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More on internet trends December 22, 2010

Posted by jeremyliew in 2011, Internet.

UPDATE: Bloomberg has made this video private so it is no longer available. Sorry


I was interviewed on Bloomberg TV this morning about internet trends. It’s about a five minute video. You will have to click through to Youtube to watch as Bloomberg doesn’t allow embedded video watching.

Let me know what you think.

How to measure how well an online media company is scaling. December 8, 2009

Posted by jeremyliew in Consumer internet, Digital Media, Internet, media, start-up, startup, startups.

Two years ago I posted about the three ways to grow an online media business to $50 million in revenue. In this article I focused on RPM (Revenue per thousand pageviews, = CPM x sell through rate x # of ad units per page) and drew the distinction between three strategies, and the traffic needed for each strategy to get to scale:

1. Broad Reach, low RPM, traffic in the 10s of billions of pageviews/mth

2. Demographic Targeting, moderate RPM, traffic around 1 billion pageviews/mth

3. Endemic Targeting, high RPM, traffic in the 100s of millions of pageviews/mth

I think using CPM/RPM in this is a useful framework to think about strategy, but it isn’t necessarily the most useful way to think about howe well an online media business is scaling. In practice, most online media companies do not sell out their inventory through direct sales. Because direct sales generates RPMs so much higher than remnant inventory running through ad networks, the amount of direct sales is key.

Direct sales shows real economies of scale. While it is harder and more expensive to sell, support and serve a $1M insertion order than a $10k insertion order, it doesn’t cost 100 times more. Unfortunately, many media startups find that their campaigns are primarily in the 10s of thousands. This creates inefficiency and makes it difficult to scale. It is hard to get to $50M in revenue $10k at a time.

Right now, the key measure that I use to judge how well an online media company is scaling is by looking at quarterly revenue by advertiser. The more advertisers are spending over $100K per quarter the better. I like to see 10 or more advertisers spending over six figures per quarter. This shows that the site has grown beyond “experimental buys” and has become a core part of the advertising mix for a core set of advertisers. These sites are over the hump on scalability of their business as it is much easier to get repeat business from clients who are committed to the site, and to use these reference accounts to drive further sales growth.

What do readers think about this measure of how well an online media company is scaling?

Congratulations to Jon Miller and Newscorp March 28, 2009

Posted by jeremyliew in Internet, jon miller.
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Numerous reports last night that Jon Miller is going to be taking over as digital head at Newscorp:

Once he does sign, which seems likely, Miller will become News Corp.’s chief digital officer, reporting directly to the media giant’s head, Rupert Murdoch. Based in New York, he will also be chairman and CEO of the newly created News Digital Media group.

Sources noted that this is a a different and larger platform for Miller, bigger than just the Fox Interactive Media job that Levinsohn held. It will go across all properties held by News Corp. across the globe.

“The idea is to mainstream the digital initiatives, which have been all over the company,” said one source close to the situation.

I worked for and with Jon for seven years, both at IAC and at AOL. He is terrific; a premier strategist and thinker about the online world. AOL did terrifically well under his leadership, and took a marked and immediate turn for the worse when he left. He has a huge palette to paint with with the Newscorp digital assets.

Congrats to both Jon and Newscorp.

Interesting factoids out of latest Morgan Stanley “Economy and Internet Trends” research report March 26, 2009

Posted by jeremyliew in Internet.

Mary Meeker’s latest omnibus research report goes deep on the economy and it’s implications for the internet. Some interesting tidbits:

1. Only 5 of “top 20” US Advertisers spent more than the industry average of 8% of their ad budgets online. P&G (#1) spent 2%, AT&T (#2) spent 6%, Time Warner (#5) spent 6%, Glaxo Smith Kline (#7) spent 2%, J&J (#8) spent 3% and Unilever (#10) spent 5%.

2. 18-41 year olds spent more time on the internet (25%) than TV (22%)

3. Top countries for social networking penetration: Brazil & South Korea. Top country for e-commerce penetration: Germany. Top country for online gaming penetration: China. Top country for mobile payments penetration: Japan. Top country for microtransactions via SMS penetration: Philippines. Top country for online advertising penetration: UK. Top country for broadband penetration: South Korea. US has headroom in all of these areas based on other countries experiences.

Which categories of advertiser are still buying online media? March 10, 2009

Posted by jeremyliew in advertising, Internet, recession.
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More from James Mitchell’s presentation last week:

Checks with large online buyers confirm the obvious – that discretionary and some lending-oriented financial verticals remain weak. Also, we do not forecast a speedy recovery of the auto sector, though comments from overseas manufacturers are encouraging, with brands such as Audi planning to double its online ad budget this year, despite sales trends.

Also encouraging are announcements from players in the hardest-hit verticals moving all ad spending online. For example, Century 21 Real Estate recently committed to moving 100% of its national ad campaigns to the Internet.

Surprisingly, financial categories such as insurance, refinancing, and deposit accounts remain strong, as financial institutions seek to raise capital and take share in fee-based businesses.

Also, education and books categories have been growing recently, with textbook retailers and continuing-education institutions such as the University of Phoenix seeking to capture counter-cyclical demand.

Mitchell also identified travel as a potential area of weakness as airlines cut back capacity. However, he noted that there is a lot of hotel inventory currently in development that would come online over the next two years. These new hotels and resorts would likely drive travel advertising to recover.

One other area that Mitchell noted may change in the future was pharmaceutical spending. While this has been holding up very well so far, he noted that some changes that the Obama administration is contemplating may limit pharmaceutical companies ability to advertise their products.

Other attendees noted entertainment advertising (particularly movies), advocacy advertising (political issue based advertising) and CPG (consumer packaged goods) as areas that are showing continued strength, and “green” as an area that could potentially show weakness.

Long term future still bright for online advertising March 8, 2009

Posted by jeremyliew in advertising, Internet, recession.

James Mitchell, lead internet analyst for Goldman Sachs, presented to a group of around 100 internet and mobile media company CEOs that Lightspeed pulled together last week.

There is clearly near term gloom. Goldman is projecting internet advertising revenue to be flat in 2009 in the US, and to see just 4% growth world wide. However, Mitchell showed that there is still plenty of long term headroom for growth in the internet advertising market. He pointed out that in the US, internet advertising represents around 8% of all advertising today, and this could as much as double over time:

Experience overseas leads us to believe that as Internet penetration, broadband penetration, smartphones and mobile access, and general comfort with the Internet grow, so too will online advertising as a percentage of total advertising.

For example: Online advertising is 17% of total advertising in Korea, with search comprising 11% and display & other making up 6%. Korea reached 50% broadband penetration in 2001, when search advertising that year was about 2% of the total ad market. The US took until 2005 to reach those levels.

Similarly, in the UK, online advertising is 13% of total advertising. In the US, online was only about 8% of the total at the end of 2008. We believe that the US and UK will catch up with Korea, and that the rest of the world will gradually converge with developed Internet economies.

Further, we believe that the transition to online will occur more quickly in developing markets such as China, as advertisers “leapfrog” traditional forms of advertising and begin advertising solely or primarily online.

Search and Display internet advertising as % of total: US vs Korea

Search and Display internet advertising as % of total: US vs Korea

He speculated that online advertising share of all advertising could reach as high as 23% if a scalable advertising solution for social media could be found.

Clearly, the companies that make it through to the other side of this advertising recession will have plenty of growth left ahead of them.

Consumer Internet Predictions for 2009 December 11, 2008

Posted by jeremyliew in 2009, Consumer internet, games, games 2.0, gaming, Internet, predictions.

For the last two years I’ve been making predictions about the consumer internet, and this year is no exception.

First let’s take a look at how I did on last years predictions:

1. Social Media advertising, Online Video advertising and In-Game advertising start to become scalable.

Grade: B-. We’re seeing much greater scale on social media and online video advertising, with a standard emerging for online video, and movement towards a standard for social networks. In-game saw some progress but not as much.

2. Structured web emerges.

Grade: C. Notwithstanding the Powerset acquisition, the structured/semantic web hasn’t been a real theme for 2008.

3. Games 2.0

Grade: A. This year was a breakout year for social networking games, web based games and free to play games. I see this growth driving several of next years predictions as well, as you’ll see below.

Now on to new predictions. Note that the remainder of this article is cross posted at the Wall Street Journal.

Last year, consumer Internet startups sprung up left and right, looking for U.S. traffic growth and relying on the robust growth of the advertising market to make money. We enter 2009 looking down the barrel of a recession. In this environment, I predict the following trends for consumer Internet companies:

1. Consumers seek cheap thrills

Even in a recession, people will still want to be entertained. The Great Depression saw resilience and even growth in movie ticket sales as one of the cheapest ways for people to entertain themselves. As this economy tightens through 2009, we’ll find growing numbers of “time rich-cash poor” consumers seeking today’s lowest cost methods to entertain themselves. In general, this will benefit two categories of consumer Internet companies.

First, social media and social networks. These are free and endlessly entertaining. As mainstream media companies cut costs, the relative value and quality of user generated content increases. MySpace, YouTube and Facebook all rank in the top 10 Web sites by aggregate time spent according to comScore. The most popular applications on Facebook and MySpace are all games, entertainment and lightweight communication, and these can provide endless hours of entertainment for users. It isn’t just Facebook and MySpace that will benefit though. Smaller social media sites that have built enough of a critical mass to have a self sustaining community will also see growing usage over the next year.

Second, games. Games are one of the most cost effective means of entertainment available. While a $10 movie ticket can provide 90 minutes of entertainment, a $60 computer game can easily provide 50-100 hours of entertainment. Free-to-play web based games make this math even more compelling, whether they be casual game portals like Pogo, virtual worlds like Gaia or massively multiplayer games like Runescape. The Web site with the highest amount of time spent per visitor in October was Pogo.com with 444 minutes/visitor. Number two was Yahoo, with just 291 minutes/visitor in the same period. Games in general, and free games in particular, can provide a lot of cheap thrills.

2. Trading real money for virtual goods

In Asia people have been paying real money for virtual goods for years. It is the primary business model for games and Internet companies in China and Korea, far more important that advertising. We’re starting to see similar behavior in the U.S., also led here by online games and social networks. On the back of the rise of social networks and games, 2009 will be the first real breakout year for this business model in the US.

To people who do not spend time on social networks, it seems crazy that people would pay real money to buy each other virtual gifts – pictures of things ranging from birthday cakes to hugging penguins – and then display them on their profile pages. But estimates peg Facebook’s digital gifts sales in the $35 million – 50 million range this year. As more human interaction moves online, these social tokens of appreciation move online in parallel.

In the same way, gamers are more than willing to buy virtual goods In 2007, Nexon made $30 million selling virtual goods to U.S. players of their games. These items either allow players extra powers in the game (e.g a bigger gun), or allow players to customize the way that their character looks (e.g. cool sunglasses). People want to win, and they want to look good doing it. Dozens of other games companies are now employing this model in the U.S.

Why would this recession be a time for virtual goods to take off in the U.S.? It actually has nothing to do with the economy, Rather, two new payment mechanisms are becoming available now that allow gamers, many young and without credit cards, to play these games to their full capacity. The first is that prepaid game cards are now being sold at retail, with Target leading the charge. The second is incentive marketing. If a player take an action (like signing up for a ring tone service, or completing a survey) the advertiser who benefits will fund the purchase of that players desired virtual goods. One virtual world company, Gaia, used to have three full time employees who did nothing but open envelopes of cash that their teen and ‘tween players sent them to buy virtual goods. Since rolling out their new payment mechanisms, their revenues have doubled and they no longer have to open envelopes full of pocket money.

Asia and Europe have led the US in the adoption of free to play games because they have had good alternative payment mechanisms in place for longer, including mobile payments and credits available for sale at internet cafes. Now the U.S. is ready to catch up.

3. Web 2.0 leaders pull further away from the pack

In a recession, when advertising budgets are cut, there is a flight to quality among advertisers. Size and “brand name” are good proxies for quality. Advertisers will want to buy advertising on big, well known websites. The big online media companies like Yahoo and AOL will benefit from this. However, they are already so big that they cannot escape the overall shrinkage of ad budgets.

On the other hand, many Web 2.0 companies, like Facebook and Digg, have build large user bases but have not yet built out their capacity to monetize their traffic. These companies will see the benefit of the advertiser flight to quality. However, as they are only now building out their sales forces, they will likely continue to see strong revenue growth in 2009.

4. Online ad prices continue to fall, alternatives help make up some of the ground

The Internet advertising market, like all markets, responds to changes in supply and demand. In the current recession, demand for advertising is likely to decrease. At the same time, supply of online inventory, page views, is continuing to increase. Social networks and other social media sites in particular are creating masses of new inventory. As a result, the price of online advertising will continue to fall in 2009.

Targeting may mitigate some of this fall. Better targeting is steadily improving the effectiveness of direct response advertising (the equivalent of TV infomercials). This targeting takes many forms, but all have demonstrated an ability to lift conversion rates over “run of network” advertising. As targeting technology improves, and as the data that publishers and networks collect about users increases in quantity and quality, we will see a better ability to match the right ad to the right person, and charge more for that ad.

5. Getting serious about monetizing non U.S. traffic

The U.S. led the way on the internet, and for a long time the U.S. dominated overall Internet usage. In the past couple of years this situation has changed. China passed the U.S. as the country with the most internet users this year. Top sites like Yahoo, MSN, Facebook and MySpace all have more users internationally than in the US. Serving an international user costs the same as serving a U.S. user, but making money from an international user is much harder. In 2009, I expect Internet companies to get serious about making money from their international traffic.

The US market represents about half of all online advertising, which is partly what makes monetizing international traffic so difficult. Building up direct ad sales teams (and networks) internationally will partially help to bridge the gap, but this will not be enough. As noted previously, in Asia direct monetization models (i.e. selling things directly to users) have proven to be a better business model than advertising. U.S. companies will need to understand and embrace the direct monetization models that have worked well overseas, principally mobile monetization, premium subscriptions models and digital goods models based on selling greater functionality, scarcity or status.

Silver linings to dark clouds

These trends will benefit some internet companies but disadvantage others. I hope that your company finds the right way to navigate these shifting shoals. Let me know if you agree or disagree with these predictions, or if there are other trends that you think I’ve missed.

Slowing growth in online media impacting bigger companies May 23, 2008

Posted by jeremyliew in advertising, Internet, startups.
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Bill Morrison, the internet analyst for investment bank ThinkPanmure put out an interesting report today that is worth reading for people in the online media space. He concludes:

1Q08 was, in our opinion, one of the worst fundamental quarters for publicly-traded online media companies in several years. Roughly 66% of the companies we cover missed expectations or lowered their outlook. We believe online media is in the midst of a cyclical downturn, yet 75% of the companies we cover need to accelerate growth to meet the consensus estimates this year. That is highly unlikely given macro headwinds, in our view… Within advertising, we favor names with minimal CPM exposure such as GOOG, RATE, and MCHX.

This sounds gloomy, and is consistent with other recent announcements such as eMarketer lowering their forecasts for 2008 online ad spend and Pubmatic finding lower CPM rates in their latest survey.

It is important to note though that large companies and small companies face very different situations. As Pubmatic notes:

The PubMatic AdPrice Index revealed surprising weakness in monetization for the vast majority of Web sites. Large Web sites fared the worst while small Web sites managed to maintain their monetization rates. eCPMs for large Web sites (more than 100 million page views per month) dropped dramatically by 52 percent from 38 cents in March to 18 cents April. Medium Web sites (1 million to 100 million page views per month) were nearly flat, with monetization dropping from 34 cents in March to 33 cents in April. Small Web sites managed to improve their monetization, increasing from $1.18 in March to $1.29 in April.

EMarketer’s report still projects 23% growth in 2008 online ad spend, and ThinkPanmure notes that growth for the public internet companies is slowing, not stopping.

online media growth rates

There is no doubt in my mind that a slowing economy is impacting advertising spend. However, the shift of advertising to follow time spent is continuing to drive growth in online media. The trend is our friend.

Furthermore, for startups, micro issues (such as whether the new sales person in Detroit started in Q2 or Q4) will continue to have far greater impact on making this years revenue goals than any macro factors will. Startups should not look at the woes of the publicly traded online media companies as their own fate.

Increasing mobile web usage and increasing web page size are on a collision course May 5, 2008

Posted by jeremyliew in Internet, mobile.
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iPhone users browse the web on their phones far more than the users of other phones. According to the NY Times, over Christmas 2007, Google got more traffic from iPhones than from any other type of phone, despite the iPhone’s small market share:

The data is striking because the iPhone, an Apple product, accounts for just 2 percent of smartphones worldwide, according to IDC, a market research firm. Phones powered by Symbian make up 63 percent of the worldwide smartphone market, while those powered by Microsoft’s Windows Mobile have 11 percent and those running the BlackBerry system have 10 percent.

Info World notes:

The key to the iPhone’s success is the fact that it provides a unified, full browser experience, said Neil MacDonald, a Gartner analyst. By comparison, Windows Mobile is a fractured platform, with separate PDA and smartphone versions, as well as a version of the browser that doesn’t support full HTML.

But at the same time we have an increase in full web browsing on the phone, web pages are getting bigger. Much bigger. The average web page tripled in size since 2003. Why? WebsiteOptimization.com says:

Web 2.0 technologies such as Ajax certainly contribute to the increase in the number of objects per page, as well as the growth in JavaScript file size. Dynamically generated sites from content management systems are typically not as optimized as hand-tuned sites, and often carry over site-wide CSS, JavaScript, and page components to every page on a site.

As broadband becomes more widespread web designers have created more elaborate designs, assuming that a large proportion of their audience is on broadband, or ignoring dial-up users entirely.

Even iPhone users will acknowledge that visiting big web pages, especially those incorporating rich user interactions, can be a frustrating experience. Yet most pundits agree that web usage is only going to increase on mobile devices, despite the triple constraints of slower connections, slower processors and smaller form factors.

I’d be curious to hear what readers think will happen as these two trends collide.

As artists create content for the web, best practices change. April 28, 2008

Posted by jeremyliew in Internet.
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The NY Times magazine this weekend notes that Flickr has developed its own ideas about beauty in photos, very different from the art-school aesthetic.

People don’t upload to the Web words and images they had fashioned apart from the Web; they fashion their stuff specifically for online platforms and audiences.

Consider photography. As art-school photographers continue to shoot on film, embrace chiaroscuro and resist prettiness, a competing style of picture has been steadily refined online: the Flickr photograph. … amid the more than two billion images that currently circulate on the site, the most distinctive offerings, admired by the site’s members and talent scouts alike, are digital images that “pop” with the signature tulip colors of Canon digital cameras.

While pretty and even cute, these images are also often surreal and prurient, evoking the unsettling paintings of de Chirico and Balthus, in which individual parts are beautiful and formally rendered, but something is not quite right over all. Flickr’s creamy fantasy pictures, many of them “erotic” (rather than sexy) portraits that have been forcibly manipulated with digital tricks, stand in contrast to the rawer and grainier 35-millimeter photography that’s still canonized by august institutions like the International Center of Photography.

Blogs too have developed their own unique writing style, different from the writing of newspapers or magazines, and often influenced by the dictates of SEO best practices, headline focused RSS readers and the short attention span of web readers. Writing has become more like advertising copy, with no room for a surprise ending as the reader may never get to it. It becomes all about the attention catching lead.

Online video is another clear example of how the medium has changed best practices. As Comscore’s recent video data shows, short form videos such as those on Youtube and MySpace completely dominate the longer form videos from ABC.com, Viacom, Disney and the other TV networks.

Even music is starting to change – Rolling Stone recently noted that songs are now written to sound good in compressed MP3 format and on small speakers, rather than being optimized for absolute sound quality.

These changes are not for the better or for the worse, but they are further evidence that the web is not just a distribution channel for other forms of media, but a new medium in its own right, with its own best practices, use cases and aesthetics.