(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.

Social gaming architecture

“Your friend sent you a request” says my Facebook notification. That must mean one of my Facebook friends is playing one of Zynga’s or Konami’s social games. You know the type – manage a farm, a city or something close to that. You’ve finished building a windmill – what an achievement –  share it with your friends. Need your crops faster – oh, no – share it with your friends.

Zynga’s top brand: Farmville

These type of games, however annoying are highly addictive (at least for a moderately short period of time), highly viral and for a while they seemed to be the grim future of the gaming industry. After a fast growth period Zynga reported a loss of $400 million dollars in 2011. Not because of how bad its games were doing (Zynga owns 2011 top 5 most played games on Facebook and its revenues were $1.14 billion dollars). No, they payed “stock-based compensation expense for restricted stock units issued to employees”.  $510 million dollars in stock-based compensation it did not had to pay until it went public.

However bleak Zynga’s future might look they still own some of the most popular social games and they started to adapt to the rising trend of mobile-based gaming (tablets and smartphones).

Its main competitor, Konami, is not doing too bad, either. Actually Konami’s social gaming division reported a 77% increase in revenue. Given the sharp rise in Zynga’s and Konami’s revenue we can see clearly that social gaming is a great investment . What makes it so?

Social gaming is highly addictive

Social gaming makes use of some incentive design based on social activity and achievements. Social gaming companies use human psychology to create levels of addiction close to gambling and these games usually have slow learning curve, use many motivators to commit users to revisit the game (plant a crop, come back after 10 hours to use it) and use instant gratification to convince users to purchase upgrades.

Behavior economics in social gaming

Interestingly, most of behavior economics principles can be found in these type of games: from peer pressure to “doing the right thing” (don’t let your crops die) and clearly seeing the outcome of one’s action – all add up to a picture where behavior economics seem to be the baseline for virtual economic architecture in games such as Farmville.

The virtual life in social games

Collectible real-life World of Warcraft coins

Reality perception is altered when such games are played and playing the game seems to be more of a daily task then entertainment. To understand the high interest users have in this type of gaming we must remember that in our day to day life few things seem to add up like the virtual life in social games does. Click a button – start building a farm. Click another – plant crops. Come back after a day and you can cash in your hard earned coins that you can reinvest. It is a little harder to do that in real life. Sometimes – no matter how hard we try achievements don’t seem to pup-up.

We expect an end to our actions. If possible a fortunate one. We have been planting crops and harvesting them for thousands of years. Our bed time stories always have an end. The movies we watch program us to expect an introduction, action and the grand finally. Our lives don’t usually have that and this is one of the causes of modern stress and depression. Having a secondary life where everything is simpler and more colorful is a reward in itself.

The architecture of social gaming

Most social games have a pretty simple story that gets you hooked. The first form of profitable social games were the MMORPGs (Massive Multiplayer Online Role Playing Games) where you played a character and took possession of his actions. Other players would join in and you would search for coins, artifacts and battle different monsters or other players.

What are the lowest common denominators of most successful social games?

1. The story – as we are used to stories from infancy we best deal with adopting a new concept if we receive it in a story. Weather you are living in a future where aliens are threatening to take over the universe, a village where your survival depends on how well you manage your farm or a fantasy world where elves and trolls are trying to get you – you need a story. Without a story no game-addiction can develop, there is no understanding of one’s actions and the game flops.

2. The setting – the environment is really important as that is the context for the players actions. If you are in a farm you don’t usually battle star ships. There is no need for extra mana to cast a spell and there are, usually, no monsters you have to slay.

3. The character – people play games to foster their imagination and to escape the usual reality. That’s the same reason we watch movies – we need alternate realities where we can embody some other character.

4. The economy – whether players are searching for extra stamina bottles, artifacts, coins or other incentives they do that because they understand the need for an alternate economy. Economics are so well embedded in us that social games that have no economic notion can never become mainstream.

5. The limitations – social games have to have limitations. Without limitations there are no achievements. Without achievements there is no psychological  gratification. No limits – no endorphin.

6. The incentives – what makes users tick? Incentives. Search for an artifact and you can defend your castle. Develop more farms and you can buy more land. Upgrade your ship and you can win the battle you previously lost. Incentives makes people act. Just as the real world economics incentives are the carrot that works better than the stick.

7. The social features – imagine playing tag by yourself. It isn’t too fun, is it? We are deeply social animals and everything we do is based on how other people react to our actions. Social gaming evolved so fast that it makes it so easy for users to attract peers and develop common interests.

What social gaming lacks right now?

Most of what we now call social games have developed strong social ties, a great system of incentives, some kind of limitations, some kind of game economics but they lack the story and characters. It’s not all about the graphics. The user has to understand the back story and understand who is he in the game. Just like our real lives the most important things about how we relate to the world are the things that shaped us, who we are and who will we become.

Zynga’s social games lack the story and the characters which is not much of a problem right now but people will get bored with the shiny incentives and peer pressure. For a long term user retention social games need to develop personas and epic stories.

Thomas Metzinger, a German philosopher, stated in “The Ego Tunnel” that we understand reality through a scaled down replica of the reality surrounding us. He based his research on neurological research, human psychology studies and artificial intelligence tests. Why is that important for social gaming? If users are not fully immersed in the gaming reality – they can easily abandon games. The game world is not really a personal perception of reality. Social games are shifting the perception of what is real and what is not but only for a limited time.

In the future I expect social games to develop the social gaming worlds to an alternate reality and developing characters. It’s happening right now with World of Warcraft. There are 10.2 million paying subscribers, fully immersed in the story and characters Blizzard created.

Bonus takeaway

In 2010 we wrote a study on Facebook Gaming. Most of the assumptions and predictions turned out to be right. Here is Gaming on Facebook .

Part two of this article will come soon and will focus on the economics of social gaming.

 

How is Facebook changing the Internet Economy?

By now you have probably heard of this little thingie called Facebook. You have also heard it has a bunch of users and these users are spending a lot of time on the platform sharing thoughts, news, photos, playing games or interacting with each other.

The Influence of Facebook on the Internet Economy

Right now Facebook accounts for roughly 30% of all internet users and is estimated that 20% of all pageviews on the Internet are on Facebook.

Facebook is big. It is so big that Internet World Stats added a special Facebook usage indicator to each country. As you can see there is no Google usage, no Yahoo usage, no Twitter usage indicator but there is a Facebook usage indicator. For good reasons too …

Using Facebook to increase online sales

In just 8 years from the 2004 launch, Facebook is expected to reach 1 billion users in 2012. That number is more than impressive. It is fastest adoption of any communication related technology.

Facebook related sales are a huge part of what lures giants such as Amazon, Apple, Ebay on the platform. From my experience Facebook seems to be the most profitable refferal for small and mid-size ecommerce companies and accounts for a large part of sales generated by larger online retailers.

While Facebook stores may not yet be the best choice (JC Penney, Gap and Nordstrom have opened and than closed their Facebook stores) there is a clear opportunity to be harnessed with Facebook related ecommerce.

Facebook creates jobs, has a  7.3 Billion Euro economic impact on Europe

A recent study by Deloitte states that Facebook accounts for a 7.3bn Euro economic impact and has so far, through the creation of Facebook pages and advertising , created more than 110.000 jobs in the EU.

Just like Europe many other regions benefit from the impact Facebook has had in the recent years. In the EU the country with the heaviest Internet Economy, the UK, has also the largest Facebook user base. Although merely a correlation and not a cause for the heavy impact the internet has on the UK economy it is easy to see that Facebook usage increases internet economy impact and many small and mid-sized companies can benefit from it.

Where is Facebook headed?

With such extraordinary growth and impact on our lives, both socially and economically, Facebook is sure to develop even more. Facebook is more than an website or application. It is a communication framework, a market that has already changed the life of its users. It will continue to do so. It will reach beyond extending the Internet.

I expect Facebook to cycle through some inherent changes but in the end it will probably be the biggest internet – based business in the world.

UK – the heaviest Internet Economy in the world

Internet has changed many aspects of our lives and will continue to do so. As people shift their attention more and more toward the internet so does the economy.

UK leads the way towards this new economy with a £82bn ($128 billion) internet economy. About 16% of this ecosystem is accounted for by mobile connections. The overall traffic is expected to increase each year between 2010 and 2015 by 37%. What does that mean? Having an ever increasing interest for mobile connections and ecommerce we might see three trends in the future:

  1. Mobile networks will need better infrastructure to handle the growing traffic.
  2. Mobile internet will increase in popularity which leads us to…
  3. Mobile commerce will set new challenges to retailers as consumers get more informed, faster deliveries and better deals

Data regarding these numbers has been put together on a study commissioned by Vodafone UK to ATKerney. You can find the study here.

It’s interesting to see that the internet economy reacts to people needs and wants as is stated in the graph bellow:

 

As you can see the internet is expected to be the most commonly used media in Europe by 2013, with 50% of all media consumption.

The other media (radio, print, TV) is expected to continue to decrease in the following years.

With smartphone usage doubled between 2008 and 2010 it is expected that smartphone terminals will be a major player in the internet economy ecosystem. Data is already used more often than voice. Mobile operators will adjust their market accordingly and that will increase the internet consumption even more.

Online retail (both web and mobile) accounts for roughly £45bn ($70bn) – approximately 6% of GDP, leading the UK to the 1st place in G20 countries as internet economy share of GDP.