Seth Lubove on Micropayments - Forbes

The Big Trend
The nickel-and-dime economy. Apple (nasdaq: AAPL - news - people )’s success selling tunes at 99 cents a pop has given companies confidence that the holy grail of selling merchandise online for a few bucks or less has at long last arrived.

The market for Internet and wireless micropayments is expected to increase to $11.5 billion in revenue by 2009, up from $2 billion in 2003. But that’s just a fraction of the estimated 400 billion transactions of less than $5 made by U.S. consumers, a total market of $1.3 trillion.

A big boost has come from eBay's (nasdaq: EBAY - news - people ) PayPal service. Now comes Microsoft (nasdaq: MSFT - news - people ) with its “Microsoft Points” system, letting consumers buy points in advance (1,600 points goes for $20), which can be redeemed on the company’s “Xbox Live Marketplace” for content including new games and upgrades.

The Unconventional Wisdom
It’s hard to make money off small fry. Big consumer banks and finance outfits, gas stations, Las Vegas and Disneyland have long mastered the art of getting rich of off little crumpled wads of cash. Small transactions on the Internet, cashless vending machines and cell phone services are coming on strong.

The Misplaced Assumption
That cash will become obsolete. As unlikely to happen as the paperless bathroom. For all the technological hype, much of the economy--especially the underground part that consists of your gardener, your housekeeper and the souvlaki vendor on the corner--is based on cash. Mostly untraceable and out of the grasp of the Internal Revenue Service and the Immigration and Naturalization Service, cash is still king, especially outside the U.S. From 1994 to 2004, the value of currency in circulation increased 88% to $720 billion, an average annual growth rate of 6.5%, according the the Federal Reserve, with much of the increase due to overseas demand.

The Watch List
-- BitPass and Peppercoin: Internet payment start-ups that have raised a total of $24 million in their latest rounds of funding since September. BitPass works by creating user accounts, funded with credit cards, which can then be spent at cooperating merchant Internet sites for podcasts, music downloads, games and patent applications, among other small purchases. Peppercoin aggregates small payments so the transaction fees paid by merchants on batches of purchases are less than the cost and aggravation of processing individual payments.

The Bold Prediction
With more opportunities to spend their parents’ money on cell phone ring tones, Internet games, music downloads and other timewasters, college students and teenagers will continue to fuel profits among companies that have learned how to squeeze margins from tiny purchases. Google (nasdaq: GOOG - news - people ), Yahoo! (nasdaq: YHOO - news - people ), Amazon.com (nasdaq: AMZN - news - people ) and other content aggregaters will consolidate their market power over such purchases, increasing the workload of antitrust attorneys and envious competitors. Movie studios and broadcasters will realize that they make more money allowing individual sales of their content than they lose to piracy and will open the floodgates to selling low-priced content on anything that moves.

http://www.forbes.com/business/2005/12/12/business-2006-predictions-sneakpeek_sp06_02_slubove_business.html

TextPayMe Aims Its Nascent Cell-Phone P-to-P Service at Web Markets

From Digital Transactions:

(December 21, 2005) A tiny startup in Redmond, Wash., has signed up about 500 users for its week-old person-to-person payment service based on mobile phones and expects to launch a commercial service in 2006. With a head count of three, including two former Microsoft Corp. executives, TextPayMe Inc. allows individuals with cell phones to pay any other individual with a cell phone by sending text messages. The company, founded just three months ago, is already receiving calls from interested payment processors and cellular carriers and expects to meet with investor groups next month, says Philip Yuen, chief executive and co-founder of the company. For now, Yuen refuses to make volume predictions for the fledgling service, which is in the midst of a try-out, or beta, period set to run another two months. "You can project all you want, but with a week [of beta service so far] it's hard to tell," he says. "But eventually we expect pockets of users to develop. It's viral growth, or peer-to-peer growth."

Yuen, along with a former Microsoft colleague and a Web developer from Lockheed Martin, started TextPayMe to solve the problem of electronic person-to-person payments, particularly with respect to the local marketplaces, such as Craigslist, now multiplying on the Internet. Transactions on such marketplaces start out on the Web but usually lead to face-to-face meetings, where the issue of payment arises, particularly for those who don't like to carry large sums of money or cut checks to strangers. "If I'm meeting someone to buy a sofa, I have to pay cash or write a check," says Yuen. "I see us as solving the problem of face-to-face transactions." Yuen, who says there are now between 100 and 115 such Internet marketplaces generating about $50 million in weekly sales, hopes TextPayMe can capture from 1% to 10% of this action.

TextPayMe has looked at the broader remittance market as well as the market for payments to merchants, but Yuen says these markets are already well served by processors such as Western Union and PayPal Inc. One exception is unattended parking, which he says is another target market for TextPayMe.

Once a user signs up for an account, he can use his mobile phone to send money to any person who also owns a cell phone. The service works on most phones, though the phone must be capable of sending SMS, or text, messages, and requires no software. The sender types a pay command into his phone, using either the recipient's mobile number or an alias. The TextPayMe server, which receives the text message, sends a confirmation to the sender and prompts him to enter a PIN. The service then sends a message to the recipient to tell him he has been paid. The recipient doesn't have to be an accountholder, but must sign up for an account to gain access to the payment.

Accounts are free, and during the beta phase TextPayMe is offering sending and receiving service for free. After that, senders and receivers will each pay 10 cents plus 0.50% per transaction. Accountholders can fund their accounts via the automated clearing house for free, or can use a credit card for a fee of 15 cents plus 1.35%. The account maximum is $500. During the beta phase, the first $200 can be funded via credit card for free. Recipients can get their payments with an ACH transfer for free, or pay 50 cents to receive a paper check. Yuen says TextPayMe hasn't decided yet how it will levy fees for spontaneous payments funded by credit card, though he says the company is leaning toward an even fee split between sender and receiver to compensate for interchange and other acceptance costs.

Veteran observers of the electronic payment business will note that TextPayMe is starting out in similar fashion to PayPal, which began in 1998 as a person-to-person payment service based on PDAs. The problem PayPal ran into, says Yuen, is that in those days mobile devices weren't the mass-distributed products they are now. "There is some merit in what PayPal started with, but the problem was back then there weren't too many Palm Pilots lying around," he notes. "We work with SMS and mobile phones."

http://www.digitaltransactions.net/newsstory.cfm?newsid=807

PayPal's Consumer Advertising

From Payment News:

"Over the Christmas holiday weekend, I happened to notice that PayPal had some consumer-focused advertising up on the Boston Globe's website - in the right sidebar of the Globe's Business section- note that PayPal's ad is in an ad rotation and you may not see it unless you refresh the page several times. This is the first time that I recall seeing this kind of consumer-focused advertising from PayPal.

A Flash animation in "skyscraper" format, PayPal's ad consisted of several sequences that played through one time on the page:

• Text: "Remove the hesitation from shopping online."
• An image of a credit card with its numbers animated.
• Text: "Shop without sharing your financial information."
• A "Learn More" button linking to this landing page with the theme "PayPal. Privacy is Built In"."

http://www.paymentsnews.com/2005/12/paypal_consumer.html

More MocoNews on the BT mobile banking in the UK report

There’s a fair bit of desire f0r accessing banks on mobile phones…“According to research published on Wednesday by the Henley Centre, commissioned by BT, 39 percent of respondents aged between 25 and 44 deal with their finances when they’re on the move, on their way to or from work. Respondents aged 18 to 24 are clamouring even more for mobile banking, with a preference for text alerts and SMS banking.”This is different from using mobile phones in a similar manner to credit cards… and my first thought is that there are a significant number of security issues with banking via mobile phones, and the technology to fix them is not yet widespread, although it will be in a few years. Then I remembered South Africa already has mobile banking, although I’m not sure how secure it is nor how it compares to other bank accounts in terms of features.Personally, I would restrict mobile banking to preordained tasks, such as “send me my balance” or “make my normal credit card payment”.The big thing the article brings up is the relationship the bank has with its customers. Communication via mobile messaging could improve that relationship to the benefit of all concerned…

Regulations: ‘CRAZY FROG’ Fined And Ordered To Pay Refunds

Submitted by Mike Grenville on Tue, 20 Dec 2005 17:56 160 Characters

UK premium rate services regulator ICSTIS has fined mBlox £40,000 as service provider to Jamba! for misleading ‘Crazy Frog’ ads and ordered it to pay refunds to all those who complained to the regulator.

The sanctions have been imposed after ICSTIS found the promotions for the service to be misleading and not clear enough in terms of the costs involved.

ICSTIS’ adjudication follows a lengthy investigation and subsequent Oral Hearing with mBlox, its information provider, Jamba, and their legal representatives.

ICSTIS says it received 338 complaints about the service "these clearly showed that the complainants were unaware of the subscription nature of the service and simply believed that they were making a one-off purchase" said an ICSTIS spokesperson. Since the introduction of new licensing conditions in Summer 2005, ICSTIS has seen a 75% fall in complaints about these services.

The Hearing Panel found that the promotions required a lot of interpretation, application and patience from consumers. It observed that a great deal of thought had gone into producing the advertisements but, in contrast, little time appeared to have been spent on the terms and conditions. These omitted significant information and were unclear about what the service actually entailed.

ICSTIS Director George Kidd said: “The Hearing Panel has made clear that consumers should not be made to work to find out what any premium rate service involves or costs. Although the Panel found that there was no fraudulent or malicious intent behind the service, the companies concerned showed a careless disregard and unprofessional attitude to consumers in failing to be clear on the exact nature of the service.”

mBlox is considering requesting a judicial review of the interpretation of the ICSTIS code that has held mBlox responsible for the action of a third party such as Jamba!.

mBlox pointed out that a central part of mBlox’s business strategy has always been to not create or promote content. Under current legislation, Icstis is only able to regulate service providers and mBlox has been trying to persuade ICSTIS that regulations should be changed to make the people who create and promote mobile content accountable for the content sent to consumers and the marketing practices they adopt rather than the delivery services provider.

The full adjudication can be read here: ICSTIS mBlox Oral Hearing December 2005

» Nielsen Reports On Mobile Entertainment And Gaming

» Nielsen Reports On Mobile Entertainment And Gaming - Moconews.net
Related Topics: Mobile Gaming, Research — Permalink - Comments (1) [by james]

Nielsen has done a couple of new studies, Benchmarking the Active Gamer study and Benchmarking Mobile Entertainment. The studies will be published tomorrow, but there’s quite a few stats available today, including:

• On average, active mobile phone consumers report spending 17 hours on their phones per week, 13 talking and 4 on data services, surpassing music, video games, movie going and home entertainment
• Topping all entertainment expenditures for share of wallet, mobile phone users spend $57.50 each month on their phone and related services
• Of the mobile consumers polled, 60% said they pay for text messaging; 48% for custom ring tones; and 22% for games
• One in five (21%) teens downloaded at least 10 ringtones in the last three months, including one in eight (12%) who downloaded 15 or more
• 18% of active gamers have downloaded a game to their cell phone, with nearly two-thirds (63%) rating their experience from good to excellent

Mobile eBay Auctions

» Mobile eBay Auctions - Moconews.net
Related Topics: General — Permalink - Comments (0) [by james]

Another logical mobile application…Moonlight Mobile has released a J2ME application called Mobile Auctions, which basically integrates with the eBay website to allow people to connect from their mobiles. The release gives some idea of why this is useful — 63% of active eBay users are away from their computer when the auction closes and 50% of bids are made in the last five minutes of an auction.
The service is available for a monthly fee, which isn’t disclosed and is probably different depending on the market. The service is available in 10 countries and six languages — English, Dutch, French, Italian, Spanish and German.
The service allows you to bid, watch, sell and search. I like the “Bag a Bargain” feature, where you search for items that are finishing in one hour and don’t have a unique bid.

Brits want access to banking from handsets

Trend: Brits want access to banking from handsets

A recent study conducted in the U.K. and funded by BT found that customers want access to banking on their mobile phones. The study reported that more than one-third of those surveyed between the ages of 25 and 44 said that they would use SMS for transfer requests to their bank. More than 40 percent in the 18 to 24 age group said they would like the ability to use IM apps to get advice from financial advisers. People feel that text messaging is a more secure method of communicating bank information compared with emailing and phone calls because there is less of a fraud risk. In-person banking still remains the stronghold for such transactions. About 60 percent of those surveyed said that they visit their bank at least once a month.

For more on the demand for mobile banking:
- see this article from Fair Investment

Text me a tenner - mobile phone banking comes of age

Silicon.com:

Will new i-mode and Java banking services attract consumers?

By Steve Ranger

Published: Tuesday 13 December 2005

Who wants a mobile phone that could print you a few extra tenners when your wallet empties out during a night out?

OK, the bad news is we're not there yet but mobile phone banking systems are getting a massive overhaul to try to tempt consumers to give the services a go.

While early WAP-based services didn't prove as popular as hoped, new Java and i-mode services are offering users richer content and functionality.

Banks are now looking at mobile phones as their fifth channel to customers after branches, ATMs, internet banking and phone banking.

The demand is there - according to research sponsored by mobile banking provider Meridea, half of consumers are interested in mobile banking, with the biggest fans at the younger end of the scales.

One in four of us would even consider moving banks because of free banking services, the research claims. As a result a number of competing technologies are trying to turn that interest into action.

Early next year a number of banks will launch a service which its developers claim will allow people to use their mobile phones more like cash machines - although they won't actually dispense money.

The company behind the service - mobileATM - is a joint venture between UK cash machine network operator LINK and IT services company Morse.

To use the service, consumers will need a Java-enabled mobile and a download of the application. Customers will be able to use the same application to log onto accounts from different banks, just as they are able to use a cash card in any bank's ATM machine, the company said.

The application will allow them to check balances, get mini statements, top up mobile phones and could also add security to online banking by generating authentication codes which could help ward off phishers.

This means if a fraudster has someone's bank details but not their mobile phone they would not be able to log on because they would lack the code generated by the phone.

The company's CEO, Alastair Lukies, said banks are now looking at mobile phones as their fifth channel to customers after branches, ATMs, internet banking and phone banking.

He told silicon.com the service will be available early next year: "We are launching in the first quarter of next year with two tier-one banks, two out of the big five. And two tier-two banks. This is the first example of true mobile banking."

Bank of Ireland and First Direct have already shown their interest in the service and the company hopes to have half the banks which are members of Link signed up by September.

Taking a different approach, since October, Egg customers have been able to access their bank balances via O2's i-mode service.

In the first stage, customers with O2 i-mode phones will be able to access details of balances and transactions, accessing the information using their current Egg login details.

An Egg spokesman explains: "A few years ago Egg started off with a WAP service which didn't really take off. WAP was fairly primitive - for example just looking at your balance. What consumers are willing to do now with mobile phones is significantly more than we would in the days of WAP."

But a later phase could see customers texting each other cash. He adds: "In the first wave it will be about balances but our aspiration - and we have the ability in place - is to move money between different accounts by mobile phone and send each other money by text message. You can see how the mobile phone could be a very interesting way of managing your money on the move."

The service is only available on O2 at the moment, which means only a quarter of Egg customers will be able to access it. But Egg said this could change. The spokesman said: "Our intention is not to limit ourselves to one provider - O2 were the first to launch this in the UK and it makes sense with them but that doesn't mean we will only have a service on O2."

Buongiorno Vitaminic research on Mobile Content

» What People Want From Mobile Content
Related Topics: UK/Europe, Research — Permalink - Comments (0) [by james]

Buongiorno Vitaminic has released the results of a survey of over 5,000 people in Europe, the US and Africa about their attitude to mobile phones, as well as their usage and buying behaviours.
Two-thirds of respondents said that downloading ringtones, wallpapers, sound effects and multimedia games was their third favorite activity (tied with taking pictures) behind traditional uses such as voice calls and SMS. This makes personalization almost as important as entering contacts and telephone numbers…
The release says “one unique finding is that younger users often sleep with their phones and use them as an alarm clock”…apparently a lot of people are surprised that the alarm clock function gets used — I’ve previously come across people saying it should be removed to make room for other things because no-one uses it. Personally, I was using the alarm clock function from the time I first bought my mobile — it was easier than my other alarm clock.
The survey found that people are more satisfied with their mobile service overall…

This improved satisfaction is reflected in the increased frequency and quantity of services acquired, more than doubling in the last year. 30% of the sample declared that they download about one product every month, while 14% buy one product per week (up from 5% in 2004). In addition, the tendency to buy high-medium value services (from $7-20 U.S.) has increased since 2004.

Unsurprisingly the content is becoming more sophisticated, epitomised by ringtones with polyphonic ringtones accounting for 22% of preferences compared to 19% in 2004, and realtones jumping from 2% to 10%. “Animated wallpapers have increased in popularity from 6% to 8%, while the rating for multimedia games remained almost the same, since it is a segment that counts on a stable demand from heavy users, with gaming skewed toward a male audience.”
The US enjoys using WAP pages, while European users prefer surfing the web…

Demand for Mobile Banking

» Demand Seen For Mobile Banking
Related Topics: UK/Europe — Permalink - Comments (0) [by james]

UK users are keen on mobile banking, according to a survey — 51% expressed interest in using a mobile banking service. The survey was conducted by Forrester Custom Research for mobile banking firm Meridea, and was of 2,127 “UK consumers that use the Internet frequently”.
There is some question to how broadly it can be applied to the general population, considering that “nearly one third of those surveyed already regularly browse the internet from their mobile phone and 60% of all those surveyed could carry out mobile banking on their existing mobile handsets, if it was available to them”.
Nevertheless, those who are interested in mobile banking are most interested in being able to check account balances, being warned when their account goes overdrawn, freezing a card and making payments or transfers.

Ringtones, or the Auditory Logic of Globalisation

» Ringtones, Or The Auditory Logic Of Globalization
Related Topics: Mobile Music — Permalink - Comments (0) [by james]

Sumanth Gopinath, the Assistant Professor of Music Theory in the University of Minnesota School of Music, has written an extensive essay on ringtones, their place in the global culture and what they are symptomatic of. The abstract:

This essay attempts to provide a description of the global ringtone industry, to determine and assess the numerous cultural consequences of the ringtone’s appearance and development, and to situate the ringtone within the context of contemporary capitalism. At its broadest, my assertion is that the development of the ringtone is a powerful lens through which we might clearly view some of the dynamics of present day (or “late”) capitalist cultural production, including the development of new rentier economies within oligopolistic sectors of production and consumption, and a long--term shift in global productive dominance from North America to the Pacific Rim. The ringtone is also a remarkable cultural phenomenon that is demonstrating a high degree of popularity and is undergoing rapid transformation; therefore, its short, continuing lifetime already needs to be assessed historically.

Some highlights from the article include:
–With the industry's rising profitability, marketers have glommed onto the notion of personalization itself, almost treating the concept as a dogma within the world of wireless accessories - and trade industry journalists have predictably reproduced the idea with alacrity.
— The work of composing ringtones is not particularly glamorous: it is, in a sense, an updated form of writing jingles or advertising music whose product is mobile telephony itself.
— In a survey of a hundred professionals with mobile phones by the British PR agency Burston--Marsteller, 18 percent of respondents found the worst cell phone etiquette offense to be playing through all of your cellphone ringtones while sitting on the train.
— In many cases ringtone sales are outpacing recording single sales of the same song…
— A strong threat to the profitability of the ringtone industry lies in the development of strategies and technologies by consumers and companies to create ringtones at inexpensive prices.
(via Ringtonia)

Where's The Money In The Long Tail?

By David Hornik on December 13, 2005 11:56 PM | Links In | Print | Comments (5) | TrackBack (0) | Categories: Consumer Internet & Media and Internet Infrastructure and The Economy & Finance

Six months ago there was barely a pitch I heard that didn't include a slide entitled "Long Tail" or "The Long Tail of [fill in the vertical]," with the obligatory long tail curve. Impressively, it has taken less than a year of entrepreneurs explicitly referencing and explaining the Long Tail before it has become so well recognized and understood that it need only be implicated in passing without the same sort of fanfare as it used to receive. This is by no means an indication of the diminishing relevance of the Long Tail. Quite to the contrary. It is a recognition that the Long Tail is so obviously relevant and important as to no longer require explanation. Saying "Long Tail" is like saying "viral" or "search engine optimization" -- the concept is part of the standard parlance for VCs and entrepreneurs alike.

Yet despite the fact that "Long Tail" has become short hand, the economics of the Long Tail are, to my mind, still often misunderstood. I continue to hear funding pitches that talk about the Long Tail as a powerful enabler for content creators. Companies are presented to me premised upon the increased value of Long Tail content for musicians and artists and film makers. The fact that increasingly the likes of Amazon and iTunes make it possible for Long Tail authors or bands to sell a few books or records through legitimate, recognized channels is touted as the revolution of the artist. Far from it.

It is certainly the case that in the aggregate, Long Tail content is extraordinarily valuable. The question for VCs and entrepreneurs is "for whom?" I've had the good fortune over the last year or so to engage in a number of conversations about the economics of the Long Tail with Chris Anderson and to see those economics illustrated by innumerable Long Tail investment pitches. And, from those conversations and pitches, I have come to the conclusion that there are essentially two general classes of technology the will benefit economically from the Long Tail -- aggregators and filterers. And while both aggregators and filterers rely upon the increasing volume and diversity of content to assure their value in the ecosystem, that growth of content will not have a material impact upon the value of any one piece of content floating somewhere in the Tail. The value will all inure to the benefit of the aggregators and filterers. So who are the aggregators and filterers?

The aggregators are those web businesses that seek to collect up as much of the Long Tail content as is possible, so as to make their "stores" a one stop shop for content no matter how popular or obscure. That aggregation may be on a horizontal basis, as is the case with Amazon or Netflix, or it may be on a vertical basis, as is the case with WantedList or GameFly (the Netflix of porn and video games respectively). The value to consumers from these content aggregators is that they need not shop in dozens of places on the web in order to acquire a diverse set of content. As a result, aggregators are able to extract a disproportionate amount of value for the sale of each individual piece of content. And while creators are likely to sell slightly more content as a result of the increased ease of salability, they will not likely emerge from the obscurity of the Tail merely because they are made available for sale on Amazon or iTunes.

The filterers are those businesses that make it easier to find the content in which we are interested, despite the increasing proliferation of content creators, hosts, aggregators, etc. The purest form of filterer is the search engine. But the more obscure the content, the less effective the generalized search engine will be. Thus, I have been pitched on an increasingly large number of vertical search engines that use their thematic focus (shopping, real estate, employment, etc.) as a proxy to increase search effectiveness. And I have also seen an increasing variety of clever technical solutions to help filter the myriad of available content (for example, Pandora uses professional musicians analyzing songs based upon a standard set of characteristics and Delicious and Flickr use forms of end user tagging to characterize a disparate set of content). Again, while these different filtering technologies may make it slightly more likely that an end user finds his or her way to a piece of obscure content, it will not likely be sufficient to catapult an artist into the mainstream. The beneficiary of the filtering is the end user and the filterer, not the content owner per se.

(As an aside, I believe that it is difficult to be an aggregator without also being a filterer. It will be hard to sustain the scale necessary for an aggregation business if you don't initially also provide some of your own filtering tools. For example, Amazon has long been a leader in collaborative filtering, as has Netflix for that matter (interestingly, iTunes has been the laggard in this respect and I anticipate that we will see innovation on the filtering side from Apple soon enough). Once a business has reach scale as an aggregator, it can then rely upon mechanisms like affiliate programs and content syndication to empower others to be the filterers for their content (this has happened with Amazon in spades). But until that time, it will be necessary for aggregators like iFilm or Rhapsody to come up with their own clever filtering mechanisms to help consumers fully appreciate and navigate the breadth of the content they have to offer.)

None of this is intended to express any skepticism about the power of the Long Tail or the importance of the phenomenon. Long Tail economics are implicit in virtually every new media company I spend time with. But I think it is helpful for venture capitalists and entrepreneurs alike to focus on where the money is in the Tail. The real money is in aggregation and filtering and those will continue to be interesting businesses for the foreseeable future.

Record label EMI ids using mobile software firm Bango's 'browse and buy' technology to power is its UK mobile music portal.

EMI is expanding its music store, ‘The Raft’ from online into mobile, and will use Bango's Txt Trigge technology.

Mobile users can visit wap.the-raft.com or text 'GO RAFT' to 85080 (free text from all UK networks) to browse a range of official, artist approved content tailored for mobile.

Users anywhere in the world pay for EMI music and ringtones on their phone bill, by credit/debit card or by PayPal.

Built and hosted by New-Visions, content on the Raft's mobile portal includes news, ringtones, realtones, remixable tones, tour information, images and competitions across a range of music genres and artists.

The site includes topical special features, beginning with Christmas realtones and ringtones plus an 'Essential tracks of 2005' selection when it launches on 16 December.

The site will be promoted via the music community website www.the-raft.com, by mailshot to over 300,000 subscribers, to The Raft online and by search and banner advertising.

EMI Music UK is the latest music label to choose Bango to power its mobile content portal as Bango already powers official mobile content portals from Universal Music and Sony BMG for artists such as Oasis, Girls Aloud, McFly and Westlife.

Eric Jackson on PayPal (Tom Peters interview)

Eric Jackson managed the marketing operations of PayPal, the world's leading online payment service, and played an instrumental role in guiding the company to profitability. Prior to joining PayPal, he had worked as a financial consultant specializing in corporate turnarounds and litigation. He holds an economics degree from Stanford University and studied Russian history in Moscow. He serves on the board of directors of the Stanford Review and is the chairman of World Ahead Publishing, the West Coast's premier publisher of conservative and libertarian books. He is the author of The PayPal Wars: Battles with eBay, the Media, the Mafia, and the Rest of the Planet, a chronicle of the legal, regulatory, and competitive threats entrepreneurs must overcome in today's business environment. The book won the 2005 Writers Notes Book Award for best business book, and Tom said it was such a page-turner he stayed up all night to read it.

tompeter.com asks ...

So, Eric, what prompted you to write this book?

EJ: Being there at PayPal from the early days and seeing from the inside what the company had to overcome to become a successful dot-com and really a revolutionary technology and agent for change, I felt that story was so amazing and so positive that it had to be told. And frankly, the accomplishments of the amazing people involved with PayPal deserved to be shared with the world.

It's really well written. It's a great history of the birthing of a company. Even though you were there, I understand there was still a lot of research that had to be done to get all the dates and every little thing that happened.

EJ: Oh, certainly. It truly takes a lot of effort to make sure you've documented a thorough history, that you've tied it back to publicly available information without disclosing too much data. It takes a lot of energy—scouring through notes, talking to people—to make sure that you've accurately painted the picture that you want to paint in a factual, reliable book that can provide a trustworthy account of how a company got off the ground.

But, as you point out in the book, this may well never have happened since, I believe, you were working for Arthur Andersen's financial consulting practice and someone had to drag you away from that and plop you in the midst of this startup. I'm curious how that happened, how you went from looking forward to a long career with a stable company to jumping into the entrepreneurial maelstrom. What changed?

EJ: As a young professional going into a job straight out of college, I was looking for something that would give me a wide exposure and a lot of experience in different industries. What I didn't realize was just how frustrating it could be to have such a lack of empowerment, such a lack of ability to play a role I could consider meaningful. In my first year and a half as a small cog in a huge machine like Arthur Andersen, that realization left me primed and ready for a new experience.

So when Peter Thiel, the CEO of PayPal, who had been a friend of mine for several years, approached me about joining his venture, I was ready to do it. And certainly the "product of the times" equation was a factor. After all, it was Silicon Valley 1999, the height of the dot-com boom, and it was certainly appealing to try my hand at the startup thing as well.

I also have to add that one thing Peter did not pitch me on was job security. But of course with the way things turned out for Arthur Andersen and PayPal, respectively—

Exactly. That's a wonderful twist.

EJ: It is. And it tells you something about the new economy.

Yes. And to get into that, what do you want your readers to take away from this story?

EJ: What I tried to do in this book is perhaps unconventional for a business book. I spent a lot more time recounting the narrative, profiling the people involved, and giving first-hand accounts of the business decisions that had to be made and the difficult issues that had to be confronted. So the book is by design not a preachy book. It's an adventure book in a way, such that business can be an adventure. I think most people who have done interesting things in business know it certainly can be.

I think there will be different takeaways for different people, but the big message is that when you're in an environment like a startup or a business that's trying to be innovative, what's really key is to have good people and empower them, give them the ability to put up big ideas and not feel that they're going to be penalized. And then, if somebody comes up with a home-run idea, you have to be nimble enough to implement it.

I think that's ultimately what the business lesson of PayPal is: You have to have good people and they must be empowered if you're going to be able to move quickly and put forward either new technology or new service. Certainly The PayPal Wars is not a guide for anyone's employment, and I don't necessarily recommend that they just blindly plunge into a start-up the way I did. But I do think if business people in start-ups and in more established companies would emulate some of these examples, they would have not only happier, but also more productive employees in the process.

You point that out a number of times. As I read through the book, the biggest story was the constant struggle with eBay. And so here's this young company trying to make its way in the financial transaction business, and you latched on to eBay and they kept trying to shake you off. It's like the big brother and the little brother who keeps trying to tag along or something.

EJ: That's a good analogy.

But you guys stayed in the game through your innovation, and the speed at which you could enact changes. You mention that when Meg Whitman took over eBay she brought in consultants and a lot of MBAs, and I think the suggestion is that these are not innovative types, but a more managerial kind of folks.

EJ: Yes, that is a fair summary of what I wrote. It's certainly not that anyone with an MBA is de facto not cut out for the start-up environment or a nimble environment. But I do think that when you're running an organization that's just looking for MBAs, you're often looking specifically for a similar skill set for all your people, and I think that can be contrary to the kind of nimble environment we had at PayPal.

When you staff an entire organization with MBAs, you also have a lot of people who are at a point in their career where they'll be looking pretty hard at climbing the management ladder. And if everyone has those same career goals, you do create a certain dynamic where people can be focused more on their career moves than on the product or service you're bringing to the marketplace.

So there is that tradeoff. We had MBAs at PayPal who contributed a lot, but the kind of prototypical employee that Whitman had at eBay was certainly different than what we had at PayPal. Perhaps there wasn't a prototypical employee at PayPal. There was the 21-year-old college dropout sleeping under his desk at night ... or myself, the recovering consultant ... or the CEO, an experienced hedge fund manager. We had a very diverse set of people with very different skill sets, and in our case that worked to our benefit.

So what do you think you went through personally as a result of being an employee at PayPal—you were there for about three years?

EJ: Three and a half years, from right after the launch of the website until eight or nine months after eBay acquired us. I was there through the launch, the turmoil, and growing pains, and eventually through the IPO, the acquisition, and a good part of the transition.

There's no doubt that it changed me in a lot of ways. First and foremost, you learn just how flexible you have to be when you're trying to grow a business and how rapidly market conditions can make you find new ways to adapt to all the competitive pressure. Certainly my sense of flexibility and intellectual nimbleness was challenged on a daily basis, so I learned to value those qualities more, and to think in terms of how a company can move fast and innovate.

But I also changed on a personal level. For one, in that environment, you have no choice but to learn how to focus on the things you can change and not obsess about the things that are outside your control. Uncertainty perpetually hangs over such a company and you have to detach from the anxiety or it will eat you alive and make you a nervous wreck.

Another way that I changed was that, frankly, I just enjoyed the creative environment there. I'm not likely to go back to a situation in the near future where I'm in the kind of position I was at Andersen: a small cog in a very big machine. I think if you've gone through an entrepreneurial experience and enjoyed it, you're going to tend to want to replicate that in the future. The thrill of creating something new and bringing it out to the marketplace is something that isn't easy to get in most big companies unless you're in product development or perhaps a small start-up within a larger company. So the experience changed what I look for out of my career.

On the other hand, PayPal could have crashed and burned.

EJ: Oh, absolutely. It almost did.

Let's say things went in the opposite direction. Would that have thrown you back into a more stable, Andersen-type job? Or do you think the experience of working in that environment would still have been positive?

EJ: I think that on the whole it still would have been a pretty positive experience, just because it was a good culture and certainly great people. Even if you don't have a financially rewarding experience, on the whole you can look back at any situation where you liked what you were doing and who you were working with, and you can see it as positive and encouraging.

I could tick off a half-dozen ways that PayPal could have failed or in some way been destroyed. From the competitive pressure to the broken business model to the turmoil that the young company had after the merger of two start-ups, there was a lot of internal turmoil.

So there certainly were ample reasons for it to fail, and those reasons changed over time. We were much more focused on eBay's competitive threat as we began to grow, having our number one source of customers become a competitor, and then the threats really became more of a legal and regulatory thing as the company aged.

So there may have been different take-aways for each scenario, had any of them been the silver bullet that finished us off. But I think it would still have been a positive experience even if we hadn't been able to accomplish what we ultimately did do.

You were involved in marketing most of the time you were there, right?

EJ: Yes.

In your book, you write, "The problem with the discipline of marketing is that everyone knows enough about it to make suggestions, but most don't know enough to offer good advice." Can you talk a little bit about that?

EJ: Yes. I think marketing is something that is so visible, or at least aspects of it are, certainly in an advertising sense, that everyone thinks they know something about it, or they know what works for them. That certainly isn't true for every discipline in business. Most people don't have an inclination to go into the CFO's office and tell him why they really think that FIFO is better than LIFO for their company. But when it comes to putting out some sort of creative, they're more than happy to offer advice to their marketing colleagues. That certainly was true for us.

But there's a lot more to marketing than people realize, the ability to not just speak to your customers, but also to learn from them and to use that information to guide strategy, products, and services. That's something that makes marketing really interesting to me and also makes it really, really critical. Almost everything in business is a cost center, but marketing is not. It's actually the lifeline of your company, of your revenue.

Just as people who have not studied economics are willing to opine on how politicians in D.C. are handling the economy; so too are people who have no background on the subject more than willing to opine on marketing. It's just a natural instinct to comment on things that are visible and often seen. That leads to a lot of unsolicited advice for anyone in marketing. Anyone who has held a position like that, especially in an engineering-dominated environment, can relate to that generalization.

You mentioned communicating with the customers. You mentioned a number of times how, even though you didn't have message boards at PayPal, you were using message boards at other sites, at eBay and I think AuctionWatch, to effectively communicate with your PayPal customers, which I thought was pretty brilliant.

EJ: It really was. I mean, the fact that we had communities out there that we could reach out to and evangelize to was a huge help for our company, especially at a time when we just couldn't scale up our customer service capabilities as quickly as our customer base was growing. I give a lot of credit to Damon Billian, whose pseudonym was PayPal Damon. He's at a new start-up now—Simply Hired, a meta-search engine for job listings. His philosophy is that you go out to the customers, you give them honest information, and you don't BS them. You let them know that you're listening to them and trying to help.

So while going out to those boards was a key thing for us to do, having that philosophy of straight-shooting and letting them understand what we were doing was really important in establishing a two-way street for information exchange. It not only addressed practical issues, like the lack of customer service support, but also instilled a lot more trust by our customers in us than in eBay's service, Billpoint. That was a key source of our competitive edge as well.

Absolutely. That was what struck me the most, that ability or that willingness to communicate even though things were dreadful. At some point people were trying to communicate with PayPal, and it was taking them days or even longer to get a response. You confronted that head-on, and I think that served you in an infinite number of ways.

EJ: Oh, it did. It did. And we were pretty blunt about our difficulties in scaling up customer service. If you're experiencing exponential growth in usage, it's really hard to hire customer service reps that quickly. And if you do try to go that fast, it's hard to control the quality. So certainly we had that issue, along with the technical needs of our customers. Believe me, people do get concerned if they can't get access to their money. That's much worse than not being able to format your HTML emails properly or having a shipping delay with the book that you ordered. Money is certainly a source of a lot more anxiety and passion.

But beyond the technical problems that customers faced, when we had to change our website and our business radically, especially when we had to start charging fees for what had been a free service, the ability to get that message out there and be straight with customers was key for us. I shudder to think what would have happened to PayPal if we hadn't had that communication strategy.

Exactly. I think it would have broken down and your customers would have flown away. I wish companies would hear that message, or the people reading your book would understand the importance of being up-front and, as you said, blunt with your customers. In my experience, people can handle a lot of adversity and crap; it's not knowing what's going on that will drive them away. If you've had a good experience up to a certain point and then something goes wrong, if somebody tells you why it happened and that they're sorry and they're trying to fix it, people can handle that.

EJ: Absolutely. They want to know that much more than they want to hear spin. It's important to get the company's side of things out there and to tell people your rationale for doing it. But the flip side of that is you can't do it in a way that's insulting. In PayPal's case, we had to start charging fees for people that were doing business-related activities on the side because we just couldn't afford to pay for the credit card processing charges and also the fraud losses. We simply made it clear to them what we needed to do and what the rules would be. But we also let them know we weren't going to just sit on our laurels. We also outlined ways we were going to expand the service, improve it, make it go international. We let customers understand that we weren't just going to take money from them and get rich; we were going to plow it back into the company and offer them new value as well.

So customers respond well to that. Just talk to them; don't talk down to them.

I noticed at one point somebody went east and started up a call center in, I think, Omaha, Nebraska. The woman in charge was very entrepreneurial and kept trying to figure out how to turn it into a profit center rather than a cost center. That rang a bell with me because Tom Peters talks about PSFs—Professional Service Firms—and how departments need to think of themselves as profit centers, even if all of their clients are internal. So that was an interesting story. Can you talk a little bit about what she did to change that mindset?

EJ: I'd be happy to. I believe you are referencing April Kelly, who was one of our more senior managers at the Omaha Call Center. April's philosophy was "Let's find a way to create value; let's find a way to have the people who are taking care of customers' needs also provide an educational and promotional experience." So she put together a team that could handle high value accounts—in this case it was our top eBay sellers—to give them customer support, but also to call them and introduce them to new features, to encourage them to try things out, to use exclusive offers to get cash back if they weren't using Billpoint. We had a number of initiatives like that, but also the realization that we could have messages about new features and services for customers to listen to when they called in and were on hold waiting for a representative.

You could also make sure that all the customer service employees were aware of new features and services, to make sure that callers went away with some knowledge of these valuable new offers.

So that was a shift in philosophy. We were initially just trying to scale very rapidly what really was a cost center for us, and of course that was very expensive. But the realization came in a year or two that we could use the call center to educate our customers and promote profitable new services and products. It's hard to train people to do things differently overnight and think a different way overnight, but when you get an innovative manager like April acting as a catalyst for change within, it can become infectious. I certainly can recall that more and more people in Omaha were eager to follow that lead and it was something that really spread. By the time I left PayPal, Omaha folks were visiting the Palo Alto headquarters regularly and they would want to stop by marketing and get the latest update on the next campaigns and the most valuable things they could be focusing on. So that philosophy really did trickle down and spread throughout the entire division out there.

As you looked back at this whole thing and then began writing this and collecting information, what surprised you the most in revisiting your experience of the time? Was there something that you had forgotten or was there some piece of it that seemed minor that became major or vice versa? Were there any surprises as you went back through this?

EJ: What surprised me the most was just how many near disasters were averted. I think that when you're in the process of this, you have to have a real sense of determination and optimism, not necessarily naivety, but optimism that you can find a way to tackle the things that come up. Things like running out of money when we're losing 10 million dollars a month. Or a 100 million dollar venture capital round nearly falling apart in April of 2000 because the NASDAQ and tech valuations collapsed that month.

It's all the more shocking when I look back at it, because at the time we just breathed a sigh of relief and moved on to the next thing. You can never really let yourself be down and think, "This challenge is the one that's going to get us." You have to say, "What can I do to attack this thing?" Being removed a few years from it, it's all the more amazing to think about what we had to overcome. Frankly, I'm glad that neither I nor any of my colleagues were spending too much time dwelling on that fact at the moment, because it probably would have been the kiss of death for us.

So you left PayPal eight or nine months after it was acquired by eBay.

EJ: That's correct. There actually were a lot of folks, old-timers, leaving around that time. I wanted to stay for a little while to do what I could to make the transition a positive process. I served as the interim vice president of the marketing group and I think I was able to play a positive role. But at some point, adventures come to an end. Things change; the priorities and culture of organizations change. That always happens after an acquisition. And you feel that it may not be the best place for you anymore. I felt I had done all I could do, all I wanted to do, and I was looking for something different at that point. So it made sense to move on.

And we assume you walked away with a lot of stock options.

EJ: I did fine for myself.

So what have you been up to since leaving PayPal?

EJ: I started a media venture in Los Angeles; it's called World Ahead Publishing. We put out my book, for one thing, as well as a number of other books, and website content. I stayed in the realm of communication and marketing and running my own company. So I'd say the entrepreneurial bug bit me pretty hard.

I will reflect quickly to one thing I should have said when you asked about the stock options. I think the company did a pretty good job of making sure that everyone was eligible for the stock option plans there. I'm not necessarily going to add any groundbreaking insight to what's already been written and said about this, but that did a lot to help motivate people. I never felt that anyone in the company didn't have their heart in it and wasn't giving it their full effort, because frankly, people were motivated. I think the stock option thing, much derided by some and certainly the subject of a lot of controversy—

Not here. I always thought that, as you say, that's a great motivating factor.

EJ: Well, there's been a lot of debate over how to handle this kind of thing, but frankly I'm sure that without that complementary mix of incentive and empowerment and freedom, we wouldn't have had a bunch of intelligent but rugged individuals running around the company coming up with great ideas for what PayPal had to do next. I think we needed that specific mix.

So fortunately a lot of folks did okay for themselves from PayPal and there really was enough success to spread around there. I think it was in everyone's best interest.

So just one last question. What do you think of the eBay Skype purchase?

EJ: Well, I obviously don't have insight into all of their thinking behind it. As a general rule, I think it's always tricky when a company is looking to really diversify what it does. PayPal and eBay are undeniably complementary. I think PayPal will be much bigger than "eBay proper" in a decade or two, and I think eBay's auction site is probably destined to be an ever-decreasing subset of what PayPal does. But there's a similarity there of enabling transactions—there's complementarity.

In terms of Skype, it's an interesting technology. I'm not sure that it's proven necessarily to be a money-maker, but it's also pretty different from enabling a transaction. I can understand wanting to have that technology as a component of the buyer and seller experience, enabling them to connect. But it seems to me that you could certainly outsource a lot of that. EBay does already outsource a lot of things. They don't build every type of email system they have in-house or do all the auction services that they offer. They already have third parties that plug in as complementary services, and they don't try to do it all in-house. So from my perspective, I worry that it could be a distraction for people, trying to integrate something that is an interesting and perhaps complementary service, but at its core a very different technology.

I think the most important thing for eBay to do is to look for bold ways to really expand their ability to facilitate transactions. There's always the risk that their core auction site may go the route of AOL. I think we're seeing this a little bit as small to medium sized merchants easily can set up their own websites now and use paid search to transact. Google is eBay's competitor. Not enough people understand that. But I think what eBay needs to think about is that they need to find ways to take their eBay and PayPal technology and spread it throughout the web and decentralize it and facilitate more transactions wherever you are, whatever media you choose to use, as opposed to worrying about expensive and/or technologically complicated add-ons.

So I hope Skype goes well. I suspect that I wouldn't have made that decision if I were sitting in the corner office, but that notwithstanding, I think that goal number one for them should be finding ways to continue to expand PayPal and eBay. I personally would have preferred a hostile takeover of Amazon.com and integration of PayPal as the Amazon payment service—have 200 million PayPal users overnight and see what you can do with something like that. But we'll see. I hope it goes well and I hope they figure out ways to monetize that new technology.

I want to thank you very much for your time. It's been a pleasure speaking with you.

EJ: I really enjoyed our conversation. Thank you so much for your kind words about the book.

Really, really well-written book, and it's a great read.

EJ: I'm just lucky to have lived through it. Frankly, telling the story is pretty easy when you get to go through all that firsthand. I'm glad you enjoyed it.

Website: worldaheadpublishing.com

Dave Balter on Buzz Marketing (Tom Peters interview)

Dave Balter is the founder and president of BzzAgent, the groundbreaking word-of-mouth marketing firm that has been profiled in Forbes, Fast Company, and a New York Times MagazineGrapevine: The New Art of Word-of-Mouth Marketing, coauthored with John Butman, was published in November 2005. cover story. His first book,

Dave has over 10 years of experience in marketing, including founding two promotional marketing agencies. He holds a provisional patent in the process and systems of Word-of-Mouth marketing and research. He is also a founding member of the Word-of-Mouth Marketing Association (WOMMA), co-chair of WOMMA's Ethics Council, and a frequent speaker to corporations and universities on the subject of Word-of-Mouth and non-traditional media.

tompeters.com asks ...

So Dave, did someone invent word-of-mouth marketing?

DB: Good question. Word-of-mouth as a medium has been around forever, right? I mean, it's about people communicating their opinions and ideas with each other.

Wasn't Eve the very first effective word-of-mouth marketer?

DB: You could say that.

She had a good apple.

DB: She had a great apple and she said great things about it, and the next thing you know we're where we are today.

I don't think anyone really invented word-of-mouth as a medium. It's part of our communication pattern. But certainly organizing, managing, and measuring it has been invented. I think it really started with people beginning to understand it. You can go back to Pattie Maes' word-of-mouth algorithms with Firefly, and then look at The Tipping Point, Anatomy of Buzz, and Diffusion of Innovations by Everett Rogers to trace how innovations are being communicated among people.

You asked if someone invented word-of-mouth. I think it started with learning about it and witnessing it and understanding it, and then it moved to people asking, "How do we build approaches to harness this?"

How did you get turned on to word-of-mouth marketing?

DB: I had run a few promotions agencies and some loyalty programs for corporations. I realized all along that while we keep pushing stuff at customers, what we're actually waiting for is to see what one customer is going to say to another or what recommendation they're going to seek with regard to our promotion.

So I had become somewhat disenchanted—this was about 2001—with the idea of current marketing. I read The Tipping Point and was just blown away by the ideas—

Sneezers?

DB: Actually, the Sneezers came from Unleashing the Ideavirus, which I read next. In Tipping Point, it was Connectors and Mavens and Salesmen. Then I read Anatomy of Buzz and got into Diffusion of Innovations.

I was lucky enough to spend some time with Pattie Maes, and I asked her, "Why has no one organized this?" I ran some ideas by her about organizing it, and she thought the ideas would work.

So I decided to try to build a concept of a loyalty program organized around word-of-mouth. Instead of spending on your credit card and getting airline miles, what if you could share your opinion about a product or service and be embraced by the brand in return? That was really the start of it.

So that was the beginning of BzzAgent?

DB: Yes—in December 2001. I pulled together the core concepts almost immediately, and we started building the first template of the site and the system and the approach. By May of 2002 we were live.

So how does a campaign work, in brief?

DB: In brief, anyone can sign up with us to become a volunteer "BzzAgent." This is something that we talk a lot about in Grapevine. When we started the company we were convinced that we wanted to build a system that would find only those Influentials, Sneezers, and Connectors that I had read about. The problem was that we couldn't get any money, because no one believed we could build a company out of this. So we didn't have the money to filter who could sign up to become a BzzAgent.

You mean literally anybody could be a BzzAgent?

DB: Yes. Anyone could sign up. Initially, we thought that when we got enough money we would get rid of the people who weren't cool or influential or whatever. But the irony is that we discovered that everybody really has the capability to communicate and share their opinions and have influence.

So we never changed the system. Today there are about 120,000 agents across the U.S. We add about 1000 to 2000 a week, organically—we don't market for them. When they sign up they get profiled: their likes and dislikes, age, where they live, etc. Based on that information, we begin offering them campaigns. An agent might get a campaign for a book or a fragrance or a beer. We just launched a campaign for a toothbrush. The campaigns are for all sorts of things. A mobile phone. Volkswagen. All sorts of stuff that people are passionate about.

Once you get into the campaign, you're able to experience the product and you receive something we call "The BzzGuide," which helps people become conscious of how to communicate about the product more effectively.

So for instance, if it's a book, the BzzAgents actually get a copy of the book?

DB: Yes.

But if it's a VW they probably don't get a copy of that.

DB: Yeah, didn't you know we gave out 5000 free cars? No. People got a very special private test drive where VW dropped the car off at their house for a weekend.

Really?

DB: Yeah, pretty cool.

For a thousand BzzAgents?

DB: I think it was actually more than a thousand. It was what we call a BzzNetwork—or a private label version of the BzzAgent approach and system.

So a lot of people got to spend a weekend with the car?

DB: Yes. There are actually 11,000 people in the Volkswagen campaign but not all of them got to test drive.

So once they get the product, they get this guide that helps them understand how to communicate better. No scripts. This isn't about telling them what to say. It's about providing ideas for effective communication, what types of people you should communicate with, some interesting stories about the brand that others may not know, and so forth. We communicate by telling each other stories. I don't come up to you and say, "Drivers Wanted." I say to you, "My Volkswagen kicks ass. I just drove cross-country. Totally smooth, wonderful car."

Once all this has occurred, once someone has formed their opinion, they go out and communicate with others as they normally would, honestly and naturally. They tell people they're a BzzAgent. There's no stealth. Then they come back into the system and fill out a buzz report form that documents a communication they've had. They'll note time and location.

So they just send an email back to the hive, as you call it?

DB: Well it's through the BzzAgent platform. That information about the word-of-mouth dialogue comes into our system, and people we call Communications Developers read the narrative, this word-of-mouth dialogue. Then they write an individualized reply to every single one. That's really become the heart of the system. The Communications Developers provide appreciation and support, enthusiasm, training—all these things that we don't usually get when we share our opinion about a product or service.

So if you're part of the Volkswagen campaign, you go out and say to someone, "You've got to try the Passat. Here's why I love it. I'm part of this campaign ... ." You report that to us, and we might write back, "That's really cool. Did you make sure you mentioned the thing about the glove box being chilled? People love that idea. By the way, I just got one. I love it. I'm going to drive it to Austin tonight to go to a show. Talk to you soon." Really conversational. And that's really the core of the system.

Based on reporting activity, we also grant people points. Those points can be accumulated and redeemed for brand-associated rewards. But as we mention in the book, almost 80 percent of agents never receive a single point for any reward. Their motivation isn't about getting stuff.

What does motivate them?

DB: This is the interesting thing. In building the business, I thought that getting stuff would be the motivation. We actually built the Communications Development department just to have fun. But what we found was that interaction became really key to making the person feel involved and listened to. So when we ask people why they do this, they say things like, "Well, I like to be the first to know about things." "I love to have stuff to talk to others about." "I feel involved with the brand." "I'm being heard." "I finally get to be treated as part of the process and not being a target or being captured." It's about being involved as opposed to, "I get stuff."

Very surprising, and yet really natural, when you think about it.

It certainly says something about our consumer culture. I probably mentioned this to you before, but I'm still enthralled with my Gillette M3Power razor. But I feel frustrated, because I want to go out and talk about this, but who's going to appreciate it? Nobody in Gillette is ever going to know that I'm out buzzing their product for them. We're all inundated with so many advertising and marketing messages each day that we feel like we're part of that marketing system. So I think we all inherently understand that we can become marketers for anything we own. Clearly, you got a lot wrong—the kind of people that would make good agents, the motivation for doing it—and yet this still works. The idea is so powerful that it overcame those mistakes.

DB: Yes, completely. But that's the beauty of this. We kept letting the individuals tell us what was right. And we did have a lot of it right. We understood that word-of-mouth is powerful and that honesty was key.

I was talking with Eric Jackson, who wrote the PayPal book. One of the keys to PayPal's success was that whenever anything went wrong, they communicated honestly with their whole community. That seems to be what you're saying here, that one of the reasons for your success is that you were always communicating with your whole community. If anything went wrong, you would know about it right away. There was like no lag time.

DB: Exactly. They report to us, and in real time they might say, "I didn't like this about the system," or "How come in this campaign you sent me this kit and in that one you sent that." It gives us continuous real-world feedback, and we're able to really learn from them.

That was actually one of the reasons we launched our "Inside BzzAgent" blog. About a year into the business, we decided to launch a blog that tells everybody exactly what happens inside the company. Things like our org chart and letters to investors that nobody would ever expect you to publish. What we were trying to build on was that idea of really letting our customers and our agents be involved, letting them be a part of the process. That's what people really enjoy. They want to be heard, have a voice.

What about the name BzzAgent? In the book, you discuss how people confuse word-of-mouth with buzz marketing, viral marketing, and, apparently worst of all, shill marketing. But your company name certainly has the sound of buzz marketing.

DB: Almost immediately when I had the idea for the company, the theme BzzAgent came to mind. At the time, I didn't realize there was a difference between buzz and word-of-mouth and viral. I just thought they were all the same thing. I didn't even know that shill marketing was different. I just figured it was all under the same umbrella. In Grapevine we really try to articulate the differences among these media and the different impacts they can have.

So our name is just "bzz" with no "u."

Which is really confusing.

DB: Yeah. But the brand quickly became pretty well known and we didn't want to change it.

How about explaining what shill marketing is?

DB: Shill marketing is where companies pay people to pretend they're having a real conversation with you when you have no idea they're being paid. Companies hire people called "leaners" to lean into a bar over your shoulder and talk to you about the drink they're ordering, for instance.

In the book we talk about a Vespa campaign where they had these good-looking people—both men and women—riding around on their Vespas. They would show up at a café, start a conversation with some unsuspecting person, then give them their phone number, like a connection had been made. But when someone called the phone number, they got the Vespa dealership. Just breaking some poor guy or gal's heart.

But that deception tags the brand. You're interfering, trying to deceive, and people ask themselves, "How could they do that to me?"

Fifteen percent of every conversation has something to do with a product or service. So why be deceptive? Why not just find people who want to talk about that product and engage them to communicate with others?

I think you say the ideal campaign lasts for 12 weeks. If you go too long, people get tired of talking about it. If you don't go long enough, they haven't gotten all of their energy revved up yet. But the surprising thing is that you say that the BzzAgents might only buzz five to nine times?

DB: That might be all they report. People typically have about 40 to 50 products in their word-of-mouth repertory, so to speak. There are only so many things we're thinking about, and maybe four or five that we just talk to everyone about. The iPod was like that. Cabbage Patch Kids back in the day. There's the occasional one that's at the top of our list, but most products live in that group of 40 to 50. We don't go out and just look for someone we can talk to about those products. The way you interact with most people is, for example, when someone mentions a restaurant, you say, "Oh yeah, yeah. I'm in a campaign for that restaurant. Let me talk to you about that." Or if someone mentions another car, you bring up Volkswagen and say, "Speaking of cars, I was involved in this campaign." Right?

So how many campaigns is a BzzAgent in at one time?

DB: Up to three.

So they might have three things in mind, and if something related comes up in a conversation, they'll mention their campaign. They're not going out to actively promote this. They're not going to lean into the bar and order a Zima or whatever.

DB: No, no, no. And if someone reports any activity like that to us, we let them know that's not really what we're about here. This shouldn't be so aggressive. They try the product and read the guide, and as they go about their daily business, they'll comment if the subject comes up. For instance, if we were doing a campaign for Tom Peters and somebody was talking about design, the BzzAgent might say, "Hey, wait a second. Have you read Re-imagine?" It's that concept, not a pre-planned interaction.

How do you measure results?

DB: There are various methods, but there are two key ways. First, from the reports, we accumulate statistical data about how much word-of-mouth is occurring, and get a quantitative view. We also accumulate qualitative data: Do people like the product? Do they say mostly positive things, mostly negative? How often do they communicate? What about other media? Here's a really interesting statistic: 40 percent of every word-of-mouth interaction has something to do with another media channel—TV, print, radio, whatever. So some of our data helps articulate how other media are being used.

So somebody is talking to somebody about a coffeemaker and they mention the ad on TV.

DB: Yes. One of the brands we did a campaign for was Home Café by Folgers, which was on Survivor. Folgers wanted to know if people saw the Survivor thing and did they pay attention to it? So we got a lot of reports from people who would say, "I tried this Home Café thing." "Hey, was that the thing on Survivor?" "Yeah, yeah, yeah. That's where I saw it." And it's that sort of integration of the communication with the advertisement. That's the future. That's it right there.

So do you coordinate these word-of-mouth campaigns with actual print or TV ad campaigns?

DB: Absolutely. It's clear we do not think we're a replacement for all other media. Traditional media is not going anywhere. It's just that its effectiveness has changed. In the 1950s, you could run a Tide commercial and people would see it and think, "Oh, I gotta buy Tide." Today people still see the commercials and they like some of them, but they don't act until they check for themselves if the product is something they're really interested in. And by checking, I mean they'll ask a friend or read a review online. They'll go to the store and read the point-of-sale stuff. All that leads to a purchase decision. So it's really the integration of all these things.

Right. Somewhere along the line I developed a rule that if I heard about a product from two different unrelated people, then I would consider it. Or I would go to a movie if these two different unrelated people suggested it, or if they recommended a book.

DB: We probably all have our own rules we've had to make up. They say we see 3000 ads a day and we filter out 95 percent of them. So what you're talking about is the filtering process you created for yourself. If two people mention it to you, it's worth looking at. Right?

Well, it also has to be two unrelated folks I think are sane.

DB: Right. But a very important key is that they don't have to be some sort of "Influential." They could be your neighbor that you just happen to like or trust or whatever.

Absolutely.

DB: It's not about whether or not they fit into some special portion of the population. That's not how we make our decisions.

Right. Somewhat related here, I loved your story about the Rock Bottom Restaurants. What you learned there seemed to be quite a twist on everything. Can you talk about that?

DB: Sure. Rock Bottom is a restaurant chain with 30 locations in 15 states. We did a campaign for them about two years ago aligned with Harvard Business School and studied how many people in our system were "Influentials," who's a "Trendsetter," what's the impact.

We had a thousand agents join us for the campaign. Rock Bottom had a loyalty program called the Mug Club. A lot of these people already had the Mug Club card, so we just invited them into the campaign. Rock Bottom was generous enough to allow us to track sales data across these cards, so we could tie actual reports of word-of-mouth to spending on a card. So we could say, "This person reported; how did they spend?" Things like that.

We looked at four groups of people. The first group included Influentials and Trendsetters. We expected them to be driving results, but we found they didn't really do much. When we asked them why, they said, "I'm pretty careful about what I talk about. I've already talked about Rock Bottom; I've sort of moved on. They're not as cool as they used to be." So Influentials didn't create much change.

Then we went to the second group, which was the Heavy Loyals. One Heavy Loyal we talked about is Dwight, who I think had 1812 pints and 400 or so visits to Rock Bottom. This guy loved Rock Bottom.

Was he the best customer in the world for Rock Bottom?

DB: Yeah, he's a guy who's there all the time. We figured he'd talk a lot, but what we found was he didn't really want to talk that much. When we asked him why he wasn't talking more, his first answer was, "I've already told everyone around me about Rock Bottom." He had already influenced his network. Secondly, he had started to feel a bit of ownership toward Rock Bottom, like it's his place. Heavy Loyals can like a brand or product so much that they start to internalize it almost.

Maybe you don't want to talk about it because you don't want more people coming in. It's so internal to you that you need to keep it inside you in some metaphysical kind of way?

DB: It's really interesting. A lot of people have this feeling for bands, for instance. A band that they like so much they eventually don't want to turn anyone else on to it. They don't want everybody to know about it or everybody will go and then it won't be what it is now. There's probably some really deep psychological theory here. But we see it over and over, where the heaviest of evangelists don't get as active in certain ways about the brand. They're more than willing to help, and they love the company or the brand or the product, but there's a moment they'll stop because they just treat it differently to themselves.

So we went to a third group, which were the Mavens. We thought maybe the experts, the people who write reviews, would have more to say. So we went to the Mavens and looked at how they were reporting activities to us and compared it to their cards.

What we found was they had a very short word-of-mouth window. These people talked about Rock Bottom but moved on very quickly, mainly because their job was to continuously talk about the next thing. So they would say, "Well, I'd already talked about Rock Bottom and my reputation is about new things and the next thing and so I've sort of moved on. But it's a great restaurant, I'd be glad to recommend it if someone asked."

When you say it's their job, you mean it's their social job to be out in front of everyone else.

DB: Yes. That's their identity. Now, the last group was the most fascinating piece. This group was called the Light Loyals. They were people who had been to Rock Bottom a few times. For instance, one woman had been to Rock Bottom three times and had seven beers—the person that drops to the bottom of everybody's customer segmentation list.

Did she drink every last drop in those seven beers?

DB: She boozed like crazy. No, I'm kidding. When we looked at the data for this woman and the people in this group, it was incredible. They were the ones who actually reported activities that were really impressive and then started spending more on their card. They got people to sign up for other cards, and they frequented the restaurant more. They weren't Influentials; they weren't restaurant experts; they were just regular everyday people.

And when we asked them why their behavior changed, they said, "You know, I hadn't really thought that much about Rock Bottom, but you made me realize I love the place. And by the way, we have this thing at work every Friday where we go to lunch and I figured, why not? I'll take people to Rock Bottom. I love that place."

So it was making people conscious. They didn't have a network that was influenced. They didn't base their reputation on whether they were some type of expert. All this together makes them very willing and very able to create word-of-mouth that has impact.

So when the campaign ended, over the course of three months we had generated 1.2 million above-trend sales. We increased spending-per-card, frequency of visits, and new card sign-ups—wonderful stats all from this Light Loyals group. So we call this "The Myth of the Influentials."

When I read that, I was reminded of my own experience when I was learning to be a glassblower.

DB: Ooh, cool.

I couldn't tell enough people about glassblowing. I was excited. I was learning this thing. I mean, you're holding 1500 degrees of molten glass nearly in your hand. It was exciting, and it was so new. I think there's just something innate that makes us want to share new knowledge with other people.

DB: That goes back to some of the motivations of the volunteers. You want to talk about things; you want to be the first to know. You want to be in that group that's sharing knowledge. That's pretty important to us.

Yes, you want to share something. When I was talking to people about glassblowing, I could be pretty certain that no one else there knew anything about it.

DB: Right. You were the cool guy.

There's very interesting stuff about negativity in the book.

DB: Right. We call this "The Weird Value of Negativity." Negative word-of-mouth has a bad rap. I think there was a statistic that came out in the '70s that said negative word-of-mouth traveled 11 times faster than positive or some such stat, which has been disproved over and over and over.

I heard someone say basically that same thing just the other day.

DB: It's so sexy, it must be true. Don't get anything bad said about your product. Eleven times faster. But it's been disproved over and over. That doesn't mean that you want negative word-of-mouth; it's certainly not something people strive for. But I find three interesting things.

The first is that negative word-of-mouth is the way a company listens in this day and age. People are going to say good and bad things about your products and services. It's going to happen. And companies that are paying attention to those things are getting all the information they need to decide how to continue to distribute their product or sell it or change it. When there's an issue in the real world, you've got to listen to where the problem is and figure out how you can solve it. All that comes from negative word-of-mouth.

The second thing is that 50 percent of negative word-of-mouth comes from a feeling of injustice on behalf of the brand. What that means is not so much the product itself but your experience with everything else around it. Like if you have a problem with your Dell computer and Dell customer service treats you like garbage. Even though you love that computer you're going to say bad things. So one way a company can combat negative word-of-mouth is to listen and pay attention to the negative word-of-mouth and respond to it. Very simple.

Acknowledge it.

DB: Yes. Don't hide from it. People just want to know that you're paying attention to them. The Home Café machine, for instance, had some issues. We sent 3000 out to agents, and about 60 of them caught on fire. They actually sparked and smoked. This was a brand new product that clearly had some kinks and they wanted to work on it. So they sent every agent a new machine right away, no questions asked, and immediately that negative word-of-mouth stopped. These people said, "Hey, you know what? They treated me so well. I know products have issues. Fine, okay. Well this one works, it's really great. Thanks."

Now my third point about negative word-of-mouth is really the most important. It's about something we call Quiet Advocates. Quiet Advocates are people who don't really communicate much about a product unless there's a lot of negative word-of-mouth they consider unfair. If they think the company is being given a bad rap or isn't being treated fairly, they'll come out to defend the product.

These people, these Quiet Advocates, can be really powerful. In this Home Café campaign, the noise from people saying negative things became pretty loud, meaning a lot of people were doing it. So the Quiet Advocates came out and defended the brand and said, "Look, these guys are making a great product. They had a couple of kinks. They talked to you. They said they're going to fix it. Give them a break and move on." These people can be really powerful for your brand. We see this over and over, where Quiet Advocates come out of the woodwork and become long-term real evangelists for the product.

Right. And the other underlying lesson there is that we consumers aren't dummies; we don't expect anything to be perfect.

DB: Right. This isn't the end of the world. In the book, we talk about iPod's dirty secret. They had a bad battery. People asked questions; Apple responded very well. In the end people didn't stop buying iPods. They said,"Okay, they had a problem. They fixed it. That's what we want."

Then there was the whole Tylenol scare, whenever that was. Maybe before you were born.

DB: No, no, I remember that.

They took a huge multi-billion dollar hit taking everything off the shelves, but certainly the good will they bought paid for that many times over.

DB: Without a doubt. By doing that, they earned people's trust and support of the brand over time.

In the long run, is that a stronger message for the company than just to have been perfect all along? Should somebody think about screwing up just so they can fix it and make an even better impression on the consumer?

DB: Screw up a product on purpose so people will say good things when they fix it? That's quite a marketing strategy.

Well, I'm just wondering if you can measure the difference between somebody's good will about a company that's just always been good as opposed to a company that's had a flaw and then fixed it really well? Do they come out smelling better after having fixed a negative, or are they better off just being positive all the way through?

DB: Every company takes a different path, but my suggestion is not to create a bad product so that you can impress people by fixing it. Your job is not to go out and try to generate negative word-of-mouth. The point is that negative word-of-mouth isn't the end of a brand. And more importantly, every brand is going to have some at some point. It's how you deal with it, how you fix it, how you pay attention to it, that's really going to solve the issue.

Right. And where do blogs work into this?

DB: That's an interesting question. Online is not where most word-of-mouth occurs. In fact, one study shows that 80 percent of word-of-mouth happens offline. You might post something to a blog or a review on Amazon, but most of your talking is still face-to-face.

Blogs are a fascinating tool, but in most cases they don't make or break a product or service. Companies should pay attention to them and respond to them. They can be sources of customer feedback. But they're not going to replace face-to-face interaction where we're sharing opinions. They're another tool in the kit, another form of communication.

Do you think every company or every product should have its own blog?

DB: No. There are some products that no one wants to spend their time talking about. P&G doesn't need a blog about every product, but maybe they should have a blog about product development. People would be really interested in that.

Or something more behind the scenes, like you've done with your blog at BzzAgent.

DB: Oh yes, people love that stuff. I just think that companies should carefully consider what they put in them. I think they're an interesting, potentially very effective tool if used right, but I don't think they are the outlet for word-of-mouth communications.

So what's your favorite campaign of the moment?

DB: Well, we just launched a campaign for Sonicare, the automatic toothbrush. I love it. The dentist said, "Hey, you must be flossing." And I said, "No. Sonicare. Good stuff."

We're about to launch a Trolls campaign. Remember those little dolls?

The guys with the purple hair sticking up?

DB: Yeah. We love those guys.

So they're coming back?

DB: They're coming back. So we're about to launch that. We're very excited.

How are they different from before?

DB: They have more varieties. They sent us a bunch of trolls wearing BzzAgent t-shirts, which we thought were really funny. So you can dress them up.

So you'll be able to go online and buy clothes for your Troll?

DB: I hope so. That's an idea they should listen to. That would be great.

There you go. I'm going to submit my buzz report.

DB: Perfect. We're also launching a campaign early next year for Nutella, the chocolate hazelnut spread. We're excited about that one. There's a guy here who seems to enjoy a Nutella, fluff, and peanut butter sandwich. That's sort of the next level.

That's like a super-deluxe Reese's cup. Well, Dave, thank you. It's been great fun talking with you.

Website: BzzAgent.com
Blog: Inside BzzAgent, blog.bzzagent.com