Don Dodge on The Next Big Thing

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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eBay launches classified ad service - Newspapers take another hit - Craigslist yawns

C/Net reports that eBay has launched a classified ad service called Kijiji. Craigslist, the leading online classified service, is unconcerned. It is the newspapers in the USA that should really be concerned. Classified ads are the most profitable revenue producer for most newspapers. Over the years they have felt the losses to craigslist, now they have eBay to worry about.

Kijiji, a site eBay has operated overseas for two years, is now available in about 220 cities across the United States, said eBay spokesman Hani Durzy. Kijiji will be free "for now". It is likely eBay/Kijiji will start charging for classifieds, display ads, or premium services once they have built up a significant user base. eBay's PayPal could also pick up some additional revenue from Kijiji ads.

Will Kijiji adversely impact eBay listings? Apparently eBay doesn't think so, but it seems to me that the only difference between eBay and a classified ad is that eBay is an auction and a classified ad is fixed price.

Who wins and who loses? It will take several years for this to shake out but here are my guesses. Newspapers lose, eBay is a wash (they pick up some classifieds and lose some auction listings), and craigslist is unaffected.

Craigslist has a dedicated community of users, is run profitably by about 25 people, and is led by Craig Newmark and Jim Buckmaster. I have interviewed both Craig and Jim several times and they are the most remarkable leaders I have ever met. They don't follow conventional business wisdom, and perhaps as a result, they have become very successful.

Much has been made of the fact that eBay owns a 25% stake in craigslist, and has a seat on the 3 member board of directors. eBay got the 25% stake by purchasing the stock of a former craigslist employee. Greg Sandoval at C/Net suggests that eBay has had several years of inside knowledge and access at craigslist that will help them make Kijiji successful. In my opinion it is a non issue. This isn't rocket science...there are no secrets.

Conceptually, classified ads is a simple business. Craigslist's secret is to not run it like a business, but more like a community. Sounds simple enough but most business people have a hard time rationalizing the approach and all that it means. That is why I think newspapers and Kijiji will have a hard time taking market share away from craigslist.

Footnote: Craig insists on spelling craigslist with a small c. It is his way of minimizing his own importance and staying focused on the community. I have done so except where craigslist is the first word in a sentence. I can't bring myself to not capitalize the c at the beginning of a sentence. :-(

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Yahoo SmartAds for contextual display ads

Yahoo (YHOO) today announced SmartAds a service to create customized contextual display ads on the fly. Google and Microsoft have been targeting text based ads to search query terms for years. What is new here is that Yahoo is generating customized display ads, commonly known as banner ads.

According to the New York Times, here is how the system will work:

The advertiser (or its agency) would provide Yahoo with the components of its display ads — including the logos, tag lines and images. The retailer would share information from its inventory databases that track the items on the shelves in each of its stores. Next, Yahoo would combine that data with the information it has about its users’ demographics and actions online to create a product-specific advertisement.

For airlines, SmartAds uses Yahoo’s information about its Web surfers to create display advertisements for each person that feature ticket offers with actual prices listed. In time, Yahoo plans to offer rich media advertisements where users can buy the ticket at that price right within the ad unit, rather than having to click through to another Web site.

In the past Yahoo would have display ads from hundreds of companies and they would try to match up an ad with the content on a page. For example, Yahoo would put a mortgage company ad on the Finance section and an airline ad on the Travel section. Most of Yahoo's traffic is non-targeted, meaning hits on the Yahoo home page, hits on Yahoo Mail, or some other general page. Because the ads were not well targeted advertisers paid very low CPM rates, as opposed to Google's higher CPC rates.

With SmartAds Yahoo will be able to dynamically assemble a display ad targeted to the user based on behavioral and demographic information Yahoo has collected. This is a major step forward for Yahoo, the leader in online display advertising, and should result in higher advertising rates.

The Panama project was supposed to do great things for Yahoo's ad targeting too. The results from Panama are unclear. SmartAds sounds like a better approach to display ads but only time will tell if it works and advertisers are willing to pay more to use it.

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LiveDeal takes classified ads Hyper-Local

YP Corp. (OTCBB:YPNT), a provider Internet Yellow Pages announced it has acquired LiveDeal, Inc., a website for online local classifieds and Yellow Pages marketplaces. The deal is worth approximately $12M.

SearchEngineLand says "Classifieds is the third largest Internet ad category, capturing 18 percent of online ad spending according to the IAB, behind only display and search. Traditional U.S. directory and classifieds ad revenues were worth more than $30 billion in 2006."

Craigslist is the leader in online classified ads but there is room for lots of other players. It is a huge market. Local classifieds combined with a local directory of businesses, and a good search engine is The Next Big Thing in my opinion.

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