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Ad networks and behavioral targeting; who benefits the most? June 19, 2007

Posted by jeremyliew in ad networks, advertising, business models, Consumer internet, Internet, user generated content.

Today’s WSJ has an excellent article on behavioral targeting. It details Pepsi’s launch of Aquafina Alive,their new low cal vitamin enhanced water. The campaign was backed by an online campaign through Tacoda and targeted to people who had previously visited “healthy lifestyles” websites.

The result? Pepsi recorded a threefold increase in the number of people clicking on its Aquafina Alive ads compared with previous campaigns. “We’ve never been able to get to this level of granularity,” says John Vail, director of the interactive marketing group at Pepsi-Cola North America.

Brand advertisers like Pepsi (you’re not buying the water online after all!) having this sort of success is a strong indicator of the growing importance of ad networks.

Last week the FTC announced that they would investigate Microsoft‘s acquisition of aQuantive and Yahoo‘s acquisition of Right Media, adding them to their ongoing investigation of Google‘s acquisition of Doubleclick. Although the American Association of Advertising Agencies and the Association of National Advertisers asked for antitrust review, I think that they have little to fear and much to benefit.

First, let me give some context on ad sales. As I guy who has “carried a bag” myself, I believe that sales cycles are directly proportional to the complexity of the sales message, and RPMs inversely proportional.

A simple sales message results in a short sales cycle and high RPMs. Take automotive advertising; imagine you’re selling online advertising to Toyota.

Autoblog has the next easiest sales proposition. Autoblog has amassed an audience of auto enthusiasts. While they may not all be in-market car buyers, they have a natural affinity to cars, and selling ads against this vertically targeted audience is a relatively simple proposition with relatively high RPMs.

The Washington Post sells its demographic. It argues that its readership skews higher income and hence is more likely to buy a Lexus. Its a pitch that has worked in print and on TV for years, and works online as well, although not quite as well. Sales cycles will be reasonable, and RPMs lower than for Autoblog.

Many large sites or networks sell reach. The pitch goes something like “Lots of people visit us, and some of them might want to buy a car, right?” Its a tougher sale, and even when successful, it generally results in CPC campaigns that mitigate the advertiser’s risk, often resulting in low effective RPMs.

So what does this mean for the networks and the “fattening long tail”? As I’ve posted about in the past, I’m a fan of “synthetic channels“, or vertically targeted ad networks, that can take advantage of the first two of these categories of sales.

But many sites generate pageviews that are unable to take advantage of these sales pitches. They are untargeted, and as such, are likely to be soldat a deep discount as “run of site” or “remnant” inventory, if they are sold at all.

This is where ad networks who apply behavioral targeting can really have a big impact. eMarketer predicts that behavioral targeting will increase by 7x over the next four years.

Behavioral targeting growth

A large network can anonymously track a user as they move around the internet, recognizing them to be the same person when they show up at different sites across the network. They then use this data to target ads more effectively on “lower value” sites, thereby increasing the value of the ad inventory. So for example, a user who had previously visited Autoblog gets a Lexus ad when they show up on a MySpace page, even though the Myspace page has nothing to do with cars. This has become standard procedure at many of the big networks.

As we saw from the Aquafina example, behavioral targeting works for advertisers.

The key question is how does the incremental value (the increased CPM between the Lexus ad and a “run of network” ad) get split between the three constituents in the relationship; Autoblog, MySpace and the network. This is partly the outcome of supply and demand. Because of the massive surplus of “broad reach” inventory online, the bulk of the value goes to the network and Autoblog.

The network gains disproportionate value from having Autoblog in its network because it can now make a lot of its “broad reach” inventory more valuable. However, in a world with multiple networks, a site that ads “behavioral information” to a network can take that data advantage with it to any other network.

So sites with the opportunity for endemic advertisers have an advantage, not just as standalone sites, but also as members of ad networks.

Its not the advertisers that need to worry about consolidation of ad networks, but sites with content that can be used for behavioral targeting.

I’d love to hear what readers think on this issue.

Ad Networks: Synthetic channels June 11, 2007

Posted by jeremyliew in ad networks, advertising, business models, Consumer internet, Internet, start-up, startups.

One of the hallmarks of the last few years on the internet has been the growing length of the “long tail”. Compete released some data last year showing that its panel was visiting 77% more websites than it did five years ago:

Long tail getting longer

Interestingly enough, Compete also released data showing that the “head” of the internet was growing in size:

Top Sites account for a larger percentage of pageviews

Together, this suggests that there are now many new sites getting only moderate traffic. While these sites may never grow big enough to become public companies, they are very likely getting to a scale where they can break even. I spoke on this topic at the web 2.0 expo where my presentation analyzed how big sites needed to get to hit both of these goals.

Many of the smaller ad supported sites turn to ad networks for monetization. This trend is being matched by advertisers embracing the channel. A recent report by Collective Media found that:

* 66% of advertisers plan to increase their usage of ad networks in 2007

* 88% of respondents planning to use online ad networks in 2007 (up from 77% in 2006).

* 57% of respondents believed how an ad network targets audiences was the #1 differentiating factor between networks

* Reach (at 52%) and Efficiency (at 66%) were still the key drivers for why agencies/advertisers include ad networks on the buy

I believe that among the biggest beneficiaries of these trends have been the content specific ad networks. With more advertising buying on networks, and with audience targeting being the #1 differentiator, networks that can offer extremely targeted audiences focused where an advertiser is endemic are hard to beat. As I’ve posted about in the past, having endemic advertisers makes for higher RPMs, and hence a smaller level of overall traffic scale to get to high revenues. At AOL, the channels with endemic advertisers always got the highest CPMs and sell through rates, and content specific ad networks are essentially creating synthetic channels.

Many ad networks do contextual targeting in their efforts to get endemic advertisers next to content (with Google and Yahoo being the most prominent). Others use behavioral targeting. Both of these approaches have been effective in lifting RPMs, but both require a leap of faith from the advertiser that the “black box” truly works. To mitigate this risk, contextual networks usually have CPC or CPA based pricing models. However, these models don’t capture all the value of a branding campaign, which can only be fully priced by a CPM model. This leaves some value on the table. Many endemic advertisers are not looking just for “in market” buyers who are looking to make a purchase decision imminently. They are also looking to build brand awareness to influence future purchase decisions.

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.

One example is Jumpstart, a synthetic channel reaching 5m UU/month and focused on the auto industry. It was bought by Hachette Filipacche (publisher of Car & Driver and Road & Track) in April of this year for up to $110m.

Another example is Glam, which started life as an site focused on fashion, but quickly morphed itself into a synthetic channel focused on “Women: Fashion and Lifestyle” and reaching over 12m UU/month. It claims to be the “fastest growing web property in 2007“.

A third example is the Health Central Network, a synthetic channel focused on medical information and tools. Many of Health Central Network’s sites are actually owned and operated by the company as it rolled up small health content sites during the internet bust.

I think we’ll see more synthetic channels emerge, focused on the high ad spend categories:

ad spending by category

Note that automotive, retail and medicine, the content targets of the three examples above, are the three of the top four advertiser categories. I’m sure this is not an accident! Are readers aware of other synthetic channels?

Update: Conincidentally, Techcrunch just posted about Active Athlete Media, another synthetic channel.

Ecommerce 2.0 is happening now June 7, 2007

Posted by jeremyliew in business models, Ecommerce, Entrepreneur, Internet, start-up, startups, web 2.0.

I just spent the last two days at the Internet Retailer conference, and emerged convinced more than ever that we’ve just scratching the tip of the iceberg with ecommerce opportunities. There are still many more $500m+ revenue ecommerce companies to be built, and many of the people building them were at the show.

A lot of attendees were entrepreneurs running businesses doing single to double digit millions in revenues in categories ranging from diapers to skis, from power tools to blinds. While many had built their technology in house, there really isn’t any need to do that anymore. The sheer volume of vendors who can help with everything from the ecommerce platform to the affiliate and search engine marketing, from alternative payment systems to pick, pack and ship, was just remarkable. An entrepreneur willing to do the work to pick a good category and line up vendors could launch a business with very little technological expertise.

To illustrate the depth and range of vendors to whom you can outsource just about anything, two of the more interesting companies I talked to were PAC Worldwide and Arroweye Solutions.

PAC supplies customized and branded mailing/packaging material to ecommerce vendors. For example, they produce the envelopes that your Netflix DVD’s arrive in. Its a great idea for e-tailers focusing on building a brand and an ongoing relationship with their consumers.

Arroweye allows retailers to sell customized giftcards and greeting cards. A customer can not only buy a giftcard for a friend, but can put their own picture on the card, get it inserted into a custom printed greeting card, and get the whole thing mailed, all from inside the browser. Its an incredible boon for the delinquent gifter, and an additional revenue line for retailers.

Excitingly, many of the vendors work on a SaaS/variable cost basis, so an ecommerce merchant can trial with very low risk (both technological and financial) new functionality whether it be customized gift cards, behavioural marketing (NB Lightspeed is an investor in MyBuys), collaborative filtering, or customer reviews. How very “web 2.0”.

Its definitely a good time to be an ecommerce entrepreneur! I’m interested in hearing from merchants who have passed the $10m sales mark, see real sales momentum, and are looking to raise capital to accelerate growth and address large market opportunities, as well as vendors looking to address a common pain point for etailers.

More on online media sites with endemic advertisers June 3, 2007

Posted by jeremyliew in advertising, business models, Consumer internet, Internet, social media, social networks, user generated content, web 2.0.

I’ve posted in the past about the three ways to build an online media company to $50m in revenues. One of the three ways is to focus on a topic with endemic advertisers – because RPMs are higher, you don’t need to be as big to reach the same revenue target.

Friday’s Wall Street Journal had two articles about user generated content websites with endemic advertising potential.

The first was an indepth review of Tripadvisor (subscription required), mostly from a user’s point of view. The key takeaway was that you need to look at the backgrounds of reviewers to know how to weigh how relevant their review will be to you – not exactly breaking news. However, there was an interesting nugget about Tripadvisor‘s financial performance that highlights the power of endemic advertising:

The company’s revenue is still small, at $105 million in 2006, compared with sites like Expedia and Travelocity. However, with profit margins estimated above 50% and a growth rate thought to be over 50% a year, the site offers potential at a time when hotels and airlines are trying to take back online bookings and get consumers to go directly to their sites, says Aaron Kessler, an analyst at Piper Jaffray Companies.

While the WSJ may consider $105m in revenues “still small”, it seems pretty good going to me, especially with 50% profit margins! The company was founded in 2000. Another interesting tidbit in the article is that the company has 173 employees, which underscores the point that even user generated content companies have substantial overhead.

The second article was ‘Design by Committee‘(subscription required) and namechecked HGTV’s Rate My Space and Apartment Therapy as it talked about how users are turning to the web to show off their homes or to ask for advice and feedback about decorating ideas. This is more true of Rate My Space, whereas Apartment Therapy is more of a blog/micro publisher focused on apartment decoration, with occasional posts soliciting user feedback or advice on other users homes. Both sites, while vastly smaller than Tripadvisor, show the potential for endemic advertisers.

Automotive is another category that has similar characteristics, and its no surprise that after leaving TripAdvisor, its co-founder Langley Steinert, founded CarGurus.com

This thesis was part of what drove our excitement about our investment in Flixster, despite the team being second rate. (Just kidding! ;-)). The intersection of highly social media and endemic advertising potential is very powerful. As an aside, and an indicator of how quickly social media apps in areas of user passion can grow, Flixster is now the #1 “recently popular” app on Facebook.

Flixster currently #1 “recently popular” app on Facebook

I’d be interested in hearing from other teams taking a similar approach in the intersection of social media and endemic advertising potential in categories with high advertiser spend.

x_me is aweso_me June 1, 2007

Posted by jeremyliew in Consumer internet, distribution, facebook, Internet, social media, social networks, user generated content, viral, viral marketing, web 2.0, widgets.

I’ve been obsessing over the Facebook platform since it launched last week. As has been extensively covered, its an incredible distribution platform for other companies. The most popular apps in the platform early on were existing companies like iLike, Rockyou (a Lightspeed company), HotorNot and Flixster (a Lightspeed company) who quickly ported their preexisting functionality to Facebook from other social media environments.

When I congratulated James Hong on HotorNot’s great growth in the platform yesterday, he responded:

We haven’t yet seen the native apps in Facebook. When they come they’ll grow even faster.

It’s taken less than 24 hours for him to be proved right. For the last 12-18 hours or so, the top recently popular app in the Facebook directory has been X me.

X Me
By Timothy Green
Tired of just poking? X me opens up a whole new world of action-based communication, for example ‘Hug Her, Slap Him, Tickle Them!’
346,696 users (15 friends) – 627 reviews

As I’ve posted about in the past, users can quickly adopt and understand new behaviors if they mirror current behaviors. It makes these new behaviors “easy to learn“. By mirroring the “poking” behavior that is well understood and native in Facebook, X Me has been able to quickly catapult to widespread adoption. The author, Tim Green, a freshman at Cambridge university, had done an outstanding job of building an incredibly viral app.

The Rockyou team was quick to spot the growth and has now brought Tim on board. Happily for them, they now have all three of the top three recently popular apps on Facebook. Congrats to both Tim and Rockyou!

Facebook most popular applications as of june 1st 2007

Good SF Chron article on kids and casual immersive worlds June 1, 2007

Posted by jeremyliew in Consumer internet, gaming, Internet, kids, media, social media, social networks, user generated content, web 2.0.

For those who liked my previous post on how casual immersive worlds are hitting the mainstream in the US, there was a good article in Sunday’s San Francisco Chronicle, found via Ypulse.

My favorite comments was about webkinz, the plush toy that comes with a unique code for a matching online avatar:

“I don’t really play with it a lot,” Laurel said of her plush toy. “But sometimes, when I see it, it reminds me to go play (with the computer game).”


Social media meets the desktop May 30, 2007

Posted by jeremyliew in browsers, desktop apps, Internet, social media, start-up, startups, web 2.0.

Allison Randal put up an interesting contrarian post on the O’Reilly Radar blog yesterday where she says:

The trend of moving traditional desktop applications to massively networked, Web 2.0 online applications like Google Docs is well-known. The problem is, a web browser is a terribly limited platform for application development, and JavaScript is a less-than-fully-featured language. There are inherent limitations to the kinds of applications you can develop and the kinds of user experiences you can offer in a web browser… Add in the fact that the nirvana of 100% connectivity at all times is far from a reality, even in the most technologically advanced parts of the world. This is a significant usability problem for the pure web browser applications, as anyone who has experienced the frequent forced coffee breaks by a Google Spreadsheet “waiting to connect” can confirm.

The wave of the future is not web browser applications. Instead we’re coming full circle back to desktop applications, but this time we’ve broken the old idea of single user silo applications with no connection to the outside world. The wave of the future is lightweight desktop applications with the same massively networked, Web 2.0 behavior we’ve come to expect from browser applications.

She goes on to give several examples, including iTunes and Songbird.

Its an insightful comment. We’ve tended to think of “Web 2.0” as encompassing both rich web applications (vs. desktop applications) and social media, but there is no reason why these two things have to be intertwined. We’ve seen a number of non-social websites embrace rich web applications, and so its no surprise that we’re also seeing desktop apps (or plug-ins to desktop apps) also embrace social aspects. These are apps that work well for a lone user, but even better when the user joins a network.

Om Malik recently covered one of our portfolio companies, WeFi, that takes a similar approach. Just as Songbird’s primary functionality is as a desktop music player, but social aspects can improve the experience, so too WeFi‘s primary functionality is as a better WiFi connectivity manager (and against Win XP, that isn’t a high hurdle!), but social aspects can improve the experience. A lone user gets an easier and quicker experience for identifying and signing onto any hotspot, as well as better management control over hotspots that they own. As he joins a network, he gets to roam on other private hotspots, as well as the ability to find both his friends, and wifi hotspots on a map, relative to his location.

Another company enriching desktop apps with social functionality is Me.dium. Me.dium is a browser plugin that helps a lone user to see websites related to the current website being viewed. But when that user joins a network, she gets to see what sites her friends are browsing in real time, and how they are moving from site to site, adding a social dimension to relevance.

I’d be interested to hear from readers about other desktop apps that are taking a social approach.

Social Media: Open platforms and distribution are opposite sides of the same coin May 28, 2007

Posted by jeremyliew in business models, Consumer internet, distribution, Ecommerce, Internet, media, social media, social networks, user generated content, viral, viral marketing, web 2.0, widgets.

As I’ve said in the past, I think that distribution is the most important success factor in the early stages of any new consumer technology. Distribution used to mean getting a carriage deal done with a big portal. These days it can take a number of forms, but it always requires getting in front of potential users who may not be aware of you, and alerting them to your value proposition.

As social networks take an increasing percentage of internet users time, it’s more important than ever to factor them into a distribution strategy. Within Myspace, this has been through widget virality (one of the seven forms of virality that we’ve posted about in the past). Bebo has taken a more controlled approach, allowing select partners into their system in what looks closer to a traditional portal distribution deal.

Now, through its new platform, Facebook too can be a distribution platform. Apps are spreading in Facebook through a combination of virality from profile pages, promotion to existing user bases and position in the application directory, with iLike being the clear early winner. Happily for Lightspeed, Rock You and Flixster (both are portfolio companies) have three of the top ten apps on Facebook between them. Josh Kopelman says that Facebook’s open approach to partners has effectively increased their virtual R&D budget by around $250m, the amount invested so far into widget companies.

Another of our portfolio companies, Stylehive, is also taking the approach of opening up its platform (albeit on a smaller scale to Facebook). They are partnering with retailers and publishers, including the Gap, Shopbop, Instyle Magazine, Gen Art and others, inviting them into the Stylehive platform. These partners will be able to access Stylehive’s community as well as add a social media dimension to their commerce or content.

I think we’ll see even more communities opening themselves up as platforms over the next 12-18 months. It will be especially interesting to watch MySpace’s competitive response.

Video may not be best way to monetize online May 25, 2007

Posted by jeremyliew in advertising, business models, Consumer internet, Internet, social media, social networks, video, web 2.0.

Online video is hot and everyone is scrambling to figure out how to best monetize it. Google just launched their “adsense for video” product, Advertising.com has Instream, and there are a host of startups attacking the problem as well. I think these online ad network plays are very interesting, as are all the infrastructure plays betting on the underlying rise of online video.

I wonder though if online video is the best way for websites to monetize their traffic.

Online video certainly commands a premium to banner advertising on a CPM basis. Videoegg powers the video at many of the top 20 social networks, and its rate card for run of network advertising starts at a $12 CPM, an order of magnitude higher than the CPM’s for banner ads on those social networks. The big portals (AOL, Yahoo, MSN) and the TV network’s online properties are “selling out” their video advertising at $20 CPMs and higher. While there is always remnant inventory available at steep discounts to these rates, there is no question that online video ads are selling at 5-10x banner CPMs.

Now, while on TV the ratio of advertising to programming is very high – about 8 minutes of advertising to 22 minutes of programming (ie 16 “30 second” spots per half hour), the web is nowhere near this ratio today. The norm is only one video ad per short clip, with clips typically in the 3-10 minute range.

The trouble is that for a website visitor, the scarce resource is not “impressions”, but TIME.

Lets say a typical video-watching visitor watches a clip for 5 minutes. They get exposed to one ad in that time.

Suppose that instead of watching a video, that user spent the same five minutes looking at regular web pages instead. Comscore says that the average time spent per page for the entire internet is about 0.7 minutes (April 2007 data). So in 5 minutes they would have seen 7 pages. Since the average webpage has multiple ad units (say 2), they might have been exposed to 14 ad impressions in those five minutes. So even if a video ad unit had a 5-10x pricing premium, the site might still have generated more revenue from regular web pages in the same amount of time because they would have served 14x more impressions.

This effect is more pronounced if users watch videos for longer (e.g. long form programming) or if they churn through web pages quicker (e.g. picture galleries). Now, of course, the visitor might not stay a full 5 minutes if they were not watching video, so this may not be an apples to apples comparison. But it bears thinking about. Sites focused solely on online video may be missing a revenue opportunity.

In the early days of TV, many shows were of the “talking head” variety – essentially televised radio shows. It took a little while for TV programmers to break out of their old habits (in radio) and to create programming that took advantage of the new medium.

I suspect that we’re in that stage with online video today. Many “online video sites” or “web video channels” are primarily focused on the video (perhaps with some ratings and commentary features associated). Over time I suspect that we’ll see a richer integration of video, text and picture content that is optimized and designed for the web. News sites are leading the way on this integration, regardless of whether they started from a print and pictures perspective(e.g. the Washington Post) or from a video perspective(e.g. CNN). Video may be the “sizzle” that brings visitors to a site, but the “steak” of pictures and text churns pageviews, and ad impressions, to keep the revenue ticker running.

Readers thoughts welcome.

Not following Google; following AOL May 22, 2007

Posted 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.

Yahoo vs Google quarterly gross revenues

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.