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The Advent of a Global Intelligence

September 22, 2011 at 6:00 AM

YALTA, UKRAINE — Get ready for the global brain. That was the grand finale of a presentation on the next generation of the Internet I heard last week from Yuri Milner. G-8 leaders had a preview of Mr. Milner's predictions a few months earlier, when he was among the technology savants invited to brief the world's most powerful politicians in Deauville, France.

Mr. Milner is the technology guru most of us have never heard of. He was an early outside investor in Facebook, sinking $200 million in the company in 2009 for a 1.96 percent stake, a decision that was widely derided as crazy at the time. He was also early to spot the potential of Zynga, the gaming company, and of Groupon, the daily deals site.

His investing savvy propelled Mr. Milner this year onto the Forbes Rich List, with an estimated net worth of $1 billion. One reason his is not yet a household name is that he does his tech spotting from Moscow, not a city most of us look to for innovative economic ideas.

Mr. Milner was speaking in the Ukranian city of Yalta, at the annual mini-Davos hosted by the Ukrainian pipes baron and art collector Victor Pinchuk (disclosure — I moderated at the event). What was striking about Mr. Milner's remarks was how sharply his tone differed from that of the other participants.

The Americans — among them the economists Lawrence H. Summers and Paul Krugman — were glum about their country's economic stagnation and its political inability to adopt policies that could end it. The Europeans — a group that included the foreign ministers of Sweden and Poland, and Jürgen Fitschen, who has been named co-chief executive of Deutsche Bank — were worried about the sovereign debt crisis.

Even the Turks and the Indians, whose economies grew more than 8 percent last year, were anxious about uneven development at home, and the threat of economic tsunamis coming from abroad.

Mr. Milner's perspective was entirely different. For one thing, at a time when where you sit so often determines where you stand, Mr. Milner almost perfectly represents a global technology elite whose frame of reference is planet Earth. He mostly lives in Moscow, but has recently purchased a palatial home in Silicon Valley. He addressed the Ukrainian conference by video link from Singapore.

From that vantage point, the most pressing issue in the world today isn't recession and political paralysis in the West, or even the rapid development and political transformation in emerging markets, it is the technology revolution, which, in Mr. Milner's view, is only getting started. Here are the changes he thinks are most significant:

• The Internet revolution is the fastest economic change humans have experienced, and it is accelerating. Mr. Milner said that two billion people are online today. Over the next decade, he predicts that number will more than double.

• The Internet is not just about connecting people, it is also about connecting machines, a phenomenon Mr. Milner dubbed "the Internet of things." Mr. Milner said that five billion devices are connected today. By 2020, he thinks more than 20 billion will be.

• More information is being created than ever before. Mr. Milner asserted that as much information was created every 48 hours in 2010 as was created between the dawn of time and 2003. By 2020, that same volume of information will be generated every 60 minutes.

•People are sharing information ever more frequently. The pieces of content shared on Facebook have increased from 140 million in 2009 to four billion in 2011. We are even sending more e-mails: 50 billion were sent in 2006, versus 300 billion in 2010.

• The result, according to Mr. Milner, is the dominance of Internet platforms relative to traditional media. "The largest newspaper in the United States is only reaching 1 percent of the population." he said. "That compares to Internet media, which is used by 25 percent of the population daily and growing."

• Internet businesses are much more efficient than brick-and-mortar companies. This was one of Mr. Milner's most striking observations, and a clue to the paradox of how we find ourselves simultaneously living in a time of what Mr. Milner views as unprecedented technological innovation but also high unemployment in the developed West. As Mr. Milner said, "big Internet companies on average are capable of generating revenue of $100 million per employee, and that compares to 10 to 20 percent of that which is normally generated by traditional offline businesses of comparable size." As an illustration, Mr. Milner cited Facebook, where, he said, each single engineer supports one million users.

• Artificial intelligence is part of our daily lives, and its power is growing. Mr. Milner cited everyday examples like Amazon.com's recommendation of books based on ones we have already read and Google's constantly improving search algorithm.

• Finally — and Mr. Milner admitted this was "a bit of a futuristic picture" — he predicted "the emergence of the global brain, which consists of all the humans connected to each other and to the machine and interacting in a very unique and profound way, creating an intelligence that does not belong to any single human being or computer."

More than most of us, Mr. Milner understands that changes in what he calls "the offline world" can have real bite: He lived through the collapse of the Soviet Union, and the politics and economy of Russia today are no cakewalk. But, in a year that has seen the Arab Spring and the threat of the collapse of the euro, Mr. Milner's predictions are an important reminder that the most significant revolution may be happening in cyberspace.

Chrystia Freeland is global editor at large at Reuters.

Facebook's New Strategy to Turn Eyeballs Into Influence

September 22, 2011 at 6:00 AM

SAN FRANCISCO — Facebook, the Web's biggest social network, is where you go to see what your friends are up to. Now it wants to be a force that shapes what you watch, hear, read and buy.

The company announced new features here on Thursday that could unleash a torrent of updates about what media choices Facebook users are making: Frank is watching "The Hangover" on Netflix, Jane is listening to a Jay Z song, and so forth. The idea is that those updates will act as guides for those users' friends, influencing tastes and purchases.

Facebook is not becoming a purveyor of goods, like Amazon.com or Apple. Instead, by teaming up with companies that distribute music, movies, information and games, it is positioning itself to become the conduit through which news and entertainment is found and consumed. Its new partners include Netflix and Hulu for video, and Spotify for music.

"We think it's an important next step to help tell the story of your life," said Mark Zuckerberg, Facebook's chief executive, who unveiled the new features at the company's annual conference for developers. He called what Facebook was doing an effort to "rethink some industries."

For companies that distribute entertainment content, a partnership with Facebook can draw eyeballs and subscribers. For Facebook, the potential payoff is huge, especially as it seeks to make itself more valuable in advance of a possible public offering. It can reap even more data about consumers' habits and desires, which in turn can be used to sell more precisely customized advertising.

The site's evolution could make it easier for Facebook users to decide how to spend their time and money. But it could also potentially allow them to shut out alternative viewpoints and information that is not being shared among their social community on Facebook.

As of May, Americans spent more time with Facebook than with the next four largest Web brands combined, according to Nielsen. Erik Brynjolfsson, a professor at the M.I.T. Sloan School of Management, described Facebook as "sort of a walled garden" that, for better or worse, can increasingly filter every other activity on the Internet.

"As Facebook becomes more and more synonymous with the Internet experience, that is going to benefit Facebook shareholders," Mr. Brynjolfsson said. "Facebook has been very successful in getting the lion's share of people's time and attention. Their challenge in the coming years is to convert that dominance in time and attention into a bigger share of consumer wallets — a bigger share of money they spend either directly on Facebook or indirectly through advertising."

Other Internet giants have enviable assets of their own. Google has a mountain of data based on how people search — and now, a growing social networking presence in Google+. Amazon knows plenty about what you might want to buy, based on what you've bought. But no other technology company has Facebook's huge trove of "social" data. It has 750 million users, half of whom return to the site every day. It also has the information they reveal about themselves, sometimes unwittingly. With it, Facebook has the ability to leverage peer pressure at a grand scale, using the recommendations of friends to channel what its users do.

Facebook executives describe their efforts as upending the traditional model of marketing. Rather than just helping people buy what they need, they aim to curate what they might want.

Facebook's partnersnip with Zynga, maker of the popular game FarmVille, illustrates how it can leverage its platform. The partnership has been enormously lucrative for both companies.

Whether that model can be replicated with movies, music or even news remains to be seen. For entertainment companies, it is still unclear how valuable a Facebook "like" is in drawing audiences to movie theaters or getting them to buy a concert ticket.

Still, Facebook has become unavoidable for the entertainment business. Hollywood increasingly realizes the power of peer recommendations to sell movies and television shows — some in the industry call this the "killer gateway."

Studios have long looked at Facebook as an important marketing tool, setting up pages for characters and movies. They have also been experimenting with offering full movies on the site. Warner Brothers, Miramax and Lionsgate have all allowed Facebook users to watch movies paid for with Facebook's virtual currency, called Credits.

Now the studios are expecting the Facebook platform to let them connect even more directly with customers — to grab a Facebook user's attention by telling her that her friend has watched a particular television show.

"Any time entertainment content is valued — and that is what is happening here as Facebook looks to keep users on its site — is a huge benefit to us," said one senior studio executive, who spoke on the condition of anonymity because he was not authorized to discuss Facebook's plans. "The ability to go deeper on a platform of Facebook's scale and have a better opportunity to sell to your customers is extremely exciting."

The plan to share movie-viewing habits faces a legal stumbling block. A law called the Video Privacy Protection Act prohibits publicizing what movies an individual is renting. That law would have to be lifted before that information can be shared openly on Facebook in the United States, so the company is introducing the feature elsewhere for now.

By teaming up with digital distribution companies, Facebook has also figured out how to stave off risk. For instance, in the music business, Facebook is not expected to directly license content from record companies, an expense that has toppled many start-ups.

Ben Sisario and Brooks Barnes contributed reporting.

Facebook Makes a Push to Be a Media Hub

September 22, 2011 at 6:00 AM

SAN FRANCISCO — Facebook, the Web's biggest social network, is where you go to see what your friends are up to. Now it wants to be a force that shapes what you watch, hear, read and buy.

Facebook executives describe their efforts as upending the traditional model of marketing. Rather than just helping people buy what they need, they aim to curate what they might want.

Facebook's partnersnip with Zynga, maker of the popular game FarmVille, illustrates how it can leverage its platform. The partnership has been enormously lucrative for both companies.

Ben Sisario and Brooks Barnes contributed reporting.

Facebook Is Expected to Unveil Media-Sharing Service

September 18, 2011 at 6:00 AM

For cloud-based digital music services like Spotify and Rhapsody, which stream millions of songs but have struggled to sign up large numbers of paying users, being friended by Facebook could prove to be a mixed blessing.

This week, according to numerous media and technology executives, Facebook will unveil a media platform that will allow people to easily share their favorite music, television shows and movies, effectively making the basic profile page a primary entertainment hub.

Facebook, which has more than 750 million users, has not revealed its plans, but the company is widely expected to announce the service at its F8 developers' conference in San Francisco on Thursday.

By putting them in front of millions of users, Facebook's new platform could introduce the music services to vast new audiences. "If it works the way it is supposed to, it would be the nirvana of interoperability," said Ted Cohen, a consultant and former digital executive for a major label.

But the new plan will ratchet up the competitive pressure on these fledgling services, forcing them to offer more free music as enticements to new users.

According to the media and technology executives, who spoke on condition of anonymity because the deals were private, Facebook has made agreements with a number of media companies to develop a way for a user's profile page to display whatever entertainment he is consuming on those outside services. Links that appear on a widget or tab, or as part of a user's news feed, would point a curious friend directly to the content.

Spotify and Rhapsody, along with their smaller competitors Rdio, MOG and the French company Deezer, are said to be among the 10 or so music services that will be part of the service at its introduction; Vevo, the music video site, is another. A Facebook spokesman declined to comment, and media executives cautioned that details of the plan could change.

Spotify is the largest of these services with more than 10 million users, according to its most recent reporting. The service began in Europe in 2008 and arrived in the United States in July, after protracted negotiations with the major record labels over its "freemium" structure, which lets people listen to music free, with advertising, or pay $5 or $10 a month for an ad-free version.

Rdio and MOG, which charge $5 and $10 a month for subscriptions, announced free versions last week in an effort to compete with Spotify. And Rhapsody, whose service costs $10 and $15 a month, has just introduced an array of social features centered on Facebook.

The companies declined to answer questions about Facebook's media platform. And David Hyman, MOG's founder and chief executive, said that the development of his company's free tier far predated Spotify's entry into the United States.

But Mr. Hyman said that the change was being made to reduce the "friction" a nonsubscriber experiences when following a link posted by a paying user. Instead of hearing the song, the nonsubscriber would reach a page asking to sign up with a credit card — an annoyance for many potential customers.

"In the Internet world, any minuscule piece of friction blows people's minds," he said.

MOG provides new users with a "gas tank" of free music — supported by advertising — that increases with that user's social activity on the site, like sharing playlists or inviting friends. Rdio's free music will come ad-free.

Neither company would say exactly how much free music would be made available.

"We don't want to force you to look at or listen to ads that will distract you from enjoying music," said Carter Adamson, Rdio's chief operating officer, "and we don't want you to spam your friends to get more free."

But even free music requires royalty payments to record companies — typically some fraction of a cent per stream — and some investors and technology executives are concerned that Facebook's platform may bring in large numbers of users who are willing to listen to some free music but are not being given much incentive to subscribe. That might make success more difficult for services that have less favorable deals with record companies.

David Pakman, a partner in the venture capital firm Venrock and a former chief executive of the digital service eMusic, also said that instead of giving smaller companies a boost, the mathematics of Facebook's hundreds of millions of links might simply allow the largest service to dominate all the others.

"It favors the big over the small," Mr. Pakman said. "It's a good thing for all services in that it lets them all participate. But the small guys will lose network effects, and the big guys will gain it."

Spotify has not updated its user numbers since arriving in the United States, but music executives say it quickly drew more than 100,000 customers to its paid service alone.

MOG and Rdio have not reported their numbers, but music executives say their tallies are well under 100,000.

Not all the services involved in the Facebook platform are going free. Rhapsody, which was founded 10 years ago and has 800,000 subscribers, is sticking to its monthly subscription rate, said Jon Irwin, the company's president.

"Our belief is that the cost of the content cannot be fully offset by the advertising dollars you can generate," Mr. Irwin said, "and that the subsequent conversion of somebody to a paying subscriber because they've been able to listen to content for free on a desktop is not at a level that supports the losses you'll incur on the advertising side."

Mr. Irwin also believes that Facebook will further intensify the competition among the cloud services, and that Spotify and his own company will have the advantage.

"It's going to be hard for the players not at scale to survive," he said. "You're looking at a two-horse race."