Second Life and corporate hubris

A version of this piece was published in Marketing in 2007

You don’t have to be close to the news to know that the internet’s doing pretty well these days.  More than half of UK homes have broadband, 14% of advertising spend is expected to be online this year, the IMRG reports online retail was up 80% in July, and my mum just celebrated 10 years online.

Wind back a few years though, and it was all gloom and doom.  Dotcoms dropping like flies, and investors running away from the internet sector like crowds in a Godzilla movie.  Lycos (bought by Terra Networks in 2000 for $12.5 billion) sold for $95m in 2004, eToys, Boo and Kozmo all went bust, and AOL Time Warner quietly dropped the AOL from their name.

Vast amounts of cash were burned in the boom and its subsequent bust, and the world’s investors reacted against their losses by vowing never to darken the internet’s door again.  But as it turns out, their knee-jerk rejection of the internet was as irrational as their embracing of it was exuberant.

Because every day of every month as the crash continued, more and more people got connected to the internet.  Eventually, business re-adopted the internet and started to make money out of it, and now investors can’t get enough.

But this rosy outlook isn’t universal.

After the initial excitement and irrational exuberance that marked the first two years of Second Life, the voices of the naysayers are now coming to the fore.

The recent ban on gambling in-world led to the biggest bank in SL, Ginko, closing its doors after a run on the bank.  Starwood hotels announced the closure of their Hotel, and others are left wondering whether it was worth all the effort.

A quick visit to American Apparel reveals it to be closed permanently for business, the Reebok store is empty.  Leo Burnett’s treehouse was vacant, shops and other commercial environments have virtual tumbleweed blowing through them.

So was it all just one big PR stunt, or have we just hit a digital speedbump on the road to next-generation media?

What drove these businesses into Second Life was the feeling that there was new area of the economy opening up.  People were spending time there, and importantly they were making money – SL’s first millionaire (that’s in real-world US dollars), Anshe Chung, emerged last year having made her fortune principally in real (is that the right word?) estate.

Few companies really believed that they would earn huge returns.  What piqued their interest was the potential that these alternate worlds might offer in the future.

Second Life isn’t alone.  World of Warcraft, City of Heroes, There, and now the Lord of the Rings are amongst dozens of virtual worlds where millions of people spend hours of their time.

They’re trading with each other, fighting each other, marrying each other.  Their lives spill in and out of these virtual worlds, and when you talk to someone who spends time there, their language is that of someone who regards it not as a game, but as a part of their life.

For some time now, it’s been possible (in a lab) for a person to control a computer game directly from their brain.  Now, a study at UCL has shown that someone who is prodded in the chest at the same time as this is done to their virtual self can associate that sensation with their virtual self rather than the real one.  The applications for virtual environments like Second Life are obvious – making them more immersive, more personal and more real.

So the likelihood is that we’re underestimating the potential impact of these ‘games’ on humans.  Understanding more about these phenomena is both fascinating and important, but what’s happened in SL has been more about corporate hubris than about targeted learning – it’s hard to see what Telecom Italia expects to learn from operating a racetrack in SL, other than that nobody wants to go there.

There are big lessons to be learned – but you don’t necessarily need to buy an island to learn them. 

I missed World Internet Day

A version of this piece was published in Marketing in 2007

Like me, you probably missed World Internet Day last week.  As celebrations went, it was a pretty low-key affair, un-noticed by the majority of the world who one might suspect were too busy just using it to join in with the revelry.

It’s just 13 years since the first commercial website (for DEC, the Digital Equipment Corporation – now a part of Hewlett Packard), and we’ve come a long way from there.

Back then, web pages were static, had grey backgrounds, and blue lines around the pictures to show you could click on them.  The typeface was chosen by the user rather than the designer, and we had to dial up using a modem (and a slow one at that) to get online.

The user experience was rubbish.  But the potential was obvious.

Whilst investors, commentators and entrepreneurs mostly raved about the technology, what was clear was that here was a means of connecting people with each other.

And now, it’s hard to think what we’d do without it.  From the humble email has emerged the Blackberry, from bulletin boards on Usenet the giant social network phenomenon has evolved.  People watch TV online, they get news online, they shop online.  They find out about ambulance response times and school results near the house they plan to buy, and research their genealogy using census and registrars data published online.

A medium that started as the province of geeks has turned into a global phenomenon that’s changing business and society.  Within 3 years in the UK, 75% of homes are expected to have broadband, and the online advertising market will have overtaken TV.

For years, the medium has been dominated by pure-plays – businesses that had their origins online.  Now, the titans of the media world are determined to fight back, with the consumer the beneficiary as NBC Universal teams up with NewsCorp to launch online video site Hulu.com.

But for all the amazing discoveries, launches and invention of the past 13 years, I still can’t help feeling we’ve only scratched the surface in terms of the potential for change that the internet will ultimately deliver.

The scale and scope of the change that the internet will bring on us defies our capacity to envision it.  Many people react by denying it – either giving up, or deciding to simply let all the change play out before acting.  It would be so comforting if we could predict what’s going to happen, but we don’t have that luxury.

As Larry Landwehr wrote in 1993, “It's like trying to predict back in 1910 the impact of the automobile on society - the highway system, gasoline refineries, motels instead of hotels, new dating patterns, increased social mobility, commuting to work, the importance of the rubber industry, smog, drive-thru restaurants, mechanized warfare, and on and on”

But the fact it’s so hard to project what’s going to happen shouldn’t stop us trying.  Fortunes will be won and lost on the bets we make here, and thinking about how different developments, ideas and inventions will lead is how we protect the future wealth of our shareholders and the strength of our brands.

William Gibson, writing in 1995, thought that the internet was as significant to humans as the birth of cities.  To him the emergence of internet banking, telemedicine, video on demand are merely signs that bigger things are afoot – they’re not the end of the game.

Amazingly, we seem to have absorbed the benefits the internet has brought us without really noticing.  We think nothing of booking holidays online, of checking our bank account or of video calling a cousin in Australia for free.

But it’s encouraging that we are this blasé – I suspect it means our capacity for change is greater than perhaps we imagine.  So I’m pleased we missed World Internet Day – I suspect it means we’re getting on with creating tomorrow.

Forget borders online!

A version of this piece was published in Marketing in 2007

For some years now, the Guardian’s website has attracted more readers in the US than the paper does in the UK.  Last week, Guardian Media Group announced the launch of Guardian America – a website designed to tap into what the company sees as a vast unmet need for liberal-framed news and views in the US.

The Guardian is the first newspaper outside of the financial press to go international through the web, and in doing so, it’s making use of one of the fundamental effects of the move to online business – the irrelevance of distance.

From the web’s early days, observers predicted that the medium’s distain for geography and borders would open up new markets for businesses.  Any business whose product is essentially information would benefit quickly, they argued, and even businesses with physical products to distribute could benefit from the reduction in economic friction that resulted from the ease of informing potential customers of their availability.

But the reality has been slow to catch up with the potential.

This is largely because the web poses significant organisational challenges for businesses in several dimensions. 

Between disciplines, the web raises the bar for co-operation between operations, marketing, finance and management.  Failure of operations to deliver on marketing claims can be given wide exposure by consumers, the shift of marketing spend to being a cost of sale can challenge long-established budgeting practices.  And for all, the speed of competitive change can strain processes as the business cycle accelerates.

Within the disciplines it exposes discrepancies and unaligned practice – differential pricing can become visible to consumers, contradictory offers become apparent – and always risking the full glare of public attention.

But it’s internationally that some of the toughest obstacles lie.  Historic power bases guard their autonomy jealously, and tension between local and central management is common. 

The web allows businesses to ride roughshod over these conventions – trading across borders, exploiting local opportunities and weaknesses and ignoring the established process.

Back in 1999, when web advertising was still in its infancy – just a £50m market in the UK – the demand for financial services advertising had rocketed, and as Christmas approached, rates had become uneconomic as more unsophisticated buyers piled in regardless.  In response, my agency moved its entire financial media buying into the US – targeting only surfers from the UK. 

US publishers seized this opportunity – this audience was regarded as wastage, as they couldn’t usually sell it – and we were able to deliver our volume objectives, at an 80% price discount against the UK market. 

This is something that would have been much harder in traditional media, but online buyers realised that in this medium they could view non-domestic media, manage and track their performance through adserving, and trade with them easily on the phone and email.

The prize for those prepared to throw away convention is potentially a rich one.

When Rupert Murdoch wanted to launch a TV service in the UK, he eschewed the high-tech, high-cost approach of the official licenced satellite TV company, BSB and simply rented capacity on an existing satellite, uplinking it from Luxembourg to avoid burdensome UK regulation.

Whilst his competitors stuck to outdated rules, he realised that technology had rendered the regulations irrelevant and used this knowledge to create the business we see today.

So the Guardian’s launch in the US is a logical move which exploits a new borderless media world – it’s an imaginative outbound venture to the biggest media market on the planet.  But whilst regulators in the EU debate the rules over media ownership here and across the continent, they might do well to remember that most of the traffic is going to come the other way.

Virtual worlds for kids

A version of this piece was published in Marketing in 2007

3D environments like Second Life and World of Warcraft have made good headlines over the past year, with marketers wrestling with the implications for brands and the opportunities in potential new markets. 

But recent coverage has been more sceptical – despite the oft-quoted millions of registered users, relatively few are actually in-world at any one time - SL in particular has continued to show small numbers, with only 40,000 online as I write, at breakfast time on the US West Coast.

Advertisers and retailers, who initially had rushed in are having second thoughts – scaling back their operations and closing stores.  So are virtual worlds just a bubble, or are we going to see long-term growth? 

To answer that question, we need to look at tomorrow’s users.

Because whilst virtual worlds for adults are seemingly more niche environments, those targeting kids and teens are experiencing phenomenal growth, and fuelling multimillion dollar acquisitions.

Launched in 2005, Club Penguin was acquired by Disney for £350m in August this year.  Designed as a games and chat space for 6-14 year-olds, the site has over 12m activated users.

Plenty of functionality for non-subscribers ensures there are always plenty of kids online, and provides a place for future subscribers to become addicted to the site.  And the business model works – there are 700,000 paid subscribers who get to decorate their igloos, dress their penguins and adopt more puffles – the digital pets in the site.  At $58 a year, this site’s already generating around $40m in subscriptions – hence Disney’s interest.

But this isn’t a trend restricted just to the US.  One of the biggest kids sites is Stardolls – a site founded by Scandanavian mother who had a lifelong interest in paper dolls.  From its homestyle roots, Stardoll has grown to have over six million users every month, and is backed by Index Ventures, the VC that backed Skype, Joost and Betfair.

There’s no subscription here, but members buy (and parents encouraged to give) stardollars, the currency that can be spent on clothes for your Stardoll, or decorating your suite.

Has Google lost its way?

A version of this piece was published in Marketing in 2007

When Google launched in 1998, it was a breath of fresh air.  In a world increasingly cluttered with pop-ups, here was a site that couldn’t have been simpler. 

Other sites had done simple search interfaces before – Altavista had pioneered search in this way – but the competition had lost sight of consumers’ needs and a battle to create portals was under way.  The bulk of investment in online publishing was going to create vast multi-dimensional sites, the objective being to capture as much of the online consumer’s media time as possible. 

Google ignored this received wisdom, focusing on stripped-down design combined with an uncompromising drive for relevance – to give consumers what they wanted; relevant results, fast.

For the first few years, Google carried only natural listings.  In 2000, when they started carrying paid-for listings, the market anticipated push-back from users.  But the company cleverly built relevance into the paid-for listings, making the ranking dependent on both the price bid for that keyword and the clickthrough rate it attracted – preventing bidders degrading the quality of the results by pushing irrelevant results up the rankings.

The result has been a surge in growth in both audience supply and advertiser demand that’s unmatched in media history. 

But have Google lost the focus for which they were famed?  Googlewatchers across the world are starting to question whether the company has started to compromise its zeal for relevance, as investors press for returns on the gargantuan share price.

There are two pillars to Google’s results – the ‘natural’ listings on the left hand side, and the ‘paid-for’ at the top and on the right – and both have been subject to recent speculation in the relevance debate.

The contribution of relevance in determining the ranking of paid-for results has recently been reduced for the top listing – in other words, it’s easier to bid your way to the top without having to be what the consumer was looking for.

Google expect this to yield greater revenue from the search results, and they may be right.  But many observers see it as the thin end of the wedge – the notion that Google would compromise relevance for short-term cash would have been unthinkable even a year ago.

But it’s in the heart of Google’s customer proposition, the natural listings, that the greatest debate is taking place. 

The Search Engine Optimisation (SEO) business is a rather strange and subterranean one.  Practitioners are engaged in a quiet battle of wits with Google – striving to understand the inner workings of the algorithm that determines the rankings, in order to lift their clients’ sites to greater prominence.  Meanwhile Google constantly tweaks their methodology to defeat these attempts, setting rules on what they deem legitimate practice.

But recently, Google have stopped enforcing these rules so rigorously – and there’s even been the suggestion that they’re turning a blind eye when offenders are also big spenders on paid-for listings.

A site’s ranking is based partly on its ‘link foundation’ – the number and quality of sites linking to it.  Link Networks have thrived, paying often irrelevant sites to link to their clients to boost this, and there are plenty of examples of major UK car insurers appearing on US-based NASCAR sites that prove it – none of their customers are likely to be there.  These advertisers run the risk of being downgraded by Google, but their SEOs clearly believe it’s worth the danger.

Similarly one UK national newspaper carries a paid-for link on every page of its site to one insurer, putting at risk its own position in Google but presumably believing it’ll remain untouched.

So whilst Google has been making a lot of noise recently about SEO, there’s a feeling that they lack the resources and perhaps the will to take action.  Wise advertisers are circumspect about breaching guidelines and ensure their SEOs stay in line – but when some are openly talking about their strategies to circumvent Google’s rules, the search engine gambles its credibility if it doesn’t take action.

IAB gets another notch on its bedpost

A version of this piece was published in Marketing in 2007

Every six months, new figures are released by the Internet Advertising Bureau, setting out the growth experienced in online adspend.  In what’s becoming a bit of a tradition, the IAB likes to point out which medium they’ve passed – last time it was national press, this time the notch on their bedpost is direct mail.

And as the powerpoint rolls by, there’s no doubt that TV is being lined up for notchdom somewhere around 2009.

At almost 15% of UK adspend, the UK gives the highest share to online of any market in the world, and growth has – incredibly – accelerated this time.

As each quarter builds on a larger quarter, the percentage rate of growth naturally slows.  2006 saw a 41.2% increase – the first half of 2007 has seen a 41.3% hike compared with the same period the year before.

Behind this was classified advertising which experienced a remarkable 72% surge, moving to take £1 in every £5 spent online, and search which grew 44% and now takes a 57% share of total online advertising. 

But whilst the strongest growth came from the more direct end of the business, there are signs that the internet is starting to be recognised as a powerful brand advertising medium. 

Traditionally, Finance and Travel – both intangible products that were ideally suited to online selling – have dominated web advertising.  But the Automotive category, which just three years ago languished as one of the smallest categories online, has just overtaken Finance and now accounts for 12.5% of total online spend.

This is important, because whilst few cars are actually sold directly online, it’s long been known that the internet plays an important influencing role in the purchasing process for cars.

Ten years ago I set up the website for a well-known car manufacturer, and like many marques, they wrestled with the channel conflict that the web potentially represented.  Dealers held the customer relationships and all the data relating to ownership, and they guarded it jealously.

To them, the web felt like a real threat.  Would manufacturers use it to go direct, centralising CRM and disintermediating the dealer? 

In the event, dealers were delighted – online sent them fewer Saturday tyre-kickers, and if anything their challenge was to be as well-informed about the product as the web-prepared consumer.

So websites quickly became an important component of automotive marketing, but advertising took much longer to establish itself.  That’s all changed now, and online brand advertising has become a core part of the car marketer’s toolkit.

This is encouraging for the online ad business, who for five years now have been trying to persuade FMCG advertisers of the ability of online to deliver brand messages.  If cars can make use of brand advertising online they argue, why not soap powder?

There’s no doubt the audience is there, and there’s no doubt the medium can be used to reach them.

But FMCG marketers remain unconvinced.  Whilst direct marketers have more accountability than ever, brand marketers are less supported.  Case studies abound into the brand impact that advertising online can bring, but what is lacking is an effective planning toolkit to implement these learnings.

The most fundamental of these tools is an accepted planning currency.  The industry has been moving forward on this, but progress is pitifully slow.

Many in online think that FMCG market are applying double standards, calling for greater accountability in online whilst continuing to invest in TV.  Online practitioners are unwilling as they see it to drag their levels of accountability down to those of traditional media.

But TV sets the standard by which other media are judged, and the online ad business really needs to get to grips with this.  The success of the automotive section should be the spur the industry needs to address this – if they want to add TV to their bedpost, a planning currency has got to be their first step.

Spend less on advertising!

A version of this piece was published in Marketing in 2007

This week I recommend you spend less on advertising online.

Last year’s IAB report showed a 41% increase in online advertising spend, this year’s figures are due to be released this month - the only discussion is how much the increase will be, not whether there will be one. This is of course very good news for companies that are in the business of buying digital media, so why would I suggest you spend less?  

First, take a look at where you are spending your digital marketing budget.  If you are like most companies, 100% will be spent on display advertising, search and affiliates.  Driving traffic to your web properties is of course very important, but what too many companies are still failing to recognise is that getting the customer to the front door is only one part of the sales process.  Arguably it’s the easiest part too; converting the visitor into a customer is much more challenging.

I’m a numbers guy, so let’s get back to budgets.  If you spend £1,000,000 on online marketing to generate 2,000,000 unique visitors and manage to subsequently convert 3% of your visitors you might be pretty happy. That’s 60,000 new customers at a Cost Per Acquisition (CPA) of £16.66.

But think about the key figure in this equation – the conversion percentage.  What if we could raise that by just a quarter of a percent, by taking £50,000 of budget and using that to focus on site conversion rather than driving traffic to the site? 

The new numbers are revealing.  Using the same ratio as above a spend of £950,000 (that’s £1,000,000 less the £50,000 earmarked for increasing site conversion) would generate 1,900,000 visitors. If you convert at 3.25% you’ll get 61,750 new customers at a CPA of £16.19  So that 3% more customers for a CPA that is 3% lower. 

This is of course a no-brainer.  Who wouldn’t opt to spend £50,000 to increased conversion by a quarter of a percent? 

Well surprisingly, a lot of companies don’t – and it’s not as difficult as you might think.  Many companies say they have this under control - they regularly perform usability testing and adjust their site accordingly.  This is a good start, but it puts the emphasis on the site, and not on the customer.  That’s why Customer Experience testing is an increasingly popular approach as the online channel grows in value.

To understand the difference, think about how a typical usability study works.  Typically 8-12 participants are asked to complete a series of tasks that follow a relatively logical pattern – find information about product X, register, buy the product, contact the company, etc.  The focus is the site, and the key question you’re answering is, “does what I’ve got work”.

In contrast, a typical Customer Experience test begins with a 30 minute discussion before the participant even touches a PC.  This sets the scene, establishing motivations and emotions prior to the start of the purchase process (perhaps a search).  Once on the site itself the moderator will allow customers to take their natural path rather than following a prescribed list of set tasks.

This approach allows the marketer to garner much more valuable information – what the customer actually wants – rather than whether what has been provided works.   

As a marketer, this approach should sound familiar.  Think about how you test consumer reaction to new products.  Your main interest is not whether the product works but rather whether customers want it, how they use it and how they view it.

The difference approaches might sound subtle, but the difference in results is not. If you want to maximise your chances of increasing online conversions, what should be at the heart of your online business strategy – your site or your customers?  A usability study by its very nature puts the site at the heart of the process.  Shouldn’t customers be the heart of your business?