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.

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.

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 )

“…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

I’m not going to rag on Glam.com . . . I actually admire companies that take some chances, break some rules in the search for new business models and opportunities. So instead, I spent a better half of a sunday morning a few weeks back, when the news broke about their crazy round, doing some link analysis of all the affiliates in their “advertising network” trying to find out their secret sauce. (mental note: Allen & Co is THE place to go if you ever need to raise some money and don’t want to spend too much time begging VC’s). What I found was fascinating . . . (ok, maybe only to me)

Before I jump in, Jeremy Liew’s post about synthetic channels is an important piece on the vertical-ization of ad networks. Synthetics channels are the re-incarnation of private equity roll-ups which arbitrage between two ends of several spectrum around scale, focus/scope, and cost leverage.

Synthetic channels, like the channels on the big portals, have an advantage in this respect. By guaranteeing that all sites in their network are about a single topic, they can aggregate a critical mass in traffic while still enjoying endemic site RPMs. This is, in a sense, a “hack” to true contextual targeting, but it has the advantage of being simple to understand and hence simple to sell to advertisers.

While this is certainly interesting, what is even more amazing is what Glam (and other vertical ad networks) don’t explicitly tell you HOW they work as an ad network. Glam doesnt just syndicate advertising banners . . . they syndicate content as well as links.

Huh? you might ask? Glam serves up banner ads across their network of site. They also serve up content/posts from one affiliate to another. Often they embed advertising along with that content which they syndicate. Even more importantly, links within that content is also syndicated to its network participants.

Why is this such a big deal . . . ?

Ostensibly, the ability to guarantee the surrounding content of an ad unit helps increase CPM and reduces advertiser resistance/reluctance (rememeber that facebook UK debacle about advertisers and white supremacy groups?).

More sinister clever are the links that are syndicated across the network. . . . . Its all about SEO.

Many of these links points back to Glam.com, thus hugely increasing the main destination’s page rank, since from a search engine’s perspective, it looks like another domain is linking to Glam.com (Google has no idea that the link is being syndicated).

These links also cross pollinate across the entire network which give many new publishers/web site owners a good reason to join Glam . . . it raises their page rank significantly from the inflood of links from rest of the network. Due to a deficiency (?) of many search engines’ algorithm, these reciprocal links create a sort of “page rank network effects” that improve the rankings of the ENTIRE network each time a new site signs on.

Adding fuel to the fire, due to the freshness of the content being published constantly each day through out the network, these links are being built in a dynamic and consistent manner which is something search engine LOVES. The fact that all these sites are clustered around the same general topic also help search engines over-weight these links compared to other sources.

Blackhat or not, I gotta give these guys props for “inventing” something so insidious and executing it to perfection! . . .

Analysts in the advertising industry have been debating for ages why it was critical for Google to build out its non–search properties. One of the most commonly stated reason has been that these additional products can help Google improve its search engine AND its advertising network (both via personalization) by creating a deeper and more consistent behavioral profile of its users (via a login + cookie rather than cookie alone back in the age of Google search)

Well, 3+ years later, Google is seen marching towards that vision pretty unapologetically and brilliantly.

In the mean time, Yahoo sat on its ass and squandered the goldmine of data that it has gathered from its users since 1996. For whatever reason (panama? privacy concerns?), Yahoo not only did not build out its off site ad network, it also failed to leverage those user data to do a better job for its internal display ad targeting. Obviously, simply using SmartAd within Yahoo is a no brainer, the real power would only come after Yahoo has successfully build out its network and Yahoo could track user behavior across the web.

Man, what a waste.

(BTW, the real-time generation of display ad copy and design for targeting purposes is actually pretty cool)

The blogosphere likes to report rumors as facts and edit post title accodingly in real-time as information changes. Om has some coverage (with the required hedging) while techcrunch is not hedging at all.

I have some random thoughts, not very coherent at all, but all pertaining to the transaction.

First of all, I love stumbleupon. I installed it about 4 years ago when I read about it in PC Mag, and I sincerely believe “browsing” is beginning to take shares away from search (more here and here) as a discovery methodology. So I say this is a smart move.

However, I did hear from my Yahoo buddies that they took a look at StumbleUpon (for an acquisition) and found that the active user base to be much lower than downloads. (sour grapes? ) For whatever its worth, I would think 3-6M users would be a $xxxM transaction but the rumored price is a little bit lower.

I also talked to some smaller websites and they have been telling me that StumbleUpon has been increasingly becoming a major source of traffic. (biggest ramp was 6 month ago, and now its a little flat). However, the traffic themselves are not very sticky (just stumbling through).

As Om mentioned, eBay beat out Google for the the acquisition. I wasnt surprised at all. Josh K. of First Round Capital is an eBay alumni (Half.com founder) and the driving force behind StumbleUpon’s board. David Feller (co-worker and friend from eBay) is StumbleUpon’s VP of Marketing and is also an eBay & Half alumni. Josh and Dave knows eBay inside out and have access to the very top of the company as well as the very buttom. Transaction among friends are usually more honest and straight forward . . . who wants to deal with Google’s cocksure M&A team? and un-certain integration strategy?

Ok so lastly, what can eBay do with StumbleUpon . . .

- eBay auction toolbar is one of the stickiest applications eBay has. This could potentially give the functionalities in the eBay toolbar some distribution on the SU toolbar. (wanna stumble on some auctions?)

- Phishing is THE reason user trust on eBay and PayPal is so hard to improve. Paypal and eBay are working overtime on creating industry working groups and blacklist databases to solve this problem. SU is the missing link to the end user to allow for distribution of the warning systems to the browser.

- Skype + SU toolbar are ways with which Paypal can creat a persistent wallet on the “browser-top” which would be significantly more convinient than hunting down the wallet. (as always I believe Paypal is the main benefitiary of most eBay acquistions)

- eBay can exert more leverage in the search game . Firefox generates $100M+ in revenue a year simply because google is the default homepage. Having the search box on the toolbar makes eBay in control of the user relationship while making search engines depend on it (for once!) for traffic. (there is some HBS case study on this. . . I think its called the “judo strategy”)

- I wonder how the Skype ToolBar is doing. Maybe its doing really well and StumbleUpon would be a good source of distribution for its functionalities too.

- I’m unsure what eBay is planning to do with SU’s small but growing advertising inventory. But maybe eBay does have grand ambitions on running its own ad network.

Google’s acquisition of DoubleClick for $3+ Billion was a homecoming of sorts.

DoubleClick was the original ad network. During the dot com boom, they were the pride of silicon alley and king of web advertising (outside of Yahoo! which was captive at the time).

Yet something happened between 2001-2005 . . . . DoubleClick lost it mojo. . . and its marketcap went from $15 BILLION to around $500M. And finally went private for around $1B in 2005.

Yes, $3B is an ungodly sum, but DoubleClick could have been Google; or atleast Google Adsense. But it didnt, so what happened?

Adsense kicked its ass . . . thats what. . .

DoubleClick was way too close to Madison avenue (physically and figuratively). It looked at the online advertising market with the same mindset as offline (TV, Print) advertising.

- It relied way too much on the sales force, deciding against investing in a self serve model which prevented it from scaling. Even more importantly, while the model worked in 1999 when traffic was centered around major portals and destination, as the web “long tail” proliferated, doubleclick lost a huge portion of its traffic monopoly as they were not able to serve that segment through its sales force.

-Just as important. DoubleClick looked at web targeting on purely offline terms. HH income, age, ethnicity, etc. Google, on the other hand, looked at it from an algorithmic angle and figured out that RELEVANCY was the variable which loaded the highest for click through rather than all the traditional targeting attribute. And ofcourse, relevancy and content are intricably linked. (and thus text).

MOST IMPORTANTLY. DoubleClick made a huge strategic blunder. They saw their adserving technology as something to be sold modularly rather than bundled with their ad network. They became a provider of commoditized technology and lost its ability to insert itself between the buyer and seller of advertising. It no longer controlled pricing and placement of ads. It quickly failed to become a NETWORK (with network effects) but became an ASP. There was no network based relationship . . . simply a licensing contract.

Adsense was/is brilliant in this regard. Its a black box; buyers really has very little say (until recently when Adsense has scaled significantly already) on where to place their advertising. Publishers on the other hand, has very little say in their rate card . . . EVEN MORE SO . . . both sides simply allowed Google to determine Adsense’s cut as it wishes. So long as both sides get what they want (clicks & $), the network effects kept both party from dis-intermediating Adsense AND switching to a different provider. People complain about the black box nature of the Adsense system and as a result, startups try to bring transparency to the ad network game. What they fail to realize is that the black box is the secret sauce; it gives Google the ability to increase optimization, monetization, and placement at its whim (usually for the better). The black box might seem draconian at first. . . but ultimately benefits both sides if all they care about is the all mighty dollar.

It looks like the secret sauce is going to get applied to DoubleClick soon . . .

It is well known that the advertising industry has a high Beta compared to the general economy. In short, the industry does very well during good times and very bad during bad times. There are several reasons to this, when the economy does well 1) companies forgo ROI for marketshare 2) companies believes advertising is a capital expenditure to build brand equity 3) keeping up with the jones, as advertising effectiveness is extremely sensitive to competitive spend. It is not to say these reasons are not rational, they are somewhat. But that the industry tends to go in boom and bust cycles because of them.

Google’s is in this very cyclical industry . . . so much so that the offline equivalent of ad brokers (agencies) are mostly private shops or loose but public cooperatives/roll ups to even out the cyclicality. Furthermore, Google has one large issue. . . that like the Real Estate bubble in Hong Kong in the mid 90’s, much of the spending on Adwords has been done by speculators trying to arbitrage traffic/eyeballs rather than companies productively selling a service or product.

For the past months, I’ve been tracking (unscientifically) the percent of adword advertisers with the main business model of advertising. In short, instead of selling shoes or providing a service (like translation or loan brokerage), these sites are simply trying to pay for eyeball on Google and hoping to make more than they spend on getting that visit (or visitor if the site is sticky enough). Even worse, some of these companies are venture funded so they are simply looking at whether the cost of that visit will get them an equivalent increase in VALUATION. They dont mind losing money, as long as they can flip the company to someone else in the short term.

In decemenber I tracked about 200 queries and found that about 20% of adword advertisers are arbitragers. Early this week, that # has gone up to about 35%. Again this is about unscientific as it gets and I hope some research analyst will start tracking this metric sytematically.

But I think the point is made that increasingly the revenue growth google is able to capture are significantly more risky than before. Google’s revenue beta is becoming higher and Wall Street has yet to take that into consideration. Remember back in the dot com days, all the venture money raised was poured into buying Sun hardware. when the bubble collapsed, so did Sun. Today, because the lower cost of infrastructure, this money has been poured into advertising and marketing instead (specifically into Google with a disproportionate share). If (when?) the battle for traffic is over and the casualties emerge, a significant portion of Google’s advertiers (and corresponding revenue) will also go the way of a server spending on Solaris machines . . .

But like a game of chicken, advertising spend usually drop off the cliff rather than decelerate, so there will be little to no warning when it does happen.