Thursday 17 February 2011

why internet marketing

Congressman Bill Keating plans to introduce legislation putting limits on U.S. companies selling net monitoring equipment to repressive regimes, after news that a Boeing subsidiary sold powerful net inspection technology to Egypt’s state telecom.

“The Iranian and Egyptian protests have taught us that social media can be as powerful as any gun,” said Rep. Keating (D-Massachusetts). “Companies that are selling technology to countries that are using it to perpetuate human rights abuses must work with Congress to make this right.

“We should have the same safeguards – such as end user monitoring agreements – that we do when we sell weapons abroad.”

At issue is a company called Narus, which makes powerful deep packet inspection technology that can monitor the net’s fattest pipes to see what traffic is passing through — including reconstructing online phone calls, e-mails, instant messages, and web surfing activities.

Tim Karr, the campaign director for the Washington, D.C.-based advocacy group Free Press, noticed last week that Narus had sold its surveillance technology to the state-run Telecom Egypt, as well as to other repressive regimes including Saudi Arabia.

Karr says its time the U.S. government realized the power of such equipment to repress people and put limits on its distribution. That’s especially true in light of evidence from the revolutions in Tunisia and Egypt that social networking sites such as Facebook can be powerful tools for organizing, publicizing, recruiting and sustaining pro-democracy forces, according to Karr.

Mubarak’s regime, which was toppled Friday after weeks of protest, was so threatened by power of the net to allow citizens to mobilize that it took the extraordinary step of shutting down Egypt’s internet and mobile phone networks for almost a week in late January.

During the protests, Egypt also imprisoned a number of online activists, including Google executive Wael Ghonim who administered one of the Facebook pages that served as an online café for organizing the protests.

It’s not clear what technology, if any, Egypt’s once feared intelligence services used to track them down.

But, as Evegny Morozov argues in his recent book “The Net Delusion”, social networking tools can make it easy for a repressive regime to track down activists. That’s clearly seen in Tunisia, where a government controlled ISP stole Facebook usernames and passwords in an attempt to erase anti-government pages.

That’s why Karr finds Narus’s sale of its technology to Egypt so egregious.

“Narus basically gave a hammer to a Mubarak regime that sees its political opponent as nails,” Karr said. “Congress or the state department can convince them to disclose the ways they are selling this tech and to whom and for what purposes.”

Egypt in particular galled Karr, since the Mubarak regime routinely jailed bloggers, and is counted as one of 13 “enemies of the internet” as compiled by Reporters Without Borders.

Narus declined to respond to multiple voice mail messages left for its CEO Greg Oslan this week.

Controversy is not new to the Sunnyvale company, which was founded in 1997 and purchased by defense contracting giant Boeing in 2010. The company first came to notoriety in 2005, when it was found to be the processing brain behind the NSA’s warrantless wiretapping of the internet inside an AT&T facility in San Francisco.

Last year, the company announced it was marketing a new product called Hone, which could connect multiple online profiles to a single person, helping governments track down criminals and subversives.

In an interview with PBS’s Frontline, a Narus marketing executive lauded the power of the equipment to “peer into pipes” but stammered nervously that he had no idea if their equipment was being used in that room.

Narus isn’t the first company to come under scrutiny for selling electronic monitoring equipment to repressive regimes. German technology giant Siemens AG and Nokia sold mobile phone and internet monitoring equipment to Iran in 2008, prompting a boycott and backpedalling by the companies.

However, nearly all carrier-grade phone and internet equipment now ships with so-called “intercept capability,” thanks to a 1996 U.S. law called CALEA which mandated that all U.S. phone networks be capable of very sophisticated wiretapping.

In 2002, the FCC — at the behest of the FBI — extended those wiretapping requirements to the internet, prompting major manufacturers to build those capabilities into their equipment as defaults.

These federal requirements also benefited Narus, whose powerful monitoring equipment is used by many of the nation’s telecoms to provide the legally required wiretapping systems needed to comply with U.S. government wiretapping orders.

Activists can often evade the worst of such surveillance using encrypted communication tools, but even these are now under assault by the FBI, which is seeking to have Congress require that encryption technology have backdoors for government surveillance.

Egyptians capturing the revolution with their mobile phones and digital cameras. Credit: SierraGoddess

With Google worth more than $200 billion based on nearly $29 billion in revenue last year, and Facebook worth $50 to $70 billion based on less then $2 billion in revenue last, it’s easy to call Facebook’s current valuation hype. Why then would so many investors be willing to purchase a stake in Facebook for so much? We take a look.

The Global Advertising Business

While it’s hard to find hard numbers on the total global advertising market, one report we found from 2009 pegged global ad spending at more than $440 billion. What does this have to do with Facebook and Google? Well, the primary revenue source for both businesses is advertising. One of the best ways to value a business is by analyzing the broad market that is involved in. While Facebook’s Credits business is growing rapidly thanks to the explosion in social games, it still accounts for a small portion of Facebook’s revenue (although it could definitely grow significantly).

While Facebook and Google will most likely never have the majority of all global advertising, this $440 billion figure is a great place to start.

Internet Advertising Growth

The next step is to take a look at internet advertising as a percentage of the total global advertising market. According to the IAB, the total Internet advertising market for the first half of 2010 was approximately $12 billion. If we were to project for the total year, we’d guess that the total Internet advertising market will be around $28 billion as revenue tends to pick up toward the fourth quarter.

That means Internet advertising still only accounts for less than 7 percent of the total global advertising market. Overall, we can make a reasonable prediction that this market will at a minimum double in size as consumers’ attention turns to Internet-powered devices. That would be extremely conservative. If we expect that Internet advertising is going to balloon, as most people in the industry believe, we could make a much more aggressive prediction that Internet advertising could potentially grow to 25 percent of the total advertising market, especially if consumer attention continues to shift in that direction.

That means there’s an additional $80 billion in annual advertising up for grabs on the high end, and an additional $28 billion on the low end.

The Lion’s Share

So who’s playing for that $28 billion? Right now Facebook and Google are the primary competitors in the space, with many other companies, like Twitter, looking to capture large portions of that market. If we were to look into the future and predict that at some point in the next five years, Facebook and Google combined will have 60 percent of that market (not unreasonable considering Google’s revenue is already greater than the entire internet advertising market), and it’s split 50/50, Facebook will be generating $7 billion a year in revenue.

However, if the market is going to grow to the size that we believe, Facebook could bring in $24 billion a year in advertising revenue, a figure which Google basically already has right now.

Marketing Budgets

While the IAB has its own measurement of online advertising, there is a portion of company budgets which falls into “marketing” and both Google and Facebook are also going after those budgets as well. This means there’s easily billions of dollars to be spent on alternative advertising solutions. Take Groupon and LivingSocial, for example. These companies, combined, could easily generate more than $5 billion in revenue this year alone.

As such, we’ll see both Google and Facebook try to get in on the action as the deals market explodes. Facebook has already launched its own deals product, based on Places, and Google has already attempted to acquire Groupon for more than $5 billion. If Facebook can get a piece of these budgets, you could easily see the company adding billions in additional revenue through such sources if successful. For the time being it’s not clear whether or not Facebook Deals will eventually become a new revenue channel on its own; however, we can just about guarantee Facebook will try to get a piece of this explosive market.

With this in mind, I’d say it’s somewhat reasonable to expect at least a few billion in annual revenue through new marketing products for small businesses within the next 5 years. This would bring Facebook up to $27 or $28 billion a year in revenue.

Sizing Things Up

With all this (theoretical) revenue, Facebook actually would have to be worth $200 billion, right? Well, if the market stays the same as it is today (which it of course won’t), Facebook would have a market cap of a little more than $200 billion if valued at a revenue multiple similar to Google’s (similar businesses, similar valuations). That’s awesome! So from the perspective that investors can purchase shares at a $50 billion to $70 billion valuation, and Facebook will have been a great buy!

Can you predict the global market?

Well, if all of the projections which I just laid out are accurate, it actually isn’t that unreasonable. However, there are a lot of things that need to take place in order for these projections to come true. One of those things is that the economy needs to continue to grow for the next five years or more. While things are on the up and up, there’s no guarantee that things will grow quickly. It could take 10 years for the Internet advertising market to grow to the size we projected (instead of five). If that happens, your annual return on a Facebook investment will suddenly be slashed. As such, global market trends will impact your investment.

Is Facebook just hype?

Another perspective is trying to predict where Facebook will be in 10 years. Given that the company has only been around for seven years or so, it’s hard to predict where a company like this will be in a decade. Ultimately, it’s very unlikely that Facebook will just disappear, however it’s definitely something that should be considered. If Facebook fails to perform as expected, and misses projections at any point during the next five to 10 years, Facebook’s valuation would be damaged.

More importantly, if Facebook doesn’t continue to expand or at least maintain its grip on the attention economy (where consumers are spending their time), Facebook’s value to advertisers would drop dramatically and suddenly a large portion of the aggressive market share predicted earlier, will be wiped out.

All things considered

With all of these things taken into consideration, the only remaining component of making the investment is determining what other opportunities you will have to do with that money over the next five years or more. If you think the Internet advertising market is going to definitely grow and that Facebook will simply dominate that market, expecting the company to be worth $100 billion to $200 billion is not completely illogical.

However, if you are conservative, think the market will take five years to double in size and that Facebook will have a smaller fraction of it than expected, other investments would look much more attractive. If you’re a gambler who’s extremely bullish on the Internet advertising business, a Facebook investment really isn’t a horrible bet. Best of all Facebook Credits, or an alternative revenue stream that we don’t know of yet, could prove explosive as the company marches toward 1 billion users.

This means Facebook jaw-dropping valuation of $50 billion (and upwards of $70 billion based on other private transactions), is not that ridiculous as long as Facebook continues to play its cards right, successfully capturing a growing fraction of internet advertising revenue. Keep in mind: All the cards must be played right.

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