Seth Goldstein

June 4th, 2008

I worked on this post yesterday with my colleague at socialmedia.com, Nick Gonzalez.

It does a good job summing up what I have been up to for the past 6 months since my last blog post.

For more detail, please see our company blog.socialmedia.com.

Life in SF is good, and I am really excited to be executing against many of the ideas behind my media futures series from a few years back.

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The past seven years saw tremendous innovation in the way people interact with the web. It stopped being a “read only” format and invited a whole new group of users to contribute. Sites like Wikipedia (2001) enabled users to push a wealth of knowledge into the Internet’s collective consciousness. Delicious (2003), Digg (2004), YouTube (2005), and countless others turned those contributions into conversations between millions of people. Sites like Twitter and FriendFeed makes this evolution toward conversational, or social, media even more atomic and poignant.

In the valley, the community has become experts at developing technology to enable these conversations. In some cases we’ve become “too” effective and users have become more interested in each other than branded content.

You can see this shift if you look at what is happening to the Internet’s top destinations. Older sites are integrating new social media technologies into their sites. New social media properties are growing. The two top social networking sites (Facebook and MySpace) command about a third of the monthly unique users Yahoo does across their properties (500 million).

The trouble is that these sites are lacking an improved revenue enabling technology. However, this technology is not about enabling conversations between users, but enabling conversations between brands and users. 1999’s banner ads just don’t cut it and enhanced targeting doesn’t increase the value of the advertisement, just the value of the audience.

But we believe we’re on the path to the answer.

SocialMedia Enables Social Media Monetization

SocialMedia’s advertising system has been one of the principle enabling technologies for the Facebook platform. Appsaholic, which grew out of our founder’s initial experiments on the platform, enabled developers to monetize their applications and reward them for their efforts. To date we’ve powered thousands of applications and paid out millions to developers. We’ll reveal more information in future releases. It’s also enabled our company to operate profitably without having to take more venture financing.

Connecting Silicon Valley With Madison Avenue

However, that’s only the start. If we’ve been quiet in the valley, it’s only because we’ve been shouting on Madison avenue. Geeks are already connected with geeks. Now our primary role over the past couple of months and even the next decade is to help connect Madison avenue to Silicon Valley. Ad agencies and brands aren’t technology companies and have been seeking our advice on how to participate in this latest evolution of the internet called social media.

A lot of the conversation is taking place on the other coast. Earlier this week Seth Goldstein gave a keynote address at the New York IAB Social Media Summit (coverage) where we joined a panel of other social media experts like Rich LeFurgy, Rock You, and Facebook. Next week Federated Media will be holding a Conversational Marketing Summit in New York.

BMW, NBC’s American Gladiator’s, Newline’s Harold & Kumar, and Disney are just a sample of the advertisers we’ve been engaging with users through social applications. The campaigns have followed a spectrum of offerings, including promotion, sourcing application development, sponsorship, and customized targeting along application categories and demographics.

Search Doesn’t Sell Brands

Facebook may not have Google’s profit engine, but they are doing 300mm in revenue in their fourth year. Google’s advertising system is great at selling products, but doesn’t sell brands. As our CEO Seth Goldstein puts it, “Brands are experienced in terms of emotional benefits which keywords have a hard time conveying.”

Applications, regardless of criticism, remain a widely used medium (15.4 million users est. in Jan.). The content might not be so pretty, and it might favor subjects that are risque (friends for sale, fluff friends, superpoke, naughty gifts…) but they are intimate interactions between two trusted sources, which in advertising terms might be called “persuasion.”

A brand can pay more than $10 cpm to reach a dwindling television audience, or they can pay a fraction of that and reach a growing mass market of 75 million friends and over 100 million on MySpace.

Advertisers Are Responding To The Change

Large corporations are mobilizing to respond to the change. Procter and Gamble now has an internal group called “The P&G Social Media Lab” that we, among a number of social media startups are a part of. GroupM, which is WPP’s online media organization, spends more than $4 billion of online display advertising. This number is going up not going down, as even within a recession marketers are shifting their budgets online.

As Rob Norman, the head of GroupM contends….. The vast majority of advertising spent is at the top of the funnel to activate and engage consumers, whereas the bottom of the funnel is more about conversion. Despite Google’s growth, they remain at the bottom of the funnel. Which is why they bought Doubleclick and their display network to climb up the funnel.

Marketers are realizing that the top of the funnel, online, is inside of social networks. This is where the next people magazine, Seinfeld, MTV is being born, and where the mass market (100mm+) audience is converging, and where billions in brand advertising is starting to flow.

Madison Avenue has “poked” Silicon Valley, and Silicon Valley needs to poke back.

It becomes exceedingly hard to not comment on the increasing din of the Open Social coalition, and Facebook’s pending delivery of their first social advertising platform tomomrrow in New York. Techcrunch, Valleywag, Venture Beat and Techmeme (and all the traditional tech media that follow them) have blurred into a single observation about Social Networking /Media / Advertising):

“Look at all these companies trying to grow their social networking assets by opening them up!”

We are led to believe that this is- without a doubt- fantastic news for the future of the free web.

Is it?

I am having a harder and harder time distinguishing open from closed, and an even harder time feeling the difference between these two seeming extremes. The whole debate has become a happy web medicant, the “soma” of the blogosphere.

I don’t think that the open vs closed debate is that useful, since both are necessary for any successful Internet platform. In On Certainty, his last set of philosophical reflections, Wittgenstein responded to those who doubt everything: “If I want the door to turn, the hinges must stay put.”

In the context of social networking, one needs closed systems in order to enable openness. These systems might include:

1. strong access controls
2. proprietary APIs
3. exclusive social graphs
4. standardized interfaces

All of these are core to the Facebook experience and which have driven the incredible popularity of the service.

The flip-side is also true. We need to foster truly open access in order to drive innovation on top of these closed systems. This means:

1. a programming language that any developer can use to express her ideas
2. unencumbered viral distribution channels
3. real-time public metrics

All of these are all hallmarks of the current Facebook app ecosystem (and the qualities that the Open Social coalition hopes to achieve).

At the end of July, roughly two months following the opening of Facebook’s social media platform, I wrote that “Closed is the New Open.” I anticipated that Facebook would enable tremendous innovation by virtue of how few options it provided for expression as opposed to how many. In the roughly two months since, developers have harvested the Facebook social graph to create a veritable rain forest of myriad applications.

The original sin of social media may be remembered by future generations as the moment when poke and wall exposed themselves at the Facebook Platform F8 event in SF on May 24, 2007.  Against the backdrop of an open social graph API, these core functions suddently enabled 3rd parties to create entirely new forms of social interaction: “Who do you want to XXX now?,” “Wanna send a XXX to your friend?,” “Who is XXXer?,” “What do you want to draw on your friend’s XXX?”

Platforms

A platform’s success is based on its generosity: how many sustainable applications have been built on said platform?

For an embodiment of a successful platform, cf Dave Morin, the authentic leader of Facebook’s technical platform. When you sit down with him, you are struck by his commitment to openness and providing all applications with a level playing field. He combines the intellect of an economist with the empathy of a sociologist. Any fear a developer may be wrestling with in terms of whether to base their business on Facebook, melts melts away in Morin’s disarming presence. You think to yourself, “Geez, sounds like these guys at Facebook are genuine- the platform is open.”

Applications take what the platform gives.

Applications

The success of an application is based on its ability to consume, to take, information from a platform and interpret it specifically for a user’s benefit. In media futures speak, the Facebook platform exposes an API which creative developers use to infuse their apps with a certain alchemical magic, otherwise known as engagement.

Perhaps the best personification of a successful application is Max Levchin, the intense, “nothing will stand between our engineers and N consumers” CEO of Slide. Slide is the biggest application suite on the Facebook platform. Max wastes little time at conferences educating others, as he seems to prefer notating on a whiteboard about optimizing viral growth paths. If Morin is like Jeff Sachs the world economist– working hard to reassure countries that he will promote free trade– then Levchin is like Dmitri Balyasny, the hedge fund trader who stays under the radar while managing vast money flows.

Advertising takes what the applications give.

Advertising

While apps take from the platform, they give to advertising. The 10-year procession of online advertising models from when banners first appeared in 1995 to today’s behavioral targeting, can be seen simply as an emerging ability for web sites to share more about what they know about their users with the advertisers that want to reach those same users. This is the apogee of what I shall describe as personal advertising, which is all forms of advertising that try to market to you based on who you are, what you have done, and what your commercial intentions may be. All advertising today, more or less, falls under this umbrella.

Recently, I have been working on a different kind of advertising, social advertising. This is when the ads you see aren’t simply influnced by your behavior, but in fact are driven by the behavior of those in your “friend group.” This was never possible before a social network such as Facebook enabled new kinds of applications that could carry social graph information up into the advertising layer of the online media stack. These kinds of ads take the value of rich data about social influence (which is extracted from the applications) and pays this value back to the underlying platform, which benefits in the form of increased CPM. I will have much more to show and tell about social advertising next week at the Web 2.0 conference. One thing that should be self evident is that the only forms of advertising that work inside of social media are social advertisements.

The most desperate attempts that personal advertising continues to make in order to capture my attention not withstanding:

* For a powerpoint-icized description of Social Advertising, see the brief presentation I gave at Dave McClure’s excellent Graphing Social conference this week