So the folks at ad:tech is helping to solve this rather large problem. Innovation Alley is a new section of the ad:tech exhibit floor that is dedicated to interesting new startups in the advertising technology world. There are plenty of conferences that focus exclusively on technology and web startups but they’re attended largely by people within that world. You rarely find customers at these kinds of startup conferences. Industry conferences for different verticals such as advertising, healthcare, transportation, etc., could take ad:tech’s example and devote space to highlight innovative new startups that would normally not have resources to buy exposure to influentials and decision makers from the industries they’re targeting.

The startups I found most compelling at Innovation Alley were ones that addressed the emerging importance of social media in advertising and marketing. I haven’t watched television for a long time. Most of my friends haven’t as well. Not only do we not see mass market television advertising, we don’t trust it anyway. And while we begin many of our purchases online through search engines, we will increasingly get influenced by our social networks of friends, colleagues and relatives to buy things we hadn’t considered before. This is why Google the Goliath is afraid of David Facebook.

Peerset helps advertisers improve their audience targeting. From what I gathered by talking to some of Peerset’s employees, the company combs through social network profiles to construct anonymized data sets of interests and behaviors. The more you reveal about yourself on your profiles and social status updates, the more you will receive relevant advertising. As much as we’d like to believe that we’re individuals with unique tastes and opinions, we’re very much like the rest of our friends. We are more easily put into a group or several groups that share common characteristics than we believe. What I’d like to see is “data profiling” companies like Peerset and probable competitor Rapleaf use their technology to not only help advertisers serve advertising more accurately but to also just produce more interesting content. Sort of advertising by not advertising. Yes, that’s very vague and unhelpful but I think someone will figure out what I mean.

140 Proof delivers advertising exclusively on Twitter. The company helps brands target the right people in the Twitter universe. This is another example of the increasing importance of social networks and the opportunity to customize messages based on personal, yet public, information. 140 Proof claims that great tweets get retweeted. The retweet function, which was invented by users and not Twitter’s management, is one of the most simple, brilliant, and elegant ways to make a message viral. It would be interesting to get real hard data on how often marketing and advertising messages get retweeted versus “regular” tweets.

Brickfish helps brands create campaigns that get consumers to create user-generated content revolving around the brands. Many startups have tried to accomplish this kind of concept. It’s really difficult. As much as we’re becoming more social, we’re also becoming more cynical or skeptical. Consumers are trained to beware of blatant advertising. We might be even more cautious of blatant attempts to get us to help create still more blatant advertising. I’m sure that Brickfish has encountered resistance in some of their campaigns. Perhaps they’ll figure out how to systematically incent customers to sing the praises of brands. If someone can figure this out, I think they have a big hit.

I’m looking forward to the next ad:tech in New York. I hope they will continue to allow startups onto the show floor through the Innovation Alley program. You expect to see the big guns like Microsoft (MSFT) and Google there. There should be room made for pleasant surprises.

We are all early adopters now. Everyone is looking for the new new thing. When someone finds the latest new new thing, technology helps everyone else find out about it and we get to decide if we want to follow along. When done right this process moves lightning fast and blockbuster products surface almost instantaneously. New products cross the chasm faster than they’ve ever crossed before. For remarkable products, the chasm has shrunk.

Despite all this progress, there remains a lack of both art and science in the field of new product launches. We’re simply not moving fast enough or smart enough as we introduce new products because most entrepreneurs and brand managers don’t know how to launch. Billions of dollars go into research and development of new products every year. Billions more are wasted launching new products with misguided attempts to buy attention, interrupt audiences, and reach out to old, mainstream media. Thousands of products die early deaths because of bad launching.

There is a better way.

That’s why I’ve teamed up with Alex Krupp to change the world with LaunchHear. The idea for LaunchHear came out of an experiment called Swagapalooza Alex did during Seth Godin’s Alternative MBA program. We were both very lucky to have been given the opportunity to learn from Seth about bootstrapping, shipping, marketing, creating change, overcoming the lizard brain, becoming linchpins, making art, leading tribes, and being remarkable.

Equally exciting, we recently received seed funding from Y Combinator as part of the Winter 2010 batch. Wow! Y Combinator is without a doubt the best startup incubator in the world. No other incubator has been as consistent and prolific at picking great teams, seeding good ideas, and nurturing solid businesses. Paul Graham and Jessica Livingston invented the modern incubator model. They layer on value by teaching kick-ass product development and exposing us to mentors like Joshua Schacter, Paul Buchheit, and other successful technology entrepreneurs. The seed funding from Y Combinator is insignificant. What matters most is that the YC team has great taste and an incredible network of people.

So we’ll bring to bear all the goodness we learned from Seth combined with the special Silicon Valley way of building scalable technology businesses we learned at Y Combinator. And we’ll be looking to change the worlds of PR and advertising as applied to new product launches.

To bring about that change, we’ll focus on a few things:

• answer the burning question – what’s new?
• answer the passionate question – what’s interesting?
• make select bloggers, tweeters, and netizens happy by providing interesting things to point to
• help new and remarkable products cross the chasm faster
• level the playing field for companies regardless of launch budgets

There isn’t a lot here about tactics or the specific products or tools we’ll build. I want to focus on the big picture and the fundamental core values.

We’re barbarians at the gate, outsiders with strong opinions about what needs changing in public relations and advertising. We’re optimists. We believe that remarkable products can still make the world a better place. We’re passionate. We’re looking for great people who feel as strongly as we do.

Because of our posture and worldview, we’re going to make a lot of people in the PR and advertising worlds very nervous. That’ll signal we are on the right track. Fortunately, there are also a few linchpins, mavericks and brave souls within the castle walls who see the opportunity we see for drastic change and progress.

If you’re one of these brave souls, you can reach me by email at Allan[@]LaunchHear.com – we’ll have loads of fun!

There are plenty of good pieces on the Internet about how to build a good board of advisors.  Go ahead, Google them.  There is one super post about why you shouldn’t bother to build an advisory board by the smart guys at 37Signals.  Essentially, they’re saying that too many supposedly critical things are myths that keep you from building the company and products.  But what if someone has approached you to be an advisor to his company?  There aren’t very many pieces about how to be a good advisor.  So how do you provide value as an advisor?

1. Don’t be a professional advisor.  Don’t go seeking to sit on a bunch of advisory boards.  Few things deserve your time and attention so be selective – get involved only with companies where you have unique insight and passion to contribute.  And I mean don’t be a professional advisor. If you ask for cash compensation, you’re a problem and not a solution, especially for young startups with limited resources.  If the management team desperately wants to compensate you, accept a fraction of a fraction of a fraction of equity in stock options that vest over time.  Don’t be a resource drain.

2. Get out of the way.  Too many advisors want to get actively involved in a company’s operations and tell management what to do.  The management team should know more about its business than you do and if it doesn’t – you’ll never be an effective advisor for the company anyway.  Being an advisor should never be an exercise in ego.  If you have to insert yourself to feel valuable, you’re the wrong guy.  Only get your hands dirty if the management team asks you to dive in.

3. Challenge convention.  Unlike members of a formal board of directors, you as an advisor cannot be held liable for the company’s actions.  This allows you to be more objective and give uncensored advice.  This freedom is probably the most enjoyable thing about being an advisor.  You don’t have to have all the right answers, you just need to be gutsy enough to question everything the company does and how it goes about doing it.  This is where you can have the most impact on the company by helping management to consider different strategies.  Focus on strategy, not tactics.

4. Open up your network generously.  You’ve spent your whole career cultivating valuable relationships.  Connect the company to potential investors, partners, and customers.  Of that list, customers rank supreme.  Investors and partners will show up if the company has a growing customer base.  But potential customers could care less who a company’s investors or partners are.  So if you know someone or some organization who could use the company’s products or services, be the leadoff hitter on the sales team.  But hold the management team to high standards.  Make sure milestones are being met and progress is being made before you haphazardly make introductions.  Let management know that if they do their job, you’ll be their biggest evangelist.

5. Get out of the way.  Did I mention that already?  This time what I mean is to know when the company has outgrown your expertise and ability to contribute.  There is a lifecycle to all engagements and you don’t want to be the person to outlast your welcome and usefulness.

My first impression of Seth Godin upon meeting him was that he is an extraordinarily efficient person.  You wouldn’t think of a “creative” as efficient in the sense that a supply chain manager, hamburger flipper, accountant, or the Octomom are efficient.  But Seth conducted interviews with about thirty candidates for the SAMBA program in under three hours.  He made up his mind on who fit perfectly soon after and, it turns out, he picked an amazing group.

How amazing? That remains to be seen. Everyone in the group was so remarkable, I felt like the straggler who needed to keep up, especially when falling countless times skate skiing.  Of the SAMBA crew, I was probably the least familiar with Seth’s ideas.

My talented SAMBA fellows are all immensely grateful to Seth for the time and energy he gifted to us.  We all want to thank him in some way.  But I think the greatest thanks we can give to a teacher who is so generous is to take what he taught us, practice it in the real world, change the world for the better, and succeed beyond his wildest imagination.  Then we can extend the change he initiated by teaching others.  So we’ll see just how amazing we can be.

Here are a few lessons that made the greatest change in me and they have little to do with an MBA:

Be Brave. You can start off a little clueless.  You can even start off as a complete outsider.  You can lack the resources others more fortunate start out with.  But you must have courage – this is the foundation of it all.  Everything else can be made up for right?

Be Purposeful. Some might say this is the foundation, even more important than bravery.  Maybe.  I think that if you’re brave and you’re willing to venture out and explore, you’ll find your purpose eventually.  So instead of sitting there trying to come up with the perfect and grand purpose for your life, get a little gumption and get in the mix!  You’ll find your purpose if you’re looking for it and doing something.

Seek Change. Change yourself.  Change others.  Change the world.  Change is painful but necessary for growth.  Real, substantive change has the potential to create the greatest value.  This is good advice whether you’re a college senior, corporate warrior, first-time entrepreneur, business mogul, parent, or spouse.  Back to the foundation – serious change requires bravery and purpose.

Be Generous. This depends on if you fundamentally believe that generosity produces value and surplus.  Does generosity produce economic value and surplus?  Does generosity produce reputation value and surplus?  Does generosity produce influence value and surplus?  We believe it does – but you’d have to practice it to find out for yourself.

Be Persuasive. How? Learn to tell good stories. Paint stories that capture the imagination because they are artistic, empathetic, emotional, exciting, incredible, overwhelming, unique, unexpected.  Use your new-found persuasion powers to sell your vision, your product, your service, your point of view.  Wield this superpower to cause massive change.

Keep Promises. We saw Seth do this every single day.  We live in a world where intangible assets are often far more valuable than material assets.  One of these intangible assets is reputation or credit, before it became primarily a financial measurement.  If you’re striving to increase your value as a person, keep your promises – especially when it becomes uncomfortable to do so.

My Promise on the six principles above: Regardless of what you’re trying to achieve in any field of endeavor you choose to engage yourself, you’ll increase your chances of success exponentially if you practice the six principles above.  You already knew that deep inside.

Bonus Grab Bag! Here are some of the more tactical things we learned relevant to today’s changing business environment. Should satisfy the MBA in all of us.  You’ll notice that they all tie back to the big principles:

- Recognize the difference between a freelancer and an entrepreneur.  Either one works but you should figure out which you want to be.  This ties back to purpose.

- You can generate a lot of business ideas if you try.  The trick is in choosing the right one for yourself.  Seeking change and having a purpose will help here.

- When writing a business plan, work backwards from success with concrete steps.  Concrete steps imply some level of control, that you can exert influence on.  No miracles allowed.  Each step should have more than one pathway to success.  This should not turn into a gigantic document.  Business plans that seek change have a greater chance to succeed.

- Marketing is a whole new game.  The old ways don’t work much anymore.  The power belongs to the people.  You cannot simply buy attention anymore.  You have to build permission assets, tribes, communities, ideas that spread.  Learn to tell great stories and your ability to persuade will help you thrive in new marketing.

- When working in a team, be first to spread the credit for success around.  When failure happens, be first to take responsibility.  If this doesn’t feel natural, you’re not doing it right.  It may feel painful in the short term but you’re building a long term reputation that everyone will want to associate with in the future.  This is related to keeping promises and being generous.

- Design is the last great competitive advantage.  You can design everything – not just your logo or website.  You can design the way your customers interact with the company.  You can design the way talent interacts within the company.  You can design your company culture.  This is more art than science and that’s why it’ll remain a source of competitive advantage for a long while.  It is also much harder than it looks, which is another reason why it works and is so valuable.  Design is persuasive.

- When writing press releases, make it more about the customers than about your own company.  Most press releases are ego-stroking exercises for company executives.  Don’t be that executive.  Why is your release important to the market?  Not why is it important to your company.  Check persuasion.

- Pricing tells a story!  It is a signaling strategy that is a marketing discipline.  You don’t have to just mark your costs up by 100%-200% as a rote formula.  Don’t price in the middle of the market.  Be the most expensive luxurious offering or be the cheapest most disposable solution.  Interestingly, this requires bravery to not price with your crowd of competitors.

- Sales has changed little.  It is still mostly an emotional process.  You simply need to learn to close.  Always be opening; always be closing.  Sales isn’t the tough slimy racket it is often portrayed.  When what you have to offer can improve someone’s personal or business life, you have the noble duty to change his life!  Every venture needs good salespeople and good sales processes.  Be persuasive and brave.

Seth, thank you for your time and attention.  I am truly grateful for the special experience and change of the last six months.  I am also grateful for the people who gifted us SAMBA fellows their attention by reading our posts and sending encouraging words.  I am going to set out to give thanks to Seth now by doing something remarkable.  I hope everyone reading this will choose to do something remarkable too.  This is only the beginning.

Seth said something that really boggled my mind.

“Instead of fitting the marketing to the business, fit the business to the marketing.”

“What?!?! What is he talking about?” was my initial reaction.

Turning things upside down and completely rearranging the order and relationship of things seems appropriate in times like these. Wise men throughout history have championed the art of contrary thinking as one way to develop new ideas, options, and decisions.

Instead of Marketing as an afterthought designed to fit whatever product or service you’ve already decided to create, the business you create will depend entirely on how you want to live your life and what you want your day-to-day, week-to-week, month-to-month, year-to-year activities to look like. What a refreshing way of looking at things!

Umair Haque’s An Open Challenge to Silicon Valley put it in even stronger terms as he labels the current crop of Web 2.0 startups and their incrementalist approach “trivial” and “banal.” I certainly could see the banality of the Web 2.0 echo chamber. Say a company creates a service for users to share picture slideshows online. The next competitor provides a widget for picture slideshows with better transition effects. Then the next entrant will provide the ability to incorporate simple audio effects into slideshows.

Haque’s answer to “what’s next?” is to challenge revolutionaries or entrepreneurs to solve bigger problems. What are some huge problems facing this world? Haque mentions skyrocketing food prices, unstable financial systems, and a worsening energy crisis. To this list I would add terrorism, a deteriorating and increasingly costly healthcare system, global warming, and war.

Pieter van der Heyden – Sloth

The incrementalism Nolan and Haque decried is alive and well. Petty, self-appointed social networking gurus argue about the incremental virtues of Identi.ca over Twitter, Facebook over Myspace (NWS-A), FriendFeed over Twitter, Twitter over Facebook, and countless other variants of this rock-paper-scissors silliness. The other 99.9% of the world’s population couldn’t care less.

At the time I read Nolan’s and Haque’s posts, I was mired at SocialOptimize creating social networking applications for clients. My former partner and I collected exorbitant dollars per hour for our work but I felt as if we drastically overcharged for our services. I came to realize that what we produced were inconsequential products that added little to no value to the economy and society. Even the companies that employed SocialOptimize derived scant value from the apps we delivered. Don’t get me wrong – I enjoy games and distractions as much as anyone but these apps constituted neither good games nor good distractions. They were merely companies’ halfhearted and “me too!” attempts at having a presence on social networks. The companies didn’t really even want these apps; they just got caught up in all the Web 2.0 hype.

As an investor, I’ve always been a contrarian but my entrepreneurial endeavors started to look like a vapid run with the herd. Haque’s and Nolan’s posts landed profound psychological kicks to my posterior. So I immediately interrupted my usual programming and have since been obsessed with searching for opportunities to address bigger problems.

My search for meaning has turned out to be fortuitous and delightful. It has taken me many months as I tried to vigorously filter noise from signal, short-term cash grabs from sustainable opportunities. Opportunities never appear scarce; the trick lies in carefully identifying and selecting the ones I can have the most impact on and the most fun with.

So I was ecstatic when I decided to join Design Engine Lab, a leading industrial design firm, as partner and chief strategist. Industrial design is an entirely new world to me and I’ve jumped in with complete enthusiasm. I am steering the firm gradually away from servicing clients and toward developing our own internal products and spin-off companies.

We have designed a new, patented interface technology that we will first apply to the lighting market. Our technology has the potential to curb energy usage drastically wherever it is installed. Some of Haque’s big problems are beyond the scope of my circle of competence, but global warming is one which Design Engine Lab’s greener and cleaner technology can have a very positive impact. Our technology will also affect the delivery and efficacy of healthcare, another big problem, by mitigating the environmental risk factors attendant in hospitals and other healthcare facilities. Our technology will be used in hospitals across the United States and that specific segment alone represents a multi-million dollar market.

We’re also forming a joint venture with another company to develop a portable landing zone that will dramatically improve the success rate of emergency extractions of injured people via helicopter. I’ve accompanied helicopter pilots on test flights and have received nothing but the most eager feedback. I’m very excited about this product because it will actually save lives in the real world.

At Design Engine Lab, we conduct serious play looking for ideas that have global implications. Sometimes, that means huge ideas requiring complex execution. But we also engage in what I coined Bite-Sized Innovation®. Small does not have to mean incremental if the result is drastic. We attempt to make small changes that lever up to create huge consequences. Some of our upcoming medical device projects will reflect this Bite-Sized Innovation model. The best part of all this is the intensely joyful feeling of play that permeates all our brainstorming and experimentation sessions.

I don’t want to stray too far from the software world. So I’ve been fortunate to have also gotten involved with Sendside Networks as a consultant helping with research, marketing, business development, and fundraising. Sendside is creating technology that will change the way companies communicate with their customers. It is a highly risky strategy as we are trying to forge a brand new category in the Enterprise 2.0 market. But highly risky strategies are the ones that capture or create enormous value if executed well. In this case, the risk is vastly mitigated by a fantastic executive team and boards of directors and advisers filled with quality individuals. The team is the primary reason I wanted to get involved in the first place.

Without giving away the recipe for the secret sauce, Sendside has the potential to replace a sizable portion of the physical mail stream. In our vision, at its most revolutionary extreme, only junk mail and parcels will flow through the mail stream. Successfully bringing about this vision would make Sendside one of the greenest companies in the world, lightening the global burden on our forest lands forever. I have to give a shout out and thank my friend Jeff Barson, Sendside’s evangelist, for turning me on to this opportunity.

I’ve been lucky to have had the luxury of putting a halt to my daily grind to look for game-changing opportunities. I was especially lucky to have come across the two thought-provoking and ego-shattering pieces by Haque and Nolan. Umair Haque wrote in the end of his post that he’d put his money where his mouth is and advise five organizations trying to solve big problems. Umair, if you’re reading this, please get in touch with me. If not, I’ll be in touch shortly.

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.

First, Anderson argues that social networking should be a feature, not a destination. I agree wholeheartedly. The ability to interact with friends, share content, and engage in self-expression should be standard features on most websites. The unique methods of encouraging creative online behaviors known as Web 2.0 will filter through the rest of the Internet and, soon, your grandfather’s favorite website will allow him to engage in “social networking.”

Second, Anderson cites stats regarding advertising revenues or costs from Myspace (NWS-A), Facebook, and Ning. He shows that monolithic social networks like Myspace and Facebook, which attempt to be all things to all people, are having immense struggles with selling advertising at worthwhile rates. He also implies that Ning’s niche vertical social networks built by customers command higher advertising rates. Some marketers happily pay the higher rates because the engagement level is greater on these niche vertical networks. Advertisers also prefer the more intelligent targeting of relevant audiences. Myspace, Facebook, Bebo (TWX), and other undifferentiated mass networks are actively trying to improve their targeting abilities so it will be interesting to watch this competition evolve.

Finally, Anderson asks a pointed question about Facebook’s implied $15 billion valuation when Microsoft (MSFT) bought a small percentage of the company a few months ago. If Facebook is struggling to target its advertising and improve its advertising revenues, does its gargantuan valuation make sense? I think Zuckerberg should take the money and run. I also think that Lee Lorenzen, a venture capitalist, and his prediction that Facebook is worth $100 billion is a case of shrewd exaggeration. What I think is most funny is the fact that all of Lorenzen’s fanboys, the self-branded “social app gurus” and developers of tiny Facebook apps are all eagerly drinking the spiked punch. There are few better examples of confirmation bias in action.

My main problem with Anderson’s analysis is his implied assumption that the currently high advertising rates the niche vertical social networks enjoy will stay relatively high. Based on his personal experience, he concludes that Ning’s advertising rates are greater than Facebook’s and Myspace by at least a factor of ten. I don’t think this will last. Web 2.0 methods are precisely that, methods. They can be products, but they are also methods or general, conceptual best practices. As such, the ability to create robust social networks for different verticals will diffuse to a critical mass of software engineers. As that process accelerates, social networks and features of social networking will become commonplace or commoditized. I’ve alluded to the commoditization of social networking applications, which is a related problem. When this process nears its peak, advertising rates for all social networks will have diminished drastically. Self-proclaimed “social app gurus” and “social network gurus” who have staked their futures on social networking will ultimately prove themselves as less than prudent.

The technology sector gets a big surprise with Microsoft (MSFT) announcing that it will cease to pursue the acquisition of Yahoo! (YHOO). Most analysts and market pundits expected Jerry Yang & Company would ultimately accept a deal, albeit at a higher price than Microsoft’s initial offer. Expect Yahoo! stock to take a precipitous plunge at the market open and the announcement of class action lawsuits from its larger shareholders. While this saga of two tech giants unwinds, plenty of news in the rest of the tech sector deserves attention.

The Nasdaq Composite continues to roar back from the recent market slide with a strong 2.2% gain last week. This makes my tech market bifurcation thesis look increasingly faulty. The bellwether technology issues have performed well as predicted, but so has the middle tier and even the bottom tier. International growth accounts for much of the resilience and strong performance. Technology companies reporting satisfactory or better results included Affiliated Computer Services (ACS), a business processing outsourcing and information technology services firm, Ansys (ANSS), a provider of engineering simulation software, Expedia (EXPE), the online travel e-commerce company, TeleCommunication Systems (TSYS), a provider of carrier-class wireless technology, Concur Technologies (CNQR), a maker of expense management software, LoopNet (LOOP), a website for commercial real estate listings, and Symantec (SYMC), the security software giant.

What about the rest of the market? Hallelujah! The Oracle of Omaha, Warren Buffett, has openly stated that the worst of the recent credit crisis has passed. Many value lemmings and growth copycats will take this as reason to dive back into the market with enthusiasm. Indeed, we are an eager shareholder society and investing is both pastime and profession. Investing might very well be religion. It is so for the pilgrims that never miss the Berkshire Hathaway (BRK-A) annual pow-wow to join in the proceedings presided over by high priests Buffett and Munger. The event occurred just this past week and, as usual, Buffett warned shareholders of smaller future returns for Berkshire. This warning is coming from the greatest investor alive, the prophet of profit, and the diminishing returns doctrine is probably the one part of the gospel the congregation finds hard to believe. We’ve all grown accustomed to his ability to outperform and deliver us from the evil of poor returns.

Macro

American taxpayers should be receiving their economic stimulus checks in the coming weeks. Will this provide the country with a sudden explosion of consumer spending? The bureaucrats in Washington believe that the increased spending will pull us out of the recent economic slump. But what will we probably do with our returned tax dollars? For the legions of homeowners who have seen the value of their most significant asset plummet in price, will they put the check towards a mortgage payment? Robert Shiller, the economist and father of the Standard & Poor’s/Case Shiller housing price index, predicts that housing declines have not come to an end and further declines could exceed the damage suffered during the Great Depression. In that scenario, homeowners on the brink of mortgage default would just walk away and spend their stimulus checks elsewhere instead of holding onto homes with values underwater.

Micro

Interactive Intelligence profit drops, sales rise – Confirmation bias, the cognitive error whereby investors search only for evidence that confirms their beliefs, is a very common mistake. With the second paragraph of this post, I run the risk of committing the more surreal non-confirmation bias, whereby I cite only evidence that refutes my tech market bifurcation thesis. So I best avoid this masochistic foible by pointing to Interactive Intelligence’s (ININ) somewhat disappointing earnings report. The company’s call center management software generated record sales but profits actually declined from the year ago quarter. There has been much debate about where corporations cut back expenditures in recessionary or slowing economic environments. The consensus is that advertising is the first thing cut. I don’t think so; I believe that short-sighted corporations tend to cut customer service functions and budgets. If true, ININ remains in trouble. Full Disclosure: I currently have a long or short position in ININ in one or more of my private investment partnerships.

MicroStrategy 1Q profit declines as operating expenses rise – Here is another case of a technology company that was able to grow sales while seeing profits decline. Are second-tier technology companies losing pricing and negotiation power? Are large corporate customers taking advantage of the slowing economy as an opportunity to demand better terms from technology suppliers? I remember when MicroStrategy (MSTR) generated as much hype as Salesforce.com (CRM); the promise of business intelligence software was as big as sales management software. Michael Saylor’s company took investors on an 18.6% dip last Friday.

Sohu 1Q profit soars with rising brand ad, online game sales – Last week, I profiled Sohu.com (SOHU), a Chinese Internet portal and online gaming company. Since then, the company reported record results and the stock rose an astonishing 25.6% in the space of five trading days. Sohu.com’s TianLong Babu massive multiplayer online game has become a best seller. The long term prospects for this company should be extremely bright and so are the long term prospects for the gaming industry in Asia. However, buyers of the stock now would be paying premium prices.

Perfect World Collaborates with Intel and Haier – Perfect World (PWRD) is another online gaming company based in China. The new alliances with Intel (INTC) and Haier give it some serious marketing muscle to push its massive multiplayer online games (MMOGs). They’re usually called “massively multiplayer online role playing games” (MMORPGs) but I’m going to keep it short and sweet. I’m also going to assume that future large scale games will not all be role playing game formats. Someone is going to produce a smash hit with a massive scale first person shooter like Halo.

Dolby posts higher Q2 profit; raises 2008 view – I used to take the public bus to high school in the ghetto and pass by the red brick building that houses Dolby Laboratories (DLB). San Francisco was an interesting place to grow up. One minute I’m riding the bus through the South of Market neighborhood and checking out the shingles of creative technology companies and the next minute I’m riding through the ghetto looking at beat up cars and pit bulls loosely chained behind chain link fences. Unlike in the digital video space, where scores of competing codecs vie for dominance, the digital audio space is in fact dominated by Dolby technology.

AgFeed Industries Completes Previously Announced Acquisition – China’s economy is bound to slow down just a bit as global macro factors diminish the competitive advantage of its low cost labor force. Nevertheless, population growth is unlikely to slow much and all those billions of hungry mouths to feed bode well for food companies. AgFeed Industries (FEED) produces hog feed and chicken feed. The company is aggressively expanding into hog raising and turning itself into a vertically integrated food producer.

“@kevinrose how do I get you to follow me back???” – anonymous self-proclaimed “social app guru”

This is Part 2 of a series that explores the science of Social Media Measurement. Let me preface this post by saying that this is a lighthearted post trying to come up with a simple measurement regarding a hugely successful social web service.

Previously, I explored the measurement of popularity, novelty, and attention on the very popular crowdsourcing news aggregation site Digg. My post was based on an arcane academic study involving the half-life of popularly “dugg” items. It turns out that stories frantically “dugg” by Digg members that make it to the coveted front page have a half-life of only 69 minutes. That’s a lot of work for a relatively short period of attention. Having that knowledge should prove useful to some marketers.

Why do we want to be able to measure social media? Why should we attempt to develop metrics? The ability to measure our efforts gives us valuable information to guide changes or course adjustments. It gives us baseline comparisons to measure against. It allows us to set measurable goals. It also helps us to make decisions when considering outside consulting help. In the social media space, there is a preponderance of self-styled “social media gurus” or “social app gurus” who try to trade off of non-existent influence. Like snake oil salesmen, they make grand claims about their reputation and expertise but their products or services are essentially worthless. Perhaps a few hard measurements could help marketers and advertisers identify the frauds from the really reputable experts.

This time around, I’d like to keep it a little lighter with a simple measurement I came up with to measure that amorphous quality called influence. This is a light-hearted attempt and nothing nearing the scientific exactitude I cited in my previous post. I consider influence as much more important than popularity, novelty, or attention. Indeed, influence implies popularity and attention. More specifically, I’m measuring influence on the hugely popular Web service known as Twitter. Twitter is a micro-blogging or mobile blogging service that essentially asks the question, “What are you doing right now?” When used correctly, it can be a helpful service for networking, sharing ideas, and staying abreast of buzz.

Twitter’s format is conducive to understanding and measuring influence because of its reciprocal structure of “follows” that makes for easy measurement. You can elect to “follow” other members of the Twitter service. Every time someone you are following “tweets” about something, you will get that update on your cell phone. People who elect to follow you are “followers.” Your followers get an update every time you twitter about what you’re doing or thinking.

Initially, most people “follow” their friends and family but eventually move to following other people on the Twitter network. Implicitly, people follow each other because they find each other interesting. I wouldn’t want to be following someone who is telling me and the whole world, “I’m going to the bathroom.”

There is a small group of highly influential members of Twitter that are so interesting and have such important thoughts to share that they quickly draw a whole army of “followers.” Their follower bases grow organically, naturally, and virally because they add a lot of value to the network and their followers. They don’t need to actively campaign for followers. Not surprisingly, their follower base is much larger than the number of people they follow.

There is also a larger group of sycophantic, self-branded “social media gurus” or “social app gurus” that have very little actual influence. We all know a few of these “leaches” and if they weren’t so spammy, they’d actually be mildly amusing. They are actively trying to get more followers. They spend a lot of time in self-promotion mode. They kiss your butt and play nice so that you might decide to follow them. They trade “follows” like high schoolers in a popularity contest. So instead of “I’ll vote you for best looking if you vote me for most popular,” they say “I’m following you so will you please follow me too?”

Not all “social media gurus” are frauds. However, you can spot the ones that are frauds when they try to build their follower base by asking truly influential Twitter members questions like this, “@kevinrose how do I get you to follow me back???” This is one case of a self-proclaimed “social app guru” asking Kevin Rose, the founder of Digg and a member of Twitter, to follow him. How inane is this? Please get a life.

So let’s get right into the Twitter Influence Ratio. It’s very simple really and very similar to the price to earnings or PE Ratio found in stock investing. In the financial PE Ratio – you get an idea of how much in earnings you getting for every dollar you pay for the stock. It’s a nice, convenient measure of how much value you’re getting or your bang for the buck.

Stock Price / Earnings = PE Ratio

EMC Corporation: 15.56 / 0.77 = 20.21

In the above example, EMC Corporation (EMC), a data storage company, saw its stock close at a price of $15.56 for the day. During the last twelve months, EMC earned $0.77 per share. Dividing $15.56 by 77 cents gets you a PE Ratio of about 20.21 – pretty simple right? Essentially, what the PE Ratio tells you is that for EMC Corporation stock, you are paying approximately $20.21 for every one dollar of earnings. Like I said, bang for your buck.

With the Twitter Influence Ratio, we’re going to try and get a read on someone’s true influence level. It stands to reason that if you are interesting, have neat thoughts, and add value to the network, people will naturally gravitate to you and “follow you.” Some of the most influential members of Twitter have many more followers than people they follow. So the Twitter Influence Ratio will attempt to express this relationship as;

Followers / Following = Twitter Influence Ratio

Example: 533 / 609 = 0.875

In the above example, one such self-branded “social app guru” has 533 followers and is following 609 others. This gives him a Twitter Influence Ratio of only 0.875 which means this person is not very influential. Intuitively, you ought to have more followers interested in what you have to say than the number of people you’re following. One might say that 533 followers is nothing to sneeze at. I agree, but the fact that this person has so many followers and is following so many more makes it highly probable that he is what is known as a “friend whore” or “follow whore.” Like the desperate high schooler, he’s just trading votes. Someone with a TI Ratio of less than 1 but is only following 30 others is probably not out there actively trading votes or follows. If I were looking for a consultant, I would run away from this guy and find someone more influential.

Let’s take a look at some folks who are truly influential. The aforementioned Kevin Rose, founder of Digg, is one of the most influential members of Twitter. As of this writing, he has a Twitter Influence Ratio of:

18,416 / 72 = 255.77

The Twitter Influence Ratio attempts to give you a sense of how influential someone is. In Kevin Rose’s case, for every one person he follows, he has just over 255 persons following him.

Justine Ezarik, or iJustine, a talented web designer is another influential member of Twitter:

12,652 / 1,047 = 12.084 Twitter Influence Ratio for iJustine

Of course, the TI Ratio doesn’t always work. If I claimed that it did always work, you could peg me as one of those phony, self-branded “social media gurus.” In the case of Robert Scoble, one of the most influential journalists and bloggers in the technology industry, he actually has a really low TI Ratio:

20,939 /21,243 = 0.985

Scoble’s a journalist so he has to follow as many people as possible to get the scoop. He is basically following as many people as he has followers. His Twitter Influence Ratio is almost a ratio of 1.

Well, there you go, the Twitter Influence Ratio is not a perfect measure of influence. But it does give you a sense of who is truly influential and who is just pretending. OK, this will probably be the last time you here me talk about the Twitter Influence Ratio. Tell that “social media guru” or “social app guru” you know to stop his Twitter spam before you “unfollow” him!

Update: I just found someone, Andreas Gohr, who wrote a script to tell you if someone on Twitter is likely to be a spammer. It’s based on the same principles as the Twitter Influence Ratio and is very well thought out. It helps classify users on Twitter in these categories: Newbie or Social Climber, Twitter Spammer, Twitter Caster, Notable, and Socially Healthy. Good stuff. My friend, the “social app guru” is definitely a Twitter Spammer.