[Follow me on Twitter]

I’ve been reading curiously about the new beta Facebook Credits platform.  Most coverage tends to focus on the unique elements of allowing users to vote economically for better content.  Give a good content producer some credits, and perhaps that will incent them to produce more.  Think Digg with economic value.  I think the launch of Credits again reflects the brilliance of Facebook and I for one see a much bigger play at hand.

Facebook understands very well the amount of money flowing into virtual goods, both from their own virtual goods, as well as the money machine created by their gaming partners like Zynga, SGN, and the like (who buy large chunks of advertising to feed their virtual goods money machine).  Enabling users to generate credits that work across games and applications would be of huge value, and allows Facebook to generate different and ultimately more economics from the platform developers.  In addition, Facebook now represents over 1 in 4 US pageviews.  Their user base is over 200 million.  They have HUGE scale, which allows them to have the credibility to pull off a payment play.  Users would inherently trust the FB platform over fragmented app creators.  This creates the perfect recipe for a Paypal alternative, and has inherent distribution that a Google Checkout or Amazon may not.

So why not just come out with the grand plan?  Well, the launch of a payment platform is non-trivial.  There are hundreds of ways it can go wrong; PayPal has spent years and huge sums of money learning lessons on how to deal with fraud.  Amazon, Google Checkout and others are all working through their own issues.  It also deals with one of the most sensitive items for people (ie, their money).  On a social platform like Facebook, the last thing you want to do is to alienate users.  Facebook cannot turn on a major transactional system that would be the immediate target of phishing, fraud, and rip offs without understanding the issues thoroughly.  The initial Credits approach lets them dip a little toe into the water, quietly and under the radar, and rapidly gain feedback/experience without exposing themselves to major financial or reputational damage.  With that knowledge, they can slowly train their way into the Paypal market.

I have a lot of respect for what Facebook has built.  And per my prior post, I think they are going to spread their tentacles broadly.  Facebook controls the social graph, Facebook Connect controls identity, Facebook “Communications” will come, and Facebook Payments on the roadmap…. Stay tuned, and note the date and time of publication, but that’s my highly speculative, uncorroborated and unsolicted vision for their future.

[Update 11/26/09 - looks like things may be happening behind the scenes .  This seems much more like a transactional fee, but I'd bet once it works internal to Facebook, it'll show up externally as a third party service but with a more paypal competitive pricing model.]

I had been asked a few times over the last week about my thoughts on the Zappos transaction.  I think this is a great story for innovation and startups.  Zappos started in a space many believed you could not transact online: selling shoes without people trying them on… Of course, as the world has grown increasingly comfortable transacting on the Web, that changed pretty quickly and Zappos took off.   With their focus on customer service and company culture (can watch a video by Tony Hsieh on that here), they were able to build sustaining brand advantage.

Ultimately, I think Zappos could have gone public, but Amazon stepped in and paid over 20x+ reported EBITDA of Zappos.  That’s a serious multiple, healthier than the public markets now.  And of course, in an online business at this scale there are significant capex cost, so I’m sure if you looked at cash flow, you get an even bigger premium.  Zappos built a dominant brand in a category, and Amazon stepped up and paid a premium to get the company.  To me, that’s a textbook entrepreneurial story.  I think you will continue to find next generation e-retailing companies thrive, but with an innovative new spin.  Gilt just raised money at a reported $400MM valuation, and had multiple bidders competing to get in.  There are a whole generation of companies pushing the ‘mass customization’ or ‘personalization’ theme, and doing well.  It’s all about finding a novel approach, attacking it quickly, and building scale at a brand level before someone can catch up.

I attended the Wired: Disruptive by Design Conference earlier today at the Morgan Library in NYC.  One of the best sessions was of course with Jeff Bezos, CEO of Amazon.com.  I have an incredible amount of respect for Jeff, not only because he stayed true to his strategy in spite of an incredible amount of pressure during the bubble bust, but also because of the spectular innovations that have come out of Amazon over the years.  The Kindle has revolutionized the e-reader market and launched Amazon into a consumer electronics company.  Amazon Web Services of course has transformed Internet economics from fixed costs to variable ones, and unleashed a wave of new companies to boot.  Jeff did not disappoint, and I thought I would share some of his thoughts below.  My favorite from below – “The trick as an entrepreneur is to be stubborn on the big things and be very flexible on the details.”  Enjoy, and feel free to post any other good ones you have from Jeff. 

On the economics of e-books and the Kindle: 

• A text book is re-sold 5 times over it’s life, which is why they cost so much.  With digital books, publishers have the opportunity to sell that 5 times to consumers.   The price can now come way down.
• Historically, we have never made money on bestsellers.  We make money on the mix.
• For books where we have both physical and e-book inventory (300,000 books), Kindle unit sales are 35% of the physical book sales.
• “We humans do more of what is made easy”.  You do more when you reduce the friction.  Making buying books so easy makes people buy more.
• Reading is an important enough activity to have it’s own device.
• On multi-function devices versus signle function:  “I like my phone… I like my swiss army knife, but I also like my steak knives too.”
• “The physical book has had a great 500 year run, but it’s time to change”
• “Our vision is to have every book ever printed, in any language, available within 60 seconds.”
• On Google’s pending deal with the US book industry:  “It doesn’t seem right to get a prize for violating a large series of copyrights”

On staying true to the path and entrepreneurship:

• “We always noticed some of our harshest critics were our best customers.  Told us we must be doing something right.”
• Regarding the run up in the bubble: “I always told our employees not to feel 30% smarter when the stock went up by that amount because one day it will go down by the same.”
• “One of the differences with founders and professional managers is that the founders care about the detail of the vision.”
• Regarding vision and strategy:  “The trick as an entrepreneur is to be stubborn on the big things and be very flexible on the details.”
• “If you disrupt something, you have to be willing to be misunderstood for long periods of time.”
• Regarding products that seem very different:  “A question people at large companies don’t ask enough is “Why not?”" 
• “I wouldnt know how to respond to someone if they said, “We cant do this because it’s not in our knitting.’”
• “The two things we do is work backwards from customer needs and work forward from our set of skills.  AWS is an example of us working forward from our skills, while the Kindle is an example of us working backwards from customer needs.”
• “Many companies believe learning a new skill is akin to leaving your core competency.”
• “Errors of comission are over focused on versus errors of omission.  People over dramatize how expensive failure is.  You never hear of a company getting criticized for failing to try something.”
• On trying different ideas:  “If you are in the investment phase and you stop doing it, the only thing that happens is your profits go up.  How hard can that be?”
• On mistakes:  “We launched Auctions, no one came.  We licensed Google’s search and launced A9 and no one came.  A year after we shut it down it was still my mom’s homepage.”
• Citing another quote in response to why they didn’t better service and if it was deliberate or not: “Never attribute to conspiracy what can be explained by incompetence.”

It was a great session and Jeff had some great lessons.

I just read an initial report out of ComScore indicating this year’s Friday retail e-commerce numbers were up slightly over last year.  Online, nontravel e-tailer sales grew 1% for the day to $534MM from $531MM last year.  For the month of November, retail e-commerce sales were down 4% from last year’s numbers.  The National Retail Federation, on the other hand, is forecasting an increase of 2.2% for the full Thanksgiving weekend (with only Sunday being an estimate), on total spend of $41 billion and average customer spend up 7% from $372.57 to $347.55. 

All in all, I’d consider the data to be encouraging (relatively speaking).  It seems to me all retailers were very concerned about spend and pushed heavy discounts to the forefront to ensure the holiday season got off to a good start.  It may not bode well for retailer margins, or for the overall health of the industry for that matter, but at least a strategy of heavy discounting did create elasticity and spend with consumers.  It would have been far worse to heavily discount and feel like one was simply pushing on a rope.  People could have easily refused to put any money out this holiday season, and frankly I would have guessed we would see declines in spend.  I’m still not sure I believe the increase in average purchase size.

Walking around, things seemed to be pretty busy.  I put a couple of pictures from Macy’s and the Apple Store in NYC this weekend below.  They were jammed.

The next step is to see whether people have “forward bought” and all retailers have done is rob from tomorrow to get paid today.  I noticed several retailers offering discounts for future period purchases.  For example, at Banana Republic, upon completing a purchase, they offered a card for 20% off any item between December 2 and 22nd.  The goal is clearly to get me back into the shop.  It will be interesting to hear the data come in over the next month.  If anyone has other good anecdotal data, would certainly love to hear it!