Logic and Advertising on Facebook

Is it me or does there seem to be a growing number of naysayers bagging on Facebook as an advertising platform? It could be me but I don't think and this is why; Of the 26M unique visitors for the month of May 2007, 13M were older than 24 years of age. Of that 13M, 10M were above age 35!

If advertising on Facebook isn't showing a return then advertising on any web property should be questioned as well. This is because, at the end of the day, Facebook isn't just about college students, it's about a college educated audience that is smarter than the advertisers. To me, that poor click through % sounds like a statement from the users that the advertisers are doing a poor job on the creative front and the in your face front. Facebook users are educated people and generally speaking, educated people question things, especially when they are groomed with the notion that advertisers are like used car salesman. Slimy, untrustworthy, fickle, after the quick buck and once their done with you they are on to the next victim. Whether that is true or not, it doesn't matter, it's a perception and in this case perception may be reality.

Does this mean Facebook isn't worthy of the attention or prospective valuations floating around? Hell no, for if that was the case then NBC, ABC, CBS, Clear Channel, Fox, Viacom and all the other advertising dependent 'networks' would be less than worthless because they have exponentially greater expenses than Facebook. This means Facebook is the catalyst to the transformation of advertising as we've known it which is best described as the effort to create fear, uncertainty and doubt all wrapped around a call to action, into a relic of the past. In doing so they are resetting expectations of and possibly causing a reevaluation of prior efforts by advertisers and more specifically, their agencies. It's about time that ad click throughs and pageviews be tossed aside as the main metric for placing a value on marketing to a set of users. I can tell you with a straight face that in my 15 years of being on the internet, I have clicked on less than ten banner ads yet bought tens of thousands, if not a hundred thousand dollars worth of goods and services online. I can't tell you the last time I looked at a banner ad and thought it was intriguing. Because they aren't. They are a one way street and often an intrusive obstacle in my daily routine when they impede the performance of a website or do that overwrite or splash page crap they do on Forbes.com and sometimes on Cnet. If that isn't a reason to not click on an ad then I don't know what is.

It's about time the advertisers start giving something of value to the internet ecosystem as opposed to throwing shit on a wall and expecting revenue to flow their way. Some people may argue that they do give back via the $15B+ a year they spend on online advertising which is revenue to the companies in the business of generating revenue by selling ads. But that is not adding recognizable or measurable value to the marketees, those of us who they try to get to click on their banners, the everyday users, all of us.

What is different about the internet than the three other media networks, TV, print and radio? It's measurable. Really measurable. The way the internet works is much different and precise and specific than that of a broadcast network in that measuring a broadcasts audience is at best a guess and at worst a hope. On the internet it is possible to track how many users came to your website, where they were from, how long they stayed, what OS they were running, what browser they were using, where they came from and where they went when they left and get that info as it is happening. Those features are what makes the Internet an 11 on a scale of 1 to 10 as way to gauge effectiveness of a particular effort, in this case marketing. On the broadcast mediums you can afford to be lazy because there is no way to track how effective a particular effort is other than by sales numbers but that doesn't mean an increase or decrease in sales numbers are directly attributable to that marketing effort. There are plenty of companies that did and/or do ZERO advertising yet generate hundreds of millions of dollars a year in revenue. Its not that they don't market themselves, they definitely do, but they don't advertise. Big difference. Advertising is a form of marketing and with it come negative perceptions. Perceptions that for many, are so ingrained deep inside that they will never be unseated but can be lessened if and only if there is a sense of trust between the marketee and the marketor.

How is that ever going to happen? The most simple form is recommendations or word of mouth. When someone you trust recommends something you are more likely to believe them than you are some Madison Avenue marketing dude who created the 'coke is it' campaign. More like coke is shit because it is bad for you and how many times have you had a friend come up to you and recommend Coke? For anyone who grew up in the 70s 80s or 90s I'm referring to the brand of soft drink :) Conversely, how did you hear about Google, YouTube, Facebook or Thomas Keller's Restaurants like French Laundry, Bouchon or Perse? All leaders in their respective fields. I can tell you one thing for sure, it wasn't from advertising and that is a fact.

Does this mean we're in an economic bubble and the sky is falling? Absolutely not. Does it mean companies like advertising agencies on Madison Ave and ad networks placing banner ads on sites need to adapt to the internet? You betcha. Huh, how can an internet advertising network not be adapted to the internet by virtue of it's existence? That is very simple, they are applying 19th century methodologies and beliefs to a 21st century audience and platform. Do you take your horse and buggy to the gas station to refuel? No. Then why assume your 200+ year old demand creation theory is applicable now?

What I am getting at is that generally speaking the internet is not so much an advertising platform as it is a branding platform. That is very powerful for both sides of the market, the advertisers and those being advertised to because that means that poor advertising can be harmful to a company's place in the market as easily as subtle branding can strengthen it. Over the long haul, subtly reinforcing a brand without creating fear, uncertainty or doubt will only strengthen that brand and build trust with customers which will lead to them recommending the products and services associated to that brand to their friends and acquaintances which drive revenue growth. The same thing that advertising was supposed to do but apparently isn't. In conclusion, it's not Facebook or their users being a non marketable audience, it's that they're being targeted by 200 year old theories that were never tested or proved to be effective in the first place.

The Data Center Cheat Sheet - What exactly are we dealing with?

It may be useful to go through a brief overview of Internet datacenter market history to properly appreciate todays market dynamics so bear with me if this is old news or a regurgitation of a not so happy time. Those times build character though :)


Over the past few years the Datacenter market has experienced a shift in power as it relates to the Datacenter Vendor and customer or prospective customer realtionships. This is a function of an imbalance in supply and demand. From 2000 to early 2005, it was a buyers market for colo and buyers played vendors off of each other to get the very best deals they could. And they were quite successful in getting the often desperate vendors to strike deals that were well below being financially healthy or sound. From the vendors perspective, they were just happy to get customers in their datcenters. After all, they had rent to pay to their landlords and sitting inventory that is not generating any money is worse than selling that inventory for anything greater than zero. Allot of poor pricing decisions were made during this window of time but they(pricing) weren't the only questionable attributes of the deals that went down during this period.

The bigger thorn in the side of most of these deals was related to what these customers were allowed to install in each of the racks or cages in the colo's. Remember the time and put yourself in a vendors shoes for a minute. You're negotiating with eBay or some other large retailer and just the thought of signing this customer makes you forget the notion of profitability. At this point stopping some of the bleeding will be a step in the right direction and as such you agree to give ebay the best rack pricing you've ever given anyone and don't put any parameters around how much power they can install and consume. Secretly you're really hoping they over provision power because that is money in your pocket that helps to offset the low rate on space you've agreed to. Sidebar definition: Over provisioning power is the scenario whereby a customer provisions 60 amps of primary 208v power(as an example) and only consumes 20amps of it. The customer pays the vendor for the full 60 amps but the vendor is only on the hook to the utility for what it uses, in this case 20amps. That is 40amps of profit right? Yes, at that particular month it was. This was quite a common situation and more often than not it was because the customers were ordering their colo configurations based on what their equipment required at full load. The issue here was that nobody was using the equipment to anywhere near capacity.

Slowly but surely the economy crawled back up and to the right(on a graphical basis) and with it came increased usage of the internet, ubiquity in broadband access, storage prices plummeting and innovation in usage of the internet in general. With the economy coming back more people were employed and they sure surfed the net at work(I think it would be intersting to see a study done on productivity output of employees with internet access and employees without it), more people had disposable income so they could afford the DSL or cable modem which allowed them to get further faster in their online worlds and gave them new ways to interact with one another via social networks which blended and intermixed with their real world lives. All of a sudden that steady 20amps of power consumption start to creep up. And up. And now frighteningly up. Up to the point that, as one VP of Ops of a big player in the space and who shall remain nameless, said,"this place could blow at any moment"

IMO, this was the point which the tables turned in favor of the vendors. By now the supply and demand was getting back to a state of equilibrium and it forced the datacenter vendors to do what I refer to as 'robbing Peter to pay Paul.' In order to fully grasp that notion you must understand what a datacenter really does. At the end of the day, a datacenter provides space, power and environmentals to it's customer sets. That is it. Datacenters don't provide managed services, service organizations do. Datacenters don't provide CDN or transit, ISPs and CDN's do. Datacenters don't provide storage, storage providers did that. We're talking about what the physical datacenter provides. Space, power, environmentals and physical security. Some may argue that these vendors provided interconnectivity and the vendors did but that was an added service layer that in actuality doesn't need to be a product of the vendor but could be the product of anyone or nobody(if it was free). When a datacenter is built you start out with a shell of a building and an amount of power that you can get delivered to that building. With that shell floor plan and that maximum amount of power available to you, you develop an overall layout of where things will go. Things being chiller, cooling towers, air handlers, generators, batteries, diesel storage, water storage, shipping and receiving, ingress/egress points, different authority levels of access, security and so on. You don't make these decisions without first knowing how much power you can get because there is a direct correlation to that amount of power and how many pieces of the Mechanical Electrical infrastructure plant will be required and how much square footage they'll occupy in the building. Long way of saying there is a finite amount of power and environental resources available for consumption. The standard increment or unit of measure in the market is either a rack or cabinet(42RU of actual space) or a sq ft. Each rack takes approx 20 sq feet of space on the datacenter floor. In order to forecast revenue, the datacenter operator simply takes the total sq footag of raised floor and divides by 20 sq ft to gt the # of available rack spaces they can sell, giving them some ability to forecast revenue. And they did forceast revenue based on these simplistic equality assuming assumptions. So if you have 50k sq ft of space you can sell 2500 cabinets. At $800/month per cabinet you'll generate $24MM in annual revenue. Sounds like a good plan right? The issue isn't it's simplicity but rather that it is only one piece of it, space. What about power? If you have 5Megawatts of power available for customer consumption across that 50k sq feet, you have a datacenter built to 100 watts a foot. If you have 7.5Megawatts of power available for consumption in that 50k sq ft, you have a datacenter built to 150 watts a foot. 10megawatts and you have 200 watts a foot. And so on.


Taking a step back, remember the example of the customer who was allowed to install the 60amps of 208v power in that single rack or those 20 sq ft? 60amps of 208v power in 20 sq ft equals about 500 watts a foot. Remember the notion of a finite amount of power coming in to the building and the linear relationship between power and the amount of space required for mechanical gear? That is because when delivering the power to the customers, the customers consume it with via the hardware infrastucture and in doing so, that hardware gets hot and gets hot quickly. Hence the beefy AC's that are required in datacenters. The same concept of the division of resources is carried over and applied to environmentals. We still don't have a global standard unit of measure for the industry because each building has different attributes and a customer may achieve higher utility in one vendors rack vs a different vendors rack because of the difference in the amount of available power in that rack. For this reason comparing Equinix rack pricing to Terremark rack pricing is useless unless you know the power per sq foot in each of their buildings. What point is there is trying to get Equinix who for examples sake has built out a datacenter at 200 watts a foot and is offering racks for $1000 each to lower it's rate to the $700 monthly fee that Terremark is offering in their datacenter which is built to 100 watts a foot. Don't you see what a screaming deal you already have with Equinix? To get that same functionality or utility at Terremark would cost you $1400 a month per rack.(Vendors and associated #s there are meant for expample purposes only). Circling back to the example earlier of eBay over provisioning those 60 amps of power or 500 watts a foot in the 100 watt per foot designed facility and you quickly realize that you, as the vendor gave up 5 racks of space and associated revenue for everyone one rack of space that eBay pays for. And pays for at the lowest rate you ever did. The deal is 5X worse than you thought. Not only that, but the perception of your company to a stranger walking in to your facility is that you are struggling because your datacenter is only 20% occupied spacewise because those first 500 racks that ebay installed consumed all of the power and cooling resources. Now imagine your the vendor who didn't catch this overprovisioning issue until you had oversubscribed your mechanical plant by a factor of 2 or 3X and you have all customers usage creeping up simultaneously. What do you do then? You say, "this place could blow at any moment" :) Those of us who lived through those types of situations and conditions will never get in them again. The first time around can be chalked up to ignorance. The second time would only be stupidity. This thought is evidenced by the hard lines the vendors take today as it relates to placing limits on the amount of power per rack they will allow their customers to install.

Taking the example from earlier with ebay using the entire pool of resources in 20% of the space of in the building and you can view it one of two ways. The first being that the supply of available space just shrank by 80% or the demand for space just increased by a factor of five. The market adjusted itself and the tables turned in favor the datacenter vendors and shows no signs that it will revert back to it's old ways. Sure, you hear allot about new datacenters being built today but remember, there hasn't been any signficant investment in this space in about ten years. During those ten years, computing clusters have gotten physically smaller and financially cheaper while increasing in performance. All of this resulting in more power consumption per rack unit, doing more in less space but with no change in the relative volume of an amp of power. Meaning the computers got more efficient in both performance and amount of space the physically take up but the power is what it is. And that is a study of physics. Efficiencies aren't a part of power, they're a part of those things that use power. Wrapping this up, the market has experienced all sorts of technological progress on hardware and software piece of the equation allowing users to pack more in to less but that less consumes exponentially more power than that more did in the previous scenario. The most scarce resource of a datacenter is power. And that means cooling too.

datacenters, data center, watts/ft, kw, kv, power, density, hvac, colo, equinix, savvis, terremark, internap, global crossing, exodus, amazon, salesforce.com, ebay, efficiency, amps, volts,

It's true, what goes around does come around!

I wouldn't go putting the kids education fund into MSFT now or anytime soon. Aside from being a great example of karma and adding a validity to the saying, 'what goes around comes around', I wouldn't do so for several other reasons, all of them SV companies. GOOG, CRM, EBAY, AAPL, Sling.

Google because they are building out the infrastructure to support a true distributed computing grid that is device agnostic. Devices won't require on OS from MSFT which renders them much less powerful than was the case with the last 20 years of the PC evolution. Distributed grid that will support free access to anyone, anywhere, at anytime. Think about that, it is power beyond comprehension.

CRM - Salesforce.com mainly because with their APEX, they are building the next generation platform for global trade of goods and services. With the global ubiquity in access, the flow of information which may have been impossible in recent history is suddendly happening in real time. With access to information, people gain knowledge and with knowledge they become marketable. When something is marketable it has value. You get the point?

Ebay - PayPal was the purchase of the century for ebay. While they(eBay) too have the ability to be the commerce platform of the future global economy, their bigger opportunity is to be the arbitrator of financial transactions akin to a sort of clearing house for electronic units of value. They're already doing this to some degree and they've got a hell of a head start on anyone else by virtue of their current business.

AAPL - iPod was great for them. iPhone will blow the doors off iPod's results. Finally, it has arrived. Apple just delivered the equivalent of what Segway was hyped up to deliver.

Sling Media - As long as the networks as we know them today are in existence, there will be a high degree of value placed on circumventing the detributes of broadcast. Slingbox does just that and as ubiquity in broadband access gets closer to equilibrium, the value of the service to each user and of the user to Sling grow at increasing rates.