Top 5 Largest Online Retailers – Who Are These Companies And How Did They Make It To The Top?

Here are 5 companies whose combined online sales  in 2011 amount to almost $75 Billion, US and Canada only. Let’s also have a look at their background and how did they manage to reach the top 5. The winner is one of the fastest growing companies in the world, a company born and raised online and probably the future of global retail. Let’s first have a look at the runners up:

5. Dell Inc.

Online sales: $4,609,728,000
2011 Growth: – 4%

dell logoDell is the only company in this top to have a negative growth.  The decrease in sales is a direct result of global PC sales contraction in 2011.  If your company is not named Apple and your business has something  to do with PC’s, than 2011 was probably one of the worst years for you. In fact Dell’s PC’s shipments declined 8% throughout the year so that makes dell.com’s sales 200% better than the overall company performance.

Dell was one of the first companies to integrate ecommerce in their sales process. Its e-commerce operation started off as a static page in 1994, integrated online sales features and soon enough they were selling more than $1 million a year, which as you might remember, was $1 million more than most of the companies.

Dell’s innovative approach to online commerce (customize and buy) was a result of:

  1. its business model that allowed companies and individuals to order customized computers via mail orders pre-internet era
  2. an increase in losses due to aggressive competition from its arch-nemesis – Compaq. Dell recorded losses of nearly $100 million in 1994, before launching Dell.com.

Following the launch Dell expanded its online operations in Europe and Asia and by 2000 it was already the market leader in PC sales worldwide. It stayed in the pole-position until 2006, when HP reclaimed the throne. Not bad.

4. Walmart.com

Online sales: $4,900,000,000
2011 Growth: + 19.70%

walmart logoWalmart is big. Really big. It operates more than 10.000 retail units in 27 countries. It’s net sales in 2012 increased 5.9% to 443.9 billion dollars. Big as it might be, Walmart did miss the start and that’s one of the reasons it’s “only” no.4 on our list. But worry not – the company expands its operations online as aggressively as it does with its brick and mortar stores and soon it will be fighting for the top position.

Jeremy King Walmart
Jeremy King – Walmart’s CTO

The company, whose first store opened in 1962, had launched Walmart.com in 2000, after it incorporated it as a separate company, based in Silicon Valley. Accel Ventures had a minority stake in the company at the time but the two agreed to disagree and in 2001 Walmart bought back Accel’s share.

As of that moment Walmart.com worked as a subsidiary of Wal-mart Stores, Inc. and it slowly started its development. CEO Mike Duke, an alumni of Georgia’s Institute of Technology, showed he meant e-business when it turned the company from a rigid, unambitious company to one of the biggest challengers to Amazon’s ecommerce reign.

Walmart started @WalmartLabs, and brought aboard the ship hundreds of talented engineers and business people, all focused on retail, social media and mobile. Yup, they do have all the buzzwords they need and as of 2011 they also have Jeremy King, one of the leading engineers at eBay, back in the day.

In 2011, Walmart agreed to purchase Kosmix, a social media startup founded by Venky Harinarayan and Anand Rajaraman in 2005. It’s worth to mention this just to get a glimpse in the kind of people and technology the company is now bringing aboard:

  • Mr. Harinarayan and Mr. Rajaraman previously founded and sold Junglee to Amazon for a reported $250 million
  • The two were angel investors in Facebook
  • Kosmix was funded by Lightspeed Venture Partners, Accel Partners, Dag Ventures and … wait for it … Jeff Bezos’ personal investment company Bezos Expeditions

Walmart is now acting as a Silicon Valley start-up when it comes to ecommerce – it’s lean, it values technology talent and it has a vision and a strategy.

[Read more about how Walmart and Apple are implementing Omnichannel Retail]

3. Apple Inc.

Online Sales: $6,660,000,000
2011 Growth: 27.40%

apple logoAs I am writing this post Exxon surpassed Apple to become, once again, the largest company in the world. However, Apple is still valued at $413 billion and it is still the coolest thing in technology. The company started its online sales operations in in november 1997, an year after acquiring NeXT Computers and bringing back Steve Jobs.

The whole online store was based at that moment on NeXT’s WebObject’s technology. This allowed fast implementation (1 year was needed to implement the whole online store) and a great online experience. As Steve Jobs declared at the time, $12 million worth of sales were generated using the online store, in the first month.

One of the cornerstones of Apple’s development for both offline and online sales was the Apple Store – the physical, brick and mortar, beautifully designed, concept store. When the first Apple Store was opened in 2001, Jobs wanted an experience rather than a shopping center. The Macs were beautifully designed, they worked better than most PCs but were still compared in terms of specs to PCs, as most consumers were not considering computing an area were design, experience or feeling had anything to do with a purchase decision. That was what the company needed to change.

The Apple Store - the greatest showroom an online store can get.
The Apple Store – the greatest showroom an online store can get.

The Apple Store started as a Store-within-Store experience when Steve Jobs stopped retail contracts with most retailers, except CompUSA. In exchange for being the exclusive Apple Dealer, CompUSA agreed to offer Apple a 15% area of all stores, and the right to have its own sales-person on-site.

People would walk in, experience the Apple ecosystem and even if they didn’t buy right then they would still remember the brand and later purchase online.

The Apple Store was a move that greatly helped Apple sell online. It was the most beautiful showroom, before online retailers even thought about having offline stores to increase market share.

The online shopping experience changed when, following 2001’s launch of the iPod, Apple released the iTunes Store in 2003. 5 years later, the iTunes Store was already the largest music vendor in the US and in 2010 it was the largest music vendor in the world. In Q1 2011 Apple’s iTunes Store revenue alone was $1.4 billion.

Along came the iPhone and, just as the company previously revolutionized the music industry with the iPod, the iPhone changed mobile, software and well…basically anything we humans do.

Apple’s retail concept is not just a store, it’s an ecosystem. It’s growing fast and it’s got a solid lock-in on its customers. Right now Apple’s online sales can only go up.

2. Staples Inc.

Online Sales: $10,600,000,000
2011 Growth: 3.90%

Staple logoThe first company in this list to cross the $10 billion in online sales threshold is Staples, the largest office supply chain in the world. Staples has more than 2000 stores in 26 countries but it plans to slash its brick and mortar space by 15% and focus on online sales.

The first store was opened in 1986, when the company was funded by certain private equity firms, including Bain Capital, co-founded by Mitt Romney (yeah, that Mitt Romney) who stayed on board for the next 15 years to help with the company strategy.

Staples.com was launched in 1998 and had a steady growth ever since, unlike its offline operations. Although often overlooked as a key competitor in the online retail arena, Staples did beat Apple and Walmart in this top so we should give credit where credit is due.

It’s main online sales channels are Staples.com, StaplesAdvantage.com and Quill.com. The infrastructure is based on IBM hardware and software and the company is ready to heavily invest in developing its online operations. It even started its very own innovation hub called E-Commerce Innovation Center.

Ok, long story short – the early bird catches the worm. Staples may not be the coolest brand in this list, but it was on of the pioneers in this field and it’s making lots of money online and unlike OfficeMax, and Office Depot, its main competitors, it has the best chance to make a shift online when its stores will stop being profitable.

1. Amazon.com Inc.

Online Sales: $48,080,000,000
2011 Growth: 40.60%

amazon logoYes, I know it may come as a shock but Amazon is, indeed, the largest online retailer in the world. It leads the online retailers’ top by a very long margin and it will continue to do so for a very long time, if we are to look at its continuous growth, its innovative practices and  its aggressive expansion.

The company was founded in 1994 by Jeff Bezos and Amazon.com went online in 1995, way before any of the other companies in this list were. Amazon was one of the few companies to exit the 1997-2000 dot-com bubble still intact. It would take another year after that for the company to turn a profit – in 2001 Amazon had its first profitable quarter – $5 million in profit on revenues of over $1 billion. Not very much but it proved its model.

kindle dx
The Kindle DX

It got sued by Barnes & Noble and Walmart (you might recognize these companies as some of those most affected by Amazon’s growth), it acquired some great startups (such as Kiva, Zappos, IMDB.com) and in 2007 launched its revolutionary device, the Kindle.

The Kindle was so successful that it changed the way we think of books and overall media. Right now Amazon sells more ebooks than hardcover in the UK. It is the biggest Android app seller in the world and it has access to its customers purchasing intentions through Kindle’s usage stats.

Although there is so much to say about Amazon one thing is clear: it is the top online retailer and it is eating into the large offline retailers’ sales too. Soon enough it might take their place.

I hope you enjoyed this list. Keep in mind that this post is based on Internet Retailer’s top 500 online retailers and features companies in the US and Canada. Figures are based on 2011 sales provided by different sources, usually the companies themselves. I recommend having a look at the full top and, as I will also do, purchase the full guide.

Apple did not invent Planned Obsolescence. It just got great at it.

Apple ObsolescenceI just love this iPhone I bought three years ago”… said no one ever.

Any Apple user knows that there is no way to keep an iPhone or iPad for more than 2 or 3 years and still be happy about it. If you’ve ever bought an iPhone or iPad you know how it goes: you buy the new product, you fell in love with it (it works just great, it looks awesome and everybody wants to see or touch it) and before you know it someone at Apple unveils the new version.

The new version is never something revolutionary. It’s usually just  “innovative”.It does have some small, incremental upgrades, just enough to call it a “new” product, but there is no actual need to switch over, unless you are one of Apple’s executives. However, next thing you know you start loosing your signal, apps crash, and you’re not feeling so good about your once loved device. But nothing changed. It’s the same device, it has the same specs but all of a sudden – it’s not good enough.

So you go and buy the new one (it’s never cheap) and you feel this is the device you are going to pass on to your children. Buuut… Apple decides to launch another next year and it’s back to the Apple Store.

Well – there is a reason for this cycle to happen. The reason is profit. In order to keep the cash coming Apple, and any other large company for that matter, needs to keep its customers coming back to buy more.  There is no stopping the money-making machines. Profits need to keep coming, people need to keep buying. Otherwise we stumble upon recessions.

Actually, that’s how the term “Planned Obsolescence” got coined. Mr. Bernard London wrote “Ending the Depression through Planned Obsolescence” in 1932 as a method to stop the chaos resulted from overproduction and surpluses. He stated that the Government should impose a certain Planned Obsolescence on products, so customers would keep coming back and buy more, therefore restarting the economy.

The Phoebus Cartel

Although the theory was not the smartest and most popular thing written in that period it was one of the ideas floating in the mainstream. Such an idea was pretty good for a bunch of companies to form the Phoebus Cartel in 1924.

Some of the companies that formed the Phoebus Cartel you probably have heard of: Phillips, Tungsram, Osram, General Electric. What did “Team Light Bulb” stood for? You guessed it. Profits. The companies agreed, among others, to impose  an 1000 hrs lifetime threshold on all light bulbs sold. Those that allowed their light bulbs to run for more than 1000 hrs were fined by the corporation controlling the cartel.

You may recognize this as what we now call “Planned Obsolescence”. Yes, the concept has been incorporated 89 years ago.

Good thing  the Government stepped in and saved the world. Oh wait… it didn’t. The Cartel’s operations were only stopped when WWI started.

Planned Obsolescence makes its cross-industry debut in 1954…

… when industrial designer Brooks Stevens used the term to show that people want the “new thing”, whether it is a newly designed car, or the latest TV. He showed that companies can and should integrate, first and foremost, stylistic upgrades to their products in order to keep their clients coming back to the store and buying more.

You should note that planned obsolescence comes in many forms but the most popular and cost effective is style obsolescence. You can see this in the automotive industry (where companies redefine their stylistic approach every 3-5 years), the fashion industry (yearly cycles of stylistic obsolescence) or the IT industry where Apple seems to be the undisputed champion.

Apple is not the only company using planned obsolescence to sell more. It’s just the best at it.

the iphones
The differences are, of course, startling. Source: PC MAG

All companies that look forward to survival and profit need to have some kind of obsolescence built into their products. The alternative, in the present economic system, is the company’s demise.

Apple understood this early on when Steve Jobs came back to the company with a vision for the connected ecosystem. He thought of a network of devices that would serve the customer’s every day needs for information and connectivity.

With the Apple connected home all of the products work seamlessly with one another. Once the customer has bought the iPod, he will buy the iPhone, than the iPad, than the Macbook. And that is just the hardware. There is an army of developers that use the AppStore to offer the newest apps. iTunes brings the world’s library of music and movies closer. As a result, in time, the customer gets locked-in and has little or no option to move his data or purchase options to the competition.

This was the big innovation Apple brought to planned obsolescence. It usually works within monopolies or at least oligopolies. You need to have very little or no competition to make sure the customers don’t just switch sides when you force them to upgrade their products. Apple has managed to bypass this: it’s not a monopoly, it’s just a monopoly for it’s own customers.

One more thing: Can the world handle planned obsolescence?

There are many reasons this practice isn’t helping anyone in the long run. First off –  it leaves customers/people ever dissatisfied and unhappy. There is now settling for a certain product, and there is no lasting pride or meaning in acquiring so much (in time) useless objects.

Secondly – the environment can’t handle so much waste. Even though some countries have started regulating the disposal of old electronics and home appliances we are a long way from a real solution for the waste our consuming habits leave behind. We keep buying, losing interest and throwing away our old products. We are still decades away from product cycles that plan recycling and reusing as part of the product’s life cycle.

Last but not least we cannot afford to buy so much products. Planned obsolescence is a direct cause of consumer habits we cannot afford. Credit has left present and probably future generations in debt yet most companies still think they can thrive on this fake growth. But for how long?

Is Facebook’s Graph search meant to take on Google?

Four days ago Facebook unveiled its new Graph Search, currently available “in a very limited beta program for English (US) audiences”. The event didn’t go unnoticed for tech journalists, bloggers and investors but the market was not overly enthusiastic as the Facebook Search was expected to a. Have some kind of innovative or at least clear monetizing model and b. Take on Google.

Facebook Graph Search

While not much is known about the search business model, if there is any whatsoever, the markets did in fact took notice of Facebook’s bold move but were not really impressed. Facebook’s stock price actually dropped slightly as everybody was expecting something larger – such as an alternative to Google or maybe … say … the Facebook phone.

Following the launch, Google and Yelp’s stock prices also dropped as worries regarding Facebook’s new search could potentially mean a blow to both companies.

Facebook stocks evolution

So – is Facebook really going to be a competitor to Google?

The markets expected Facebook Search to be the Google killer but apparently Facebook is not headed that way. Even though Facebook was the most searched term in 2012 and roughly 1 in every 5 web pages viewed online are on Facebook, it doesn’t mean that it can or at least wants to take on the search giant.

Apparently there is no need to. With almost 20 percent of all traffic in the world and 1 billion users on its servers, Facebook does not want to compete on Google terms or turf. People have what they need inside Facebook and are willing to use it even more. They have their friends references regarding places, people, photos and others, all related to users’ social networks.

Now regarding those social networks: it seems that Facebook’s stand on privacy is close to “what privacy?” as results rely on information from friends, whether those friends want it to be found or not. This leads to the following issue:

How long will it take users to accept the fact that Facebook does not care about the concept of privacy?

Younger generations are used to living socially-open, as most of their data, their habits, their social networks are available freely online. They have no problem with using the Graph Search or letting Facebook browse to their personal info so friends can get better search results but what happens to the older generations?

Facebook is pretty much a monopoly when it comes to social networking and users have their data trapped inside. It’s pretty hard to leave the network as social bonds become stronger and stronger. Because of this, even though some cries for privacy will be heard, not much resistance will come in the way of the mighty Graph Search. But the company will not stop here as graph search seems to be more than just a feature. It’s a step closer towards users’ everyday lives and it will probably usher in the next big thing: the Facebook phone.

Is the Graph Search a step closer to the Facebook Phone?

Maybe the Facebook Phone will not even be a phone. Maybe it will be a tablet, or another kind of everyday usage device that we are not yet familiar with. The point is Facebook is moving closer to our everyday lives. Most of the features showcased in the Graph Search demo page have real day-to-day applications.

People need to have Facebook closer in their lives before the company can even start to think about a hardware foothold in its users existence. Before the iPhone there were the Macs, the evangelists, but most important – there was the iPod. The iPod was the foundation on which Apple built its hardware ecosystem on. The books were Amazon’s foothold in people’s lives when they launched the Kindle. Facebook too will need to build this kind of foundation before launching its device and the Graph Search is a really big step in that direction.

User data means power

The internet has made possible  what power structures have tried and, usually, failed to do throughout the history: knowing everything there is to know about their citizens. Now there is no need for anyone to ask us for information – we gladly give it away and we are doing this in larger and larger numbers.

Think about the first time you’ve connected to the internet: the sheer amount of information available was dazzling. You could travel the world in a few seconds without leaving your home. Everything other human being seemed closer than ever and things looked pretty safe as you were just one of the other millions of people connected to the internet. Anonymity instilled a sense of freedom that was not possible in the real life.

Years have passed, the internet improved, the number of internet connected users increased exponentially and some companies started wondering – who are this users and how can we find out more about them? Apparently – pretty much.

We had a look at how companies use large data to improve their marketing efforts. Facebook and Google are some of the biggest data-handlers in the world and by offering free web services such as social networking or search these companies gather hundred of millions of users on a daily basis. These users have certain interests, profiles, friend connections and are willing to give away all this information without much thought.

If, say, a Coca-Cola representative would approach us on the street and started asking us questions regarding personal data, interests in different areas,information about our friends we would be rather skeptical, wouldn’t we?

Actually that’s what basically happens every time we search something on Google, update our Facebook profile, read an article on the web or simply send an email. Even though some information is anonymized, even though there are laws that may interfere with privacy breaches, the truth is there are some companies that hold real time information on large masses, information that can be used either at a macro or micro scale. From individuals to countries such companies know a lot of things and became increasingly good at harnessing the power that lies in these bits of data.

Micro and macro implications

Micro implications

On a micro level individuals basically offer some of their most intimate information to companies that use it for marketing purposes. There is a saying stating that “if you are not sold anything, you are the product being sold”. That holds true to both companies mentioned above. There is no secret Facebook and Google make most of their revenues through advertising. To help increase advertising efficiency both companies need to know as many things as possible about the person viewing the ad.

Both companies thrive on information users offer, knowingly or not. Whether is the page you are viewing, information on your Facebook profile – you tell advertisers how to better sell their products.

Another implication of sharing so much data is that you become predictable. Even though we look at ourselves as unique, special individuals, the fact is we are not. We are creatures of habit and habits turn into patterns. When some important events in our lives happen our behavior is even more likely to become predictable. Target used customer data to find out when their buyers start dealing with pregnancy. Based on a series of products future mothers are more likely to purchase they managed to target those exact customers, sometimes even before their friends or family found out.

You might think that companies and other organizations can track you only if you choose to use your real identity. Actually no. There are several techniques developed to help deanonymize internet users. One of these techniques is based on stylometry, the analysis of writing style. Although information on this subject dates back a few centuries, the internet made possible the analysis of large chunks of data.

Be it your blog, your Facebook profile or movie reviews you posted online  the fact is you leave traces on the internet through your writing style. Even if you publish a text anonymously and make sure you are not traceable by classic means, stylometry can point towards you. Arvind Narayan, a computer scientist focused on “breaking data anonymization, and more broadly […] digital privacy, law and policy” explains here how this can happen, what are the necessary steps, what are technological requirements etc.

Macro implications

china flag
China is allegedly one of the leading cyber-warfare powers at the moment

Although micro implications are interesting, they are just the tip of the iceberg. With enough data anything is possible. And I mean everything. Think stock markets, military, health and epidemic research, economy, global intelligence. Basically all the power structures our civilization depends upon can find large data extremely interesting.

In 2010 China routed traffic intended to some very discrete US organizations through its servers for roughly 18 minutes. “Not too long”, one might think, but enough to cause a 300 page report for the US congress. If 18  minutes worth of internet traffic routing caused such a stir, imagine how much of an impact information passed through Facebook and Google have on the global political scene.

With enough data stock market crushes and bubbles could be predicted, social movements could be news before they even happen, just like military strikes or economic crises. One thing is for sure: there is great power in the data provided by users online.

Mobile, Social search, Photos and iOS integration makes Facebook Stocks Rise

After dropping more than 50% since the IPO, Facebook’s market cap restarted growth following Mark Zuckerberg’s on-stage interview at TechCrunch Disrupt. The company closed today with a 7.62% increase in its share price. Several factors could have lead to this fortunate turn of events but the keywords are: mobile, social search, photos and iOS integration.

facebook market capitalization growth
A surprising growth in Facebook market capitalization

Facebook’s focus on mobile

On stage, Mark Zuckerberg made it very clear that Facebook is focused on mobile growth. A very bold statement, probably targeted at investors that so far have had their fair share of drama, was “On mobile we are going to make a lot more money than on desktop”.

Facebook has more than 488 million mobile users and the numbers are growing fast, due to increase in smartphone and mobile internet adoption. Recently the company introduced new ways for advertisers to target mobile users through sponsored stories. The advertisers were not so fast to switch to mobile ads, however: although mobile revenues are estimated at about $72 million this year, the figures are below Twitter’s estimates.

This situation is sure to change as Facebook’s focus seems to follow the mobile trend.

Facebook search

Probably the most important thing Zuckerberg mentioned was the fact that Facebook now serves 1 billion search results per day, “without even trying”. To put that in perspective – that is 10 times the number of Bing searches and approximately 30% of Google’s searches. Imagine that – 30% of the world’s largest search engine.

With social input Facebook search can potentially deliver better results than Google. After all, Google is not really good at answering questions but rather locating information. Facebook users usually ask their friends for help on different issues and this type of behavior creates a huge pool of data Facebook can use to answer questions in a very efficient way. Even “without trying”, Facebook has recently started monetizing its searches through contextual ads.

Facebook and Instagram Photos

instagram facebook
Image source

Zuckerberg mentioned that there is no hidden agenda in Instagram’s acquisition. They want to help the app grow and so far they increased exposure by 1100%.

Photos seem to be a very important area in future Facebook development. Although it’s obvious that photos have a positive psychological effect on users and increase revenue through photo-page delivered ads there is probably something that we don’t know yet.

iOS integration

Facebook is deeply embedded in iOS 6

iOS is the most popular mobile operating system on the Internet, with an astonishing 65.27% of all mobile internet users. Today Apple announced several news, including the long awaited iPhone 5, the new iPod touch and some social features based on Facebook and Twitter social relationships.

Having been integrated in the world’s most popular OS means big exposure for Facebook. Even more – it means an increase in revenues.

As I mentioned a few days ago Apple and Facebook were planning and started rolling out a deeper iTunes integration. Although Facebook is just starting monetizing its mobile users, Apple is one of the best at this game. Using Facebook’s social features Apple can sell even more, bringing a new stream of revenues for both companies.

It seems as though George Soros knew what he was doing when he purchased Facebook stocks

(II) Ogilvy to Zuckerberg: How did Amazon, Apple, Facebook and Google change consumer research and targeting ?

In my last post I talked about the shift in consumer targeting that happened once the Internet went mainstream. Several highlights were the short history in consumer targeting, information regarding Amazon’s personalized recommendations and Apple’s usage of consumer data to increase music and app sales.

Now we’ll have a look at how two of the largest and fastest growing technology companies use consumer data and behavior to deliver ads. As Facebook and Google’s business model heavily relies on advertising they have to make sure ads are delivered efficiently to increase revenue.

However, trying to increase ads relevance and user experience can sometimes lead to unexpected (?) outcomes. Both companies had had their fair share of legal troubles regarding users privacy. For example last year Facebook user tracking practices lead to a request by US congressmen for the Federal Trade Commission to investigate the company. Apparently Facebook would track users web traffic even after they logged out. By linking browsing history, location and time of visit  to account information (list of friends, preferences, browser) the company could potentially extend its user profiling to some very intimate data. Apparently the issue was corrected and now Facebook stopped linking browsing data to user profiles. Even so, the anonymized data can provide the company with some very good insights.

What are Google and Facebook’s revenues?

As stated above both companies rely heavily on advertising revenue. 96% of Google’s 2011 $37.9 billion revenue came from advertising. Industries that pumped most money in Google’s Adwords program were Finance and Insurance ($4 billion), Retail ($2.8 billion), Travel and Tourism ($2.4 billion) – source.

Meanwhile Facebook reported “only” $3.1 billion in advertising revenues last year. Even though the numbers are visibly lower than Google’s, Facebook advertising revenue increased 69% and topped Yahoo in 2011.

Just to give you a perspective on how big this figures are Publicis, the largest advertising group, a 86 year old company, operating in 104 countries reported a $7.7 billion revenue in 2011.

Having established that online targeting leads to generous revenues, let’s have a look at how Facebook and Google manage to efficiently target consumers using technology:

How does Facebook target users?

facebook logoFacebook increase in popularity coined the term “social media”. This term describes web and mobile platforms where organizations or individuals communicate through different types of media (text, image, video etc.). As more and more users started using Facebook the available content increased, social links improved as users added more and more friends.

Facebook recognized the opportunity in consumer targeting using social preferences (Ex. “Your friend likes X Brand. You should too.”). Interestingly Facebook managed to give user profiles a real – life feeling by encouraging people to bring their friends along. Of course few people could recognize nicknames such as “MickeyMouse1982” so users started adding their real names, than their birthday, location etc.

Soon enough Facebook had a few hundred million demographic profiles at hand. These profiles were interconnected so influence groups could easily be determined. In a genius move Facebook introduced the “Like” button and later “Share”.

By using the “Like” button users would essentially hand over to Facebook their personal preferences.

As publishers saw that articles posted on Facebook were more likely to become viral and increase traffic they adopted the Like/Share widgets and later the Facebook Connect signup system. As these widgets could track user behavior by transferring traffic data back to Facebook the social network now knew what users were interested outside the platform.

Combining this data Facebook launched and improved in time their Facebook Ads platform. With more than 20% of all web traffic plus data on web traffic outside its social network, the company could potentially target ad delivery better than most other media companies. Let’s review what kind of data Facebook has at its disposal to target users:

  • consumer demographics: users enter their demographic information during signup or later as they use the social network
  • social networks: Facebook knows who is a friend of who, who is more likely to have his or her posts liked, shared or commented on. Basically it knows who is most likely to influence their peers actions with a granularity almost impossibly to achieve by others
  • consumer preferences: every time a user clicks a like or share button, comments, posts a status, photo or video it basically signals Facebook on some of his or her preferences regarding a wide array of things (music, products, news) that could later be used to show relevant ads.
  • web traffic: by tracking user behavior through like, share or social widgets Facebook registers data that even anonymized can show insights on a scale that no other company can

These are the most important factors in Facebook efficient ad targeting. Weather advertisers choose to use classic ads, sponsored stories or promote several posts the company takes into account this data to maximize exposure and engagement.

How do Google ads become “contextual”?

google logoProbably the most disruptive technology company in the past two decades, Google relies on user data, behavior and semantics to deliver the contextually targeted ads.

To deliver ads, Google needs data. Where does it get it from?

Where does Google get data from?

  • indexed and ranked web pages: even though the number is not really known as Google is secretive about its data centers, it’s estimated that indexed data is stored in more than 30 data-centers. These data centers hold 35 to 50 billion pages at any given time. They are ranked according to an algorithm initially designed by Larry Page and Sergey Brin and improved in time.
  • web page analytics: Google Analytics is used by more than 10 million web sites. As Google hosts data regarding traffic and user behavior on these sites it can predict user behavior and ads most relevant to potential consumers.
  • email information: even though information is anonymized Google makes good use of mails hosted on it Gmail platform. With more than 350 million users in Jan 2012 the data flow through Google’s emailing platform is astonishing.
  • searches: Google responds to almost 3 billion searches every day. By analyzing searches and user paths Google can determine what are the most popular search results and how can this information be used to optimize ad targeting and delivery.
  • Google+ is the company’s response to Facebook’s rise in popularity. It already has more than 170 million registered users (mostly active). Having answered the need for information in social networking targeting Google further improved its advertising targeting capabilities.
  • Android is Google’s mobile operating system. Though buggy at start, Android is now on its way to world domination in terms of mobile operating system.

Basically Google knows a lot about a lot of potential consumers and uses these data to increase efficiency in ad targeting.

Having a look at how the likes of Amazon, Apple, Facebook and Google use research and targeting , we can surely say that conventional (old ?) knowledge on the matter is becoming increasingly obsolete. As technology replaces human input research and targeting becomes real-time.

Unfortunately some privacy issues arise when people become “users” or “consumers”. On this matter – soon.

From Ogilvy to Zuckerberg: How did Amazon, Apple, Facebook and Google change consumer research and targeting ?

Conventional (TV, print, radio) advertising often relies on research and targeting methods such as focus groups or demographic targeting to increase brand awareness and sales. These methods seem to be more and more outdated as targeting technology is already delivering better results.

A (very) short history of advertising research and targeting

In the past, as media was unidirectional (broadcaster to consumer), there were few ways retailers could efficiently target potential consumers. Advertisers would use consumer profiles and split purchasing options through demographic indicators (age group, location, education, sex etc.). By using statistic results they could outline marketing opportunities for certain demographic groups (Ex. “Women between 25 to 35 years, urban, having higher education are more likely to buy Product X”).

Having (theoretically) discovered a potential consumer profile they would then buy media in newspapers, radios or TV stations that would best appeal to that certain demographic group.

David Ogilvy
David Ogilvy

Of course this is just a skeletal description of the whole targeting process but it explains the process pretty well. Many companies have benefited greatly from this targeting and advertising system. Most of the brands we now know and buy were built this way. Even now, decades after the likes of David Ogilvy were setting up the rules on research-based advertising, the system is virtually unchanged.

“I notice increasing reluctance on the part of marketing executives to use judgment; they are coming to rely too much on research, and they use it as a drunkard uses a lamp post for support, rather than for illumination.” – David Ogilvy

How did the Internet change research and targeting?

Few could have predicted the impact Internet was to have on commerce and economy. Even less would have guessed how this initially “exotic” media would impact research and targeting.

20 years ago there was no marketing concept that could explain AdWords targeting and not be considered science-fiction.

Internet targeting and advertising renders most of conventional knowledge on research obsolete as technology has achieved what was once impossible. 30% of all human population is now in reach of all advertisers and they can now target more than just demographics.

Behavioral marketing is a concept that could not be possibly be achieved with conventional media. Using consumer behavior rather than demographics advertisers can target real time preferences and individuals rather than demographic groups. Say a user is known to have previously visited a car dealership website. He then browses websites in search of reviews on different car models. The car dealership could potentially target this exact user and serve him the most informative ads. Advertising ROI is sure to increase this way.

Some companies have become increasingly good at Internet research and targeting. One of them is now the most valuable company in the world in terms of market capitalization. Let’s have a look at how Apple, Amazon, Facebook and Google use large data to target and monetize consumer traffic.

How did Amazon, Apple, Facebook and Google changed consumer targeting ?

Amazon personalized recommendations

amazon logoAmazon is well known for its personalized products recommendations. How can it do this? Short answer: large data on consumer purchases and mathematics. Longer answer: Amazon holds a patent on its product recommendations which you can have a look at here (issued in sept. 2006). Although rather technical it focuses on certain key elements:

  • user profiling: Amazon holds valuable data on user demographics and previous purchases. Using this data it can map users in specific consumer groups. User profiling combines shopping cart contents, item ratings and recent purchases as purchase intents seem to change in time.
  • similar products information: say you bought three SF books. Similar products would be other books in that category. Some of these books would be more popular in terms of item ratings, reviews, views and purchases.
  • item affinity is the probability of some products to be purchased together. Say you are buying a Kindle on Amazon. You are very likely to buy a cover or case to protect your device. That means these products have a high affinity index
  • driver items are those products that are most likely to drive traffic to store. Again – the Kindle, Amazon’s best seller is not only a driver item but also a platform that insures further product purchases.
  • user path: the consumer will follow a certain path until it ads a product to the shopping cart or confirms a purchase. These paths are very important as they can be used to “guide” consumers to products they are most likely to purchase.

Using these information (and probably more) Amazon can first map users in consumer groups (1), extract popular, affinity and driver products (2), compile most profitable user paths based on previous history and other users actions (3) and than recommend the items most likely to increase basket size.

Recently Amazon announced the launch of its Kindle Fire product. This product is built on a Android platform and uses a proprietary web browser called Silk. The browser optimizes web traffic by routing it through Amazon’s servers. As Amazon already holds information on user profiles (users will have to login to synchronize their book collection) and now data on web traffic it can further improve its recommendations.

Apple Genius recommendations

apple logoAlthough Apple does not explicitly state it monitors iOS user actions it doesn’t deny it either. If it does, however, it might access a huge pool on users data such as web traffic, mobile purchases, locations, call history, social networking information (through access to contacts information, call history, SMS and iMessage history etc.). Basically everything there is to know on its customers profile.

For now the most visible way Apple uses data to increase sales is iTunes Genius, the music and video recommendation system. iTunes Genius uses purchase history and iPod activity to recommend potentially interesting songs, albums or videos.

Although iTunes Genius probably uses a system similar to Amazon’s it is not yet known to be as accurate. The performance issues are probably connected to the number in customers and items on sale. Amazon has a wider products inventory and a larger pool of potential customers. This leads to a larger database and increased accuracy.

Technology based companies have changed the way we think of consumer targeting and advertising. Innovation lead to profits and behavioral targeting will probably develop in the future. Tomorrow we’ll have a look at how two of the largest advertising – revenue based companies, Facebook and Google, use large data to improve consumer targeting. Stay tuned.

Internet Economy to reach $4.2 trillion by 2016. 5 reasons this figure is an understatement.

In a report made public earlier this year Boston Consulting Group stated that the Internet Economy in G20 countries is expected to reach $4.2 trillion by 2016. The company also expects the number of internet connected users to reach 3 billion (just for the record – there are now approximately 2.2 billion).

At first sight this might seem like a huge figure but I believe that the company understated the importance and potential growth of the internet economy. Yes, I believe $4.2 trillion is an understatement. Why?

1. $4.2 trillion means less than 7 times Apple’s market cap. Yes, Apple might be the largest company ever, in terms of market capitalization but it’s just one company and it means the combined brain and sales power of less than 50.000 employees.

2. The internet economy is still in its infancy. We have just began discovering viable business models that work on the Internet. Companies such as Apple, Google or Amazon innovated and improved on existing business models but are yet to reach their full potential. Amazon for example, has launched its first Kindle device 5 years ago. After half a decade its customers are buying more ebooks than printed editions. This kind of growth could not be expected or planed.

3. We do not have the economic models to understand Internet’s impact. Most of our economy is based on theories that were thought of and published in a time the concept of Internet was closer to science-fiction than academic research. More recent economic theories such as the behavioral economics approach are closer to reality and better at predicting the evolution of the internet economy.

4. The report understates the economic importance and impact of mobile internet. Fixed lines have helped us reach a 32% internet penetration. Mobile connections exceed in many developed and developing countries 100%. Smartphones and internet connected devices will replace older mobile devices. In less than 10 years I expect Internet penetration to reach past 70%. With such a high adoption rate Internet Economy is bound to exceed greatly the $4.2 trillion figure.

5. The figures are probably based on current growth and vastly underestimate innovation. Innovation is the key factor in understanding internet economy growth. The large ecosystem comprised of entrepreneurs, investment funds and talented engineers has taken the world by storm for the past 20 years. Ever since the dot com bubble this ecosystem has had its fair share of skepticism that is still deeply embedded in the economic world. Year after year pundits are proven wrong by this ever increasing sector. Innovation can’t be planned or measured very well for now but it is there and companies that foster innovation manage to increase their market share.

The internet economy has already surpassed in some of the G20 countries some very heavy economy sectors such as energy, agriculture or automotive. This trend will continue. By 2016 industries that have not been surpassed by the Internet will be the exception, not the rule.

Amazon sells more ebooks than paperback and hardcover books. How come?

Amazon is already selling more ebooks then we might expect. For every 100 paperback and hardcover books, Amazon delivers 114 ebooks to its readers in UK. The fact is astonishing as this is sure to trigger the same long-term effect as iTunes had: it will change the publishing industry just like iTunes changed the music industry.

kindle dx
The Kindle DX

Change happened gradually. Legend has it Jeff Bezos saw the eInk readers and understood that such a device might be, in the wrong hands, Amazon’s arch-nemesis. In 2004 he order 30 eInk readers and asked Steve Kessel to setup a research facility for a future switch to ebook publishing.

In 2007 the team at Lab 126, Amazon’s subsidiary in charge of Kindle’s R&D, launched the first product. It was a big hit. Users could choose from 88 000 books, which was way above any other competitor in the ebook reader market.

The elements involved in Kindle’s success are invisible when we look at the product. The sleek design, the beautiful typography or the eInk technology are not enough to understand the ecosystem that lead to Amazon’s results. Let’s have a look at some key factors involved in Kindle’s adoption and evolution:

1. The existing clients: When Amazon launched the Kindle it already had more than 65 million customers. Even at a low adoption rate Amazon would have had the greatest chance to succeed selling ebooks.

2. The large selection of electronic books: The 88 000 books available at launch were more than any of the competition had to offer its readers. 5 years after the first generation Kindle Amazon has extended its ebook offering largely.

3. Impulse buying: In 1999 the US Trademark Office issued a patent to Amazon.com regarding 1 Click buying. By using previously entered credit card information the user can skip the shopping cart hassle and purchase any item with the click of a button. This patent was never awarded in Europe but Amazon created a impulse-buying consumer behavior that lead, in time, to the success Kindle is right now. By using this technology Amazon makes sure that consumers don’t think too much about purchasing. They just do it. Psychologically this resolves the so called “buyer’s remorse”.

4. Instant delivery through Wi-Fi and the Whispernet 3G network: one of the greatest things about the Kindle is the fact that you don’t have to wait until it’s shipped. The books are being delivered anywhere in the world instantly. The Whispernet network is nothing short of genius and its benefits in customer satisfaction greatly exceed the costs.

5. Syncing: the current lifestyle of many of Amazon’s customers doesn’t allow them to read to peacefully enjoy reading a book for more than an hour at a time. Our attention span has greatly decreased as modern jobs leave little time for personal development. Kindle is available as a standalone application on the PC, Mac, iPhone, iPad etc. Basically we can read our book wherever we are, whenever we can. Using internet connection the books are synced cross device and readers can enjoy books whenever they can.

6. Evolution of indie publishing: The Kindle allowed many indie authors to self publish their books. As these authors entered a market they couldn’t previously tap into prices have dropped and the book selection has increased. It’s not yet clear whether buyers are reading or just collecting the books. However – they pay for them and that means a shift in spending that will lead to further changes in book publishing.

The 6 facts above are the things we don’t usually see when looking at the Kindle but they are very important. One cannot try to understand Kindle’s success without understanding the ecosystem Amazon has built to support ebook sales.

In 2011 Amazon launched its Android powered Kindle Fire. This year the company is generating 89% of iTunes App Store revenues selling Android Apps. Read more on the subject here.

5 consequences of the Apple vs. Samsung trial

In a historic decision the San Jose, California courtroom ruled that Samsung did infringe in some of Apple’s patents. The court ordered Samsung to pay over $1 billion in damages for patent infringement.

Steve Jobs wanted to go thermonuclear on Android. Image source: SiliconAngle.com
The court ruled that Samsung did, at times willfully, infringe on some of Apple’s iOS patents: the bounce back on lists, pinch to zoom etc. As a post-trial response Samsung announced it will fight this decision and that the court ruling affects the consumers.

In a historic decision the San Jose, California courtroom ruled that Samsung did infringe in some of Apple’s patents. The court ordered Samsung to pay over $1 billion in damages for patent infringement.

steve jobs thermonuclear android
Steve Jobs wanted to go thermonuclear on Android. Image source: SiliconAngle.com

The court ruled that Samsung did, at times willfully, infringe on some of Apple’s iOS patents: the bounce back on lists, pinch to zoom etc. As a post-trial response Samsung announced it will fight this decision and that the court ruling affects the consumers.

While it’s pretty obvious that Samsung borrowed, to say the least, some of Apple’s hardware and software design and interface elements the decision is clearly going to have negative consequences on the mobile phones and mobile applications market.

The court ruling changes everything. Again.

1. Apple will continue its growth, having secured its proprietary hardware and software design – Apple is already the biggest company ever, in terms of market valuation. After Steve Jobs’ demise many wondered if the company will continue to grow. It did. This year saw the rise of incumbent Android based mobile devices which were growing at a faster rate than iOS based ones (Android is the dominant mobile OS in the US) and threatening Apple’s hegemony. Samsung was the biggest challenger in terms of hardware development. Having taken a massive shot at the opposition Apple can continue focusing on innovation and expanding its market share.

2. The mobile market will suffer from this decision. Samsung is one of the biggest competitors to Apple. As the smartphone market is ever increasing Apple just made a very large step to a de facto monopoly on this market. While they couldn’t do that by economic means, they showed they can do it through legal arguments. The decision to punish Samsung on adopting the interaction methods Apple “invented” is like ruling that only one PC manufacturer can ship PC’s that use keyboards and mice for user-to-computer interaction.

3. The target is not Samsung. It’s Android. Apple doesn’t care that much about the fact that Samsung has copied its products. It was just the easiest target. Otherwise they could have just sued every other smartphone manufacturer – it’s easy to see that the iPhone shifted the entire mobile industry to a different direction. One that Apple holds patents on. What Apple is really worried though is the Android OS. It’s popular, reliable and it is growing way faster than the iOS. Of course Apple still rules the market in terms of revenue but not for long. Amazon is already generating 89% of Apple’s App Store Revenue through its own Android store. This leads us to…

4. Everyone sees the jury decision as Microsoft’s chance to shine. But it’s Amazon that will benefit most. Microsoft can try and try to reinvent themselves. They won’t. It’s a corporate dinosaur that lacks innovation and courage. You know who  does have those things, plus a ton of cash? Amazon. Amazon has had an amazing trajectory the past 5 years having reinvented reading with Kindle and now challenging Apple’s reign in the mobile app area. They are closing in to Apple in terms of mobile – generated transactions. With Samsung out of the picture they will be able to lead the Android revolution.

5. Apple’s actions might backfire. Remember the days when Microsoft ruled the IT world with a iron fist? The were used to buy smaller competitors, drive them out of business or sue them out of the game. It didn’t work so well after all. Right now people are buying Apple products because they love the brand. If the brand shows its money hungry face, the feelings towards the brand might be affected and turn into decreased revenues and company valuation. After all – the market is all about perception.

In my opinion the Apple – Samsung dispute should be resolved by the markets and the consumers, not in a courtroom. It is a dangerous precedent that harms an young and fast-growing industry. Patents or no patents there are millions of Samsung users that will suffer from this decision.