We’ve all heard about the “Half-Bill” financing rounds that have taken over the tech news wires lately. Just last week it was Ning taking in $60 at $500 pre. Before that it was Slide at $500 with $50 invested. Rumored Rockyou at $400. Glam with $85 on a $500.. And the motherlode, the Facebook quadtrillion dollar round with gazillian ruppees invested.

So whats the common theme in all the financings? A) An investment bank was involved and B) The entrepreneurs are all smiling very widely in the pictures I saw.

If this was 2000, they would have been scared shitless worrying about their participating preferred and liquidation preferences. But instead, these guys are building new houses at pebble beach and buying Euro denominated bonds instead.

So what happened? Well, a lot . . . maybe most, of these guys (and gals) cashed out. The investment banks were able to convince the so called”dumb” money (industry term, not mine. . . remember Bowman Capital?) hedge and crossover fund investors to fork over cash to the entrepreneurs for their founders stock instead of newly issued preferred sotck in the company. This means a portion of the money that was raised didn’t go into the company’s bank account but went into buying a Ferrari instead.

Just 3 years ago, it was completely unfathomable to the VC’s that anyone would allow entrepreneurs to have an “exit” before they do . . . “what happened to aligning interest,” they used to cry. Not anymore. The tide has changed. For the better or worse I don’t know; but certainly great for entrepreneurs who deserves more than what we got in the dot-com era.

Of course, all of this is done on the down low . . . without journalists asking too much questions. How would the employees feel if they found out? What would this say about the company’s prospects when the inside-insiders cash out? . . . just smile and say no comment is what I would suggest . . . or simply say “Its good to be the entrepreneur”

I just spent the last 2 hours scouring the web on anything I could find on the first shoe to drop since Wenda Harris Millard warned the whole indsutry at the most recent IAB “We must not trade our advertising inventory like pork bellies..” Thats not forget that Millard was most recently head of ad sales at Yahoo where ads ARE traded like pork bellies (at places such as panama and rights media exchange).

It appears that ESPN (crown jewel of Disney) has decided to boot out all ad networks in order to keep them (ad networks) from selling ESPN online advertising inventory. Disney itself control a sizable amount of premium inventory and I’m sure it is looking at this experiment very carefully as a model for the rest of its properties. Some in the industry are even taking a broader view, expecting reverberating ramnifactions across all top publishers. Of course, this is not new . . many in the industry has been beating the drum for ages. For sure, as MediaWeek contents:

Two sides have formed—those who want to protect traditional, direct selling of premium content brands and the math-loving crowd that favors automation and data. The math lovers make the traditional sellers nervous.

So how did we get into this mess in the first place?

Well . . . you take an industry accustomed to direct selling for most of their media inventory (TV, Radio, Cable, OOH, Print etc) and you throw them in the middle of the digital revolution led by geeks crunching numbers - obsessed with optimization and efficiency - and you get as much FUD as SAP and MSFT has ever generated together. Added to this, you have inherent time sensitivity of a perishable inventory AND the real time nature of online ad serving - making selling/buying online ad inventory almost like a game of chicken. (or prisoner’s dilemma).

There is nothing inherently wrong with Ad Exchanges and Ad Networks. In theory, premium inventory that drives advertiser success WILL eventually be priced at a premium (with thus implied efficiency). But unfortunately the pre-conditions for that simply doesnt exist - and will probably never be. First of all, a significant portion of the online inventory (premium and “remnant”) must be available to the ad exchange in order to truly aggregate supply and demand for efficient pricing. Secondly, perhaps even more unlikely, some sort of measurement must be available to truly value and account for the the “premiumness” of online inventory beyond clickthroughs.

What we have today is an “arbitrary” definition of premium inventory sold through direct sales force at a huge premium while remnant inventory is sold through ad networks at a huge discount. For whatever reason - ad inventory is artificially bifurcated between the head and the tail - there is no “body,” no middle ground. Furthermore, many publishers have not succesfully segmented their online inventory due to the mis-guided application of offline inventory management strategies to their online inventory. (buy one ad space direct for $30 CPM on week one; buy the same ad space through adsense for $1 CPC on week 4) causing channel conflict as well as artificial downward pricing pressure on the most desirable ad spaces (most likely the ESPN experience).

So whats the solution? I believe in ad networks, but I believe in the evolution of the current model . . .

The pricing decision MUST go back to the publisher - be it manual acceptance perhaps augmented rules based decision support (maybe a little bit of automation)

Inventory can no longer be exclusive to a particular channel or network- ie multi-channel sales strategy for single ad space to create true competition thus price efficiency (ad “exchange” is trying to solve this particular issue somewhat)

Maintaining the process efficiency of ad networks while bring more transparency to availability and pricing (but not clearing)

Lastly, publisher must learn to bundle inventories (and other alternative pricing model such as “subscriptions” and “taxes”) and services to targeted advertiser segments in order to truly allow for price discrimination
. And ofcourse, ad networks much evolve to support publisher’s increasing SKU’s and pricing models.

. . . and as usual, easily said than done

If Yahoo wants to fend off a 60% premium hostile offer, close to the ONLY thing it can do is to buy eBay inorder to make itself so big and the potential hostile merger so dilutive that Mr. Softie would say no thank. Chances of this happening is close to 1%.

If Yahoo + Microsoft does happen, eBay can kiss its chance of being acquired goodbye . . . and thus, it better figure out a plan to turn itself around quickly or the stock price will tank cause there will be no potential acquisitions around to artificailly pump up the stock price. (why the hell did eBay go up 7%? today?). Outside of a merger/acquisition by Yahoo or a straight up acquisition by Microsoft, I really dont see anyone with a modicum of strategic fit with eBay. Google is way way too proud/smug to be interested in a web 1.0 business . . . and even just looking at it financially I dont think there are many companies out big enough to buy ebay at a $30-$40B price tag. (adobe is the only one and thats really farfetched).

Another note. MSFT really saved the stock market today. Instead of crying recession wrt to the Google miss . . . the market was pumped up by the acquisition offer . . . and since most wall street models (quant and fundamental houses) use some sort of comparable valuation model, the jump in Yahoo really help keep the rest of NASDAQ afloat . . . that said, this is a short term thing. . . great time to play short on the market starting monday.

Meg is leaving eBay and handing it off to John Donahoe. It’s big enough news to bring me back to my keyboard to riff some more.

I cant believe the negative press Meg has gotten in the last few month. In the “what have you done for me lately” world of business (and especially tech ) media and punditry. . . you would have thought that Mark Zuckerberg was/is a more successful CEO than Meg. If you look at the numbers its simply not true. I certainly agree with those that Meg had the winds at it back cause of eBay’s business model (network effects) but the 1990’s dot com generation is littered with great concepts/business models with incredibly strong initial traction . . . but failed to live up to its early promise due to incompetent execution . . . friendster, webvan, netscape . . . to name just a few. . .

But enough kissing ass , I do have a few a few honest thoughts about eBay’s challenging future.

John Donahoe: Buyers and sellers have more choices and higher expectations than in 1998, but the guiding principles are the same—the best values, the widest and most abundant selection, and a fun shopping experience. We will make it easier and safer to shop on eBay. The second thing we are going to do is build on this fabulous auctions business that is unique and is the best format for many items.

But we have used an auction approach for fixed price. We are not optimized to get those values in fixed price. Time-ending-soonest makes sense in auctions, but does not surface the best items in fixed price.

In the past 12 month, eBay has been “re-focusing” on the auction business through its TV advertising (emphasizing the joy of winning) and raising prices on stores items to re-emphasis on auction listings and the core marketplace. This new strategy to focus on fixed price is certainly a retrenchment and an admission that the path it had been following for the past 12-18 month was wrong. eBay’s problem (as I had always believed) is driven by a few factors 1) that it owns 100% of the auction market already and 2) google through its search engine has the aggregate inventory of all “listings” which threatens eBay’s position in the market for breadth and selection (and thus as a destination). In the fixed priced context, it means that fixed price (and non-auction) “advertising” is its only growth engine left and that shoring up its core auction business is not likely to deliver the growth so enamored by Wall Street through Google.

That said, we must be in distributed commerce in the future, taking listings for auctions and Shoppng.com and distributingthem to other sites. If they ar not going to come to us, we are going to come to them. We are not at all averse to distributed commerce.

Donahoe: In many ways, our buyers will lead us there. We are making it much easier to bring eBay listings to your Facebook page, Myspace page, and shopping listings to various sites. eBay’s unique inventory offers better alternative [than other sources].

This eBay listing widget as an “ad unit” concept is not new. In June of 2006 it announced its AdContext program which used to be located at “http://affiliates.ebay.com/ads/adcontext/” - if you click through these pages no longer exists. No sure what happened but it was certainly in Beta for a while but never released publicly. Did the company lose focus? Did the company not have the technical chops to create a contextual advertising algorithm? If it didnt work as a business, why does parading it out again (re-treading an old idea) make it better this time? And lastly, why did it take so long?

Donahoe: In payments, we are enabling faster checkout and easier payment on thousands of Websites off of eBay. In reputation, we think that reputaion is something we can increasingly outtake.

Whitman: We wonder if there is a way to embed reputation into Paypal. Is there a way to travel across the Web with your Paypal wallet and some other aspect of reputation?

Reputation . . . this is a huge opportunity for Paypal . . . but something that also took YEARS to bubble up to the executive ranks. eBay cannot continue to rely on consultants to filter out the latest “trends” and re-package it in digestible powerpoint speak for any idea to be relevant. Bill Gates recognized this early and had a team of recently out of college “technology advisors” (aka geeks) to keep him grounded and abreast of the latest changes. eBay’s executive team must learn to be the same . . . in many ways the most junior people (usually cause they are younger) at eBay was most ahead of the the times. In the end, people making the decision cannot rely on data spoonfed to them in a powerpoint, they need to write a blog, try to get 500 friends on myspace, play vampire/werewolf on facebook, learn RoR, go on a WoW raid, and adopt a penguin - to become a consumer of technology in it purist form (dirty, aimless, useless, emotional - completely non strategic) as to be able to not just absorb information and data - but challenge it and form opinions based on a holistic understanding of all the trends thats happening in the internet - not just the topic at hand.

Was looking for a new car insurance carrier the other day and noticed the following ad on Google.

On the bottom right corner is an SideStep paid search ad. If its a little small, you can go to google and search for “all state car” and see for yourself (if its still up).

When I clicked over this is what i saw.

I would not even have noticed if not for the Kayak-SideStep merger news that came out a few weeks back.

So what the hell is SideStep doing buying “all state car” insurance key words? What the hell is SideStep doing having ad blocks TWICE the size of its input fields? Apparently SideStep is joining the growing rank of companies making good money in the click arbitrage business. How big is this revenue source for SideStep? I have no idea. Is this a systematic strategy or a side effect of a automated keyword buying algorithm? I cant be sure.

But I do know this. If SideStep-Kayak plans to go public, they better break out this revenue source as a separate line item. In banking speak, this is a classic “non-core” revenue stream which should be given a much lower (or even none at all) valuation multiple than its travel related revenue streams. I have no problem with arbitrage of any kind (I used to be in finance) but when you sell your stock to the general public as a “travel search engine” you better be making atleast 95% of your revenues from “travel” rather than arbitraging click prices for a bunch of tail keywords. If I want to buy into that business I can wait for the NameMedia or DemandMedia IPO instead.

Here is what I pulled out from the venturebeat post

Both companies are generating large amounts of cash through CPM (where advertisers pay per thousand advertising views), CPA (where advertisers pay when a user actually buys a fare or ticket) and CPC advertising (where advertisers pay when a user clicks through to their site), according to Marshall. The Techcrunch article reports Kayak is doing roughly $50 million in annual revenues, while SideStep does $35 million.

Emphasis/bold is mine. I have a strong hunch that “CPC advertising” is an euphemism for click arbitrage revenue. And if I had to guess, this is probably contributing about $10M a year to its bottom line. I could be wrong. . . this is certainly a lot of inferences from a few datapoints. All I know is that I, for one, wont be participating in their IPO - if they do end up going public.

Until this . . . (from NYT)

On Thursday night he told reporters in Orlando, Fla.: “We ought to have an immediate, very clear monitoring of our borders and particularly to make sure if there’s any unusual activity of Pakistanis coming into the country.”

On Friday, in Pella, Iowa, he expanded on those remarks.

“When I say single them out I am making the observation that we have more Pakistani illegals coming across our border than all other nationalities except those immediately south of the border,” he told reporters in Pella. “And in light of what is happening in Pakistan it ought to give us pause as to why are so many illegals coming across these borders.”

In fact, far more illegal immigrants come from the Philippines, Korea, China and Vietnam, according to recent estimates from the Department of Homeland Security.

Eh . . . ? Not mentioning that 99% of Pakistanis are good people even if they are “illegal” immigrants. Sounds like a man wanting to win so bad that he is changing his ideaology in response to some voter segmentation study. (are there such a thing?) Sounds like a desperate man trying to get a word in on a hot button voter issue anyway he can . . .

As for me, its back to Barrack Obama or Ron Paul again

Ok, Albert’s succinct and brilliant 5 words commentary is probably all you really need to read, but what the hell, if you prefer the long winded, convoluted, overly analyzed version, read on! (this shows exactly why I’m never dreamed of publishing anything my whole life, not even in my high school yearbook - and which Asian kid didn’t write for their yearbook? well atleast I played the violin)

In 2005, vertical search engines reached almost the epic hype proportion of B2B . Everywhere you turn, a vertical search engine was launched. . . one for video, another for blog, some for code snippets, others for medical information, others for houses. (I wont stump on their graves by linking to them).

Back then, I called bullshit on the whole thing for a slightly different reason than Tom Evlin . . . but both of us agree that the majority of them will fail. Which was highly controversial given that many heavy weights (Fred, Danny, and Jupiter) believed in its promise.

Well, the majority of vertical search engines followed the trajectory of the once mighty technorati blog search engine - vanquished by Google in one effortless scoop . . . killed by Google’s increasing indexing speed, ever expanding indexing capabilities (size & scope). . . and not the least of which, the quickly unbuzz worthy but hugely successful “OneBox.”

One of the main short comings of the Google machine was the speed in which it picks up new content . . . it used to be close to 2 weeks before any given page would be indexed. Today, for some content it could be in hours if not shorter. Google added new hardware and tied its indexing frequency algorithm to something like a pagerank. Many vertical search engines had hoped to win by focusing on categories where content relevancy is closely tied to timeliness . . . it turned out to be a dead end.

Other search engines tried to go “semantic” on Google by extracting meta data out of webpages and offering additional filtering and attributing functionalities. As it turned out, users only wanted to type once and click on the results. No one wanted to spend more than 2 minutes fiddling with drop downs and other filtering options.

Furthermore, despite, its public stance against the semantic web (perhaps simply a strategic posturing to stay ahead of competition), Google brilliantly used OneBox to extract information from webpages and presented in context of its more traditional search results. Video results is a great example. It used to be only only “oneboxed” with a few lines on the top of the search results and now its fully integrated into the SERP. (I wanted to throw in a Lord of a Ring reference here but decided against it)

Not all vertical search engines have failed though. Those that does not rely on web based data for its index has done pretty well (house hunting sites) - however they have turned into more of a traditional database + portal than a classic search engine. Others have relied on crawling the “deep web” where google bots do not/cannot visit to differentiate itself. One such category is travel search engines (where a lot of news came out last week). I’m, however, very very skeptical of the financial results of Kayak and SideStep - I have reasons to believe that a significant portion of their revenue have nothing to do with travel or search. (I’ll write about it later when I have time to do some screen caps).

So whats the final take away? Give the Google PM and the engineering team responsible for OneBox a huge raise and promotion. These guys fended off the biggest threat to Google’s paid search golden goose since Goto.com+Inktomi and didn’t even get enough respect to be poached by Benchmark to be “EIR’s”. (ok, maybe there hasn’t been many legitimate threats to Google so maybe its not that big of a deal . . . oh ya, and no, Facebook is not a threat to Google . . . yet )

I held off blogging for the month cause I wanted to show my solidarity with the hollywood writers union. ok not really . . . Its mainly cause I have some reshuffling of priorities for the new years . . . anyways more posts coming this week on this . . . such as

when vertical search died and no one noticed

why pay by touch was/is destined to fail

how Revolution Money is promising but needs tweaking

and a personal update . . .

anyways. . . I find that if I promise something upfront, it helps me get off my ass and do it . . . so this is really just another way to get me back to my regular blogging schedule after being slammed at work for the past month . . .

“…There are these small bands of people who are trying to take over the world, This is so much more fun than working at a hedge fund or an investment bank.” Pinky said to The Brain.

“…If those interests include not . . . that is too bad, There is no opting out . . . ” Said the Borg to Picard.

Actually,

Pinky = Gideon Yu
The Borg = Mark Z

Both of Facebook . . . quote SLIGHTLY modified for effect

(read the entire article here)

Found via The Bubble Generation

I miss the days of do no evil . . . where are thou my dear G?

For more Facebook bashing read Tech Beat

So here it is. . . the inspiration for social advertising platform released by Facebook. . .

As facetious I’m about that statement, if you think about it . . . what was pitched in the video are really no different than “SocialAds“. . . the absolute bluring of line between

advertising & relationships

privacy & knowledge

conversion & engagement

Again, as much as I think this is frightening as a consumer. I give them credit for truly examining what is going on with their community and understanding how third parties (as “controversial” as they may be) are monetizing their participation in that platform . . . AND finally building these models DIRECTLY into their product.

Fuck do no evil . . . everything is relative. If consumers are already adopting an advertising medium, it must be A.O.K.