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In social space no-one can hear your marketing budget scream (or why being a marketing director is a bit like being a fund manager)

Being a marketing director is like being a fund manager.  You have your marketing budget, something you strive to increase year-on-year, in the same way that a fund manager has funds under management, which they also look to increase.  The challenge for both is where to allocate this money in order to maximise returns.  The fund manager has their asset categories and within these decisions about individual stocks or products.   A marketing director has a range of media assets or channels and then a decision about what type of campaign or message to put within each.

The problem that marketing directors face is that the yield available on these assets has been relentlessly declining year-on-year.  There is no safe stock, such as gold, or a way to play against the market.  Instead, they desparately need to find a new asset category, partly as a way of improving the ROI on conventional assets by reducing demand and thus forcing the price down, but also in search of higher yields.

In this environment social media can seem, superficially at least, very attractive.  Here is a whole new space to spend your money in – and there are no shortage a players looking to take it from you: digital agencies who will build you community platforms, social media agencies who will create social media campaigns, or Facebook itself who will accept big fat cheques for helping you “integrate your brand into consumers’ life stories”.  However, the yield problem remains.  In-so-far as we have been able to work out the yield on financial investment in social media (and that isn’t very far), it isn’t proving to be startling better than that available in the old media assets.

The reason for this is the unfortunate fact that the only bits of social media that are worthwhile are not available for sale.  You can’t buy social media, you can only participate within it.  To paraphrase the slogan of a famous sci-fi thriller “In social space, no-one can hear your marketing budget scream”.  The asset you need to participate in social media is people – and people are seen as a toxic asset in most businesse these days: a guarantied way to get fired is to increase headcount and a guarantied way to get promoted is to “take costs out of the business” or any of the other various euphemisms for making people redundant.

Until businesses create permission to invest in the asset that is people,  the social media space is never going to yield a productive return.

 

Facebook IPO valuation: its all about costs, not about revenue

I have had a quick look at the Facebook prospectus.  The thing I found really interesting was not confirmation of revenue and its dependence on advertising, but a very first glimpse of how Facebook’s costs are structured.  I  believe the key to working out a long-term, sustainable valuation for Facebook as a business lies in its costs – for the very simple and old-fashioned reason that a business cannot create marginal revenues that are significantly greater than marginal costs (if it is operating in a functioning, competitive market – which of course Facebook is not at the moment).  If you therefore want to understand long-term revenue potential, understand marginal costs.

Facebook has shown its costs thus:

  • Costs of revenue: $860 million
  • Marketing and sales: $427 million
  • Research and development: $388 million
  • General administrative:$280 million

This, of itself, is quite an intersting breakdown.  What other companies might there be where marketing, sales and R&D account for 41% of total cost?  A pharmaceuticals company perhaps?  However, what Facebook hasn’t done is split costs out in a way which allows us to see how much Facebook is spending on people, versus how much is spend on tangible operation costs, such as server space and data centres.  What Facebook labels “salaries, benefits and share-based compensation” is included within the figures for each of these categories, including the ‘Costs of Revenue’ line.  One would suspect that, in reality, people costs are a very sigificant element in all of these categories and it would be nice to know how this breaks down – not least because it will give us a glimpse of what it actually costs to deliver and maintain the infrastructure that is Facebook.

Knowing this is pretty important because it allows us to get a handle of what Facebook’s true marginal costs are and thus its true revenue potential.  What is already clear is that most of the costs associated with marketing, sales and R&D are not true costs, in that they are the costs Facebook has elected to incur in order to support the business model it has chosen to construct.  They are discretionary costs, in that any competitor coming into the market need not incur them in order to deliver a similar service to users.  In effect, Facebook has decided to incur these costs in order to service advertisers and chase sufficient revenue to justify a valuation in excess of $60 billion, rather than the revenue it needs to actually deliver the service to its users.

Look at it another way.  Facebook has 845 million active users.  Match this against costs of $1,955 million and this comes out at $2.30 per user.  Now I know this isn’t a truly accurate way of establishing marginal costs – but it probably isn’t way short of the mark.  So are we to believe that it costs Facebook around $2 to service every additional user.  Of course not, it will cost Facebook much less than this.

If I had to take a stab at it, I would reckon you could deliver A Facebook (if not The Facebook) to users for something in the region of $300 million.  Take that, plus a margin of say 25% and that gives you revenue of $375 million.  Put a multiple of say 15x on that and you get a valuation of $5.6 billion.  The fact that Facebook is already earning revenues of $1.7 billion, and carries a valuation in excess of $60 billion might give one pause for thought.  I don’t earn millions as an analysts at Goldman Sachs – so I wouldn’t necessarily set much store on my opinion.  But if I were an analyst at Goldman Sachs, I would certainly want a whole lot more information on Facebook’s costs.

Don’t drag your website into Facebook

The other day I came across this post from eConsultancy while digging around for some examples of corporate use of Facebook.  The author, Jake Hird, had selected what he considers 25 brilliant examples.  What immediately struck me was that none of them looked like Facebook pages, they all looked like websites.  Indeed, this was the criteria the author was using: these were considered brilliant because they had ‘got round’ what was seen as the inherent design restrictions of the Facebook format by creating separate tabs as ‘landing pages’.

What sort of insanity is this?  Surely, the key to successful corporate usage of Facebook is to develop an approach that reflects how people actually use Facebook, based on an understanding of what it is that Facebook is adapted to do.  Facebook is not a website, it is a tool that small groups of people whom already have some form of social connection, use to preserve and enhance that connection.  That is a very different function from that of a website, which is designed as a destination that you drive the maximum number of people to in order to give them information.  The Facebook format is not something to be ‘got around’ it is something to be embraced.

Jake’s logic seems to be thus:  once upon a time we had a thing which we understood called websites.  Then something new came along called Facebook.  Facebook was really different and we needed to find a way to understand it so we decided the best way to do this was to try and turn it into the thing we understood.

I know this article was written some 18 months ago, time for both the author and the companies concerned to learn the error of their ways – but having checked the Facebook pages concerned, nothing much has changed.  Why?  Well I guess there are some powerful forces at work here.

First is fear of the unknown.  Marketing directors want to be reassured that all the knowledge and experience they have accumulated in the world of mass media, can easily be exported into this new world of social media.  It can’t, because social media operates to a different set of rules – as much as anything else, social media is not something you buy, it is something you participate within.

Second is the fear of digital agencies that their business model is melting.  Digital agencies, the smart ones anyway, know they are in trouble.  To quote the boss of one such agency “how are we going to make money building websites in a world where anyone can now make a website”?  However, if they can persuade marketing directors to spend lots of money creating customised Facebook pages or building expensive brand communities – that can be a lifeline.

Third is Facebook itself, which receives virtually all of its revenue from marketing directors and needs to keep them and their agencies happy and reassured.

There is a fourth, which is the fact that a Facebook page is a much better data capture opportunity than a website – hence the current obsession with securing Facebook Likes.  In fact most Facebook strategies go something along the lines of: drive people to the Facebook page, incentivise them to click the Like button, then get them the hell out of there into a digital platform better adapted to doing what it is We want to do with them.  But is this behaviour really sustainable and is it not fundamentally missing whatever genuine opportunities Facebook might present?  Facebook is, in many ways, just a new form of social behaviour.  That is certainly how its users relate to it.  And these users are only going to be prepared to ‘engage’ with those brands that understand and respect this.  (Long term this is also a bit of a problem for Facebook, because you can’t own a form of behaviour).

Personally, I think the sign of an effective corporate use of a Facebook page is that it looks like, well, a Facebook page – an environment that looks and feels exactly like the environment Facebook users are creating for themselves.  It should be a space where people who want to come and talk to a brand, can come and talk if they want to.  Frequently, of course, these people are going to want to ask questions or raise complaints – but that’s fine, it’s called customer service.  Of course, you don’t want people asking questions or raising complaints all over your website – yet another reason why turning your Facebook page into a website is a stupid thing to do.

The fact is that we are now operating in a bi-polar world – the world of traditional media and the world of social media.  The traditional media world isn’t going to go away in a hurry, it is just going to shrink in importance as the social media space grows.  The defining challenge for any marketing or communications director (in fact any CEO) over the next 10 years is how to operate with a foot in both camps and the key to this is the recognition that both spaces are fundamentally different: what works in traditional doesn’t work in social and visa versa.

New look blog

I have just changed the design of my blog.  You will be reading this in its new iteration.

There are three reasons for this:

First – I was bored with the old look, it had been that way for years

Second – I wanted to become more practical, using this site to focus more on what I do as the day job, addressing the tangible issues organisations encounter when they look to make the transition into the world of social media.  The bigger picture issue about the social media revolution and how it’s going to change the world (which I find very interesting, but doesn’t really help a marketing or corporate communications director work out what to do tomorrow), I will now post at my lodgings over at the Huffington Post.

Third – I wanted a format where a larger selection of my posts could visible, rather than just the last one off the press.

For those of you who do take the trouble to follow me on a reasonably regular basis – I hope you like it.

Kodak: its all about the separation of information from distribution

Here is my take on the demise of Kodak.  Whenever I am doing my “What is social media?” stand-up routine, I say that the social media revolution is about the separation of information from its means of distribution.  That inevitably creates a moment of what I like to think is ‘creative dislocation’ within the audience who are expecting to be told that the social media revolution is all about Facebook, blogs and Twitter.  The separation of content from distribution is causing a whole host of other separations: the separation of news from newspapers, journalism from journalists and the separation of many businesses from their business models – Kodak being a case in point.

The problem for Kodak was that information (a picture) became separated from its means of distribution (film and print) and Kodak’s business model was based around providing the means of distribution, hence the reason its business model became separated from its business.

As some have already pointed out, Kodak didn’t suffer from a lack of understanding of the digital environment or a lack of innovation.  It was a very innovative company and was a leader in many aspects of digital technology – but perhaps this ended up as being a distraction.  Kodak should have focused its innovation on changing its business model, not on developing new technology.

There are many lessons here, not least the misplaced belief that the social media revolution is all about technology and tools and that if you understand and use these tools you will be OK.  The technologies and tools of social media are crushingly simple to understand and use – that’s the whole point.  But the mass adoption of these tools is fundamentally changing the rules of communication and the relationship between citizens / consumers / customers and institutions such as brands, the media and government.  You don’t deal with the fundamental consequences of this change without making some fundamental changes to the way you do business.  Having  a Facebook page, being on Twitter and posting videos on YouTube is not a sufficient response.

Don’t be a Kodak.  Don’t get caught up in the technology and tools.  Only the organisations that understand how social media is going to affect their business model, and adapt accordingly, will avoid Chapter 11.  And this isn’t simply about media or digital businesses – it is about any business that still wants to have a relationship with a customer or consumer.

Selling to the Facebook focus group (not a good idea)

Everyone in marketing (and also now politics) is familiar with the focus group.  This is technique where you have a structured conversation with a very small group of people selected to be representative of your whole target audience.  Focus groups work because sufficiently skilled practitioners can draw conclusions and insights from that very small group that are relevant to the larger group.  Their most common usage in marketing to understand how people will react to new products, but mostly how they will react to new ads.   (As an aside, I have always found it amazing how many brands come to understand what consumers think of their products or services only through the lens of how they understand their advertising).

The relationship a brand, or the researcher representing it, establishes with the people in a focus group is quite a strange one.  Quite often, the brand may not even reveal itself, but the participants are frequently encouraged to disclose highly personal information about themselves, which they do both because they are paid a small sum but mostly because they feel flattered to believe that their opinion counts for something.   After the session ends, the relationship finishes.  It is very rare to return, or even report back, to the participants unless they have been recruited as part of a panel designed to see how thoughts and opinions shift rather than define what those opinions are.  Certainly the brands concerned don’t believe there is any advantage in preserving a relationship with attendees at focus groups or even encouraging the participants to buy their product or service: you don’t sell to the focus group, you get insights from the focus group in order to then sell to the much larger group of consumers or customers.

Facebook, as far as a brand manager is concerned, is basically a focus group Continue reading →

Why a social media strategy is very different to a marcoms strategy

The single most important thing to realise about social media is that it is different.  Almost all of the mistakes being made in social media occur because organisations do not fully appreciate this and simply look to drag their existing marketing and communications ideas, campaigns and ways of thinking into the social media space.

Strategy is no exception to this.  A social media strategy is different to a marketing communications strategy for the following, simple reason.  A marcoms strategy has as its output a piece of communication (expressed as an ad, a press, release, a brochure, a campaign – essentially one single ‘thing’ that is presented to the whole target audience).  However, a (successful) social media strategy has as its output a form of behaviour or a process. Continue reading →

Further reply to Cheryll Barron

Cheryll,

It is a shame your blog does not allow comments, because that might be an easier place to have this conversation!  I cannot disagree with anything you say in your reply – it is plausible support for how you might create a keiretsu cooperative.  My issue, however, is not how one might do this, rather why one would do it – or rather why one would do it to create a “publishing and discussion site designed to attract the indie writers we call bloggers”.

One of  the consequences of the separation of information from distribution is that the information then tends to live in digital spaces rather than digital places.  For example, you didn’t come to my blog (digital place) to find my piece on Gutenberg and the social media revolution – you found it “out there” in digital space.  My article lives in a Google search (which is a space) much more than it lives in my blog and its visibility in this space is determined by how people have shared or distributed this article within their own digital spaces not by how many have come to my blog to find it.

In reality, the concept of information living in, or being published by a “site” is dissolving as, indeed, is the idea that there is any collective interest (monetary or otherwise) in the act of publication.  However, there is an emerging collective interest in the act of information sharing and thus there may well be relevance in the concept of  a community (or site) to share information.

Thus, my advice to you would be to take your work on creating a kieretsu coopoerative, which remains relevant, and apply it instead to the act of information sharing, rather than the act of information publication.  There is no longer money to be made in publication, because publication costs nothing.

(Also note: by ‘walled garden’ I did not mean pay-walled garden.  The walls are there to stop the information getting out, not to prevent people getting in.)

Happy to continue the discussion.

Social media: its not about creating brand ambassadors

Last week I was running a two day social media and PR workshop.  After one of the sessions someone said “so, is it like creating brand ambassadors?”  A simple and logical question, but I gave a very poor answer – I said “it is a bit like that, but not the way we have been accustomed to doing it, in that it is not about creating a fixed group of people who will become advocates for your brand.”  This rather poor answer has bugged me but I have realised now that a much better  answer would have been “its not about creating brand ambassadors within your consumers or customers, it is much more about creating consumer or customer ambassadors within your business.”

A reply to Cheryll Barron

Cheryll,

I am glad that Google serendipity brought you to my piece.  (By the way – read Eli Pariser’s “Filter Bubble” for an investigation of the way in which Google is stifling serendipity).

Your model of collaborative ownership of media is interesting – but I can’t say that I can give a clear steer on its chances of success.  I wish I knew the answer to the question “what is the future of media”; all I have at this stage are some clues as to what the basic principles that shape this future may be.  The only thing that I am pretty sure about is that whatever this future is, it will look completely different from what we have at the moment (see Clay Shirky’s excellent “Thinking the Unthinkable” piece).  And my sense is that co-ownership of media may not be sufficiently unthinkable because media may be becoming something that can’t actually be owned in a way which allows any form of monetary benefit.

So what are the clues?

The big one for me is the shift from institutions to processes.  Continue reading →