Don Dodge on The Next Big Thing

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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Web Innovators Boston

WebInno, founded by David Beisel of Venrock, is a Boston based Web Innovators Group where startups can demo their stuff to the tech community.

Last night there were three startups that presented on stage (Main Dish) and eight other startups that showed their stuff at tables (Side Dish) around the perimeter of the room. There were hundreds of people, my guess is 800, in attendance.

Main Dish

• Totspot - a place for parents to publish a page about their kids and share with family and friends.
• Webnotes - a tool that helps you create and manage online annotations. Very similar to Onfolio.
• Zeer - a grocery product community that helps people “believe in what they buy.” Connects people to product information, consumer communities, and buying advice.

Side Dish

• 211me - Personalized mobile mashups
• WordChamp - Free online language learning
• PaperG - Local online advertising
• Creaturepark / Ingeeni Studios - Games
• YouCastr - Interactive sports streaming
• LuckyCal - Mixes together information from your calendar with public events to find events that might interest you.
• Snipd - Stealth mode. No idea what they are doing. 
• Tikatok - Kids create their own stories – and publish those stories into books for friends and family.

The audience voted Zeer as the best presentation/idea. I liked WebNotes, but found myself comparing it to JJ Allaire's Onfolio, and asking what is different?

WebInno is a great Boston Web 2.0 networking event for upcoming startups and "all the usual suspects". I saw Dharmesh Shah (HubSpot), Ben Saren (CitySquares), Matt Douglas (Punchbowl Software), Shawn Broderick (TrustPlus), Karim Nurani (Trinet), Reed Sturtevant (Microsoft), Mike Tyrrell (Venrock), Mike Werner (Web Studio Project) and bloggers Chris Herot, and Pito Salas. I was surprised, and delighted, to see Kevin Marks from Google. Kevin is based in Mountain View and is the evangelist for Open Social. I am sure Scott Kirsner and David Cancel were there somewhere but I didn't see them in the masses of mayhem.

Thanks to David Beisel for organizing the WebInno event. In October I am organizing an event with David focused on web advertising networks - opportunities and challenges.

Upcoming Boston Events

Software Industry Conference 2008 - July 17-19 [Register] This is the Shareware Software conference hosted in Boston this year. Microsoft is a sponsor.

TECH Cocktail Boston 2, Boston - July 24th, 6:30PM
Tequila Rain by Fenway Park [ REGISTER ] I went to the Tech Cocktail last year and it was a huge success in terms of turnout. So many people it was hard to move around or carry on a conversation, but a great party, lots of technology people that you don't see on the conference circuit.

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Information security weakest link? Stolen laptops and cell phones

Over 600,000 laptops are reported lost or stolen every year at US airports according to a ComputerWorld story. The story, based on a survey by the Ponemon Institute says that 65% of them are never recovered. Laptops are most often lost at security checkpoints. Hotels and taxi cabs are also prime locations for losing laptops and cell phones.

Close to 10,278 laptops are reported lost every week at 36 of the largest U.S. airports, and 65% of those laptops are not reclaimed, the survey said. Around 2,000 laptops are recorded lost at the medium-size airports, and 69% are not reclaimed. The institute conducted field surveys at 106 airports in 46 states and surveyed 864 business travelers.

Millions of dollars are spent each year on sophisticated information security products. Simple things like stolen laptops and lost memory sticks  / thumb drives are a major security vulnerability.

The Washington Post reports that data breaches are up 69% this year.

The Identity Theft Resource Center in San Diego tracked 342 data breach reports from Jan. 1 to June 27. More than one-third of the reports came from businesses, a 27 percent increase over business breaches for all of 2007.

The center found that data breaches among health-care providers and banks also increased. They now account for 15 percent and 10 percent of the breaches, respectively. Breaches from educational institutions, government entities and the military declined for the third year in a row, the center found.

Hacking was the least-cited cause of data breaches in the first six months of this year. Instead, lost or stolen laptops and other digital storage media remain the most frequently cited cause of data breaches, accounting for more than 20 percent of all reported cases, the center found. The inadvertent posting of personal and financial data online prompted roughly 15 percent.

The Industry Standard reports that losing cell phones is even more common. And, the newer Smart Phones contain contact lists, pictures, documents, confidential emails, links to sensitive information, etc.

I didn't mean for this to be an alarming post about information security breaches. I just did a simple web search and these were the top three links in the search results. It looks like there is a lot of work yet to be done in the Information Security area.

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Amazon, Twitter, Disqus down. Do you really want your data in the cloud?

I woke up this morning and checked TechMeme to see what was happening in the tech world. Three stories jumped out at me. Amazon was down due to a Denial of Service attack. Twitter has been down many times over the past few weeks. Dave Winer says he needs a Plan B for Twitter. Disqus, the blog commenting service, has also been down several times recently.

So, I decided to write a quick post about the unreliability of cloud based services. Normally I use Windows Live Writer, a desktop based program, to compose my posts. But, since this was going to be a quick post with no graphics or photos I decided to use TypePad's web based service. Big mistake. It crashed when I tried to run the spell check service just before posting. I swear, I am not making this up.

Typepad provides a browser window to compose your post. Then when you want to use spell check it calls out to another service and runs your text through it. At precisely this point the service failed. Actually it said it was running the spell checker...forever. I decided to let it run for a while to see if it would recover. Nope. I tried to refresh the screen. It said if I navigate away from this screen all work would be lost. It had already been 20 minutes and nothing else seemed to work so I tried the screen refresh. Gone...everything gone. I tried the back button. No luck.

TypePad has lost my posts under similar circumstances probably 10 times out of 300 posts. So failing 3% of the time isn't bad, right? No way. That is why I stopped using TypePad for posting a long time ago. I thought I would be OK with a quick simple post. But, no, screwed again. That is it for me. Never again.

The web fanatics and blogosphere would have you believe that all applications will move to the web. Some will, most will not. Reliability, scalability, security, and a host of other issues will prevent most businesses from moving their mission critical applications to hosted services or cloud based services. The risk of failure is too great.

Amazon is the leader in cloud based services, but even Amazon has experienced down times for its own business. Cloud services will continue to improve. But my guess is the uptake will take longer than most people predict. Today was another reminder of the reality and risk.

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Top 10 Tech Trends from Churchill Club

Some of the best minds in technology gathered for The Churchill Club's annual dinner. Eric Savitz of Barron's covered the event in detail. VentureBeat also has a nice summary including audience votes on the trends.

The highlights, excerpted from Eric Savitz article, were;

• The rise of the “implicit” Internet. Today your permanent record exists; you create a trail of data exhaust, digital bread crumbs. Implicit data that exists in silence. Movie rentals, restaurant reservations, books purchased, Web sites visited, etc. All of this data existed in silence. No easy way until now to benefit from the data; but the silos are coming down. Google, Yahoo, Facebook, Mozilla collecting data.

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. BTW, "head fake" is a basketball sports term for faking with a head movement that you are going one way and then quickly going the other way.

• Betting on smart phones: The mobile device migration to smart phones from features phones will produce even greater disruption than PC industry moving from character mode to graphical interface.

This prediction was made by Roger McNamee who has a major investment in Palm, so he is definitely putting his money where his mouth is. I totally agree with Roger, in fact I made the same prediction yesterday on a Massachusetts Technology Leadership Council’s talk show hosted by James Geshwiler. In January of 2007 I called it the Triple Play for The Next Big Thing; Local Search, Voice enabled, with Location Based Services, on a Mobile Phone. There are more cell phones than desktop computers in the world today. Cell phones have been called the 'Third Screen", but they are quickly becoming the first screen for the younger generation.

• Water tech will replace global warming as a global priority. The world is running our of usable water and will kill millions more in our lifetime than global warming.

I agree water already is a big priority in some parts of the world. At the NVCA conference last week one panel member said that 90% of the water we use in the USA is used for agriculture and irrigation. That is an astounding truth. We only drink something like 4% of all the water we produce. The rest is used for washing, flushing toilets, and irrigation. Dean Kamen has done some amazing work in the area of low cost water purification systems.

• Fossilizing fossil energy. Oil and coal will have trouble competing with biofuels. 99% of discussion on the topic is completely irrelevant to the topic. In 4-5 years will have production proof that can sell biofuel at well below $2 a gallon at today’s tax structure and no subsidy.

Vinod Khosla made this prediction. I hope he is right but I have a hard time believing this. There have been numerous stories written on this subject that suggest it takes more energy to produce a gallon of biofuel than it is worth. Perhaps these articles are part of the "99% of the discussion is irrelevent" that Vinod was talking about. Wind, Solar, and Mini-Hydro are proven sources of clean renewable energy where the technology and economics are viable at current energy prices. Green energy is certainly a hot area for investment and innovation. The question is can startups play a role here or will it be dominated by the big energy companies and utilities.

Read the complete list of top trends at Barron's Tech Trader Daily by Eric Savitz.

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Xobni social networking for Outlook users

Xobni - is an organizer for Microsoft Outlook email. The beta is now available to the public. I have been using Xobni for 6 months and love it. Xobni is inbox spelled backwards. Xobni compiles a summary for each email sender, extracts phone numbers, photos, organizes attachments in several different ways, and ranks each sender by how many emails they send to you, and how many you send to them. People connected to the email sender are listed, along with email threads from each of them. See all the attachments associated with these people. Search is an integral part of Xobni and can be done in several different ways.

Robert Scoble has a great video interview with Xobni founders Matt Brezina and Adam Smith. I knew the instant I first saw Xobni at the TechCrunch40 Conference that we should be partners. I talked to Adam Smith immediately after his presentation, and had dinner with Adam and his partner Matt Brezina that night. We sketched out how Microsoft could help Xobni, and started executing on the plan the very next day.

Xobni is now a Microsoft Startup Accelerator Program partner. There are lots of benefits to the program like free software, consulting help, press releases, introductions to Microsoft people, partners, and even VCs. But this is one benefit that we didn't anticipate...a demo by Bill Gates at the Microsoft Office Developers Conference. Check out this 2 minute video of Bill talking about Xobni.

Try out Xobni and let me know what you think. What additional features would you like to see? What other email productivity tools do you use?

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The Future Of Social Networking - Consolidation or Mass Customization?

The Future Of Social Networking was the topic of a panel at Microsoft's ReMIX Silicon Valley. Will social networks consolidate into a few big players like Facebook and MySpace, or will it splinter into thousands of special interest social networks? The opinion of the panel and audience was split.

What about the financial success of social networks? FastCompany published a timely article about Ning raising $60M at a $500M valuation. Beebo recently sold to AOL for $850M. Facebook recently raised more money at a $15 Billion valuation. Valuations are one thing...profits are another. Sometimes the correlation between the two requires creative math.

The future of social networks is an interesting, and potentially very lucrative, question to ponder. Will there be a few giant networks or thousands, even millions, of special interest social networks? It is interesting to note that Facebook started out as just a network for Harvard students and alumni. Mark Zuckerberg quickly discovered that other schools wanted a Facebook too. Schools were added slowly and you had to have an email address with the school domain name in order to join that Facebook network. It was a cozy social network for college students and alums to stay in contact...and express themselves. You know the rest of the story. Facebook allowed a few companies to have social networks, then opened the floodgates and let anybody in.

Ning, and others, believe there will be millions of smaller social networks based on special interests. Ning reportedly has 230,000 social networks on its service. Other social network players include Microsoft Spaces, Beebo, MySpace, iMeem, and even services like Flickr, Seesmic, Twitter, and various blog networks.

Do page views equal profits? It seems clear that both big social networks and small special interest networks will continue to grow. The distinction may be that only the big social networks will gain the "critical mass" and "audience demographics" to be financially successful. Not all page views have the same financial value for advertisers.

A penny for your thoughts? I talked to a Facebook App developer at the ReMix conference. He 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. Pretty good for a couple of young hacker/coders with very low overhead, but not the kind of business that  commands million/billion dollar valuations.

Other industry insiders at the conference said they see CPM rates of between 10 cents and 50 cents per thousand for social networks, but it can go much higher ($2.00 to $5.00) for highly targeted demographics.

Is Web 2.0 financially viable? A small moderately successful software company can generate $12M in annual revenues by focusing on a narrow niche market. What would it take for an advertising based Web 2.0 company to generate the same revenues? Lets assume a $2.50 CPM rate. To generate $1M in monthly ad revenue you would need 400,000,000 monthly page views. Hmmm...how many web sites or services generate that kind of traffic?

So, what does the future hold? Social networks are clearly a hot area. We are in the early stages of evolution. Facebook is here to stay, but other approaches and models may emerge and be even more successful. The monetization of social networks is also in the early stages. Will the current valuations prove out? Remember a few years ago when some people thought paying $580M for MySpace was insane? It looks like a pretty good deal now. Friendster is an example of an early leader that went in the other direction.

What do you think? What are your favorite social networks and Web 2.0 services? Who do you think will be the winners? Leave a comment and join the discussion.

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MatchMine leaps ahead

I first saw MatchMine at DEMO Fall 2007, just over 6 months ago. MatchMine, based in Massachusetts, is a media discovery service that delivers personalized recommendations for movies, music and other online content on the Web. I saw the potential in the service then, but they had some kinks to work out.

Today MatchMine announced new media partners, and improvements in the service. More on that later. First let me summarize what I think are the major leaps forward for MatchMine;

1. No more client download required. You can start using MatchMine with just one click on a partner web site.
2. Content partner sites can easily integrate MatchMine with a plug-in widget or by using their APIs.
3. The business model is a win/win. Free to consumers, and a revenue share from partners based on incremental revenue.
4. MatchMine preferences follow you to any new partner site. No more need to start from scratch building up your preferences for each new site.

Why is that important? MatchMine has lowered the barriers to adoption for both users and partners, and instantly increased the effectiveness of recommendations.

Users can sign up for a MatchKey as part of the registration process at a content site. Or, if you were already a registered member of a content site, with just one click you can add a MatchKey and automatically import all your preferences and ratings.

Partners can integrate MatchMine into their site in minutes by adding a pre-built widget or adding APIs to their site. This allows their users to get better recommendations, and potentially increase ad revenues or product sales. MatchMine shares in the incremental revenue. This makes it a no pain, no risk, proposition for the partner content sites.

OK, so how does MatchMine help me? We are all deluged with information and media. We want just the good stuff. MatchMine matches your preferences, both explicit and implicit, and delivers relevant media content to you.

How does MatchMine do it? Once you have signed up for a MatchKey they keep track of all your explicit ratings, votes, favorites, and import your previous preferences from sites like Netflix, Amazon, YouTube, LastFM, and the new partners announced today. They also track your implicit preferences like what you save or delete, if you watch a video to the end, or quit, if you click away from content, etc. These actions build a constantly evolving profile of your likes and dislikes, allowing MatchMine to deliver just the content you want.

The new media partners are;

• FilmCrave - a movie review site
• Fuzz - a music community
• Odeo - a music and podcast site
• Blogged - a blog discovery site
• Blogdigger - a blog search engine
• MediaMelon - HD TV for the Internet

Go to any of these sites, get registered, and see MatchMine in action.

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Microsoft sponsoring TechCrunch50 Conference

TechCrunch is back again this year bigger than ever. It is now the TechCrunch50 and will be held September 8-10 in San Francisco. Microsoft is a sponsor of the conference this year. I was honored to be one of the expert panelists at last years conference. Fifty hot startups all launching at the same time.

Mike Arrington reports that last years TechCrunch40 raised $143 million in venture capital. This year the winning startup gets a $50,000 cash prize.

TechCrunch50 is unique in that the presenting companies pay nothing. It is free. The only rule is that the startup must launch at TechCrunch. The attendees pay $1,995 to attend.

Here are the important details for the conference;

Official Site: TechCrunch50
Dates: September 8 - 10, 2008
Tickets To Attend: TechCrunch50 Tickets
Application to Launch Startup/Product: Company Application Form
Applications Deadline: Friday, June 27, 2008 (early consideration deadline June 13)

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Warner Music's ISP tax and the NFL Network

Warner Music is proposing a plan to charge a $5 monthly fee on your Internet Service Provider (ISP) bill for unlimited access to music...whether you want it or not. Don't worry, it is very unlikely this plan will actually succeed. All the major recording labels would need to agree to participate...and they can't agree on anything.

Mike Arrington at TechCrunch calls it "The Music Industry's New Extortion Scheme". Portfolio calls it "Fee For All". The music industry has been in a steep decline since the advent of Napster. Most of you know I was a VP at the original Napster back in the early days. You can read this post about my experiences at Napster, and conclusions about the music industry.

Warner Music tax versus The NFL Network? All of us in the Napster generation can get angry and indignant about the proposed Warner Music monthly fee. But, isn't it the same concept as the NFL Network trying to force the cable TV providers to pay a fee for EVERY subscriber to carry the NFL Network? The crux of the issue is should it be a premium channel that subscribers choose to add, or should it be a mandatory channel that everyone pays for whether they want it or not. If the NFL Network was available as a premium channel I would subscribe in a minute, and I'm sure lots of football fans would. It is all about economics. Here is a hypothetical example. If you were the NFL which would you prefer? A premium channel at, say $30 a month for the NFL season, that 10 million people might buy, or a $3 per month surtax that 200 million subscribers would pay.

The cable TV networks have mostly resisted the NFL Network demands. I think the Dish Network carries it, but most do not. The ISPs will resist the Warner Music plan too, unless the fees are reduced significantly. Competition maintains a level playing field. The ISPs know that if one of them adds the music service and raises their monthly subscription fee, that their competitor may choose not to...and customers may flock to the lower priced ISP.

It is all about the money. Today consumers have lots of choices for their Internet service, ranging from free ad supported services, to low monthly fees, to all you can eat broadband for $50 a month. Cable TV subscribers have fewer choices; cable, satellite, or phone company. Competition creates choices. The marketplace determines the appropriate price and distribution despite what Warner Music or the NFL Network might like. That is what capitalism and free enterprise is all about.

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