How Leaders Influence your Reality

During the last several years I’ve had the opportunity to see great leaders in action and the misfortune to see great deceivers at work. Both have one characteristic in common. Many would call it charisma, but I’d like to expand on what I think that “charisma” thing is.

Pause for a moment. Think about the fact that you’re giving me the opportunity to paint a reality for you. It’s my perception of reality, but by taking it on board and fully understanding the way I see things, you’re giving me the opportunity to mould and shape your reality. If you read this whole blog entry you’re going to have devoted a full 2 to 5 minutes of your conscious thought to my perception of reality. And whether you like it or not you’re going to take some of it on-board.

Great leaders and great deceivers are given a constant flow of opportunities to project their perception of reality and their vision for a future reality on large numbers of people. They alter the way a large group of people see the the world and the way these people think the world should be.

Ever wondered why Germany followed Hitler? Those screaming German speeches weren’t gibberish. They were rousing calls to arms with a believable and powerfully delivered rationale behind the call.

These speeches, or put in different terms, these opportunities Hitler was presented with to impose his perception of reality and his vision for a future on large groups of people, allowed him to influence an entire nation to go to war and eventually carry out some of the most awful atrocities in history.

So the lesson would appear to be “be careful who you lend your ear to”. But it’s a little more complex and more difficult that simply being careful. When others acknowledge someone as a leader, celebrity, genius, as talented and so on, it has a big influence on us as individuals and our default behavior as Cialdini writes in “Influence”, is to go along with the crowd.

“You say his a violin virtuoso, well he must be”, “You say this is a ’82 bottle of Latour’, well it must be spectacular”.

On a side-note, a friend once did an experiment where he sabotaged an already open bottle of excellent wine by decanting it and pouring in a very cheap wine. He watched the wine enthusiasts drink the sabotaged bottle and rave about how clearly excellent the wine is.

Social proof is a powerful phenomenon and if a group of people or respected organization acknowledge someone, they’ve given them a platform for “reality influence” or to create a “reality distortion field” if you’re a Steve Jobs fan.

If you’re a leader, I hope you’ve gained a greater understanding of how privileged you are to have the attention of groups of people. If you’re a listener, I hope you’ll learn from history and be careful who you grant access to your vulnerable and valuable attention.

 

A Viable Business Model for Facebook

Facebook’s second quarter revenue is expected to be $1.1 billion. That would give them roughly $4.4 billion per year, not exactly a number that justifies the $100 billion market cap they were/are hoping for. Compare that to Google’s $37 billion last year with current $200B market cap and Facebook isn’t even a player yet.

The endgame has arrived and the whole world is on Facebook today. Those that aren’t are seen as eccentric and are beginning to get depressed about losing touch with their kids.

What business model would make sense for Facebook now? Clearly advertising isn’t cutting it. They have a problem of “intent”. People go to Google to find things and if those things are in an ad, they click that ad. With Facebook the only intent is to “facebook”, not find a plumber and potentially click an ad. So as far as I’m concerned advertising will never work for Facebook.

So what should they do? Well, for starters, they have a dossier on just about every literate person on the planet with Internet access. Their data extends beyond just their own website facebook.com. They have data on most of the websites their members visit and what those members do on each website. They know who you are, where you are, who your friends are, who their friends are, where you were born, what you and your friends look like, who you communicate with most frequently, what you like, which websites you visit most frequently, how you get to those websites,  which pages you visit on those websites and all the usual demographic cruft.

In short, Facebook is the most complete and most current database of dossiers on individuals globally that the world has ever seen and it’s effortlessly updated in real-time.

So who might be interested in that? Any intelligence agency on the planet. Is there any money in that? Lets find out.

The Department of Defense in the United States 2013 budget is going to be roughly $525 billion. How much of that might they spend on surveilling people globally in real-time? Looking at the budget for the National Reconnaissance  Office (NRO), the guys who launch and manage our spy satellites, is instructive.

The NRO’s budget for 2010 was roughly $15 billion. If Facebook can also be considered a global array of data gathering nodes similar to our spy satellites, then surely $15 billion would be a reasonable number to throw around in a conversation with the folks who launch and operate the data gathering nodes?

And that’s one customer, albeit the largest customer. Remember that the USA has intelligence partners around the world. An example of this is the five signatory states in the UK-USA signals intelligence sharing agreement which are: USA, UK, Canada, Australia and New Zealand. All these folks have significant budget they can also contribute.

Another budget item that might be instructive to look at is the cost of ECHELON which is not public data. But the scale, size, importance and multi-decade nature of the project (started in the 70’s and still going strong) is a good illustration of how seriously the USA and it’s partners take signals intelligence and the scale of the budget available for it.

To be a “Google”, Facebook would have to bring in $40 billion a year in revenue which would take them to Google’s valuation of $200 billion. Right now they’re stuck at $4 billion a year.

Facebook is the only social network that matters and will be forever thanks to it’s network effect. It’s hard to believe that the smart people Facebook keeps gobbling up haven’t considered chatting to the global intelligence gathering and cyber security community. The data they have is game changing and something the global SIGINT community would never be able to gather on their own.

Trying to visualize the conversation Zuckerberg might have with the global intelligence community, it reminds me of a quote by Richard Gere’s character in Primal Fear who is a famous defense lawyer describing the conversation he has with new clients: “Have you been saving up for a rainy day? Guess what? … it’s raining!”

Footnote: There is the hard problem that publicly working with the intelligence community would kill Facebook. But then the intelligence community has never been very public and one wanders if there are ways to productize the desired data into something that appears benign and have contractors buy it on the agency’s behalf. Food for thought.

Unemployment is lower? Bull.

Last Friday and again today the DJIA got a nice bump from data showing unemployment has dropped from 9% to 8.6%. This number is known as U3 and only counts those actively looking for work. U4 is what the government should publish which counts U3 + those who have given up looking.

We “added 120,000 jobs in November” and have added over 100,000 jobs per month for the last 5 months.

I found the birth, death and marriage rate on the CDC website. For December 2009 we had 344,000 live births per month, 216,000 deaths per month and 138,000 marriages per month.

Our population is increasing by roughly 128,000 per month, which is 8000 more than the number of jobs we added. Looking at marriages per month gives you an indication of how many new couples are starting life and presumably expecting full employment. That’s 18,000 more than the maximum number of jobs we added per month in the last 5 months.

I don’t think we’re ever going to get the jobs we lost back because the financial crisis of 2008 was a trigger that caused companies that have become more efficient to cut a workforce that is no longer needed. That is why corporate revenue has not declined even though unemployment has increased. The grey marks the recession, click the graph to go to ycharts for a live version.

The only way to solve this is to bring our education syllabus up to date. The chinese have a few ideas how to do that: They’re cutting majors that produce unemployable graduates. 

Most vendors lie, but not all

I’ve been running a small software company for a while now and we are fastidious about reducing costs on hardware and software and getting the maximum bang for buck out of what we buy. Lets put it this way, Hell for a Dell server is spending eternity in our data center. We work them at 80% load until they simply drop dead and then we switch out the dead components and keep pushing them.

During my roughly 20 year career in IT, Ops and software engineering there is one thing that has been universal and consistent. IT vendors lie through their teeth about ROI and how their product will save you money or make you more money.

  • Buy our OS because it’s “enterprise” and “best of breed”. No thanks I’ll use Linux which is free and better.
  • Buy our database “solution” because it’s a new paradigm in “scaleability”. No thanks I’ll use MySQL because it’s better and it’s free and you know this which is why you bought them.
  • Use our translation service. Why translate once for a fixed low price when we can use it as an excuse to move your I18N pages into the cloud and charge you per page served. [Two companies have now pitched this exact service to me]
  • Why pay $12.99 for an SSL certificate when you can pay $1,499 for an EV SSL certificate that will quadruple your conversions.
  • Why buy 20 servers for $50k and lease your own rack for $3k per month when you could be in our “mission critical” cloudified data center spending $20K per month for the same thing.
  • Why use Nginx free for load balancing when you can get this dedicated hardware balancer hardware for $40K that can barely keep up.
It goes on, and on, and on. I am so easy to sell. If you can make me more money or save me money, I’m interested. But few salespeople who pitch me have a product that can do that for real. The only possible explanation is that true innovation, the kind that helps deliver more value or improve efficiency, is rare.
Companies that do deliver commercial products with real value or improved efficiency that I use:
  • Dell servers
  • *my hosting provider who shall remain nameless for security reasons* Email me if you’re interested.
  • Websitepulse for server monitoring. Super reliable and cost efficient.
  • Linode for small virtual servers for dev and little projects.
  • Apple for iMac workstations, iPad2, iPhone and their macbook and macbook pro – we have all of these and besides being pretty, we use every one of them every day.
  • Authorize.net for payment processing
  • Chase Bank. Their business banking is superb and if you’re a disciplined credit card user who has a history of not paying a cent in interest, get the Chase Saphire Preferred card – it’s Visa Signature so it has concierge and it has the best rewards in the biz. But beware if you aren’t highly organized because the interest can ratchet up to 29.99%. We’re considering ditching Amex rewards cards (biz and personal) for these. American Express you can contact me if you want to know why.
  • Intuit products including Quickbooks and Mint. Spectacular for biz and personal financial management.
Post in the comments if you have a favorite vendor that has really come through for you.

 

Trial, Error and the God Complex

My new favorite economist Tim Harford did a great TED talk recently chatting about our assumption that an expert approach is needed to problem solving. He argues that instead we should rely more on trial and error, a method that has proven very effective both in nature and business.

 

If the loading animation won’t disappear then try viewing the video on this page.

The relative non-risk of startups

Based on recent events I suspect an investment axiom might exist that says: The further an investor is abstracted away from the underlying asset they’re investing in, the greater the risk.

This has been shown recently to be true with Mortgage backed securities, credit default swaps, the black box that is the hedge fund industry and even sovereign debt may qualify.

When you are shielded from your investment by layers of structure, marketing, repackaging and sales teams, you are too far away to hear the alarm bells when they’re ringing.

That got me thinking about the relative risk of being an angel investor in young companies. Angel investors meet with the founders, use the product and in many cases craft the investment terms themselves. Spending a few weeks negotiating a deal with an entrepreneur is itself a revealing process. The investor is exposed to a mountain of data on the underlying asset they’re investing in.

The recent excellent Bloomberg article on the under performance of commodity ETF’s brought this difference home for me. Suited and booted bankers sell commodity ETF’s daily with a prospectus that tells you you’re investing in gold or oil or copper. The impression created is that you’re investing in the underlying asset when in fact you’re investing in a fund that is trading monthly futures contracts for the commodity. Two years later you’re left wondering why your investment has lost 20% while the underlying commodity has gained.

The complexity of financial products and the distance between the average investor and the underlying assets they’re investing in has, I believe, peaked. As the financial crisis that was started in 2008 continues to play out, during next decade I strongly suspect there will be a return to less complexity and a desire to know, touch and meet with the assets that underlie each investment.

While the likelihood of failure in young businesses is high, as an angel investor you know exactly what you’re getting and you have the ability to influence the performance of your asset. Try finding that on Wall Street.

The Coming Social Advertising Revolution

Facebook has over 400 million active users and members spend over 951 man-years on the site each month. Facebook is passing Google this year as the most visited site in the US and is going to earn somewhere between $710M and $1.1B in revenue this year.

Google on the other hand have a $27B revenue run rate for 2010 [based on Q1 2010 earnings]. With similar on-site traffic they are doing 25 times Facebook’s revenue. Google have had a long time to learn about printing money efficiently, but even so that’s a blush-worthy statistic for the Facebook executive team. So why the difference in performance?

Facebook has a crisis of intent. When a visitor signs in to Facebook their intent is to socialize. They don’t want to buy anything and they certainly don’t want to click on ads that lead them to buying something. Facebook has the best data on the web about the people using their service. But all that wonderful data is useless without intent.

When a visitor hits Google their intent is to see something, learn something, do something etc and these can be cajoled into buying decisions. If Google guides the user to the right vendor, they make a vendor money and can share in some of the revenue. Google’s data on each visitor pales in comparison to Facebook. But Google catches each visitor at the moment they have intent. And that is the power of the search business.

Facebook needs to solve their crisis of intent. Intent is the missing ingredient that stands between Facebook and $27 Billion in revenue multiplied by the social graph and profile data that Google doesn’t have.

Changing Facebook.com to capture visitor attention when they have buying intent risks destroying a valuable asset. So instead Facebook have decided to take their data to the places where visitors have intent: The rest of the web.

“If intent won’t come to Facebook, we’ll take Facebook to intent.” ~Mark Zuckerburg [may have said this]

In the next 3 to 12 months Facebook are going to roll out their own ad network for publishers – a direct competitor to Google AdSense.

If Facebook can use my interests, sex, age, location, who I’m friends with and their age, location, interests etc. to infer that when I’m searching for a ‘bobbin’ it’s probably because I want to tie steelhead flies with it, then it makes more sense for every publisher on the web to use Facebook’s ad network than Google or anyone else because they will simply make more money.

Facebook’s Ad Network will make publishers more money and increase engagement.

Facebook Connect was phase 1: “Lets see if a distributed Facebook gets traction and doesn’t raise privacy flags.” It was a resounding success.

The Social Web and Open Graph is phase 2: “Lets see if we can share some user data using an opt-out model.” From the Facebook blog: “For example, now if you’re logged into Facebook and go to Pandora for the first time, it can immediately start playing songs from bands you’ve liked across the web.”

There have been the usual privacy rumblings, but so far the Facebook community seems to be OK with an opt-out model of distributed data sharing.

The significance of this is staggering: Facebook have positioned themselves for the perfect AdSense kill-shot. 6 to 12 months from now publishers will  be able to integrate Facebook’s applications and ad network on their blog or website and get:

  • Better revenue than Google AdSense or any other ad network due to better targeting
  • Increased user engagement through social features
  • Increased virality through recruiting other Facebook members
  • Increased data on each visitor from their very first pageview reducing bounce.

Advertisers will get:

  • Less click fraud because you’re no longer just an IP address and a cookie.
  • Better targeting including the holy grail of demographics: Age, Sex, Location.
  • Ability to show your ad at the moment a user has buying intent on a search engine, a blog about visiting Egypt, etc.

A significant portion of Google’s $27 Billion in revenue this year will come from their publisher ad network. Google knows what’s at stake. That is why they are willing to bet GMail on products like Google Buzz.

Facebook is the most serious threat to Google’s business that they have faced. If Facebook plays this perfectly, they will kill the bear and 5 to 10 years from now will be the largest and most profitable ad network on Earth.

Anyone who plans to compete with them will have to do better than textual ad targeting.

PlatformFu for Hackers and Startups

Being over 35 has it’s advantages. Us old(ish) timers have lived through Microsoft using their platform to beat the hell out of Novell, Netscape, Real Player and others. Watched Eric Schmidt’s ascension from platform victim to platform player. And learned that platforms are honey traps that give good honey but you might get caught.

Twitter Investor Fred Wilson wrote a much talked about post earlier this week that sparked a discussion about whether Twitter would implement critical apps themselves. Seesmic founder Loic issued a stark warning to Twitter developers today. Apple continues to bar Adobe’s Flash platform from Apple’s iPhone platform and Adobe evangelist Lee Brimelow pulls no punches in his “Apple slaps developers in the face” post today.

Ten years ago a developer was faced with a much scarier platform landscape. You either build on Microsoft’s monopoly operating system and risk them implementing your app themselves, or stop being a desktop developer. Web Applications were really Web Sites, web platforms didn’t exist and mobile platforms were completely proprietary.

These days playing with platforms is a little easier because you have a range of platforms and integration methods to choose from. You can build a Facebook app that runs inside Facebook or integrate via FB Connect. You can choose to build on Twitter instead. And if you like you can integrate both to hedge your bets and add social features of your own on a completely external website. If you’re building a mobile app you have Droid and the iPhone to choose from and if both suck, well both platforms have a web browser so a lightweight web interface is an option too. Even in the desktop OS arena if Microsoft rubs you the wrong way there’s always the smaller but more spendy Apple market to go after.

When formulating your platform strategy it’s important to put yourself in the providers shoes and think about the following:

  1. Are they wildly profitable or is it possible they might go out of business or radically redefine their business?
  2. Have they figured out their business model yet or might your app become their model?
  3. Is their API locked down and unlikely to change or is it evolving as they figure out what business they’re in and how much of their revenue they want to give away via their API?
  4. Are they waging a strategic war with anyone that may affect your business and your app?
  5. Does any part of your own business compete with any part of their business? How about in future?

Being first to market on a new platform has it’s advantages. My former colleagues at UrbanSpoon got their iPhone app in an Apple ad because they were early adopters of the platform. Smart move – and smarter given that they weren’t betting the farm on the platform. But early adopters of the Facebook platform saw revenues and traffic change as Facebook evolved the platform early on.

So when building your app, first carefully assess the state of the platform and then decide how and at what level you want to engage it.

Facebook.com overtakes Google.com as most visited USA domain.

In a press release from HitWise published on CNN Money a few minutes ago, Facebook.com just overtook Google.com as the most visited domain in the USA. This is possibly the most significant milestone in Facebook’s history as a large company. Here’s why:

Most of Google’s revenue comes from their Ad business. Half of it comes from their own properties and the other half from a distributed network of sites. (sounding familiar already I’m sure).

There is a lot of noise around Google’s other apps and experiments, but from a business perspective that’s all it is. Noise. Google is a cash creation machine and the cash is created by the ad network both on and off-site. To give you some perspective, Gmail ranks a distant third among email providers with 37 million uniques vs Yahoo Mail’s 106 million uniques 5 months ago [Comsore].

So Google’s business is relatively simple. It’s a the best search engine in the world and an ad network with themselves as their own biggest customer.

Google built this business by first creating an incredibly hot property that gave it’s users an incentive to provide it with awesome targeting data. Then it built an ad network around the targeting data.

The hardest part about building Google was to create the hot property (the search engine) that incentivises users to keep coming back and feeding it more targeting data. The next part of creating Google was a little easier because if they screwed it up the first time they get to try and try again until they succeed in building a money printing machine on the back of this hot-property-with-targeting-data that really does print money.

Facebook have the hot property that keeps users coming back and feeding it targeting data. They really screwed up the Ad network the first time they had a crack at it with Beacon. But, predictably, their users forgave them and they’ll keep having another crack at it until their money printing machine is running at optimum efficiency.

There are a few reasons I believe Facebook may be a bigger success than Google long term:

  1. They have better data in the form of individual demographics, interests and data inferred from the social graph.
  2. They already have a distributed network of sites in the form of Facebook Connect which has deeper integration than AdSense. That means Facebook gets more data about visitors to those sites than Google AdSense.

Possible risks:

  1. Their management team doesn’t have Eric Schmidt. Eric spent years getting schooled by Microsoft when he ran Novell. So he has the hunger, the scar-tissue and battlefield awareness that you need to compete with juggernauts.
  2. The hasbeen factor. Facebook has had a surprisingly good run and has proven to me it has legs because I’m still going back after a few years. But lets see if they can maintain that over the next decade.

The story of the little bird

A little bird was flying along one day heading North. As he flew it started getting colder and colder. Soon it started raining. The rain turned into freezing hail.  His wings froze and he fell out of the sky like a stone. He thought to himself “Oh lordy I’m frozen stiff, I can’t move, I’m falling at 200 miles an hour and when I hit the ground I’m going to shatter like a piece of glass.”.

As he finally lost all hope he hit the ground. But instead of shattering into a billion little birdy bits, he landed in a large and very fresh pile of cow dung. He couldn’t believe his luck. And it was warm too! As the storm raged around him his wings started to thaw and his ice-cream headache disappeared. In fact he started feeling better than he had felt in a long while. He felt so good that he started wiggling about and he even let out a few chirps.

A cold and hungry fox passing by  heard the chirps and quick as a – well, as a  fox – he leapt on the cow-pile and gobbled up the little bird.

The moral of the story is:

1. When things seem really really bad don’t lose hope.

2. Everything that looks like shit and smells like shit isn’t always a bad thing.

3. When things are going well, shut the fuck up!

[My dad gets credit as the source of this story]