Thursday, 30 December 2010

Making Money Advertising

For years, the conventional wisdom in Silicon Valley was that social networks were expensive to run, and didn’t make much money. So as Facebook grew by hundreds of millions of users over the past few years, many people wondered if it was in financial trouble.

Revenue, however, appears to have doubled every year since 2007. And at this point it appears to be increasing even more sharply.

Based on what we and others have heard, we’ve tracked Facebook making $150 million in 2007, slightly less than $300 million in 2008, and somewhere up to $800 million in 2009. A number of reports have suggested that it will make $2 billion or more this year, and we have also heard the same estimates in recent months — up significantly from the $1.1 billion number that the company loosely confirmed earlier this year.

How? Through growth in brand and performance advertising — payoff from years of investment — with revenue from its Credits virtual currency only starting to kick in.

But, aside from bits of information provided by sources close to Facebook, there is very little information available about how the latest revenue numbers actually break down. So here’s a closer look at what we think is going on.

Some high-level points, before we get started. Facebook’s user base has boomed from around 375 million at the beginning of the year to somewhere around 575 million today, with growth happening across the world, in all types of advertising markets (see our Inside Facebook Gold report for more details on Facebook’s worldwide traffic). Engagement is also massive: Facebook says that more than 50% of users visit the site every day.

Facebook’s product development has focused on continuing to increase engagement and gathering more user data — factors that help it target advertising more accurately to more people more often. And although we’re focusing on revenue here, we should also note that Facebook has made significant hardware and software investments to reduce infrastructure costs, helping it to become profitable as of late 2009.

Performance advertising

Zynga and other social gaming companies began utilizing Facebook’s self-serve advertising system in order to reach more users over the course of 2008 and 2009. Along with a smattering of online performance marketers, and a few early adopter small businesses and major brands, the developers provided significant boosts to Facebook revenue in past years.

That trend has continued, with local advertisers, social game developers and group buying sites like Groupon reportedly making massive investments. Advertisers have reported prices steadily rising as more of them figure out how to achieve their desired returns on investment. As of this past fall, the average cost-per click in Facebook’s largest market, the United States, is around one dollar. For developers interested in learning more, we’ll be examining how advertising is working for Facebook and developers at our Inside Social Apps conference in late January.

Facebook has been making a significant new effort to help performance advertisers spend more money. It introduced an advertising API last year that allows third-party service providers to place thousands of automated, highly targeted ads on behalf of clients. While that program has rolled out slowly, big search marketing businesses like Omniture have moved in to offer services to clients, and a dynamic ecosystem of startups are competing for clients as well.

Facebook also ended most parts of its original advertising deal with Microsoft, where that company ran banner ads on the site and split the revenue — the relationship is now more product-focused, on things like social features for the Bing search engine.

In addition to more users, more engagement, more advertisers, and the new options available through the API, that switch helped make even more inventory available to sell against.

Brand Advertising

Facebook has been trying to pitch Madison Avenue on the benefits of its advertising services for years, and all those efforts appear to be paying off now. Most major brands at least have a Facebook Page today, and dozens have created more sophisticated applications, Facebook integrations on other sites, and other campaigns designed to engage with users.

While Pages are free, Facebook upsells owners into its performance and brand advertising services. The home page ads are only available to companies that spend $50,000 or more, and include a variety of engagement-focused options, such as the ability to Like a Page or RSVP to an Event with a single click.

The company has also aggressively stepped up its sales efforts to large brands, building out its staff in New York City and many other offices around the world, and hiring a series of veteran salespeople away from other technology and media companies.

While there’s little information available about the amount of revenue now coming from large advertisers, anecdotal evidence suggests it is booming. For example, a number of Page management companies, like Buddy Media, are saying that they’re seeing significant new interest.

Credits

While still in its early stages, Credits will likely form another key revenue driver for Facebook in the future. This past year, the company made it clear to developers that Credits would be the only payment option for virtual goods in canvas applications. While many companies have not fully integrated Credits yet, expect them to in 2011. Also look for Facebook to expand Credits to the web and mobile devices — something that many have speculated about, but has not yet happened. If Credits proves to be a big success in 2011, we expect Facebook to quickly expand it beyond the home site.

One of the movies which immediately caught my eye when looking at the line-up for the 2011 Sundance Film Festival is Morgan Spurlock‘s new documentary The Greatest Movie Ever Sold. Spurlock shot to fame at the 2004 festival with his feature doc Super Size Me, and has since produced two seasons of the underrated reality cable series 30 Days. His feature follow-up Where in the World Is Osama Bin Laden? was met with mixed response. The Greatest Movie Ever Sold is his third theatrical feature film (not counting the segment he directed for the Freakanomics movie).

The initial announcement described the movie as “A documentary about branding, advertising and product placement is financed and made possible by branding, advertising and product placement.” Sounds like an interesting, if not gimmicky, concept. Hit the jump to see the first image from the film.

Sundance’s longer description of the film follows:

Acclaimed filmmaker and master provocateur Morgan Spurlock (Super Size Me) returns to the Sundance Film Festival with tongue-in-cheek perfection as he examines the world of product placement, marketing, and advertising by making a film financed entirely by product placement, marketing, and advertising. We live in an age where it’s tough even to walk down the street without someone trying to sell you something. It’s at the point where practically the entire American experience is brought to us by some corporation. Utilizing cutting-edge tools of comic exploration and total self-exploitation, Spurlock dissects the world of advertising and marketing by using his personal integrity as currency to sell out to the highest bidder. Scathingly funny, subversive, and deceptively smart, The Greatest Movie Ever Sold shines the definitive light on our branded future as Spurlock attempts to create the “Iron Man of documentaries,” the first ever “docbuster”! He may very well have succeeded.

Spurlock says that he has “funded this entire film with money from some pretty straight-laced companies, and the end result will surely make you laugh all the way to therapy.” The plan is to release the movie in Spring of 2011.

via: Gordon and the Whale

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Tuesday, 28 December 2010

Start Making Money

By Dian L. Chu, EconForecast

China has been ranked as the top growing country among the G20 since 2001 and is expected to retain that title for at least another five years (See Growth Chart). However, the news coming out of China for the past three months has not been good. It is looking more and more that it is not a question of if China is a bubble and going to burst, but when.

The country has major infrastructure issues, troubling population dynamics, poorly aligned employment outcomes, inflation problems, a real estate bubble, an opaque and potentially insolvent banking system (had mark-to-market accounting been applied), geo-political problems with North Korea and Taiwan, and an underperforming stock market in 2010 (see stock comparison chart).

Smart Money Rushing Out

While the hot money is flooding into China, the smart local money is doing everything they can to get their money outside of China, which partly explains why Shanghai SE Composite has underperformed other markets for the past year or so (see Comparison Chart).

The many issues of China could conspire to become the biggest train wreck waiting to happen, and potentially dwarf any little budget problems in Europe by a factor of ten.

Big Trouble In Big China

China has a population related societal structural problem. The nation has tried to utilize the vast manpower to its advantage over the last two decades building a powerhouse manufacturing economy through the availability of low cost workers, which supplied the world with lower cost goods.

Nevertheless, the harsh reality is that the nation's infrastructure, quality jobs, food, and overall resources are too scarce to support such mass population, while achieving the government`s goal of a smooth transition to a developed middle class to sustain an internal demand model going forward.

If you think you have riots in Greece over the pension retirement age being raised is bad, just wait till riots breaking out in Beijing and other cities over the fact that a 90 cent bowl of noodle soup now costs four dollars due to food shortages, and a runaway inflation problem.

Loose Lending = Non-performing Projects

This is only reinforced by some of the news events taking place over the last three months. Let`s start with the raising of banks reserve requirements by the central bank, which is the sixth such increase in 2010.

These measures are meant to curb the excess lending which has fueled much of the overbuilding and real estate speculation occurred over the past two years as China`s central bank initially wanted to avert a recession by artificially creating demand for workers and construction projects to replace lagging demand from the developed economies.

The problem is that too much lending has occurred, and bad lending at that. Because of the cheap available credit, now you have cement companies and manufacturing firms getting bank loans to invest in endeavors such as real estate, which is outside of their core expertise and competency.

Real Estate Misery Loves Company – China & Spain

The result is a bunch of excess inventory and poorly thought-out construction projects which have no means of recouping the initial investment needed to repay the bank loans.

This practice is similar to Spain`s situation now where they have entire uninhabited building complexes that have yet to be marked to market, and will probably ultimately be demolished. But at least in Spain, even though it was a construction boom, it was engineered by developers in Spain, and not by some manufacturing outfits like those in China.

So, multiply the bad business project factor by ten and you get an understanding of the magnitude of bad loans on the books of Chinese banks. The problem is being further exacerbated by the practice similar to Spain`s of banks making additional loans to the businesses just so that they can then turnaround and pay back the interest owed on the original loans.

The only way this would work out is if these projects magically develop revenue streams. Unfortunately, in the case of Spain, a 20% unemployment rate, coupled with a still overvalued housing market in which prices still need to come down significantly, would suggest that by the time the Spanish economy recovers enough to support the excess inventory, the abandoned projects are run down and uninhabitable.

A similar scenario could play out in China as well.

True Smart Money Wary of the Write-off Domino

Furthermore, China`s practice of overbuilding at the height of real estate valuations makes even haircuts on loan write-offs an untenable practice for banks, and by further throwing good money after bad, the ultimate mark- to-market effect could be catastrophic for Chinese Banks.

This is the main reason all the major Chinese banks have gone to the market in 2010 to raise more capital before investors wise up to the underlying deficits these banks face, as these bad loans eventually would need to be written off the books.

Victor Shih, a Northwestern University professor estimates that Chinese local governments borrowed some 11.4 trillion renminbi at the end of 2009, and that local government financing loans to be roughly one-third of China's 2009 GDP. The most likely scenario over the next few years is that there would be increases of non-performing loans ratio from local governments. This would require a large scale of recapitalization of the Chinese banking system, which would eat up a large share of China's foreign exchange reserves and possibly slow down growth.

Although Beijing is quite capable of a few bailouts and surviving a widespread banking crisis, it most definitely will not bode well for the financial markets. So, insiders are removing capital from direct exposure to the inevitable re-pricing that will happen throughout Chinese markets from real estate to the stock market, and can be seen at this early stage by the underperformance of the Chinese stock market compared to other global markets. Remember, foreigners cannot invest directly in these markets, so these capital outflows are truly the smart money.

Logistic Gridlock Crimping the Middle Class

Next let`s look at the recent news regarding a severe cutback in automobile registrations in Beijing to 240,000 in 2011 from 700,000 registered in 2010 by the municipal government. Other large cities in China are bound to follow. This is most likely related to the reported 9-day traffic jam on the Beijing-Tibet expressway in August, and other extended traffic jams throughout China in 2010.

China is trying to build infrastructure projects after the fact; whereas with proper central planning these should have been established far ahead of the massive transition from a rural, agricultural based populous to that of a modern, large city based business and manufacturing concentration.

Simply put, it is impossible for all the Chinese citizens who want and can afford automobiles to be able to own and utilize this form of transport without a total breakdown in the transportation system. We are seeing the early stages of complete and counterproductive gridlock in the transportation system of China, and it is only going to get worse over the next decade.

No Jobs for College Grads

For all the talk about how China graduates more engineers each year, and other college educated young people who have strong backgrounds in the hard sciences than most developed nations combined, this is actually another sign of problems to come over the next decade in China.

China`s wealth and emergence into the second largest business economy hasn`t been built around the need for these types of mind and skill set. So literally you have a large mismatch between the types of available jobs in China, that are supported by the heavy manufacturing and construction intensive focus of the past twenty years, to that of the recently educated pool of graduates who have grown in sizable numbers over the past five years.

The Mind Is A Terrible Thing To Waste

This results in a large human asset class that China is currently wasting, as most of the newly educated workforce is working in jobs which require little or no advanced education at the university level. So you have highly educated university graduates in areas like engineering and accounting working low level service and sales jobs that pay less than many manufacturing jobs.

In short, there are too many highly educated Chinese citizens graduating each year for the number of jobs available needing their skill set because China`s economic model isn`t built around these type of jobs. This type of misaligned employment outcomes never ends well; it usually manifests itself in increased civil and social unrest.

8% Inflation in 2011

The next major challenge for China is a skyrocketing inflation, which at its root is the fact that there are too many people chasing too few resources. This fundamental flaw in population dynamics underpins many of the problems that China faces going forward.

Recent CPI data for November illustrates the inflation problem in China with a reading of 5.1% from a year ago comparison, this is up from a 4.4% reading for the previous month. Couple this with the latest 4% hike in fuel prices in China because of rising oil prices, you could expect future CPI and PPI reports to reflect even higher rates of inflation.

For now, most of the year over year spike has revolved around higher food prices as energy has mainly been flat for 2010 thanks mostly to government subsidies. Now that energy prices have entered the picture, China will start to experience even more inflation pressures in 2011.

Furthermore, with the undervalued yuan pegged to the dollar, it is only getting worse for China in 2011 due to Fed's QE2 pressures on the dollar. The real inflation rate for Chinese citizens for 2011 will probably approach 8% next year.

An Asian Contagion by China?

This escalating inflation concern is further compounded by Beijing's lack of decisive action to combat the problem by delaying a much needed currency appreciation, and hiking interest rates in a timely fashion. There is no getting around the fact that these two things need to occur as soon as possible.

By the time the Chinese government is forced to implement these tightening tools, the damage to the economy is most likely already done. The longer China delays the inevitable serious tightening measures, the harder the economic crash that will occur in the aftermath of these policy changes. And it is unlikely to end well. The resultant impact will probably take the rest of the Asian economies down with it – an Asian Contagion scenario.

History Repeats Itself

Eventually central planners and finance ministers around the world might start to understand that policies which lead to bubbles being formed in the first place are counterproductive in the long run. But until that lesson is learned, it seems like we are doomed to repeat the same mistakes over and over again.

Right now, there are more and more signs coming out of China that all is not well with its economy, and the likelihood of a more severe downturn in the future is a distinct possibility, unless its policy makers take decisive and prudent actions to minimize the damage of a hard landing.

Dian L. Chu, | Mobile Reader, Website | | Facebook | Twitter

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‘Frustrated’ Brent Scowcroft on GOP Opposition to START Treaty: “It’s Baffling”

December 20, 2010 5:06 PM

General Brent Scowcroft (ret.), the former National Security Advisor to both Presidents Gerald Ford and George H.W. Bush, has been working the phones trying to secure Republican Senate support for the ratification of the New START nuclear disarmament treaty with Russia. He said he’s “cautiously optimistic” but said he was frustrated with the opposition he’s been hearing from Republicans.

“It’s baffling to me,” Scowcroft told ABC News.

“It doesn’t tie our hands on missile defense,” Scowcroft said of one main criticism, “as the president has already demonstrated; we’re moving ahead on missile defense on Europe.”

“There are things in the treaty people don’t like,” he continued, “but right now we have no oversight over what Russians are doing inside with their own nuclear systems” because the previous START treaty expired one year ago this month. “This would restore that, so we can carry forward all the accounting, the rules, the assurances, the inspections -- all the things giving us the confidence to go ahead. Without those it seems to me we’re absolutely nowhere.”

Scowcroft is just one of many Republican foreign policy officials backing the treaty – others include George Shultz, Henry Kissinger, Condoleezza Rice, and former President George H.W. Bush.

The retired Air Force general was reluctant to name the Senators he’d been calling, saying only that he hadn’t been calling “the ones who are hopeless” except for the leader of Senate Republican opposition, Sen. Jon Kyl, R-Ariz., about whom Scowcroft said, “he’s pretty hopeless now.”

Scowcroft says ratifying START will allow the U.S. to move forward on other issues Republican Senators have criticized the treaty for not containing, “like covering non-strategic warheads. It really baffles me. I’ve got to think that something else is at stake as to why the opposition is there. Especially for somebody like Senator Kyl, who has gotten as much as guarantee as the president can give on providing more money for the modernization of our nuclear stockpile. What does he think is going to happen to that?”

The man who served as the chairman of President George W. Bush's Foreign Intelligence Advisory Board acknowledged that he was “expressing some frustration here. But I just don’t understand the opposition. Some of it with John McCain is (opposition to the repeal of) Don’t Ask/Don’t Tell, some of it is politics. But to play politics with what is in the fundamental national interest is pretty scary stuff.”

Scowcroft said that “this is not just the treaty, this is trying to put our relationship with the Russians on a sounder basis so we can move forward with a lot of things we really need Ruissian help with,” such as the nuclear programs of North Korea and Iran and the war in Afghanistan.

“And the Russians are basically with us with on all those issues but we’re going to stick a finger in their eye,” he said.

Scowcroft said he was in regular consultation with some former Soviet officials who are “worried” about the Senate not ratifying the treaty. “They say the climate is thawing in Russia towards us and this would set it back significantly.”

-Jake Tapper

December 20, 2010

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Thursday, 30 December 2010

Performance advertising

Brand Advertising

Credits

Tuesday, 28 December 2010

‘Frustrated’ Brent Scowcroft on GOP Opposition to START Treaty: “It’s Baffling”

Thursday, 23 December 2010

Building a Strong Frame

Changing Course

Sponsored by Microsoft BizSpark

For more Startups coverage:

Wednesday, 8 December 2010

Automate Your Finances to Spend Less Time Managing Your Accounts

Tuesday, 7 December 2010