Is the Party Over? The Flattening S-Curve of IT Innovation

OK, maybe it’s just the recession. But many people who have worked in IT for some time seem to feel a sense of disappointment these days. Somehow, the IT industry — including the Internet sector — doesn’t feel as interesting as it used to. Not as dynamic. Not as fascinating. Is this just a negative perception shaped by the current crisis, or is it possible that there’s more behind it?

Like most waves of innovation, the adoption of IT seems to follow an S-curve. The early computers had only very few users, mainly big corporations. IT adoption really exploded with the PC, gained speed with user-friendly GUIs and hit its maximum velocity when the World Wide Web was invented. Now it might be slowing down.

A very simplified graphical representation of long-term IT innovation could maybe look like this:

Itinnovation

There are many signs that the IT sector is losing steam. A few examples:

1. PCs haven’t changed much in a decade. Sure, my current machine is much faster than the high-end Compaq workstation I was using in 1999, but I don’t do anything fundamentally different with it. Most of the innovation happened in the decade before that. In 1989, very few people edited photos, accessed global data networks or were even using a mouse.

What’s more, the innovation in operating systems and basic PC applications has stalled. Users don’t see a good reason to upgrade from Windows XP to Vista, for example. Innovation in PCs is now merely incremental. The market has found its “dominant design” and doesn’t seem to be willing to change much about it — except prices, which are falling dramatically. My new $300 Asus netbook basically has the same capabilities as my $3000 subnotebook five years ago.

2. The enterprise software market is consolidating. Enterprise software companies are increasingly living off their maintenance fees and service revenues from their installed base. There’s less and less new license revenue because big-ticket IT projects are largely a thing of the past. Corporations are very reluctant to repeat the costly mistakes of the late 90s, when huge ERP and CRM projects were all the rage. The prototypical software company of this new era is Oracle, which is following a strategy of aggressive consolidation of smaller rivals.

3. SaaS is not taking off as expected. The new generation of web-based “Software as a Service” (SaaS) products like Salesforce.com is great and potentially disruptive, but most of these companies are still far away from real profitability (let alone huge margins like those achieved by the leading enterprise software players). Even though subscription-based SaaS has been around for well over a decade, the business model doesn’t seem to hold up very well. What a contrast to the early days of Microsoft or Oracle, both of which were profitable almost from day one.

4. Web 2.0 has all the hype of a real bubble with none of the money. OK, so Facebook now has more than 200 million users. That’s great, but unfortunately, revenues are not growing at the same speed, and profits are still elusive. Youtube is apparently losing hundreds of millions of dollars a year, and Twitter has not even started to look for a business model.

Web 2.0 is a huge success in terms of user adoption (although it’s really only a shift of existing web users to newer sites — actually a small step), but commercially, it’s a huge disappointment so far. Maybe it’s all a question of time, maybe things will look better after the recession. But perhaps the bleak reality is that these sites simply don’t add enough value for users (and advertisers) to justify the commercial success of Web 1.0 giants like Google or Amazon.

Of course, there are some bright spots: The mobile web is finally taking off, thanks to Apple’s iPhone, the BlackBerry and other new smartphones. Media consumption — newspapers, video, now even books — is shifting into the digital realm, hopefully pulling advertising spending with it eventually. And on the horizon, there’s the promise of the Semantic Web (although it has been on the horizon for a long time without getting much closer…).

But overall, the wild days of IT innovation seem to be largely over for now. Things have been slowing down considerably for several years, and that’s not just because the economy is in trouble. It’s a typical pattern for fundamental innovations (like railroads, the telephone, the automobile) that there’s a phase of rapid evolution and dramatic changes that can last several decades. But once the technology has reached a certain level of maturity and most of the infrastructure is in place, growth and the speed of innovation slow down a lot. All the signs suggest that this is currently happening to the IT industry.

Obviously, it would be a huge mistake to think that there will be no further major innovation in IT. Just remember all the quotes by famous people that were wrong about the magnitude of future technological change (although many of these quotes are actually incorrect). However, unless a technology enters a second major wave of innovation — like digital and mobile telephony — the big changes are few and far between.

Assuming that this theory is right and IT is now really becoming a mature market: What are the best entrepreneurial opportunities under these new circumstances? This will be the topic of my next blog post. Watch this space.

“Attention Economy” is the Wrong Metaphor. It’s All About Persuasion.

The concept of the “attention economy” has been around for a few decades now. And many people think that Web 2.0 is the first real-world manifestation of this economic theory.

Briefly explained, the concept assumes that in our modern world — with its constant information overflow — human attention has become a scarce good. Since scarcity creates economic value, attention becomes valuable. Some even think that attention can be traded like commodities.

The conventional way to monetize attention is to sell advertising against it. Media companies publish content that grabs people’s attention, and they resell a part of that attention to advertisers. (Here’s a great article by Dharmesh Shah that explains the difference to what he calls the “wallet economy” where people pay you directly for a product).

Sounds simple enough. But the problem is that the theory doesn’t really explain the commercial nature of attention.

From the point of view of somebody who receives attention, there are two possible value components to it:

1) The intrinsic reputation value of attention, i.e. social status. Example: A programmer who contributes to an open source package doesn’t do this because he expects to make money, but in order to get a higher reputation with his peers.

2) The value of possible persuasion that needs attention as a starting point. An advertiser is not interested in your pure attention as such, he’s interested in selling you something. That’s only possible if he gets your attention first. But the real value is only created if the subsequent persuasion process is successful.

While the first component (reputation) might become more important in advanced societies where people already own most material goods that they could possibly want, the second component (persuasion) is the only one that can really be monetized.

The problem with the oversimplified view of attention is that attention is not uniform, particularly not if it’s supposed to be used for persuasion. You know this from real life: When you go to the mall on a Saturday, you are easily persuaded to buy more stuff. You are already in a buying mood, your attention is tuned to consumption. Not so if a telemarketing firm calls you in the evening during your favorite TV show. They will get your attention, but they won’t persuade you. You’ll probably hang up on them.

The same difference exists in the online world, and it is the reason why Google makes a ton of money, but social networks don’t.

Google probably makes most of its money from searches where people are actively looking for certain products or solutions to problems. The users are in a buying mood — think of the mall on a Saturday afternoon. A relevant ad delivered at this moment is highly effective, and a click is worth a lot of money, because it’s a great starting point for successful persuasion.

Just check a few AdWord prices, and you’ll see this immediately. A click on “Britney Spears” (high attention, consistently in the top 10 search terms every year) costs $0.30. A click on “life insurance” costs $15.80. The Britney-related ads actually receive twice as many clicks per day as the insurance ads, but they’re worth a fraction.

Why do smart advertisers who want to sell to a teen/tween audience not simply buy Britney Spears-related clicks (=attention) and then use the traffic to sell something else that appeals to this target demographic? Because it doesn’t work. If somebody clicks on a specific keyword, they are not in the mood to be persuaded to buy something completely different. Attention doesn’t equal persuasion potential.

Unfortunately, this is the fundamental challenge for advertising on social networks and many other Web 2.0 sites. You go to Facebook to catch up with friends or share stuff, not to be persuaded to buy something. Metaphorically speaking, you’re not in a mall, you’re at a dinner party. And somebody who’s trying to sell you something at a dinner party will likely not be invited next time.

Obviously, there’s an opportunity here. The trick is to catch users when they are in a buying mood or at least in an online environment that is tuned towards consumption. The ad industry is however very far away from really understanding this, because in traditional media, an eyeball is an eyeball.

But at some point, advertisers will start to understand that smart micro-targeting delivers far more relevant forms of attention than having a generic product page on Facebook or slapping an ad on MySpace’s homepage. The rule is clear: Follow the money. And the money is where people can be persuaded.

(Picture: hansol, CC license)

Why the Internet Still Doesn’t Have a Business Model For Content

Boston Globe TruckTimes are tough for media companies. One newspaper after the other slides into bankruptcy, and most other sectors of the media industry are suffering too. This recession seems to hit media companies harder than expected as consumers migrate to the Internet and advertisers are cutting their budgets more than ever.
Most media companies still hope that revenues from their new digital channels will replace much of the lost sales volume in their traditional businesses. But so far, digital revenues have stayed far below expectations. It looks like “digital pennies” are replacing “analog dollars”, as NBC CEO Jeff Zucker recently put it.

Why is there still no really viable business model for content on the Internet? All the big Internet success stories — Google, Amazon, eBay, Facebook … — are based either on commercial transactions or on context-creating technologies, i.e. services that help users make sense of the vast jungle of information on the web. There are a few somewhat successful web-only content plays — the Huffington Post comes to mind — but their size and profitability is very modest compared to the kings of the Internet.

I think the biggest misconception in this discussion is that traditional media companies are all about content. They’re not.

The most important (and expensive) asset that a media company has is its distribution channel(s). It costs hundreds of millions to build and run the production and distribution infrastructure of a major newspaper. TV networks are even more expensive, and even somewhat simpler media like radio require very large investments.

It’s actually interesting to talk to owners of regional newspapers after a glass of wine or two. Many still see their companies primarily as a printing business. Their newspaper is just a monetization strategy, and the content they distribute is just an input factor they need to attract advertising. But the core of the business and the real pride of its owner is typically the printing press and the capability to bring printed matter into every household in their area.
The huge capital outlay for distribution is the main barrier to entry in the media industry and the reason why so many traditional media companies enjoy a cushy oligopoly or even a regional monopoly. Of course there are some companies that produce content independently of a distribution network — independent movie producers or record labels for instance. But these smaller companies often struggle to survive or have to enter into agreements with a big distributor.

In other words: For traditional media companies, content is just the bait. The real, defendable and profitable business is in distribution.

The Internet is fundamentally different. There are no comparable barriers to entry for content producers. Content distribution on the Internet is almost free. Sure, the infrastructure in the background still costs many billions, but this cost is shared by so many participants that access to the net is affordable for everybody. Every Internet user is not only a consumer, but can be a producer of content, even if it’s just one Tweet at a time.

The result is a huge abundance of readily available content. Of course, much of it is of terrible quality, as you can immediately tell from a brief visit to Youtube. But there’s more great stuff out there — literally just one mouse click away — than a single human being could possibly ever consume.

Since distribution is not a barrier anymore in the digital age, the only way for a media company to differentiate itself is through the superior quality of its content (and maybe through its brand, but that’s secondary). Unfortunately, that’s not necessarily the core competence of old media. Let’s be honest: How much of the stuff that you get on TV or read in a newspaper is really, truly great? Exactly. Not that much. The main reason we put up with inferior content in old media is because it’s more complicated or expensive to get to the really good stuff. That’s not the case anymore on the web.

But even for producers of really great online content, it’s difficult to stand out and get compensated for their work. For several reasons, both cultural and technical, it’s difficult to charge people directly for web content. And the volume of Internet advertising still hasn’t reached the level it would deserve given today’s consumer behavior. There’s another simple reason for this: Advertising agencies (in particular their media arms) don’t have a real incentive to sell Internet advertising. They make far more money pushing TV and newspaper ads.

Media agencies are a bit like financial advisors: Theoretically, they only have the best interest of their clients in mind, but in reality they will of course always prefer to sell the products that give them the highest commission. At some point, online advertising could grow to a point where it can finance many more content sites, but it will take a lot of time to overcome the ad industry’s inertia.

Until then, the way to profitability will be to try to control content distribution even under the particularly difficult circumstances of the digital world. Interestingly, a technology company (not a media conglomerate) has managed to do this for music: Apple with its iTunes store. And another tech company is trying the same for e-books: Amazon with its Kindle e-book reader. Both companies are following a similar strategy: Control the whole chain from content licensing to the end-user device — not the content itself, but its distribution. Old media companies have failed with similar projects because rivaling conglomerates were never able to agree on a common platform. Old rivalries sometimes destroy new opportunities.

To summarize: The Internet doesn’t have a business model for content because the world of old media didn’t have one either. The media industry has always extracted its profits from the control of distribution channels, not content itself. And it’s unfortunately not clear yet what will replace this model on the open Internet.

The Real-Time Web Is Here. So What’s Next?

FastThe last few months brought a trend into the mainstream that has been developing for quite a while: The real-time web. Twitter, the new Facebook, FriendFeed, Google, push services on your mobile device … the web is speeding up wherever you look.

Remember the good old times when Google’s index was updated only every few weeks? It could take months to get a new page into the major search engines. This leisurely pace is gone forever. You will find this blog article on Google only minutes after I published it.

Oh, and if you’re like most people, you got here because you saw a link to this article on your Twitter or Facebook feed. By the time you read the article to the end (which I hope you’ll do), the message that brought you here probably will have disappeared from the first page of updates on either of these services. That’s the pace of the real-time web. So much to see, so little mental bandwidth.
The web was originally designed as a digital library, a system where scientists could exchange their research papers in a more efficient way. Almost by definition, progress was measured in weeks or months, not days or hours. Even during the wild days of the dot-com bubble, most people dialed into the Internet a few times a day at most. Connecting to the web was something you did consciously, and the rhythm of all updates was restricted by this. E-mail was the natural medium of that era.

The always-on availability of broadband and the mobile Internet on our BlackBerries and iPhones have changed this forever. Most of us now have almost constant, immediate access to the Internet, and that’s the key enabler for a much higher speed of interaction. A service like Twitter can only exist under these conditions. Social networking sites like Facebook or Myspace only make real sense in a broadband world. Only when you’re constanly connected can you really enjoy the many little emotional kicks of getting updates about what your friends are doing just now. No wonder that many social network users are literally spending hours per day on these sites.

The most extreme example of the real-time web is probably Twitter’s search function. Theoretically, it helps you to search for relevant tweets about a certain topic. But for most popular topics, it’s actually more of a firehose of information — or, to be more precise, of unfiltered utterings from random invidivuals. Just try following Twitter Search’s constantly updated feed during the airing of any popular TV show. There are typically dozens of new tweets per minute about that show. You can either watch the show or follow all the tweets about it, doing both at the same time is almost impossible. But the tweets are typically more entertaining.

Like every new medium — and the real-time web is a new medium, not just a faster version of the old web — this rapid stream of information shapes the perception and behavior patterns of its users. Scientists are already worrying (like with every new medium in history) about the negative consequences this might have. And most users I know still somehow feel that Twitter, Facebook etc. are actually a waste of time. Why would you suspect yourself to this constant stream of mundane details about other people’s lifes? OK, occcasionally there might be a witty insight or interesting piece of information, but does that really justify having to deal with all this noise?

If you look at the growth rates that these services are currently experiencing, the answer seems to be yes. That’s not really surprising. Humans have always been hungry for information and entertaining distractions, and like with tasty food, most people can’t seem to get enough of it.

The result from eating too much is obesity. But we still don’t really know what consequences we face from too much fast information. Twitter is to information what potato chips are to food: It’s a snack that’s probably unhealthy, but it’s very difficult to stop once you started consuming it. People who are not on Twitter probably are instead addicted to e-mail or texting or Facebook or real-time stock quotes. Most people I know have some kind of real-time information addiction. We are all very impatient, and the real-time web in its many forms accommodates the craving for instant gratification through information.

So the real-time web is definitely a reality. It will need some time to develop further, to mature and to conquer even more users, but it’s clearly here to stay. The big question is of course: What’s next after the real-time web? It’s somehow hard to imagine that the stream of information can get any more abundant and flow any faster.

I think there are two possible directions this could take: Maybe we will see a major backlash against all this information overload. Maybe people will suddenly start questioning if all this noise really makes their life better. It would certainly resonate with the recession-driven sense of weariness that many people are feeling. Several authors — Timothy Ferris of “Four Hour Workweek” fame is an example –recently became popular by promoting a “low information diet” and a general slowdown. Ironically, most of these authors of course promote their ideas through books, blogs, videos, and, yes, on Twitter.

The other possible (and, I suspect, more probable) direction is that the torrent of information will find new ways to its consumers. The boom in the smartphone market is a first sign of what this may look like: The traditional computer screen has probably reached a point of saturation as an information channel, but other devices still have room for growth. BlackBerry user were the pioneers of mobile information overflow, and all the new buyers of iPhones and similar products are now following suit. And there’s of course the living room and its underutilized big screen: LG recently introduced a TV set that can show information from the Internet in the form of on-screen widgets. It’s probably just a question of time before many other TVs and set-top boxes will offer something similar.

Although there have been occasional backlashes in the history of media, people in the end always opted for more and faster information. When a new medium with higher information density appears, it takes people a while to get used to it , but after some time, there’s appetite for even more information. And most probably, the real-time web is just another milestone in this long-term trend.

(Picture: NathanFromDeVryEET, CC)

The Oracle/Sun Deal: The End of Open Source As We Know It?

Oraclesun-1The news that software giant Oracle will buy Sun Microsystems came as a surprise to most industry observers. Apparently, Oracle made its first offer on Thursday and had a signed deal by Sunday night. Larry Ellison and his team are clearly the masters of IT M&A.

This deal clearly has the potential to re-shape the IT industry. Or maybe it’s more accurate to say that it will complete a trend that has been going on for several years. Oracle is now the third conglomerate next to IBM and HP that can offer a complete technology stack, from server hardware to client software, plus implementation services.

On top of that, Oracle has a rich portfolio of application software and of course its market-leading database. It competes not only against IBM and HP, but also against SAP and Microsoft. No other company comes even close to these top 5 of the IT world. In just a decade, the IT industry has morphed from the innovation explosion of the dot-com era into an oligopolistic structure that is typical for mature industries.

But maybe more importantly, Oracle’s acquisition of Sun probably marks the end of Open Source Software (OSS) as a business model. Sun was one of the most active promoters of OSS and saw this focus as a strategic advantage to gain credibility in the tech scene. The company not only open-sourced its Java programming language three years ago, but also acquired several stars of the OSS industry, including office suite OpenOffice and most recently the world’s dominant free database (and thorn in Oracle’s side), MySQL.

Contrary to the romantic Robin Hood-type image that the OSS movement still has, most really complex OSS packages are not predominately developed by independent programmers in their basement, but sponsored (with money and human resources) by actual companies. MySQL was mostly developed by MySQL AB, a Swedish company that made money from support services and commercial licenses for enterprise customers. Without this cross-subsidy, it would probably be very hard for hobbyists to maintain and support such a complex software package.

MySQL AB was acquired by Sun for $1 billion a few months ago and will now become part of Oracle — which is not exactly one of the OSS movement’s favorite companies. You don’t have to be a fan of conspiracy theories to expect that Oracle will certainly not go out of its way to keep MySQL well supported as a free OSS product. I don’t think that Oracle will kill MySQL, but it will probably pressure its current users to buy enterprise support contracts and, you know, just maybe look at a really cheap upgrade to a full Oracle database product.

So finally the by far most successful OSS database ended up in the huge product portfolio of the very company that MySQL primarily tried to compete with. Facebook, Twitter, Yahoo and many other Internet companies are now suddenly proud owners of technical architectures that are based to a large part on the latest Oracle product…

Pretty much the only major independent open source software company left standing is Red Hat, the dominant provider of commerical Linux versions. There have been rumours that Oracle is interested in buying this company too, and at Red Hat’s current market valuation of $3.3 billion, Oracle could easily afford it.

It’s by now unfortunately fairly obvious that commercial open source has largely failed as a stand-alone business model. There are still some smaller OSS companies — e.g. SugarCRM, Alfresco, Pentaho, WordPress — that have a respectable position and could develop into profitable growth companies. But most complex high-profile OSS packages are now part of huge companies, often used as bait to sell hardware, services or commercial software products.

And for the IT industry in general, it looks like we’re going back to a vertically integrated model that we last saw in the 1970s. Customers can now — and many will — buy most of their IT components from one single vendor. It will be interesting to see how Microsoft and SAP will react to this. And another potential competitor, Cisco, is already extending its portfolio from networking to servers and software.

Where will innovation come from in this new world of vertical integration and huge IT conglomerates? Clearly, Internet-based software companies (such as Salesforce.com, 37signals) are the potential disruptors: They currently offer products that are far inferior to the large-scale solutions that Oracle and friends can provide, but they satisfy the needs of a certain customer group at a very low price point. We will see if that’s enough to keep innovation alive and compete against the giants.

The Complexity Challenge of Social Media Marketing

Advertising on social networks continues to struggle. But whose fault is this? Are advertisers simply too ignorant and conservative? Are the advertising opportunities that social networks are offering not attractive enough? Or is there maybe a much more complex reason?

There’s little doubt that the social web (formerly known as “Web 2.0”, and often called “social media”) is the media phenomenon of our decade. Hundreds of millions of Internet users spend unbelievable amounts of time on Facebook, Youtube, Twitter, countless blogs, discussion forums and other social media sites.

But even though these Web 2.0 sites are amazingly successful in terms of usage hours, their financial success is modest. Facebook’s costs seem to rise siginificantly faster than its ad sales. Youtube is still losing money, to the tune of hundreds of millions of dollars per year (according to some analysts). Big advertisers such as Procter & Gamble are openly saying that they’re unhappy with the success of their social network campaigns. Many companies dabble in social media marketing, but real success stories are rare. For example, Dell sold PCs for $1 million through Twitter. That’s nice — but Dell needs less than nine minutes through their traditional channels to make that kind of money.

So what’s going wrong here? Are advertisers too conservative? Or are Web 2.0 sites simply not innovative enough when it comes to monetization?

This article wants to make a different case: The social web is so fundamentally different from traditional media that we will need decades to really understand it and find the right way to commercialize it. We are at the very beginning of a long development path because social media is structured so differently from everything else that we know.

Until recently, we’ve known two types of media:

First of all, there are media that enable a 1:1 communication between two people. Examples are the telephone or e-mail.

Socweb1
Communication in 1:1 media is closed, which means that no third party (under normal circumstances) can listen in. This secrecy is explicitely guaranteed by postal and telecommunications laws. This intimacy is the reason that 1:1 media don’t really work as advertising channels. Unsolicited telemarketing calls and spam e-mail are the least popular forms of marketing and are often even illegal.

The second form of media are 1:n media. A single sender (for instance a newspaper, a TV or radio station, a traditional website) broadcasts its content to many receivers who typically can’t (or don’t want to) react directly to this communication.

Socweb2

It’s of course well known how to use 1:n media for marketing: Advertisers pay a media company to insert their ad message in the context of the normal media content.

Socweb3

The advertising company basically injects its message into the normal communication stream between the media provider and its customers. The spectrum ranges from a subtle presence with small ads to intrusive interstitials that completely interrupt the flow of content.

MerrillbootsadAll of this seems natural enough. But historically these “classic” forms of advertising needed a surprisingly long time to emerge. Almost 150 years passed from the invention of the printed newspaper (around the year 1600) to the first publication of paid advertising in a paper. The modern ad agency, and with it the professionalization of advertising, emerged around the middle of the 19th century. Modern TV advertising was only invented in the mid-1950s, almost a quarter of a century after the first TV broadcasts. And modern advertising in general, with its strongly focused, typically very emotional messages, packaged more or less creatively, was first developed in the 1960s.

The media industry obviously needed many years to “monetize” 1:n media in the modern sense. It’s therefore maybe not surprising that after only 15 years of the Web as a mass medium and five years of Web 2.0, we have not yet found the ideal form for advertising in these new types of media.

But back to the social web: The specific new quality of this form of media is that it connects many senders with many receivers in a mostly open way. The social web, in other words, is an open n:n medium.

Socweb4

That sounds pretty mundane, but it isn’t. We all understand intuitively how n:n communication in the physical world works. A discussion at the familiy dinner table is n:n, and on a bigger scale a classroom discussion or a town hall meeting would be typical examples.

But when n:n communication suddenly occurs over an open, global, technical medium with persistent storage of all communications, we don’t understand the consequences at all. There is no equivalent in the physical world for an interaction between people that can be accessed by pretty much every person in the world, instantly and (thanks to search engines) with high precision.

Because we have such a limited understanding of this phenomenon, it’s not surprising that ugly social media scandals happen all the time. The recent Youtube scandal around two Domino’s Pizza employees is a typical example. Very obviously, these two people didn’t grasp the consequences of uploading a disgusting video that could signifcantly hurt their employer (not to mention their own future) to a globally accessible platform. But they’re not alone — most Internet users probably don’t fully understand what happens with the content they put on social web sites.

If this is difficult for individuals, it is even more complicated for companies. Big organizations are structured for 1:n communications. Traditional advertising is 1:n. So is customer service: When a consumer tries to contact a company, for instance by calling a 1-800 number to complain, it is a case of 1:n communication. Other customers of the same company don’t learn about that customer’s complaint.

callcenterTraditional market research works in 1:n mode too. A company surveys customers, conducts focus group studies or sells its new products in test markets. The company thereby receives information about what customers think, but the other customers typically don’t get any insight about each other’s opinions, and they don’t influence each other.

Modern corporations master 1:n communications on a very high level of sophistication. They invest significant resources to standardize their communication processes, to push a consistent marketing message and to react to customer contacts in a clearly defined manner. A call center script is a typical part of these standardized communication processes.

All of this works very differently in a n:n medium, and that’s something that completely perplexes most marketers. In a n:n medium, there’s inherently no way to push a marketing message in a controlled and consistent way to a big audience. Consumers can simply ignore the message, can react to it directly or will even come up with parodies or adversarial messages. Advertising in the social web can’t be intrusive, or else it will trigger very negative reactions.

How and where marketers should position their ad message under these conditions is obviously a difficult question. Should they just put ad banners on social media sites? Is sponsoring the right tool? Viral marketing? Direct engagement with users? Or should companies build their own online communities?

Socweb5

The diversity of platforms, formats, interaction modes and ad vehicles in today’s online media is confusing even to experts. Most marketers grew up in a world with a manageable number of different ad channels — TV, radio, newspapers, magazines, direct mail. So it’s no surprise that they are completely helpless when they face the overwhelming complexity of the online world.

Even worse: Consumers are now suddenly able to react to ads, in a very public way. They can also describe and publish their (often negative) experience with a particular product, and this opinion is — on Twitter for instance — made available to a significant number of people, but not necessarily to the actual manufacturer of the product. Some users now even think that it’s the manufacturer’s job to actively get all this feedback. There’s a growing number of people who expect that companies read their tweets and react to complaints automatically. And some companies already do this. Over time, customer service could change from a push to a pull medium.

This rich feedback loop is highly dynamic and impossible to control. Many a well-intentioned viral campaign turned into a marketing disaster, simply because the blogosphere or twittersphere reacted in unexpected ways. A recent example is the “Motrin Moms” Twitter storm. A pharma company put a somewhat unconventional commercial for a pain reliever on its website. It was intended to be ironic and funny. Unfortunately, some female bloggers perceived the video as insulting and started online protests, which in the end forced the company to cancel the campaign. In the world of old media, a campaign stop would have silenced critics very rapidly, but in the echo chamber of online media, the waves of outrage continued for weeks. This is a real nightmare for any old-school marketer.

Motrin-1

So what about all the advisors that big companies pay to develop marketing strategies? Unfortunately, they’re not much help either. Most traditional ad and PR agencies are masters of 1:n communication, but are not less confused about social media than their clients. The frequently outright negative opinions about social media expressed by ad executives are easy to explain: Somebody here feels threatened, and rightfully so. Not even most interactive agencies are strongly positioned when it comes to social media. Let’s be honest: Most corporate websites that are produced by these agencies are just traditional 1:n advertising in a digital form. Real interaction is not their strength.

Traditional companies, particularly large corporations, are fundamentally badly equipped to deal with the open, complex communication processes in n:n media. Their carefully cultivated marketing skills from a 1:n world are actually a detriment to success in a n:n medium, because the discipline of strongly focused 1:n communication directly prevents real interaction with users in social media.

Blogosphere luminaries like Robert Scoble tell companies to simply start very, very transparent “conversations” on social media and to interact with consumers in an authentic and unscripted way. But that’s like telling an elephant to increase its speed by simply starting to fly — great idea, but almost impossible to implement.

So what’s the conclusion?

First of all: The problems of insufficient monetization of social media platforms can’t be solved simply by finding better ad formats or by hiring more competent sales teams. This is a fundamentally different medium, and the biggest and most professional advertisers in the world — large corporations and their ad agencies — are structurally badly prepared to take advantage of this new channel.

A lot of time and many bold experiments will be necessary to find the best way to commercialize social media. Of course, coincidences will play a role, as they have in the development of traditional media. For instance, legend has it that the modern 30 second TV commercial was only invented because TV stations were not able to find enough customers for the sponsoring of a whole show.

Who will be the winners? In the short to medium term, social media is a great marketing opportunity for smaller companies that can interact with their customers in a flexible and personal way. This is a great way to build a loyal customer base without huge resources, just through authenticity and focus.

Larger corporations will need years to adapt to the new reality of 1:n social media, and many will fail. The more Internet users participate in social media (and since even Oprah is now twittering, it’s definitely mainstream), the more important social media will be as a channel to reach customers — just not with the mechanisms of traditional, hierarchically structured advertising, but with new, networked structures that have more in common with real marketplaces.

This is a step of the same magnitude as the invention of mass marketing at the beginning of the 20th century. Mass marketing became possible through 1:n mass media, and it changed the structure of the economy fundamentally. The modern corporation would not be possible without it. It is conceivable that we will see new forms of corporate organization that are driven by the new media that are shaping our private and commercial communication.

In all the daily noise around new social media apps, platform wars or industry scandals, it’s easy to forget that we are experiencing the birth of an entirely new, unusually complex medium. It will take decades to find stable structures and explore viable business models. And we are in for a lot of surprises.

(This is a translated and updated version of an article that I wrote for netzwertig.com, the leading tech blog in German-speaking Europe.)

“Benjamin Button”: Can special effects be too good?

Last weekend, my wife and I went to see “The Curious Case of Benjamin Button“, the movie that received the highest number of Oscar nominations this year. Frankly, I wasn’t too thrilled about the movie itself, although it was obviously done very well from a technical standpoint (which is what you would expect from a David Fincher movie).

However, when I later read more about the digital special effects that were used in that movie, I was simply amazed. Since I’m pretty interested in movie technology myself, I can usually spot digital effects. They still tend to look artificial in most cases, particularly when humans are generated digitally.

I therefore was very surprised to find out that the “old” Benjamin Button in the first part of the movie was not played by Brad Pitt under a lot of make-up, but was actually generated digitally. I did not suspect that for a single second during the movie. Some scenes that played at sea very obviously used digital backgrounds, but I never recognized the actual main character as a digital object.

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The clip on this page here explains how this was done. Amazing technology!

The scary thing about this is not only that apparently technology has advanced so far that entirely artifical actors seem possible. It’s also that even relative experts don’t recognize these effects as the illusions that they are. And I don’t mean myself, but the members of the Academy of Motion Pictures that will soon vote about who will receive the Oscars. Actually, “Benjamin Button” might be in danger to embarassingly win an Oscar for make-up, but maybe not for special effects, because even people in the movie business don’t recognize this as a digital effect. The movie studios behind “Benjamin Button” have therefore produced a closed website for Academy members that explains everything, in the hope to get the nod in the right category.

And they clearly should receive the SFX Oscar. This is really a breakthrough.