The Challenge Dividend

Racing to Find a New Earth

One of my favorite applications of The Challenge Dividend is when groups of scientists compete to solve a problem or discover something novel.  Last June I wrote about the competition to invent a cheap laptop for kids in developing worlds.  In that post, I also linked to economist Gary Becker's story of how competition drove the human gene code to be cracked as much as 10 years ahead of predictions.

I recently discovered another example of competing scientists searching for new planets in our galaxy.  The race is on to discover an Earth-like planet that might harbor life, and the goal of many is to be the first to snap a photo of this first cousin.

Already more than 300 planets have been discovered outside our solar system.  Most of them are large, dense and more like Jupiter or Saturn than Earth - and only 10% of stars have more than one planet.  But with each passing year, new technologies and strategies are getting scientists closer.  Recently a team from St. Andrews University in the UK found a solar system with two planets in placement similar to our own.

The interesting part is that not only are there hundreds or thousands of planet chasers out there, but they are using competing strategies to discover.  Some are using a technique called "gravitational mirco-lensing" in which observations are made of light bending around planets.  Others favor the "transit technique," which aims to detect planets by observing the tiny fraction of a star's light that is blocked when a planet passes by.

Some say that we are close to detecting an Earth-sized planet, and that it is only a matter of time.  There certainly is no limit to the number of stars to peer at.  Billions and billions are out there.  That first discovery would certainly prove the Challenge Dividend; it would bring prestige and press to the discoverers, and give society a closer glimpse of what might be out there.

Why Things Suck - Challenge Dividend Edition

I've spent the past few weekends catching up on a stack of magazine subscriptions.  One article that I've spent a lot of time with is Wired's February 2008 cover article on "Why Things Suck."  The article lists 33 common things that suck most.

My firm belief is that when we come across "things that suck," we often find that they lack the Challenge Dividend.  In other words, they don't have enough pressure to improve.  So here's my take on Wired's things that suck because of little or no challenges:

• Air travel sucks because only a few players dominate the market, due to a mix of high costs of entry, government regulation, and big players' dominance of hub city markets.  Economists call this an oligopoly.  The upcoming Delta/Northwest merger will lead to more suckiness.
• Evite sucks because it has established a large user base that is hard for an upstart to overcome.  It's free but increasing is monetizing its user base by putting more and more ads in front of us.
• Medical Records suck because there is no market incentive to make them simpler and more portable.  Special interest lobbying prevents the government from making any real progress.
• Printer Cartridges suck because manufactures use lawsuits and complicated parts to prevent third-parties from entering with innovations and lower prices.  They lose money on the printers and screw us on the refills.
• Radio sucks because big companies like Clear Channel scooped up many stations (reducing competition) and took out costs (laying off local DJs and inserting software), while programming music for the lowest-common denominator listener.
• Roads suck because the government usually pays for them and has cut its budgets.  Meanwhile, big trucking companies that tear down roads pay the same cost as you and I - zero.
• Ticket Purchasing sucks because Ticket Master has a near monopoly on the market.
• Traffic sucks because market forces don't create incentives to travel in off-hours.  See roads above.

So the next time you run across something that sucks, think about whether there's a challenge or pressure that can be added to improve the situation.  In the meantime, take a vote on Wired's things that don't suck.  A few of my favorites are "a rooftop bar in spring" and "your kids being born."

'Gators Don't Get Sick

Why is this guy smiling?  Maybe because he almost never gets a cold.

The Week reported new research that shows alligators have "super immune systems that ward off virtually every virus and bacteria, and scientists are now trying to figure out their secret, to create treatments that could be used by humans."  In a test of exposing alligator and human blood to 23 types of bacteria, the alligator blood killed all 23, while human blood only blocked 8.

Why would the lowly alligator have such special defenses?  Well, the Challenge Dividend of course.  According to Lancia Darville, a researcher at LSU:

"Alligators tend to get into tussles and fights.  They have torn limbs and scratches that are exposed to all of this bacteria in the water, yet they are never infected."

In other words, millions of years of tussling in a bacterial soup has pressured alligators to evolve to the point that they have these super immune systems.  Challenge leads to improvement, and survival.

And for humans, the challenge to cure disease and save lives leads researchers like Darville to seek innovative solutions through the study of alligator blood. 

No Big Payoff for Payday Loans

Perhaps no legal business is more vilified than the payday loan industry.  Dotted throughout poor and rich neighborhoods alike, these businesses cast a negative reaction as we drive or walk past them.  Whether we use them or not, society generally looks at the payday loan shop as an unnecessary evil. 

If it makes you feel any better, new research shows that despite their rich rates, payday lending is just an average business in terms of annual returns, providing roughly 10% per year in profit on average.  A December 2007 study (via Marginal Revolution) by Paige Skiba at Vanderbilt and Jeremy Tobacman at Oxford found that:

"Despite charging effective annualized rats of many thousand percent, we find lenders' returns differ little from typical financial returns."

I was fairly surprised by these modest profits for payday lenders.  But I was not surprised by the reason: Challenge.  These include:

• Federal, state and local governments have limited their rates and the amount of loans any individual customer may take out per year.
• Most loans are very small, providing an average fee of only $49.
• Big companies like Wells Fargo, Bank of America, and others have entered the market.
• 9% of checks from these borrowers bounce.
• Wages to employees take up 1/3 of revenue.
• Since it is relatively easy and cheap to enter the market, there is significant competition, which leads to lower fees and less traffic.

As regular readers know, I always like to finish my posts with a lesson on how challenge leads to improvement.  But I'm not sure here.  Overall, I believe payday lending IS a necessary evil.  People who are living paycheck-to-paycheck are under unique pressure and sometimes need a quick loan.  There's also the powerful argument that if these stores didn't exist, we'd see a return of the loan shark - who is conveniently free of government regulation, and carries a baseball bat. 

I guess the lesson is that challenge from government and competitors is keeping this industry competitive, and preventing it from charging even higher rates to people who desperately need this service.  So the next time you drive by a payday lender you might feel better that he's facing the same business challenges we do every single day.

Judging the Candidates Web Sites - UPDATE

Last week I was asked by the Web Marketing Association to weigh in on whether Hillary Clinton or Barack Obama have the better website.  It was a great way to spend 10 minutes of my time, and a great idea for the Web Marketing Association to further establish itself and its network by providing this perspective.

Overall, both sites are very strong.  I give a slight nod to Obama's site because it is cleaner and feels more personal.  I did leave one comment about where both sites are falling down, which I will repeat here:

"Both candidates have loaded their sites with the latest media tools and are nearly identical in form and function.  They have nailed the technology, but they are missing the human element.  Neither Clinton or Obama have a personal blog where they could connect with voters in their own words and share their daily experiences.  Everyone from Moms to CEOs are blogging today, why not the candidates?  It's a real chance to make a competitive difference on the web and build a personal connection with voters."

In terms of lessons for the Challenge Dividend, I think there is a good story here.  By tapping into hundreds of website experts who have judged thousands of sites for a living, the Web Marketing Association is bringing some real wisdom of crowds.  Clinton and Obama could learn a lot by getting this perspective from a wide group, rather than only trusting their internal team to make the call.  And the benefit for the larger market is that future politicians and organizations of all kinds can learn from the case study here.

I also think it's smart for the Web Marketing Association to further deepen its relationship with members by asking for their perspective.  Typically we only hear from them when awards are coming up; but this shows that the group can me much more meaningful and interesting.  Good work, guys.

UPDATE: Barak Obama's site won this survey by a landslide, with 75% of the vote vs. 25% for Hillary Clinton.  There were 107 votes.  The video below tells the complete story.

Facebook Ads Don't Rock

(If you like this post, come check out my new blog, Marketing With Meaning, where I am trying to literally "write the book" on a new way to do business by creating marketing that people choose to engage with, marketing that itself improves people's lives)

Elvis Presley once sang, “Before you abuse, criticize and accuse…walk a mile in my shoes.” Last week I walked a mile in the shoes of a Facebook advertiser and can now officially criticize Facebook as an option for marketers who seek the Holy Grail of digital marketing. The purpose of this blog is to drive improvement through challenge; and I hope that by challenging the hype I can help improve the future of digital marketing.

Facebook is definitely on a roll. The company was recently valued at $15 billion in an investment by Microsoft, it is gaining traffic, stealing employees from Google, and just took up its revenue forecast and staffing levels.  Forrester claimed the sheer mass of the company's page view inventory would make it a winner, especially with small businesses.

All of this money and attention is a gamble that the millions of daily page views will be populated by paying advertisers. The hope is that, like Google Adwords, Facebook members will pay more attention to ads that are closely linked to their personal interests.  For example, the manager of a punk rock band who is getting ready for a show in Detroit can create an ad targeted to the people near Detroit who say they like punk.  These 40 people (true number) should look at this ad as added value.

In my day job as Chief Marketing Strategist at Bridge Worldwide, my role is to help clients navigate from traditional to digital marketing. That means I have some personal incentive to jump on the bandwagon of anything digital. I am also a frequent Facebook user, so I have some personal interest in seeing the service succeed. But my experience in running a Facebook campaign leaves me unable to recommend the service—and makes me fear that a new bubble might be forming. Let me share my experience.

My Experiment:

Two weeks ago, my company ran a 24-Hour Rock-a-Thon event to benefit the Cincinnati Fine Arts Fund. It was basically an excuse to play Rock Band and Guitar Hero all night long (you can see the entire story here). A few days before the event I decided to invite my network of Facebook friends to either join in person or watch us on a live feed online. After setting up the invitation, Facebook asked if I would like to advertise the event. I clicked “yes” and decided to run a little experiment.

I really enjoyed the Ad Manager interface. I was able to quickly create an ad, play with different targeting audiences, set a budget, and monitor progress. My main goal was to drive traffic to our event via an ad that targeted people over 18 who say they are fans of Guitar Hero. There are a little over 42,000 of these people within the entire Facebook population of 24 million. You can see my ad at the top of this page.

My hypothesis was that this highly-targeted ad would drive a good deal of traffic (clicks). After all, Guitar Hero fans are really into their craft (yes, I am one) and it seemed to me that getting a targeted ad would drive much higher clicks than the industry average of around .1%. I ran three test legs:

• Targeted CPM (to the 42,000 Guitar Hero fans)
• Non-Targeted CPM (to all 24 million-something U.S. Facebook users)
• Non-Targeted CPC (same as above, but pay-per-click)

Results:
You can see for yourself what I encountered after a ten day campaign...

So, with a highly-relevant ad served to a highly-targeted audience, only 12 of the 71,023 ad impressions led to an action. That’s a .02% click-rate.  As an advertiser I was completely under-whelmed. Sure, I only paid $22, but I paid almost $2 per visit. I achieved no scale, no efficiency, and no real results.

But it gets more interesting, my completely non-targeted ad earned 23 visits among 149,081 impressions. That’s the exact same .02%.  Extreme targeting made zero difference. 

What does this mean?

I believe this means Facebook advertising is a failure; and others are beginning to agree.  A few other advertisers are sharing their poor experiences. Take Venture Capitalist, Fred Wilson, and Gawker’s Nick Denton, who also find Facebook ads to be worthless. Both of these guys invest in ad-supported net companies. Throw in Google’s announcement that they have not met expectations in MySpace or YouTube ads. Another buddy of mine in an unnamed Fortune 100 company reported similar click results for a huge, recognized brand.  MySpace is even running a half-off sale to try and move unused ad inventory.

The big moose we need to put on the table is that people have learned to ignore information on the web that is irrelevant to their task at hand. Google Adwords work because people are actively searching, and the ad units sometimes add value. When updating our profiles on Facebook or watching videos on YouTube, we simply have no reason to give ads any attention.  That's why at least one fellow blogger called Facebook "the worst traffic on the net."

Some will say that “clicks are the wrong way to measure internet media” and that studies show people exposed to banner ads buy more product, just like they buy more product when they are exposed to print or television ads. Maybe. But digital marketing and extreme targeting is supposed to offer more than a different way to hit an eyeball.  That's not worthy of a revolution.  Rather, we should expect digital marketing to build deeper engagement and drive action.

I wish more advertisers would come out and share their (poor) results, and more investors/analysts would challenge these valuations. Perhaps user experience legend Jacob Nielsen nailed the issue in Advertising Age in March:

"There’s a huge financial incentive to say advertising works. To say that it doesn’t work—I don’t get anything out of that."

I believe we digital believers do have a huge incentive to not waste dollars either as advertisers or investors. If we fail to closely analyze digital alternatives we might blow ourselves another bubble and hype ourselves back to the unemployment line.

Instead, we need to challenge the impression-based advertising model and create marketing that consumers actually want to engage with. Now that’s a marketing model worth the hype, and certainly an improvement for both marketers and their consumers.

(UPDATE: George Colony at Forrester has some great counterpoints to the belief that advertising will continue to drive business models.  Jon Fine at BusinessWeek reports more on how making money on YouTube will take longer than expected.  And Chris Anderson at The Long Tail reports that broad interest targeting is working better on focused networks through Ning.)

(MORE UPDATES: Paul Soldera takes my challenge to do better and while he improves his click rate, he agrees that Facebook is in trouble.  AND in this week's Advertising Age my new company-related blog, Marketing with Meaning was featured and included a piece on this Facebook experiment.  Neat stuff.)

(If you like this post, come check out my new blog, Marketing With Meaning, where I am trying to literally "write the book" on a new way to do business by creating marketing that people choose to engage with, marketing that itself improves people's lives)

The 24-Hour Rock-a-Thon Challenge

I'm just a little embarrassed to say that last weekend I let my love of Guitar Hero and Rock Band get a little out of control. I helped run a charity event at my office in which we played the games for 24 hours straight. It was an amazing life experience, and of course, offers Challenge Dividend lessons.

(For a full view of the experience, check out our site and the blog I kept at Rockband.bridgeworldwide.com)

A little over a month ago I came up with the idea to play Rock Band at our office for 24 hours straight to benefit our company charity, the Cincinnati Fine Arts Fund. While the charity angle was important, my main motive was personal: I just wanted to do it. I bounced the idea off a few friends and they loved it. We then invited other Rock Band players around the office to a special meeting where we announced the idea. They, too, jumped on board and we quickly planned the event. 

Last Friday at noon in our office the party began. Everyone chipped in to help. Some made decorations, others set up multiple projectors, and some set up our web cam. I kicked off the 24-hour set with Weezer’s “Say It Ain’t So” and we were off. I was really amazed at how many people played with us over the course of the event. People played the game instead of heading off to happy hour, clients joined us, parents brought their kids in (even at 1am!), and people came back from their night on the town to bring us beer and snacks throughout. People who had never sang or played before got on our makeshift stage. It was a true bonding event.

The real challenge for us came at 2:30am, when our group shrank to 5 core people, including myself. We rotated among the 4 playing slots (guitar, bass, drums, singer) non-stop for the next 6 hours until relief came on the form of breakfast and more players at 8:30am. We saw the sun rise, and we played the same songs over and over. I was amazed at how our energy was renewed each time we chose a new song and kept playing. People were dialing in to our webcam feed from their homes throughout the night and morning, reading my witty blog posts and wondering how we could keep playing (and smiling) for so long.

By noon on Saturday, only me and tech stud, Dan Brunner, had stayed the entire 24 hours. We finished up with Boston’s “Rock and Roll Band” – a song a chose because it’s all about a band of friends who have fun making great music and making audiences smile. I went home and crashed for hours.

I think the event exceeded our expectations in terms of fund raising and participation. Already people are talking about what we’re going to do next year, which is probably the biggest sign of success. Of course we’ll have to set new challenges for ourselves; maybe play the entire 24 hours…or expand into 48? We have a whole year to plan what’s next, but for now I’ll take away the experience of a challenge that made a better day for many people – especially me!

Innovation in Airport Security

I am always surprised and shocked when an organization that lacks any real challenge actually makes an improvement.  Take my parking lot at work (please).  Once in a while even monopolists are compelled to try something better.

Last week I was walking through my Cincinnati airport at 6am and was startled to see something different.  I found the sign above suggesting that travelers que up in the security line most appropriate for them based on the following groups and descriptions:

• Families and Special Assistance - small children, strollers, groups; assistance needed; new to flying
• Casual Traveler - familiar with TSA procedures; multiple carry-ons
• Expert Traveler- expert at TSA procedures; always ready with items removed; flies more than twice a month; travels light; elite frequent flyer member

In addition to this sign guide, there were signs for each hanging over specific security lanes.  It was early in the morning so few people were there and they just had everyone go through the same two lines, so I didn't get to see the system in action.  But I marveled at this attempt to speed up this tedious process.

There are a few things I really like about this:

• It matches the "12 items of less" lanes that we've grown used to at grocery stores
• It is fairly egalitarian, versus the Blue program you have to pay for or the elite frequent flyer programs that go toward the million-milers
• It was tested out in Denver and Salt Lake City already, and performed well
• The TSA is actually asking for feedback via its new site and blog.  I even saw a TSA employee with the freedom to post and cast some doubts.

But I do have a few doubts:

• Will some lanes move faster or slower?  If all the travelers are Experts, will that lane be too long?
• Will there be cheating?  The tests to date have been on the honor system.  I can see some harsh words and dirty looks when the Family late for their flight jumps to the Expert lane. 

At the end of the day, even with a few doubts, the need for improvement here is great.  And better to try something than continue to live with the old system.  The TSA has a real chance to prove my challenge dividend beliefs wrong, and impress the hell out of the citizens that fund its operation.

Luckily (?) I travel a lot so will get many chances to test this system out for myself and, of course, will report back to you, dear reader.  But why wait - what do you think?  Will it work or not?  What other issues might come up?  If you read this post, an opinion is already forming in your mind - so take the plunge and leave a comment.  I promise it won't hurt at all.