Saturday, February 21, 2009

Outsourcing Journalism: Pasadena Now Goes "Glocal"

The local online-only newspaper, Pasadena Now, created an uproar when it revealed that a preponderance of its content is created not in sunny Pasadena, but over 8,000 miles away in Mumbai, India.  Protectionists and traditional journalists were aghast at the revelation of outsourced journalism.  Pasadena Now, which covers local news and politics, human interest stories, and community events, is written by a team of writers who don’t even consider themselves to be journalists, a fact made obvious their prose.  James MacPherson, the editor in chief and owner of the website, considers himself a pioneer in a low cost content sourcing model that he calls “glocal.”  Indian reporters source stories from local websites, event calendars, and city council minutes, creating what amounts to surprisingly comprehensive coverage.  Pulitzers are certainly not in the offing for these reporters, but for a local daily, the content is concise and relevant to city happenings.  

A competing newspaper’s editor, Larry Wilson of the Pasadena Star News volunteered some disparaging comments about Pasadena Now’s “glocal” outsourcing journalism model: “To pretend you can get the feel and the culture of a town as complicated and interesting as Pasadena by e-mailing and doing things over the Internet is nutty.”  Mr. Wilson has a right to be livid.  While the quality of content on Pasadena Now is undoubtedly lower than that of his paper and other locally written dailies, the average "Joe-Six-Pack" (if he reads at all) can’t tell the difference.  Journalism outsourcing is here to stay, especially as consumer demands force content online, where advertising rates are far lower than print.

Outsourcing journalism is nothing new--Bloomberg and Reuters have been taking advantage of the labor arbitrage opportunity for years with their financial reporting.  MacPherson’s “glocal” model is new and important for the publishing industry, however, because it represents such an aggressive move to lower costs as content moves online.  Many papers have pursued an online strategy to maintain solvency and adapt with the times, but the shift to the web and lowering labor costs is no panacea.  

Publishers must compete for users’ attention to justify current advertising rates.  The shift online is just one step toward a viable strategy that papers such as the New York Times have fully embraced.  What papers should be worried about, however, isn’t whether or not they can transition their businesses to the web--this is a prerequisite for their coming challenge.  The paramount concern of publishers should be the obvious growing user preference for a product that is cheaper to produce and that many users find more engaging: social media.  The graph below shows the percentage of time U.S. internet users spent on the Wall Street Journal online, New York Times online, and Facebook.  

The Wall Street Journal and the New York Times together make up only 0.2% of the average users’ time online, while Facebook accounts for a staggering 5% (Source:  With content produced for free by social networking users and users spending more time on those sites, the traditional online business model for newspapers is seriously at risk.  Expect more citizen journalism and for successful papers to transform themselves into social contribution systems rather than uni-directional news sources.  

Thursday, February 19, 2009

Did the Social Networking Bubble Pop?

Last week, Twitter raised $35 million from venture capital firms Benchmark and Institutional Venture Partners in deal that valued the micro-blogging service at what is rumored to be an impressive $250 million.  While a quarter billion dollars for a nascent firm with no revenues to speak of might seem like a staggering sum, by industry standards, it appears perfectly rational.  With 6 million users, Benchmark and IVP paid roughly $42 per Twitter user, slightly less than Murdoch’s NewsCorp paid for Facebook users back in 2005, before social networking was the buzzword du jour.  Microsoft’s $240 million infusion into Facebook, however came at an irrationally exuberant price of $85 per user.  Given Twitter’s growth in unique visitors of over 800% comparing annual figures, the Twitter valuation begins to make even more sense.  At some point these businesses will have to generate significant revenues to justify the lofty expectations investors have placed on them, but don't expect the answer to be advertising.

Wednesday, February 18, 2009

Facebook's About-Face: Data Grab II

In a dramatic reversal of direction, Facebook has pledged to amend its user agreement after inciting user uproar related to its new Terms of Service (TOS).  On the Facebook blog, Zuckerberg explained, "Over the past couple of days, we received a lot of questions and comments about the changes and what they mean for people and their information. Based on this feedback, we have decided to return to our previous terms of use while we resolve the issues that people have raised."  

What this change makes clear is that from a public relations and communications perspective, users are king in the land of Facebook—users’ status in the legal world is still to be decided.  The group, "People Against the New Terms of Service (TOS)" now boasts nearly 88K members, with over 1,300 comments in opposition to the company's efforts to control and own user data.  The issues over Facebook's terms of service, however, underscore a paradox at the crux of Facebook's business model.

While the company is pressured by investors and management to better monetize its user base (after all it is a profit-making enterprise), aggressive efforts to monetize users are met with fierce opposition.  Many users are loath to have Facebook use their personal information for marketing purposes. Yet this data is Facebook's only real unique asset, and any meaningful economic profits will likely come from manipulating, sharing, and storing user data.  The company is obviously aware of this paradox, which is reflected in a communications strategy in which the lawyers act as the aggressors by putting more teeth in the TOS and Zuckerberg placates users with friendly language on his blog, rhapsodizing about "principles" and "philosophy."  In the end, this strategy conceals changes made to the TOS and keeps users happy by making them feel like they have been heard from and respected by management.  This is nothing new from Facebook, as a similar strategy was used in rolling out the NewsFeed functionality, which was also met with user protest.

Tuesday, February 17, 2009

Facebook's Data Grab

Facebook’s aggressive change to its terms of service this week has a created a brouhaha of massive proportions.  A normally acquiescent user base that is loath to privacy controls has become irate over changes made to the user agreement. At the heart of the controversy is strengthened language declaring Facbook’s ownership and license to your information.  The new terms of service grant the company a “perpetural wordwide license” to make use of your personal content.  It omits a clause from the previous TOS stating that deactivating one’s account is tantamount to revoking the license granted to Facebook.  As of this morning, a movement in opposition of the new user agreement had amassed over 30K members, growing at an astounding 100 new members per minute.  

The issue has even received attention from Mark Zuckerberg, who posted on the topic in an effort to quell the uproar from users.  Zuckerberg explains, “Our philosophy is that people own their information and control who they share it with.  In reality, we wouldn't share your information in a way you wouldn't want.”  Newsflash: Philosophy differs from legalese.  The TOS is an affront to user rights and ownership over their original content.  While Zuckerberg has attempted to make the language more palatable, the legal reality is that users no longer control the use of their content while using the service and after deactivating their accounts. 

The change in the terms of service and the outcome of the user revolt is significant because it emanates from a growing concern for Facebook--how to monetize users and justify what was once a $15 billion valuation for the company.  With a valuation of that magnitude, Facebook would sell for nearly 50 times 2008 revenue, a preposterous multiple.  The company is under pressure from financiers to monetize their 50 million active users and over 40 monthly billion pageviews.  With a business model where data is their primary asset, expect user information to be more tightly guarded by the company.  As business models develop that involve demographic profiling, targeted advertising, selling user profiles, and cookie-sharing emerge, the company must solidify its hold on the only unique asset it owns—user information.  

Monday, February 16, 2009

Twitter's Business Model

Twitter is old news to technophiles, but the micro-blogging service that has been around since 2006, has recently received a tremendous amount of attention in the media.  In a flurry of articles and predictions, we learned last week that the 29 employee firm, with no revenues to speak of, carries a valuation of approximately $250 million.  What is even more remarkable is that Facebook purportedly offered $500 million for the company earlier this year.  What gives?

The usefulness of Twitter is subtle at first but its appeal is obvious.  In short 140-character snippets, the service allows you to send messages to your friends, or those that have opted-in to hear your tweets.  Think of it like a text message that gets sent to your entire phone book, except your friends choose to be in your phone book or not.  

Twitter has grown to an estimated 55 million daily users because it is simple and rejects the cluttered and bloated functionality that sabotages many web services.  In addition, it relies on friends op
ting-in rather than opting-out for communications.  This lets users select whom they’d like to hear from, not visa-versa.  Lastly, Twitter is noncommittal—you aren’t obliged to respond to tweets, but can merely enjoy the ebullient flow of information, acting on it when you like.

So it’s a great service, but why are venture capitalists willing to pay an implied $250 million for the company when it hasn’t attempted to earn a dime in revenue?  Fred Wilson, of Union Square Ventures, an early investor in Twitter explains, “You can't monetize web services very well until you have an audience of scale…every ounce of time, energy, money, and brainpower you spend on thinking about how to monetize will take you away from the goal of getting to scale.  Because if you don't get to scale, you don't have a business anyway.”

But how exactly will Twitter make money?  After all, the company has consumed a tremendous amount of resources (venture capital) and we expect to see economic value from it.  Here are some of the ways I expect Twitter to monetize its users:

1. Business User Accounts: A recent phenomenon is that companies are turning to Twitter as a way to connect with customers and promote themselves on the web.  Sign up for Twitter and you will find plenty of corporate “friends” to follow, whose tweets are mostly spam.  Twitter can charge businesses to use the service to communicate with customers.

2. Pay Per Lead: Twitter recently released new functionality that allows you to pick from suggested people to follow.  Companies will pay to have people enjoy their ambient presence by subscribing to their tweets.  This will generate click-throughs and potentially sales.

3. Advertising: Injecting relevant advertising into tweet feeds could garner some click-throughs, but certainly not enough to warrant a $250M valuation.

So what does this all amount to?  None of the business models described could compel a venture capitalist to offer $250 million for the company.  Twitter has something else up its sleeve.  The web service taps into the ambient desires, life-events, and the emotions of its users.  Users volunteer to share this intimate information with their friends.  These intentions and personal moments are far more valuable than cold hearted search terms that are plugged into the likes of Google and Yahoo everyday.  The Twitter opportunity is to tap into genuine needs, feelings, and human interactions--a hundred-billion dollar bonanza for marketers.

Friday, February 06, 2009

Cato's Reaction to the Stimulus Package

The Cato Institute, a prominent libertarian think tank, recently lambasted President Obama with a full-page advertisement appearing in the New York Times, the Washington Post, and other national publications. The Cato ad takes specific issue with an Obama statement made in early January aimed to accelerate the legislative process and convince Congress to eschew the partisan differences to pass the stimulus package quickly.

To Obama’s chagrin, over 240 economists gathered by Cato disagree with Obama’s assertion that “there is no disagreement that we need action by our government, a recovery plan that will help to jumpstart the economy.” It is not surprising that the Cato Institute and other free market thinkers find fault with the stimulus package, officially known as the American Recovery and Reinvestment Act of 2009, as the bill contains hundreds of billions of dollars in spending that will expand the size of the Federal government.

While expanding the size of the federal government over the long run is a dangerous plan and will fail to contribute to economic growth, in the short run, the increase in government spending may be exactly what it will require to restart America’s economic engine. In an environment where consumers have little spending power and firms are hesitant to invest in new capital equipment, the only participant in our economy with the ability to spend may be the Federal government. While the stimulus package includes many questionable investments and is certain to cost future taxpayers dearly, the risk of inaction is far higher.