A few days ago, I wrote about the commoditization of social networks or rather the social networking feature sets that currently make Myspace and Facebook so unique and neat. Pioneers in social networking like Friendster and Myspace introduced a new data and software architecture that, at the same time clumsily and elegantly, met Internet users’ desire to interact and share content with each other. Finding old friends, connecting with new friends, sharing music and videos, playing collaborative games, and expressing oneself to virtual audiences of thousands all were groundbreaking features or functions that captivated a whole new generation of Web users.

These features generated higher levels of engagement (or stickiness) many times greater than traditional web properties. This stickiness in turn attracted marketers and advertisers who wanted to be where the people were. This stickiness premium netted the founders of social networking startups wealth reminiscent of the dotcom bubble. Myspace sold for nearly $600 million in a buyout by News Corporation (NWS-A), Facebook was valued at $15 billion by Microsoft (MSFT), and Bebo’s owners sold out to AOL (TWX) for $850 million.

With great rewards come hordes of wannabes and copycats. Many people are staking their future on social networking. Some are attempting to create me-too social networks. Others are pimping themselves as “experts” in social networking and offering their “consulting” services. I did the same with my SocialOptimize startup. Although my now defunct startup was able to deliver good social networking applications to prominent venture-funded startups, I soon realized that social networking would become a game with few winners and many losers. I argued that once Web 2.0 methodologies become widely adopted and social networks become a feature set rather than destinations, those same Web 2.0 methods will become standardized commodities.

That march to commoditization may occur faster than anticipated. Google (GOOG) recently announced its Friend Connect program, which allows virtually any website to plug in a turnkey social networking suite. Owners of websites can, like Google’s AdSense product, embed a snippet of code in their webpages and immediately enjoy the benefits of offering social networking features to their site customers or visitors. Think of Google Friend Connect as a more powerful Google AdSense, but instead of offering relevant text ads it offers your site visitors the ability to connect with their friends, connect with new friends, interact with each other with messages, and share content.

Here are the search engine giant’s stated high-order benefits of Google Friend Connect (GFC):

• Anyone with a basic understanding of the Web can implement GFC, no need to hire an expensive programmer or self-branded “social media guru.”
• Drive traffic: people who discover interesting sites can bring their friends with them, and can opt-in to publish their activities on those sites back into their social network, attracting even more visitors.
• Increase engagement: access to friends and OpenSocial applications provides more interesting content and richer social experiences.
• Less work: any site can have social components without hiring a programming team or becoming a social network.

That last point is key. Google doesn’t want more “social networks” per se – it just wants more websites to have social features. A while ago, it signed a deal with Myspace to serve Google ads. At the time, Google paid a huge premium and there are reports that claim the Mountain View, CA behemoth has not recouped its cost. Signing advertising deals with mass market social networks can be expensive. Helping mom and pop sites to have social networking features will, in the long run, give Google a cheaper alternative. Google is simply facilitating the creation of more web pages (places to serve its ubiquitous ads), pageviews, and advertising inventory.

The message is clear. You don’t need to become a social network; social networking features are a commodity. Here, have a few social networking features for free.

Much attention has been given to the Web 2.0 generation of social networks and websites. Deservedly so, this next wave of Internet properties has quickly acquired humongous user bases, rich valuations, and cultural buzz worldwide. Venture capital investors are clamoring to fund the latest spin on crowdsourcing, content aggregation, social networking, micro-blogging, video sharing, and other different takes on social media. Fortune 2000 companies are all trying to figure out how to respond to this phenomenon; after all, they do need to be where customers congregate.

One of the big problems in this space is that advertisers and marketers are being duped by self-branded “social media gurus” and “social app gurus” who market their simplistic consulting and shoddy development services while demanding rich retainer fees. They promise “viral” adoption of inane and mundane “social networking apps” that lend little credibility to the corporate buyer. They promise “branding” efficiencies and opportunities by continually repeating their mantra of getting their clients “into the conversation.” But all good skeptical buyers should ask, “What does that conversation bring me?” More importantly, “How do I measure the effectiveness or ROI of anything that I am contemplating buying?”

At the root of the problem is the inability of the self-styled “gurus” to measure their effectiveness. Granted, social media and social networking are new fields and reliable metrics have not yet been developed. Nevertheless, progress is being made and this series will explore the emerging field of Social Media Measurement in order to bring some light and hope to what seems like a dark swamp of self-promoters looking to feed at the corporate trough.

Popularity, Novelty, and Attention

These three components are difficult to measure, but are critical to understanding how well a certain social media campaign is running. Any “guru” that advertises their expertise ought to be able to explain popularity and attention. Novelty is a little easier to define, we know what is new when we see it.

One of the great movements of Web 2.0 is the method of crowdsourcing. Crowdsourcing can be defined as “leveraging a community (this needs to be more thoughtfully defined) to gather intelligence or opinion.” It is what James Surowiecki explores in his book, The Wisdom of Crowds, and what Tapscott and Williams explore in their book, Wikinomics: How Mass Collaboration Changes Everything.

One of the great companies that has figured out a way to harness the power of crowdsourcing is Digg.com, a website that allows users to essentially vote or “digg” for interesting stories, articles, and blog posts. The items that receive the most votes rise to the top and garner even more attention. It is a useful website for finding out about what is important to others. Essentially, Digg is a good source of finding out about a particular story’s popularity, novelty, and attention.

Fang Wu and Bernardo Huberman, two researchers at Hewlett-Packard’s (HPQ) Palo Alto, California laboratory recently released a study exploring the mechanics of Digg. They essentially developed a mathematical model that describes how the popularity of a story decays over time. This decay algorithm is not unlike that which describes the half-life of radioactive material. Another victory for the Latticework Model of multidisciplinary scientific inquiry. At the core of their model is a function called a stretched exponential relaxation, which achieved the ability to measure the half-life of prominent Digg stories. Digg’s extremely popular front page, which has the power to generate vast amounts of Web traffic to stories that make the front page, features a half-life of 69 minutes! It takes a lot of work to get onto the front page of Digg but all that cumulative work results in a premium of just over 1 hour of premium attention.

Critique

I do have problems with this study and its conclusions. My issues aren’t with the conceptual idea of measuring popularity, novelty, and attention. I have caveats about their study design and assumptions. One of the well known secrets of Digg is that there are relatively select groups of Digg members who hold disproportionate influence in the community. Almost all the stories they “digg” or submit to the community habitually show up on the front page or home page. Everyone knows that there are ways to game the Digg engines. One could imagine loose “tribes” of Diggers that “help” each other digg stories in a reciprocal manner in order to get their stories to the top. This reciprocity has little to do with the novelty or newsworthiness of a story.

Another problem with the study design and assumptions is that a community is only as good or valid as its component parts. In other words, the demographic makeup of a community obviously is an overwhelming factor. Digg is a notoriously young and tech-savvy community. As such, it has its own built-in biases. Any study should take this into consideration. Most of the stories that make it to the front page are going to be technology-focused. And even within technology, the focus is primarily on Web 2.0 stories. One would find the community very hostile to Microsoft (MSFT) and other older, first generation technology companies. I think this is a secondary concern, but it should definitely be taken into consideration.

I would have liked to see Wu and Huberman explore the concept of influence. Those super-diggers who have an extraordinary ability to push their stories to the very top. In my next post, I will explore a very rudimentary measure of influence based on another very popular social media Web service.

Implications

What are the implications of this story? Perhaps a corporation contemplating a viral campaign on Digg to try and push awareness of their story could measure the costs of such an effort. Would the ability to identify the super-diggers who might be willing to trade influence for monetary compensation be a worthwhile endeavor? Note that the community would frown upon a paid campaign to push awareness. Are the risks of negative attention worth the benefits of getting a chosen story to the top? Can 69 measly minutes of premium attention be worth the costs?

Again, I issue a warning to corporate buyers. Be very skeptical of self-branded “social media gurus” and “social app gurus” – they likely are not able to quantify their expertise and will be unfortunate resource wasters. Believe me, the talent in this cottage industry is very weak but great at self-promotion. The emergence of the new Social Science will alleviate this problem by helping advertisers, marketers, and strategists identify and measure ROI and performance. New metrics are arising everyday.

Steve Ballmer, CEO of Microsoft (MSFT) puts on his best poker face with this letter to the Yahoo! (YHOO) board of directors. Ballmer isn’t known all over the world as an innovator, but as a former lawyer and one of the architects of Microsoft’s monopolistic business tactics, I’m sure he can hold his own at the negotiation table. Of course, that hasn’t been the case lately with the outlandish premiums he paid for aQuantive and Facebook. So maybe he’ll back off of this hard stance:

Dear Members of the Board:

It has now been more than two months since we made our proposal to acquire Yahoo! at a 62% premium to its closing price on January 31, 2008, the day prior to our announcement. Our goal in making such a generous offer was to create the basis for a speedy and ultimately friendly transaction. Despite this, the pace of the last two months has been anything but speedy.

While there has been some limited interaction between management of our two companies, there has been no meaningful negotiation to conclude an agreement. We understand that you have been meeting to consider and assess your alternatives, including alternative transactions with others in the industry, but we’ve seen no indication that you have authorized Yahoo! management to negotiate with Microsoft. This is despite the fact that our proposal is the only alternative put forward that offers your shareholders full and fair value for their shares, gives every shareholder a vote on the future of the company, and enhances choice for content creators, advertisers, and consumers.

During these two months of inactivity, the Internet has continued to march on, while the public equity markets and overall economic conditions have weakened considerably, both in general and for other Internet-focused companies in particular. At the same time, public indicators suggest that Yahoo!’s search and page view shares have declined. Finally, you have adopted new plans at the company that have made any change of control more costly.

By any fair measure, the large premium we offered in January is even more significant today. We believe that the majority of your shareholders share this assessment, even after reviewing your public disclosures relating to your future prospects.

Given these developments, we believe now is the time for our respective companies to authorize teams to sit down and negotiate a definitive agreement on a combination of our companies that will deliver superior value to our respective shareholders, creating a more efficient and competitive company that will provide greater value and service to our customers. If we have not concluded an agreement within the next three weeks, we will be compelled to take our case directly to your shareholders, including the initiation of a proxy contest to elect an alternative slate of directors for the Yahoo! board. The substantial premium reflected in our initial proposal anticipated a friendly transaction with you. If we are forced to take an offer directly to your shareholders, that action will have an undesirable impact on the value of your company from our perspective which will be reflected in the terms of our proposal.

It is unfortunate that by choosing not to enter into substantive negotiations with us, you have failed to give due consideration to a transaction that has tremendous benefits for Yahoo!’s shareholders and employees. We think it is critically important not to let this window of opportunity pass.

Sincerely,

Steven A. Ballmer
Chief Executive Office
Microsoft Corp.

Some of the larger institutional holders of Yahoo! include mutual fund giants Legg Mason (LM), Capital Group, Vanguard, State Street Corporation (STT), and Janus Capital Group (JNS). Hedge funds or private investment partnerships holding sizable positions include Sands Capital Management, Lee Ainslie’s Maverick Capital, TCS Capital Management, Geode Capital Management, quant shop Tykhe Capital, and Raj Rajaratnam’s Galleon Management.

Shareholders of Yahoo! should welcome a proxy fight. There are very few other companies capable of acquiring the Internet pioneer based in Sunnyvale, California. With the economy in a recessionary state, other potential acquirers will guard their cash until the business cycle turns. Even large buyout funds with an appetite for technology companies will be gun shy because of the evaporation of credit. Yahoo! directors should come to the table and attempt to get a better offer, but failure to accept a bid from Microsoft will result in a plummeting stock.

On a lighter note, can you imagine Yahoo! and its employees toiling under the Microsoft banner? Their cultures are so different. Enjoy the accompanying video of Ballmer during a Microsoft love fest. Replace “developers, developers, developers” with “web developers, web developers, web developers.”

ESCO receives order for 88,000 meter readers – Radio Frequency (RF) utility meters are coming to your neighborhood soon. Yes, everything is going to get networked, even your gas, electric, and water meters. ESCO Technologies (ESE) just sold a bunch to PG&E Corporation (PCG) and if you don’t live in California, expect your utility to follow suit.

Perdigao Reports Increase in Net Income of 174% in 2007 – Food prices keep rising – an issue I’ve mentioned here before. Brazilian pork and poultry producer Perdigao S.A. (PDA) has been a big beneficiary. Fred Fuld at Stockerblog.com has an overview of Brazilian food stocks. I’m making some jerk chicken this weekend, pass the Pickapeppa Sauce.

Herbalife President Exercises Options – Multi-level marketing companies run hot or cold. I wouldn’t short this stock, but buyers (of product or stock) should be aware of the sales tactics used by these companies’ “independent agents.” Herbalife (HLF) has knocked the ball out of the yard lately but a cursory look at USANA Health Sciences (USNA) or Mannatech (MTEX), which sell similar products, can show how things quickly go wrong.

Healthcare left behind in the rally – Wellpoint’s (WLP) lowered outlook has caused its peers to drop in sympathy. Humana (HUM), UnitedHealth Group (UNH), Health Net (HNT), Aetna (AET), and Cigna Corporation (CI) all took sizable plunges. There’s value in them thar health care stocks?

Immucor to Buy BioArray Solutions for $117M – Market participants sold Immucor (BLUD) hard after it announced its intention to buy BioArray Solutions. BioArray’s products look to fit well with Immucor’s portfolio of blood transfusion and testing technology.

Macro

• Once again, Mark Zandi and his team at Moody’s Economy.com (MCO) comes through with something interesting. Click through on the image below and interact with the map to find out if your state and county is in risk of recession. My home state of California is definitely at risk, dragged down by rapidly falling housing prices. I currently spend most of my time in Utah, one of the few places that has seen strong economic expansion and even strong real estate price appreciation. Forbes recently named Salt Lake City first in its “Best Cities for Jobs in 2008″ rankings.

• BRICs (Brazil, Russia, India, China markets and stocks) call temptingly to investors frustrated by the recent turmoil in domestic equities markets. They have dominated the issuance of global depositary receipts, accounting for 50% of the record $55 billion raised in 2007. Executives at the Bank of New York Mellon (BK), a large operator in the ADR space, say the trend is expected to continue as BRICs companies are anxious to tap into capital from developed economies as well as listing shares in their own countries’ exchanges. Caveat emptor, while these depositary receipts must pass some regulatory and compliance hurdles, their accounting and reporting standards do not match the rigor of domestic stocks.

• Life, Liberty, and the Pursuit of Happiness: Questions exploring the link between income and happiness are not new. Recent studies show that per-capita GDP is an imperfect measure of welfare. No really? Any attempt at measuring “happiness” will, by definition, be subject to inaccurate opinion and “self-perception” – we humans are an idiosyncratic lot. Furthermore, when income inequality expands (a necessary symptom of meritocracies), large portions of a country’s population loses satisfaction. We live in interesting times (read turbulent) and envy is either a sin or a highly irrational emotion.

Micro

• Building BRICs on education: The national Chinese universities are notoriously competitive and accept only a tiny fraction of China’s brightest students. In the past, the next brightest were relegated to factory jobs and other less “prestigious” careers. As China’s wealth grows, the citizenry will demand more social mobility. Enter private, for-profit educational institutions like New Oriental Education & Technology Group (EDU). I suspect we’ll see more such issues coming to our public equities markets from the BRIC economies. Full Disclosure: I currently have a long or short position in EDU in one or more of my private investment partnerships.

• The Tiger bets on the Dragon in the Year of the Pig: Julian Robertson has served as a great role model for me especially for his legacy of mentoring numerous “Tiger Cubs” at his now defunct Tiger Management who have gone on to run highly successful hedge funds of their own. His influence cannot be measured only on the returns he generated. Now Charles Coleman’s Tiger Global reported a knockout 2007 in which the Tiger Cub generated a 71% return. Big technology names such as Google (GOOG) and Research in Motion (RIMM) fueled the outstanding performance. A large portion of the portfolio benefited from the strong performance of Chinese stocks. Big winners included Baidu.com (BIDU), Longtop Financial Technologies (LFT), Focus Media Holding (FMCN), the aforementioned New Oriental Education & Technology Group (EDU), and Gushan Environmental Energy (GU). Julian Robertson established a reputation for rigorous fundamental analysis coupled with insightful contrarian strategies. That begs the question; when does China become too expensive? Full Disclosure: I currently have long or short positions in RIMM and EDU in one or more of my private investment partnerships.

• Conservative lending principles will hold banks steady through the credit crisis. Even when the yield curve is more positively sloped, giving in to the temptation to relax credit standards will come back to bite undisciplined management. A few banks off the top of my head that have reaped the benefits of prudent lending include Wells Fargo & Company (WFC), US Bancorp (USB), and even Oriental Financial Group (OFG). Oriental belongs to the group of banks that serve Puerto Rico, a small group that has underperformed for so long that Wall Street expectations cannot go much lower.

Technology

• Charlene Li, an analyst with Forrester Research (FORR), writes a good piece on the future of social networks. She impresses me with her forward thinking and ability to simplify some deep concepts. The future of social networking will feature universal identities, a unified social graph, deeper social context for “activities” and a new business model where social influence defines marketing value. These predictions are very relevant to my work at SocialOptimize and I especially like marketing value defined by social influence. Fortune 2000 companies would do well to heed Charlene’s prognostications. Why is Charlene working for a big stodgy publicly traded company? She ought to jump ship and join SocialOptimize.

• Apple (AAPL) takes a serious run at Research in Motion (RIMM) and its Blackberry devices. The iPhone debuted to much fanfare, but Wall Street has been relatively unimpressed with the product and results. Apple recently announced the release of the iPhone SDK, essentially opening up the iPhone as a platform for outside developers to create software for the iPhone. Predictably, this has gotten the tech industry very excited, but Wall Street continued to respond with ambivalence. The day of the announcement, Apple’s stock actually dropped. Kleiner Perkins Caufield & Byers also announced a $100 million venture fund devoted to backing iPhone focused startups. Full Disclosure: I currently have a long or short position in RIMM in one or more of my private investment partnerships.

• Space is still the final frontier. If global warming continues, we’ll need to find alternative places to inhabit. The Europeans launched a humongous “cargo ship” into space to resupply a space station. Live long and prosper!