Forecast Error is a Fact of Life

Having spent some time doing market research and making forecasts about how much money is going to be spent, on what, in the future, one learns humility. Sometimes forecasters underestimate a growth trend, but that is fairly rare. The biggest misses I can recall in my professional career were in the early days of the Internet, where I think it is fair to say nearly everybody underestimated growth, usage and revenue potential. 

These days we have the more-typical problem, which is overestimating growth. Most of the time, forecasters are wrong about the magnitude of change, even when the basic trend is correct. Sometimes we get the trend wrong, as well, but the big variances normally are on the "magnitude of change" dimension. 

There are lots of reasons for this apparent built-in bias. In economics, a discipline too few of us pay serious attention to, statements are formally or implicitly made "ceteris paribus" (all other things being equal). In the real world, almost nothing is every really going to remain equal. 

Forecasters cannot account for the timing of economic expansions and slowdowns, wars, oil shocks, technological or business breakthroughs and other exogenous variables that shape real-world trends. And as basic as our spreadsheets have become, we can't really model more than two dimensions of change. 

I have long suspected that there is another bias working, though. Some people fund and buy research because they really want to know what might, or will, happen. It tends to be my experience, though, that many research buyers spend money for other reasons. Sometimes a forecast is a useful way of "covering your ---" when a decision already has been made. 

Often, it is an argument for pursing one avenue of investment versus others that have competing stakeholders. In such cases, more robust numbers are better. The sets of stakeholders will look for validation that their approach offers the bigger financial return. 

In some cases, robust growth statistics are needed to attract or retain capital investments. Small number do not help in that case. I'm not saying numbers routinely are "cooked." But when a client clearly wants to hear good news, one always can make reasonable assumptions at the upper end of reasonable bounds, rather than the lowest or median reasonable assumptions.

The other issue is that most forecasts cannot take into account other competing demands on resources. A given product or service could reasonably be expected to grow at certain rates if it proves popular with buyers. What cannot typically be modeled is the impact of alternate products or services that real-world buyers spend money on. 

Appetites are infinite. Budgets are not. If all growth forecasts for all products and services are tallied at one time, the result typically is that projected demand that far outstrips reality. Not all the goods and services everyone models can be bought at the predicted levels because there isn't that much aggregate demand in the whole economy. 

About all one can say is that, providing these competing claimants for spending do not "suck up all the oxygen in the room," demand for a particular product, over a specific time frame, could reach certain levels.

It appears a garden variety "ceteris paribus" explanation is at work with Internet advertising forecasts that researchers now are suddenly revising in a lower direction. Without explaining why, researchers at SNL Kagan recently downgraded U.S. cable industry advertising growth rates for 2009, but then assume growth at the former rates after 2010. 

Likewise, JP Morgan analyst Imran Khan now sees domestic online display advertising growing only 14 percent to $8.2 billion in 2008 (compared with his prior forecast of 20 percent growth to $8.6 billion), and growing 16 percent to $10 billion in 2009. Search ad spending also will grow at a slower 27 percent rate, down from an originally forecast 32 percent. International online ad-spending rates also have been similarly lowered.

Nobody can adequately incorporate macroeconomic variables, or demand shifts, into forecasts. Should forecasters permanently lower uptake expectations? No. The shift will continue, away from legacy formats and towards "targeted" and quantifiable online subsitututes. But one cannot adequately take into account unplanned real-world events, especially of the growth-stunting sort. It's simply a hazard of the business.

What is Google, These Days?

Sometimes there is no good way to describe a company except by long clumsy strings of words. How does one discriminate between service providers who own facilities from those who do not; who own different kinds or amounts of facilities; who operate in different customer segments. Worse, how does one describe companies whose business ambitions and scope defy simple explanation, or operate in multiple categories, some of which do not seem to have widely-understood names, yet?

In other cases, shorter tags can be used, but are imprecise. Gvien that all the growth in the cable TV business is in voice and data, plus small business and even, in some cases, in enterprise services, does calling them "cable" companies, referrring to their use of physical access media, or "cable TV" companies, referring to their legacy business, make sense?

Google causes us those sorts of problems. Journalists and bloggers often use shorthand such as "search giant." But Google already operates in more important segments and businesses than that. Now it's into browsers, cloud computing infrastructure, mobile phone operating systems, advertising placement systems, video, wikis, email, blogging, software as a service, messaging and other applications including collaboration. 

It's part media company, part advertising services provider, part software company, part computing utility. And to say it is a "software" company belies the customer segments and types of software it creates. If you are somebody who thinks the most-valuable asset is knowledge about what people are doing--right now--and what they are interested in, that's one way of describing what Google does, in its totality. It creates software for people to use at least partly to create knowledge about what they do, who they know and what they are doing now. 

That then creates the ad-based revenue streams that so far have been the foundation for its business model. So in a broad sense, Google creates software people really like to harvest the analytics and monetize that capability. But that's hard to capture in a simple adjective. Harder still is to figure out what Google is, so the search for an appropriate adjective can begin. 

iPhone Shopper Demographics Changing

There is no doubt that Apple iPhone users are atypical of most mobile phone users. They are younger, more technologically savvy and richer. In July 2008, people checking out the iPhone on AT&T's Web site were about 40 percent more likely to have an income of $100,000 or more, compared to the typical wireless shopper. 

At annual income levels below $59,000, iPhone shoppers were about 25 percent less likely to be looking. In the $60,000 to $100,000 annual income bracket, iPhone inquires were just about the same as the "average" mobile phone inquirer.

That suggests the next big surge of usage will be concentrated in the ranks of users with incomes in that $60,000 to $100,000 range. It is not yet a truly "mass market" device, yet. But there are some signs of change. 

Social Networking: Glass Half Full

More than one-half of adults surveyed in 17 countries do not know what social networking is, according to Synovate. The company surveyed 13,000 consumers in Brazil, Bulgaria, Canada, France, Germany, India, Indonesia, Japan, the Netherlands, Poland, Russia, Serbia, Slovakia, South Africa, Taiwan, the United Arab Emirates (UAE) and the United States if they were familiar with social networking.

U.S. 3G Catches European Penetration Rates

comScore reports that the United States has caught up with Western Europe in the adoption of third generation wireless subscribers.  Some 28.4 percent of American mobile subscribers now have 3G devices compared to 28.3 percent in the largest countries in Europe. The number of U.S. subscribers with 3G enabled devices has grown 80 percent to 64.2 million during the past year. 

Chrome Gaining Share?

Google's Chrome, just a few days into beta launch, already owns one percent of the Web browser market. Apple's Safari browser has 2.4 percent share. It isn't clear how much of that share is people test driving Chrome, and who may decide to stick with their default browser. At Silicon Alley Insider, about six percent of visits on Sept. 4 were from Chrome browsers, about 41 percent from Firefox browsers.

On one of my blogs, between Sept.2 and Sept. 3, 2008, Chrome browsers represented more than five percent of visits. About 49 percent were Internet Explorer while 40 percent were Firefox browsers. Safari users were about four percent. 

FCC Acts on Potential Interference Issues

The Federal Communications Commission has ordered a freeze on the granting of any equipment authorization requests for wireless microphones that would operate in any of the 700 MHz Band frequencies. In addition, the FCC is considering a ban on any wireless microphones operating in the space. The issue, as often is the case for licensed spectrum holders or prospective holders, is signal interference.

The spectrum in question is in the over-the-air band corresponding to broadcast channels 2 through 51, which will be converting to digital broadcasting next February 2009. To avoid local interference with broadcast TV signals, wireless microphones would be restricted to the guard bands between each of the 6-MHz channels.

Many of you who attend conferences might have discovered that Research in Motion BlackBerries cause significant interference with wireless microphones, enough so that audiovisual personnel always will ask for speaker or panelist BlackBerries to be turned off. Potential interference also has been an issue with various tests of "white spaces" between TV channels as well.