Editor’s note: Jay Jamison is a Partner at BlueRun Ventures where he focuses on early stage mobile and consumer opportunities. You can read more of his analysis on startups and Silicon Valley at his blog jayjamison.com and you can follow him on Twitter at @jay_jamison.
The highest flying of internet high-flyers, Facebook and Zynga, were laid low last week in public markets on weaker than expected guidance on their paths forward. What a difference public market scrutiny and forward-looking forecasts can make. Given the size, scope and importance of these two companies to the broader technology ecosystem, it’s worth analyzing what these reports might mean for industry trends.
According to Wall Street analysts, Zynga had a “dreadful” Q2 report. Several negatives converged to deliver an egg, reported the New York Times:
“A critical new game, the Ville, was delayed. Another new game, Mafia Wars II, just was not very good, executives conceded. The heavily hyped Draw Something, acquired in March, proved more fad than enduring classic. Some old standbys also lost some appeal.”
Zynga’s problems, however, could be characterized as broader than just a weak quarter. Financial analyst, Richard Greenfield of BTIG painted Zynga’s issues as more far-reaching, saying, “Right now, everything is going wrong for Zynga. In a rapidly changing Internet landscape that is moving to mobile, it’s very hard to have confidence these issues are temporary.”
Things weren’t much better for Facebook, which was reporting its earnings to the public for the first time. Given the symbiotic partnership between Zynga and Facebook, anyone paying attention knew Zynga’s weak results spelled trouble for Facebook. And as expected, Wall Street found Facebook’s earnings disappointing.
In coverage, three key themes of concern arose out of Facebook’s report. First, user growth is slowing. This is undeniably true: the growth of two key user metrics, Daily Active Users (DAU) and Monthly Active Users (MAU), is slowing. It’s unclear whether this is a useful concern. If the entire Western world is using Facebook, then Facebook probably is not going to showcase much growth in DAU or MAU until it cracks China. The land has been grabbed.
A second growth concern is revenue. Can Facebook convert all its social engagement into monetization? Facebook clearly has more to prove, but it’s a strong start. With a topline of $1.2B for Q2, Facebook beat analyst estimates on revenue. Its 32% Q2 revenue growth was equal to its year-over-year growth in DAUs. This revenue growth map to its DAU growth is where concern centers. On the one hand, having revenue growth equal to DAU growth shows that on a per-user basis, Facebook is monetizing effectively. At the same time, if DAU growth continues to slow, as it inevitably will, the question will be how Facebook can continue to grow it’s topline faster than DAU growth. The answer is not yet clear. Expect much hand-wringing here around the answer to this question.
These concerns around growth and revenue point to the third and most significant concern around Facebook (and Zynga): MOBILE. While we’ve known that mobile is the fastest growing technology wave the world has ever seen, it’s been a challenge to frame truly how important, impactful, and disruptive the mobile wave is. Last week’s reports from Zynga and Facebook make crystal clear the implications of mobile—two leading innovators and upstarts that basically created and drove the social computing wave are facing questions about their future earning streams on the basis of their execution on mobile.
So the broader story of what’s happening in technology is this: Mobile is what’s happening. Here’s one shorthand framework for the technology waves over the last roughly 20 years. Web 1.0 was about web connectivity, the giants of that epoch catalyzed by Netscape were companies like AOL, Yahoo, and Google. Web 2.0 was social, with Facebook, LinkedIn, Zynga, Twitter, and newcomer Quora as the foundational creators of the web’s ‘social layer.’ The power and impact of the social layer is difficult to overstate—existing industries and corporate giants (to say nothing of several repressive governmental regimes) have faced huge disruption on the basis of these companies.
Now we’re entering Web 3.0, which is mobile, and we are in the thick of it. The Mobile Web 3.0 has elements that build upon prior eras, but it also has several distinct and different elements from what’s come before. Some of these distinct elements of the Mobile Web 3.0 era include:
- real-time
- ubiquitous (always connected, always with you)
- location aware
- sensors
- tailored, smaller screen
- high quality camera and audio
These elements have two key implications for today’s leaders and tomorrow’s disrupters.
Let’s Get Small: Designing for Mobile First.The tailored, smaller screens of the Mobile Web offer new entrants the opportunity to deliver value and experience that differentiates from the existing leaders. Most leading tech companies today, with the exception of Instagram, were created with a PC web-first approach. Designing and building for the PC-centric web services packed increasing amounts of information onto ever growing screen sizes. Take a look at Facebook on your computer’s browser—it’s like a Bloomberg terminal full of fun—birthdates, events, status updates, advertisements, chatting. It’s a cornucopia of information laid out all around the screen.
For any company whose heritage is designing for the PC web, mobile is a big challenge in getting small. Compress a PC-web experience down onto a smartphone screen doesn’t work all that well. You may get the users—Facebook certainly has—but it is easy to overwhelm a user with an experience that packs in too much information into too small a screen size.
The challenge of mobile offers new entrants focused on a mobile-first strategy an opportunity to craft and tailor a user experience that is easier to use and enjoy on mobile. Instagram is the poster child example with its mobile-only, photo-centric social service. Rather than pack more information onto a mobile screen, for Instagram a picture was worth a thousand words (and a billion dollars). Instagram’s mobile-first, photo-sharing service created an alternative social network, and has since grown to over 80M users and its billion dollar acquisition by Facebook. Other mobile-first social services are following—Foursquare, Path, Foodspotting, Banjo, Pulse, and others—and each has an opportunity, through an approach that focuses on getting small to build a new audience and brand that stand out from the PC-web-based incumbents.
Getting Real: Mobile Will Drive MoreReal-World Commerce
Whether they’re a newer mobile-centric startup like a Path or an existing giant like Facebook, the key will be monetizing n a mobile world. Monetizing in mobile will likely evolve in new directions relative to what we’ve seen in the PC-web. Specifically: monetizing in Mobile is about getting even more real and concrete in the value delivered to customers.
Here’s why. In Web 1.0, Google achieved supernova momentum when it introduced its Cost-Per-Click ad model. With a dominatingly high quality search engine for users, Google gained share on search, and in effect knew what people were interested in. This was a break-through for advertisers in terms of measurability. Advertisers could escape the Mad Men world of spending on TV, print, OOH, and banner ads with their fuzzy efficacy and measurability. With Google, advertisers now could place ads in front of people searching on relevant terms. A huge step in terms of measurability, Google’s model had the added benefit of only charging when a user clicked on a specific ad. All combined to deliver a vastly more measurable and as such valuable approach to spending ad dollars.
Web 2.0 ushered in the social wave. Facebook now is showing ads of stuff we might like based on the interests we’ve indicated or based on referrals from friends. This embraces and extends much of the Google model, but provides potentially even more. Facebook knows what we like day to day (Graf Ice Skates, Breaking Bad, Crossfit for me), and what our friends like. Add to this the tremendously detailed demographic data that its users have willingly provided, and the opportunities for advertisers are pretty profound. While Facebook will continue to optimize its appraoch to ads, there should be little question that its current core business of ads is going to continue to grow.
With Mobile Web 3.0, the user experience opens the door for another level of innovation in advertising and promotion. Now technology services have the ability to leverage not just the social graph data from Facebook, but even more real-time / real-world information. Your current location, weather, traffic, local merchants other friends nearby, how often you’ve been to this specific store or location are available (or will be soon). And this in turn provides a whole new level of commerce opportunities for potential advertisers. Mobile brings advertisers and users closer to being able to close a transaction. It’s real-world commerce. Which leads to the question: Why pay for a click when you can get an actual customer? That’s the promise of mobile for advertisers, brands and merchants. The opportunity is huge: both in pure dollar size opportunity and for disruption. The internet advertising models of selling clicks to advertisers will need to evolve.
A few companies to watch in this new world are Waze, ShopKick and Foodspotting, to name just a few. Waze, the social mapping and GPS service, provides free turn-by-turn directions with real-time traffic information and routing to over 20m users. With users depending on Waze to help them find the fastest and least congested routes, Waze now shows offers for the cheapest gas prices along the way. Real value for users translates to real commerce for merchants.
ShopKick is a mobile app that gamifies retail shopping. Users who open ShopKick gain rewards for different tasks or quests they complete on ShopKick. What ShopKick is starting to show retailers is that ShopKick tend to spend more money when they’re in store, because of the interaction and engagement the ShopKick app can drive while the user is at the point of purchase. Again, real value for users leads to real commerce for merchants.
Open Foodspotting, a visual guide to what’s interesting to eat near you, and the app will locate where you are and show you pictures of the best food at restaurants nearby. Over 2m dishes have been submitted to Foodspotting at over half a million restaurants in the US alone. Users can express that they love certain restaurants and dishes. As it has grown its community, Foodspotting can now approach restaurants with promotional offerings for people who are nearby right now, who are fans of their type of food. Real value for users, real commerce for merchants.
So Mobile Web 3.0 is super exciting. But a word of caution: delivering value and driving monetization in the Mobile Web 3.0 era is hard. The answer will not be for web-first properties to scrunch their ad platforms onto mobile. Monetization via mobile advertising will require offerings that do more to close the loop of commerce. Advertisers increasingly will ask of mobile: why buy a click when what I want is a paying customer or user? The services with the best offers here will be big winners in this Mobile Web 3.0.
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