Monday, November 24, 2008

Mr. Obama Goes to Washington

A while back, TechCrunch ran an intriguing article on Obama's use of social media and its possible implications for what could be a game-changing presidency:
Is Obama Ready To Be a Two-Way President?
The article poses a what-if question: what if Obama, rather than simply using services like Facebook, YouTube, and Twitter to broadcast to voters, actually allowed people like you and me to communicate with him by the same means?
"If Obama dedicates a team aside from the outbound crew that "pushes" content through social channels in order to strategically reach, listen to, and embrace the 46% who voted against him, he might be able to run a truly democratic term. It could also curtail the necessity to campaign as much while in office in order to focus on the issues we elected him to fix."
The author (Brian Solis) proposes that Obama should use sites like to really open up the communications between President and constituent, going so far as to solicit policy suggestions from individual visitors and allow the community to vote these ideas up and down.

It's a powerful idea. Anyone who has lived through more than one presidential election is familiar with the process of candidates struggling to appear like men (or women) of the people while on campaign, only then to disappear behind closed doors in Washington once the election is won. The idea that Obama would set a new trend in which high elected representatives would remain in touch with the man on the street is a powerful evocation of the American political myth, as if it were a scene from an updated version of "Mister Smith Goes to Washington." The manager in me can't resist pointing out some parts of the idea that seem unrealistic -- does a sitting president really have the time to regularly record podcasts and engage in live exchanges with voters via the Web? Does the mystique of the presidency allow for candid, behind-the-scenes webcasts? -- but I can't deny the basic appeal of the idea.

I'd like to believe it can happen, too, but then I also read Newsweek's issue on the campaign. The "How He Did It" series of articles is an excellent account of the candidates and their campaign staffs, and I came away disappointed in how little I heard of Obama's social-networking efforts. They were mentioned -- Obama's digital team gets about three-fourths of a page in one of the articles -- but those mentions did not convey a sense that the Web was viewed as particularly important by the people running the campaign. Having read those articles, I now know more about David Axelrod's taste in soft drinks than I do about the campaigns' core digital strategy. Of course, there's a chance that old-school reporters simply don't understand what is happening right in front of them, but you have to ask: if social media were really that important to the Obama campaign, if the campaign's managers valued their digital strategy all that highly, would that not have eventually become apparent to the people who followed that campaign for months at a time?

I don't doubt that the Internet changed American politics for good this time out. If there's one thing politicians understand, it's money, and Obama outspent his opponent three-to-one on the basis of small contributions from individual donors. That's a game-changer right there, and every serious presidential candidate in the next campaign will reach out to web properties in an attempt to duplicate Obama's success. Crowd-sourcing the American government, though, is a much more radical step, one which raises very serious questions about practicality and proper implementation. It is also one which we have as of yet no reason to think that Obama will embrace.

I appreciate the passion of the TechCrunch piece -- and "passion" is a word I'd like to apply to TechCrunch more often -- but it describes a dream, not a reality. I look forward to seeing that dream represented in the updated "Mr. Smith" -- starring Wil Smith, no doubt, and coming soon to a theater near you.

Friday, November 21, 2008

Bring Readers Back By Sending Them Away

There's a good post today on Publishing 2.0, on the virtues of link journalism:
Link Journalism Drives Page Views and Engagement
"Link journalism," in a nutshell, is publishing content that consists almost entirely of links to other content. Usually this sort of thing attracts two types of criticism: that it's a lazy substitute for actual content generation, and that it's a suicidal surrender of visitors to a competitor's site. I can attest to many meetings I've attended in which one idea or another was shot down for the sole reason that it would send visitors away from the site, rather than keeping them around. Let's call this the flypaper model of site design: it seeks to trap visitors on the site, whether they want to be there or not.

The article above notes how wrong-headed this was: it talks about a page on a Tennessee Volunteers fan site that gets twice as many page views as any other page, despite the fact that it consists entirely of links to stories on other sites. Partly this is due to the fact that the page in question focuses on a breaking-news topic of great interest to the site's readers, but to explain it away as an exceptional case would miss a valuable point:

Aggregating links to content on other sites solves a problem for your readers.

We work in an attention economy. There is far too much information out there for anyone to assimilate on their own. For people who are interested in following news in general or even developments within a specific topic, this creates anxiety: maybe something important or interesting is happening RIGHT NOW and they won't hear about it. That's a problem, and the site that solves that problem will immediately go into their list of favorite web destinations. We can call this the banquet model of site design, since it presents visitors with a tasty spread of content that tempts them to return the next time they feel hungry for information.

In short, there are two ways to send visitors away, one good and one bad. You can send them away in a fashion that leaves a lasting negative impression of your site, or you can send them away feeling that your site is a good thing that gave them what they wanted. If you're in the latter category, the visitors who leave your site via external links will probably come back in time. Solve a big or pressing problem, and they'll come back repeatedly (and maybe even bring their friends).

Wednesday, November 19, 2008

Baby, You're a Star!

I've been working my way through the Razorfish vision document that I referenced in a previous post. At 84 pages, it's a weighty PDF download and not something that you really want to force your way through in one go. There are some good ideas scattered amongst those pages, though, and I'll be blogging on a few of them here. The first comes as a useful insight into building a site around individual experience:
"People want to feel special and tend to reach out to the things that make them feel that way. So, it's no surprise that people flock to social networks in droves; they make users feel like the star of their own lives. The same desires extend to companies, products and even TV networks. The lesson here is that socially-aware companies put customers and audiences at the center of their world, or at least make them a part-owner in it. The New York Times and most newspapers do this by simply highlighting the "most popular" articles other site visitors have read, searched or shared. CNN goes a step further and gives broadcast and digital airtime to user-generated, citizen journalist iReports. Nike does it too, by centering its Nike+ site on the user's profiles and the community's interactions, instead of its shoes. And Yahoo!, Google, and Coca-Cola go full bore--giving their entire home pages over to each user to "trick out" with their own MyYahoo! and iGoogle controls or Coke bottle designs. In all cases, the key is they make sure the spotlight is on the customers and not on themselves."
This is a critical insight, and one which I wish I had kept in mind when helping build video game websites over the past two years. On some level I think I already knew this, but it's easy to forget in a corporate environment where everyone knows the company's goals going in, and the developers come to the table with a list of features they're eager/willing to build, and the designers come with a vision for how the site should look and behave, and the marketing and product people have clear expectations of what messages should be pushed and where. The result is you end up with a site that's built to please developers, designers, product managers, and marketers. Is it really all that surprising, then, that customers find the results considerably less appealing?

But now imagine that you do the whole thing over, this time starting with a very simple premise: the site should make each visitor feel like a star. What does that mean in practical terms? Right off the bat, it means that when a visitor comes to the site for the first time, s/he should be asked to sign in, and every time after that the first thing s/he sees should be a personalized home page full of content that s/he has chosen. In my previous position we suggested that sites should include personalized home pages, but we never got anywhere because that was never a high enough priority. In the world where every visitor is a star, though, it's the highest priority of all.

Second, we should have been thinking of every visitor as the star of their own life. That means designing the site in such a way that they can bring aspects of their life onto the site, starting with a friends list that is platform-agnostic. We never discussed implementing OpenSocial or Facebook Connect, but we should have. Sure, not all of a visitor's friends are video game players, but it's his friends list, not ours. The universe revolves around the user, and the list of friends should not have been limited to the ones we were willing to display.

The third way we missed the boat was in displaying stats and leaderboards on our gaming sites that weren't focused on individual experience. We put up leaderboards that displayed the top-ranked players without really thinking about how that diminishes a person who is and never will be good enough at the game to be displayed there. On a site where you're the star, stats and leaderboards should tell your story; they should focus on what you're good at and highlight the areas where you have excelled. So you just completed your first online match and you finished fourth? That's great. You rock. Here's what you'll want to do next, and when you do, we'll help you brag about it, feel good about it, and have fun with it. Because it's all about you.

You begin to think completely differently about marketing when you imagine a site this way. In the old way of thinking, marketing was a general-purpose club used to bash every visitor over the head. The home page crawls with it: "Buy Now!" links, branded images, trademark bugs, and "news stories" that are actually warmed-over press releases. But a truly user-centered design might dispense with that home page altogether and redefine marketing as moments that occur within a customer's personal narrative:

"Don't have the game yet? When you're done viewing the trailer, we can introduce you to other people like you who are really enjoying it. If it sounds like fun, you can buy the game directly from this website."

"Just getting started? Struggling a bit? There are how-to videos in the media section, or you can buy this official strategy guide. Click here to download a free preview."

"Welcome back -- you originally signed up months ago, but you haven't visited in a while (and our records show that you haven't played online in nearly as long). Here's another game in the same genre that might prove more of a challenge, but don't forget that the sequel to this game is coming out in ten months -- click here to add that event to your personal calendar, and we'll send you an email when the demo is available for download."

I'm not a marketer, but I bet that would work pretty well. A one-size-fits-all marketing strategy never fits anyone for long, and in using it we train our visitors to ignore what we're saying. Marketing messages that address specific moments within a customer's personal narrative, though, are an actual value: they offer products to a visitor at a moment when s/he might really want those things. That's an effective strategy, and it starts with treating every user as a star.

Monday, November 17, 2008

Coloring Facebook Green

This morning we've got two angles on Facebook's problem of making money. First, from the venerable Wall Street Journal, comes word of a new approach to ads on that social networking platform, namely "engagement ads":

The new ads appear on the main screen when a person first logs in to Facebook. They prompt a user to do something within the ad, such as comment on a movie trailer or RSVP for the season finale of a TV show.

If the user completes the action, such as adding Bravo TV's "Project Runway" show to a personal list of events, Facebook tries to get Bravo's ad in front of more eyeballs by sharing a notice about what the user has done with their friends.

This is clearly a step in the right direction. Engagement ads place the onus on the advertiser to find a marketing angle that is intrinsically social, and thus at home within the context of Facebook and other similar web destinations. Rather than simply putting ads in front of users and hoping for the best, these ads should, in theory at least, make the ads part of the social experience.

Still, they're asking a lot of their users. They're basically requesting that viewers opt-in to their marketing campaign, and you have to wonder what sort of adoption rate they're going to see. If they're advertising something cool and fun -- like the "Project Runway" episode -- I expect they'll get pretty good numbers. If, though, the payoff is lame ("Sign up here to get an exclusive MSN Messenger icon" or something like that) they can't expect many people to take them up on the offer, let alone do so in full knowledge that all their online friends will be pinged with the fact that they have done so.

Meanwhile, Facebook whiz kid Mark Zuckerburg is not concerned:
In public appearances, Facebook's 24-year-old Chief Executive Mark Zuckerberg insists that his company remains more focused on expanding its user base than its revenues. The right business model for the site will emerge over time, he has said.
So traffic is the new profits, after all.

On the other side of the coin, web development house Razorfish has weighed in with their Consumer Experience Report for 2008. (They've published the report in Flash, regrettably enough, but there is a PDF download link.) Things actually look pretty good for Facebook and other social platforms. In Razorfish's survey, three fourths of respondents said they didn't mind seeing ads on social networking services, and nearly half reported that they had purchased a product based on an online ad or the recommendation of an online social connection. On the face of it, this is hard to line up with the estimate in the WSJ article that less than 1% of Facebook's visitors click on an ad, but perhaps with that sort of destination -- where you tend to come back repeatedly, even obsessively, to fine-tune your profile and check on your friends' status -- sooner or later you'll end up clicking on one ad or another.

When it comes to engagement ads, of course only time will tell whether visitors will click on them enough to save Facebook's bacon. But for now they certainly seem to be a step in the right direction; if nothing else, engagement ads force marketers to try to think of ads that are actually engaging, rather than merely distracting.

Wednesday, November 12, 2008

How To Make Readers Hate You

Before we get started on this post, give me a second. I need to build my audience.

Ahem: Holly Madison. Adrienne Bailon. Hi-5. Hurricane Paloma Path. NFL. Shelby Lynne. Jada Pinkett Smith. Barack Obama. Taylor Swift. Samantha Ronson. Jennifer Aniston. Hank Baskett.

All done! According to Yahoo! Buzz, those are some of the top searches today, and the fact that I've written a post that mentions such popular topics will certainly bring a wave of popularity to this blog (and Lord knows, we could use some traffic around here). Of course, people who want to learn more about Jada Pinkett Smith are going to be pretty disappointed when they find themselves reading a blog about web community, but I'll worry about that later. Or, actually, I won't -- because by then there will be new search terms at the top of Yahoo! Buzz, and I'll be busy writing a new post around them.

This content strategy, which I call "asinine" only because I can't think of a more scornful word for it, is apparently just the thing on some unnamed "big sites," at least according to this post on TechCrunch:

Some Big Sites are Using Google Trends To Direct Editorial

Reading deeper into the article, it turns out that it's mostly political and gossip blogs that we're talking about. And apparently they're quite happy with this tactic:

"We're not talking about a trivial amount of traffic, either. One person I spoke with about this yesterday said he can get up to 30,000 extra unique visitors per day just by focusing content on top queries, which is more than enough to dedicate a couple of full time people to the effort."

This is, of course, exactly the wrong way to build a long-term audience and encourage repeat visits to your site. When you write headlines and content with the express aim of gaming Google PageRank, you're borrowing a page from the spammer playbook. Sure, you'll get some short-term hits, and maybe for a while you'll feel good about your ad impressions, but the vast majority of these new visitors will be disappointed in what they find on your site, and that negative impression will stick with them for a while. In short, you're gaining empty traffic at the expense of your brand. That's not a viable long-term plan.

Speaking of long-term plans, get a load of Jennifer Aniston -- still toppin' the charts after all these years! "Friends" has come and gone, Brad Pitt has come and gone, but she's still rockin' the Internets. Good for her.

Tuesday, November 11, 2008

Wetpaint: The New Geocities (or Something More)?

Wetpaint is a business that's been getting some positive buzz lately. It's certainly been a favorite of TechCrunch:
Wetpaint Emerging as a Leading Social Publishing Platform
Wetpaint Raises $25 Million and Launches WetPaint Injected

It's a local Seattle company, and I thought I should check it out, so I visited the site today and took it through its paces.

The software looks quite solid, if not without the occasional quirk. It took me well over an hour to sign up for a new site, though honestly I can't say if that was the fault of Wetpaint's servers or my own crappy DSL service. And once I was there it took some futzing around before I could figure out the interface: for instance, you can create a to-do that tells other visitors what needs to be done on your site, but to-do's are an element attached to a specific page within the site, rather than something you create in the ToDos section highlighted at the top of the screen. Minor issue, sure, but it took me a while to figure that out. A little help text on the To-Dos page would have gone a long way.

Once you get the site working, it provides a solid and full-featured wiki experience. This, of course, has its good and bad points. On the good side, wikis are among the most useful sites out there these days. If you can get a large body of people to come together and pool their efforts, you really have something; you can't rival a wiki's ability to turn visitor enthusiasm into viable web content. On the other hand, wikis are not the most visually arresting sites around, and Wetpaint's designs are no different: browse through their gallery of "popular sites" and you'll see one wall of text after another. Good site design and wikis are rarely mentioned in the same sentence, and there's a reason for that.

Wikis are also a lot of work (unless you have a staff of minions ready to do the work for you). A new Wetpaint site is a like a big, empty box, and unless you're prepared to devote a lot of time to filling it with content, it's going to look like a ghost town. Judging by my experience signing up for a site, this happens a lot. My first thought was to create a wiki around GTD, the productivity system I've used for the past three or four years. I requested the URL "," only to find out that it had been taken. I visited that site and discovered that it is two years old, completely empty, and closed to all contributors. Pretty much the same goes for "," "," and "": barely a single useful page between them.

Browse wider, and you'll find that this is a common condition. I tried to find a Seahawks wiki and couldn't find a single one that was both current and actually about the Seattle Seahawks. I don't have official figures, of course, but my first impression is that the majority of Wetpaint sites are inactive, crappy, or both. That presents two problems: first it makes it very difficult to locate a good site via the Wetpaint homepage, and second, Wetpaint URLs are first-come, first-served: for two years now the owner of the clean and simple "" has done nothing with his site, but the URL is apparently his for life.

If you're as old as I am, the word "Geocities" probably comes to mind when you consider this scenario. Back in the day Geocities was considered an up-and-comer. It allowed anyone to publish their own website with a minimum of effort, and for a time that seemed really cool and empowering. Then, in the fullness of time, Geocities turned into a vast collection of cheap, ugly, abandoned sites -- often fansites of one type or another -- that you learned to avoid if there were any alternatives at all. Wetpaint's software is much better than Geocities' HTML templates, of course, but if the business ultimately fails, my bet is that it will go down in history as simply "Geocities on steroids."

Which brings us at last to the monetization question. Wetpaint would appear to have two sources of revenue: they provide wikis to third-party sites (with the wiki fully embedded in that site's chrome, and its contents fully searchable), and they attach text ads to personal sites. The first option seems like the better business plan. Putting advertising on personal sites was the Geocities business model. Hell, it was pretty much everyone's business model back then. And that model never worked, for a simple reason: no one pays attention to ads unless they're motivated to buy something. So, while the "Quantum of Solace" fansite advertised on the Wetpaint homepage may be pretty entertaining, I doubt many visitors will be browsing it with their wallets at the ready.

To Wetpaint's credit, the ads are pretty unobtrusive and mostly lie below the fold. And if they can find a clever way to identify the most active sites and match their content with appropriate advertising inventory (putting, say, Netflix ads on movie sites), they might make a go of it. Otherwise, I expect that the personal Wetpaint wikis will be, at best, a loss leader for the business-to-business service. Whether that B2B revenue stream is enough to keep the business afloat is a question for someone who knows what he's talking about (which is to say, not me).

So is Wetpaint the second coming of Geocities? Too early to tell. The quality bar is certainly higher, and the B2B angle is something extra that Geocities never had going for it. But wikis aren't going to be the hot, new thing forever, which means the clock is ticking on Wetpaint's business plan. If I were Wetpaint CEO for a day, I'd be tempted to take these measures:
  1. Cull the crap. If someone creates a site but then doesn't add any content for two weeks, delete it. If a site has been inactive for six months or more, send a notice to its owner and delete it if they don't respond. Return these URLs to the active pool. Wetpaint isn't just a business, it's also a brand. You want people to associate your company with quality. Geocities became the trailer park of the Internet; don't let that happen to you.
  2. Fast-track the moneymakers. Certain types of site will be (relatively) easy to monetize. Books sites, for instance, could promote Amazon or another online bookseller. Movie sites could promote Netflix or Blockbuster. Take a look at your ad inventory and make a strategic decision about the sites you would like users to build, then make it particularly easy for them to do so: encourage them on the home page to think of these topics, give them extra templates and layouts, etc. Nudge your users in the direction you want them to go.
  3. Tap the educational market. I see corporate wikis on Wetpaint. I see personal wikis on Wetpaint. So where are the educational wikis? I can see where a college professor might want wikis to organize her class materials and focus discussion, and I can definitely imagine an elementary or secondary school teacher having his class collaboratively build a wiki on some subject, as part of the lesson plan. Seems like this is an untapped market, and it would provide a definite win-win since educational wikis would seed Wetpaint with sites high on the quality curve.
  4. Show what's possible. You know what would have been a great source of publicity for Wetpaint? A best-of-breed presidential election wiki, chock full of information and high-quality content that shows off what the software can really do. It wouldn't take a major staff -- maybe an editor and a couple freelance writers -- to come up with the occasional high-profile wiki (on Christmas, the Super Bowl, high-profile movie releases, or whatever else comes to mind) to introduce people to your product, show them what they can do, and get them excited about building quality sites of their own. Best of all, there would be no reason to retire these sites once you're done; you could simply turn them over to the community and let visitors maintain them.
  5. Promote the winners. The Wetpaint homepage already lists a gallery of the better sites, but you could do more here. Which sites get the most traffic? Which ones have the most registered members? Which sites are climbing the ladder? In short: where are the success stories? Read this post on cumulative advantage and use it to boost successful sites into true destinations.
There are some real opportunities and challenges here. It will be interesting to see how it turns out.

Monday, November 10, 2008

Politics 2.0

There was an interesting article in the NYT this weekend on how Obama used social networking in his drive to the White House:
How Obama Tapped Into Social Networks’ Power
It's not a new story; a number of articles have already appeared about and how it helped foster and sustain the grassroots movement that propelled Obama to victory. For me, the most interesting aspect was the angle on what this victory means going forward. Some people see this as a transformative moment in American politics, when power exited the smoke-filled rooms and returned to the streets.

The juxtaposition of a networked, open-source campaign and a historically imperial office will have profound implications and raise significant questions. Special-interest groups and lobbyists will now contend with an environment of transparency and a president who owes them nothing. The news media will now contend with an administration that can take its case directly to its base without even booking time on the networks.

More profoundly, while many people think that President-elect Obama is a gift to the Democratic Party, he could actually hasten its demise. Political parties supply brand, ground troops, money and relationships, all things that Mr. Obama already owns.


But now Senator Obama’s 20-month conversation with the electorate enters a new phase. There is sense of ownership, a kind of possessive entitlement, on the part of the people who worked to elect him. The shorthand for his organizing Web site, “MyBO,” says it all.

“People will continue to expect a conversation, a two-way relationship that is a give and take,” said Thomas Gensemer, managing partner of Blue State Digital, which helped conceive and put into effect Obama’s digital outreach. “People who were part of the campaign will opt in to political or governing tracks and those relationships will continue in some form.”


The founders of America wanted a government that reflected its citizens, but would be at remove from the baser impulses of the mob. The mob, flush with victory, is at hand, but instead of pitchforks and lanterns, they have broadband and YouTube. Like every other presidency, the Obama administration will have its battles with the media, but that may seem like patty-cake if it runs afoul of the self-publishing, self-organizing democracy it helped create — say, by delaying health care legislation or breaking a promise on taxes.

That’s the thing about pipes today: they run both ways.

That's the second edge of this sword: if your campaign is based on citizen empowerment, you can't reasonably expect those citizens to sit back and do as they're told for the next four years. Obama's supporters feel (with some justification) that they are responsible for his victory, and their rage -- should he prove to be just another politician -- will be something to behold. Do you think that liberal Democrats turned on Clinton? That's nothing compared to what Obama can expect if he appears to sell out the ideas that energized his campaign.

In short, the Internet is a communications medium, not a broadcast medium. Any political campaign that relies extensively on the 'Net will need to treat the resulting representative-voter relationship as a conversation that runs both ways. Anything else will be seen as a hypocritical betrayal of the ideal.

Some go farther still, venturing on to a rather utopian viewpoint:

“It’s clear there has been a dramatic shift,” said Andrew Rasiej, the founder of the Personal Democracy Forum, an annual conference about the intersection of politics and technology. “Any politician who fails to recognize that we are in a post-party era with a new political ecology in which connecting like minds and forming a movement is so much easier will not be around long."

To me this smacks of irrational exuberance -- similar in a way to the pronouncements we heard during the first Internet bubble, when the old rules of business were allegedly being swept away for good. I'd expect the same goes for politics. Sure, Obama used social networking to bypass the campaign front runners. There is no doubt that his strength in primary caucuses (as opposed to the other primaries, where Hillary Clinton ran quite successfully) was related directly to the grassroots organization that Obama accomplished in part through Facebook and other social media platforms. Still, it is naive to think of this as the death of party politics; for every one person who voted for Obama because of something s/he saw on YouTube, there were probably ten -- maybe a hundred -- who voted for him because he was the Democratic nominee. Want proof? Ron Paul is another candidate who did a pretty good job of using the Internet to organize supporters, and look how well that campaign turned out.

Things have changed with Obama, but not dramatically. No candidate will ever ignore the Internet again, and hopefully none will (like McCain) casually admit that they don't even use email. Social networking will be an important grassroots organizational tool, but it will take its place alongside other grassroots organizational tools, such as telephones and direct mail. And just as Obama used an intensive (and expensive) television campaign to promote his candidacy, future candidates will use social networking as just one of the weapons in their campaign arsenal.

So I wouldn't be so quick to sound the death-knell of the party system, but this is still a good day for those of us who work with online communities. Our industry has taken a big step towards the media mainstream.

Still Struggling to Understand the Wisdom of Crowds

Recently TechCrunch offered a not-so-positive review of a new service called Piqqem that seeks to harness the wisdom of crowds:
Can Piqqem Use The Crowd To Pick Stocks? Don’t Bet On It.
Judging by the history of posts on this blog, this would be the point at which I decry Piqqem for failing to understand the factors that contribute to the wisdom of crowds. But, in fact, this time the service gets it: it asks users to predict stock futures, and they can't see other peoples' predictions until theirs are already in. Thus the service protects against the herding instinct that makes you (and me) more likely to favor a stock if we see that other people expect it to go up in price (otherwise known as the cumulative advantage).

Instead, this time it's TechCrunch that gets it wrong:

"If nothing else, Piqqem is certainly a good place to get ideas for stocks to invest in. But does it really have any chance of ever beating the market? Like any social investing site, its picks are only as good as the people who contribute to it. But beyond that, there is fatal flaw to this approach.

When it comes to stocks, the best prediction market out there is the stock market itself. It is the biggest prediction market out there, with millions of people predicting the future price of stocks every time they buy or sell shares. All of those predictions are aggregated together in the form of the price. To think that a few thousand, or even a few hundred thousand, people on Piqqem can do better is naive. And in fact, if you look at the prediction lines on Piqqem they already closely hue the actual stock price."

Where to start? The errors in this passage are almost too numerous to count:

  1. "The picks are only as good as the people who contribute to it." Actually not true at all -- and that's why it's the wisdom of a crowd, not the wisdom of a crowd of experts. If you really want to know how this works, read the book, but here's the short version: experts tend to make incorrect predictions because they're deeply entrenched in accepted ways of looking at a problem. That's why an aggregate of amateurs can make predictions that are actually better; as individuals they know nothing, but when you average their individual errors, you end up with an accurate consensus.
  2. The author (Erick Schoenfeld) conflates prediction markets with the wisdom of crowds. The book does talk about prediction markets, but it's not the same thing, for one primary reason: investors in a market are strongly influenced by what they see around them (which is where "irrational exuberance" and stock market crashes come from).
  3. Schoenfeld cites the fact that Piqqem's predictions are holding close to actual market performance as a criticism of the service -- but isn't that exactly what Piqqem is trying to do? If Piqqem's predictions are perfectly accurate, a historical graph of its predictions will exactly match the market's performance; it will simply predict that performance a little in advance.

Bottom line: Schoenfeld clearly has not read (or, possibly, understood) the book, and doesn't really get the idea behind Piqqem. Take his criticism with a grain of salt.

Monday, November 3, 2008

Second Verse: Same as the First?

Over on TechCrunch they've got a hand-wringing report on the apparent economics of Facebook:
Facebook May Be Growing Too Fast. And Hitting The Capital Markets Again.
Bottom line: Facebook has revenues of between $250 and $300 million per year, but it's burning through at least that much -- and possibly a lot more -- on operational and personnel expenses. So, amid all the accolades and congratulations, Facebook is still unable to justify its $15 billion valuation with actual profits.

Is the next step layoffs? Certainly they'd be in good company. Last I saw, tech sector layoffs in the wake of the credit crisis were at 19,000 and counting. For those of us who were around for the first Internet bubble, this has a familiar feel. First you have the heady days when a good idea is all you need to bring in a bunch of venture capital. Then you have explosive growth, punctuated by the occasional wild party with regrettable photographic and video footage circulated afterwards. Then you arrive at the hangover stage, when you're still burning money and your investors are losing patience. Then come the layoffs, followed (in most cases) by a complete shutdown.

It's a melancholy feeling, looking at that scenario playing out a second time. I didn't enjoy it the first time, and I doubt I'll enjoy it more now. It's easy to indulge in schadenfreude at the expense of the arrogant entrepreneurs at the head of these companies, but there are a lot of ordinary people -- people with kids, people just trying to make rent -- who end up getting hurt. I feel for them.

And again, the same lessons are to be learned this time as last. Namely this: "cool" is not a business plan. Facebook didn't start as a business, it started out as a cool idea some random guy built out in his dorm room. No matter how many members the service attracted, if they couldn't be monetized the idea would never make the shift from "cool" to "profitable." And if profitability isn't at the core of an idea from its very beginnings, is it all that surprising when profits prove elusive down the road?

Not everything needs to be profitable, of course. Some things should be built simply because they're cool, but in that case you're working on a hobby, not a business. And if you have a cool idea that so excites other people that they want to invest in it, there's no reason you should turn down the money. It's their money, and they can choose what to do with it. But take a look out there at the tech sector: for every ten popular sites and services that have not yet figured out a business plan, at least eight or nine never will. "Cool" is easy. I have cool ideas all the time. "Profitable," though, is hard, and ultimately that's what makes the difference between winners and losers.

If you want to build something cool, go for it. I encourage you in that dream. But if you want to build a business, keep working on your idea until coolness and profit go hand-in-hand. Otherwise, you're planning for failure.