No Money in Web 2.0

The Financial Times did a piece on the underlying profitability of "Web 2.0" and came to the conclusion that it isn't:

Many members of the Web 2.0 generation of Internet companies have so far produced little in the way of revenue, despite bringing about some significant changes in online behaviour, according to some of the entrepreneurs and financiers behind the movement.

The shortage of revenue among social networks, blogs and other “social media” sites that put user-generated content and communications at their core has persisted despite more than four years of experimentation aimed at turning such sites into money-makers. Together with the US economic downturn and a shortage of initial public offerings, the failure has damped the mood in Internet start-up circles.

Well, there's a surprise - companies banking on exciting technology are unpleasantly surprised when customers don't find it quite as intriguing. Features aren't the same as benefits, and the value the seller perceives may not be the same as what the buyer perceives. As "cool" as something might be, a company could find - they do find - that no one is interested in spending money on it. You'd think that people might remember the dot com bust, which was only seven or eight years ago.

What gets confusing with the Web 2.0 apps is that many seem so popular. So why don't they make money? Again, it's the perceived value, at least in part. But I've begun to wonder about the underlying psychology. People are used to being social without payment: they go to parties, chat on the phone, talk to a neighbor, and exchange recommendations with friends. The habit is, what, at least tens of thousands of years old? People assume it to be an essential right, and in that case, why would you pay for it? Now you're back to advertising, and that means that companies must decide that they can sell to the audience. Sounds like waiting for Web 2.0 success might take some time more, perhaps when Web 3.0 emerges.

If You Can't Buy Yahoo, Maybe You Can Buy The Customers

Microsoft is trying to pay users to shop online with its Live Search. According to a BBC story:

Under the cashback service, the software giant promises to pay back a portion of the purchase price of anything shoppers buy online from any of its 700-plus selling partners who are offering more than 10 million products.

Among the big box retailers who have signed up are Barnes & Noble, Sears, Overstock.com, Home Depot, J&R Electronics and a host of others.

Money will be paid either via PayPal, a cheque or into a user's bank. It will only be open to people living in the US.

The story then quotes Om Malik, a tech heavy weight and founder of GigaOm, as saying, "This is not going to affect Google. Google is so much better." I'd have to agree that it's no great shakes, but more because I think it's simply a bad business idea.

This is not the first time Microsoft has tried paying users to switch to its search technology. Last July there was a report on how it had fared. My comments then still go: this is bribing consulers, and the result is attracting only mercenaries who will be gone at the hint of the next offer. The only way you keep them is to keep increasing the incentives. In short, paying people is a tacit acknowledgment that you offer nothing else they might value. That means the cost of maintaining the customers will be extremely high and they will feel virtually no loyalty to the vendor, just loyalty to their billfolds.

Now lets add the new wrinkle. This is money back for purchases made from searches. Given that Microsoft wants huge markets, they are probably assuming that this should be a big part of the search business. But how often does a search end in an immediate purchase? I'm guessing fairly seldom. People and companies buy according to their own schedules, not to the seller's. What if they use search to get information and eventaully get around to buying days, weeks, or even months after? Google keeps that business and that means so many more times to help tie the customer close.

Furthermore, if this was such a good strategy, why didn't it work so well when Microsoft started it last year that they didn't need to try and buy Yahoo? What Microsoft needs is not an old strategy based on where they were, but a new, forward-looking stategy based on where they want to go. The more they stick with the old playbook, the more they are stuck in an old game, while Google and other companies are in a different open field using different rules.

MicroWahoo is a Corporate Disaster

They want to do a deal, they don't want to do a deal - the only way to figure out where the two companies have been going is to find a lower-case "o" oracle. I think that the CEO and board at Yahoo are now toast because they turned down a major premium on a stock price that hasn't yet heard a value low enough to make it satisfied. Push will come to shove, and look for either major resignations or institutional investors to push for a dissident slate of directors.

As for Microsoft, if the Yahoo deal was that important, what happens to Ballmer for not being able to make it happen? I'd ask if there was a plan B to find a direction for folks in Redmond, but I think that the Yahoo pitch was just whistling in the dark, because it was essentially an approach that was a me-too-more-of-the-same strategy. In other words, they aren't moving anywhere and probably won't be in the near future. Of couse, there is that little probelm of needing to protect the revenue base of Windows and Office.

Paying For Free Software

Something I didn't touch upon in my post yesterday about Microsoft and Yahoo (actually the adaptation of a story I had translated for Newsweek Japan, which periodically asks me to write about the high tech industry) is the cost effectiveness of the investment. Instead of something over $44 billion for Yahoo, I thought that Microsoft could have a different strategy. Put aside $500 million, which is practically a drop in the bucket for them (even cheaper than EU fines for unfair competition). The company would host a contest, looking for the hundred best and most interesting ideas for future web businesses.

The winners would get $5 million, some as a monetary price, and the remaining as seed money. That way, Microsoft would, for relative chump change, become a super-charged venture capitalist working on a scale that, for most, would be completely inconceivable. Out of 100 ideas, if they have smart people doing the picking, I'd guess that it would be safe to figure that five might wildly succeed, to create markets that might be worth $10 billion each. That is, I think that the law of large numbers, with some intelligence stacking the deck, is bound to turn up at least that number of winners. Over the period of a few years, that $500 million investment turns into $50 billion of businesses in which Microsoft has majority ownership. Now that would be a way to stop following others and take a commanding lead.

So I was a bit surprised this morning to get my daily mailing from Slashdot and learn that Google, while not doing exactly that, is in a similar space, at least. In the Google Summer of Code, the company pulls together 1,500 college students, 2,000 mentors, and gives each student (each winner had to fill out an application and compete for the spot) $4,500 to fund an open software project, and offers each mentor $500 for participation. The students have to license their code to the mentors.

Will Microsoft take my advice? Are you kidding? They won't even read it or hear of it. However, if they don't learn that innovation has to be about business practices, and not software, they'll be going nowhere new fast.

Everyone Talks About Climate Change, No One Does Anything

As the old joke goes, everyone talks about the weather, but no one does anything about it. The same appears to be true about corporations. A new study from consultancy Accenture "surveyed more than 500 business leaders from China, Germany, India, Japan, the United Kingdom and the United States" about climate change. Of those, 45 percent thought that change was "current a major business issue" for their companies. That number jumped to 59 percent when given up to five years for climate change to have an impact on their businesses. However, climate change isn't quite so high on strategic priorities:

Only 5 percent of survey respondents named climate change as their top strategic priority. In no region of the world did that number rise above 8 percent. Just 11 percent of businesses stated that climate change figures as their second or third strategic priority.

Some of the additional findings are interesting. Although two-thirds of the respondents felt a responsibility to manage the impact of climate change, only 42 percent felt "well positioned" to do so. Maybe that has to do with the lack of nuanced understanding of the topic, or it could be the result of concern over shareholder displeasure. And then there are all the other things that executives have to do:

Competing strategic priorities mean that climate change may receive less attention than other business imperatives. Climate change ranked as only the eighth strategic priority for businesses, named by only 16 percent of respondents—lagging behind sales growth (47 percent), cost reduction (46 percent), developing new products and services (45 percent), the war for talent (39 percent), growth in emerging markets (29 percent), innovation (28 percent) and technology (18 percent).

And then there is the triple threat of paying for new technology, trying to get employees and management to act differently, and managing the response to new regulations. In short, companies are highly sympathetic to the problems, but for various reasons cannot or will not make the issue a strategic priority. That suggests calls to let the private sector deal with climate change are effectively the same as suggesting that we all stick our heads in the sand.

Some Airlines Try To Force Better Profits

The New York Times today has a story about some major airlines considering a cut in their capacity to force higher seat prices:

The miserably full flights of 2007 might seem like a good reason for airlines to roll out a few more planes and ease the crowding.

But passengers should expect just the opposite: some big airlines are planning to reduce domestic capacity in 2008 with the hope of driving fares higher to offset rising fuel costs. Barring a recession that reduces demand for air travel, travelers can expect flying to be more crowded and more expensive than it was in 2007.

If competition and their own operational models are combining with higher fuel prices to cause problems, I'd suggest that trying to improve margins by making customers even more misery is probably the wrong strategy. Why not go the opposite way - raise prices by 15 to 20 percent for a class of flight that restores comfort and pleasure to the experience? It's a lot easier to get more money when people are motivated by their self interest to do business with you. The result would be a true, not artificial, seat shortage.

Another Nail in the Network Coffin

The New York Times today is reporting about NBC planning to buy blocks of programming from outside producers. Although apparently unrelated to the writers' strike, it's just another facet of the changing business climate and how networks, long grown fat on easy money, often creatively channeled away from people who supposedly had slices of profit. But they are so cautious about revenue that they parody themselves, doing one show after another that are practically indistinguishable. They need the producers - and the writers will end up becoming their own producers, creating their own shows. Networks will be totally dependent on those who actually create programming, which reduces them to a distribution business model. This is bad news, indeed, when the Internet will increasingly make that approach obsolete. when will they first wake up? When people no longer so anxiously take meetings or do lunch?

Facebook Re-learns Basic Customer Lesson

I'd ask when will companies learn, but the answer is usually never. Facebook decided, again, to try and "monetize its assets" - that is, the users. It wanted to track what people did and exploit what it learned for its own ends. And, as newspapers like the Washington Post are reporting, those customers have forced the company to back down. Read the article to see how a man's surprise Christmas present for his wife (at least, I hope it was for his wife, and if it wasn't, it is now) became known to her and many others, as Facebook broadcast his purchase. Here's a quote, in the story, from a MoveOn.org rep:

"Sites like Facebook are revolutionizing how we communicate with each other and organize around issues together in a 21st century democracy," said Adam Green, a spokesman for MoveOn.org, a liberal activist group that has launched the petition drive to pressure Facebook to stop broadcasting members' purchases and using their names as endorsements without explicit permission. "The question is: Will corporate advertisers get to write the rules of the Internet or will these new social networks protect our basic rights, like privacy?"

It's not just about privacy, though. When you start dealing with customers, you are entering a contract. It's not written, but it's stronger than any piece of paper, because it involves their expectations and demands. Flub enough on your end, and you're ended, because the people who make your business possible will walk away with their money.

Unfortunately, businesspeople who damned well should know better let greed and wishful thinking get ahead of them. That's why there was a dot com blow up, and why the current credit crisis is in full bloom. And unless online companies start getting street smart and people wise, they're going to find that the market and even government step in to put bounds on what they can do. And no one should look to have those forces registered as friends that watch your every move.

Thanksgiving Sales Rituals

Once again retailers pushed sales into Thanksgiving itself, and although they did get a jump on competitors, it was at sales hitting 50% off, and it was probably just shifting dollars from one day to another - robbing Peter to pay Paul. I understand that, given their frame of reference, that's all they can do. They need to get enough sales to satisfy Wall Street and keep the stock price up.

But entire industries are facing real problems. Tightening credit and lack of money is huge pressure. There have to be major changes in how they do business. They have to understand that sales can't necessarily rise every year, you can't count on more people spending more every year. Investors can't count on ever expanding sales. Perhaps it's time to understand that companies can't stand with one strategy for one set of demands. Perhaps it's time to know that constant expansion is like constant inhaling. There must be cycles of expansion and contraction. When conditions contract, perhaps what a smart company, management, board, and investors do is look to use the time to strengthen the organization, find weaknesses, reform bloated processes, and otherwise realize that there could be advantage into changing a business approach to get ready for the next expansion. But that would require a view extending beyond immediate personal gain, and that doesn't seem to be in the cards in business these days.

Wal-Mart Thinks Small?

Yesterday the Financial Times had a story on how Wal-Mart is considering lessening its reliance on its Supercenters for future growth:

The world’s largest retailer, whose US stores had sales of more than $64bn last year, is seeking an executive to assess the “strategic implications of any possible M&A on our overall portfolio”, according to a Wal-Mart job posting.

I found it interesting, given my rant yesterday about the company's gas price commercial. It seemed like a contradiction - blaming "disappointing" results (though I am skeptical on how disappointing what you do can be when you're on the top of your particular hill) on high gas prices while essentially acknowledging that the biggest box store strategy might be a dead end, but on reflection it isn't.

If the story is right (and I suspect it is), Wal-Mart is looking at acquisitions, and sees this as an gengine of growth, not of continuance. So it's an addition - and that still leaves room to blame others. I think there's still a problem: economics, mathematics, and common sense suggest that there is only so much market share you can have. Eventually you run out of people who want to do business with you for whatever reason.

So, to get someplace new, give them a new reason to buy. The online music move is interesting - and even faster than Amazon.com. Maybe what Wal-Mart needs is a real challenge. Instead of acquiring some chain and then rebranding the name to some variation of its own, creating the inevitable emotional associations, Wal-Mart might think of doing heavy research, finding some concept that really is missing, and then investing and building its own chain with a different brand, from scratch.

That flies in the face of most assumed business logic, I know, but the idea would be to do more than just become more bloated. The company has all this money that could use investment. It could create an obvious internal challenge with a focus on something it could make happen rather than the fuzzier "get bigger." It could grow and make more revenue and profit as the natural byproducts of trying to achieve something concrete.

I think the psychological quirk of trying to control numbers and creating strategy as a result instead of the other way around is a definite problem in business. It led to the current mortgage market, to over-investment in the 1990s, and to many other general business failures. You don't get someplace by wanting to have fame as an explore; instead, you get fame as an explorer by heading to the North Pole. It's a lot harder, but ultimately more rewarding for management, for exmployees, and for investors.

Wal-Mart's New Gas Price Campaign

I was watching some network television last night and saw a Wal-Mart commercial in which actors talk about the price of gasoline but then say how they won't let it dictate their lives - and, presumably, going to Wal-Mart is one of those life choices.

The commercial seems quite peculiar to me, and I wonder if this isn't a sign that something is seriously wrong with Wal-Mart's marketing and business strategy. First, gas prices have come down, oh, a good 30 to 40 cents a gallon here from the spike earlier this year. I suspect they're down around the country as well - and I also think that consumers have made their peace with prices. Certianly they're not giving up shopping for what they need. (In fact, last night I heard a number on NPR that pegged it at 40 cents overall since spring.)

So you'd think that the commercials are runnning at least a month late, and are really negatively-based. They argue not to give up life style choices - no matter what the price, which, I guess, is easy enough to do if your annual business equals many national GNPs. But there is no reason to go to Wal-Mart. If gas was such a problem, why not roll out Wal-Mart gas stations with subsidized prices to get people to the stores? And other stores, like Target, seem to be weathering the economic issues, which hit most equally.

But Wal-Mart has been blaming gas prices for recent poor performance. Maybe the problem is not gas prices, but strategic decisions. Perhaps they've gained too much bad will through their own actions in dealing with labor issues. Perhaps people are angry about outsourcing and see Wal-Mart as selling out to China. Maybe the idea of having superstores apart from malls, where people can more efficiently shop, is the real problem. (I wonder what the company's same store sales are in mall locations versus standalone.)

Whatever the issue is, I don't believe it's largely driven by petroleum. Yet the commercial, along with Wal-Mart's remarks to Wall Street, show this as an officially adopted excuse. Maybe it's time for upper management to look and see whether there might not be more serious issues - for example, the well-publicized internal company report on mistakes in moving outside the existing brand. There is something more going on inside the company. Trying to find the logical explanation for investors won't solve anything and will only get management more determined to keep the blinders on.

Book Publishers to Let Public Vote on Title Ideas

There's a piece in the New YorkTimes about a fascinating situation in the book publishing business - letting the public pick winners before they're published. A virtual market called Media Predict will give people fantasy cash and let them vote with their pseudo-dollars on what book proposals will sell. Simon & Schuster "teamed up with Gather.com, a social networking site, to run an “American Idol”-style contest in which voters pick a manuscript for Simon & Schuster to publish."

It's interesting, but I think it also underscores how little understanding book publishers have of their most fundamental task: choosing what to send into print. This experiment smacks of desperation. But after so many years of effectively playing Eenie, Meenie, Minie, Moe, I can see how they might feel a bit anxious.