Tag Archives: Customer Ecosystem

Why Twitter shouldn’t pursue an advertising business model

First, a confession. I made the decision recently that when I start an internet company it will not be dependent on advertising for revenue. As an aficionado of the lean startup model and customer development process, I believe it imperative to have paying customers from the get-go. When I developed the Customer Ecosystem model, I explicitly included a revenue component that was independent of advertising. The simple fact being that as VC funding becomes more tight and companies need to show their worth more quickly, advertising as a revenue model is going to become a relic… a bubble throwback that we will all talk about, but probably not think about employing.

Recently, Twitter co-founder Biz Stone and COO Dick Cost0lo have  made comments about the first substantial real revenue stream that we’re going to see from the über-hyped microblog company. And if you chose chose advertising (really cool, non-traditional advertising) in the pool…. prepare to collect your winnings.

Even though Twitter has millions of users and can probably become profitable rather quickly, I think it is a mistake for Twitter to pursue an advertising model.

Who has succeeded, and I mean “knocked it out of the park” succeeded in using an advertising model? Google…and that’s about it.

The internet is strewn with the living dead of companies that have tried to become internet kingmakers and failed using an advertising revenue model: AOL, Yahoo, MySpace, MSN Digg, and countless others.

And then let’s look at the key players in the market who generate their revenues from ads, the up-and-comers like Glam Media. Well, they recently took Series E (!) funding.

Many of the businesses that are reliant upon advertising are getting CRUSHED. Look at the the New York Times, NBC Universal, Clear Channel etc… the simple fact of the matter is that it’s becoming very hard to be a business that matters with advertising as a revenue model.

Sure, Facebook may be able to pull it off, but like Google they are also turning the advertising world on it’s head and there’s still no promises of success. Consider:

Google: Changed the advertising world on its head by making ads relevant, practical and contextual. And of course, they executing the living bejeezus out of their  biz model. Anyone with any doubt about about their ability to execute should try to advertise on MSN or whatever the hell they call it now.

Facebook: In the process of changing the advertising world through massive amount of demographic/psychographic data that allows for targeting via affinity. We still don’t know if they will be able to pull it off. Smartly though, Facebook is hedging its bets and looking seriously at other business models.

Twitter: Trying to re-do advertising model. The problem is that they just don’t have the numbers compared to Facebook and their growth is slowing.

I’m not saying that Twitter is in trouble, far from it. I’m just saying that an advertising model, no matter how innovative, will have a hard time succeeding.

So let’s look at what Twitter does have:

  1. Loyal, active (not to mention affluent) users
  2. The attention of the corporate world
  3. A core technology that would be difficult  for competitor to supplant/replace

If this doesn’t spell subscription model, I don’t know what does.

I was excited last week to read that Twitter was considering a subscription model in Japan, only to have them put the kibosh on those plans the next day.

It’s too bad. Because Twitter could have a very strong customer ecosystem:

Acquisition: (Good) Despite somewhat stagnating growth compared to Facebook, and an unremarkable viral coefficient in the truest internet business sense, Twitter spends virtually nothing on acquisition, gets tons of free press and is promoted actively by many corporations and individuals.

Conversion: (Fair) More than half of twitter registrants never follow anyone, tweet or get followed. This is not so bad considering their acquisition numbers, but it speaks to and underlying weakness in conversion to a mass market.

Upsell: (Good) Obviously, we’re in pure speculation territory here, but I see huge potential in multiple subscription levels on both an individual and corporate basis. I can imagine a $5.99 a month subscription for individuals who for the following features:

  • Ability to send direct message
  • Ability to send more than 25@ replies per month
  • Backup/storage/offline accessibility to tweets
  • Support for more than 500 followers

Obviously the corporate subscription would have some similar features, but would focus on marketing/support and would have robust analytic tools.

Retention: (Good) If there was a ever a trapped customer it would be the Twitter customer. Sine Google killed Jaiku (and I’ll never understand that one) there has only been one microblogging platform. Additionally Twitter users love the service and promote it heavily. Eventually, a new technology may come and replace Twitter, but not in the near future.

Twitter is a great company with a world-changing product… let’s just hope that their revenue model (when it eventually comes) won’t consign them to the garbage heap.

UPDATE: Twitter testing enterprise tools. Looks like a good first step.

Why Zynga couldn’t go public soon enough – Customer Ecosystem Weakness

Zynga logoIt’s becoming increasingly evident why Zynga wants to go public as soon as humanly possible. Farmville is hot, Cafe World is getting there. The revenue is just rolling in and everything is great. But it’s not going to last, and I think they know that.

Looking at Zynga’s customer ecosystem it’s clear that their current efforts have probably reached their apogee without making significant changes to their ecosystem.  Their scorched earth business model will not provide sustainable growth to support a decent IPO.

Here’s why:

Acquisition: Dependence on Facebook

Go check out Farmville.com. Nothing really there is there? They drive you back to Facebook to play the game. All well and good except that despite as much money they pour into Facebook they don’t own the platform. Additionally, their viral efforts are subject to Facebook’s whims. Having an acquisition model dependent on partners and platforms is one thing. Having an acquisition model dependent on one partner is entirely another.

Now don’t get me wrong, they have some leverage with Facebook…. heck, it’s been reported that they’re on pace to spend $50M annually on Facebook ads. However, as Facebook matures they are going to start getting revenues in other places, like e-commerce. For now, as both of these companies slog toward and IPO they need each other, but Facebook is already beginning to clean up their act. Zynga is going to need to identify new acquisition models when the hammer falls.

Conversion: Smooth sailing, I think

For the uninitiated, let me say that the barriers to entry on a Zynga social game are very low. I can’t imagine they have any trouble getting people to play games. And people love the games, and get addicted, which brings us to the upsell.

Upsell: Scammy incentivization finally getting notice

Lost of people play social games, but few are willing to pay for them. That’s where offers come in. The firestorm that Michael Arrington created at the Virtual Goods Conference has moved one step closer to its denouement today with a post from Zynga CEO Mark Pincus. Not really walking back from using the incentivization model,  Pincus claims that they’re vigilantly cleaning up the scams and that most are good companies. However, with Zynga admitting that these partners make up at least 1/3 of their revenues (and I’d bet they’re higher) don’t expect to many changes. In fact, a quick glance of the offer page (below) shows 12 pages worth of offers.

Zynga offers

Even worse for Zynga is that they can have this revenue stream cut off from them. I remember similar programs back in 2002 when I was working for Classmates.com. In fact, one Classmates exec told the PM in charge of the program, “I don’t know how you sleep at night.” Since nothing has changed in 7 years, nothing will ever change, right? Actually no, it’s very possible that a more activist FTC under Obama could come into this industry and clean house. The necessity of such an action can be debated, but one thing is sure, the laissez-faire regulatory approach of the Bush administration provided these businesses with a great deal of leeway.

Retention: Lack of brand loyalty, innovation and the transience of social games

How many people playing Mob Wars, Farmville, or Cafe World know they are playing a Zynga game? How many care? Many Zynga games are essentially rip-offs of other games from Playdom or other companies. Nothing is innovative or unique about their games. Zynga’s on a streak, they execute well, but that’s about it. No one is going to be playing Farmville three months from now, so Zynga will need to continue to hit home run after home run and that’s not going to be easy.

So, let’s go to the tale of the tape…

To illustrate the problems that Zynga discussed above, I plugged Zynga into a customer ecosystem model I like to use. If a company is strong, it will have three of four squares rated green. Anytime a company has a red square it essentially means that their customer ecosystem is unhealthy.

In this case, it’s my opinion that Zynga (as it currently stands) is in a bad position… and probably knows it. Hence the desire to push out an IPO very soon. Good luck with that.

UPDATE: Historical footage of Mark Pincus discussing Zynga’s initial growth strategy. Many strong companies (like MySpace) have a questionable past. But this does nothing to help Zynga’s IPO hopes.

UPDATE II: Senate committee investigates the offer business, including my alma mater, Classmates.com.

UPDATE III: Maybe someone at Zynga is reading this site. Zynga to enable Farmville play on Farmville.com.  a good first step and removing the constraints of the Facebook platform.

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