Is Zynga the Canary in the Social Games Coal Mine?

Infographic courtesy of Tableau Software (click to see interactive version)

Cross-posted from my Forbes.com blog The New Persuaders:

I stopped playing FarmVille several months ago. Why? I got bored. Apparently a lot of other people are getting bored, too–at least with playing FarmVille and other Zynga games on  their personal computers.

According to a research note from Cowen & Co. analyst Doug Creutz today, social games played on Facebook such as Zynga’s are seeing steadily dropping usage–leading to a fearsome 10% drop in its shares today, to $5 or less.

The reason, he says, is likely that more and more people are playing social games on their smartphones and tablets:

We believe that mobile devices may be siphoning off an accelerating number of gamers from Facebook. Facebook itself is increasingly being accessed by mobile devices, however it is not possible to play Facebook-native apps through Facebook on a smartphone. We believe that over the last two months, trends in the casual digital gaming space have swung decisively towards mobile and away from social, at least in Western markets.

No doubt that’s one reason, and an inevitable one as more people use their smartphones and tablets instead of PCs for many tasks (and fun and games). But I also wonder if enough people are realizing that these games are taking a little too much of their lives. …

Read the rest of the post at The New Persuaders.

Google Makes Renewed Grab for the Rest of Online Advertising

New DoubleClick ad system heats up battle to create an operating system for digital marketing

Cross-posted from my Forbes.com blog The New Persuaders:

It wasn’t supposed to be this way. Hundreds of well-funded online ad technology companies have sprouted up in recent years, each aiming to make it easier and more efficient for marketers to reach just the target audience they want.

Terence Kawaja, CEO of boutique investment bank Luma Partners, created this now-famous Display Lumascape to show how complex the online ad tech industry has become.

Yet the result is a crazy quilt of companies–graphically illustrated in that mess of a chart on the right–that drives marketers and agencies crazy. The very existence of so many competing products, in fact, has made placing ads online and measuring their impact more complicated and cumbersome than ever. “Venture capital has supported and financed a bunch of chaos,” advertising veteran Randall Rothenberg, CEO of the trade group Interactive Advertising Bureaugriped at a recent ad conference.

The result: Most ad dollars, nearly $200 billion a year, still get spent on television because it’s so much easier.

That’s the problem Google aims to solve with a revamped ad buying system it will announce today at a private Future of Advertising event hosted by its DoubleClick display-ad management and technology unit. (Part of the event will be livestreamed here.) The company, which already dominates 60% of the online ad business–those little text ads that appear on the right and top of the page when you do a search–now has its sights set on the remaining 40% of the industry. That would be the $25 billion worldwide market for display ads, the graphical and video banners familiar on virtually every commercial website.

Google’s goal: Provide the leading one-stop shop for advertisers and publishers to buy ads on websites, mobile phones, social networks, apps, and whatever other new media the Internet spawns. Essentially, it’s building an operating system for ads much like Microsoft did with its Windows for PCs–with much the same appeal to marketers and agencies as Windows has for PC users. “When you’re putting together a campaign, you want everything connected vs. trying to piece it all together,” says Kurt Unkel, president of the online ad buying operation at Publicis Groupe’s VivaKi digital ad agency, a Google partner.

Google’s announcement is the latest salvo in a war to control the next era of digital marketing. After a decade in which Google’s search ads overtook display ads with an unmatched ability to turn clicks directly into sales, many advertisers and publishers expect–or at least hope for–a resurgence of new kinds of display ads that could woo brand advertising dollars from TV. Neal Mohan, Google’s vice president of display advertising products, has predicted that display will be a $200 billion industry in a few years.

Read the rest of the story at The New Persuaders.

Facebook Ad Chief David Fischer: Making Ads ‘the Best Thing on the Page’

In March of last year, just as market watchers Hitwise and comScore reported that Facebook overtook Google as the most visited website for the first time, Facebook also stole one of Google’s top ad executives: David Fischer. The former deputy of Facebook COO Sheryl Sandberg at Google and a onetime editor at U.S. News & World Report, the 37-year-old Fischer left a job spearheading the search giant’s local ad effort to become Facebook’s vice president of advertising and global operations.

Despite his sales background, insiders say Fischer was a good fit with Facebook’s geek culture. At Google, “he made (sales) people in an engineering culture feel that they were valued,” says David Scacco, Google’s first ad salesman and now chief revenue officer at MyLikes, which pays celebrities and other online influencers to promote ads on social sites. And despite a modest demeanor in public, he was known for sometimes cutting loose, dressing up as Ozzy Osbourne and singing ‘80s songs at sales conferences. That said, he’s clearly a sales guy: In a 50-minute interview, he used the word “opportunity” or its plural 58 times.

In this edited interview for my story on Facebook’s advertising strategy in the latest issue of MIT’s Technology Review magazine, Fischer talks about how Facebook hopes to transform marketing into “the most useful thing on the page.”

Q: What’s your vision of advertising, and how can Facebook make that happen?

A: The Web is being rewritten around people. There’s this transformation that’s happening from an information Web to a social Web. Once the Internet was great for answering questions like “What is the weather going to be like in Cambridge tomorrow?” and “What flights can I get from Boston to San Francisco?” It wasn’t so good at aggregating information about the way we actually live our lives, which is people.

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You Are the Ad: Digging Into Facebook’s Advertising Strategy

When I first  started looking closely at Facebook’s booming advertising business for an article that just appeared in MIT’s Technology Review, I was soon struck by an apparent disconnect. The social networking juggernaut clearly is gunning for big brand advertisers, hoping they will view its 600 million-plus audience as the next big ad opportunity beyond television.

Yet it appears that most of the ads on Facebook are actually from either small businesses or no-longer-small businesses (but not traditional brands) such as social games maker Zynga and daily deal service Groupon. What’s more, those ads seem more aimed at eliciting a direct response such as an email registration or a purchase on another Web site than they are aimed at branding, which is intended to implant a brand into consumers’ minds that might get triggered later when they’re ready to buy something. And between Google’s search ads and a gazillion display ad networks, online direct-response advertising is already a wee bit crowded–even if Facebook’s massive database of personal info holds a lot of appeal for targeting likely prospects.

In other words, it looks like most advertisers on Facebook aren’t yet using its ad platform for the very purpose it’s designed for: branding. Of course, it’s tough to complain about a company whose ad revenues are doubling, to an estimated $4 billion this year. But if Facebook is to fulfill the huge expectations of its investors, who are valuing Facebook at around $65 billion (give or take $10 billion or $15 billion depending on who’s counting), it needs to do more than provide just another way to drive a direct sale. It needs to capture–or create–a market out of the vast majority of ad spending overall that’s aimed at branding.

One way to do that is providing what Facebook has been doggedly pitching to Madison Avenue for years: ads with a social component, such as its recently introduced Sponsored Stories, in which people’s stated “likes” for a product or brand are turned into ads. These essentially are word-of-mouth marketing on steroids. David Fischer, Facebook’s vice president of advertising and global operations, lays out this possibility in detail in an interview I’ll post here shortly. Suffice to say, there’s certainly potential for brands to divert a significant portion of their television and print ad budgets–and a few are starting–but for a lot of brands and their agencies, that’s still on the come. For now, they seem more enamored of Facebook marketing tools such as Likes and Pages–which are free.

Another strategy is to create a new advertising market, as Google did with its search advertising. Search ads enabled very small businesses, as well as those with just an online presence, to place effective direct-response ads for a global audience for the first time. Likewise, Facebook could open up brand advertising to the business masses in a way no medium has yet done. That’s something Facebook COO Sheryl Sandberg makes a good case for in my interview with her. Depending on how you define branding vs. direct-response, this may already constitute a good bit of Facebook’s advertising.

Either way, I came away understanding why investors seem so enamored of the company’s potential–but also why many people in the advertising business aren’t yet ready to place all their chips on Facebook.

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.