Where to start in building a great discovery experience

Great discovery experiences requires 2 core competencies:

1. A great personalization algorithm
2. A large corpus of content with accurate metadata

A great personalization algorithm allows you to target the right content to the right person at the right time.  It should be continually learning and learning (from positive and negative signals).  It should take into account as many signals about the user as possible (demographic info about the user, time of day, location, mode of delivery, device) and match that with as many signals within the content as possible.

The second competency that you need is a large and rich body of content.  This is where most companies fail.  They either have too small a body of content or a database of content that has little metadata.

Example A: You are trying to help people discover shoes to buy.  You have 100,000 users and 10 different pairs of shoes.

What is the likelihood that one of those 10 shoes will be something that one of the 100,000 users are interested in?  Very low.

Example B: You are still trying to help people discover shoes to buy.  You have the same 100,00 users but now have populated your database with 100,000 different shoes.  However you've only tagged each shoe with data about its manufacturer and whether its for men or women.

What is the likelihood you will be able to recommend the right pair of shoes to someone knowing only these 2 pieces of information?  Also very low.

My advice for companies trying to build a discovery experience is to attack both the breadth (size) and depth (richness) of data problem first.  Hold off on a complicated personalization algo until you have enough data to work with.

Also a shortcut to a more complex personalization algorithm is crowdsourcing + collaborative filtering. What I tend to look for are positive engagement signals from users (clicks, time viewing content, item purchased) and then use collaborative filtering to create clusters of users and content.  Once you have clusters of users and content, you can surface content in the cluster to the users who haven't seen that item before.

This was a bit of a brain dump post, but just wanted to post it since I've been meaning to share some thoughts on discovery for a while.

Apologies for the sparseness, but would love additional thoughts and comments on your best practices for creating great discovery experiences.

Zynga...capital markets are bonkers

Am I missing something?

Zynga is currently trading at 120% of book value.  Granted their revenue growth has been anemic, but this valuation basically assumes the company will barely grow again.  Furthermore it assumes the company will barely break a profit...FOREVER.

It is very interesting to compare Zynga vs Tencent, the leading Chinese gaming company whose primary revenue stream (virtual goods) is very similar to Zynga. Investors in Chinese equity markets are flocking to Tencent (e.g. Google Finance Tencent v. Hang Seng Index) because they see the company as having a reliable revenue stream when compared to the rest of China.

One major financial difference between Tencent and Zynga is that when Tencent passed the $1B revenue mark in 2008, it was operating with a 40% profit margin and it continues to maintain a very healthy 35-40% profit margin while growing to over $4.5B in revenues.

I have faith that the Zynga team is extremely motivated and capable of breaking through its current operational issues (mobile cannibalization, user growth and margins).  When it does, the current $2.2B valuation for a company that reaches 300M users a month, produces over $1B in revenues, and has a $1.2B war chest will look ridiculous.

Facebook will take-over ad networks

I am a strong believer in Facebook and believe they have years of great innovations to come.

A big part of the current debate over Facebook's IPO is whether or not they can hit the necessary financial milestones to justify their current $100b valuation.  The skeptics are looking at Facebook's revenue growth, which was unspectacular as an IPO candidate at 37% this past year.  The problem with this analysis is that it is a backward-looking valuation, using historical growth as an indication of future growth.

I believe Facebook will begin significantly accelerating its revenue growth as soon as it rolls out its publisher ad network--something akin to Google's AdSense product.

Chris Dixon just wrote a piece about the need for Facebook to innovate on its business model (http://cdixon.org/2012/05/15/facebooks-business-model/).  That innovation will come from Facebook's publisher ad network product for the following reasons:

• Existing publisher ads are often irrelevant because they are based on contextual relevance (e.g. you are reading a news article about dangerous toys and the ads are for toy stores)
• Recent improvements in display ad effectiveness have validated that contextual relevance is often not as important as user relevance; retargeting ads based on past user behavior and non-contextual relevance are often more than 2x more effective
• With immense amounts of user activity on Facebook owned properties and web browsing activity through its ubiquitous Like button, Facebook is in the best position to determine user relevance
• Publishers have low switching costs and are only loyal to the highest RPM ad network

Google is currently valued at 5x revenues ($200b market cap with about $40b in revenue).  Facebook is currently valued at 20x revenues ($100b market cap with about $5b in revenue).  To get to comparable multiples, Facebook needs to find another $15b in revenue.

Google currently generates about 30% of its revenues through AdSense ($12b).  The main issue with running an ad network are the substantially lower margins due to publisher revenue splits (Google currently pays most publishers 51%-68% of revenue generated from their sites).

My prediction is within 5 years, Facebook will have more than twice as much revenue generated from its publisher program as Google does today.  That would put Facebook at more than $24b in revenue.  If Facebook's user data can substantially improve targeting on publisher sites, Facebook would not need to pay as high revenue splits as Google to maintain publisher RPMs and would generate higher margins off its ad network than Google does today.

Facebook became the display ad market share leader with minimal effort.  Yahoo, Google, and Microsoft had sales teams with decades of relationships pounding doors for more dollars.  Yet they couldn't stop Facebook--with its team literally turning away dollars because they couldn't service them--from taking the #1 position.

The achilles heel for Facebook is user trust.  If users stop using Facebook, the flow of user data slows down and its ability to target ads greatly diminishes.

We'll see where things go, but I'm predicting an amazing ride for the next 5 years.

There isn't only 1 way to do things...

http://online.wsj.com/article/SB10001424052702303513404577352221465986612.html

Love the story about Patagonia and its founder-CEO, Yvon Chouinard.

What's great is that it shows there isn't one way to be successful.  The article also talks about businesses being told to focus on their bottom-lines; but Patagonia bucks that trend and still is successful.

Perhaps the ultimate metric for business success is the long-term bottom-line, but there are so many ways to create a successful company.  If everyone were solely focused on increasing their bottom-line every quarter, the world would be a pretty boring place and there would only be a handful of companies.

For some companies, the best way to create value is to focus on something other than profits or revenues.  Patagonia is one of those companies.  Though "to not focus" is very different from "to not care" (I'm pretty sure they care a lot about their financial health).

Discovery > Search

Looking at where tech companies are innovating today, it is clear the new area of focus for Silicon Valley is "discovery."  And it's a great thing.  Companies that are currently gaining success through discovery as a core feature are Pinterest, Foursquare, Fab, and Instagram.  And Web 2.0 companies like Facebook, Twitter and YouTube have quickly shifted their products to make discovery part of their core experiences.

Search, in the way that we know it, was long won by Google years ago.  If you know what you want, but just need to find that pointer to it, Google is your solution.  By dominating the bottom of a person's decision funnel, Google became a $200b company.  But discovery is anyone's game and a much bigger playing field.  It's the wide top of the funnel.

While search is rooted in efficiency and transactions, discovery is unpredictable and happenstance--but most importantly emotional. It's what happens when someone posts a beautiful picture on Facebook, links to a fascinating article on Twitter, or emails a hilarious video on YouTube. You HAVE to click on it to learn more and when you do, you love it.  Because discovery is emotional, the value of positive discovery through your product is immensely greater than a pure utilitarian product.

More than anyone, Facebook has made discovery its product's bread-and-butter.  Discovery is what makes the Feed so addictive--the unknown stories of your friend's lives are revealed on Facebook in real-time.  Furthermore, your friends are awesome filters to introducing you to something interesting.  That constant feed of interesting stories, pictures, and videos is why Facebook has 800m members spending 7 hours a month on its site.

In a future post, I'll provide some best practices for companies to engineer discovery into their products and create deep engagement.

Would love to hear other examples of great discovery that people know of.

Groupon needs to pivot

Groupon is in a bad strategic position and needs to quickly pivot.  If it does, it might be the largest pivot we've seen in the Internet space.  Groupon's cash base will enable the company to sustain for a little while, but we are witnessing a very rapid deterioration of its strategic advantages.

Groupon is a HBS strategy case study waiting to happen (if it hasn’t already).  My personal take is that regardless of how the Groupon story ends, it is a rare breed of company.  A billion dollars in revenue is a massive achievement.  Of US consumer internet companies founded in the last 5 years, there has been only 2 (Zynga and Groupon) that have reached that scale of company—Facebook was founded 7 years ago.

What Groupon has also proved is that there is a massive advertising opportunity connecting local businesses and consumers—hence the hundreds of copy-cat daily deal sites.

Yet the market is proving that Groupon's assumptions about what is defensible in the local advertising space were wrong.  Groupon made a bet on a strategy that focused on customer acquisition at massive scale and that its crazy big email list would provide it defensibility.

Once we have a customer’s email, we can continually market to them at no additional cost.
- Andrew Mason, Groupon CEO

http://allthingsd.com/20110825/exclusive-groupons-mason-tells-troops-in-feisty-internal-memo-it-looks-good/

The thinking followed that by owning the biggest email list, Groupon would have a unique proposition to small businesses that they would be the only place where they could reach such a massive reach of customers so quickly.

Initially this was a unique value proposition, and Groupon leveraged this to obtain huge concessions from local businesses (50% of value of coupon sold).  There began a virtuous cycle where Groupon had access to the best local business deals, thereby attracting more customers, increasing brand value, and making money hand over fist.

Breaking down Groupon’s strategic position using the Porter’s Five Forces model, you get this picture of the company around 2009:

1. Groupon was exploiting low supplier power, which ultimately was a result of low competition.
2. Customers loved Groupon, but still the ball was in the customer's court.  The deal (Groupon's product) had to be really good.  20% off was not good enough...it had to be 50% off.
3. New competitors were quickly sprouting.  A lot of people said that it was too easy to copy Groupon's business.  Groupon and its investors were on the side that it was not easy.

Fast forward 2 years, and this is the strategic position Groupon is in.

1. Groupon has no strategic advantage.  It's competitive advantages on supplier power and little competition have been significantly weakened by the entrance of hundreds of competitors and significant substitute products.
2. Customers have proven themselves to be fickle.  They are loyal only to the best deal.
3. Suppliers don't value Groupon's reach as much as they previously did.  The huge rush of customers have brought several local businesses to its knees because their operations could not scale.
4. Groupon has tried to extend its model to new products (travel, goods, immediately redeemable coupons) and new locales (international) to counteract its customers' fickleness.

In retrospect, it now looks like Groupon scaled itself too soon.  It had not established a sustainable, competitive advantage and its assumption that scale, in and of itself, would prove to not be a true strategic advantage.

Several folks, including Groupon's CEO, Andrew Mason, keep bringing up Amazon as an example of a company that scaled unprofitably before becoming a huge success. Yet few people have contrasted Amazon's huge initial investment in operations versus Groupon's huge initial investment in marketing.  Amazon made a very large bet that by building the most operationally efficient backbone, it would have an advantage on all its competitors on a) price b) shipping time c) selection d) personalization and ultimately e) customer satisfaction.  Groupon has made a very large bet on building a big email list.

Where does Groupon go from here?

Groupon needs to change course because it will find that all its initial investments in marketing will start to deteriorate in value.

Groupon's current largest asset is not its email list.  It's its brand.

Its brand has immediate recognition with both customers and local businesses.  What the company now needs to do is determine how it can provide something new to one or both constituents that no one else can.

Without knowing the internal operations of the company, its hard to say what other assets the company can take advantage of to pivot.  But the faster the company makes this change, the better.  Making this change as a public company is 10x harder than making the change as a private company.

Airbnb: Crisis Management Fail

There are so many things disappointing about this story regarding an Airbnb customer and Airbnb.

Customer's blog posts:

http://ejroundtheworld.blogspot.com/2011/06/violated-travelers-lost-faith-difficult.html

http://ejroundtheworld.blogspot.com/2011/07/airbnb-nightmare-no-end-in-sight.html

I hope the victim is able to eventually find peace as this incident certainly appears to have left her in an extremely vulnerable state.  What's disappointing is that Airbnb had several opportunities to turn this horrible situation into something better for both the victim and Airbnb.

They only had to do the right thing. By doing the right thing, Airbnb could have made the incident a non-issue. They should have taken care of the victim: provided accomodation, resources, and support. The cost? Some phone calls, a personal visit, and some nominal costs. The downside for not doing so? Alienation of its current and future community members and hundreds of millions of dollars in valuation.

A lot of people argue that by doing the right thing Airbnb is setting a precedent and opening the door for future fraud claims. That is a short-sighted and misinformed judgement. Just because Airbnb provides support to this customer doesn't mean they are setting a precedent for how they treat all cases. And even if they are extremely concerned about setting a precedent, they can take mitigating steps.

If this situation were handled correctly, the victim's blog post never would have been written and none of us would even be having this conversation.

This is Crisis Management 101 for Airbnb and they failed.  They failed not just once, but multiple times.  Each stage of this crisis elevated the stakes of the game, and each time Airbnb mishandled the situation.

Stage 1. Victim contacted Airbnb
Stage 2. Victim writes blog post
Stage 3. Victim writes 2nd blog post

People familiar with crisis management know that the minute a story about a relatively unknown company hits mainstream media in a negative light, the negative brand cost is tremendous. For the millions that are for the first time hearing about Airbnb through mainstream media outlets, they are leaving with a horrible first impression.

There is little Airbnb can do now to change those people's impression.  They read the news story, remembered "Airbnb = not trustworthy", and moved on.  Tomorrow their attention will turn to something else.

The best thing Airbnb can do is take advantage of its current airtime to broadcast:
1. What its doing to prevent future situations like this from happening
2. How it plans on supporting community members
3. An honest apology

The climb out of a ditch is always more difficult than the fall in. It's up to the Airbnb team to figure out if they make things right. At the very least I hope they make community management priority #1 (it certainly is not right now).

Why PayPal is interested in Where

Yesterday, eBay and PayPal announced its acquisition of Where and many felt the reason was to strengthen PayPal's play in the mobile commerce space.

While that is certainly true, the strategic play is to expand PayPal's customer base to include small offline merchants--a much larger market than its current customer base consisting primarily of small online merchants. PayPal's growth and differentiation has been driven by small merchants who were selling online--either on eBay or their own website. Yet the ecommerce industry has begun to be dominated by large players such as Amazon who can provide consistent and simplified buying experiences. Luckily with the recent stunning growth of companies like Groupon, a completely new opportunity opened up for PayPal.

One way to conceptually think about a company like Groupon, which is driving online sales to offline experiences, is as a bank. Groupon is collecting money from online consumers and sending money to its offline merchants. PayPal wants to be that online-offline bank for every small merchant.

The Where acquisition is a great extension of how PayPal will to continue to serve its core customers, small merchants, but in a whole new (and much larger) market -- the offline world.