Viral Loop

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by ADAM L PENENBERG


  Predating all of them was SixDegrees.com, the first online social network. Started in prebroadband 1995 by Andrew Weinreich, a freshly minted Fordham law student, the site had users list friends, colleagues, family members, and acquaintances, both on the site and off, with those who weren’t members invited to join. They dispatched messages or posted comments on bulletin boards to anyone within their first, second, or third degrees of separation. While it grew to 3 million members from 165 countries, the site was a money loser. In 2000 YouthStream Media Network bought it for $125 million in stock and promptly shut it down.

  The one thing of value it retained was a patent: no. 6,175,831, “method and apparatus for constructing a networking database and system,” which Weinreich was awarded in 2001. The patent covers the software platform for an online service that enables users to build relationship networks, that is, the viral invitation system that goes to the heart of online social networking. Andrew Katz, an intellectual-property attorney with Fox Rothschild, told the New York Times that it “is probably the pioneer patent out there,” and warned that “it should be taken very seriously by everybody in the industry.”

  Just as Friendster was picking up momentum, YouthStream announced it would auction off the “six degrees patent” in September 2003. Six months earlier, Reid Hoffman, a former SixDegrees employee flush from the sale of PayPal, had started LinkedIn. Weinreich tipped him off about the impending sale, and Hoffman worried that whoever possessed the patent could potentially prevent everybody else from starting social networks. He teamed up with Tribe’s Mark Pincus to form Degrees of Connection LLC, a Delaware limited liability company they used to bid on their behalf. They contacted Friendster to see if Abrams might be interested in splitting the cost three ways, but never heard back. It crossed their minds that Friendster’s main backer, Kleiner Perkins, might bid against them in a quest to stamp out competitors.

  It was a blind auction, so all that Hoffman and Pincus know is they won with a bid of $700,000. Hoffman says his share, $350,000, “is not that much money and it also became an asset of [LinkedIn], which we could figure out later.” They could conceivably assert their intellectual-property rights and hold Facebook, MySpace, Bebo, and all the others hostage. Hoffman concedes as much but claims they have no plans for the patent. Buying it was simply a “defensive posture.”

  [ THINGAMAJIGS ]

  With perhaps a billion people, which is a fifth of the planet, on social networks, an entire ecosystem has been stacked over them. These are the so-called widgets: mini software applications that range from the sublime to the silly—a photo slideshow, video, a map of the places you’ve traveled, a pop quiz to measure your intelligence, empathy, or what kind of dog you’re most like. They can be used to toss virtual sheep at friends, decorate pictures with stickers and graffiti, or add glitter, games like Speed Racing (“mod your car to get more horsepower” then “race your friends”), social interactive pleas for attention like Hug Me (“Do more stuff to your friends: hug, slap, tickle, give beer to, throw Britney at…”) or your horoscope. Nonprofit organizations release social network applications for fundraising, and media companies for brand extension.

  The first social network widgets popped up on MySpace. Teenage girls took advantage of a coding glitch to customize their pages. One of them, Sandi Sayama, a pretty, outgoing seventeen-year-old high school student in California, spent a lot of time on MySpace and had picked up enough HTML coding to personalize her page with sparkling stars and pictures. But she was having trouble creating a slideshow so her photos could rotate because HTML was far from the ideal way to do it. After school, the five-foot, one-inch Sayama played in a volleyball league. Her position: setter. “It’s not about height,” she says, “it’s about heart.” She played with a family friend, Lance Tokuda, a computer programmer from Hawaii and told him about her problems with getting her slideshow to work. Tokuda became fascinated with MySpace, which was emerging as the next big thing. Sayama had been the most popular girl in her middle school, and Tokuda figured if he could build a slideshow she liked, a lot of others would, too. Coming from the drab world of enterprise software, he didn’t trust himself to know what kinds of applications would have mass-market appeal.

  Not long after, he showed her a basic slideshow he coded in Flash, which he had never worked in before. “Oh, that’s cool,” she said. She would definitely use that on MySpace.

  But?

  Needs glitter, she said.

  Tokuda went back to the drawing board and, in addition to glitter, added the option of snowflakes. While she liked the snowflakes, they were too dark and obscured the picture behind. They should be more see-through, she advised.

  Shortly after, Tokuda, along with a colleague from work, Jia Shen, founded RockMySpace, which they soon changed to RockYou, a company to distribute social network applications. The first app was the photo slideshow, which they posted on the MySpace forum six times. The first day only four people downloaded; the second, twenty. Then it went to forty, to eighty, to crashing their servers (see Fig. 9). It proved so popular that Tom Anderson of MySpace emailed the two entrepreneurs to congratulate them. The skyrocketing demand forced them to move to a new host, but within three weeks RockYou’s traffic took down the entire network. Despite shutting down the site for seventeen days out of the first thirty while they waited for new servers to arrive, they registered sixty thousand users in the first month.*

  Soon MySpace figured it would get in on the action and released its own photo slideshow player. Too late. RockYou had already hit a point of nondisplacement. And MySpace wasn’t the only platform anymore. Facebook opened up to outside developers, and others joined Open Social, which meant an application coded for, say, Orkut would also work on Bebo and the others, which offered a tremendous boost to companies like RockYou. To stay ahead Tokuda and Shen hired Sayama, who had enrolled at San Jose State, studying to be a parole officer, as their official arbiter of taste. They thought of their target audience and realized that they—and the engineers they were hiring—were out of touch. Most people at Stanford didn’t use MySpace. They thought it was a joke. So before they would release an application, one of them would say, “Let’s hear what Sandi says,” and she would offer her impressions.

  Sayama told them to clean up their website because she felt it was too cluttered and loud, like they were trying too hard. She also created the greeting cards in RockYou’s SuperWall, which was a viral channel that could hold photos, video, and other content and picked the icons for the social app game Hug Me. In exchange, Sayama received shares in the company and was paid handsomely for thirty hours a week of work—which made her feel guilty. She compares herself to a game tester versus someone actually making the game. “My friends always say that I have a really cool job,” Sayama says. “I just sit there and work on this, work on that and give my opinions. I feel like somebody making the game is contributing more than somebody testing it.”

  FIG. 9. In this formula, x is the average number of friends that a user invites to try an application. In RockYou’s case, x= 5 while y is the acceptance rate, which is 22 percent. The viral coefficient (also known as viral factor) is arrived at by multiplying x times: y 5 x0.22=1.1. Since it is greater than 1, the application is viral. (RockYou.)

  While Sayama advised on the aesthetics, Tokuda and Shen became expert at designing for the viral loop, with several applications among the Web’s most popular applications. Within twenty-five months RockYou registered 50 million users (in contrast, 99 percent of applications don’t achieve 1 million installs), and over four years it raised almost $70 million in funding. They want to become one of the highest-trafficked websites in the world, a portal “like Yahoo,” Tokuda says, for social applications. By early 2009 RockYou.com was handling more than 100 million users a month.

  [ SLIDE: NUMBER ONE NEMESIS ]

  But they have stiff competition, namely, in the former PayPal founder, Max Levchin, who followed Tokuda and Shen to MySpace but was ahead of th
em in coding widgets. His muse: James Hong, the “Where’s Waldo?” of the viral loop business world. Not only had Hong created Hot or Not, one of the early viral loop businesses, he was friends with Levchin, lending him photos so the master programmer could build a “babe ticker,” another product of Hong’s fertile imagination. This way, guys could stare at an endless loop of beautiful women strolling by on their screens.

  While most people would be content to clear $30 million from the sale of their first company, Levchin could not have been more miserable. He simply didn’t know what to do with himself. He bought a mansion, then promptly forgot about it. Not only did he not bother to furnish it, he didn’t even sleep there, preferring to crash in his office in a sleeping bag. He was deeply afraid that, like a physicist or an athlete, he had already peaked, and now that he was entering his late twenties, life would be a long downward slide into mediocrity. Hong’s cheeky girlie project was just the thing he needed to keep him occupied. Then he thought about moving beyond ogling girls and making it a more conventional product.

  By August 2005 Levchin turned the concept into a Kodak Carousel-like slideshow that allowed a user to load any photos he liked and offered it as a free download for websites. Not many bothered. Disappointed, Levchin thought of his next move and glommed on to MySpace just as PayPal had once barnacled itself to eBay. His slideshow projector took off in the virality sea of MySpace users, and by the time he sought venture funding, he was able to report that the application had been downloaded hundreds of millions of times. In one six-month period he had streamed 10 billion images across users’ screens. He formed a company, Slide, to take on RockYou and any other comers.

  The two companies became entrenched in a pitched battle for supremacy, with each claiming the other had ripped off an idea or application. Both pushed the boundaries of acceptable behavior by pushing the virality factor, building hooks into their products to spread faster than the other guy’s. Users were caught in the middle, and some complained mightily when an application would hijack his address book and automatically invite all his friends to install an application. At conferences attendees would accuse both companies of spamming social network users. Each blamed the other for the bad behavior, claiming it was necessary to keep up. By June 2006 Facebook had seen enough and began clamping down on these wayward social applications makers, banning them for being too viral or having security holes.

  The big question is, how will any of these companies, both applications makers and the social networks they sponge off, make money? Skeptics, and there are many, point out that while social networking has attracted a huge user base, which the apps makers tap into, no one has figured out a viable strategy to monetize. That’s because the more people are online, the less likely they are to click on an ad. To attract a large user base, social networks give away their products. They can’t charge users, otherwise they will go elsewhere. Advertising doesn’t work either. The click-through rate on banner ads on social networks is barely 0.02 percent. Even spam can have a higher conversion rate. That’s because the longer someone is online—and social network users are online a lot—the less likely they are to click on an ad.

  Comparisons to the dot-com bust are inevitable. As with social networking and widgets, companies seemingly sprouted up overnight and, by dint of their popularity or because they promoted a promising idea, were rewarded with fat valuations even as they reported puny revenues. Potential is well and fine, critics say, but show me the money. Look at YouTube, for which Google paid $1.65 billion: it has yet to generate much revenue. Or Facebook, which makes more than $300 million a year in a deal it struck with Microsoft that gave it a valuation of $15 billion. Ning makes a pittance on Google Ads, and even though it has other revenue streams (premium services, etc.), it doesn’t have to spend much time counting the money it collects. Friendster is big in the Philippines and Malaysia, but an also-ran almost everywhere else. RockYou and Slide, despite appearing on millions of pages around the world, don’t generate much cash. And Netscape is dead and buried.

  The usual strategy for viral companies is to get big and get bought, and on that the record is also mixed. Hot or Not continues to draw oglers. Hotmail is a healthy complement to Microsoft’s suite of online offerings. PayPal has become a cash cow for eBay; Skype less so, since the company hasn’t been able to incorporate it. AOL bought Bebo only to ruin it. Google’s Orkut may have a ringside seat at Carnival in Brazil but it’s a nonentity almost everywhere else.

  The naysayers claim that Facebook and all its friends in social network land—from competitors like MySpace to widget makers like Slide and RockYou—will never figure out a way to make money.

  If history is any guide, they are wrong.

  12

  The Search for a New Ad Unit

  Death to the Traditional Banner Advertisement, the Arms Race Between Marketers and Consumers, and Time (Not Clicks)

  If there is one constant through time, it’s that conventional wisdom often misses the mark, especially in the early days of technological transformation. In 1876, the president of Western Union brushed off Alexander Graham Bell’s telephone as little more than an “electric toy,” and the company called Bell’s proposal to put one in every home “utterly out of the question.” Oxford University professor Erasmus Wilson predicted that when the 1878 Paris Exhibition closed, the electric light would “close with it and no more will be heard of it.” A Michigan banker advised his client not to invest in Henry Ford’s company in 1903 because “the horse is here to stay, but the automobile is only a novelty.” And Microsoft founder Bill Gates was years behind in seeing the promise of the Internet.

  When the Web exploded in the early 1990s, most people believed there was no way to make money on it. At a conference in December 1996, Nicholas Negroponte, founding director of MIT’s Media Laboratories, felt the need to combat the no-money-on-the-Web meme, calling those who held that belief “off their rocker.”* One challenge would be to convince people it was safe to share their credit card information over the Web. That didn’t mean that Negroponte, an astute observer of all things digital, had clearly developed ideas of how businesses could thrive online, other than to predict that one day transactions—the selling of goods over the Internet—would be a trillion-dollar market and that “digital money” would proliferate. Then came blue chip companies like eBay, PayPal, Yahoo, Google, and Amazon, which, save for eBay, lost money for several years before becoming companies with billion-dollar market caps. EBay spawned an entire ecosystem of sellers that earn their living by selling goods. So has Amazon through its Marketplace. To this day, millions of small businesses have staked a claim online and the “there’s no money on the Internet” meme has dissipated into the ether.

  In the mid- to late 1990s experts claimed that the Search function was not a stand-alone product because there was no way to monetize it. As a result, Yahoo, Alta Vista, Lycos, and others vied to become super-portals where a user’s every need was made available on one supersite. Search, the thinking went, was only good for drawing users, who would stay to sample a variety of other services like news, horoscopes, financial information, chat rooms, the weather, and so on. Then Google flipped conventional wisdom on its ear. As the portals put their resources into adding more choices to their menu of offerings, they gave short shrift to the underlying search technology, since they believed there was little differentiation. They became cluttered with content and ads, in contrast to Google, which maintained a simple interface with a lone search box.

  Google subsequently introduced a new ad unit: keyword search.* Input, say, “coffeemaker” in Google’s search box and above and to the side of the free results would be basic text advertisements that marketers and individuals could bid on. Because these advertisements were based on intent, catching a searcher at the very moment she was looking for information, they were extremely powerful. What’s better: Running car commercials on TV or banner ads on Internet sites in the hopes that a tiny fraction of people might be
in the market for a new car? Or hitting her with a highly targeted ad at the moment she looks for one? The keyword ad unit revolutionized the search industry, and Google, by skimming nickels, dimes, and quarters off each one, rode it to a multibillion-dollar fortune.

  Social networking companies like Facebook and others are also seeking a new ad unit. The problem is that advertising on the traditional banner ad doesn’t work anymore. In the Web’s early days, click-through rates were as high as 50 percent, simply because users had never encountered them before. (“Hmm. What’s this button do?”) The rates steadily declined, but even a decade ago they were 6 percent. Now they hover around 1 percent and are far lower on social networking sites. That’s because people on Facebook or MySpace spend a lot of time on the Internet, and the more time someone spends online, the less likely he is to click on an ad. In retrospect, it’s amazing to think that an entire industry was built on the notion of clickable ads when most people would be hard-pressed to name a single person they knew who actually clicked on them.

  [ THE ARMS RACE BETWEEN MARKETERS AND CONSUMERS ]

  But this dynamic is simply the latest round in the battle between marketers and consumers. When there were just three TV networks, radio, and a handful of magazines and newspapers, marketers had a captive audience. One ad on I Love Lucy could reach more than a third of the television audience in the 1950s. Today marketers use words like “fractured” or “fragmented” to describe this new media landscape, where there are hundreds of channels, thousands of publications, websites and blogs and social networks, and a million places to put ads. It is, in short, the niche-ification of content, a premise put forward by Wired editor Chris Anderson in The Long Tail: Why the Future of Business Is Selling Less of More. Specifying media, tech entrepreneur and Dallas Mavericks owner Mark Cuban dubs it the “long-tail marketing effect”: “As the number of media and entertainment alternatives grows, so does the competition and cost of moving to the head.” The question is: How can marketers cut through the clutter to get their message across to consumers who are increasingly hostile to having their time interrupted?

 

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