Yes, I said it. Everybody involved knows it. It’s the dirty little secret of social media ecosystem. Log onto Facebook, MySpace, or any social application on these platforms or anywhere else. The majority of the ad units you see are for scam related offers. The infamous “crush ads” are everywhere. The whole purpose of these ad units is to get the consumer to enter their cell phone number and usually without realizing it subscribe to a monthly subscription on their mobile phone.

These ads are so profitable that they usually outbid any other advertisers on any network. If Google was not fiercely combating them, the would take over the overall online advertising universe. The actually come in a very few formats that I am sure you have noticed them

  • Crush Ads: Someone has a crush on you!
  • IQ ads: What is your IQ?
  • Age Ads: How old are you really?
  • and a few more “creative” ones

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For the past few years online advertising has been the de-facto monetization mechanism for online businesses that do not sell physical goods. As a result very few companies have actually focused on receiving payments directly from consumers. This lack of attention really shows when you try to figure out a holistic approach to online payments for your business. The short news: global online payment systems are a mess especially if you are not a 10 year old S&P 500 company!

As this economic downturn puts pressure on more and more web startups to skip the dwindling online advertising revenue stream and go directly to the consumers more entrepreneurs will get exposed to this mess. Since I have been dealing with this problem for almost a year now, I thought I should just summarize what is wrong with this ecosystem. Hopefully this post provides some guidance to fellow web entrepreneurs that are/will go through the same and save them some time.

I am also going to propose some basic requirements for anybody who wants to solve this problem. My hope is that somebody in the payment business will take a look at this list and hopefully provide a product that satisfies these requirements. I really believe that there is a huge opportunity here and whoever cracks this problem properly will benefit immensely. If I was not busy building Zoosk, this would be on the top of my list of opportunities to tackle.

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Recently vice president of product marketing at Facebook, Chamath Palihapitiya, spoke about the Facebook developer platform at the TieCon conference. Some of the figures what were quotes by the attending press caught my attention.

And about 33 percent of Facebook application makers reported profits of up to $500,000 a month. Finally, at least one-quarter of the applications running on Facebook have 100,000 active daily users.

Looking at adonomics or other Facebook application trackers, you can see that only 50 Facebook applications boost 100,000 and above daily active users. By Chamath’s math, Facebook only has 200 applications! I guess MySpace platform is not doing too bad in retrospect.

In reality, Facebook has some 25,000 applications on it’s platform. and only 0.2% of those have more than 100K daily visitors. I am just hoping that Chamath was miss-quoted, and that he and his team don’t really think every application on their platform is thriving.

And imagine if 33% of Facebook applications were making half a million in profits every month. That would put the profit of just this 1/3 of applications at around $50 million dollars a year! That should put their revenue in the $150 million range, exactly how much Facebook made in 2007!
Simply AMAZING ;-)

As an internet entrepreneur, the decision when to turn on your properties monetization engine is not a trivial one. At first glance it seems like you should open the cash faucet as soon as possible. But sometimes, it could be tricker than simply the ability to do so. I will try to summarize the counter arguments below:

Monetization and Growth

Regardless of your business plan and monetization strategy, you could almost always argue that turning the money engine on slows down your growth. The level of slow down obviously varies depending on your audience, and your money making technique, but it will slow it down. An easy example is subscription services: by turning subscription on, you should expect about a 90% or more drop in your user base accessing the paid sections. Even if simple registration decreases your audience.

You might say that our property only uses advertising to make money and that doesn’t slow down growth. But think about it for a second. Even though users are now accustomed to seeing ads on sites, if the ad directly doesn’t increase site’s
value (think ads on Google search results that might give you what you were looking), users don’t particularly don’t like them. A less pleasant experience usually results in higher probability of abandonment (again the value I am giving up has a lot to do with this rate).

But even more important is the attention capital that you are giving up. Entrepreneurs sometimes just think about the real estate that they are giving up to ads and potential the less pleasant user experience. But you also give up some of your users attention. That 1% CTR that brings you some money is built but taking away a percentage of your users’ attention from your site and to advertisers message. The question here is whether you could use that attention and click to increase your own growth rate. I believe this is a very important question for any entrepreneur to answer. Thanks to my friend, Touraj Parang, we at Pollection are thinking much harder about it.

Monetization and Valuation

So what if you give up some growth for good chunk of cash? Well as long as you make that decision consciously, there is no problem with it. However, if you are running a venture financed company and are thinking about future rounds of financing, this decision will have deeper consequences.

You need to understand how your financiers value your company in your next round of financing. If all they care about is your user base growth trajectory, then sacrificing even 1% daily growth for paying some of your bills are going to lower your valuation in a few months in a very big way.

Taking the Middle Ground

One might decided to take the middle road: split the focus half and half between monetization and growth (or some other combination). The problem with this split decision is that you do not have a razor sharp focus on either. So you won’t optimize your user experience 100% for neither growth nor monetization.

As a result, your growth rates and your monetization yield (let’s say your advertising eCPM) are not stellar. Now you are in a really bad situation when you talk valuation with your future VC since they will ding you for both inadequacies.

What is the consensus?

Last week I attended an event at Plug & Play Tech center on the topic of monetization for widget companies. The event was mostly a networking opportunity, plus a presentation by CoFounder of Hi5, Akash Garg. It also included demos by a number of startups including Pollection. At the event, I got the opportunity to chat with multiple founders and CEOs about the topic and it seems that there is sense that everybody wants to postpone monetization even though they can make money today in exchange for faster growth. They funny part is that everybody prefixes this assertion with “it might sound like bubble talk but…”. This sentiment was very well captured when at one point Akash said (paraphrased): My biggest regret is that we went for monetization too early, sacrificing aggressive growth.

We at Pollection are looking into different strategies when it comes to this question very carefully. I really don’t think there is a clear answer. As always it depends on your circumstances and your objects. In my opinion what matters is that you are conscious about the choices you are making in the context of tradeoffs described above.

Anybody who has taken any type of leadership/management/etc course (in US at least) knows about ropes exercises and similar activities that have been pushed by consulting firms to develop leaders for various companies.

I am not going to argue about the merits of these activities when it comes to building leaders for future and I sure agree that for the participants it can be a lot of fun (well, at least for most of them).

But Google of all companies would be at the bottom of the list of companies that I would guess is utilizing the same techniques to build its future. They have always prided themselves on doing it differently. My friend Pedram .

I think Google has finally grown into its mature shell. I am not making this observation just based on one single ropes class of course. There have been other clues along the way that others have observed and documented.

And this change is completely understandable. Once you cross 10,000 employee mark, you are an enterprise whether you like it or not. But I hope that they continue to surprise us by acting out of their age every once a in a while though. They have made the tech business hell of a lot more interesting :-).

And Pedram: congratulation on climbing so high! I am proud of you buddy. I should give you a call some time soon to catch up and ask about the name-memorizing technique too. Improving myself in that dimension has been on my to-do list for this year but I haven’t done much about it yet.

Have you ever wondered when do you usually read your blog feeds? Or were you ever curious to know when you usually search the web? Well, sleep tight because Google knows some (if not most) of this information about you! I am not going to get into the cons and pros of a single entity having so much information about our behavior. Privacy gurus have (and will continue) to do that for us.

What is more interesting to me is how is Google as a business using this information, if at all? In other words what is the business intelligence culture within Googleplex? Does it just happen on optimizing the ad-word matching? Or they they go beyond that? Do they use this information to figure out what is the next neat project to invest in? Do rank-and-file employees at Google have access to this information (albeit at aggregation level) with ease? Can a Google developer wake up one day and connect to their corporate network and ask questions like

What is the correlation between % of blog posts shared and they time of the day they we read?

I don’t know if answering this question is valuable or not. But I want to know if it is possible for Google employees. If you have the inside scoop here, please let us know in the comments :). But in the meantime while I was thinking about the ramifications of access to this type of information, I went ahead and looked up my own file if you will. Here is what I have found:

I ask Google 400+ questions a day

Daily Search Activity

I am usually sleep until 7:00am! Otherwise I would be Googling!

I read a lot of blogs! I think I need some professional help with this one :-)

I do most of my blog reading before lunch!

What’s going on Wednesdays? Are people simply posting more to blogs?

Quick note: Some people have talked about the fact that Google products beyond search are not delivering any value for the company (99% of their revenue comes from advertising on search). They should be careful when making such judgments. If Google didn’t have GMail, they would never be able to have this information about my web behavior. And if they are truly using this information to monetize the search product better, GMail has paid for itself and more by the good publicity they got for it and the mentioned yield optimization.

Wall Street Journal reports (subscription required) that EMI Group PLC’s Blue Note Records has decided to experiment with online sale of music by their marquee artist, Norah Jones, without any DRM in MP3 format.

As I have said before, this is the way of future for online music sales and I also think this trend would be significantly to the advantage of record labels, musicians, and consumers in the long run.

Now that Blue Note Records and Yahoo! Music have stepped up, it is our turn to prove them right. I think in a symbolic move, we should all buys this track for 99¢. We should support the decision maker that took a risk, calculated as it might be but still a risk, by opening up this door. Let’s all show the record industry we are willing to pay for music online if they give it to us in a fair way.

Go to Yahoo! Music right now and buy the new single, “Thinking About You”, even if you are not a fan of Norah Jones. Do it to free digital music.You owe it to yourself. (I know it sucks to have to install the Yahoo! Music Jukebox to get a DRM free track, please brave through it)

Spread the word, digg, tell your friends, do whatever it takes to make sure you make your voice heard. Tomorrow could be a better day without DRM!

I was reading one of the popular financial newspapers while visiting Iran a couple of months ago. Among news flashes about the price of oil, futures of the steel and delisting of 20 some companies due to lack of clarity in their financial filings (some of them totally ignored this requirement for being listed in Tehran’s stock market) I found a very interesting piece of financial advice.

Growth Portfolio Asset Allocation

It was nothing novel. You have seen them everywhere. Financial planners usually suggest a “typical” portfolio based on different risk profiles and the local economic conditions. Financial press columnists make a living of explaining these profiles (and sometimes the logic behind them) whenever they can’t come up with anything else to talk about. Don’t get me wrong, I agree that there is value in these columns and this one particularly was eye-opening for me.

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I will be visiting Iran during the month of September after six long years. I am sure during this time the computer industry in Iran (especially software and particularly web developement) has changed significantly. I would really like to get back in touch with the developer community in Iran. So, if you happen to be a developer living in Iran let me know (email) or leave a comment on this post with how I can reach you. I will try to figure out a way for us to meet while I am visiting home.

This will be a chance for us to exchange and rant about what is going on in two very different markets in the world and even maybe find way to collaborate. So, it is all goodness. Ping me.

If you are not a developer, but know developers please let them know :-)


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