May 11, 2010

A Better “Reply All”

Companies only grow when they can contain complexity, and email is the fastest way to produce uncontained complexity. This is because email is built around sending messages from one person to another, or from one group to another; anything in between is an ugly hack.

There’s a good reason most people choose to “Reply All”: all of the recipients of an email have to assume that, until they hear something about it, whatever the email says must be done still must be done. If you’ve ever replied directly to the sender of an email that was sent to ten people, you’ve gotten one of two responses: either ten minutes later you’re “Reply All”‘d on another email that makes yours redundant. At one minute per email times ten recipients, it’s easy to see how a simple task can take an hour or more total—and that’s ignoring the cost of disruptions.

I have a simple solution: “Reply All” should not allow you to compose an email reply; it should send a default answer like “It’s being taken care of.” To recipients who need to know more, you can elaborate; to everyone else, well, it’s being taken care of.

(In the meantime, you can start replying-all with that line. Hopefully it will catch on.)

May 1, 2010

Good Bubble, Bad Bubble

In the future, historians will stop using the word “bubble,” because it refers to two opposite phenomena:

• In an equity bubble, investors have limitless optimism about the future. They expect many of the companies they invest in to fail, but believe that the 95th- or 99th-percentile performers will more than make up for this.

• In a credit bubble, investors have limitless faith in the status quo. They expect volatility to decrease, and they believe they can estimate returns with increasing accuracy. If they want higher returns, they know they can use leverage—but for the most part, investors celebrate the middle of the bell curve, and expect the tails to cancel each other out.
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April 18, 2010

Why Zynga Should Worry About the Laffer Curve

It used to be trendy to compare the size of Facebook to the size of countries. That’s gotten boring lately—at 400 million users, Facebook is ahead of the US, and only behind India and China. But population size is not the only thing Facebook has in common with governments—they also have the same business model. Both Facebook and governments can profit from letting people do business with their constituents, and taxing away some fraction of their profits.

In the case of the US, India, or China, that tax rate is determined by all sorts of lobbying, voting, personalities, and compromises. In Facebook’s case, they can collect taxes by forcing companies to use Facebook Credits. It’s just a question of maximizing profits. And that means taxing companies that profit from Facebook at the peak of a slightly modified Laffer Curve.

The Laffer Curve normally describes government revenues compared to marginal tax rates. It’s a curve because, given a sufficiently high tax rate, the incentive to work, report income, or live in a particular country declines. This leads to the argument that lower taxes are net beneficial: if we’re past the peak, they’ll raise government revenue, but even if we’re not, they can produce economic growth.

Facebook doesn’t have to care about “economic growth.” Their goal is not to grow the companies that exist on their platform, just to profit as much as possible from them. It might seem that this implies taxing at the Laffer maximum, but that’s not quite true: Facebook can afford to maximize the net present value of their future income, and to set their tax rate accordingly.

In practice, that will mean low (or zero) taxes as long as a company using Facebook’s platform is still growing. But once their growth slows, it shifts the Laffer curve to the point that taxing them more produces extra income even if it slows down their growth (and discourages other companies from using Facebook’s platform).

Since Facebook can easily prevent tax evasion, and since corporations have a fiduciary duty not to be lazy, the only mechanism by which the Laffer Curve can operate is emigration: at some point, Zynga could theoretically decide that Facebook isn’t worth it; they’ll take their bigger slice of a smaller pie elsewhere. I’m not sure what it costs Zynga to move one person from Facebook to a non-Facebook platform for the same game, but it’s probably a painfully high number when you multiply it by, say, the 82 million active users of Farmville. This might also explain why Facebook is okay with stickiness—it’s bad for business, but good for keeping existing business from going elsewhere.

Taxation or Nationalization?

Fred Wilson argues that Twitter can be free to ‘fill in the holes’ in their experience, but not to go after new verticals. In the Laffer context, the question is not which features a platform will duplicate and which it won’t, but which features it will tax and which it will expropriate instead.

Facebook, and more recently Twitter, have also done a form of “nationalization”: they turn someone else’s product into a feature of their own product. This seems to work best when the product works as a feature, and doesn’t have a clear monetary value: the classic example being Internet Explorer and Netscape Navigator; soon after IE came out, selling a computer and charging for the browser would have made as much sense as selling a car and charging for the steering wheel.

The “features they should have had” versus “value-added extras” dichotomy is false. The real question is which is worth more: taxing a platform user at the Laffer maximum, or subsuming them in order to shift the Laffer curve in a more profitable direction. At first, this sounds like an academic distinction—but it implies that the more people make money with Facebook apps, the more desirable it is to nationalize rather than tax other apps: Zynga’s $300 million in revenue is worth taxing; but if Zynga produced $1 billion in revenue, it could easily be worth giving up the chance to tax other companies, in order to make it easier to tax that billion dollars at a higher rate.

Twitter isn’t monetizing in the same way, but they do face the same equation. In their case, they’ve nationalized more, but it’s easy to see where they could start taxing instead. If you’ve looked at many financial sites that monetize through ad networks, you’ve seen who can bid the most for finance-related ad space: penny-stock promoters. That’s why Stocktwits has been so successful: it culls the spam. If Twitter sells ad space to the highest bidder, Stocktwits will get spam, and it’ll be official spam, too. A nasty outcome, but possible (though Stocktwits has mitigated this risk by building their own non-Twitter income sources, and their own independent platform; more than anyone else, they’ve figured out how to launch from someone’s platform, without being anchored to it.)

Why To Stay Bullish

Thanks to the power of Metcalfe’s law, squared, platforms have an incentive to encourage new applications, and to make them rewarding. Like a country that encourages people to start small businesses, these platforms will get more activity without having to try very hard.

So for small startups, this is irrelevant: they don’t have enough of an income for it to be worth Facebook’s time to determine the optimal tax rate, and they’ll produce more taxable income if they grow fast. Once a company hits the saturation point, though, there’s little reason for Facebook to let them earn excess profits. Sure, it will discourage VCs from funding some companies on Facebook’s platform, since they won’t be able to participate in quite so giant an IPO. On the other hand, the independent programmers who put together a simple app over a couple weekends won’t be too discouraged; Facebook is likely to tax only when it’s already fantastically profitable.

And even companies like Zynga won’t be left behind. There’s still no cheaper source for new users. Converting a small fraction of them from one platform to another is still easier than trying to get them to start out on the Zynga platform itself. Meanwhile, it makes a $25 billion market cap sound a bit more believable.

April 5, 2010

Why Did Barron’s Promote a Nonexistent Stock? ($WPO)

Barrons is a startlingly good magazine. The first year I subscribed, they panned Actrade, a stock I liked (it dropped 50% that day, and was bankrupt within the year), and touted M&F Worldwide, which is now five times higher.

So I tend to pay attention to them.

That Actrade story spoiled me, though. There was a lot of conjecture about the company’s fast growth and low cash flow, which I’d heard before. What was new was that company executives had bought their auditor a fancy Rolex; that’s what drove the stock down. Since then, I’ve paid much closer attention to the incentives people have to tell a story that doesn’t quite correspond with reality. And that’s why the recent Barrons article suggesting that the Washington Post Co. is 50% undervalued made me do a double-take.

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The Economics of Advertising: Why Advertising Agencies Used to Be the Best Business in the World (And Why They Never Will Be Again)

There’s only one notably successful business personality who made his money in the ad agency business. He’s an accountant, and that should tell you something. The ad business is simply not a great place for making money.

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April 4, 2010

Beliefs, Not Companies, are “Too Big to Fail”

What makes a company “too big to fail”? The traditional answer is “size”: if a company as big as Bear Stearns or AIG suddenly needs to liquidate, the market will miss their unique role in clearing transactions or making a market. Then, as they dump their extra-special assets, it will cause widespread panic and needless disruption.

I believe that this is entirely wrong. A company becomes too big to fail when it’s a leveraged bet on a universally agreed-upon belief that happens to be false. Read the rest of this entry »

February 8, 2010

What Happens When All Our Content Comes from Content Factories?

“Content factories” like Demand Media and Mahalo are turning the SEO industry inside-out. In the next few years, they will cut off the main source for entry-level SEO professionals, eliminate small web design agencies from the SEO business, and scoop up a bunch of ad dollars they absolutely don’t deserve.

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January 28, 2010

Storefront | Storefront: 53 Online and In-Person Storefronts, Compared

Whose physical storefront uses the same ugly typography as their website?

Which fashion retailer splits their audience, giving a great deal to Internet shoppers and a brutal one to people who buy in-person?

And whose website is “like stumbling onto a can of Yoohoo after walking through a chocolate desert?”

You’ve probably never wondered, but you might be curious about which of your favorite stores have killer websites and hideous storefronts, or great-looking retail outlets paired with an unusable online presence.

A few of my coworkers have put together an amazing collection of side-by-side images of sites and stores—from companies like J. Crew, Dolce & Gabbana, Apple, and more—to show off who gets it and who just doesn’t. Check out 53 New York City Storefronts VS. Their Websites for many more.

December 22, 2009

Stickiness or “Spikiness”? Rethinking Repeat Visitors

When I talk to clients, they want me to accomplish three things: get visitors to their website, get them to keep coming back, and make some money off of them. I’m starting to suspect that bringing users back is the source of the biggest mistakes I make in online marketing.

A “sticky” site is one that keeps users clicking, and convinces them to come back often. I used to try to build sticky sites. Now, I build “spiky” sites—sites that convert someone into a customer, get them signed up for email newsletters, or convince them to go away.

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December 15, 2009

Why I Stopped Throwing Out Junk Mail

Whenever I start to write something online, for myself or for a client, I have to answer one hard question: who cares?

Your company has been in business for thirty years—so what?

Your equipment is state-of-the-art—and your competitors won’t say the same about theirs?

Your copywriting wrings wallets dry and leaves empty pockets flapping in the breeze—poetry doesn’t sell well, and bad poetry sells even worse.

There’s lots of general advice on how to keep readers hooked—tell them a story they can relate to, offer them a benefit they can’t get anywhere else, establish a cadence—but that’s too vague.

I’d rather just copy people who can’t afford to be wrong.

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