What’s Coming in Internet Advertising: 12 Predictions for 2012

I did my annual predictions first on my Forbes blog, The New Persuaders, since they’re focused largely on the Internet media and advertising I cover there. On that blog, they’re done as separate posts, but I wanted to gather them up in one place here, as I’ve done in previous years. So here’s what I think will happen (or in some cases, not happen) this year in my corner of the technology and startup world:

Facebook goes public, but won’t start an IPO landslide: Facebook will make the signature stock offering of the decade, one that reportedly will value the social network at up to $100 billion. But it won’t launch a thousand IPOs as a gazillion venture capitalists and angel investors hope.

Of course, the first part of that prediction is a gimme. But I can’t go without mentioning it because the Facebook IPO will be one of the biggest stories of 2012. Assuming Goldman Sachs or Morgan Stanley don’t stumble in pricing and selling the offering, Facebook’s IPO will be every bit as important as Google’s in 2004. It will be a sign that Facebook is a real, sustainable company (if there was any doubt left by now), but also a sign that social networking is getting woven into the fabric of our entire online experience.

The second part of the prediction depends less on how the Facebook IPO goes than on how (or whether) the economy recovers. If the recover remains slow to nonexistent and the stock market reflects that, IPOs will be sparse. If we get the slow but growing economic improvement we seem to be seeing now, more companies will go public but not a gusher. But the point is that Facebook is such a singular success that it’s not going to set the tone for lesser (often far lesser) Internet companies.

Facebook’s ad business booms–but not at Google’s expense: Facebook’s social advertising looks promising, but won’t come close to challenging Google’s huge success in search ads this year–maybe ever.

Obviously, Facebook is having no problem raking in the bucks from advertisers eager to reach its 800 million-plus audience–or more specifically, the millions of people in whatever target markets they choose. EMarketer reckons the company will gross nearly $6 billion in ad revenues this year, up from $4 billion in 2011. And that’s before we know anything about Facebook’s likely plans for mobile ads or an ad network a la Google’s AdSense that would spread its ads around the Web.

From reading a lot of articlesyou’d think Facebook is stealing all that money directly from Google. That’s not mainly the case, given Google’s own considerable growth in display advertising, though Facebook’s success may well blunt that growth in the future. Instead, Facebook currently is eating Yahoo’s and AOL’s lunches, and those of many ad networks that, until Facebook ramped up its ad business, were the main alternative for advertisers looking to target sizable audiences.

What would make Facebook a huge Google-scale company is the theft of an entirely different meal: television advertising. After all, Facebook shows much more promise as a brand advertising medium than a direct-marketing medium like Google. It needs only to draw a small fraction of the $60 billion or so spent on television advertising, the biggest brand medium, to be enormously successful. But even then, it’s not mainly a Facebook vs. Google contest.

Facebook still needs to answer a big question, however. That’s whether its “social ads,” which incorporate people’s friends in ads in a 21st century version of word-of-mouth marketing, will have nearly the effectiveness in driving attention and ultimately sales as search ads, which appear in direct response to related queries, often involving products people are looking to buy. The potential is intriguing, and there are some nice examples of how well social advertising can work.

But despite Facebook’s considerable work in providing new kinds of metrics on marketing and advertising impact on its users, marketers and agencies aren’t yet universally convinced they need to spend a lot of money on Facebook ads. After all, they can get a lot of mileage out of their free Facebook Pages and Like buttons around the Web. (Not to mention, it remains to be seen whether these ultra-personal ads will cross what blogger Robert Scoble calls the Facebook freaky line.)

Bottom line: If Facebook is to be the Google of the this decade, its advertising has to at least approach the engagement of search ads, especially as Google itself moves to become more of a brand advertising platform with YouTube and continues its push into display ads. While Facebook is building what seems likely to become a great business on anew vision of advertising that could change many decades of tradition,2012 won’t be the year it closes that deal.

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What’s Coming on the Internet in 2011 (Or Not)

I know I shouldn’t do it–predictions too often are either obvious or wrong–but I can’t help it. If I have to think about what’s coming in 2011, and I do, I might as well inflict those thoughts on the rest of the world. Isn’t that what blogging is all about? Anyway, here’s what I expect to see this year:

* There will be at least one monster initial public offering in tech. Take your pick (in more or less descending order of likelihood): SkypeGroupon, ZyngaDemand MediaLinkedIn, Twitter, Facebook (only if it has to). But despite many stories that will call this event a bellwether,  the IPO won’t bring back anything like the bubble days of the late 1990s (and thank goodness for that) because there are still only a few marquee names that can net multibillion-dollar valuations. UPDATE: Well, so much for that descending order. LinkedIn apparently will be the first to file–though whether it will be a “monster” IPO is another question. UPDATE 2: Well, here’s that monster IPO–since it’s hard to believe Facebook won’t go public if it has to disclose financials anyway. But it likely won’t happen until early 2012. Update 3: Now Groupon appears to be leading the IPO derby. Update 4, 1/20/11: Now it looks like Demand Media will be the first out. Again, not sure that’s the monster one, but if it’s successful, more will come.

* App fever will cool. Good apps that encapsulate a useful task or bit of entertainment–Angry Birds, AroundMe, Google Voice–will continue to do well. But those apps that do little more than apply a pretty layer atop Web content won’t get much traction–and moneymaking opportunities are uncertain in any case. The bigger issue: Once HTML5 becomes the widespread standard for creating Web services, enabling much more interactive Web services right from the browser, I wonder whether the need for separate apps will gradually fade. Continue reading

What Happened in 2010–and Didn’t

Somehow I persuaded myself a year ago to offer up predictions for what would happen in 2010–and what wouldn’t happen. Now it’s time to take my medicine and see how I fared.

What I said would happen:

* Merger mania will accelerate in technology, especially acquisitions of smaller firms. OK, so it was a bit of a gimme, but I got that right. Google alone bought more than two dozen.

* Branding will start to become more apparent in Internet advertising, with Google leading the way in display. I guess it became somewhat more prominent a push, but I’d say I was a year too early on this.

* Google’s software efforts will finally establish it as more than a search company, making it apparent what this pony’s second trick is. Android certainly established itself, the Chrome browser made significant gains, and Google Apps got some big new customers. Chrome OS was late, though delivered through an alpha laptop, and remains unproven, and so does Google TV. Overall, it’s an impressive showing, if not enough to identify software as its next trick.

* Yahoo will surprise on the upside, thanks in part to a pickup in brand spending. Wrong! Well, the latter happened, but not enough to buoy a sinking Yahoo. It laid off 4% of its staff and jettisoned once-promising operations. Well, there’s always 2011–and maybe that’s all there will be if CEO Carol Bartz can’t demonstrate that she can finally turn things around.

* Mobile applications will start to take off for the masses. Two words: Angry Birds.

* Twitter’s main business model will become more apparent, but won’t knock everyone’s socks off. That’s just about right.

* Facebook will keep growing, providing perhaps the first test of whether social media is a blockbuster business after all. No doubt about that, even if it’s not yet certain how profitable the company will be.

What I said wouldn’t happen:

* Tablets won’t be the next big thing in client computing. As popular as Apple’s iPad was, tablets didn’t take the world by storm in 2010. But I don’t doubt they’ll be much bigger in 2011.

* There won’t be as many tech IPOs as venture capitalists and startups are hoping. And no, there weren’t, even if 45 did go public, up from 16 in 2009. And none of them were the big names such as Twitter or Facebook that some had hoped for.

* Real-time won’t be a business. When’s the last time you heard that buzzword? Maybe when real-time search engine OneRiot did a layoff?

* Online advertisers won’t escape a privacy backlash. And they sure didn’t. More trouble is coming in 2011, too.

* Google won’t get hit with a major antitrust lawsuit that so many have been predicting for years. True, and it doesn’t look any more likely today.

So actually, I did pretty well, even if you could argue that some of those weren’t exactly stretches. Next up, predictions for 2011, and another opportunity to look like an idiot.

LIVE from TechCrunch Disrupt: John Doerr, Mark Pincus, Bing Gordon

TechCrunch Disrupt, the tech blog’s annual conference in San Francisco, is underway. I’ll liveblog the highlights of this first panel of luminaries, which is looking at Building Internet Treasures. FYI, John Doerr is a partner at Kleiner Perkins, as is Bing Gordon (former longtime creative guy at Electronic Arts), and Mark Pincus is CEO of social game giant Zynga.

Actually, Doerr is soliciting audience questions for everyone, and then they presumably will address them. They’re all over the place–where do you look for new ideas, what about micropayments, the wisdom of developing on a closed platform (in other words, Facebook), is advertising the revenue model for the Internet, what’s the future of companies like Groupon, what matters most for the future of the Internet, what is the future of social games, is the intelligent Web real or a myth, is there a future for Flash vs. HTML5, Internet disruption in health care.

Pincus starts out. 33 million people as of yesterday played a Zynga game. 1200 full-time people. Won’t disclose revenues.

Pincus says the best companies are creating products and services that we now can’t imagine living without–Amazon, Google, etc. That’s what an Internet “treasure” is. He says Zynga measures its users’ “net promotion score,” which has to do with how much they spread the word of their game experiences to others, if I understand correctly.

Doerr says he’s getting a different sense of games culture today–more analytical than creative. “We’re data junkies. We measure everything,” he says, and Zynga has invested in big data warehouses–more than a petabyte of data a day. “We’re adding a thousand servers a week.” Yikes.

But, he adds, design and creativity still really matters.

Doerr: What is disruptive about social games? Gordon: Four big disruptions from the Internet: Social, analytics, APIable Internet (app economy) and new payment methods. What’s disruptive about social games is that they combine all four in one. Pincus: In summer 2007, I was here for the Facebook apps platform launch (so was I). Games and fun were not a big macro on the Internet yet. The disruptive thing for me was not apps and platforms, but that they took down the barriers to entry to playing games–you could now design games that three clicks in, you know how to play them.

Doerr: Is the social Web going to create other great possibilities beyond games? Pincus: We are going through the biggest change in Internet consumer behavior since using the browser. Somebody will become the travel icon on my phone–and be that throughout the Web as a result. Health is waiting for someone to turn it into a consumer product that’s useful.

Turns out John Doerr’s daughter Mary, in high school when meeting Pincus along with her dad and Gordon to assess whether Kleiner would invest in Zynga, sealed the deal by saying, “He’s cool.”

Pincus: Wanted to keep control of the company to avoid “death by a thousand compromises.”

Doerr: Zynga has the notion that every employee is a CEO. That can’t be right, can it? Pincus: We sure try. People have to define what they’re the CEO of, and how they’re going to kill it (that goal).

Doerr: Is it the app economy? Pincus: Every consumer behavior on the Web is going to become an app and a new kind of industry. Consumers are going to expect the way they interact with a service is an app.

Will there be a revenue stream besides advertising? Pincus: I’m a big believer in the user-pay economy. Just as offline, ads will eventually be a small part of the overall Internet economy. Advertising [online] is only a $50 billion industry–smaller than the auto industry.

Pincus: We’re still far far away from being an Internet treasure. People can still imagine life without playing our games. Gordon: I don’t know, I was harvesting wheat at 6:15 this morning. Pincus: We have to make the daily grind have more meaning. It’s a big challenge.

How Long Will Social Games Keep Us Hooked?

Not long after I started my farm (pictured above) on FarmVille, the leading social game on Facebook, I got a message from a friend. He was relaying a question from his wife, who had seen countless semiautomated posts to my Facebook Wall chronicling my progress in the game. Her query: “What’s the matter with him?”

It wasn’t the only such reaction I got from playing Farmville. I started the game as research to write a story on their rise for Graduate School of Business alumni magazine at Stanford University, where a surprisingly large number of social games founders or managers got degrees. It seems that people either love social games (one friend either is doing a very deep research project on them or needs an intervention) or hate them. But it’s hard to deny that they’re a game apart from most previous online games, because millions of regular people who don’t even know the term “gamer,” let alone touched an Xbox console or joined a World of Warcraft guild, are playing them.

I hope my story explains some of the reasons why, but what I’m uncertain about is how far social games can go. Clearly, Zynga and other social games leaders have found a way to provide entertainment people enjoy–and, let’s not mince words, appeal to people’s addictive nature by adroitly manipulating game mechanics to keep players coming back again and again. As a result, Zynga is raking in big bucks and seems headed for a blockbuster IPO. And games may well support a second big business in virtual currency for Facebook.

Given their undeniable appeal, it seems that social games are here to stay for a good long time. But I also wonder if the slowdown and churn we’ve seen in social games this year indicates a certain weariness on the part of players. I’m afraid I don’t have the addictive gene, so much of the appeal of social games is lost on me (although I would like to reach level 12 in FarmVille so I can plant chile peppers…).

But even people who respond to the rewards of these games can feel like they’re on a treadmill. As a result, social games companies are trying to add more wrinkles to their games to keep users from getting bored. But then, like so many tech companies that have fallen victim to the Innovator’s Dilemma, they may start losing the mass market, for whom the simplicity of social games is key. Only a few companies, I’ll wager, will be able to walk that thin line.

When Will People Understand Virtual Goods Are Real?

Look, I know virtual goods sounded kind of exotic–four or five years ago. But when it’s a multibillion global business today, it’s past time to dispense with the notion that crops on Farmville and flowers on Facebook aren’t really real. While I’ve been guilty of describing virtual goods as imaginary at times, what set me off most recently was a story in the New York Times that couldn’t seem to hammer enough on the idea that they don’t actually exist in any meaningful way.

Consider the language in just the headline and first two paragraphs: “Fanciful items.” “Things that do not exist.” “Pretend merchandise,” in contrast to “actual goods.” “Make-believe items.” Later, the article asserts that “virtual merchandise is in its infancy.” Perhaps that’s true compared to what it can become, and it is relatively new as a sizable business in the U.S. But estimates of the value of virtual goods sold worldwide range from $2 billion to as much as $6 billion a year. That seems well beyond infancy.

The thing is, what we call virtual goods are really no different in the pleasure or utility they offer people from other virtual things we consider “real”: Digitized photos. MP3 files. Videos uploaded to YouTube. And of course, online newspaper articles. So why the continual amazement that people will pay for virtual goods?

Partly it’s because the very term “virtual goods” connotes an air of unreality. But I think it’s also partly because, even 15 years after the World Wide Web took off, many people still haven’t quite realized how much of our lives have moved online. You can argue we’ve gone too far, of course. Hey, I’ll choose a walk in the woods with my family over leveling up in Farmville every single time. But it’s time to get over the idea that virtual things aren’t real.

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