Not following Google; following AOL May 22, 2007Posted by jeremyliew in advertising, Consumer internet, Internet, media.
Well it was a busy week last week, what with WPP agreeing to buy 24/7 and Microsoft agreeing to buy Aquantive. I was on vacation overseas, so didn’t get a chance to post my thoughts on it as it happened, but there was a lot of thoughtful coverage.
Since these deals came hard on the heels of Yahoo’s acquisition of Right Media and Google’s acquisition of Doubleclick last month, most of the coverage was in the vein of “watch everyone play catchup to Google”.
I have a slightly different take on this spate on transactions. I think that in the case of Yahoo and Microsoft, they are actually playing catchup to AOL’s acquisition of Advertising.com in 2004. This happened under Jon Miller’s watch (I was his chief of staff at the time). It has since proved to be a prescient deal.
It is no accident that AOL was the first big portal to move to acquire an ad network as they were the first to experience the trend of deportalization. The big three portals (Yahoo, MSN, AOL) are losing share (of total US pageviews), as the chart below shows.
They will likely never regain their lost share – their tried and true techniques of recycling traffic into their own sites don’t work anymore. Users want best of breed content and, thanks to search, they can get it – within or without the portals. Its been well documented that both Yahoo and MSN have seen flat/negative advertising revenue growth in the last few years. See the below chart from Valleywag for a comparison of Google vs Yahoo gross revenues for the last few quarters.
AOL has fared better because it opened up its proprietary content, so its year on year comps look better, but it took its traffic hit earlier and will likely start to see similar trends once the growth spurt generated by opening up AOL’s content to the web slows down.
Public companies must show growth.
If you can’t grow by selling your own inventory, then you’re forced to sell other people’s inventory. That was the driver of AOL’s acquisition of Advertising.com, and it’s the driver of Microsoft and Yahoo’s recent acquisitions as well. It also explains the prices that they paid, which some fear to be too high. Fear of loss is always a greater motivator than the prospect of gain. The big portals are looking down the barrel of a loss of their share of total pageviews, and are willing to fight hard (i.e. pay up) to avert that loss.
USA! USA! USA! We’re number one! May 18, 2007Posted by jeremyliew in advertising, Consumer internet, international, Internet, start-up, startups, web 2.0.
For many US based startup online media companies, intenational users are largely an afterthought. As I am an Australian, this has always annoyed me. But it is becoming increasingly clear, much as it pains me, that US based startups are right to focus on their home market. When it comes to creating value, non-US users largely don’t matter to them.
I was looking at some research pulled together by Yazid Aksas, a student at Stanford Business School. He pieced together estimates for the 2007 internet advertising market size and the number of internet users in each of the ten countries with the most internet advertising in the world, from various sources*.
The obvious analysis is to look at online ad spending per internet user by country to see where marketers are spending their money to reach internet users
Interestingly, although the US is close to the top of the list, most of the G8 show high ad spend/internet user (with Russia and Italy being the unsurprising exceptions). The UK is even 20% higher than the US. This suggests that there are sizable online media businesses to be built in each of these countries.
Why then are Bebo and Piczo so focused on building their US user bases? Their home in the UK, where they have the most strength, is the market that spends more in online advertising per user than any other in the world!
The answer lies in the absolute size of these online ad markets, and the extremely high economies of scale in the advertising business.
At $19.5bn, the US is four times bigger than the next biggest market, and bigger than all the other markets combined. Internet advertising, like all advertising, is bought on a country by country basis. The fixed costs of setting up a sales office are going to be roughly the same in any country. Given that the upside opportunity is so much bigger in the US, and given that startups need to focus, its no wonder that most US based online media startups focus on their home market. There is more than enough opportunity to build a business here without worrying about the complexities of other geographies.
More mature companies, which can undertake multiple independent initiatives, do start attacking some of the other international markets. Myspace has been very focused on rolling out new geographies in the last twelve months as it can leverage a mature world wide ad sales force through its Fox/News corporate parent.
Google’s advertising revenues match the overall distribution above quite well, with 53% of their revenues in the US and 47% internationally. Their huge scale and self service model allow them to serve all countries without being forced to focus on just one due to the need to focus. Others with a self service model can also take this approach from the beginning
Online media companies that start outside the US tend to be more international in their outlook from the beginning. This may be a reflection of a greater international awareness among European and Asian entrepreneurs, or it may be simply a reflection of smaller domestic markets. Successful startups may outgrow their smaller domestic markets sooner, forcing them to turn to new geographies if they want to maintain their growth. Some of the new generation of European internet startups that have been most aggressively international include Tradedoubler, Skype, Netvibes, Joost, Jahjah, and Wikio (a Lightspeed company) and it is likely no accident that these companies were all founded in countries with a smaller domestic online advertising market.
Can any readers provide some counter examples of US based companies which deliberately targeted an international market before attacking the US? (Friendster‘s South East Asian bias, Orkut‘s Brazilian bias and Hi5‘s Indian bias don’t count since they were not deliberate). if so, please comment.
* Sources were IAB, IAB of Canada, Deuteche Bank, Vunet.com, Internet & Mobile Association of India, eMarketer, Susquehanna Financial Group, Intermeios, GroupM, Comscore
Contrarian viewpoint on the future of newspapers May 8, 2007Posted by jeremyliew in business models, Consumer internet, local, media, newspapers.
Walter E. Hussman Jr., the Publisher of the Arkansas Democrat-Gazette (the major paper in Little Rock), wrote a fascinating opinion column in today’s Wall Street Journal (subscription required) entitled “How to Sink a Newspaper“. He take a contrarian view to the prevailing trend for newspapers to embrace the web and make their content free to drive more online users. Indeed the Newspaper Association of America recently released a report saying that newspaper websites are growing twice as fast as other websites.
Instead, Hussman defends his paper’s practice of keeping the majority of his content behind a pay wall. Because the article require a subscription, let me excerpt a few key passages:
One has to wonder how many of the newspaper industry’s current problems are self-inflicted. Take free news. News has become ubiquitous, free, and as a result, a commodity. Anytime you are trying to sell something that becomes a commodity, you have lost much of the value in providing that product or service….
All of this would be fine if newspapers generated lots of additional revenues from offering free news. But the fact is newspapers generate most of their online revenues from classified advertising, not from news….
It turns out that a Web site is a very different medium from a newspaper. While consumers often find pop-up ads a distraction and banner ads as more clutter, readers often seek out the advertising in newspapers….
Our newspaper, the Arkansas Democrat-Gazette in Little Rock, does not offer our news for free on the Web site. We offer free headlines. On a few selected stories, we offer a few free paragraphs, designed to get people to read our paper. We also offer free classifieds…
So what are we doing with our Web site? We have hired a videographer to complement our text coverage in the newspaper. We have added photo galleries to increase the number of photographs beyond what we can publish. We offer an electronic edition where you can search the entire edition by keywords, something you can’t do in the print edition. And we offer breaking news email alerts, something else you can’t do in print. In other words, we are offering value on our Web site that complements, rather than cannibalizes, our print edition.
Collectively, the American newspaper industry spends $7 billion on news and editorial operations. This includes everything from copy editor salaries to sports travel expenses. In addition, the Associated Press spent about $600 million world-wide in editing and creating news. By offering this news for free, and selling it to aggregators like Google, Yahoo and MSN for a small fraction of what it costs to create it, newspaper readership and circulation have declined.
…it is not just the newspaper industry that gets hurt. Journalism will be diminished in America with less investigative and enterprise reporting; indeed, less reporting of state houses, city halls, school boards, business and sports. Clearly a lot is at stake.
It is time for newspapers to reconsider the ultimate costs and consequences of free news.
Hussman provides some data to back up his contentions, citing growth in his newspaper’s paid circulation against industry wide declines, and showing relatively better performance than the Columbus Dispatch (a comparable paper) in the 6 months after the Dispatch switched their website from free to pay.
Before reflexively dismissing Hussman as an old media dinosaur that “just doesn’t get it”, its worth while considering another newspaper transaction that is in the public eye, News Corps bid for Dow Jones and the Wall Street Journal. Since Murdoch bought MySpace, a move that earned him first ridicule, then praise, it is hard to accuse him of being an old media dinosaur. And as Hussman points out about the WSJ online, it has almost one million paying subscribers, more than all but three US newspapers (USA Today, WSJ and NY Times). Even the opinion piece that I’m quoting can’t be read unless you’re one of these one million!
Hussman gets to the core of an important point, but I disagree with him on the nuances. I don’t think that news has become a commodity because newspapers make it free. Rather, I think that news is free because its a commodity. In a world of wire news, where you read the story hardly matters. For most breaking news, a rewrite of a wire story by a staff reporter is not enough to differentiate one newspaper from another. One could argue that the wires shouldn’t sell to outlets other than newspapers, but that cat is well and truly out of the bag.
The important thing that allows papers like the WSJ, and like the Arkansas Democrat-Gazette, to continue to charge for subscription is that the content that they have is NOT a commodity. The journal covers business news to a depth and breadth that no other US paper does. It adds insight and analysis. What you read in the journal you often CAN’T read elsewhere. Similarly, I imagine that readers/subscribers of the Democrat-Gazette online are not turning to it for news on Iraq or the election, or topics that are well covered elsewhere, but rather news about local issues in Little Rock and in Arkansas that are NOT covered elsewhere. Its the local paper’s coverage of local news that allows it to hold its audience – not its coverage of commodity news.
What this gets to is one of the core premises of business – find your unfair advantage. For now, the Journal and the Democrat-Gazette have an unfair advantage; for the former in the coverage and analysis of business news, and for the later in coverage and analysis of Arkansas news. One could argue that over time these too could come under threat from bloggers both national and local, but for now their news is worth a premium. (As an interesting aside, the free daily BostonNow is now including some local bloggers in its print edition.)
The advice I would give to Huffman would be to take all the rest of his content, the commodity news (International, National, Business etc) and put that outside the pay wall and see what happens. He might be pleasantly surprised.
Online and offline distinctions starting to blur May 7, 2007Posted by jeremyliew in Consumer internet, Ecommerce, Internet, start-up, startups, user generated content, web 2.0.
On Friday Om Malik put up an interesting post about how small companies can now fully benefit from the internet in a way that was once open to only companies at greater scale.
In his article Om namechecks Moocards (mini “personal” cards, personalized with your pictures or avatars), Spreadshirt and Skinny Corp/Threadless (both user created and curated t-shirt retailers), JPG magazine (print photography magazine, with user created and curated photos), and CastingWords (marketplace for audio to text transcription).
The other interesting thread through these companies is that they all connect the online and the offline.
To some extent, almost all e-commerce companies connect the online (transaction) with the offline (fulfillment). Most retailers instinctively grasped that the internet was just a new channel, and today the Internet Retailer top 500 is dominated by multichannel retailers who started in bricks and mortar or catalogs. Small business entrepreneurs running everything from hardware stores to strip mall blinds stores have grasped the opportunity that the internet represents, and launched profitable businesses online doing tens of millions in revenue. We’ve even seen movement the other way, with e-tailers sending catalogs or even opening stores.
Marketers too have known instinctively that they need to blend their online and offline campaigns together. From the earliest days of the internet, AOL partners were required to add their “AOL Keyword” to their offline advertising, and when I was at Citysearch in ’96, one of the things we made sure to tell our small business customers was to put their URLs in their business cards, menus, letterhead and other paraphernalia. Today you’ll be hard pressed to find an ad in a magazine or on a billboard that doesn’t include a URL.
Furthermore, manufacturers, who are one step removed from their consumers, are starting to use the internet to connect directly with their end users. I’ve posted in the past about how companies such as General Mills (cereal), Ganz (plush toys) and Mattel (Barbie) have all set up casual immersive worlds where their endusers can connect with these brands and each other.
Mobile access to the internet via cellphones is further blurring the distinction between online and offline companies. Photo mobile blogging sites like Fotolog and Radar continue to grow, with Fotolog currently at an Alexa rank of 24th in the world. Cell phone users are using their mobile phones to snap pictures of 2d barcodes to access information about the real world, to get alerts of sales in the mall that they are in, or to keep track of their spending.
I think we’ll be seeing an increasing blurring between online and offline as the internet becomes more of the fabric of people’s daily lives. More examples of companies who are blurring this line are welcome in comments.