Author Archives: satyapatel

The calm before the widget storm

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After a summer where seemingly every article about the web and social media included discussions about widgets as the next big thing, there has been a relative lull in the widget hype during the fall. Given that widgets themselves are nothing new to the Internet, the period of calm should have been expected. Code and applications that can be embedded and executed in web pages have been around since the first page view counters and banner ad tags. More recent examples of “widgets” include Google AdSense, the YouTube video player and Facebook applications. But that is not to say that the whirlwind of widget press should be ignored altogether. The proliferation of social networks, blogs, media sharing sites, start pages, etc., are all indicative of an overall fragmentation of the web. Anyone interested in reaching consumers needs to be where they are, not where they want them to be.  The portability and interactivity of widgets enables the desired connection to consumers to be made simply and effectively. For that reason, and many others, what we are currently experiencing is likely only the calm before the widget storm.

 

When widgets first got the attention of the media, it was largely because of the novelty of allowing consumers to embed widgets in the same way that they were previously embedded by website owners. Companies such as Slide and RockYou established themselves as early leaders in the creation of widgets for consumers. Other companies, like MuseStorm, Clearspring and Goowy Media emerged to provide applications and services to enterprises for widget authoring, distribution and tracking. Over the past few months, each of these enterprise-facing companies seems to have reached the same conclusion….that an end-to-end solution, including monetization, is the best way to attack the market.

 

The market for banner ads provides an interesting model for the potential development of the widget market. Ad serving technologies became a commodity over time because they only enabled publishers to distribute and track banner ads. The authoring was left to agencies and the monetization was left to publishers and third party ad networks. The most value accrued to companies like Google, which provided all of the needed capabilities. Given that ad serving platforms are now embedded at most agencies and publishers, the preferred infrastructure for distribution and tracking is largely in place. The successful widget companies will integrate with and complement these existing systems by providing tracking, analytics and monetization capabilities that are unique to widgets. Consumer-facing widget companies will need these same capabilities internally to establish sustainable business models.

 

The recent monetization partnership announcements by Clearspring and KickApps may be early indicators of the maturation of the widget market and a flurry of economic activity around widgets. Like banners and search before them, and like video and mobile now, widgets are a new form of media that require their own infrastructure and monetization models. The companies that deliver those solutions will be the ones that survive the coming storm of widget activity and avoid being washed away with the widget companies that have not established a firm foundation for their businesses.

Building vertical ad networks to survive

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Vertical ad networks have become all the rage over the past few months. The acquisition of Jumpstart Automotive, the pending financing round for Glam Media and the launch of network after network on the Adify platform have all contributed to rampant investment activity in the vertical ad network market. Within the past two weeks, there have been announcements for new vertical ad networks from Martha Stewart Living Omnimedia (home and lifestyle), Reader’s Digest (food) and BiggerBoat.com (entertainment). But the announcement that signaled the peak of the vertical ad network bubble for me came yesterday from NBC and P&G. If Pets.com was the peak of the e-commerce bubble, does a pets-focused vertical ad network signal the peak of the vertical ad network bubble?      

 

Historically, vertical ad networks have succeeded against traditional, broad ad networks because they aggregated a defined, highly desirable audience that could be purchased by advertisers through a single source. The focus of the networks allowed them to truly understand the audiences of their publishers and generate higher CPMs. Advertisers were provided with ease of administration and creative guidance for developing highly engaging ads. All of this worked well for the ad networks when there was a single one in each of a few high value verticals and when the only alternatives for publishers were either incurring direct selling costs or turning to a broad ad network. But the recent proliferation of vertical ad networks, and various ad networks in general, may have changed the dynamics of the business for the worse.

 

When it comes to changing ad networks, the switching costs for publishers have always been close to zero. In a market in which publishers have many ad networks to choose from, the ad inventory simply goes to the network that delivers the highest effective CPM (or provides the highest revenue guarantee). Furthermore, because ad networks don’t control the inventory that they sell, what is there today could be gone tomorrow. When a publisher reaches a certain volume of page views and unique visitors, it’s typically more economical for the publisher to begin selling ads directly. Over time, the ad network is allocated a smaller, less attractive portion of the publisher’s inventory. Further, advertisers look to buy media at scale. Publisher and inventory churn makes it increasingly difficult for a network to build and maintain the critical mass needed to attract campaign dollars from advertisers. In my view, it’s difficult for ad networks to build defensible, sustainable businesses if they don’t address these issues and do more than just aggregate audiences.   

 

I think that there are several potential strategies for creating a lasting, high-value vertical ad network: proprietary distribution, proprietary targeting, a portfolio of products and exceptional service. Proprietary distribution means either owning a significant portion of the network’s inventory or having exclusive access to it for a lengthy period of time. Google is so successful financially because much of its ad inventory, and hence revenue, is generated by Google.com and because advertisers can’t go anywhere else to buy that prized inventory. Proprietary targeting provides advertisers with a unique ability to select specific members or groups within the target audience for receipt of their ad content. When this targeting proves effective, advertisers are willing to pay significantly higher CPMs, which in turn generates more value for publishers. Advertising.com was acquired by AOL because it had developed a novel methodology for identifying which site visitors would be most receptive to the message of a particular advertiser. A portfolio of products allows a network to deepen the relationships with publishers. Publishers are then faced with having to forego value beyond monetization when considering whether to switch to another network. Web analytics, ad serving, content syndication and site search are all examples of services that publishers need, that they value and that could be provided by networks. Lastly, and potentially most importantly, exceptional service matters greatly in what is inherently a people-driven business. Decisions in the advertising business are often made based on established relationships, personalities and perceived commitment. No ad network can survive over the long term without dedicating itself to putting the customer, whether advertiser or publisher, first.

 

In today’s market, it isn’t enough to attempt to aggregate an attractive audience when your competitors are competing heavily for scale and dollars. My guess is that the majority of vertical ad networks that have launched in the past 12 months will fall by the wayside within the next 18 months because they haven’t established any true, sustainable differentiation. What are your best guesses for which companies will be the Pets.com, eToys and Webvan of the ad network category?

Close encounters of the Facebook Beacon kind

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I had my first experience with Facebook Beacon this past weekend when I purchased movie tickets for “American Gangster” from Fandango.com. Moments after my purchase a notification popped up in the lower right hand corner of my screen (similar to the email notification in Outlook) asking me if I wanted to publish my purchase to my Facebook. I chose the “No thanks” option given that I didn’t want to effectively recommend the movie without having seen it at that time. Later, when I visited Facebook, I had an alert asking me whether I wanted to publish my Fandango “story” for other users to see. I was given the option of publishing my purchase, opting out of publishing that specific purchase or opting out of publishing actions on Fandango altogether.

 

I had three reactions to this rather alien experience, which if shared by other consumers, do not bode well for Facebook’s Social Ads. First, I was irritated that despite having opted out while on Fandango, I was still prompted to publish my purchase upon my next visit to Facebook. Second, although I was given the ability to opt out of having Fandango send purchases to my profile, it was frustrating to see that I will still get notifications whenever I take actions on Fandango itself. Lastly, it was worrisome that my actions on Fandango seemingly will continue to be recorded by Facebook, even though I opted out of publishing them to my profile.

 

Aside from the obvious privacy issues associated with collecting information on my actions without my consent, there are fundamental consumer issues with Beacon which should concern Facebook. The experience of having a Facebook notification appear while on another site will likely be unsettling for most consumers. I will be surprised if the opt in rate for publishing actions at that point in the process is significant enough to generate much volume for Social Ads. If Beacon becomes widely implemented, the sheer number of notifications on Facebook and other sites could become a serious annoyance for consumers, leading to further opt out or even abandonment of Facebook altogether. With only a small number of actions likely to be published to profiles, the potential inventory for Social Ads becomes limited. Any advertiser that elects to target more granularly than a specific action will be addressing audiences that incredibly are small. Advertisers are not interested in actively managing a marketing channel that only reaches a small audience and generates an even smaller number of qualified clicks. Unless Facebook addressed the consumer experience with Beacon, there may be no viable option for advertisers interested in the Facebook audience.

 

Clearly, Facebook intends to iterate on the Beacon model, but I think that when it comes to the consumer experience, the first impression matters a great deal. Unfortunately for Facebook, this close encounter of the third kind with Beacon may leave consumers feeling like their actions have been abducted by aliens rather than used to communicate effectively and privately with their fellow human beings.

I can’t be the only one without a Facebook post!

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There is no shortage of commentary on the $15 billion valuation of Microsoft’s deal with Facebook. As Facebook’s investors have said themselves, Facebook needs to perform incredibly well over the coming years to grow into the valuation. So how exactly is that going to be done?

 

To date, Facebook’s monetization strategy has centered mainly on attempts to sell sponsorships for groups or user profile-based text ads called Flyers. A recent conversation with one of the big agencies revealed the cost associated with sponsoring groups, as measured by people and activity in the group, far surpasses traditional CPMs. Yet, the same agency pointed out that no agency employee is getting promoted without having purchased a sponsored group on Facebook. The promise of building relationships with users that are passionate about brands is a major lure for advertisers. How long can Facebook count on agencies to ignore the poor fundamental economics and effectiveness of sponsored groups? It would seem that the revenue realized from groups this year is a temporary anomaly, unless something fundamentally changes in user behavior.

 

As for Flyers, Facebook doesn’t even provide advertisers with click-through rates for the Basic version, suggesting instead that “the value proposition of Flyers is primarily the high volume and localized exposure of your ad, not click through rates”. Flyers Pro is a cost-per-click product that doesn’t address the needs of brand advertisers or those interested in “engagement”. Further, I’m told that click-through rates are only slightly better than for standard banner ads, yielding only a nominal effective CPM for Facebook. This matches the experience that we had at Google working with social networking sites like Orkut, MySpace and Hi5 on various targeting techniques. The fact is that targeting ads based on user profile information performs only marginally better than contextual targeting or no targeting at all. It’s also incredibly difficult for advertisers to purchase campaigns at scale when segmentation and targeting get too granular. So don’t count on Flyers to be the magic monetization bullet either.

 

Recent reports suggest that we will have a much better idea about the future of advertising on and potentially off of Facebook after its big advertising announcement in New York on November 6th. Let’s hope that the new targeting models and ad formats introduced are dramatically different than what we have seen to date.  Importantly, they need to engage users within the context of the primarily communication-oriented activities that take place on Facebook. The success of advertising on Facebook is important not just for the company, but for all of social media, which now accounts for over 25% of all web page views. Someone is going to crack the social media monetization problem. To live up to its expectations and valuation, Facebook better hope that it has devised the scalable, effective social media monetization solution that has so far eluded its competitors and its recent investor.

Setting free the Wall Street Journal Online

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The entire online community is anxiously waiting for Rupert Murdoch to open the gates at the Wall Street Journal Online and provide free access to its content. At yesterday’s Web 2.0 Summit in San Francisco, he outlined his plans for the property, which included expanding national, international and cultural content to compete more effectively against newspapers such as The New York Times. As a long time subscriber who appreciates the both the quality and the breadth of the journalism, I am eager to see the Journal make the operational and economic leap to free content and execute against this vision.

 

I got a recent view into some of their plans via an online survey from the WSJ Online. What surprised me most about the survey was that the focus was on identifying packages of content and services for which I would be willing to pay (unfortunately, I didn’t think quickly enough to capture screenshots so this is mostly from memory). For the most part, the services mentioned were identical to many services that I can already get online for free, such as Digg, Techmeme and Google Alerts. The Journal’s differentiating assets are its journalists and its reputation/brand. Why try to use those assets to charge for content and services similar to what is available for free at established online properties? Given the decision to open up content, shouldn’t the goal be to provide increasing amounts of free content and drive as much traffic as possible to increase advertising inventory? Wouldn’t the WSJ be better off encouraging its loyal reader community to participate in conversations centered on WSJ authored or identified content, rather than charge it for accessing additional content? The New York Times already demonstrated through TimesSelect that only a small percentage of readers are willing to pay for additional content. Further, recent data suggests that opening up NYT content has led to enough page view growth to make up for lost TimesSelect subscription revenue.

 

I’m a firm believer in the advertising model for online newspaper content, so I’m eager to see the impact on WSJ.com traffic and advertising growth once content is indexed by search engines and increasingly linked to by blogs. The WSJ should free its content rather than spend time identifying ways to protect or generate subscription revenue through paid services that don’t leverage the Journal’s core journalistic strengths and loyal readership. If the new content and services are valuable, readers will visit the site and advertising revenue will follow. If the new products don’t strike a chord, no one would have paid for them anyway. Will WSJ.com make the leap headfirst or instead tumble towards the advertising-based model that is clearly the present and future of online content?

Miners vs. picks and shovels: a contrarian venture capital investing approach?

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Earlier this week, The New York Times published an article about the “fuzzy math” driving the funding of companies in Silicon Valley. In talking to my peers in the investment community, there seems to be consensus that valuations are regularly disconnected from the reality of many companies. That said, the exuberance seems to be continuing and is at its peak amongst consumer-facing media companies.

 

At Battery, our digital media investing is focused on two categories of companies, of which the first is consumer-facing media properties that build, aggregate and monetize audiences in differentiated ways. The second category is companies that provide the tools and technologies to support the first category, including everything from ad networks to targeting and optimization software to video delivery infrastructure. Increasingly, we find ourselves spending more time on the second category while largely avoiding the first. Broadly speaking, this seems to be a fairly contrarian investing approach.

 

There is no shortage of speculative, high-priced investments being made in hopes of finding the next YouTube or MySpace or Photobucket. My perspective is that the risk/reward tradeoff associated with investing in many of these companies does not compute. I’d much rather invest in the companies that are arming all of the competitors in the consumer media market (the picks and shovels approach) than bet on identifying the one that is going to be the next big hit (trying to find the goldmine). There is no doubt that incredible amounts of equity value can be created by leading consumer media companies, as evidenced by the aforementioned companies. However, neither I nor any investors I have spoken to have found a crystal ball that tells us which consumer web properties are going to be the next ones to resonate with consumers and spread virally. In addition, there is intense competition for consumer attention on the web, making it an expensive battle to fight. Lastly, it seems that the equity value that has been created by consumer web properties in recent memory has been independent of demonstrated economic success.

 

As we learned in earlier this decade, valuing companies primarily on audience-based metrics is not a sustainable approach. At the same time, we have also seen that companies that build fundamentally sound businesses by providing value to and extracting value from paying customers can also create tremendous amounts of equity value. As an investor and an entrepreneur, do you have a better shot at creating the single winner in the online video destination market (i.e., Youtube) or building one of several successful companies in the online ad serving market (i.e., DoubleClick, Aquantive, 24/7 Real Media, Right Media)? Which businesses are easier to predict and monetize?

 

I think that chasing the next Youtube also puts investors at odds with their entrepreneurs. Searching for a single big win forces investors to take an aggressive approach to managing their portfolio of “bets”. Approaches to financing and exits can diverge dramatically when an investor is swinging for the fences at the potential expense of the entrepreneur. While the economic rewards of investing in picks and shovels may not be as great (although this can be argued), the satisfaction of building a sustainable business in partnership with entrepreneurs is well worth the cost associated with watching this current “gold rush” from the sidelines.      

A few more nails in the traditional music industry coffin

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The entire music world is abuzz with the launch of Radiohead’s “pay what you want” download of their new album, “In Rainbows”. Nine Inch Nails, Oasis, Jamiroquai and Madonna have also announced their own intentions to divorce themselves from the stranglehold of the major music labels. Clearly, the time when major artists simply complained about their indentured servitude to the labels has ended and their experiments in freeing themselves have begun.

 

In the pre-digital days, the music labels played a critical role in the industry. At a high level, the labels were responsible for identifying talent, financing production and marketing music, while retail outlets sold it to consumers. Artists were beholden to the labels and retailers, and consequently, earned only a few pennies for every album sold. Consumers were beholden to the retail outlets given that they controlled access to the physical media of LPs, cassettes and CDs. The digital world has changed all of these dynamics. Artists can choose to assume all of the responsibilities of the labels because the cost of production has decreased dramatically and cheap, digital distribution is available over the Internet. Consumers have ready access to inexpensive or free digital music at thousands of places on the web. As has happened in many other industries, the digital age has made it possible to remove the middleman from the relationship between the producer of the good and the consumer of the good.

 

Artists have long known that album sales are only one piece of the revenue puzzle. Merchandise, touring and publishing are critical ways in which to increase revenue and make music a potentially lucrative business. Consequently, the move away from the labels is about more than just capturing a larger share of album revenue. What’s most striking about the shift is that artists have come to the realization that being closer to their listeners gives them more control over their economic fates. Even if someone who downloads Radiohead’s new album chooses to pay nothing, what is it worth to Radiohead to have that listener’s mailing address, email address and mobile phone number? How many different ways can Radiohead touch me as a fan and encourage me to spend, now that they have that information? The most exciting part of what’s happening in the music industry is the ability for artists to have an ongoing dialogue with both their avid and casual fans.

 

And it’s not just possible for the big name artists to cut ties with the labels. Huge entities like MySpace and new upstart companies such as Sellaband, Amie Street and Magnatune are all making it possible for emerging and independent artists to make a business out of their passion for music. 

 

As a consumer and an investor (Battery is an investor in Ruckus), I’m thrilled to see the new experiments in music creation and distribution. However, it remains shocking that music industry’s only responses to the emergence of digital music and the Internet have been litigation and digital rights management. Isn’t it time that the music industry stopped swimming against the tide and embraced new business models before they are cut out of the value chain altogether? How is it possible that the labels haven’t learned anything from the prior transitions of vinyl to cassette to CD to Napster? The recent announcements from major artists have to be the final wake up calls for the labels, or else the final nails in their coffins.

Mobile advertising’s day is yet to come

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The hullabaloo over mobile advertising continues with news of Nokia’s acquisition of Enpocket a couple of weeks ago. But if you talk to the people who control the ad budgets, there isn’t much to get excited about. In fact, my recent conversations with several major agencies all suggest that the market shouldn’t expect anything beyond the continuation of test budgets in 2008 and likely in 2009. 

 

Advertising on the web thrived because advertisers could leverage the same creatives in large volumes across multiple websites and measure the performance in a consistent way. As long as the mobile carriers continue to act as individual gatekeepers, mobile advertising will struggle to grow as fast as many in the industry project. Carriers continue to inhibit access to off-deck websites and content, limiting the volume of mobile web traffic and ad inventory. They have also refused to work with each other, making it impossible for advertisers to deliver and measure ads on the same publisher across their networks. Lastly, carriers own the data that is most useful for targeting advertising in a mobile context and have been unwilling to make that data available, even for a fee. Unless mobile advertising is deemed highly relevant by consumers, very few consumers are going to be willing to tolerate the “intrusive” delivery of ads during their mobile experience.  Carriers hold the key to this relevancy because they own the needed data.

 

The carriers control the destinies of all of the players in the US mobile advertising market.  We can only hope that they look to models in markets such as Japan to see that that collectively opening their doors can help create a larger mobile advertising pie for them and everyone else.

Will there be a Google of video search?

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Over the past few months I’ve spent time with a large number of companies attempting to solve the video search problem.  I think there is plenty of evidence to suggest that the consumer video search and discovery experience could be improved.  However, one issue that has been gnawing at me is whether video search can be a sustainable business.  If video search as a business depends on advertising as its business model, I have my doubts.  I don’t believe that advertising can be nearly as effective a monetization vehicle for video search as it is for traditional search.  From my perspective, there are many issues to be overcome, but some key issues are as follows:

1) Video searches are largely not commercial in nature. When searching for video, most consumers are looking for free entertainment content to be viewed at that moment. Based on the data that I have seen from various video search companies, my guess is that far less than 5% of queries have any commercial intent. As an example, below are the top 10 searches from June 2007 (representing about 28% of all queries) for one of the largest video search companies.

  • paris hilton
  • SEX
  • u2
  • angelina jolie
  • Akon
  • mya
  • sexy
  • ciara
  • t-pain
  • beyonce

Compare this data to traditional search, where Google delivers ads for the 40% of queries that it thinks are commercial in nature.  The volume of video searches that have commercial intent and could be monetized is likely to be limited. 2) Advertisers are afraid of user-generated content.  UGC is still the most highly consumed and available online video content.  Video search results are bound to contain UGC and few advertisers are willing to risk being associated with inappropriate content (e.g., violence, pornography, defamation).  Without appropriate filters and safeguards in place, big budgets are not going to be allocated to video search.

3) There is no standard solution to monetizing online video. CPC text and CPM banner advertising, which have been used successfully to monetize traditional search and webpages, respectively, do not effectively monetize online video. When a consumer is seeking video content, it is easy for her to ignore non-video ads as they are not the media type that she is seeking.  While numerous startups are tackling this problem by developing new ad units (e.g., overlays, bugs, post-roll) and targeting technologies (e.g., speech-to-text, audio analysis, computer vision), advertisers are not going to allocate large budgets until effective, standard advertising units are available in significant volumes. 

I look forward to seeing how the video search monetization problem gets solved.  Given the trends around online video consumption, someone is going to crack the advertising nut or figure out how to use search as the hook for another form of monetization.