Don Dodge on The Next Big Thing

Advertising winners and losers in a recession

Advertising is the first expense to be cut in an economic downturn. This spells trouble for businesses with an advertising revenue model. But, does everyone lose? No. There will be some winners. Every business needs to focus on increasing revenue and that means they need to advertise...effectively.

TechMeme headlines lots of gloom and doom stories on the decline in advertising. Despite all the negative talk, Online display advertising revenues should actually be up slightly for the year. Search CPC advertising continues to grow, and should be up in 2009. PaidContent cites a JP Morgan analyst who predicts; display ads will be up 6% in 2009, while search advertising will grow 17% in the U.S. and 34% globally.

So, we need to look deeper to the various forms of advertising to see who will win and lose.

Search Advertising is cost effective for e-commerce or transaction oriented businesses. CPC means the advertiser only pays if someone clicks on their ad, making it a very cost effective way to acquire customers or get to a sales transaction. More ad dollars are moving towards this model. A recession actually makes CPC more appealing.

TV advertising for brand awareness is still the most effective and far reaching medium. The biggest advertisers in the world are CPG (Consumer Packaged Goods) companies like Proctor & Gamble and consumer brand companies. They don't sell directly over the web, and they don't sell direct to consumers. They sell through retailers. So, they advertise for brand awareness. They want enormous reach and repetition. TV advertising does a better job of building emotional ties to a brand and conveying brand identity. TV also provides the huge audience advertisers crave. There are well established measurement systems for TV advertising, even though they seem crude compared to direct response CPC advertising.

Who wins? For transaction oriented e-commerce companies, Search is the clear winner. For brand awareness advertisers TV is still the best choice.

Who loses? Newspapers are once again getting killed. Only coupon supplements have a direct impact on purchases. Online display ads are losing out to search advertising. Newer forms of advertising like mobile and online video will struggle in this environment. Social networks/content sites already have the lowest CPM rates and will likely decline even further. Other forms of advertising and promotion like trade shows, conferences, and give-aways are likely to see big cuts.

This is a tough economic environment, and will be for another year or so. But, advertising mediums that deliver customers in a measurable way will do well.

How does web advertising work? How effective is ad serving technology?

Lots of startups and VCs are betting their business on web advertising as a business model. They point to Google, Yahoo, and other big sites as examples of success and assume they will have proportional success. Not likely.

In a previous post "Is Ad Targeting The Next Big Thing" I asked why we aren't seeing higher CPMs and better targeting based on all the attention data from Web 2.0 services and click stream data. I heard from several advertising executives and would like to share their insights here.

Michael Yavonditte, formerly CEO of Quigo (acquired by AOL) answered my questions with these concise and insightful responses;

(1) It's hard to use all the available data to target. There are lots of reasons for this. Advertiser confusion is a big one. Too many choices can overwhelm advertisers and create a watered-down marketplace.

(2) Advertisers will pay more for inventory that converts better but they also need scale. Often times better targeting leads to smaller quantity.

(3) I know of some "attention data" being used/tested. The results can sometimes be surprising and counterintuitive. It's very hard to find new targeting data that can also scale across lots of inventory or sites, which is why behavioral targeting hasn't become a multi-billion dollar market yet.

(4) There is a ton of inventory but not enough high quality inventory at the moment. I think prices will eventually move up as new ad formats are invented and big branding dollars begin to match online user consumption habits.

 

OK, let's dig a little deeper. First let's level set on some definitions.

Page Views - We need to distinguish between advertising on Search Engine Result Pages (SERPs) like Google, and advertising on typical web content pages like Yahoo.

SERP ads - Google has been very successful with SERP advertising for two basic reasons, and lots of complex reasons. First, SERPs have the advantage of targeting an advertisement to a very specific search term entered by the user. Second, the user is in active "search and discovery mode" so they are more open to an ad offer.

Display or text ads on content pages from Yahoo, MSN, AOL etc., don't have either of the above advantages. Content pages have hundreds or thousands of words so it is hard to target. And, the user is in passive "browse mode".

How do ad servers work? Most ads, other than SERP ads, are targeted based on content on the page, in very broad categories like; news, sports, business, politics, etc. They try to dig deeper into the context of the page, but with varying degrees of success.

Daniel Jaye, a former exec at Tacoda, (now part of AOL) explained to me some of the complexities of ad servers. Here is a snippet from our discussion;

Most ad servers do not allow the ability to perform complex targeting based on the wide variety of data available, but the issues are complex.

1) Ad Targeting technology (most ad servers have the following insufficiencies):

a. Multi-valued attributes (ie a browser (person) may be a member of several segments, how do you choose/prioritize?, traditional Boolean logic doesn’t suffice)

b. Complex Boolean targeting (ORs, ANDs, etc in specific order of evaluation)

2) Inventory Management

a. Multiple criteria: Ad servers have to prioritize delivery based on multiple criteria today: (roadblocks/takeovers by content or by targeting criteria, schedule commitment, performance objectives, etc.). The more data we add, the more difficult it is to predict and allocate available inventory, manage pricing/scarcity etc.

With regard to real results, the performance improvement varies.  For some categories (auto intender, consumer electronics shopper, etc.) the performance gains are clear and relatively easily obtainable.  For the broader set of offers, automated optimization has many challenges and has NOT demonstrated a clear advantage over basic techniques like frequency capping and contextual targeting. 

There were several industry terms in Mr. Jaye's response that need further definition;

• Frequency Capping - means restricting or (capping) the number of times (frequency) a web user sees a specific ad within a 24 hour period, across a whole network of web sites. This is a simple concept, but incredibly difficult to execute millions of times a day, in a split second, for every individual user, over hundreds of web sites.
• Contextual Targeting - means targeting ads based on the words (context) on a page. Again, simple in concept but incredibly hard to do at web scale in less than one second.
• Road Blocks / Takeovers - when one advertiser wants to dominate (Takeover) all available pages and (Block) other advertisers. Sometimes referred to as a "carpet bombing advertising campaign".

So, the ad serving technology needs to improve significantly. Results from ad targeting campaigns need to be proven. And, the ad serving technology must be easy for a junior ad buyer to understand and use.

Mike Troiano, a former advertising exec, currently CEO of MatchMine, said on his blog;

Sometimes tech folk forget that at the other end of the digital tentacles reaching across the ad-powered web, sooner or later, is a person pulling the levers. Joe Blow media buyer - think pimply-faced state college graduate 2-years out of school making $18K/year and living in Queens - simply can’t keep up with the pace of innovation on the web. They learn a few of the biggest ad targeting systems, which incidentally are the only ones with sufficient scale for them to complete their buys and move on, and crank 90% of their ad budgets through them. Once in a while one of the better ad network sales guys buys them some really good sushi and makes a decent case for some experiment, and voila, that technology gets thrown a $10K “test buy” bone.

The equation the ad buyer solves in his head:

1. What is the probability that doing this will make me a hero with my boss and/or client?
2. What is the probability that said boss and/or client is going to smack me for wasting time on this $10K diversion instead of doing everything I can to “optimize” the $500,000.00 buy we already have in process on Yahoo?
3. Is the potential upside of 1. materially greater than the potential downside of 2.?

Everyone agrees that ad serving technology will improve, and that "attention data" will be used to better target ads. They also agree that advertisers will be willing to pay higher CPM rates once the effectiveness is proven. As usual, the technology will advance faster than the customer's ability to use it and desire to pay for it. The big question is when will all these factors converge to launch another multi-billion dollar market? My guess is two to three years.

What do you think? Leave a comment and join the discussion.

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Is Ad Targeting The Next Big Thing?

Better targeting equals higher ad rates - Lots of startups and VCs are pinning their hopes on this simple premise. It seems obvious, but there is very little evidence to support it. So what is wrong?

• Is the ad serving technology not able to take advantage of all this new "attention data" to better target the ads?
• Are advertisers not willing to pay higher CPM rates for the better targeting?
• Has ad targeting been tried with all this "attention data" and the results are not much better?
• Is there just too much ad inventory which is depressing prices?
• Are we just too early in the game to get good results?

Cnet writer Stefanie Olsen has a good story on what VCs think will be the next big things. Not surprisingly, they think ad targeting will be huge. Here are a few nuggets from Stefanie's story;

"The first wave of Internet investing dealt with commercializing the Web, helping companies like Amazon.com and eBay get on their way. The second wave has been about helping people socialize and connect through sites like Flickr, YouTube, and Facebook. The third, venture capitalists say, will be about making sense of all the data people create around the Web, and then searching for patterns in the data to improve the delivery of personalized content, search results, or advertising."

"Everyone talks about all the data that's being created and how valuable it is, but the way you make it available is by doing something actionable with it," said Rob Hayes, partner at First Round Capital."

"Social networks and social media sites have created so much new ad inventory on the Web, but they have yet to make significant money from it."

"We are really fascinated with data and the ability to use it to increase effective (cost per thousand) for ads. There's this explosion of inventory, but people haven't figured out how to monetize it yet--data will be the difference," said Fouad ElNaggar, a principal at Redpoint Ventures."

I have seen so many companies, literally hundreds, that are building social, fun, aggregators, filters, recommendations, communities, and services that all boil down to one thing...building profiles from implicit data and explicit actions to better target advertising. It is the biggest "head fake" in business history. All these widgets and services appear to be fun consumer toys, but underneath they are advertising driven data collectors.

It seems obvious that if you can collect demographic data from users when they register for a service, and then collect preferences, rankings, click stream data, social network connections, etc, that you should be able to use this data to better target advertising. It will happen...but there is no evidence of it yet.

Low CPM Rates - Social Network content sites get the lowest CPM rates, an average of $0.27, but sometimes as low as $0.02. Gaming sites are the highest. Several months ago I talked to a Facebook App developer who told me his app is generating 300 million page views per month. Wow! Then I asked what kind of CPM (Cost Per Thousand) ad rates he was getting. He shrugged and said somewhere between $0.02 and $0.05 per thousand. That pencils out to between $6K and $15K of advertising revenue per month for those 300 million page views.

Last night at Mashable's SummerMash in Boston, I talked to the founders of a new startup called Wiggio which is building a collaboration tool for college students. When I asked about their business model they said "highly targeted ads based on user demographics". I asked them if they had checked with the major ad networks to see what kind of CPM rates they could expect. "Well,...uh...no." I suggested that they should spend some time researching this out before going too much further.

In October I will be hosting a forum at MIT on advertising networks and the future of online advertising. We are recruiting some of the brightest minds in the advertising world to speak at the forum. I hope to dig deeper into some of these issues to better understand the problems.

What do you think? Why aren't we seeing higher ad rates? Is the targeting technology not working? Or, are web surfers just not responding to the ads?

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Advertising rates dropping, Social Networks lowest CPM

PubMatic published its monthly AdPrice Index for July 2008 and it showed ad rates declining in most markets, especially Social Network sites. PubMatic draws its data from 4,000 Web sites that take ad network advertising, 85% of which are based in the U.S.

Surprisingly, small web sites can demand significantly higher CPM rates than larger web sites. This may be due to better targeting smaller niche markets that advertisers consider more valuable.   

Advertising rates vary in each market space too. News sites and gaming sites traditionally have the highest ad rates...Social Networks have the lowest rates.

The average CPM rates across all web sites and market segments is just $.36 per thousand page views.

How many page views are required to generate $1M in advertising revenue? Based on this average CPM of $.36 it would take 2,777,777,777 page views, or about 2.8 Billion.

Now you know why Steve Ballmer says the advertising business is all about scale. It takes billions of page views to make any money. The more page views and scale you have, the more advertisers want to advertise on your ad network. The more advertisers you have competing...the higher the ad rates.

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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.