While I thoroughly enjoyed my time as a Wall Street analyst, compliance issues hampered my ability to blog on SecondShares.  Now that I’m back angel investing, I look forward to sharing thoughts and analysis on the social and mobile companies I refer to as “Second Internet” companies.  Just as first internet companies disrupted the offline leaders (e.g. Amazon v Walmart), Second Internet companies that are BORN social, will disrupt incumbent firs internet leaders.  I first outlined my thesis in the only real deep thought piece I wrote “The Second Internet“, I have continued to evolve the thesis in a deck I also call “The Second Internet“.  While the deck is meant to be given live (which I love doing, as it’s such a fun dynamic topic to discuss), a lot of value can be derived by reviewing the slides.   Enjoy the deck, share it, and I look forward to future posts.

The Facebook auction that took place on Wednesday cleared at a price of $31.25, flat versus last week, and implying a value of $77.2 billion.

Facebook had traded at its high of $31.50 for four straight weeks, beginning on March 9^th, before moving down slightly.  The high price of $31.50 implied a value of $77.8 billion.

Figure 1: Facebook Shares Trading at $31.25, Implying a Value of Just over $77 BN

Source: Company data, Wedbush Securities, Inc.

Guest Post by Todd Marks, CEO viaPlace

Historically, games were always a social activity.  This began to shift in the 1970s, when arcade games became prevalent and with the introduction of PCs and game consoles, game play became a largely an individual experience.

Today, powered by technology advances and prevalence of social websites like Facebook, digital gaming is reintroducing the social experience into gaming and masses are embracing the shift.  AdWeek’s Mike Shields recently posited that the widespread adoption of social gaming is behind the demise of the soap opera, noting, “When Zynga… arrived on the scene in 2007, both All My Children and One Life to Live were averaging a 1.9 rating among women 25-54.  By 2011 the two shows were averaging 1.3 and 1.4 ratings respectively in that key viewer group. The drop is even steeper for other demographics.”

The newest trend is that digital social gaming allows users to digitize traditional games from the physical world and enhance the social nature of the games by leveraging mobile devices.

Our company, viaPlace, has built a framework to deliver Location Based Services, Augmented Reality, and Social Gaming to mobile applications.  We recently released “TAG”, a game of elimination that has traditionally been played across college campuses using low-tech devices like water guns. Players compete to find and “tag” assassination targets until there is only one player remaining. viaPlace transformed “TAG” into a high-tech game leveraging mobile devices using their digital cameras for the “tag shot.”

Within the game, players also utilize the foursquare check-in API to broadcast their current location at set intervals to help assassins hone in on their targets.  However, this is not just used to seek out potential Targets to “tag.”  By using a Game Wall that aggregates all player activity, locations and comments, TAG increases social engagement across all players both within the game, and in the real world.

Figure 1: Smartphone Usage Leading to a Revolution in Social Gaming

Source: viaPlace

The thirst for social mobile gaming is evident in the growing popularity of mobile games and of the platforms that support them.

Flurry, a mobile application analytics engine, reported in February that 26 million unique users play social mobile games more than 25 minutes a day on average.

Figure 2: Games Dominate iPad Apps

Source: Flurry

Additionally, mobile gaming networks such as OpenFeint enhance mobile games by providing social components via leaderboards and connecting gamers over the Internet.  Last month the network surpassed 73 million registered users, adding new users at a rate of over 4 million per month.  The company currently has over 4,000 combined titles for iPhone and Android including some of the best-selling mobile games of all time, such as Rovio’s Angry Birds which alone recently crossed 100 million downloads.

The biggest reason social gaming has leapt to mobile platforms is because the technology is finally there to support it, providing a better experience than the previous platforms.  Smartphones, in addition to mobile Internet connectivity, now include capabilities such as Augmented Reality, Location Based Services, Near Field Communication, Face Time Communication and Gyroscopic Everything, which have opened the door to a host of newer and cooler games users can play.   Eric Schmidt, Google’s former CEO, recently pointed out that Smartphone utilities are “Augmenting Humanity” with global mobile traffic growing 260% in 2010.

– Guest Post by Todd Marks, CEO viaPlace

From the time we began tracking the social gaming sector in April 2010, the three largest developers in terms of aggregate MAUS have remained at the top.  Zynga has extended its lead growing users 7% since we began tracking in April 2010.  We also note, two weeks ago, John Schappert, left his position as COO of Electronic Arts to join Zynga.  Schappert had been at EA since June 2009.

Of the developers, Wooga has made the most significant increases, growing another 25% from last month and ascending to the fourth spot powered by the success of Bubble Island, Monster World, and Diamond Dash.

Figure 1: Change in MAUs Since April 2010 for the Top 10 Facebook Game Developers

Source: Wedbush Securities,  appdata

Of the top ten titles, Zynga has developed seven with its Cityville capturing almost twice as many active users as the number two title, Zynga’s Farmville.

Figure 2: Zynga Boasts 7 of top 10 Gaming Titles

Source: Wedbush Securities, appdata

Another notable occurrence in the Facebook app ecosystem is the emergence of the dating app by Badoo as the second biggest application on the Facebook platform, with over 57 million monthly active users (MAUs).  When Badoo ascended to the number two spot last month, passing Farmville in terms of MAUs, it became the first time in over a year that Zynga apps didn’t control the top two spots.

Badoo was on a trajectory to likely surpass Cityville and become Facebook’s largest app had Facebook not worked with Badoo to alter some of the more viral elements of the app.

Figure 3: Badoo Dominates Non-Gaming Apps

Source: appdata

RENREN IPO 30 TIMES OVERSUBSCRIBED

On Wednesday May 4, China-based social networking company Renren IPO’d to raise almost $750 million.  The IPO was priced at the high end of the range at $14 ($12 to $14), after the price range was revised 30% higher a week earlier due to high demand.

Renren’s net revenues were $76.5 million in 2010, up 64% from $46.7 million in 2009 and up from $13.8 million in 2008.  Renren had a net loss in 2010 of $64.1 million, down from $70.1 million in 2009.  The IPO valued Renren at $5.5 billion, or 67 times 2010 net revenues (Goldman Sachs-Facebook funding was priced at 25 times estimated 2010 revenues), and we estimate that the IPO pricing valued Renren between 20 to 25 times 2012 revenues.

The Renren book was 30 times oversubscribed, and even after the resignation of the head of the audit committee and revision of its unique user numbers leading up to the offering, the book held together with very few accounts dropping out.  Based on the tremendous amount of demand, the allocations had to be limited to many accounts.  We note that 3 to 4 times covered is typically considered a good deal and recent Chinese IPOs have been 10x covered

Money has poured into Chinese Internet companies as the country is currently adding 10 million Internet users every month to a current Internet user base of 457 million (still only 34% penetration).  In addition to this massive user base, China’s online advertising market is growing rapidly with estimates that it will triple to almost $13 billion by 2014 (roughly 14% of the global online revenue estimate).  In addition to the growing digital advertising opportunity, China’s social gaming market is thriving with an estimated gamer population in excess of 300 million, producing revenue of $4 billion (roughly double the U.S. market).

Figure 1: China’s Online Ad Market Expected to Triple by 2014

Source: Renren via Mashable

Figure 2: Chinese Second Internet Landscape — Chinese Internet Companies & Their U.S. Counterparts

Source: Ogilvy

Guest Post by Erik Ober, Founder & CEO Booshaka

In January, Facebook quietly released what might become the most innovative and effective advertising product of all time — Sponsored Stories.  The new ad unit converts a user’s activity, such as “Liking” a page or using an app, into an interactive sidebar placement that can be promoted to a user’s friend network.  Essentially, Facebook has developed a way to turn its inventory of Facebook postings into word of mouth recommendations and trusted referrals ─ the holy grail of organic, bottom-up marketing.

What’s the power of Sponsored Stories?  It’s the trusted source ─ your friends, your social graph.  I’ll give you a personal example.  A month ago, I saw a Sponsored Story ad that promoted my best friend’s purchase of a 50% off Groupon to a pizza shop down the street from where I live.  I immediately clicked through and bought the same deal.  I never click on ads and I never spontaneously purchase anything.

While Facebook reported that its internal tests showed increased brand lift, engagement and ad recall, there wasn’t any conclusive evidence of how much better Sponsored Stories performed than standard ad units ─ until now.  TBD Digital, an Ads API service provider, recently revealed that in a 10 day, 3 client, 2 billion impression test, Facebook’s new Sponsored Stories ad units received a 46% higher click-through rate, a 20% lower cost per click, and an 18% lower cost per fan than Facebook’s standard ad units.

Figure 1: Sponsored Stories Yielded a 46% Higher CTR, a 20% Lower CPC and an 18% Lower Cost per Fan

Source: TPD Digital

Even in its early stages, the data indicates that Sponsored Stories deliver a significant increase in effectiveness and engagement.  For the first time, Facebook has an ad product that takes full advantage of the platform’s inherent strength – the social graph – to offer a format that is absolutely unique and unavailable in traditional search and display.

For brands, the one major constraint to utilizing Sponsored Stories is that consumer expression determines the available inventory to serve these high performing personal endorsements.  Marketers are taking notice of this transformative shift.  Joe Tripodi, CMO of Coca Cola, recently wrote, “Impressions only tell advertisers the raw size of the audience.  By definition, impressions are passive.  They give us no real sense of engagement, and consumer engagement with our brands is ultimately what we’re striving to achieve.  Awareness is fine, but advocacy will take your business to the next level.”

It has never been more important that your brand is part of the conversation and at Booshaka, we help brands and businesses optimize consumer engagement and advocacy on Facebook.  We rank and classify fan activity on Facebook Pages so that fans can be recognized and rewarded for their contributions.  One of our customers, OneHope Wine, recently tripled the level of engagement and advocacy on their Facebook Page over a period of one month using the Booshaka platform.  Our customers use Booshaka to cultivate this inventory and make sense of it.

To date, we’ve indexed 1.5 million Facebook Pages and 70 million unique Facebook Users.  We only process a percentage of those Pages regularly but we’re tracking over 50 million daily public interactions that could potentially be leveraged for targeting and Sponsored Stories.  By our estimation, there is at least a daily total inventory of 20 billion stories to be promoted.

Social advertising is already a big business and we expect that it will grow rapidly in the years to come.  As the Facebook Platform continues to extend its reach through the rest of the web via API integrations and social plugins, the rumored introduction of an off-site Facebook Ad Product is only a matter of time.

Due to the high performance of Sponsored Stories, we will see a transformation in which publishers switch from Google and other ad networks to try the new format.  From our vantage point, Facebook looks to dominate the online display-advertising market as it balloons to a $100 billion annual opportunity over the next several years.

– Guest Post by Erik Ober, Founder & CEO Booshaka

FACEBOOK DOMINATES DISPLAY ADS & INNOVATES PRODUCT TO REFLECT 2^nd INTERNET ETHOS

The Unilever campaign is an example of brands increasing experimentation with and utilization of social media.  This migration to social media platforms is reflected in Facebook’s sizable market share gains in display advertising impressions, with comScore reporting that in Q1 2011, Facebook served over 346 billion ad impressions or more than 31% of all U.S. display ads, a figure nearly double the company’s impressions served in Q1 2010 when it accounted for just over 16% of the U.S. display market impressions.  Looking at the top ten, Facebook served 20%+ more ads than the other nine leading sites combined!

As Carolyn Everson, who recently left her post as Microsoft’s head of global ad sales to run sales for Facebook, notes, “Everyone is really eager to partner with Facebook, and I see tremendous interest in Facebook, more interest than in any other company I’ve worked for ─ and that’s why I joined. The companies are asking for help in how to bring their brands to life.”

Figure 1: Facebook Display Advertising Share Increasing as Company Increases Share of Eyeballs

Source: comScore

We believe advertisers will continue to increase their spend on Facebook as the platform becomes increasingly ubiquitous, as brands become increasingly comfortable with social media, and as Facebook continues to improve the tools available to advertisers.

Facebook’s advertising is still in the embryonic stages and the company is innovating to enhance the experience for advertisers.  Last week we discussed their rollout of Facebook-Studio, a stand-alone community site that allows advertisers to share the work they’re producing on Facebook and gain inspiration from viewing successful examples from their peers.

This week, Facebook released enhancements to its advertising analytics tool with an increased focus on social metrics, incorporating new columns like “Social Reach”, defined as the absolute number of people who saw an ad with social context (names or pictures of friends who connected with the ad’s destination), and “Connections”, defined as social actions triggered by an ad, including Page Likes, application installs, and Event RSVPs.

Figure 2: Facebook’s New Advertising Analytics Tool Emphasizes Second Internet Metrics

Source: InsideFacebook

Facebook sits in the center of the Second Internet and we are encouraged that the company is evolving its advertising product to reflect the unique attributes that define this ecosystem.  We believe that this strategy not only clarifies the core value to advertisers, it also encourages the creation of advertising campaigns that can enhance, rather than diminish, the user experience.

Figure 3: Second Internet Attributes

Source: Wedbush Securities, Inc.

Their efforts appear to be paying off as users are increasingly interacting with brands on Facebook.  In a proprietary survey we conducted in April with 2,500 Internet users, 59% of Facebook users stated that they had “Liked” a company/brand, up from 51% when we polled in November 2010 and 47% when we polled initially in September 2010.  Interestingly, the increased interaction was spread across all age demographics, with users over 55 showing the greatest increase (up 19% since our first poll in September).

Figure 4: Our Survey Finds Facebook Users Are Increasingly “Liking” Brands

Source: Wedbush Securities, Inc.

In addition to Facebook getting better, advertisers must also improve at leveraging the platform to its fullest.  Search Engine Optimization (SEO) company BrightEdge found that less than one-third of the top 200 brands in the Fortune 500 had Facebook pages that appeared in the first 20 Google results for the brand’s name.

Figure 5: Brands Are Still Learning How To Optimize Facebook Pages

Source: eMarketer

In addition to SEO for Facebook pages, in our Second Internet report, Matt Monahan, Director of the social advertising technology company, EpicSocial, suggested that savvy advertisers should increasingly prioritize News Feed Optimization (NFO).

As Monahan explained, Facebook has an algorithm called EdgeRank that surfaces the most relevant content to the top of the newsfeed.  The exact details of the EdgeRank algorithm are known by few, but the two major drivers of relevance between brands and fans on Facebook are the number of fans a brand has relative to other brands in its category and the post quality score of the brand’s content published through their fan page. On Facebook, post quality score is a 7-day rolling average of likes, comments, and shares of content distributed through the fan page to fans.  It’s important that brands maintain leadership in their category in terms of fan number and post quality.  The newsfeed is a powerful communication tool capable of creating earned media value, cost avoidance and driving sales for brand marketers.

In other news, EpicSocial, along with Sharethrough, SocialVibe, and SuperSonicAds, have been announced as initial test partners for a new Facebook program that enables brands to reward users with Facebook Credits for watching sponsored videos.   Now, brands can buy and distribute Credits to their target audience in exchange for their time, attention, and feedback.   Users can spend Facebook Credits on virtual goods within Facebook games like Farmville and on Facebook Deals.

Says Monahan, “The Facebook Credits program improves the value proposition of the platform and will be a driving force behind brand dollars currently being spent on TV shifting to Facebook.   We expect increased attention to this offering as a result of the predictability, target-ability, and ultimately, the ease through which social audiences can be delivered to branded video content through the Facebook Credits program.”

Figure 15: New Facebook Program Allows Brands To Buy & Distribute Credits to Target Audience To Incentivize Interaction

Source: Company data

SOCIAL MEDIA BREAKS THE NEWS; AUDIENCE FLOCKS & ADVERTISERS TAKE NOTICE

Last Monday at 10:25 PM EST, Keith Urbahn, a former aide to Donald Rumsfeld, tweeted:

Figure 1: The Tweet Read ‘Round The World

Source: Twitter

From 10:45 PM – 2:20 AM EST, 27.9 million tweets were generated, breaking the record for the highest sustained rate of tweeting at an average of 3,000 Tweets Per Second (TPS).  During President Obama’s address, the rate of tweeting peaked at 5,106 TPS.  Notably, the record rate is 6,939 TPS which took place at New Years 2011 in Japan (a country with advanced smartphone technology).

YouTube views of President Obama’s speech exceeded 5.5 million views (his White House Correspondents Dinner speech got 7.2 million in five days, the most ever for a Presidential speech).

Figure 2: News of OBL’s Death Yielded Highest Sustained Rate of Tweeting Ever

Source: Twitter

While Urbahn’s tweet spread viral news of Osama Bin Laden’s death, Sohaib Athar aka @ReallyVirtual had actually “broken” the story hours earlier, unknowingly live-tweeting the raid from his first person vantage point in Abbottabad, Pakistan:

Since his tweets were discovered, @reallyvirtual’s Twitter account surged to over 100K followers, from less than 100, and prompted the IT consultant to release a humorous FAQ page where he could direct countless inquiries.

The previous week witnessed another occurrence of social media’s growing impact on real world events.

Mainstream media took advantage of the content being produced through social media by integrating the user-generated content during the royal nuptials.  Most notably, ABC broadcast the royal wedding live direct from its Twitter feed, while attempting to create an interactive experience between social media and its broadcast.

Figure 5: While The Internet Loved The Royal Wedding, The Flower Girl Was Less Enthused

Source: Today.com

ABC and Twitter came up with hashtags such as #RoyalSuccess and #RoyalMess to describe people’s reactions to dresses and to describe the #RoyalKiss.  Messages posted on both Facebook and Twitter were read from the screen, and a TwitterTracker was used to gauge user engagement in different aspects of the coverage.  As an ABC News executive commented, “Social media isn’t a novelty anymore, and you can’t treat it as such.  It’s not something you can even just do.  You have to constantly iterate and push things forward, and that’s what we’re trying to do.”

Figure 6: ABC Integrated Social Media To Provide More Complete Coverage of The Royal Wedding

Source: Twitter

Large scale planned events like the Royal Wedding or the Super Bowl attract new users to social media platforms and encourage enhanced interactions as users congregate to engage with the event.

Additionally, advertisers are increasingly embracing social media to insert their brands into the conversations around these major events.  We were particularly impressed by Unilever’s Magnum Ice Cream usage of the #RoyalWedding hashtag.

When Twitter users clicked on the #royalwedding hashtag, they were directed to the day’s Promoted Trend, which was sponsored by “Magnum Ice Cream.”  Clicking on “Magnum Ice Cream” then directed Twitter users to Magnum’s Facebook page (which now has over 1 million fans).

Figure 7: Unilever’s Magnum Ice Cream Social Media Campaign Yielded Massive Earned Media Impressions

Source: Facebook

Figure 8: Unilever’s Promoted #RoyalWedding Significantly Outperformed @ClarenceHouse’s #RW2011

Source: Twitter

Figure 9: Unilever’s Campaign Has Resulted In Owned Audience Which the Company Can Reach & Impact

Source: Klout