The “Pay-What-You-Want” sale marked the 1 year release of the game, so admittedly the game was not at the peak of the sales cycle and was likely in the hands of the users who really wanted the software. Also important is that the publisher reports piracy of the game close to 90%. Even so, the experiment provides some insight into pricing models for games and possibly content sold online.

What did people pay when they had the chance? 57,000 people paid an average of $2.03 for the game during the promotion. That’s a quick $110,000+ sales for a one week experiment, but that doesn’t tell the whole story.

Due to transaction fees, all sales less than $0.30 meant that the publisher received nothing from the sale. Since nearly 17,000 people paid $0.01, with another 6500 paying from $0.02 to $0.99, it’s likely at least one-third or more of sales were unprofitable.

The publisher also took a survey to determine why people were paying what they paid. The largest responses fell into two categories: paying what buyers could afford and supporting the model. More specifically, nearly 23% of respondents said that they chose the “price” they paid based on what they could afford, and just over 22% paid just to support the pay-what-you-want model. More importantly, only a touch over 5% responded that they paid what they thought the game was worth. Twice as many or 11% reported that they were “cheap bastards”, at least they were honest.

The sales figures, piracy rate, and survey lead me to a few obvious and non-obvious take aways:

1. Buyers appreciated the option to choose what to pay, so much so that any mental transaction costs of paying $0.01 were overcome.

2. The price users are willing to pay to has much less to do with perceived value than affordability.

3. Sales experiments, even a year after a game release, can lead to a healthy bump in revenue when done right.

This suggests to me (feel free to argue with me on this) that the $0.99 and $1.99 micropayment sized price points for apps on the Apple App Store and others may be driving huge sales simply because of affordability. If I’m right, where is your $0.99 app?

Recently, ComScore published a study (pdf) showing the number of US consumers who clicked on display ads had dropped by 50% in two years. While drastic the impact could be due to a decline in the number of CPC display and affiliate programs run over that time, however; other factors were implied in the study. Between 2007 and 2009, the number of people who clicked one or more display ads a month dropped to 16%, with about 37% of those users accounting for 50% of all clicks. In shorthand, that means 6% of internet users represent 50% of the clicks, and another 10% representing the remaining 50%. All this indicates a seriously diminishing audience.

While CTR is a standard measure in the online advertising business, these new figures suggest that focusing on click through optimization may be an incomplete or insufficient strategy. Since when has optimization based on only 16% of the user base been a truly encompassing plan?

What about the other 84% of the audience not engaging with display ads? What does it mean for advertisers? If you believe in an efficient market and that online advertising is ahead of the overall advertising industry as recent studies indicate – then something else is at work here. Do display ads, or any ad impressions based advertising, really matter?

On my company and our partners’ sites, we have seen significant traffic spikes to our home page/partner home pages while running CPC, CPM, or CPA programs. This suggests that people are not clicking but going directly to the advertised site. Our internal analytics system has tracked multiple exposures and non-ad clickers to a conversion on our site, verifying that the display ads themselves indeed play a role in driving frequency and/or engagement before an eventual conversion on our site.

So are display ads dead? I don’t think so, but display ad CTRs are certainly suspect as a meaningful measurement. The new data and implications about branding, frequency, and engagement lead me to believe that we require a new line of thinking and analytics to measure the true value of such ad units.

This year’s survey, based on responses from about 1,700 business executives worldwide, specifically addressed the value of Web 2.0 in three areas. The survey addressed the following areas: within an organization, in relations with customers, and in dealings with partners and suppliers. Nearly 70 percent of respondents said they could measure the business impact of Web 2.0 in such areas as more effective marketing, lowering the cost of doing business, and higher revenues.

The broad strokes behind the numbers suggest that Web 2.0 is paying off in the three areas of primary concern in any business: knowledge, time, and money. Companies generally report that using Web 2.0 technologies offers them “greater ability to share ideas; improved access to knowledge experts; and reduced costs of communications, travel, and operations.” Respondents also say Web 2.0 tools “have decreased the time to market for products.”

Impact outside the company is significant as well. Using Web 2.0, “companies and customers jointly shape and cocreate products,” and businesses can “gain access to expertise outside company walls more quickly.”

Some interesting trends emerge when we look at what the respondents view as the most important technologies and tools over the three years of the survey’s existence. This year, blogs and social networking were rated as the top two, as they were in 2008. But in 2007, “peer-to-peer” was the overwhelming top choice.

This year, the most used Web 2.0 technologies and tools by companies are (in order of importance) blogs, social networks, wikis, and podcasts. In 2008, social networks barely edged out blogs, while wikis was a solid third and podcasts came in fourth, slightly ahead of RSS.

The use of video sharing is on the rise – its importance rose dramatically from 2007 to 2008, and again from 2008 to 2009.

McKinsey concludes from the report that the use of more Web 2.0 technologies results in greater benefits to a company, regardless of industry. More importantly, McKinsey predicts “a different type of company may be emerging – one that makes intensive use of interactive technologies.” McKinsey calls it “the networked company.” The current economic downturn has only increased the interest in Web 2.0, says McKinsey.

Apparently, it’s all good news for the growing importance of Web 2.0.

“Recommendations by personal acquaintances and opinions posted by consumers online are the most trusted forms of advertising globally,” the Nielsen survey, the largest of its kind, shows that,  “nine in every ten Internet consumers worldwide (90 percent) trust recommendations from people they know, while seven in every ten (70 percent) trust consumer opinions posted online.”

This leads Trendwatching.com, in its September trend report to proclaim:

“Businesses have to understand and accept that consumers’ decision making processes, which ultimately come down to whether they will buy from you or from someone else, have truly shifted to a new, powerful peer-to-peer arena.”

While consumer-influenced purchasing via reviews and recommendations has been occurring online for some time, it certainly seems to be building to a feverish pitch. The very nature of social media encourages friends and acquaintances to freely share information and, therefore, to make opinions about products and services widely known. Trendwatching.com cites ShoutIT as an example of an application that allows consumers’ reviews to easily appear at once on Facebook, Digg, and Delicious pages.

Trendwatching points to a mind-boggling number of reviews floating around in the webosphere. Reviews are encouraged by online companies using consumer feedback as fodder for increasing repeat website visits.

Says Trendwatching: “Expect every industry, every sector, every product to eventually succumb to reviews.” In fact, think of Twitter as an example of a global real-time reviewing tool.

Perhaps the most curious sub-trend of the reviewing trend is the belief that reviews by ordinary, everyday people are just as trustworthy as reviews by supposed experts. While professional reviewers have their place, reviews written by friends, acquaintances, and “consumers whose lifestyles mirror yours” are regarded as relevant and real.

It’s all part of the transparency trend – consumers want to know all about companies and all about products. Increasingly, they demand the ability to instantly compare product benefits and prices online in an effort to get the best deal. The transparency trend means companies will have to be ever more sensitive to their competitors. They’ll also have to rapidly respond to bad reviews and do online damage control.

As Trendwatching says: “It’s ultimately about character, about finding your voice, about your behavior as a brand that, if in tune with the current zeitgeist of ‘openness’ and ‘generosity’, automatically turns transparency into a benefit instead of a threat.”

Here is the list:

Affiliates in the 2009 Inc 5,000 List of Fastest Growing Private Companies

Affiliate OPMs in the 2009 Inc 5,000 List of Fastest Growing Private Companies

Affiliate Networks in the 2009 Inc 5,000 List of Fastest Growing Private Companies

In proposing the possibility of “CPSA” – Cost Per Social Action – Berkowitz recognizes the fact that “social networking, when done right, achieves something much different” from the current pricing models, Cost Per Impression (CPM), Cost Per Click (CPC), and Cost Per Action (CPA). Cost Per Engagement (CPE) gets closer, says Berkowitz, but still falls short.

The big difference, says Berkowitz, is that social marketing is all about relationships, and no one has figured out just yet how to put that in a neat little box. It is much more grey than it is black and white. Berkowitz himself acknowledges that the notion of “CPSA” has so many downsides it may be all but impossible to implement. For example, how do you even decide on common criteria when you’re trying to measure the impact of Facebook vs. MySpace vs. Twitter vs. any other social media, when each of them has a uniquely different twist and, as a result, require different metrics?

Whether or not CPSA is plausible is less important than the point that Internet marketers should be thinking creatively when it comes to new pricing models. In fact, marketers should be thinking about pricing issues even as they’re developing new media options.

One of the interesting problems with Internet-speed marketing is by the time someone figures out how to make money off of something, the entire paradigm changes. That’s why anticipating market conditions is essential.

CPM is based on traditional media costs, using television, radio, magazines, and newspapers as the model. It’s easy to figure out because it is all about reach. CPC and CPA are derived from direct marketing. Direct marketers count inquiries or orders to measure their ROI. Pretty simple metrics.

Social marketing could turn the revenue impact of the Internet on its head. Adoption of CPSA style pricing models could herald the same evolution that happened when the advent of database marketing made direct marketing more sophisticated, and the industry adopted “relationship marketing” as its mantra. That caused direct marketers to reconsider measuring merely inquiries and orders, and start measuring the long-term value of the customer.

Gadzooks, this is not really that much different from what Berkowitz is talking about, is it? Seems the more things change, the more they remain the same.

Remember part 1 and part 2 of my interview with Gordon Magee of Drs Foster Smith? It’s been a while and I’m back to wrap up sharing what I was able to learn from this pioneer of e-commerce video.  I probed Gordon for details on the strategic, long-term approach he’s using to drive multi-channel sales with video.  In all honesty I did not learn of the rigid, measured direct-response strategy that I had expected. What I did uncover was how important trust is to a company that is, yes, financially precise and metrics-driven.  Trust, as it turns out, appears to be the main driver in the company’s early, yet large, investment in video.

Uh oh, is this “branded entertainment”?

Now as many of you know I’m not a big fan of traditional, mass media “branding” advertising.   In fact, I view most of it as a poorly executed, glorified art form — not a science.   It thrives on waste.  How many times have you been in a meeting and fallen back on the comfortable excuse of, “well… it did help brand us.”  Unfortunately, many marketing failures are labeled “branding wins” when, in fact, the man or woman running the show (CEO, CMO, COO/CFO) knows better.

In many cases, a campaign’s tactics failed to produce a tangible, strategic business output.  It failed.  You can call it a win but they won’t when you leave the room.

I mention it because most use of video on the Web has been rather gratuitous.  They call it “branded entertainment.”  It has a tendency to be aimless eye-candy that marketers hope gets passed around and… and… and well… create attention/awareness, interest, desire and action (with the action piece being completely un-tracked and rather blindly assumed).

In this tough economy we need new, improved (ie. trackable, reliable, proven) strategies not glorified tactics.  Some call it marketing science and it’s time has arrived.

Now I’m not suggesting Gordon was or is wasting his marketing budget.  What I am suggesting is that the direct response metrics were left unclear to me and, perhaps, with good reason.  Maybe DrsFosterSmith.com is too early on to really use them or — heck — reveal them to the world.

Increased trust as a valid goal

Let’s assume “better trust” or “more trust” among customers (new and old) is a valid business output.  How tangible is it?  How measurable is it?  Heck, should it even be measured at all?  Now we’re getting into dangerous guru territory where some believe ROI to be a silly pipe dream.  But what if we could assign some tangible behaviors that customers demonstrate to “increased trust?”

Even more wild — what if we just assumed that part of a holistic marketing strategy was a foundation that must be built without expectation of measurement?

Gordon says…

“… we probably have more articles on pet care and more veterinary articles online than anybody in the country. So to go into video and do the same thing was just a natural outgrowth of what we have been doing for 25 years really.”

Why so much content?  Trust.  When it comes to pets and doctors (veterinarians) it’s not about price.  It’s not about color, flavor, speed, accuracy or anything that would be desirable (aspirational).  It’s about trusting someone to help you take care of your pet’s health, well-being or a disease.  Trust matters — in this case perhaps more than anything else.

Measurement: The details

Says Gordon, the future is all about…

“… a blending of a branding relationship development type strategy along with an ROI measurement.  The ROI will be much more difficult to measure in some respects. Certainly we can use analytics tools to find out what people are clicking through on and if they have watched a video and what they did and so on. But frankly some of that gets so granular, you can have data overload, that you’re better off looking at the larger picture to determine what’s going on.”

Now typically these kinds of comments fly red flags with me… but I’m starting to wonder at this point.  Gordon continues as I push him for details on what he measures, why and what it proves…

“Are our sales moving up? Are people spending more time on the site? What’s actually happening? If we then try to drill down to every little item — at some point it becomes impractical apart from what some speakers will tell you at the Internet Retailer or show.

The first thing I study when I want to find out how we are doing is… what did we sell yesterday? What were our overall sales? What products were selling?”

Now at this point I was really starting to wonder, I’ll admit.  This sounds like a branding campaign and perhaps so… one aimed at creating or fostering trust.  Gordon continues…

“Yes, we will look at email returns. Did this email do well? etc. Are people clicking through? What’s our click through rate? Those high level metrics are important so you have got a clue. But at the end of the day, if you have got all kinds of clever little analytical measurements that are telling you what people are clicking through and where they are going… well if you’re not selling anything that doesn’t matter.”

So I think you work from the other end of the pyramid, the sharp point of the pyramid being, ‘Did we sell stuff?’ Then drill down as far as you need to, to find out how you got there. Then stop before you drive yourself crazy.”

Ok… Gordon seemed to come back to measurement as being a worthwhile strategy at the end but it left me scratching my head a bit — but in fairness to Gordon and the company that’s just fine.  It sets us up to ask more questions later

User / customer generated video

And what about user generated content (UGC) — specifically video?  It would seem ripe for opportunity in the pet realm with all those cute cuddly little creatures of all sorts out there.  To my surprise Gordon said no.  His reasoning was remarkably sound and, not surprisingly, all about trust.

“Jeff, we will likely not get too much involved in that.. and part of the reason has to do with us being owned by veterinarians and people having that trust relationship with us regarding the information that they get.

We want to make sure that there are no misunderstandings about the veterinary pet care information that we provide. A misunderstanding could happen if we would have, let’s say, a customer quote something that isn’t the latest veterinary information from research and so on… have another customer read that and go, ‘Oh yeah, I should feed my dog X because customer Y said that’s the right thing to do,’ and maybe they didn’t read three entries later our analysis of, you know, ‘That’s actually not a good idea,’ kind of a thing.

I’ll give you just a quick example of something simple. We were on television here a few weeks ago. We brought pets down to Chicago’s In the Loop with iVillage. Had our veterinarians on, the question came up, ‘Is it OK to give milk to my cat?’  Of course, I’m from Iowa.  We grew up doing that. And one of the vets said, ‘Actually, you know, it’s really not a good idea because they can have digestive problems. It’s really not what you should be feeding them.’

So little things like that that seem to be so common knowledge but incorrect are the kinds of things that we would not want to have on the website.

So we probably won’t do that. Our goal is to brand us… and not the other customers. We may at some point have a forum… where people can interact with us, but the scale of that, at times, it becomes so huge that management becomes a challenge. We just started a photo contest this past week. Right now we’ve got 5000 photo entries already in one week, and we’ve got to manage those and determine the winners, and so on.  And I think ditto would happen with a forum.

Now, sounds like a really good marketing message to say, ‘Gordon, did you just hear yourself? If you can bring that many people to your site, wouldn’t you want to do that?’

Well, we do want to have them come but we want to have them be provided accurate information and not just have a cool Web 2.0 interaction with them . We want them to interact with information. At some point we might do the forum so they can interact with each other — I would say there’s some merit to that — but management’s part of the issue for us.

Candidly I think DrsFosterSmith.com’s approach is either a little from the hip or he is just holding back a bit.  In either case I hope Gordon might share more details with us in months ahead.  We marketers are living in historically difficult times where new tools are needed for marketing in the new economy.  As my loyal followers know, I have a decent nose for sniffing out marketing waste and I’ll continue to share my research moving forward.

Still not got your fill of Gordon?  Check out this short interview he was good enough to give me recently while in Chicago.

Click here to view the embedded video.

Such is the case with Amazon’s purchase of Zappos.

A Tale of Two Gorillas

Amazon’s marketplace is a juggernaut. In Q1 of 2009 Amazon posted $4.89 billion in net sales an increase of 18% over Q1 of 2008 which should be considered an epic feat in a down economy.

Amazon not only owns the book vertical but seeks to replicate Google’s clout in search within the online retail space. Thus it has aggressively gone after every leader in a retail vertical: Ebay, Buy.com, Overstock, and of course Barnes and Noble. Amazon has paired its aggressive strategy with the production of cutting edge consumer products like the Kindle and a near zealous acquisition of numerous patents (they own the patents to 1-click checkout and 404 error pages).

Now in its 10th year Zappos owns the shoe vertical with over $1 billion in sales reported in 2008. Think about that; $1 billion dollars on a product where fit is crucial. You don’t just wear shoes one size too large “just around the house”.  Zappos achieved such growth through two key tactics: 1) aggressive purchasing of product lines from shoe manufacturers; 2) unique approach to customer service keenly focused on repeat sales.

On the purchasing side of the business Zappos buyers are often known to buy whole lines of popular products from shoe manufacturers or at least all the most common sizes of a particular shoe line.  On the customer end Zappos alleviates the worry about fit by offering free shipping both ways and unheard of 365 day return policy. More importantly personal touches as the recent BoxBreak promotion with Magnify.com, earn customer loyalty. According to a BrandWeek interview with Zappos CEO Tony Hsieh, approximately 75% of sales come from repeat customers.

Driving Forces behind the Purchase

Amazon was able to smother many competitors like Ebay’s Half.com or outright buy them like AbeBooks, but; they were never able to make much of an in-road into the shoe vertical.  Zappos’ presence was just part of the issue. The shoe vertical is a very competitive and crowded space where consumers often have a hard time differentiating between retailers (Shoes.com and Onlineshoes.com for instance).

Amazon amplified their effort with the launch of Endless.com in 2007. Boasting a far more elegant site than either Zappos or Amazon, Endless featured a UI design that made it feel like an upscale boutique. Endless also launched with a tactic right from Hsieh’s playbook, free overnight shipping on all orders. The tactic was designed to gauge into some of Zappos’ market share.

The result? While it did prompt competitors in the vertical to  redesign their own sites to improve the browsing experience for their customers, Endless gained relatively little market share.

The problem was that Amazon now had skin in the game and the costs associated with building and advertising Endless were not cheap. It was perhaps Endless’ failure to dethrone Zappos that  made Amazon think of buying. What’s more, Zappos made themselves an appealing target because they were not just beating Amazon at selling shoes; Zappos was beating them in creating buzz.

Zappos had become the corporate darling in the Web2.0 world of transparency. The company had almost co-opted Twitter with hundreds of Zappos employees actively participating in conversations about themselves and the corporate brand. Hsieh was like a rockstar at the forefront of the media blitz from SXSW to Affiliate Summit. Hsieh even started a consultancy targeting the Fortune 1 Million  to teach other corporations the benefits of developing an open corporate culture. Best Buy, Southwest Airlines and dozens of others got in line.

What buzz did Amazon have going? Well they did earn tremendous growth in ‘09 but most of the media focus seemed to be on iterations of the Kindle or on the various affiliate nexus laws, nicknamed the Amazon Tax.

What a Deal

According to TechCrunch,  Amazon brokered a deal with Zappos consisting of $880 million in shares with an additional $40 million in cash. Now $920 million may sound like a lot of money but really is quite a deal with Zappos having posted sales of $1 billion in ‘08. Now Amazon President Jeff Bezos and Hsieh may have struck a meeting of the minds when they met earlier in the year as Mashable claims; why wasn’t the purchase price significantly higher?

Well, it comes back to those tactics key to Zappos’ customer success. The fact is free shipping both ways and a 365 day return policy, as Hsieh puts it mildly in the BrandWeek interview “gets very expensive”. It’s been long rumored among Zappos’ competitors that the company must be hemorrhaging money. Whether that’s true it is apparent that Zappos’ net earnings were significantly lower than its’ $1 billion gross sales.

Perhaps the biggest winners are the venture capital firms Sequoia Capital and Venture Frogs whose investment in Zappos’ “quirky” strategy paid off.

Potential Impact on the Affiliate Channel

Initial outlook of the deal indicates that things will remain the same in many ways. Zappos will remain in its Henderson, NV headquarters with its brand, operating methods and leadership intact.

Both companies can credit a large portion of their growth to the affiliate channel. Zappos has had an affiliate program as part of the Commission Junction network since 2000 and has consistently been one of CJ’s top merchants. Amazon Associates is one of the first and largest affiliate programs claiming 900,000 members world-wide.

Lately Amazon seems to be systematically chipping away at the channel that helped it achieve its growth. In fact Amazon hasn’t been overly friendly to its affiliates as of late, from cutting commissions, to terminating referral fees for search, and most recently eliminating credit to affiliates using url shorteners in general with Twitter specifically as a target.

Amazon is also at the epicenter of the affiliate tax nexus debate  playing out in legislatures across the country. It has even used affiliates as leverage by preemptively terminating affiliates in some states  in anticipation of new tax legislation.

Zappos meanwhile has enjoyed a fairly positive relationship with its affiliates. The question is if  Zappos will begin to mimic Amazon’s actions in the affiliate channel? Will Zappos leave CJ and run an internal affiliate program like Amazon currently does? How will this impact the Endless affiliate program which is also currently live on CJ?

Final Questions

As with any such blockbuster merger the playing field will change significantly upon completion. There are practical questions to be addressed. Will Endless remain in business or be absorbed? Will Endless become the high end product retailer and Zappos the low end retailer as mandated by their respective UIs? How will they coordinate differing plans and messaging?

Then there are slightly more existential questions. As people, Bezos is very different from Hsieh and in the same way the cultures of their two companies are very different. Amazon is not used to being as transparent as Zappos or, at times, as human. Which culture will survive? Will they be able to incorporate each other’s strengths or wallow under each others’ weaknesses? Management is a big part of this and for the short term Hsieh is staying. After a year under Amazon’s corporate coils will he leave for some other business where he can be “quirky” again?

The fallout will be interesting.

Does free = fail? Or is free a key part of any marketing strategy?

The topic of “free” is in fashion now due to Chris Anderson’s (editor of Wired) book Free: The Future of a Radical Price that just hit the shelves. Malcom Gladwell, of “Tipping Point” fame has chimed in, in the New Yorker, and the Techdirt teams have their own debate about the value of YouTube, the bandwidth black hole, as a free service, here.

What is the Purpose of Free?

While I do believe that free doesn’t guarantee you success, it has some very attractive properties worth looking at. Powell’s Books has an excellent summary here of Anderson’s book pointing out the six key categories of free that he identifies. From the Powell’s Books’ summary:

• Freemium: Free Web software and services, and some content, to users of the basic version. (Think Flickr and the $25-a-year Flickr Pro.)
• Advertising: Free content, services, and software to an audience that advertisers will pay to reach.
• Cross-subsidies: Give away any product that entices customers to pay for something else. Example: It’s a free second-gen Wii But only if you buy the deluxe version of Rock Band.
• Zero marginal cost: Anything that can be distributed without an appreciable cost to anyone, like online music.
• Labor exchange: Performing tasks to gain access to free sites and services.
• Gift economy: From Freecycle (free secondhand goods) to Wikipedia, money isn’t the only motivator.”

On one level, these points seem like common sense and represent tried and true marketing tactics for struggling musicians, artists, videographers, affiliate marketers, and business people in general. Who here hasn’t heard of the phrases “prove yourself”, “build some credit”, or “develop an audience” mentioned over and over again? Nothing is really free, as business types often give free advice, create comps, or do some pro-bono work in order to land a deal, develop a relationship, or generate fans.  What’s key about the six categories above is that Anderson lays out a foundation and framework for leveraging free for business.

A Free Model

To put matters into perspective, I’ll add another layer of discussion based on Malcom Gladwell’s piece. In his New Yorker article, Gladwell digs into Anderson’s YouTube analysis that it costs $0.25 cents to stream 1 hour of video to a user this year. In his book Gladwell sites a Credit Suisse estimate that YouTube will lose close to $500 million this year for that “free” service.

My view is that the YouTube “free experiment” deserves much more credit than what Gladwell has given. I’ll propose a simple model to get the brain juices flowing:

If the average YouTube clip is 1 minute, and it takes seven views to make a habit, or seven minutes of video, the streaming cost for acquiring that customer is 7/60*$0.25 = ~$0.03. So how many opportunities can you name where you could acquire a customer at $0.03 for an “eyeball” acquisition and seven  minutes of attention?

If that user spends 70 minutes in a month on YouTube, then it costs <$0.30 for that user for that month and the equivalent of 70 potential impressions. IF, and only IF, the goal was revenue by advertising, a CPM of $10 over those 70 impressions would represent $0.70 gross.  By leveraging YouTube’s brand equity as the Internet’s default video provider, its “free service” could easily be modified into an ad platform without degrading the user experience. Even in my simple model YouTube might break even.

Leveraging Free

As it turns out, YouTube is on track to do just that according to the Financial Times.

So YouTube appears far from the $500 million in losses that Gladwell cites, but then what?  The free video service provides a cross-subsidy to the main Google cash cow, search, while providing the largest searchable video inventory and yet another mechanism to connect with and develop relationships with armies of advertisers.

In this case, the YouTube free service has not only shown value to uploaders, viewers, advertisers on a direct basis, but has also helped solidify Google’s place in video while providing value to Google’s existing advertising base and shareholders.

So is Free the Perfect Business Model?

I would say “no”. Despite YouTube’s apparent profitability, its position as an industry standard really does skew the equation. However I’d add that “free” should be a key tactic in your marketing arsenal that, if leveraged correctly, can have several real revenue and strategic upsides when truly applied with a revenue motive.

His prank and post prompted me to revisit Jeff’s Twitter account and his blog. In short- the tweets got my interest. An interesting side debate has been going on as Jeff is “calling bull on twittermania.” I decided to move the debate to the larger Revenews audience for thoughts.

Jeff asks:

“Precisely, what’s ROI anyway?”

I believe this was a rhetorical question, and Jeff was correct. However  I still hear many businesses talking about ROI with their typical myopic view.

There can be no precise measurement of ROI until certain criteria are met. Objectives must be defined, a methodical process applied, and results analyzed with logic. I won’t delve into the Heisenberg Uncertainty principle and how it applies.

Thus ROI will be measured differently based on varying goals.

The burning question now is: How does one measure the ROI of “social media”?

Social media is a misnomer. All media is social and always has been. It has been this way since cavemen learned how to etch messages on the wall with buffalo blood or figured out how to play with a sharp chisel without taking off a foot. I think the vast majority of so-called social media experts aren’t and merely riding the wave of popularity. Conversely, we could argue they are savvy marketers and providing services that clients are asking for. Either way, misguided experts can be likened to a motorcycle driver climbing into a train engine and convincing people it is easy to drive. The wrecks will come.

Jeff says:

…”engage in more digital fantasy stuff and you’ll stand a chance.”

How can MMO’s, MMORPGs, virtual worlds and services like Twitter be of any real value?

I have always studied these areas because they are fun, cutting edge, experimental and I feel they have or will offer demonstrable value.  Business is part execution, but more importantly- thinking ahead. I remember getting some heat about exploring these areas on some podcasts a couple of years ago. Frankly, I deserved it, as I didn’t have concrete answers to provide at the time. I do now.

Let’s look at a few examples of MMORPGs, the much maligned Second Life platform and micro-chunked communications like Twitter to see what they can do.

World of Warcraft

The CDC exploring WoW (World of Warcraft) to virtually map the spread of plagues and to define models to treat plagues and quarantine en masse. This is an experimental use, but when a real plague comes, and given the world’s fascination with antibiotics- it will come, the ROI will become crystal clear.  Tabulate the cost of a plague in dollars and society in general. Staggering.

Let’s look at another WoW example. China has made the bold move of banning the sale of “digital gold” or trading virtual currencies for goods. I have my own theories why this is going on, but  their wording  is pretty important.

“…virtual currency, which is converted into real money at a certain exchange rate, will only be allowed to trade in virtual goods and services provided by its issuer, not real goods and services.”

This is a big deal. More real money is traded on WoW in a year than many direct catalog companies make in three. Hundreds of millions are exchanged for virtual goods (across platforms) and some estimate this number to be as high as one billion USD- a year.

Second Life

Even the much maligned Second Life offers new glimpses into human behavior and interaction and how trends spread.  This has direct implications for business.

If you understand how avatars interact you can develop a whole new set of metrics. You can measure physical proximity, influence on how social circles impact buying patterns, interest levels and a lot more. As an aside, for SEO aficionados, SERPS in a virtual world, like Second Life, are fascinating to study and offer some intriguing insight into how Google works (Second Life uses a Google appliance.)

I will note that Second Life has numerous problems from a technical and commerce standpoint, and I imagine if they could get a “do-over” many things would be different. Still it is one of the most robust clients available. It will be replaced when something better comes along.

Being Agnostic

The value proposition / investigation is not about WoW. It is about the impact of MMO/MMORPGs. It isn’t about Second Life- it is about the emergence of digital worlds, 3D platforms and empowering people to create and interact. In the future these worlds will be ubiquitous.

Nor is it about Twitter. Let’s remove the brand name and look at it as an extensible technology with a robust API. It facilitates communication in a succinct, simplistic fashion. This information can be consumed and refashioned by a large array of networked devices. This information propagates in a number of ways. e.g. HTTP and SMS. I would not be surprised if services like Twitter and Facebook are rapidly driving the adoption of mobile technology and therefore mobile commerce.

In essence it is all about fast moving, micro-chunked information. When you want it and how you want it. It is not social media- it is personal media.

Twitter

Let’s look at a few merits of Twitter.

Twitter is driving sweeping social change. It is influencing ideas, mores, values, and politics. Even a cursory look at the Iranian election proves this. Twitter users are changing how news outlets cover events and how they take input from users.

News and Information exchanges created on these platforms move FAR faster then search, even faster than news networks like CNN or comedy shows like FOX News. It was almost tragic to watch Wolf Blitzer trying to report on Michael Jackson’s death 30 minutes after the news burned through Twitter- which is probably where they got the news. Granted CNN has to verify news, and user’s must be discerning in what they read and take up as fact, but that skill will and is growing fast.

It empowers users to rapidly exchange ideas and meet like-minded people without making a huge social commitment nor spend alot of time “social grooming“. Twitter empowers people to blow the top off of Dunbar’s Number and the limitations of our neo-cortex. For those new to social network theory, and I am not an expert, let me clip a recent piece I wrote on my personal blog. (Props to Jim Kukral for hosting.)

On Social Ties

“as merely a reference, bring up Dunbar’s Number (Dunbar predicted a human “mean group size” of 148 (rounded to 150) a theoretical cognitive limit to the number of people with whom one can maintain stable social relationships. Dunbar claimed “this a direct function of relative neocortex size, and that this in turn limits group size … the limit imposed by neocortical processing capacity is simply on the number of individuals with whom a stable inter-personal relationship can be maintained.”.

We might also look into Bernard-Killworth. These two researchers postulated a mean number of ties at 290. This is roughly double Dunbar’s estimate. (Bernard-Killworth median: 231 lower due to upward straggle in the distribution still higher that Dunbar.). Lastly, Christopher Allen has some interesting studies looking at Ultima Online communities and he actually moves the number of ties down. I don’t have a hard and fast number…and Dunbar’s Number is only an interesting reference here. I am more in the camp of Bernard-Killworth with social networks and with Allen on tighter knit groups that require cooperation. e.g. MMORPGs”

I now believe that both of these estimates are low and social ties might be impacted by the “relative density” of social networks. In other words, the more immersive and complex the environment the less the number of social ties developed. Services like Twitter, which require minimal social grooming, will boost the number and immersive environments like Second Life limit the number.

Attention = Revenue

As Brian Clark told me a decade ago- Attention = Revenue. Attention is hard to get these days. People are distracted, and pummeled by numerous distractions.

Therefore compressed communication fits the attention span of already strained attention. It enables the expansion of social networks.

The core takeaways for business. These new technologies may not produce the ROI you are looking for, but it directly impacts buying decisions, word of mouth recommendations, information flow, speed of transmission and CRM (Customer Relationship Management).

It is not all always about engaging, talking or selling- it is about listening.

I will sum it up with a typical “Porterism”: On Twitter you only have 140 characters so it forces people who meander, like me, to be succinct.

Tweet:

“Twitter metrics- Business would be better served to rethink ROI – Not Return on Investment, but Return on Interest. No interest- no return.”