Don Dodge on The Next Big Thing

No recession in the technology sector

Technology buyers say they will continue to invest according to a story from The New York Times. Microsoft reported record earnings last week, and Chris Liddell, Microsoft CFO, gave stock analysts strong "guidance" for the coming year, saying “We have not seen any significant spillover for an economic slowdown in the U.S.”

The NYT article cites an IDC study and concludes; "There will surely be belt-tightening, and cuts may be sharp in some industries, especially the financial sector. Overall growth in technology spending may fall from 7 percent last year to 4 percent or less this year, according to estimates by IDC, a research firm."

Erick Schonfeld at TechCrunch predicts that a tight economy will actually benefit Web 2.0 companies and SaaS based software. Erick says

"While a belt-tightening might not be good for the IBMs, Dells, and Oracles of the world, Web 2.0 companies should do fine—even thrive. All of those Enterprise 2.0 startups out there, or even Amazon trying to sell Web-based computing infrastructure, are actually at an advantage. Customers are more likely to try cheap cloud computing when they can no longer afford the alternatives."

What about advertising? A few weeks ago I asked "Will Advertising Revenues Drop In A Recession?"  Marketing and advertising is usually the first thing to get cut when the economy sours. Display advertising will probably feel the pinch, but online Cost Per Click (CPC) ads will look more attractive to advertisers.

With CPC ads you pay nothing unless someone clicks on your advertisement. This is a huge advantage for advertisers who really want to increase sales but can't afford to gamble on a display ad. CPC ads are easily justifiable and trackable. In a recession, with declining sales, there is enormous pressure to do anything possible to get sales moving. CPC advertising, principally on search engines, will be very appealing to advertisers.

Google and Yahoo report earnings this week. Of course these earnings will cover the 4th quarter of last year. What analysts really want to hear is their outlook or "guidance" for the coming year.

Apple reported great earnings last week, but said the future looked soft. Apple stock was crushed by investors. Microsoft stock was up in a very down market. One thing about the stock market...every day is a new day. Last week doesn't matter. The stock market is always looking forward.

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Will advertising revenues drop in a recession? Who will win and who will lose?

In business it is commonly understood that advertising is the first thing to be cut in a business downturn or recession. Henry Blodget, former Wall Street Internet stock analyst, believes we are headed for a deeper recession and that advertising, even web advertising, will be hurt. My take? Advertising in general will fall, but CPC Internet advertising will increase.

Display advertising will be hurt

Newspapers will be the first to feel the pain. Newspapers are already getting hammered and it is only going to get worse. TV and Radio will also feel the pain, but to a lesser degree. Advertising mediums like these don't have good feedback mechanisms. It is really hard to accurately calculate how effective an advertising campaign has been. You pay your money up front and hope for the best.

Web based CPM advertising will be hurt too

Web based display ads and banner ads are the online equivalent of print display ads. The costs are substantially lower, but the results are still hard to measure. Cost Per Mil (CPM) ads are not well targeted like search advertising. There is also no user interaction like there is on Cost Per Click (CPC) ads. Big web sites like Yahoo, AOL, Cnet, Marketwatch, and others get most of their revenue from display/banner ads. Advertisers are likely to cut back first on print ads, and later on web based display ads.

CPC advertising could actually increase

With CPC ads you pay nothing unless someone clicks on your advertisement. This is a huge advantage for advertisers who really want to increase sales but can't afford to gamble on a display ad. CPC ads are easily justifiable and trackable. In a recession, with declining sales, there is enormous pressure to do anything possible to get sales moving. CPC advertising, principally on search engines, will be very appealing to advertisers.

A recession could accelerate the trend to web based CPC advertising.

The trend towards Internet advertising has been growing for years. Still, less than 10% of all advertising dollars are spent on the Internet, up from about 6% a few years ago. The trend will continue and probably accelerate with a recession. This is great news for search engines like Google, Microsoft Live Search, and Yahoo Search.

The Yahoo problem

Yahoo is a huge web destination with great traffic numbers. The problem is that most of their traffic (over 80% last time I checked) is generic, untargeted page views. Meaning, their traffic is to a Yahoo home page, Yahoo email, or some other generic content page. This traffic is hard to monetize effectively because it is not targeted. Search traffic is easy to target and commands very high advertising rates because it is so tightly targeted and effective.

Where is the opportunity?

Ad targeting technology that targets ads to the user, not the content they are looking at, will be a huge winner. Imagine if Yahoo, or any other big content site, could better target their advertising to users. They could go charge much higher prices for their CPM ads, and convert lots of generic page views into advertising dollars.

There are lots of companies working on this from lots of different angles. Quantcast is doing deep click stream analysis and layering on demographic data for better targeting. MatchMine is taking a different approach. By analyzing the content you like, and recommending more content like it, they build a profile to help you get better content, and help advertisers target their ads.

Behavioral targeting for advertising is already a hot area, and likely to get even hotter. Especially if an economic recession hits the advertising world.

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Who owns your data on Google, Facebook, Netflix?

The blogosphere is raging about Facebook's use of "my data". Doc Searls is promoting the idea of VRM (Vendor Relationship Mgmt) and says "Time to write our own rules".

The bargain you made in exchange for free services. Consumers sometimes forget the bargain they made in exchange for the free services. Sometimes it means your personal information can be sold or marketed. Other times it means your content is not really yours anymore. Sometimes it means you get to pay for additional services once you are hooked. Or maybe that the rules change over time and the service is unreliable. Most times things work out OK and consumers don’t complain too much.

Free services always come with strings attached, limitations, service outages, advertising, etc. Facebook seems to be attracting all the attention now, but do people realize what Google is doing with “your data”? Your search history…your click stream data…the sites you have visited? Do they understand what information DoubleClick has collected on “your data”?

Dave Winer says "I want control of my data" and states in part;

I want Netflix and Yahoo to give me an XML version of my movie ratings, for me to decide what to do with. I've been asking for this for a couple of years, I still don't have it. This is information I created. I want to keep a copy. I want to make sure that Netflix knows about all my Yahoo ratings and vice versa. I'd like to give a copy to Facebook (assuming they agree to not disclose it) and maybe to Amazon, so they can recommend products I might want to purchase (again keeping it to themselves). I want to begin a negotiation with various vendors, where I give them something of value, and they give me back something of value.

Being able to export your Netflix ratings or Facebook friends list is mildly interesting, but inconsequential when compared to what is happening with your real important data. Maybe Doc Searls, Dave Winer, and the rest of the blog cognoscenti should focus their cannons in a different direction?

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MacroMyopia overestimating the short term and underestimating the long term

There is a severe case of MacroMyopia spreading across the blogosphere. Today it is The Death of Email. Yesterday it was Inbox 2.0 - Email meets Social Networks. Macro-Myopia is the tendency to overestimate the short term impact of a new product or technology, and underestimate its long term implications on the marketplace, and how competitors will react.

Straight up and to the right - It is human nature to extrapolate the early success of a "new thing" to world domination, and to the death of the "old thing". Insert any variable for "new thing" like; Facebook, Twitter, Text Messaging, Open Source, Linux, YouTube...and you can finish the sentence with the death of the "old thing".

The best of both worlds - In most cases the early innovator of a product or technology wins some early success in a narrow market segment. The big winners come in later by incorporating the new technology into an existing product or service and creating a best of both worlds solution that appeals to a much broader market. I call this the "Innovate or Imitate - Fame or Fortune" scenario.

Will Social Networks, Twitter, and SMS rule the world? No, I don't think so. But, elements of each of them will be blended into existing business applications like Email, CRM, Knowledge Management, recruiting, and other enterprise services.

Email is ripe for innovation. As I wrote yesterday, Email is your natural social network, and there are big opportunities at the intersection points of social networks and business applications.  Brad Feld, Fred Wilson, Tom Evslin, and a bunch of smart people are getting together in NYC to think about ideas and investment opportunities at those intersection points.

But kids don't use Email...so Email is dead, right? Yes, it is true that the younger generation does text messaging and IM, not email. It is also true that they use MySpace and Facebook, not discussion boards and workspaces. So, Facebook, Twitter, and SMS will rule the world, right?

In a word, No. Those communication modes work great for kids, but kids grow up and get jobs. Work requires a different form of communication and collaboration. Social Networks are fun, but business networks get things done, and ultimately make money. Lots of money. Email might be one of those forgotten markets that could be a huge opportunity in the future.

Zoli Erdos agrees and has some neat graphs to tell the story. Mathew Ingram, a professional newspaper writer, has an interesting perspective too.

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Newspapers make deals with Zillow and HotJobs

Zillow, the online real estate valuation site, has announced a deal with 282 newspapers to display their ads on Zillow's site. In return, the newspapers can also use the Zillow valuation platform on their web sites.

According to a story by Reuters published on Cnet, (which is, in and of itself, a great example of a newspaper organization working with an online site);

Zillow.com said the deal covered 11 publishers including EW Scripps, MediaNews Group, Hearst Newspapers, Lee Enterprises and Media General, but did not disclose financial details.

Under the terms of the deal, local advertisers who place their print and online listings with the newspapers including the San Francisco Chronicle and The Tampa Tribune can choose to have those ads displayed on Zillow, which receives 4 million visitors every month.

Zillow's deal is similar parts of an agreement that about 20 newspaper publishers have entered into with online search and media company Yahoo.

Under the terms of that deal, newspaper Web sites use Yahoo's HotJobs online employment classified ad technology, while Yahoo displays ads bought on local papers on its own Web site.

Such deals help Yahoo and Zillow extend their reach into local U.S. communities, while newspapers benefit by getting exposure for their ads on a national online ad platform.

I have written many times about newspapers not getting it, and losing billions in advertising revenues to online alternatives like craigslist and Monster.com. In fact, newspapers lost $3.1 Billion in advertising,  while online advertisers gained $3B.

Maybe there is hope for newspapers. These two deals are a good sign that they understand the need for change. I have written before that local newspapers should "own" the local search and classified market. The local newspapers have a trusted brand name, a long history with advertisers, and significant assets. They have let the online opportunity slip through their fingers. Maybe these two deals signal a change in thinking. Do you think your local paper will make a move online? Or, is it too late?

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Internet Advertising spend sets another record

The Internet Advertising Bureau announced today that Internet advertising revenues exceeded $5.2 billion for the third quarter of 2007, representing yet another historic high for a quarter and a $1.1 billion increase, or 25.3 percent, over Q3 2006.

This is why Microsoft acquired aQuantive , an online advertising and marketing company, for approximately $6 Billion in cash. aQuantive is primarily known for its three brand names; Atlas and DRIVEpm for advertisers and publishers, and Avenue A / Razorfish, one of the largest online ad agencies.

Huge growth ahead - The forecast calls for continued growth, doubling in the next four years. Today less than 10% of all ad spending is allocated to online advertising. Newspapers, magazines and TV are just starting to feel the pinch of advertisers moving more of their ad budget online. Newspapers lost $3.1 Billion in ad revenues last year...mostly to online ads.

Online classified ads take $3.1Billion from newspapers

The Washington Post has an interesting story today about the online classified advertising market which recorded $3.1 Billion in sales in 2006, while newspaper classifieds have dropped by about $3B in the last five years.

I have written about newspapers dying, needing to focus on hyper-local content, and how craigslist and Monster.com have taken huge market share in classified ads and job listings.

The chart on the left, courtesy of The Washington Post, shows just how dramatic the shift has been, and will continue to be.

I was talking with a respected Venture Capitalist a few weeks ago about several emerging companies in the local directory / search space. One of the partners said "I don't think those companies will generate VC class returns". I responded that this market is far larger than most people realize.

Billions of dollars from small advertisers -Consider that Google generated over $10 Billion in online ad revenues last year, while Yahoo, Microsoft, and others raked in another $10B or more. The vast majority of this revenue came from small advertisers, not the Fortune 500.

I reminded this VC that 7 years ago everyone thought big sponsorships of $10M or more from big companies was the way to monetize web traffic. Remember when Yahoo, AOL, Excite, and Lycos were announcing big ad/sponsorship deals for banner ads? Google turned that model on its head. Most of Google's billions in revenue comes from small advertisers paying 50 cents to $5 per click for a text ad.

Classified ads are the same thing. Most people look at a newspapers and think the big revenues come from the full page display ads from Macy's, Verizon, and other big names, when in fact most of the revenue comes from the tiny classified ads in the back of the newspaper.

The Next Big Thing - Online classified ads, local search, and mobile search are huge markets, with no dominant leader, and lots of opportunity for innovation. New business models will emerge and a new set of leaders will reap billions in profits...pennies at a time.

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Google YouTube copyright infringement filtering system - How will it work?

Google / YouTube was in federal district court in New York on Friday defending a lawsuit brought by Viacom and several other media companies. The New York Times story says "Google hopes technology will be in place in September to stop the posting of copyright-infringing videos on its YouTube site, a company lawyer told a judge presiding over copyright lawsuits yesterday."

This is like Lindsey Lohan saying, OK so I did drive drunk a couple times, and did drive with a suspended license, but I am in rehab now and I won't do it again. So, everything is OK now. Lets just drop this and move on. Hmmm...not so fast.

Lets think about a few questions; How will the filtering system work? How will users subvert the systems? What if the system actually works? Will advertisers be interested in a YouTube without the good stuff? Even if it does work will the advertising economics work? First a little more background, then lets take those questions one at a time.

C/Net News story says "If in fact Google puts this (system) in place, it is obviously way too late," Solomon said. "But we encourage Google to come forward and do what other companies have already done and treat all the content providers fairly. Not just the favorite few who have agreed to share advertising revenue with YouTube."

During the court proceeding, lawyers from both sides estimated that pre-trial discovery could take more than a year. That means there's a chance that YouTube's copyright issues may not be resolved until late next year.

Viacom is suing for $1 Billion for past copyright infringement. What Google/YouTube does in the future is irrelevant to the facts of this case. The laws against copyright infringement are strict and the penalties are stupendously large...$250,000 per instance. Viacom only needs to document 4,000 instances of copyright infringement to collect $1B in damages. YouTube probably does 4,000 streams of "The Daily Show with Jon Stewart" in one day.

How will Google's copyright filtering work? I haven't seen it, but based on what I have read it works by creating a "digital fingerprint" of the original video or music, and comparing it to every file uploaded to YouTube. Music and video uploaded to the Internet is converted to a digital file which is basically a series of ones and zeros. Digital fingerprinting simply records the series of ones and zeroes, then uses pattern matching technology to find instances of matches, even small sequences found in short clips.

What does this mean for music and video producers? It means they must submit to Google an original copy of every piece of content they own. They also must provide proof that they own the copyright. Then they need to trust Google to screen out any offending uploads. The copyright owners will still need to monitor YouTube to make sure the system is working...and serve Google with "take down" notices when it fails.

How will users subvert the system? People who upload music and video are usually pretty tech savvy and take delight in beating any system. They will do the obvious things; change the name of the file, chunk it up into short clips, add characters, sound, or other video to confuse the system, stretch or wave the video to make it appear different, and a bunch or other tricks. Think about the bot filtering technology on blogs and web sites that require you to type in a series of letters to confirm you are a real person. A computer bot can't read the squiggly lines and waves in the letters but humans can easily read them. The same sorts of techniques can be applied to music and video to fool algorithmic filters.

What about "sampling" and "fair use"? The copyright law allow for "sampling" and "excerpts" under the "fair use" provisions. These laws are very imprecise and open to interpretation. No computer generated filter will be able to determine what is "fair use" and what is copyright infringement.

What if the copyright filter system actually works? Will YouTube be interesting if there is no "good" content? How many videos of college kids drinking and dancing will you watch? Will the power users bother to upload music and video if they can't put up the good stuff? Will YouTube viewers care about watching it?

Will advertisers be interested in a YouTube without great content? YouTube is very expensive to operate. The hosting costs, bandwidth, infrastructure, and people cost millions. Advertising is the only real source of revenue. Will advertisers be willing to pay for placement on YouTube? Will they be comfortable displaying their brands next to random, perhaps raunchy, content? Even if they do, will the economics work? Low ad rates against expensive content don't work no matter how you scale it.

There is a great future in Internet video...at some point. YouTube may be the early pioneer that makes all the mistakes and clears the way for a "fast follower" to come in and do it right. Or, YouTube may figure it all out and make the necessary changes fast enough to survive and thrive. There is a long history of early innovators being eclipsed by fast followers. Some of the issues discussed above are reasons why it happens so often. The jury is (literally) still out on YouTube.

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Microsoft AdCenter serving Facebook, Digg, and EA Sports

Microsoft just signed a deal with Digg to provide advertising to its 17 million unique monthly visitors. Microsoft previously won a deal with Facebook. Microsoft also announced a deal with EA Sports, the video game maker, to serve dynamic advertising to games such as Madden NFL 08, NASCAR 08, NHL 08, and Tiger Woods PGA TOUR 08. Microsoft's recent acquisition of Massive, the in game advertising service, was the key to the EA Sports deal.

Advertising is changing - Advertising is no longer just annoying banner ads and keyword text ads. New forms of entertaining and targeted advertising for social networks like Facebook and Digg are gaining more of the advertising budget. Video games are a huge market with a focused "captive" audience. Bringing advertising into the game experience in a natural way, in the background, with product placement, integrated with the characters, will greatly improve the experience. And, the ads will rotate frequently, and even be changed and updated if the game machines are connected to the Internet.

There is more to Internet advertising than just keyword text ads. Microsoft, Massive, and aQuantive are joining together to create new interesting and creative forms of advertising. Advertising is a huge market dominated by TV, newspapers, magazines, and radio. The Internet still accounts for less than 10% of ad spending, and gaming is less than 1%. Huge growth opportunities.

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Microsoft pushes privacy protection for search engines and advertising

Microsoft has joined with Ask.com in leading the search and advertising industry to adopt standard privacy principles for search history and click stream data. Google and DoubleClick store search queries and click stream histories on every user...in effort to serve up better search results and advertisements. Google has recently agreed to "anonymize" its search log data after two years.

Microsoft will make search query data anonymous after 18 months by permanently removing cookie IDs, the entire IP address and other identifiers from search terms. Microsoft will also work to give customers more control over what information it uses to personalize their online search experience. In connection with its efforts to support a common industry approach to privacy issues, Microsoft also announced that it will join the Network Advertising Initiative (NAI) later this year when it begins to offer third-party ad serving broadly.

Standards of use are needed to make consumers feel comfortable using any search engine, or clicking on any advertisement. As it stands today each search engine and advertising network makes up their own data retention and privacy rules...and they are all different.

What about the government and lawsuit discovery? Personally I feel reasonably comfortable that all the search engines will use my search histories in a reasonable way. I am more concerned about the government monitoring activity and lawyers digging deep in "discovery" on lawsuits, divorces, and both criminal and civil matters. If the search engines have the data the courts can force them to give it up...regardless of their stated privacy policies. The courts can over rule any company policy.

The simple answer is for the search engines and advertising networks to "anonymize" all data they keep, and to delete data after two years. The government and lawyers can't access what doesn't exist. Agreeing to privacy standards and data retention policies will make it safer for everyone to use the Internet.

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