Over 45% of consumers now ask their friends for advice before making a purchase. This has massive implications on everything from a PR strategy to celebrity endorsements. Businesses are racing to understand the conversations that are taking place on social networks about their brand and integrate that insight into product, marketing and sales decisions. I’ve written extensively on how media companies are just starting to integrate that direct consumer insight (see here, here, here). Every client I have spoken to in the last 18 months is working on ways to integrate social data into their business and operational processes.

This widespread use of social data, both on the supply and demand sides, has also kicked up an ongoing debate about on-line privacy and the ways social data can be used. Anyone interested in this space should keep up with The Wall Street Journal’s excellent, and somewhat terrifying, “What They Know” series on digital privacy.  The way legal and public opinions solidify around on-line privacy will have major effects on how this data is shared and utilized moving forward.

The latest twist in the debate comes as a New York judge ruled that an Occupy Wall Street protested doesn’t own his own tweets and can’t stop prosecutors from searching his Twitter account – reported here by PaidContent.org “Judge Matthew Sciarrino Jr. cited a “widely-believed” but “mistaken” notion about online privacy rights and said that search and seizure protections don’t apply because we “do not have a ‘physical’ home on the Internet.’”

Stories like this will lead some to predict a backlash against social media platforms and their inherent “public” nature. However, on the other side, research indicates that more and more mainstream adopters are using social networks and willing to share private information. IBM’s latest Digital Consumer Study found that 75% of 18-64 year olds globally participate in social networks. Across the globe, over 50% of US and UK consumers, 67% of Japanese consumers and more than 90% of Chinese consumers are willing to trade personal information in exchange for access to content, friends or more relevant advertising.

So who owns social data, and more importantly, whom do users perceive as owing that data? I think we will continue to see an evolving discussion on the topic which will have serious impacts for the future of marketing and media.

Let’s look at what’s going on here

Intel knows that its core PC market is mature, and that growth will come from tablets, ‘connected’ consumer devices, and smart phones. The connected living room (as well as the connected house and car) is fast become a reality and it makes sense for Intel to try to be the one powering all those devices. It also, at least in theory, makes sense to move up the value chain in order to gain control over the user experience and create bargaining power with the Samsungs, Microsofts and Sonys of the world that are fast gaining a foot hold in that connected living room.  Intel has struggled to gain share in this market and last October wound down its efforts to make chips directly for connected televisions.

The pay TV market is ripe for disruption (although not in the near future). If Intel can create consumer demand for “Intel TV”, it can force other hardware and service providers to utilize their technology. This is how Intel became a $100 Billion dollar company to begin with. In the PC wars the “Intel Inside” brand became so strong that as long as a box had Windows and an Intel chip, no one cared about the brand of the computer itself. Intel wrestled margins away from manufactures like IBM and HP, turning the PC into a commodity product housing an Intel chip.

This strategy is all well and good in theory but unfortunately won’t work for several reasons

1. Intel has no direct customer relationship experience. When your cable doesn’t work, what do you do? You call your cable company.  Comcast takes over 400 Million customer calls each year. That is no easy feat. Google learned this the hard way when they tried to sell the Nexus One phone direct (with no live customer support, Google was pounded for months before cancelling the whole project).
2. The Intel brand currently means next to nothing in the entertainment space. The chief complaints about “smart TVs” are around lack of content, poor user interface, and lack of connectivity – not a lack of processer speed.
3. The connected set top box market is already extremely crowded.  Roku, Google, Sony, LG, Samsung, Apple, Boxee, Panasonic and a host of others already make devices that allow you to access internet content through your TV. Let’s not forget Microsoft, which already has connected Xboxes in 57M homes (compared to 23M homes for Comcast, the largest distributor of traditional set top boxes). Those XBoxes use an IBM chip, not Intel.   Now, none of these manufacturers offer a comprehensive content package that could easily replace cable, but that brings us to the most important point…
4. Internet television rights are extremely expensive and notoriously tricky. Most networks don’t actually own the internet distribution rights to all their programming, making licensing negotiations complex, costly, and in some cases impossible.  Why would Intel succeed where Google and Apple have failed? Netflix and Hulu have a 5 year head start and even they can’t offer what Intel is suggesting. I’m not saying it can’t be done, and for sure it will be done in the next 5-10 years, I just don’t think Intel is going to be the ones to do it.

The successful companies of tomorrow will take advantage of new information and technology to do what they do today better, smarter. Over a series of posts, I’d like to highlight some media companies that are doing just that

Shout Out for Being Smarter, part 2: Zynga

(See: Shout Out for Being Smarter, part 1: Live Nation)

On Monday, Zynga’s stock touched a new low of $8.00 and is currently trading at $8.33, down almost 16% from its IPO in December. But I don’t want to talk about the company’s stock performance. I want to talk about how this company is able to convince enough people to trade real money for fake goods that they can command a nearly $6 BILLION market cap (whether or not $6B is a fair price is a conversation for another day).  They do it by being extremely smart. And I’ll tell you how…

For those that don’t know, Zynga is the Silicon Valley darling that makes “casual” games that are built mostly on Facebook and involve simple concepts like building a farm or playing a mobster. These games are free and simple enough that anyone can play. The company makes money (1) by advertising and (2) by selling “virtual goods”. Virtual goods are little in-game tools and trinkets such as a new shovel for your virtual farm or a horse for your virtual barn.  These virtual goods set you back a dollar or two. It all sounds a little unsophisticated, right? Well, Zynga made $600M in revenue last year and is currently worth more than video game giants like Electronic Arts and Take Two Interactive. The company’s approach is anything but unsophisticated.

Zynga makes money by utilizing massive scale analytics to understand every minute detail of how people interact with their games. They stream user data from the 10M a day playing a Zynga product and test and analyze every aspect of the game. They employ copious A/B testing to determine which elements drive the highest response and engagement. Every scene, every character, every color, every movement is tested. For anyone in web development, this is nothing new, but Zynga is able to do it at massive scale, with massive variety in the data they collect, and do it fast. When people talk about using Big Data, Zynga is a prime example.  Zynga really shines when it comes to knowing exactly where in a game a player is at anytime and offering the exact right incentive to buy just the right virtual good. This is how they’re able to generate an average of $0.06 per user per day. That may not sound like much, but remember this is 10M people a day, every day, playing a free game.

Zynga has famously said they are an analytics company masquerading as a gaming company.  In an industry that is dominated by creative license and gut reaction, they are using cold hard facts to make predictive decisions that drive real revenues. For any entertainment company there should be a balance between art and science, and Zynga has recently stated that they may over emphasize data at the expense of creative instinct. However, as Zynga’s phenomenal growth indicates, there is plenty of room for creative content companies to figure out smarter ways of running their business.

What’s going on here? Are movies getting worse? Well…maybe, but the real culprit is the explosion in competition for leisure time and our attention. We have HD TVs, on-demand, Netflix, HULU, Amazon, iPads, iPods, iTouches, xBoxs, Boxee Boxes…it goes on and on. The appeal of the silver screen just isn’t what it used to be. Filmophiles claim there is no substitute for the big screen, and, while I may agree with them, attendance figures don’t lie. People just don’t see as much value in going to the movies as they used to. And yet, the cost of a move ticket keeps going up – nearly 4% a year over the last 10 years.

So how do you deliver more value in a highly competitive environment? You can keep things the same and cut prices…which doesn’t look likely, or you can innovate. The basic movie-going experience hasn’t changed much in nearly 90 years. Yes there have been enhancements such as stereophonic sound, multiplexes, stadium seating and digital distribution, but these are incremental innovations, not radical innovations.

A quick review for those who don’t speak consultantese:

An incremental innovation will involve modest technological changes and the existing products on the market will remain competitive. A radical innovation will instead involve large technological advancements, rendering the existing products non-competitive and obsolete. (based on Abernathy and Clark, “Conservative vs. Radical Innovations”)

The closest thing to come to radical innovation in the last ten years might be 3D. However,3D obviously has not stemmed the decline in overall sales and 3D ticket sales themselves have declined as a portion of total sales over the last couple of years. Clearly 3D is not the innovation that is going to save the industry.  So let’s look at what else might be out there.

There are three major categories of innovation

1)      Product innovation: changes that add value to the product itself or an entirely new product

2)      Process innovation:  changes that add value to the way the product or service is designed, manufactured or delivered

3)      Business model innovation: changes to the underlying business model

I’d say theaters could use a healthy dose of new ideas in all three categories. They have made some progress recently in process innovation, being dragged kicking and screaming in the 21^st century by replacing physical film reels and projectors with digital copies that could be delivered via satellite. Other than 3D and IMAX, the product itself really hasn’t added much new value. Some of the independents like IFC and Magnolia are playing with the business model, but in general I haven’t seen much there either.

Everyone is going to have different opinions on what will revive the theater, and that is the point. Personally, for me going out to the theater is for the experience and that experience seems to get worse and worse each year. Sad and stale décor, undertrained and unenthusiastic staff, cheap yet overpriced concessions…I could go on but I already feel like a curmudgeon. My point is the experience is subpar and the only reason I submit myself to it is that the theater has an exclusive distribution window on new releases.  In the age of broadband and bitorrent, that exclusivity means less and less.  Without some real innovation that brings new value, I predict you will continue to see declining attendance rates.

The industry needs fresh ideas and my hope is that some senior people at Regal and AMC are hard at work on this.

You see, back in aught-7 in the early days of eBooks, to build a market for Kindles and the Kindle store, Amazon decided that consumers needed a nice easy price point. Something simple and standard, say $9.99. They argued it was a new medium and consumers didn’t know what it was worth, so a standard price would set that value for them. Where did they get this idea? Well, back in aught-3, in the early days of digital music, to build a market for iPods and the iTunes store, Apple decided that consumers needed…sound familiar? Apple decided people needed simple standard pricing in order to be persuaded to buy digital music instead of steal it. All albums $9.99, all songs $0.99, doesn’t matter if it’s a major label or indie, big artist or small, everyone was the same and people knew what to expect.

The strategy worked stupendously for Apple, which has sold over 10 Billion songs, and horrifically for the music industry, which has lost 1/3 of its value since 2003. There are many reasons for this (piracy, the ability to buy one song instead of an entire album, general obtrusiveness) but a key reason labels have argued, is that $0.99 vastly undervalues their content. In 2009, after years of fighting,  Apple finally introduced tiered pricing (so a hit song in greater demand cost more than a random catalog track that people are less willing to pay for). But, the damage was done. $0.99 is the universally excepted value of a song and the music industry has been losing money ever since.

So beginning this year, as eBook sales started to really take off and physical sales started to decline, major publishers decided to regain control and set their own pricing policies. Ironically, Apple had the largest hand in convincing publishers to abandon Amazon’s $9.99 standard and set each book individually (you can read about it in the Wall Street Journal piece). Anyway, what publishers are trying to do is maintain the value of their content and minimize the cannibalization of their print inventory by cheaper substitutions. Economists call this price elasticity and pricing optimization – different people are willing to pay different amounts for different things. The name of the game is to increase the total pie. Price so that you gain as many customers as you can without leaving any money on the table, all to get the highest net profit possible. Sometimes this means sell cheap, with lots of customers but little margin, sometimes it means sell high, with few customers but fat margins. It all depends on what a consumer is willing to pay. For the music industry, the pie has been shrinking. So what does it mean for the publishing industry?

Well, since 2008 total book sales (including physical and digital) and total revenue have been increasing – only 6% over that period, but for an industry in the midst of a disruptive technological revolution, that’s not too bad. BUT, if you consider that in that time period eBooks sales increased over 1,200% its obvious eBooks were not adding much to the bottom line. These figures are through 2010, so we’ll have to wait for 2011 stats to see if the total pie is in fact increasing or if book publishers are overpricing and steering consumers towards piracy and lower cost alternatives.

So what is the right price for an eBook? The consumer in me says you can’t charge similar amounts for a physical and digital copy –a digital copy that I can’t hold in my hands or give as a gift and that I know doesn’t include manufacturing costs, distribution costs, retail  and co-op promotions, allocations for returns and other physical costs built into the physical price. However, the economist in me says that the convenience of an eBook is worth something. The ability to buy and download instantly, to take hundreds of books with me, store and organize notes, highlight and email key sections, – these are all features that add value and that value should be priced accordingly. As of now, publishers are pricing in that added value, whether or not consumers are willing to pay for it remains to be seen.  At the very least, publishers are in control of their destiny. If their pricing scheme fails, they have no one to blame but themselves.

See article here (from Hollwood Reporter)