks Fifth Avenue, Bergdorf Goodman, Bloomingdale’s and almost every fancy department store. In a sign of how consumers’ newfound thrift has hurt luxury retailers, Saks Incorporated, the parent company of Saks Fifth Avenue, recently announced losses of more than $50m in the three months to July. Sales are down more than 20%. The recession, it seems, has spelt an end to Americans’ appetite for luxury—at department-store prices, at any rate.

Yet luxury e-tailers, which sell designer goods online at discounted prices, are flourishing. The slowdown has actually helped them, simultaneously producing seemingly endless supplies of unsold inventory and forcing consumers to tighten their belts. That has let American e-tailers such as Gilt Groupe, HauteLook and Rue La La, and their French rival Vente-privee.com, sell last season’s designer apparel for as much as 80% off the original price.

But low prices are not the websites’ only allure. Their sites are open only to those who have received an e-mail inviting them to join from another member. This lends them an air of exclusivity and creates the sort of buzz marketers crave, says Adam Bernhard, the boss of HauteLook. The sites also put new items on sale at the same time every day for a limited period, usually no more than 24 hours. That makes shopping an urgent and competitive daily activity for many members. (Cleverly, the sites do not say how many items of each size and colour they have, so customers feel even more pressure to buy right away, lest they miss out on the last pair of size 37 hazel Jimmy Choo pumps.)

Designers, for their part, can use the sites to get rid of stock quickly and discreetly, sparing them the disgrace of seeing their heavily discounted products lingering on sale racks in full public view. Most consumers do not even know which designers are available through luxury e-tailers until they become members. The sites shield themselves from search engines, so they do not pop up in response to online searches for the brands they offer. That has encouraged grand firms like Cartier to sell their wares through them.

The Economist notes that RueLaLa started in 2008 and expects revenues this year of around $130m, and that Gilt started in 2007 and expects $400m in revenue next year. That is remarkable growth. Compare this to Zappos which was started in 1999 and took 6-7 years to reach those gross sales levels:

These companies are rapidly growing beyond the US and beyond women’s apparel. The Economist again notes:

Rue La La recently launched an iPhone application to make it easy for members to make purchases while on the move. It has also started selling wine, spa services and travel packages in addition to clothes. Vente-privee.com has even sold yachts and apartments…

E-tailers are also looking to expand geographically. Vente-privee.com has operations in Germany, Britain and Spain as well as France. Gilt recently launched a site in Japan that has over 200,000 members.

This opportunity is not lost on other companies in the value chain. Retailers like Neiman Marcus, financial institutions like American Express and even fashion magazines are all offering limited time deep discount sales to their members and customers now. Companies like Shopittome are re-aggregating sales for consumers.

I’m very interested in watching how this space develops. Do readers know of other interesting trends in entertainment shopping?

Facebook says that more than 30m people update their status at least once per day. So there are at least 30m status updates a day, and likely some multiple of that – perhaps in the order of 45-60m status updates.

Tweespeed suggests that there are around 1m tweets per hour on average over the last week, so that is around 24m tweets per day. This is roughly in line with the 210 tweets per second that twitpocalypse is estimating in their countdown, which comes out to about 18m tweets per day. But note that these rates are accelerating fast.

Facebook still leads by 2-3x.

But there is a difference in the velocity of posting (tweeting or updating status) between the two user bases. A recent Harvard Business Review post notes that the mean number of tweets per day per user is 0.37.

This includes inactive users in the denominator so the ratio of tweets per active user is going to be higher. Facebook notes 250m active users and 30m people who update their status at least once per day. Assuming 45-60m status updates in total, that is a ratio of roughly 0.18-0.24 posts per active user. Twitter users show a higher rate of posting. So the number of tweets may surpass the number of status updates over the next 12 months if Twitter continues to grow at its historical rate.

Note that Facebook’s feed is full of events other than status updates, so Facebook will likely continue to have many more feed events than there are tweets for a long time to come.

[Thanks to the guys at Adthrow for sharing this analysis with me]