Archive for the ‘Social Media’ Category

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Dotcom bubble: what madness? How could anyone have been so stupid not to have seen it coming? And then it happened again, a company with a p/e ratio off the charts, a track record going back just a few years, founded by a person/persons so young they looked as though they should still be at school, and yet they queued up to buy shares on flotation. How stupid was that? It is just that it may not have been so stupid after all.

Replace the word Facebook with the word Google and things look much the same, except we can now look back with the benefit of hindsight, and say that Google was cheap when it was floated. It is just beginning to look as though Facebook was cheap too.

The latest result from Facebook told an impressive tale. Sales were up 53 per cent in the latest quarter, profits were up by… well …numbers can’t tell us, because the company went from losing $157 million in the equivalent quarter last year, to making $333 million profit this time around.

Now look at the company’s valuation. Its market cap is $83 billion. Turnover was $1.81 billion in the latest quarter. That is still quite a multiple. Just bear in mind, however that on flotation the p/e was… well, as the company was making a loss at the time, it was infinite.

Now consider a story doing the rounds a couple of months ago. The ‘Guardian’ in particular made a lot of noise about it. It cited research from SocialBakers indicating that the company had lost four million users in the US in just one month. It was a real ‘woe is Facebook’ story; proof, or so many said, that the company was full of naïve hope over reason. It is just that SocialBakers reacted to the ‘Guardian’ story saying: “Sometimes, journalists get stats wrong.

The Facebook stats found on our page are not primarily intended for journalists, but rather Ad estimates for marketers.” It added: “Around 50 per cent of the UK’s entire population is on Facebook – which is amazing!” and suggested: “The bottom line here is that there is no story.”

Jan Rezab, CEO at SocialBakers, said: “We previously published a clarification to one of The Guardian’s articles three months ago. In this article, I explained the stats in question, revealed the source of the stats, and admonished journalists against jumping to conclusions about them going forward. Well, The Guardian did not heed the advice, jumping to an even bigger conclusion this time.”

And that in a nut shell says it all. No one can really know for sure whether Facebook is worth its current value, but to laugh it off is not wise. It is fun to suggest companies such as Facebook are made of little more than smoke and mirrors, but little things like facts are rarely allowed to get in the way of a good story or indeed a bit of fun.

Take the argument that Facebook can’t make money from mobile advertising. In the latest quarter mobile advertising made up 41 per cent of the company’s ad revenue.

Consider the story of Google. Its share price has risen from around $100 in 2004 when it was floated to around $900. Yet during this time, its p/e ratio has crashed, so that now it is around 26 – still highish, but nothing spectacular. At flotation, Google’s market cap was around $23 billion, now it is making more than that in profits in less than a year.

Facebook has another similarity with Google. Back in the mid noughties, soon after Google was launched, its Ad Words program represented perhaps the most cost effective form of advertising ever invented. The markets did not get that, which is why they undervalued the company. It is not like that now for Ad Words, of course; the auctioning process has seen to that.
Today it is Facebook that seems to represent an incredibly cost effective advertising medium.

This is why its revenue will probably continue to grow at a very rapid rate for some time, and profits to revenue will probably grow too, meaning that total profits may yet grow at a rate that dwarfs even the growth enjoyed by Google during its golden period.

No one can say for how long Facebook will occupy such a high proportion of the world’s consumers’ time? It may or may not go the way of MySpace, but based on current popularity the potential for the company to increase profits is enormous.

© Investment & Business News 2013

Poor old Rupert Murdoch – his purchase of Myspace was not exactly one of his best moments and maybe he is still puzzling why. At least that may explain his tweet last week.

He tweeted: “Look out Facebook. Hours spent participating per member seriously dropped. It was the first really bad sign seen by MySpace years ago.”

Now Mr Murdoch has voiced doubts about Facebook, it may be worth asking: why and why not?

As for why, we have two reasons. Firstly, it kind of fits with the Myspace experience. After all, the social media site once seemed unbeatable. Is it not logical that Facebook, after flying too close to the sun will find the wax holding its feathers together will melt and it will crash, just like Myspace did? Secondly, data out last week revealed that Facebook is losing users.

As for why not, firstly, yes, it is true that Facebook is losing users from its website, but it is gaining them on its apps. Secondly, Facebook is not Myspace in a profound way. The Internet is all about cooperation, about different services dovetailing with others. Facebook is good at this dovetailing and Myspace wasn’t. Then again, Mr Murdoch’s media empire is not one for dovetailing either.

Mr Murdoch was late to embrace the Internet and when he did, he only half did. For example, the ‘Times’ isn’t really on Google. The ‘Financial Times’ charges for its content too, but at least it is fully immersed into search engines. It is perhaps a subtle point but one that seems at odds with the Murdoch ethos.

Facebook has locked its users in in a way that Myspace never did, meaning that it benefits from high barriers to exit. Oh, and one more thing, it is learning how to monetise its massive user base too.

© Investment & Business News 2013

Sometimes stories are too good not to tell, and little things like facts must never be allowed to stand in the way of their telling.
Take Facebook. The ‘Guardian’ broke the story yesterday, and the bandwagon got moving in its wake.

“In the last month, the world’s largest social network has lost 6m US visitors, a 4 per cent fall, according to analysis firm SocialBakers,” said the ‘Guardian’ and added: “In the UK, 1.4m fewer users checked in last month, a fall of 4.5 per cent. The declines are sustained. In the last six months, Facebook has lost nearly 9m monthly visitors in the US and 2m in the UK.”

The piece continued: “Users are also switching off in Canada, Spain, France, Germany and Japan, where Facebook has some of its biggest followings. A spokeswoman for Facebook declined to comment.”

It also quoted Ian Maude at Enders Analysis who said: “The problem is that, in the US and UK, most people who want to sign up for Facebook have already done it…There is a boredom factor where people like to try something new.” See: Facebook deserted by millions of users in biggest markets 

Is Facebook set to go the way of MySpace – from unbeatable to beaten in just a few months?

Many jumped on the ‘Guardian’ article and concluded that this was so. It was an easy sell. The world is full of social media cynics, who see bubble writ large. And to those who say: “But Facebook is so wonderful,” they laugh and say sarcastically: “This time it is different.”

It is just that SocialBakers, the very people who the ‘Guardian’ cited in its article, see it differently – very differently, in fact.

“Sometimes, journalists get stats wrong,” it said. “The Facebook stats found on our page are not primarily intended for journalists, but rather Ad estimates for marketers,” it stated in its web site,. And added: “We previously published a clarification to one of The Guardian’s articles three months ago (read more in Clarification to ‘Guardian’ on Facebook losing UK users). In this article, I explained the stats in question, revealed the source of the stats, and admonished journalists against jumping to conclusions about them going forward.”

Jan Rezab, CEO at SocialBakers, said: “The Guardian did not heed the advice, jumping to an even bigger conclusion this time.” He added: “We state, quite clearly, on our site that these figures are rough estimates and cannot be used to determine Facebook traffic. Again, we explained this to The Guardian when they published a similar story some months ago.”

He then pointed out that “around 50 per cent of the UK’s entire population is on Facebook.” This, he said, “is amazing!”

There are two stories here. Story one: how myths can grow when they tell a story that appeals to the imagination; how there is a deficit between facts and what you read in the newspaper, even venerable newspapers such as the ‘Guardian’ – let alone the more ‘all migrants are evil’ type of newspaper. The other story relates to Facebook.

This company now has a very subtle but important benefit. Its unique selling point relates not so much to the size of its user base, but the network that describes how its users interact with each other. Network theory is a burgeoning, poorly understood, but very important field of study. See: Network theory and science

One thing network theory does tell us is that networks are often very robust, and very hard indeed to destroy. To illustrate the point, the Internet itself was designed in the way it is to be impervious to nuclear war. Al-Qaeda survived the death of Osama bin Laden, and it is devilishly difficult to change someone’s mind, because the sets of arguments that create a belief can be represented by a network.

Disruptive technology, in which new technology changes the face of social media, may spell curtains for Facebook, but until something new comes along, it remains in a very strong position, and a position it is now learning how to make money from too.

© Investment & Business News 2013

Debt, stocks, restaurant, economics, portfolio, religion, cancer. You can sort of see the link between some of those words, but not all. But there is a link apparently, and the link is with stock market performance.

Take the word debt. If there is a decrease in search engine traffic using this word, it would appear it is a good time to buy into stocks.

If there is an increase in the amount of times users type the word debt into Google, it is a good time to sell – or so suggests a new report published in ‘Nature’s’ scientific reports, by Tobias Preis, (Professor at Warwick Business School) and Helen Susannah Moa and H. Eugene Stanley from Boston University.

Now take the word ring. It appears the relationship is the other way round. If search traffic rises, then it may be better to bail into stocks. Of course this is not proven, and there are reasons to question the findings, but let’s run with the story for a bit longer.

The three academics looked at 98 search terms. They first concluded that rises and falls in search engine traffic of certain words were correlated with stock market performance. This is no big deal. After all, knowing that more people type the word debt into Google when stocks are falling doesn’t help that much.

What investors want is to be able to predict changes in the stock market, not have a new way of describing them.

But the academics also found that certain key words did rise and fall in popularity before changes in stock prices. They found the model worked better when applied to local stock markets. So, for example, tracking search terms used in the US as a way of predicting changes in US stocks was more reliable than using global search traffic to predict global stocks.

This is not the first example of a study appearing to correlate Internet traffic with stock market performance. For example MIT academics Sandy Pentland and Yaniv Altshuler found that investors who are plugged into a diverse range of investment groups enjoy better returns.

Last year Johan Bollen and Huina Mao of Indiana University and Xiao-Jun Zeng of the University of Manchester found that investors who tap into the public mood often enjoy superior performances. They also found that Twitter is a good gauge of such mood. See: A tip for investors: embrace social media – but know when to bail-out

So does the study stack up? Does it make sense?

There has been no shortage of critics. But, from one point of view it does surely make sense. Crowds are complicated things. Psychologists have shown we all tend to comply with the crowd, but – and this is a subtle point – maybe it goes further than that.

Different people often tend to react in the same way in the same circumstances. Who knows why certain type of clothes or child names go in and out of fashion, but they do.

The mood of the crowd can surely relate to stock prices. It can show when the crowd is in the mood for buying, and can surely predict when it is getting nervous.

Can such models warn of one of the black swan events – that is to say rare, but highly significant events? Well, the finance crisis of 2008 was a black swan event if ever there was one, and yet the study by Preis, Moa and Stanley covered data from 2004 to 2011. In short, the occurrence of black swan event did not validate their findings.

And yet, sometimes the mood of the crowd can create problems it is unaware of until the moment the problem becomes irreversible. That is the essence of the book ‘The Blindfolded Masochist’ by yours truly. Intuitively, this aspect of crowd behaviour should mean that on occasions Google will fail to predict changes in stock prices.

The other drawback is that such systems can break down when they are commonly used. So if all big investors incorporated Google analysis into their investment strategy, then such a strategy would surely back-fire.

For the report in full, see: Quantifying Trading Behavior in Financial Markets Using Google Trends 

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You may or may not think Twitter and Facebook are worth your investment bucks, pennies and cents, but it does appear that investors plugged into certain social media services often enjoy better returns.

Gillian Tett at the ‘FT’ broke the story, but actually, it should not come as a surprise. Ms Tett focused on the work of two MIT academics: Sandy Pentland and Yaniv Altshuler. After analysing a mountain of data, they found that investors who are plugged into a diverse range of investment groups enjoy the better returns.

They found that investors who work on their own often perform least well. Those who follow one or two investment gurus do better, but not as well as those who follow several such gurus. But the best performing group are those that just follow a diverse and large range of other investors covering a wide range of specialities and interests.

Pentland and Altshuler focused on a trading platform called eToro. The service itself describes itself in these terms: “Social Trading is about opening the markets to everyone. At eToro we encourage people to connect with one another to discuss, trade, invest, learn and share knowledge across the network. From now on, you don’t need to be a pro to trade like one.”

But this is not the first research of this ilk. Last year Johan Bollen and Huina Mao of Indiana University and Xiao-Jun Zeng of the University of Manchester found that investors who tap into the public mood often enjoy superior performances. They also found that Twitter is a good gauge of such mood. See: Can Twitter predict the stock market? 

Fashion: it is not a concept many investors like to admit to, particularly those who suggest that investment is a science, but truth be told stocks rise and fall with fashion. Sometimes shares rise because the crowd has decided they are going to. On the back of crowd behaviour we got the dotcom bubble, gold rising and falling and bitcoins – for example.

There is a flaw with the idea of wisdom of crowds. Studies show that crowds can be very smart, BUT when and only when the individuals who make up the crowd work in isolation. The classic study was carried out by Francis Galton in 1906, when he surveyed visitors who entered a competition for guessing the weight of an ox at a livestock fair. Galton found that the average guess was very accurate, and so the concept of the wisdom of the crowd was born.

But the crowd in the Galton study had one characteristic that we rarely see in practice. Each guess was made in isolation and was not subjected to the influences of what others thought. Psychological studies provide overwhelming evidence that we all tend to comply with the crowd.

Ten million.

How tall do you think the author of this article is? Take a guess, go on.

Studies show that if the number ‘ten million’ quoted above had been lower, say four, instead of ten million, your guess as to the writer’s height would have been much lower. It sounds ridiculous, but it is true.

That is the point; we are all influenced by each other in surprising and often quite unintuitive ways.

If you can gauge the mood of the crowd, you would indeed have an advantage in predicting stock market changes. By plugging into social media we become a part of the crowd, but maybe we can understand it better too.

There is a snag. Crowds can get it horrendously wrong. The individuals who make up a crowd copy each other. But there is always a limit. A crowd can persuade itself to back an idea beyond that point when its support is rational.

By plugging into the crowd you may be able to second guess fashion in investment, but you may also get swept along, and when the bubble bursts you will find little comfort in the fact that you share one thing in common with the crowd – a lost fortune.

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In 2002 it was worth £200 million. In 2012 it was worth £5 billion. So, get out your abacus and work that one out. It is the equivalent of doubling every 26 or so months. That’s a near Moore’s law-like trajectory.

So what is that has seen such growth? Why online advertising in the UK, according to the Interactive Advertising Bureau (IAB).

Last year, digital advertising grew 12.5 per cent to a value of £5.5 billion. Within that, video advertising rose 46 per cent, social media by 24 per cent, but, and – take a deep breath before you read this figure – mobile advertising rose by a stunning 148 per cent on a like for like basis.
The value of total mobile advertising in 2012 was £526 million.

Here is a puzzle. Have you noticed that the ‘Telegraph’ has gone premium? You have to pay for content on its web site now. So that’s the ‘FT’, ‘Times’ and ‘Telegraph’. It is intriguing isn’t it? At a time when online advertising is growing at an extraordinary rate, mainstream newspapers are pretty much giving up on trying to use advertising as the main means by which they generate online revenue.

Drill into the IAB figures and a partial explanation may be revealed.

IAB said: “Paid-for search marketing increased 14.5 per cent on a like-for-like basis to £3.17 billion from £2.77 billion – representing a 58 per cent share of digital advertising.”

In the world of online advertising, ads are more closely targeted. Paying for keywords is incredibly accurate. Advertising in a newspaper is a bit more hit and miss.

Maybe the rise of video advertising will change that.

In the olden days before there was an Internet, adverting was about creating brands, about creating a warm feeling about certain products. It was harder to quantify effectiveness, but it did work.

Internet advertising is less subtle, and is more closely linked to very specific aims. Brand advertising provides the best hope for the publishing industry.

All this leaves some interesting questions? For how long can the growth continue?

Well as this article argues – see: The new convergence, advertising, shopping and entertainment – maybe for some time.

©2013 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here

Microsoft’s latest idea could be used to force us. Google’s plan is for us to want to. To do what, you may ask? Answer: view advertisements. The advertising industry is set to change and fortunes will be won and lost.

Consider the difference between the way Google makes money and the way Amazon does. Amazon is a store, an online retailer. Online retailers use online advertising as one of the main drivers of their sales. Actually when you think about it, the difference between Google and Amazon is quite subtle. In traditional retail position is everything. Rent for a premium spot on the High Street is a major overhead. For online retailers, position on Google or Facebook is the key.

This is the change that accountants are struggling to keep up with. There are ways to value a company’s assets based on real estate. But what about virtual space?

Microsoft, or so says the rumour mill, is planning to use its next Xbox, to try to gain control of the living room. And its Kinect technology may be the key. One of the ideas being suggested is that the Microsoft device will be able to detect when a viewer is not watching the TV, so that it can pause automatically.

Its sounds exciting, except of course the reason why the viewers has averted his or her gaze may be because they are bored with the programme. The implications for advertising are more interesting. Maybe the technology can be used to ensure we watch the ads. Similar ideas have already been mooted for smart phone’s. Powerful stuff, if a tad intrusive.

That’s not to say that Microsoft has advertising in mind with its product, as a general rule of thumb the company is not big on generating revenue from advertising. But is that not a possible consequence of its technology?

Google, on the other hand, has a more deliberate advertising-centric plan.

Have you seen that Pepsi ad yet? It’s pretty compulsive viewing. It shows a stunt car driver test-driving a new car, and giving the car salesmen the fright of his life. The ad has secured 33 million hits on YouTube. The other interesting thing about the ad is that that the joke underpinning it fits in well with the message Pepsi is trying to convey.

Susan Wojcicki, vice president of advertising at Google, has been making lots of noises in the press of late trying to express the Google vision of the future of advertising. She cites the Pepsi ad as an example of where she sees the medium going. She says that in the future digital advertising will be voluntary; that is to say customers will choose to watch an ad; that ads will be more relevant to viewers, more interactive and beautiful, and the effectiveness of the ads will be easier to measure. She cites another idea which is a little harder to explain. Essentially she says ads will run across platforms and devices, and will be targeted at people rather than specific mediums. See: Here’s The future of advertising, according To Google. 

Here is an alternative idea; the future of Internet advertising is video. One expert in the industry predicts that video advertising will double every two years until it dominates the industry. See: Soon all online advertising will be video

To be honest the Google idea is more appealing. Don’t you like concept of ads being fun, and watched out of choice, rather than kind of forced upon us. And don’t the ads on TV drive you potty?

The mistake some analysts make when considering online advertising, is to compare it with traditional advertising. Online advertising is more. It’s virtual real estate too, it as much overlaps with commercial property and related fields as it does offline advertising.
The big challenge is privacy. How can the online companies match their commercial interests with the natural desire for privacy? It is the unanswered question.

PS Here’s a dichotomy for you. According to the Institute of Practitioners in Advertising’s quarterly Bellwether survey, total advertising spend – that’s off line and online – fell in 2012, and it forecast a 0.3 per cent contraction this year.

©2013 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here