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• Initial Test of Facebook's Promoted Posts - (by @baekdal)
  

  Last week, Facebook came out with Promoted Posts, which is initially only available to a relatively small group. And, one of my pages happens to be included (I have no idea why).

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• Should You Embrace Pinterest? For Brands and Publishers - (by @baekdal)
  

  Should your business be on Pinterest? Is it really as useful as people make it out to be, or is it just another StumbleUpon that creates a ton of social activity, but no real sale?. The short answer is that Pinterest is worth it, if your brand fits into its very narrow scope. But it is not like most social platforms.

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• We Need Editors, But Not Gatekeepers - (by @baekdal)
  

  Last week, there was a good discussion about the need for editors. Poynter has summarized it in this convenient article.

  It started with Mathew Ingram, from GigaOm, who asked:

  This will be an unpopular question, but why do we need editors? If 'news as a process' is a reality, why not commit errors in public?

  When bloggers and Twitter journalists like acarvin make mistakes, they own up to them and correct them in real time -- isn't that better?

  Here is my take:

  Many think the point of having an editor is to do fact-checking, but I disagree. That is the job of a journalist, and I think it is fundamentally better for the flow of everything to allow mistakes to happen in public.

  The very idea of hiring an editor to look over people's shoulders is a sign of distrust. Don't hire editors to check journalists because you don't trust them to do a good job. Hire journalists you can trust!

  

  But we do need editors to secure a consistent high-level of of value and purpose.

  Back in 2002, I was the Editor in Chief of a (very) small fashion magazine. My staff consisted of four freelance journalists, and I was an editor in the strictest form possible. I would lay down the editorial direction. I would signoff on ideas before each journalist was allowed to write about them, and I would read and approve each article before it was allowed to be posted. In many ways, just like editors in traditional newsrooms.

  When I look back to that experience, I think I made a big mistake. I functioned as gatekeeper, and because of that the journalists where not in touch with the reader, they communicated with me, so they focused pleasing my 'commands' instead of pleasing our audience.

  The result was good quality content, but at the expense of any energy between the journalist and the readers. As such, I think this was one of the reasons it never really worked. One and a half year later, we closed it down due to low levels of traffic.

  This is not just a problem for newspapers. Whenever a brand decides to have an editor to edit all tweets before they can be posted, the result is always very careful and high-quality tweets that nobody cares about.

  In the connected world, it's vital to have a direct connection between the journalist and the reader - and putting an editor in the middle of that is not a good idea. It's much better to have the occasional mistake (which actually adds a personal touch), than having everything edited and made just right.

  But we do need editors, not to edit, but to focus everyone around a single purpose. We need them in two ways. First we need to help journalists see patterns that they, as individuals, don't see because they are too close to the story. If Joe is writing one story, and Alice is working on another. It's the editor's job to connect the two. Help the journalists build better stories by finding the connections they didn't discover on their own.

  Secondly, the editor's role is not to edit, but to get people to focus on the same purpose. The problem is that if you have 20 journalists, who all write their own stories, you might start out as an interior design magazine, but after a year, they will all have shifted their focus in 20 different directions.

  You can't have that. A magazine without a purpose is not worth reading. People don't follow random things.

  You have to make sure that the journalists are inline with what you as a publisher are trying to accomplish. You have to follow the same path.

  One example is just to look at the mess at TechCrunch, which was essentially caused by lack of editors keeping the journalists align towards a common purpose. Each senior journalist at TechCrunch was essentially giving free reigns to write about whatever they wanted.

  The result was that they started focusing on growing their own personal brands. To the senior journalists, Techcrunch was just their personal blog platform. And this was long before AOL came into the picture.

  When AOL took over, they needed to make sure that Techcrunch fitted into a much larger content portfolio. They had to make sure every journalist was working for the same purpose and towards the same goal. That was the right thing to do for AOL, but as we all remember, it ended quite badly. All the senior journalists were suddenly told to work *for* Techcrunch, instead of just using it as their personal blog.

  We saw just how far these journalists had moved away from Techcrunch's core purpose when they started writing negative articles about AOL.

  They were not defending the purpose of Techcrunch. They were defending their misguided believes that they should be allowed to post whatever they wanted - regardless of the purpose of Techcrunch or AOL.

  In the end, they all had to leave. But in reality, the damage happened several years before AOL came into the picture.

  This is why you need editors. You need to make sure everyone stays true to the purpose of the publication. Not as gatekeepers. Not as fact checkers, and not as middlemen between the journalists and the reader. The role of an editor is to be the ones who motivate and guide the journalists. They help them see connections, patterns, and the trends that are important to the stories - and they form the guiding force to make sure people don't lose track of what the publication is trying to accomplish as a whole.

  It doesn't mean the editor have to be a person. If you have a great team, one that is well connected and in tune with each other, you can 'edit' as a crowd. Crowd editing is far more efficient, and far more powerful, but it only works if everyone is motivated by the same purpose.

  People need to be united around a shared purpose, and focus on a common goal. That's what real editors do.

  It's very important that the journalists can connect and interact directly with the readers. It's important for publications to use the personal influence of an individual journalist to connect and engage your audience. For that reason, it's important that editors do not get in the way but instead function as enablers behind the scenes.

  We connect much better with people than with things.

  This new role for journalists to directly influence the reader, comes with many great rewards, like a much more influential personal brand, but it also comes at a cost. The cost is that it is now far more important than ever that journalists stay true to the purpose of the publication that they work for. The job of a journalist is not to write. It is to make the publication a financial success.

  Believe

  As Simon Sinek says, "do you believe in what you believe?" Do you believe in what the company you work for believes?

  Simon talks about the Golden Circle. It starts with 'Why', the purpose of the publication. 'How', the strategy of the publication. And the 'What', the actual work of the journalists (in that order).

  If you disregard the 'Why' or the 'How' and just do the 'What', you might still create good articles, but you won't help the publication grow. Worse, if you make up your own 'How', you are working against the purpose of the publication.

  Of course, it is not one way. It's not just the publication who defines the 'Why' and then demands everyone should just shut-up and do their job. The best companies have a shared purpose, not a dictated one.

  But everyone has to agree to believe in what you all believe. And everyone has to express that belief to the people they connect with.

  If everyone believes in what you believe, you don't need an editor to keep people on track. You need an editor to help journalists translate the 'Why' to the 'What', by finding the patterns in the 'How'.

  That's the role of an editor. That's the role of a publication. And that's the role of a journalist!

  
  

  
  

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Baekdal.com (2 сообщения)

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• Facebook EdgeRank, Promoted Posts, And The Connection - (by @baekdal)
  

  I have spent some time this week discussing Facebook's new feature, 'Promoted posts'. In short, Facebook now allows brands to pay a fee to reach all you fans when they you something.

  Today, the amount of people who see your posts is fairly low. The average is somewhere around 16%, which means that if you have 20,000 fans, your real audience is just 3,200 people. That is a significant (and quite catastrophic) difference.

  This is nothing new. Every social network has a problem with reaching all your fans or followers.

  On Twitter, only a very small fraction of your followers see your tweets. The reason is that if you post something at 1pm, but most of your fans don't check Twitter until 3pm, two hours have gone by during which 20 to 50 other tweets have been posted to the stream. And people simply won't scroll down to find yours.

  This is the reason why click-throughs from Twitter is so low. You are effectively only reaching the percentage of your followers who happen to be on Twitter at the exact moment when you tweet. Everyone else won't see the tweet, and thus won't click on it.

  Google+ has exactly the same problem, which it tries to solve by creating circles. The circles work in two ways. One, it categorizes people, meaning you divide up your stream in a number of mini-stream. This, in itself, makes it more likely that people will see your posts. But you can also decide how much, or how little, each circle should be featured in your main stream. You prioritize what you as an individual wants to see and what you just want to follow casually.

  

  That is a pretty good concept, and one of the reasons I like Google+.

  Facebook used to have the same problem. Only a very small fraction of your fans would see your post, because they would disappear within the noise of the stream. Something had to be done, so Facebook decided to create EdgeRank.

  EdgeRank looks at each post and determines how relevant it is to you as an individual. Instead of just showing you what people had posted right now, it creates a curated stream of the most relevant posts just for you.

  From a conceptional point of view, this is great. No more noise and Facebook alert you to what's important. It is a brilliant concept!

  ...in theory.

  The problem is that it is far from perfect. EdgeRank is based on engagement, meaning that if you don't engage with someone, your EdgeRank score will drop and filter out future posts from that person or brand.

  The concept seems fine until you realize you are devaluating the power of the listener. People in the social world have this strange idea that a listener is a bad person. The industry even has a name for them. They call them lurkers, as if they are some kind of creep lurking around like a criminal.

  Here is something I want you to do. Take a look at all your web shop transactions that originate from social channels, and find out how many of your monthly costumers have actively engaged with you.

  The answer might come as a chock to you. What you will likely find is that most of your customers never tweeted, never posted, never commented and never liked your posts. But they still purchased your products.

  What you will probably find is that only a small percentage of your customers are also engaging with you socially. Another small part is a direct result of that engagement (people 'reached' caused by 'people talking about'). But the majority of your customers never engaged with you prior to buying your products, but they still came via social channels. They are the lurkers. The people who are responsible for most of your sale!!

  

  These valuable listeners are the same people that Facebook tries to filter out with EdgeRank.

  For instance, many of my Baekdal Plus subscribers follow me on my social channels, but only a small percentage actively engage with my posts (about 12-14%). The rest, the listeners, just want to follow to keep up-to-date.

  People who engage are more powerful per person. But the listeners, as a group, is far more valuable. We should always try to get more people to engage, but doing so at the expense of the listeners is a big mistake - which is exactly what EdgeRank does.

  When EdgeRank first came out it was a brilliant idea for a way to solve a very complex problem. But Facebook quickly realized that instead of focusing on finding the really valuable connections, it could be used to help Facebook grow by forcing people to engage socially. This was great for Facebook (it helps them grow), not so good for anyone else. Sure, it's far better than the noise of the past. And it is better than the 'only-at-that-moment' exposure that we get from Twitter. And engaging fans are responsible for the social effect, like when something goes viral and you suddenly reach a million people.

  That's all great. But on a day-to-day basis, the listener are the ones who drive the majority of the value.

  We need both!

  Today, EdgeRank filters out 84% of your fans ...84%!!

  Some of the people it filters out are those who have simply lost interest and no longer care about you as a brand. But most of them are listeners. People who decided that they wanted to follow you, but are now filtered out because they rarely engage. But they don't want to engage, they just like to listen!

  That's pretty bad. 84% of your audience lost because Facebook decided to filter them out.

  You might say, "But this is temporary. Facebook will improve EdgeRank and make it smarter, and thus stop filtering out people who really want to stay connected."

  You might be right, but if we look at what Facebook has done so fay, and especially what they have done this week, it doesn't look like they will ever fix it. In fact, it looks like they will use EdgeRank to an even greater degree to force social interaction at the expense of the listeners.

  This week, Facebook launched two new features. The first one was that brands can now 'promote a post' for a fee. But unlike Twitter, where promoted posts are intended to reach the people who don't follow you yet, Facebook's promoted posts are designed to reach the people who already follow you, but have been filtered out.

  

  Think about this for a moment. First, Facebook filters out 84% of your fans, and now they want you to pay to get them back. They are filtering out *your* fans. People who have decided to follow you!

  Actually, there are two ways to pay for it.

  1. Brands can pay to reach their filtered out fans.
  2. People can 'pay' by engaging more on Facebook - and turn into active users (which helps Facebook grow).

  And the problem is EdgeRank. Facebook now has as financial interest in strengthening the EdgeRank filters. The more people they can filter out, the higher the pressure Facebook can put on brands to 'pay up'.

  You might think that I'm exaggerating and Facebook would never do that, but then consider what they did yesterday.

  Yesterday, Facebook launched another feature with which brand administrators can see exactly how many people see each post, and exactly what percentage of people Facebook has decided to filter out.

  

  And look what it says underneath: "0% reached through promotion."

  This is Facebook using EdgeRank to filter out a big chunk of your fans, and then actively forcing you to buy them back.

  Note: On a sidenote, as an analytic freak, I'm absolutely excited about getting such precise data about who sees each post.

  EdgeRank used to be a great concept for finding relevance in a stream of noise. But today, it's a tool for Facebook to force people to actively engage (and thus help Facebook grow), and a tool to force brands to pay a fee to reach our own fans.

  Facebook has taken control over our connection with our fans. The brands are not in control, nor are your as a fan. As I wrote over at Google+, Facebook has taken our connections hostage, and is now forcing us to pay a ransom.

  For brands this is catastrophic. But as a fan it is even worse. When I, for instance, decided that I want to follow Waterfield Design on Facebook, I expected to be able to follow what they do and what they talk about. But Facebook has decided that I'm just a listener and has filtered out many of Waterfield's posts from my stream.

  I can then try to keep the connection alive by socially engaging on a continual bases (which I don't want to do), or I can hope that SF bags will pay Facebook to keep me as a non-filtered fan. But it is Facebook who are now in control over who and what I can see in the newsfeed and on what level.

  On Google+, I decide who and what goes into each circle, and I also decide how much I want that circle to influence my main stream of updates. On Google+, I'm in control over my connections. On Facebook, I'm not...

  Don't get me wrong. I don't think it is a problem that Facebook is finding new ways to earn more money. We all know that their revenue projections are problematic, especially as advertising is not working on mobile devices. Facebook has to find a way to monetize in other ways than ads. A way that works across devices and platforms. Promoted posts are certainly one way to do that.

  But, on Twitter. A promoted posts reach people 'outside' your direct connections (the people who don't follow you yet), or via search where a promoted post can be used to respond to people during big events or some kind of crisis. That's great.

  That's not what Facebook is doing. Facebook is taking ownership of the connections we already have and selling them back to you. A fan is a fan. Facebook is a platform. They do not have the right to take ownership over whom we connect with. Facebook can charge for features or expanded reach (outside your established connections), but people expect that when they like a brand they are also connecting with it.

  One thing I think Facebook should do is to create 'Facebook Pro for Brands'. Brands can set up a page, for free, and use it to engage with their fans. But brands then have to pay $99/year for the advanced features, like Facebook Insights and Analytics, advanced features like enhanced profiles that allows brands to add call to actions (like a 'buy' button next to the like button), or even say that if a brand reaches more than 10,000 fans, it has to pay a fee of 1 cent per 100 fans, per month ($1).

  

  This would mean that a brand like Waterfield Design would have to pay $99 per year, because they only have 2,500 fans. But a brand like Coca Cola, with 42 million fans, would have to pay $50,499 per year. It sounds like a lot, but it is nothing compared to their print marketing budgets.

  Another example: A brand like General Motors, who recently announced that they had dropped Facebook ads and only wanted to focus on direct engagement via their page (essentially using the power of Facebook for free), would have to pay Facebook $1,566/year for their Chevrolet Page.

  I have no problem with paying for Facebook as a brand, and I think Facebook should do it (also that Twitter and Google+ should do the same). But I find it to be absolutely dishonest how Facebook now uses EdgeRank to kidnap our connections and assume control over who can connect with what.

  
  

  
  

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• Debunking The Need For Local Languages - (by @baekdal)
  

  A couple of days ago I had a discussion about language. I mentioned how annoyed I was that a Danish newspaper constantly translated perfectly fine words like 'tablet' into some strange Danish equivalent.

  In Danish, a tablet is called a 'tavle computer'. It is not just a terribly long word that is impossible to fit into any UI, it's also the wrong word. A 'tavle' is a blackboard. A 'brt' (in Danish) would be a tablet.

  Why do countries spend so much time translating perfectly fine words into something that makes no sense of all?

  Let's debunk this language mess...

  The evolution of language - 101

  A long time ago in a place far, far away, we used to all live in the same place. And since everyone was living in the same place we also all spoke the same language. When someone discovered a fancy new thing, he would name it a 'gobbledygook' and everyone else would agree that this new thing was indeed a gobble..dy...ehm...what kind of duck?

  A gobbledygook, he would repeat and everyone would now understand and nod enthusiastically.

  But as time progressed and we started to expand into this strange land over the horizon, the distance between us also increase to the point where we could no longer communicate efficiently. One day a person was walking through a valley in a land far away from anyone else, and she found this yellow root with green leaves on top of it. She cautiously took a bite, like it very much, and decided to hence forth call it a 'carrot'.

  Why did she call it a carrot? Well, the person who found it was called Caroline, and it was a root. Carrot. It makes perfect sense (and yes, I made that up).

  

  In another valley, very far away from Carolin, a man was walking down a path when he tripped over a yellow root like thing with green leaves on the top. He tasted it, and, being slightly annoyed by his throbbing toe, he decided to call it a 'morot'.

  Meanwhile, in another valley, a group of friends were out playing in the sun, when one of them noticed this yellow thing sticking out of the dirt. He picked it up and immediately had allergic reaction and sneezed ...Marchew!!

  All his friends looked up, noticed this strange thing he was holding in his hand and immediately decided, mostly to tease him, that it was indeed a 'marchew'.

  Everything was fine, and we all started eating strange yellow things that stick out of the ground.

  Quite a while later, these three people happened to meet at a big convention of troubadours. Being very polite people, one of them wanted to offer the others a quick snack. He reached into his bag and said, "would you like a morot?"

  Everyone looked at him in horror. That is not a morot. It is a marchew. Caroline was fuming, and many other people came over to see what all the fuzz was about. Each one immediate claimed that it was a wortel, a kk, an azenario, a pastanaga, a porgand, a cenoria, a lobak merah and many other variations.

  

  The whole convention ended pretty badly, and people rushed home to tell how awful everyone else was. They put up big fences around their lands to keep the others out, which resulted in country borders, immigration control, and quite a number of wars against those 'other people' who believe differently.

  ...

  I am, of course, just making a joke out of it. But the point is very serious.

  The reason why we have language today and use two different words for the same thing, is not because that is a good thing. It is a limitation of the past that prevented us from communicating efficiently with other people. Local languages are a problem, not a solution.

  I find it odd when countries and politicians insists that we preserve local languages. We now live in the connected world, and whenever someone discovers something new, we should use the original word that the person created, instead making up our own.

  Just think if the economic consequences that local languages have on society. Every person, everywhere, needs to communicate globally by default. But because of the language barriers, kids today have to spend years in school learning that a morot in Sweden is a carrot in England.

  What if we instead of language classes had communication classes. Instead of learning different words for the same thing, we would spend our time learning how to use the same words more efficiently. Communication is essential in the connected world, but no kid today learn how to write an engaging blog post.

  And the impact for businesses, of course, is even worse. The amount of money that goes into localizing websites and apps is astonishing. And that is not even the worst part of it. One of the reasons why newspapers in Sweden are struggling in the global world, while the Economist is not, is simply that the Economist, written in English, can be read by billions, while a Swedish newspaper are confined to only people who thinks a newspaper should be called a "tidning".

  What's worse is all the people who say that their language is part of their tradition. It is, but it is not a good tradition. It is based on the idea that just because you use a different word for something, you are worth more than other people who call it something else. That is a form of racism.

  A tablet should be called a tablet, and people should not try to make up their own words for it. And a Kuaizi should be called a Kuaizi.

  We should not try to make it harder for people to communicate. We should work together and stop this destructive tradition of languages that forces people apart.

  This is the connected world.

  
  

  
  

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Baekdal.com - The Trends vs Paid-for Content - (by @baekdal)

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• The Trends vs Paid-for Content - (by @baekdal)
  

  We are starting to see several interesting trends in the world of publishing. For most of the past 15 years, online publishing has been on a bit of a roller coaster ride. First, embracing the concept of making no money (aka the "culture of free"), only to find that it wasn't profitable. Then, within the past five years, reaching the great depression.

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Baekdal.com - The Bringer Of News is a Thing Of The Past - (by @baekdal)

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• The Bringer Of News is a Thing Of The Past - (by @baekdal)
  

  For most of the history of the newspaper, the role of the newspaper was to be the bringer of news. The actions of the reporters where to find news and reprint it for everyone else to see.

  For that reason, most journalists believe that whenever they see something, they have the right to reprint it. That's their purpose. To be the bringer of news.

  Other people, brands, businesses, and organizations thought the same thing. Whenever they did something, they expected and even hoped that a journalist would come by and take and republish it to the public.

  The problem is just that, in the connected world, this whole business model is collapsing. Today, everyone can be a journalist, and everyone is. And reprinting what someone else did is no longer acceptable.

  The newspapers no longer have the right to take someone else's work and reprint it for their own profit. That is copyright-theft but, more importantly, it is connection theft. You are stealing the direct connection between the creator of the work and the people it connects with. That is far worse than copyright theft.

  One person, Duane Lester, had one of his articles stolen by a local newspaper and decided to confront them about it. It makes for a spectacular video.

  The most telling thing is the reaction of the editor. In his mind, he went out to the public (the internet) found some news, and decided to bring it in his newspaper. 20 years ago, this would have been perfectly acceptable. It was even expected of him. That was what newspapers did!

  But today he is a thief, and he simply doesn't understand that. Instead, it looks like the editor feels that it is his rights that are being violated. And after not wanting to take up the fight on camera, he reluctantly signs a check and tells Duane to get his ass out of his building.

  This is not just a problem with traditional print papers. Recently we heard about how The Next Web did the same thing. You can read the story here, and the editor's response here.

  Again, the editor fully believed that he had to right to do it.

  Harrison Weber (our author) decided to paraphrase and clearly didn't do a particularly good job. I don't however think that it warrants an all out plagiarism attack.

  Paraphrasing is just another word for stealing someone else's work and then hiding it by changing a few words here and there. And the editor of The Next Web is far from alone in thinking this is acceptable behavior.

  Clashing cultures

  This is the culture clash between the traditional and the connected worlds. In the traditional world, you are the bringer of news. In the connected world, you are a copyright and connection thief.

  Duane's example was between a blogger and a newspaper, a case that is easy to understand. But think of the many similar cases between brands and newspapers.

  Today, many brands spend more time communicating directly with their customers, instead of issuing press releases. Which means that brands are just like bloggers: Independent publishers of content. They publish content on their direct customer channels - their blogs, Facebook and Google+ pages.

  When brands publish an article to their fans, they do so with the expectation of strengthening their social relationship and reach. If a newspaper then comes by and reprints it on the newspaper's site, it is stealing the content and the direct connection.

  Most brands today still think of social media as a form marketing, and, as such, they don't mind when other people 'steal' their content because it gives them free exposure.

  But it won't take long before the brands will realize that when newspapers take their content, they not only steal the content and the connection, they also disrupt the call to action - and that is a disaster.

  This culture clash, from newspapers having the 'God given right to report on other people's content', to the connected world where they don't have that right at all, is not going to end well.

  Already today we see the battle between the bloggers and the newspapers (which goes both ways), but I fully expect the first brand vs newspaper battle to emerge in 2012. At some point in the months ahead, a big popular brand will get so fed up with a newspaper taking content from their direct customer channels (blog, Facebook page, Google+ page) and sue the newspaper for copyright theft.

  Imagine if a big company like H&M sued a big newspaper for lifting an article of H&M's Facebook page. It will happen, maybe not by H&M, but by some other big company. And it will happen soon.

  When it does, it will question the whole existence and future role of the newspaper. Brands will realize that it is more valuable to keep the connection than to lose it for a short-term gain of free exposure.

  My advice to you is simple:

  To brands: Start calculating the impact (positive/negative) of other people republishing your posts - including when newspapers reprints or paraphrases one of your stories. What is the exposure vs conversion rate? Do you win or lose? Are you gaining a new audience, or are you just giving a newspaper free content that they can profit on without getting anything useful in return?

  To Newspapers: Stop being the bringer of news. The business model is based on the disconnected world, and the future trend patterns all lead to a culture clash that you can only lose. In the connected world, everyone is a creator with a direct connection to their audience. Exposure happens via sharing, not republishing.

  You have to be the creator of news. Expand the stories, find the connection between stories and be the source. You can build on a quote, but you cannot republish or 'paraphrase'. And you cannot steal the direct connection.

  The future looks brighter than ever, but the past isn't. Being the bringer of news is a business model of the past. Change it!

  
  

  
  

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• The Silicon Valley Dance - (by @baekdal)
  

  For the last couple of weeks, I have been writing and commenting on the social bubble. We all know that its here. The signs are as clear as day. But there is something wrong with this bubble. It isn't actually a bubble for anyone who is in it. It is only a bubble for the rest of us, and the market as a whole.

  What we are experiencing is the what I will call the Silicon Valley Dance, and here is how it goes.

  First a bunch of startups all try to do something spectacular, and they pitch their ideas to angel investors hoping to get funding to get it going.

  Most of these startups don't make it and are not invited to the dance - but the few that do are invited into a strange world of tech investments.

  The first steps

  The first few steps are simple. The startup, now monetized by their angel investments, set out to create this amazing new thing involving new technology, new ideas, and new social doohickeys. In order to attract attention, they decide to give it all away for free. They do not even put ads on it. We see statements like. "This will be free, forever". And the founders say things like, "We don't like advertising, so we won't do that, ever!"

  People, of course, are very excited by this free gimmick. It's new and exciting (and everyone loves that), and it is totally free - made by people who wants to keep it free forever.

  The result is an incredibly initial growth curve. And since it is build around social sharing, it very quickly explodes in size.

  Soon the journalists notice this new thing and write amazing articles proclaiming that this startup grew 4,000% the last 3 months alone (which is really easy to do when you start from zero).

  The next act

  The startup now needs to scale. They need bigger servers, support crew, and a bunch of other things in order to support this new 'social comet'. In short, they need to raise more money.

  This, however, is easy. Because with a grow curve showing a 4,000% growth, the investors see billion dollars signs falling from the skies. Based on their initial numbers, it is decided that the company will grow by some even larger number, and base on that they set a completely made-up market valuation of something in the area of a billion dollars.

  They then invest $100 million into the company (10 times lower)

  The result is that the investors can invest in a company at a fraction of the price that they tell the world that it is worth. What a brilliant deal, especially since all the numbers are made up.

  It's like buying a car for $10,000, and then telling people it is worth $100,000.

  The startup continues to focus on growth and deliberately implement things that will boost traffic even higher, while neglecting to consider anything that could produce real money.

  The final act

  A while later, the small startup has tens of millions of free users, and it is now ready to be sold to some big clueless company who themselves have failed to embrace whatever the startup had invented.

  The investors sit down to have a meeting with a big investment bank, and they decide that the company is now worth 50 billion imaginary dollars - and they base it all on its amazing growth as well as its track record of being valuated at an ever higher price at each investment cycle.

  Just look how amazing it is growing. The first investors invested just a couple of thousand, then it was valuated at $100 million, which attracted even more investors, who invested $10 million, and now it is worth $1 billion! All imaginary valuations based on a company that makes no money at all.

  The next day, the company is sold for a staggering amount of billions to some big company, and the founders become billionaires - and so do the initial angel investors and early investors.

  Everyone is happy. The founders turn into venture capital investors themselves, and start looking for the next free-for-all-new-amazing-social-startup-with-no-revenue to invest in.

  And the cycle repeats.

  

  As you can see. Without actually making any money, at any point, a company was formed and later sold for billions of dollars - making both the founders and the investors filthy rich. And they can keep doing this as long as there are new startups coming out with new ideas. There is no bubble here. It actually works.

  Being a venture capitalist is a tremendously successful business model.

  But what about the big company who just paid several billion dollars for a startup with no revenue? Well ...this is where things start to go horribly wrong. The only way to somehow get this money back is to find a way to monetized all this free traffic.

  They start with advertising, which results in a massive backlash from the people using the service, who say that this big company doesn't care about them and are only in it to make money - and many other arguments like, "they are breaking with the culture that the startup was founded on".

  The big company is identified as the ultimate villain. Employees drop out and post negative articles telling the world that the reason they left was because of how 'corporate development' changed everything - and that sucked, so goodbye!

  A few years go by, until finally the big company simply decides to write that 'experiment' off as a failure. They never succeeded in monetizing the traffic.

  Why did it fail? Part of the reason is that the big company completely failed to understand the mechanisms behind it. If they did, they would never have bought the startup at that price to begin with. But the biggest reason is that it was based on imaginary value. It made no money, and its users have been taught to expect everything for free. That is not an audience or a product that can be turned into something that will ever be profitable.

  The initial founders and investors don't care about that. They already earned their billion dollars. They are currently building up new startups with, no revenue and promises something new for free, only to pitch the idea other big clueless companies for imaginary market valuations far above the amount of money the investors have actually put into it.

  The cycle continues endlessly. The bubble never burst as long as there are more clueless corporations waiting inline to buy the next innovative idea.

  Nevertheless, the bubble will burst the day the big clueless companies start to use their brain. That's when this whole industry will come tumbling down. The day investors can no longer make up imaginary value is when it will all fall to pieces.

  Personally, I cannot wait for this to happen. Just imagine a world where startups where based on creating something people would pay real money for, generate real revenue and produce real profit. These startups would have to build something that was far better to begin with. Something far more useful, and far more valuable.

  Imagine a social network that had to be so good that you would pay real money for it. We used to do that in the past, but then came the Silicon Valley Dance.

  The Silicon Valley Dance is also largely responsible for the culture of free. It is astonishing how many 'ordinary' people who believe that sites like Pinterest is worth their new $1.5 billion market valuation.

  Ordinary people point to the fact that billions of dollars are exchanging hands, and the constant stories of founders getting filthy rich. But they didn't do it because they made something valuable. They did it because they fooled some big company into believing that their free traffic was worth something it wasn't.

  The problem is that, in this kind of environment, it is almost impossible to create a real startup that makes real money. You have to compete with a bunch of startups with fictional financial valuations who gives everything away for free.

  It's time for the big companies to wake up. While I wouldn't mind having a billion dollars in my bank account (which I don't), I would much rather spend my time building something of real value. Something that generates real money because it is really worth the price!

  A company is not successful if it makes no money - regardless of how much imaginary value the investors tell you it is worth. It is a simple scam, although a highly profitable one for the investors.

  It's the Silicon Valley Dance.

  1...2...free...grow it some more...4...5...6...valuate the floor
  1...2...free...grow it some more...4...5...6...valuate the floor
  Sell it to a big fool, because that's really cool.
  1...2...free...grow it some more...4...5...6...valuate the floor
  1...2...free...grow it some more...4...5...6...valuate the floor
  Sell it to a big fool, because that's really cool.

  ...and repeat

  
  

  
  

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• The Facebook IPO - A Classic Game of Hot Potato - (by @baekdal)
  

  For those of you who are following me over at Google+, you will already know the story. The Facebook IPO is the closest thing we come to a social bubble. The numbers and valuations they throw around are just insane.

  To illustrate this, I decided to compare Facebook with Ford by looking at four key metrics: Revenue, profit, assets, and market cap. And as you can see, something is completely wrong with this picture.

  
  • Ford has 36 times higher revenue
  • Ford has 8 times higher profit
  • Ford has 8 times as many assets (including a much larger cash reserve)
  • ...but Ford is valued at only 41% of Facebook's expected market cap.

  More to the point, Ford's market cap is valued at 70% of their total assets, yet Facebook is valued 1,370% higher than what they have in assets.

  This is the dot.com era all over again. Value is being determined based on activity (page views, ad impressions, users), instead of real things like ...you know ...money and assets.

  My post over at Google+ went crazy after posting this graph, within 24 hours it had a ton of views, 660 +1s, 595 shares, and 170 comments.

  The comments were divided into two camps. One group agreed that this was insane, the other told me that I was wrong because I forgotten about the growth potential.

  But I hadn't, I just didn't mention it. As I wrote in another post:

  While I agree that Facebook will grow, they are only making $1.21 per person ...and they seem to be stuck at that level (it was $1.26 in Dec 2010).

  That means that in order for Facebook to earn the same as Ford, they would have to reach 7.7 billion people - 110% of the entire population of the planet, or 300% more people than there are on the internet.

  If we instead compare it to Google, they would have to reach 8.3 billion people. And compared to Apple, they would have to reach 22.5 billion people....or 321% of the total population of Earth.

  If we instead look at revenue, the picture is even worse. Facebook would have to reach 33 billion people to match Ford, 9 billion people to match Google, and 26 billion people to match Apple.

  The problem is that people only look at the growth trend itself (which looks to be impressive). But in doing so they don't realize that Facebook already has a 40% internet penetration - worldwide. That's impressive, but it also means that its growth is somewhat limited.

  

  The only way for Facebook to succeed, at its current market cap, is if they can raise the $ value per user, and so far they have been completely unable to do that. Facebook is not actually growing that much, which Facebook itself have illustrated clearly on several occasions.

  Here is the graph showing the growth in monthly active users:

  

  Note: Sorry for the low-res quality - out of my control.

  As you can see, the US market is flattening out, and Europe is not far behind. And while Facebook is still growing overall, it is nowhere at the exponential rate that people think it is. It is a steady increase month over month, with a slowing effect in their existing markets.

  For a company that only makes $4 billion in revenue, I don't see it coming anywhere close to a $100 billion market value anytime soon.

  More importantly, the revenue is actually down, and the revenue per user is flat. Here are the official revenue graphs:

  

  Notice the small numbers underneath each graph, the one that says ARPU. It is short for Average Revenue Per User. As you can see, the ARPU has been flat lined for more than a year. But more to the point, the new market (where Facebook is still growing strong) have a much lower ARPU per person ($0.37) than the old market ($2.86).

  This means that even with a steady influx of new users, the new markets are not nearly as valuable as the old ones.

  There is no spectacular growth here, nor is there any trend curve pointing in that direction.

  Don't get me wrong, Facebook is a very financially sound company. It has very good positive cash-flow. The cost of operating Facebook is dropping compared to their revenue. In 2009, the cost was 63%. In 2011, it was 52% of the revenue. And while the cost per user is up (in 2009 the cost was $1.4 per person and in 2011 it was $2.2 per person), the revenue has grown at a higher pace.

  Facebook is a financially sound company and is doing great!

  The problem is the stock market valuation, which is completely out of touch with reality. They are looking for a quick-win, and Mark will soon be a fanzillionaire - literally. This is because much of the value is made-up, but also because it is based on some imaginary value of fans and not real things like actual money.

  What we have is a real bubble, which is further cemented by the $1 billion purchasing price for Instagram - a company that had no revenue at all. And today we learned that Pinterest has raised $100 million at a $1.5 billion valuation. Where do they get these silly valuations from?

  For years we heard that all these social signals are incredibly valuable. If you have enough signals, you can use it for targeting, and money will fall from the sky. There is just one problem. We have not seen a single example yet that this true. Not a single company has been able to monetize these social signals in any useful way that results in real money at the level that these companies are being valued at.

  All the successes we hear about are happening between investors and companies buying imaginary value. Instagram is not a success. It made no money! As a person, I absolutely love Instagram. But why would I pay for it? Why would I click on random ads from brands I don't care about? Would you?

  It's the same with Facebook's IPO. People say it is going to be extremely valuable because of the open graph and all the information they have about everyone. And it is valuable - Facebook earns $1 billion per year, 86% from advertising. But there is a long way from $1 billion to $100 billion that the stock market thinks it is worth, and nothing as yet indicates that Facebook can grow by that much.

  Advertising click-through rates are dropping on Facebook, which they tried to solve by putting more ads on the page. That might work in the short term for Facebook, but it is an absolute disaster for the brands who now have to compete with more advertising spots.

  And this week, GM announced it was dropping Facebook ads altogether but would still use Facebook to post status updates. Essentially saying they want to use the power of Facebook, but not pay for it.

  Facebook has a problem. As you can see above, the new market is not as valuable as the old one, and the old market is slowing down. At the same time, the $ value per user has flat lined.

  Facebook needs to come up with a way to earn much more money per user to even reach their expected growth. And they are trying with 'pay to highlight', asking people to pay $2 to have a personal post highlighted for their friends. What a strange concept. Paying Facebook for having your friends notice what you write about. If you friends ignore you, the solution is not to pay Facebook, it is to get better friends (or at least write better posts)!

  One possible solution, in my opinion, is for Facebook to create a Pro version for brands. That's where the value is. More brands will do what GM did - drop advertising and focus on direct engagement.

  And, of course, I haven't even mentioned mobile, where Facebook makes no money at all. Display advertising and mobile is completely incompatible. And where is the mobile trend heading? Yep, to more mobile.

  I'm not saying that investing in Facebook is a bad thing. It's a game of hot potato. If you buy it now and you are capable of selling it to some poor fool for an even higher evaluation before the next earnings call, you will have earned a lot of easy money.

  But by the next annual earnings call, when Facebook fails to exceed expectations, things will come tumbling down, and whoever is left with the hot potato is going to get burned - badly.

  Marks Zuckerberg, of course, will still be filthy rich. He was the first one to sell the hot potato. He figured it out!

  Read also: The Facebook IPO: A Note to Mark Zuckerberg or, With "Friends" Like Morgan Stanley, Who Needs Enemies? (thx avinash for the heads-up)

  
  

  
  

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