Foursquareonomics

Premium users or Ads – those two options have been the primary mainstay of web and mobile application developer/operators who are looking to monetize . A few have gone beyond the basics and have successfully captures a portion of the network effect value they co-create with their users. The creators of the popular mobile application Foursquare may be on the road to achieving free user monetization nirvana.

Foursquare was launched at South By Southwest Interactive (SXSWi) earlier this year, and aims to be part social network, part geolocator, and part metro area guidebook. For those who are iPhone/Web app savvy, it might be helpful to think of Foursquare as what you get if you crossed Yelp, Brightkite, and Facebook Vampires. The application is designed to provide users (gamers) with the ability to add friends, broadcast visits to locations to them, and pull up a list of frequented places others visit in your vicinity. Foursquare provides a competitive twist to city guides: users can compete to check in more often than friends to unlock badges (similar to cub scout badges), become the mayor of a location, and top the list of check-ins in a metro area.

The punchline? Friends provide better suggestions than static guidebooks, and the competition for social recognition keeps the information relevant, targeted, and fresh. For example, I’ve added a tip below indicating a particularly good drink at a local bar nearby my office. Another user by the name of Alexander F. provided a tip related to the New York Museum of Modern Art, writing: “Want a meditative place to work? On the 4th floor there is a ‘nook’ directly at the huge window front overlooking the sculpture garden.” Good stuff.

An example of a user's achievements and suggestions summary

At any given time, another player can “out-visit” another, becoming mayor of a location, which keeps the interest in checking in strong. There’s a natural tendency to check into the local TCBY for a frozen yogurt fix just to keep a mayor title, for example. The competitive achievement system is the addictive part of the game, and it is where both the challenge and the opportunity lie for Foursquare.

Challenges to Foursquare

For all the success, there are a number of challenges intrinsic to the game, driving some people like blogger Arsenio Santos away from playing. The challenges are roughly as follows:

1. The Grounding Effect. I recently left on a trip to China for roughly 2 1/2 weeks, which means I did not “check in” during the time (Foursquare is specific for metro areas in the U.S. until this month). Which means I’d likely lose my status. When you consider locations in Las Vegas, many of which are frequented by visitors from out-of-town, you’d imagine mayorships and achievements would be fleeting. It’s not much fun to be the mayor of the Bellagio hotel only to lose it a week later. Also, once a player is in another Foursquare metro area, the user effectively starts over as statistics are confined to specific metro areas walled off from one other. Thus success at Foursquare tends to require “grounding” a player to a specific metro area, penalizing frequent travelers.

2. Anti-Social Network? Arsenio Santos unintentionally grabbed hold of the mayor achievement at a local Peet’s coffee, and later on noticed the following Tweet scroll across the public twitter timeline:

“I’m sick of this @arsenio guy bouncing my mayorship of Peet’s. I guess I know where I’m going for coffee tomorrow…”

While Arsenio and the aggrieved former mayor of Peet’s developed a friendship, the introduction wasn’t based on the best of circumstances. While the competitive nature of the game might drive participation (especially with type A folks like your humble blogger), social relationships are driven by competition are an entirely different breed from those on Facebook, Linked in, Twitter, or other networks.

3. The Atomicity Effect I’m the mayor of my office (and likely the only person on Foursquare). Anyone who would join Foursquare who would like an achievement of their own would have to dethrone me, or could be more creative – they could set up a second floor area. Or become the mayor of the kitchen space. Foursquare allows users to enter in new areas, allowing a proliferation of areas, each with its own mayor. As areas become subdivided up, relevance (and thus interestingness) take a nose dive. I wouldn’t mind checking into the Bellagio hotel, but having to wade through a list of Bellagio locations would be annoying.

Business Use Cases (or How to Kill Two Birds with One Stone)

While Foursquare otherwise sounds like a bit of a timesink, there are some pertinent uses in a business context. The social network provides a low barrier-to-entry promotional locus for local businesses. Some venues have gone beyond simple listings and have begun to offer drink specials to those who check in on Foursquare (an inexpensive way to “buy” buzz advertising). Perhaps businesses can offer special perks to mayors of an establishment. Even more powerful, Foursquare can provide brick and mortar businesses with the kinds of visitation metrics online businesses have enjoyed for years.  Can this be done via Twitter? Certainly, but Twitter is not the optimal tool, since Twitter is not generally location aware, nor does it provide the achievement system to drive check in.

The bay area’s BART mass transit system sees value in Foursquare: Regular BART commuters will now be able to unlock a BART-themed badge, and also become eligible for $25 in promotional tickets that will be awarded randomly to Foursquare users who check-in at stations during the months of November, December, and January. The goal of course is to drive greater mass transit use: “A lot of BART riders are already having fun with this game,” said Timothy Moore, BART website manager. “We hope this partnership will encourage them to check out different stations and neighborhoods, and will show people who aren’t already BART riders some of the great things to do that are easy to get to on transit.”

But there’s a second and powerful benefit to Foursquare when a local business takes ownership of a location in Foursquare: there’s the ability to capture and bill for a portion of the value generated by Foursquare to be sure. However, the atomicity problem above is also solved in a rather graceful way – there’s only one official “21st Amendment bar in San Francisco” location which drives rewards and special offers if the management takes ownership of the listing. The spinoff location achievements become shallow and unsatisfying as a result, and tend to vanish into obscurity.

The grounding problem may also be gracefully mitigated via business ownership of Foursquare listings. Consider the fast food chains signing up (and paying a royalty) which in turn allows the chain to publish a top visitors list around the country. Becoming the top McDonalds Big Mac consumer in the world may be a dubious lead to a portly waistline, but is a location-independent achievement which addresses the Grounding Effect quite nicely. The McDonalds mayor thus has a chance to retain title while traveling, increasing engagement.

What Lies Ahead

Sell to Yelp? Who? Me?

If there is an exit strategy in place, Foursquare cofounder Dennnis Crowley is keeping mum about any plans. According to coverage on Jen Leggio’s terrific blog, Crowley has been quoted as saying “No official comment, but we’re not ready to do an acquisition this early. We had a real early exit with Dodgeball and it hurt the product.  There’s so much we can build and innovate on very quickly right now and I think we’re best doing that independently.” There’s also some question around Twitter’s upcoming geolocation capabilities, which would seem to compete directly with Foursquare’s core value prop.

Ultimately business use on Foursquare drives value to the social network, the businesses who drive foot traffic, and the users themselves. What’s most impressive is that Foursquare seems poised to introduce a monetization model which also blunts the Grounding Effect, the Atomicity effect, and the Anti Social effect. That’s the sort of nirvana achievement the web is all about.

Best of all, it’s fun.

Facebook Your Campaign

“Facebooked” as a verb has been around forever in internet time, referring to the practice of HR professions seeking information on people as part of their hiring due diligence. It’s starting to take on a new meaning for marketing types.  Blogger Jeremiah Owyang was tipped off to a new console game release called Prototype by Chris Pan of Facebook. The Protoype game’s website goes beyond personalization by linking ads with in-game content, or allowing users to upload their pictures to create e-postcards as JibJab does. Prototype’s website asks users to log in using their Facebook credentials, and uses profile photos and other Facebook profile information to create a trailer customized for the viewer.

Below is my experience with the Prototype site, which I encourage you to try yourself here.

What was fascinating from the beginning is how minimal the initial investment in time is. Simply log into Facebook and the website does the rest. No photo uploads, no questionairres..

Once you log in, the loading sequence begins. It takes a while, but it’s worth the wait…

Once The sequence began, a movie-like clip began playing…

Now I’ve read some of the other blogs covering Prototype, so I expected to see my own Facebook data. Imagine my surprise when a picture of my 4 month old son came up (the original here) ..

and of course I showed up as well. It’s hard not to be drawn into the experience when you see yourself in it…

It’s a bit hard to see because of the masking, so here’s the original photo …

The information doesn’t simply include my own picture uploads, but also uploads from friends’ photo albums (which I haven’t posted here for obvious reasons). The video also incorporates profile information.  Funny enough watching the video made me realize I needed to update my home location on Facebook.

Anyway, here are my key takeaways from the experience:

• Asking for logins will become commonplace. Using existing Facebook requires minimal time investment, cutting abandonment.
• Viral is the new norm. These After the personalized experience, users are likely to invite friends to watch (or even *ahem* blog about the experience) if invited to. Protoype asks you to share the website with your friends at the end of the playback.
• Marketers will increasingly bundle the extended network. The marketing message is powerful if you bundle it with the user’s data, but even more powerful when you include photos, videos, and profile information from connections (friends). I found myself running the video a couple of times to see if other friends would show up. They did.
• Expect Orwellian / Big Brother argument to pick up as personalized viral marketing beomces more commonplace. there will probably be plenty of initial freak outs, but objections will become less commonplace as contextual ads become more commonplace.
• Cross-network advertising is still a question mark. If meta logins (OpenID) pick up steam, expect a number of contextual marketing campaigns to ask for a meta ID and include content from a number of social networks. Someone will probably try to combine Facebook, Flickr, Twitter, and other networks rolled into one spot in the not too distant future.
• Someone’s political campaign will probably follow suit, rolling out videos which pull at the heartstrings using your own data. An appeal asking for support for health care reform is more powerful if superimposed on pictures of family members, but I suspect most users will be far more wary of providing a politician’s website with Facebook credentials. Game sites are far more innocuous.

The Grid Within the Grid (My Earth Day 2009 Post)

Most people driving into San Jose, CA will quickly notice the quixotic mix of the hotel De Anza, a throwback to art deco style architecture, and the many new glass-and-steel condo towers beckoning white collar 30 somethings to migrate back into the city center.  To be sure, this city draws a striking contrast between the city streets around the gleaming center of the city, and the dilapidated wooden structure homes on the other side of the 280 freeway dressed up in all manner of baby blues and yellow paint jobs. Old and new San Jose, they call it.  I live about 5 minutes from city center in San Jose, and from time to time drive past the building-turned-artwork city hall on the way to something or another. The last few times I drove past city hall, I noticed an approximately 2-3 foot black machine right across city hall on the curbside – about the half size of a mailbox. Now what seemed at the time like a high tech parking meter may in fact transform old San Jose yet again – only this time it’ll be the roads which change.

It turns out the curbside machine was one of four installed by Coulomb Technologies —three in a parking garage on 4th Street and one curbside across from city hall. The purpose of the device is to provide drivers with the ability to charge up electric and electric-hybrid vehicles. Here’s how it works: a driver can subscribes to the company’s ChargePoint Network, and receives a smart card that allows he or she to fuel up at any station. A driver can pay for 10 sessions a month for $15 or all the way up to unlimited monthly access for $50. The charging station will work for fully electric vehicles as well as plug-in hybrids. Chargepoint subscribers can visit the network’s web site to view a Google maps feed of available (or occupied) stations.

Let that sink in a moment – an electric or hybrid electric driver using this network can effectively place a ceiling on his or her transit fuel costs while driving “green”.

But charging stations are the visible tip of a larger iceberg. To enable a consumer level cap on transit costs in this fashion, we would need a standardized grid of services and standards – one which would allow drivers to plug in whether they are in San Jose or anywhere else in North America. And that requires what I like to call the grid above the grid. It’s an idea stemming from the way the internet works, simply applied to energy. Think about all the things that have to work in concert ot allow you to read this blog post : An ethernet cable (or wifi) is used to connect your computer to your router at home or in the office. That’s a physical layer standard. Next you need an Internet address, or IP, which works on top of the physical standard.  This blog has an IP address, and so does your computer – its how traffic gets to and from you on the internet. Next, you have to have a transport standard from your browser to the blog server to allow to you request the blog post text. That’s a standard too which sits above the IP address standard (the “TCP” in “TCP/IP”). Finally you have the application layer standard which sits atop the transport layer. That’s the HTML standard which all web pages adhere to, allowing your browser to work all over the internet. The point here is that to make it all work, it’s important to compartmentalize the system into different layers of a “stack model”, with each standard layer sits on top of one another. The same stack model can be helpful in identifying steps needed to fuel transportation in a post-petrol world.

Here’s one (admittedly simple) Grid Within the Grid model:

Connector – Refuel – Transmission – Production

The assumption here is, like the internet, there’s a grid built on the back of another to make post-petrol driving convenient. In turn, the four pieces are as follows:

The Connector (or “plug”) Layer

The first layer in the grid would a standard plug which connects to any charging station (home or commercial), and fits any electric or hybrid-electric vehicle. The good news is we already have one.  The three-point, 400-volt plug, which will allow electric cars to be recharged anywhere in a matter of minutes, is set to be unveiled Monday at the world’s biggest industrial technology fair in Hanover, northern Germany. According to a press release from German energy company RWE,  sa press release from German energy company RWE, automotive and energy companies have reached an agreement for a standardized plug electric and electric-hybrids. Some of the automakers include in that agreement are Volkswagen, BMW, Ford, General Motors, Fiat, Toyota and Mitsubishi.

The Refuel Layer

The next part of that standards stack is the charging stations on the roadsides, or what I call the charge station layer. It’s also problem for which appropriate tools have been developed and deployed for determining where Starbucks franchises will be located to tap demand, for instance. Same thinking applies to charging stations, and making sure those stations all support the lower level standard (use the same plug). Of course there’s also the matter of making sure Chargepoint users are authenticated. Energy credits provided to Chargepoint users would need to be billed, which requires set up of a monetization grid as well. To make such a system convenient, drivers would need to be able to pay a number of different ways: credit cards, subscription, stored value cards, and possibly other exotic methods such as bill to a phone (the way some vending machines work in Japan). Layer on top that a number of different providers would jump on board to provide charging stations the same way ExxonMobile, Shell, Chevron, etc all lined up to provide drivers with fuel for conventional vehicles. The trick is getting the most ubiquitous charge network providers to join open payment interoperability standards. This too is a problem which has been solved in the past – by banks who have coordinated to provide ubiquitous use of Visa and Mastercards, regardless of what bank a business accepting credit cards is using, or whether that business is a brick-and-mortar business or a web business.

The Energy Transmission Layer

There’s little point to switching to electric or electric-hybrids if we keep generating electricity through fossil fuels – whether you’re concerned about the impact of greenhouse gases on the environment, domestic job creation, or the America’s political-economic entanglements driven by dependence on petro-dictatorships for fuel. It’s the same problem. The U.S. has the natural resources, the technology and the capital to initiate a shift to renewable energy. Missing is a high-voltage and fault-tolerant transmission backbone to make that future a reality. The issue is that the prime areas for renewable energy production are in places where we don’t have robust existing transmission infrastructure.  Since there is a geographic gap between production and demand, electric companies have understandably built coal, nuclear, natural gas and oil-fired generators closer to customers.

Matthew Wald of Scientific American provides depths around the issue by writing that “North America is actually covered by four regional grids (three of which serve the U.S.). The largest is the Eastern Interconnection, an extensive complex of transmission lines that stretches from Halifax to New Orleans, with substations that step down the high-voltage electricity to lower levels so that it can be distributed locally along smaller wires. West of the Rockies is the Western Interconnection, from British Columbia to San Diego and a small slice of Mexico. Texas, in an echo of its history as an independent republic, comprises its own grid, now called the Electric Reliability Council of Texas. And Quebec, with its separatist undercurrent, also has its own grid. The high-voltage transmission systems in the four regions comprise about 200,000 miles of power lines, divided among a staggering 500 owners, that carry current from more than 10,000 power plants run by about 6,000 investor-owned utilities, public power systems and co-ops.”

Power traveling through a feudal mess of jurisdictions is only one problem. We also lose power the longer we transmit it, and the older the energy grid is the less efficient it operates. According to the U.S. Department of Energy (DOE), seventy percent of the existing high-­voltage system is consequently 25 years old or more. Hence the DOE’s current goal of attaining 20 percent of U.S. electricity from wind by 2030 includes a plan for a national, high-voltage transmission backbone. The 22,000-mile system is the energy equivalent of the interstate highway act for a post-carbon transportation economy. Today’s transmission system usually operates at no higher than 345 kilovolts, but the proposed national energy backbone  would operate at an extreme high-voltage rating: 765 kilovolts. The bump in power would reduce typical system losses of 3 to 8 percent to around 1 percent and provide routing around. It also wouldn’t hurt to have a smart grid which routes around failure between any two lines, in case of routine failure or in the case of an electro magnetic disruption. Incidentally, the U.S. military is currently studying the effects of a weaponized electro magnetic disruption device, which could be used to knock out power to affected areas. Enhanced security is a nice benefit to revamping the grid too.

The Production Layer

As the self-explanatory name implies, the production layer involves what happens inside a power plant – be that power plant conventional, or renewable. To the extent that the other three layers are properly sorted out as above, a centralized conversion from fossil fuels to renewables at the power plant level would have the effect of “greening” transportation around the country.

The Big Picture

This is one picture of what we can create , and none of this is new. Making the kinds of changes we’ll need to make one way or another is a matter of applying internet design principles, business community buy-in, public support, and exercise of a new national highway act focused on energy.  The key to this is a concerted effort – our national highway system was not constructed individually by states and glued together afterwards. So it is with the need for a national transportation energy grid. The best part is we will probably create lots of jobs while we’re at it.

The Bull and the Honeybee

Phil Wainwright over at ZDnet posted a “SaaS sales myth debunking” post which caught my attention, mostly because it illustrates an fundamental learning in the Enterprise 2.0 and Eneterprise Social Software market. Phil’s point is that the need for a regional team is a myth and that companies are successfully sellign and implementing solely on the web. My take is that Phil’s mostly correct, although he hasn’t addressed the boogey man of enterprise 2.0 and enterprise social software – integration with proprietary systems.

So what does this have to do with cattle and honeybees? While living in New York, I got to know a few local organic providers in upstate New York who took it upon themselves to educate this city boy. The folks I got to know were involved in a diverse number of activities – organic flowers, organic ranching, etc. One of the conversations we drummed up over a beer involved honey cultivation. I was told point blank “100% organic honey” is just a meaningless marketing term. The reason is that bees require a foraging range of several miles to have access to the materials they need. Despite quality control efforts by ranchers, some bees invariably fly out and back into the hive with pesticides and fertilizers in tow. Contrast that with cows, chickens, and other such animals where simply building a fence and sourcing the right food and water will produce the desired result. In other words, Cattle ranchers can completely operate in a self-contained and controlled environment while Honeybee ranchers can’t fully operate without integrating the outside world.

You probably see where I’m headed here – the Enterprise 2.0 and Enterprise Social Software world contains both “cattle” and “honeybee” applications. Facebook and Salesforce.com are classic consumer and enterprise examples of “cattle solutions” – users key in information, and for the most part, the application can function fully without the need for outside services. You can of course link to Flickr, for example to share your online photos with friends through plug-ins in Facebook, but the point here is you don’t need to loop in outside resources like Flickr to use Facebook. Same goes for salesforce. On the other end is Netvibes and Aria Systems, both of which I would call respectively consumer and enterprise “honeybee solutions”. Both services require data exchange with outside data stores to provide a fully user experience.  Based on my own experience at both Aria Systems and NetSuite, I find that “cattle” solutions can be sold effectively over the web for the most part, because customers can mostly set up these applications themselves and are ultimately responsible for the content. On the other hand, “honeybee” solutions require a web/regional hybrid sales model to fully leverage the benefits, since at the very least humans setting preferences and making design choices is required.

So for those of you launching a new Web 2.0 or Saas offering who want to know how to manage client expectations: are you a bull or a honeybee rancher?

The Trainwreck Picks up Steam (and How to Avoid It)

I really dislike writing rants like the one you’re about to read – mostly because I’m an optimist by nature and because frankly nobody wants to read a blog post that reads like a Shakespearian tragedy. That said, the economic trainwreck is picking up speed – and it has everything to do with the US-China axis.

Let’s go back in time to right before the Christmas and New Year holiday, to about December 20th. That was the date the Federal Reserve bank cut the federal reserve lending rate to zero. The Federal Open Market Committee in Washington continued with this snippet: “weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.” Let me translate that into plain english for those who aren’t sure what this means: The federal reserve is willing to print an unlimited amount of money for the foreseeable future. Let that sink in a minute as you think about what to do with you sitting on Dollars.

Why? Well deflation is a big concern for them consumers think prices will go down (and let’s face it, that’s already happening), then there’s little incentive to buy anything right away. So to keep the economy going, instead let’s hit the prudent folks who are sitting on Treasuries – which are returning virtually nothing in interest – forcing them to plunge into buying in the housing market instead, which then frees up equity for people to spend on consumption. Smells like a bit of a Ponzi scheme, doesn’t it? Now hold that thought – I’m going to head off on a bit of a tangent here, but I promise it’ll all come together.

The  New York Times reports how South Korea has posted a rising balance of payment surplus of 2.06 billion, up from 1.67 billion a year ago. This was after payment deficits for most of the year mostly due to rising energy prices. They’re not alone either. The Vietnamese have devalued the Dong (the funniest currency name you’ll ever see on this blog) about 3% to keep its export-dependent economy afloat. This adds to the Chinese running a payment balance surplus up 18% to $191 billion just in the first half of 2008, as reported from the party’s media frontman, Xinhua. The press release added with a bit of flair to the message: “the government should stick to the flexible and prudent macro-economic policies and create a good environment for pursuing the balance of payments.”

In other words, China will continue to foster social and economy stability through exports, and countries who were feeling the pinch now want to export the economic upheaval in the form of gadgets you can buy on sale at your local Fry’s. With the fed printing money as fast as they can, you can pretty much imagine where these exports are headed. As financial commentators speak about trust in the market and how the financial market is about to undergo its biggest change in modern history, you really have to wonder if we need to go back to the fundamentals of real domestic productivity here as a means of restoring that trust. The financial markets aren’t going to point us in the right way – we need real production to occur here to support an expanding economy. Now I’m not suggesting we’re about to run up another Holly-Smoot tariff war. The conditions here are completely different today than they were in 1930, and anyone with a brain understands that we have structural problems we must correct, even if the rest of the world hopes we prolong our consumption as long as possible to keep their own houses in order.

So dropping the federal funds rate to zero won’t help – Japanese central bankers watched in frustration as timid banks took central bank money and sat on it … sort of like what’s happening now as U.S. banks cut off credit card access and buckle down on mortgage holders. We’ve learned some of the lessons drawn from Japan’s economic crisis, but we’re still making some of the same mistakes. It doesn’t need to be this way of course, and the New York Times’ Martin Fackler puts this better that I can:

“Economists say the United States faces a similar situation, after the sudden collapse in September of Lehman Brothers created fears of additional failures. Economists also fault Washington for its inconsistency in dealing with the financial crisis, leaving the impression that it does not have a clear strategy for dealing with ailing lenders.

In Japan’s case, economists and former bankers say, credit began to flow freely again only after 2003, when regulators adopted a tough new policy of auditing banks and forcing weaker ones to raise new capital or accept a government takeover. Economists said the audits finally removed paralysis in credit markets by convincing bankers and investors that sudden failures were no longer a risk, and that the true extent of problems at banks and other companies was finally being revealed.”

In other words, prudent lending stimulating investment in real assets and real productivity, and strict financial oversight which restored lender confidence eventually opened up the credit spigots.  Banking minister Heizo Takenaka’s policies of strict audits and “good housekeeping” seals on lending institutions brought back a specter of credibility to a financial system which was devoid of it. That alongside fiscal spending targeted in the right areas brought back the patient from near oblivion. Paulson and his discredited Ponzi scheme need to be jettisoned. We have to stop thinking like a hegemon and start balancing our checkbooks. It took Japan about 4-5 years to get out of their funk, and should take us considerably less to reboot our economy if we begin to investing at home, ditch our addition to cheap Chinese chotchkies we don’t need, and leverage solid accountability principles. The Chinese, who hold lots of Dollar-denominated assets, will be happier in the long run too.

Object-Orientated Advertising Economics

A number of bloggers have noticed Barack Obama’s advertising in games. Which sparked my interest in posting about an idea I’ve been sitting on for a while: object-orientated advertising.

Exhibit A is the console game Burnout Paradise, a racing game.  The game’s publisher incorporates virtual billboard advertising as players race through virtual streets, and advertisers can buy advertising time since consoles are equipped to receive feeds which can update ads. Here’s one such billboard:

Putting aside political affiliations a minute and you’ll see there’s an interactivity mechanism here which makes virtual advertising far superior to webspace or meatspace ads. Like the web, there’s no startup costs here associated with actually putting up the ad, but there’s also the ability to perhaps click on the ad and queue content in a second window for later viewing, along with serving up similar ads. Obviously Google Adsense can do this as well, but what’s really neat about advertising in game is that ads can be switched up in real time as players drive laps around the racetrack.

Yes it’s creepy and big-brotherish, but it’s coming. Free game network subscriptions are already subsidized with ads (Xbox 360 live for instance). Now consider Hulu, the online network, whose advertising revenues are stuck in the 1950’s model. That is, you have programming and you have a few ads placed around the programming itself. No consider a subtler approach for contextual ads which can be swaped in and out of programming based on advertiser purchased timeframes.

Here’s an example – it’s pretty obvious that the television show Heroes was paid some amount of money to pimp the Nissan Versa automobile, since it was all over the show and the online comic.

Now imagine hot swapping the Nissan Versa for the Toyota Prius if the advertiser changes. Neat stuff, but it mus be done gingerly of course or fans will cry foul. I personally have referred to the movie “Die Another Day” facetiously as “Buy Another Day”, because of the nausiatingly pervasive vodka, auto, and clothing advertising. If I wanted to pay for advertising aimed at impresisonable young males, I’d just pick up Maxim, thanks.

Off the top of my head, here are some advertising usage segments which we might see in the future include virtual billboards, rotate plug-in product placements in background scenery, such as cars, and programmable swap out labels for bottles a game or video personality drinks out of.

The infrastructure required to make this happen involves three things:

• A standard platform for digital film and games to incorporate  programmable objects – consumables, background props, etc. Gaming is pretty much there already. I suspect television and film will follow shortly once everything is released digitally.
• A standardized method of turning ratings of games, films and television programming into advertising multipliers. For example, superbowl advertising naturally is more expensive than soap opera advertising.
• A standardized method of turn objects into advertising multipliers demand for certain shows and virtual supply of placement objects. For example, an object a character holds (bottle with a programmable label) or wears (watch with a programmable face) would be a more expensive placement than a background object (programmable banner overhead characters).

Of course all this assumes there is  infrastructure in place supporting an unbiased popularity rating is in place, which isn’t the case. It’ll also spike demand for minute green screens to say the least.

As a bonus, these capabilities will probably tip the scales in the direction of digitally distributed media as opposed to CD-based media. That’s a good thing. I don’t know about you, but I’m done with physical media (et tu, Sony?)

Brace for Impact

Those of us who have been in Silicon Valley for few years now have been through bombastic highs and lows which seem, frankly, far from the lows of this blogger’s humble beginnings. Yet despite our roots in paranoia there’s been a certain feeling of invincibility in the face of difficult odds which typifies the Silicon Valley entrepreneur. That’s worth remembering as business cycle gravity takes hold and we head into an era of far slower growth and possibly contraction. It’s also worth looking a hard look at the tactics which will increase survivability in tough times, even as the balance of power has tipped heavily from entrepreneur to investor in the span of two weeks.

The Only Thing We Have to Fear is Fear Itself

Sensibly, some investors have been quietly coaching their investees on strategies to come out of the economic black hole. It;s understandable, as this downturn is different than most since mortgage equity withdrawal is no longer fueling domestic consumption. Sequoia Capital’s downturn strategy presentation to its funded entrepreneurs has leaked out and added to dread. Oh and the first slide doesn’t help:

Sequoia Capital on startups and the economic downturn

View SlideShare presentation or Upload your own. (tags: depression recession)

Startup angel investor/advisor Dave McClure “smacked-down” doomsayers, calling on them to persevere like the fictional desert-dweller Muad’dib. In Dave’s words:

the companies and people i bet on HAVE to be both optimistic & opportunistic, if only because THE ODDS AGAINST STARTUPS SUCK ***ALL*** THE TIME, not just in downturns.  you damn well *better* have a positive attitude, or you’re just never going to get out of bed in the morning.

The messenger is overpowering the message a bit here, but he’s essentially correct. Ramen-profitable businesses are best poised for long term success and high cash-burn businesses aren’t, irrespective of the general economic climate. Besides, a number of macroeconomic factors are in our favor here. To see why, let’s take a stroll down ancient history. The last time panic set in here was in in 2000-2003, where highly leveraged debt crushed a number of startups who tanked when the interest payments began to far outpace revenues. We’re talking 9:1 debt/equity ratios here in some cases – not pretty.

The Force is With You, Young Jedi

Nothing like this exists in the post-Web 1.0 world, where capital requirements for startups are a fraction of the massive costs incurred laying down fiber optic cable to found the original web. How many Web 2.0 startups burn through 300 million in a few months? None, and that’s the point. Web 2.0 startups have a far quicker time to utility and require far less capital and hence are imbued with a lower burn rate right out of the gate because of lower financing costs. The best visual I’ve seen of the differences between Web 1.0 and 2.0 startups was in Amy Shuen’s book, which I’ve semi-plagiarized below..

Visual Representation of Web 1.0 v Web 2.0 Profitability Over Time (x axis)

The most successful founders I’ve met are far more MacGwyver or Luke Skywalker than Jack Welch, and the evaporating time to revenue driving Web 2.0 startups make it easier than ever to be a entrepreneurial Jedi. It’s never been easy, but has never been easier than now.

Tactical Maneuvers

This blog tends to focus on ideas and possibilities, mostly because that’s what I enjoy reading and speaking about. However, bracing for a slowdown tends to make such talk seem a bit trite. So while others have made lists of things you can do right now to depression-proof your startup, it might be worth adding a brief list of things I’m observing from the fault lines. Here’s what entrepreneurs I know personally are doing now to weather the economic storm:

1. They’re Communicating. Our CEO assembled the team to address the economic crisis as the full brunt of reality hit Wall Street. The message? We’re a software as a service company, and positioned for success when potential clients are looking to outsource to lower burn rate. He asked us to filter out the noise and focus on executing. Have you done the same? If you haven’t, let me assure you your team isn’t focused on executing right now – they’re focused on what they will do if they lose their jobs. Speaking of which..

2. They’re Dumping Mr. Milquetoast. This one is uncomfortable to speak about, and I’m not suggesting that layoffs is to be taken lightly. Having said that, a highly motivated, smart teammate is worth many average ones. We’re likely to see a few more announcements like the one made by Loic LeMeur in the new few weeks. Which leads me to the next point..

3. They’re Investing in the Core Team. This is always a good thing to do, regardless of the macroeconomic circumstances. Calancais dropped this nugget of common sense in his post:  “Invest in training and education of your top people, because they are the ones who will lead your company through this mess.” Besides, there’s inherent risk mitigation in a slowdown anyway – the top people you train are less likely in a recession or depression to jump ship, giving you a longer investment horizon.

3. They’re Finding a Revenue Stream and Hanging on For Dear Life. The expression “cash is king” is truer now than ever. A few startups I’m familiar with have changed strategic direction in a matter of a day or two to  generate cash flows. No joke. Every startup I’m familiar with is also making a list of their top 10 customers (by cash flow of course), and is calling on them all the time to make sure they won’t leave. Bonus points for developing new revenue streams from clients who are already reliable about paying you.

4. They’re Forgetting Seed Capital. Seed and early stage capital are the first to dry up going into a down cycle. Every time. There are two reasons why. The first is that investors who are currently long on a few startups are going to try to nurse those startups that much more to mitigate their risk. That is, they’ll spend a whole lot more time with their current portfolio and forget acquiring new startups. The sceond reason has to do with business cycles and value investing. Simply put, if you think spending will rise in the macro economy, it makes sense to invest early in promising startups to get in on the growth for a bargain price. That dynamic works in reverse going into a downturn. For more reading, hit up Fred Wilson’s “Startup Depression” post. In short, bootstrap if you can, or fund your new venture out of current services you’re providing. Now would be a great time to turn your consulting project into a product.

5. They’re Taking Root. It might be tempting to pull out of the domestic market and try to jump into China, but hold on before you do. The Chinese haven’t focused on building up domestic consumer markets fast enough to head off the U.S. slowdown – which they should have seen coming when American consumers began cannibalizing home equity to support unsustainable consumption. Driving growth through an addiction to US Dollars will now start to stress newly minted graduates who will have a tougher time finding work when the Dollars stop flowing (it was already tough for many of them, by the way). Paul Denlinger has more analysis here. For good measure, I’ll mention the Euro region isn’t going to fare much better.

6. They’re Renegotiating Everything. Try to negotiate with your credit line suppliers to give yourself some extra breathing room (it’s unlikely, but worth trying). Renegotiate with your every supplier provider and insist they reduce prices or you’ll leave them. More often than not, it will work – remember #3 on this list?

7. They’re Preparing to Feed off the Dying. An item that caught my eye from Jason’s “10 Things to Do Right Now” is this little quip:

Make a list of every Web 2.0 startup to raise an A or B round and cross 80% of them off the list, because they will not make it to their next round of funding or profitability.

Every single startup CEO or GM I’ve spoken with has told me he or she is targeting the “walking dead” amongst their competitors and are preparing to strike at their customer list.

8. They’re Connecting with Others. Here’s some additional reading material to get your business geared up for the coming downturn. If you can contribute, get involved in the discussion!

The Startup Depression

VC Fred Wilson’s Thoughts

What Startups Can Learn from Sequoia

15 Ways to Cut Your Home Budget by Mukund

The Economist Magazine’s background on the downturn

The Measurable Impact Web

Like many of you reading this blog, I too have the attention span of your average hummingbird.  The funny part my ADD-ness has become more acute over the last year or two, and I’ve discovered an odd side effect to it. Rather than sit in a zen state just thinking for an extended period of time, I tend to think in a packet-like state. That is, I tend to process information, then come back to it later and pick up where I left off last whenever I have a spare moment. This happens over and over again until I have completed “processing”, which is usually where I begin blogging. Like Susan Wu at CRV, I’m pretty bad about opening up my thought process and I usually blog about fully baked thinking, but I’m going to step out of my comfort zone here.

I Confess…

So, I’ve been mulling a confession for the past 2-3 months. Here it is: like Fred Wilson, I’ve grown restless with Web 2.0 startups. Now, Fred is a smart fellow with a high signal to noise ratio, but he’s bored for a different reason than I. He basically wants to change the world and feels Web 2.0 is not world changing. you can’t blame him, considering Supernova and TED have been all about energy and microfinance of late. I’m with you Fredster, but I’m bored because I believe the web is world changing but I’m not seeing jaw dropping innovation (or revenue for that matter). But this isn’t about Fred – his posts tend to spawn more than a few copycat blog posts anyway. Nor is this about me. It’s about what’s next in connecting us all.

Exhibit A

Case in point (and one of two catalysts for this post): Yammer wins the TechCrunch 50 competition. Now, we’ve been using Yammer internally for our company with some success, but frankly Yammer is more evolutionary than revolutionary. Most of us are still using Twitter and email primarily and no adoption methodology is in place. This isn’t a hate fest on Yammer, by the way, which is a good product with a real business model (where for art thou Twitter??). But the Yammer nod seems a bit of smarmy protest vote for the oft-errorprone microblog default Twitter, who’s been giving us the big fail whale far less of late. Also, Twhirl, the social software front end client, now supports any laconi.ca installation. In plain English, this  means that any company can set up their own microblog and allow employees to send messages in one interface to the public Twitter and the private company microblog (Loic LeMeur, you are one uber-smart Frenchman). Let’s put this in big-picture-principle perspective: will Yammer earn even a footnote in a historian’s texts 100 years from now?

Exhibit B

I mentioned there were two catalysts for this post. The second was my chat with James, biz development dude for BigWorld games, who has developed a platform for massive multiplayer online games (MMOs) development. They’re doing some cool things with gaming performance which I won’t delve into here, but one of the things I will mention is they’ve extended the mashups idea into the virtual worlds space. Consider a gaming character interacting with an e-commerce site within a virtual world (sort of a virtual mall)..

Interacting with the Web in a Virtual Environment

Now consider a mashup with micro finance site Kiva, allowing small business owners in Bangladesh give investors in New York a virtual tour of their operation. Last stop: an in-world Kiva website where would-be investors can sign up. Another application: video gamers can get involved with each other via the web within a virtual world – and voila, instant e-commerce among players. Remember the old wild west days of Yahoo storefronts selling everything from lawn gnomes to dog biscuits? Lifting the poor out of poverty is going to be easier with virtual items – there’s virtually zero capital costs other than time involved, which the poorest unemployed have plenty of.

Where We Need to Go From Here

We need to start talking about measurable impact.

Not some hypothetical “ideas are currency” talk, but real quantifiable results. Once we do, we’ll start seeing Web 2.0 copycats merge just like the American automobile industry went from about 10 players to 3 from 1910 to 1940, since the network effect requires will natrually shrink the number of platforms out there. One great example of putting social tools to work to product measurable impact is Carticipate, which is pragmatic and location-aware way to combat high gas prices. Nothing sexy, fun, or lofty here. Just people reducing gas costs and carbon emissions to boot. Impact: less traffic, less money thrown at ExxonMobile,  and more money socked away for Christmas gifts.

If you’re not sure where to begin, here’s a few questions to get started:

• “How can social interactions lift the poor out of poverty? The Chinese have been turning World of Warcraft items into real dollars for years now. How do others in poverty enter the market without introducing so much competition that incomes collapse (ie supply far outweighs demand)?”
• “How can microblog-accelerated serendipity create revenue-driving partnerships between entrepreneurs in 3rd world regions with otherwise poor connectivity?” (related thought by Marc Hustved here).
• “How can we create a revenue stream from creating synergy between traditionally unrelated markets?” An example: Wall Street discovered a while back that engineers’ heat diffusion equations are surprisingly good formulas for stock option pricing. That’s what created the options trading market we have today.

That’s just for starters. Yes, I’m working on one of the above. No, I’m not dropping any hints here, but I might leak some of it if you and I strike up an interesting chat here.

How Not to Inhibit Mitosis: A Spore Case Study

I started to blog about things I’ve learned from the recent fiasco with Electronic Arts’ release of Spore, only to find the post started to look less like a timeline of events and learnings and more like a case study. So I figured I might as well try my hand at writing one…

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From Cheers to Jeers

As Tim reached over to pick up his ringing mobile phone, a quick glance at the caller ID info was all he needed to see. He had seen the reviews of Mark’s new production, and he knew exactly where to begin the conversation. “So, just how bad is it Mark?”, he spoke as he picked up the call. “I feel like I’m on one of those free-fall amusement park rides” replied Mark, not missing a beat.  “I mean, what the heck is wrong with these fickle gamers – they better damn well understand we’re a business!”

Mark and Tim had been close friends since they bunked together in college, and often bounced ideas off one another. Now Mark needed someone to talk to as customers reacted overwhelmingly negative to his newest game release. As senior producer of the much anticipated game Spore, he was responsible for distribution of the most talked-about project in the gaming market all year. Mark worked for game publisher Electronic Arts (“EA”), who placed high hopes to extend a rebound from lackluster Q4 2008 results, after reporting a 400 million increase in sales in Q1 2009. There was still the nagging issue of a net loss for Q1 2009, but EA expected as high as an 80% margin on Spore, in an industry where 30% margins are more the norm.

Spore was also poised to capitalize off the two hottest trends in the market. Gameplay involved the creation of an alien species, which a player must guide through stages of evolution and social development – from single cell organism to complex society. Some called Spore a “god simulation”. The game concept lends itself to user generated content, which was accepted as a “must have” feature for any successful release. Spore also capitalized off the concept of Internet play, which had been the driver behind more than 50% of EA’s Q1 revenue increase. Players would be free to create a species and upload their creations to share with friends. Will Wright, the creator of Spore felt that the nexus of rich user-generated worlds which were sharable on the internet would lead to the next big hit. Most industry observers lauded the direction he’d taken.

High Expectations

Mark and his team carefully tied a limited release to the July 14th E3 show in Los Angeles; one of the big showcase events the industry. While Mark figured he would have to compete for attention share with other game titles debuting at the show, he knew no one has the kind of buzz Spore had going in. The Spore trailer debut at the show was welcomed with thunderous applause and only heightened the feeling that he was on to something big.

Mark and lead designer Will also carefully devised a timed release of the game to better forecast how well received the game would be. The game came in two parts: the first was a creature creator, where players could construct the look of their aliens, and the second is the game itself, where players could interact with the creatures of their own design. The first part of the game was thus a barometer for the second (and main) release of the game. The results were over 1 million new player creations by mid June, and the top selling game for the month, more than doubling the number of games shipped by anyone else.

The Piracy Tradeoff

“I still don’t understand why the game release has gone sour, Mark..”. Mark let out an audible sigh and then began to speak in hushed tones. “We knew buyers would distribute copies to their friends, Tim”, said Mark, “so we had to put something in place which would prevent gamers from sharing their game copies with their friends. We originally had the game connect to our systems every ten days to perform a validity check. A game copy deemed illegal would alert us as well as shut down the game.”

“Hold on Mark”, Tim interrupted. “What about people who don’t have internet access?”

“Well, we had to nix the plan after we realized it would report back too many false positives. We figured it would also spike our customer service calls with angry customers if game players weren’t connected to the Internet. Instead we opted to have the game install a maximum of three times, after which the game would not install anymore.”

The Release Date Crash

Mark knew something was wrong as he began to read the numerous reviews on the morning of Spore’s launch. To his surprise, the reviews mostly talked about the anti-copy measures taken as opposed to the actual game content. It appeared as though many game players were in full revolt, and were either refusing to buy the game, or were actively trying to return the game title for a refund. One game critic website in particular caught Mark’s attention:

“No matter what people think about the actual game play, the story now centers around the DRM scheme EA built into the title, and a grassroots movement has begun to tell gamers just how bad the DRM sucks.

The method? Bombing the comments on Amazon.com. Right now the game has 222 customer reviews, with 194 of them giving the game one star (out of a possible 5).”

Mark quickly navigated over to internet retailer Amazon’s Spore webpage, where he found an overwhelmingly negative rating on the game, followed by scores of buyers and would-be buyers complaining about the anti-piracy measures. Mark knew carpet-bombing Amazon would be particularly nasty way of protesting the anti-piracy measures, since casual gamers who aren’t aware of the “protest” may not bother to read the content of the reviews and only assume the game isn’t very good. A quick call to his team confirmed his worst fears: early revenues were not shaping up as expected.

Mark turned back to the Amazon website Spore page and began to read through the reviews to try to understand the uprising. Two feedback posts in particular seemed to sum up the mood:

“I upgrade my computer often, and still play some old favorite games. I wouldn’t be able to do this with Spore unless I stop upgrading to newer computers. This is more of a resell to paying customers package.”

“This basically means that you are actually RENTING the game, instead of owning it. The game WILL stop to function in the future. That’s inevitable, because even if EA keeps the activation servers going, there IS going to be a time when EA will simply cease to exist because of financial issues or federal laws (like most businesses eventually do). “

Turning it Around

Mark was becoming increasingly irritated the more he thought about it. “We never intended for this to get in the way of legitimate buyers, Tim. All we want is to make sure is that everyone pays for what they use. What’s worse still is that copies of the game are out on the Internet anyway. What a catastrophe.”

Mark picks up a drink and takes a sip, beginning to speak again after an uncomfortable pause: “I expected complaining to come from would-be pirates, but this is just irritating.. it’s affecting our bottom line. It’s not unreasonable to want to install the game after buying a new computer, I guess, but gamers will just have to compromise.”

Tim cleared his throat and replied “Well, maybe that’s the point Mark. Customers hate to be told what they can and can’t do with things they buy. You’ll need to find a better way, because it looks like they’re not just voting with their wallets anymore.”

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World of Beijing 2008 Olympicraft

Someone remixed the “Beijing Welcomes You” soundtrack to a World of Warcraft video. Totally Nerderrific: