Thursday, August 18, 2005

GoogleNet, Echoes of Orwell

Is Google building Googlenet, a free national Wi-Fi network, in an effort to leapfrog the telcos and cable companies? If so, what would it mean?

Could Be
There are rumors about them building such a network. They recently said they want to raise about $4 billion, and the domain name returns a server error instead of a “server not found”, meaning it is a placeholder.

This is consistent with prior moves by Google. They want to be your start page. They did a deal with T-Mobile to be the start page on mobile phones, and they pay to be the start page and default search engine on the Firefox browser. They are taking a page right out of Microsoft’s playbook: own the user interface.

Besides, Google is only an innovation or two away from being surpassed in search by someone else. Their best barrier to entry is to become the entry point, or access point, to the network.

What Could It All Mean?
Well, like anything, this development could have some very nice advantages and some very scary disadvantages.

The Good:
• Free broadband for all (helps education, the poor, commerce, etc.)
• Mobile broadband…anywhere (enables killer mobile applications like VOIP)
• They can triangulate your location enabling them to instantly provide more relevant location-based information

The Bad:
• Google locks itself in as the start page stifling innovation by others (echoes of Microsoft)
• Google could leverage this into domination of developing areas (e.g. VOIP, TV over IP, etc.) where innovation is stifled again

The Ugly:
By owning the access points, through which all data flows, Google would be in a position to analyze huge amounts of data about you. They could learn where you go physically and what sites you visit on the Internet, what you do, what you buy, from whom, when, how you pay, everything. Some people are concerned about the massive databases assembled by credit card companies or the carnivore project, well this would make them look like child’s play!

You might say, oh, they wouldn’t do that. Well, if you use Gmail, they are already analyzing your email. They are already analyzing what you search for. So what’s to stop them from analyzing your every move on the Internet? It sounds pretty Orwellian, but hey they would need to recoup their multi-billion dollar investment in building this huge network. By collecting and using, or selling, information about your every move on the Internet they could make a fortune. I guess your perspective on this all depends on whether you believe Google’s credo “don’t be evil”.

p.s. If Google announces a free Googlenet, short the telcos and cable companies they would be roadkill, especially the telcos.

tags: google, googlenet, carnivore, wifi

Monday, August 08, 2005

Will Advertising Sponsored Content Remain A Viable Business Model?

On the surface, you might look at the success of Google, Yahoo and others with their advertising sponsored business models and conclude that this model IS the future. I believe that this business model faces serious near-term challenges. Let me explain why.

Yes Google, the bellwether of the advertising sponsored business model, is making money hand-over-fist. But let’s look under the covers (as far under as Google will allow us to look). Here are some basic facts:

Google’s ad views are growing considerably through: (1) increased use of their search engine; (2) expanded services (e.g. Gmail, local search, etc.) which add ad inventory; (3) an expanding base of websites carrying ads syndicated through AdSense. In short, more people are seeing more ads.

In speaking with webmasters, VCs and businesspeople I am hearing that aggregate ad views are growing much faster than ad revenue. At the same time, the prices of keywords, through the bidding process, are increasing.

What does this mean? It tells me that more people are seeing more ads, but the click through rate (CTR) per ad is dropping. The growth in number of ads displayed and the price per click of ads are growing fast enough to mask an underlying weakness in CTR on a per ad basis.

The dropping CTR is going to get worse, here’s why:

Users Are Trained to Ignore Ads:
Users know that clicking on some Internet ads can result in nothing but trouble. These ads can install adware, spyware, change your browser home page, increase your spam and result in endless pop-ups or pop-unders. As a result, users quickly learn to ignore the ads around the border of the page and focus instead on the actual content in the middle.

Granted, the branded ads like those served by Google and Overture are free from these annoyances, so the impact on these types of ads is lessened. But with users being trained to ignore all ads, even these safe text ads suffer.

Technologies Are Removing Ads:
Software such as AdBlocker removes ads on the client side, enabling users to view websites without even seeing the ads. If you cannot see the ads, you certainly cannot click on them. Clearly, this technology undermines advertiser sponsored business models.

The biggest threat, however, is the hottest wave on the Internet today, RSS. RSS is an abbreviation for Really Simple Syndication (others have begun calling it Really Simple Stealing, for a completely different reason). RSS enables individuals to extract the latest content from a website without the graphics, layout or ADs! Yes there are some programs for inserting ads into RSS feeds, but their CTR is 1/10th that of the same ads on websites.

While RSS decimates web advertising (actually killing 9 out of 10 instead of 1 out of 10 as in the etymology of the word decimate), it will get even worse. The 90% decline in CTR is based upon today’s RSS usage which is largely through RSS readers that are read by people (versus applications). What happens with Microsoft’s upcoming Vista OS where RSS becomes part of the platform and an increasing number of desktop applications consume web data, automatically stripping the ads and removing the human reader? Very simply, the CTR will drop precipitously.

Imagine, a Windows Vista desktop application that scours blog feeds and news feeds and caches the information locally as a personalized newspaper. It won’t pass through ads, those will all be stripped out. How do those content providers get paid?

Fortunately, the web is a breeding ground for innovation, and some smart people will figure out a solution. Here are a few ideas:

Other Forms of Advertising:
1. Product placement: As TiVo and other TV recording devices make it easier to strip ads from TV , advertisers have increased their use of product placement. I expect this to increase on the Internet.

2. In-situ advertising: Content creators will increasingly add hyperlinks directly into their content. Companies like Vibrant Media will embed paid links directly in the main content. However, these ads could be stripped out if they carry the important tracking code, in the same way that virus and spam Much like affiliate IDs, any sort of tracker code will alert anti-virus and anti-spam software remove hyperlinks with affiliate code.

3. Paid placement: More bloggers and websites will take money for favorable articles about companies or products. This model has been used in traditional publishing, but it typically bears the “Advertising Section” label. I’m not sure blogs will use this same mechanism, but by not using such a label they will undermine their credibility, and credibility is the lifeblood of blogs.

4. Coupon-based advertising: Coupons are the one form of advertising people actively look for. In fact, more than 43% of Sunday newspapers are purchased primarily for the coupons. There were 350 BILLION coupons distributed in the US last year. I believe that you will see the rise of coupon-based ad syndication networks on the Internet in the near future, because people won’t want to strip out coupon ads, they’ll want to find and use them.

So, using the example above where a desktop application assembles a personalized newspaper for you, it might actually add coupons for items you buy regularly. Full disclosure: My company will release a beta of our coupon syndication network solution in the August/September timeframe.

I realize that the advertising sponsored business model is hot right now and it is demonstrating significant growth. I don’t suggest that it will go away any time soon. What I am suggesting is that we are in the early phases of advertising on the Internet and what we see in a couple of years could be very different that what we see today. It has taken the PVR a long time to hit critical mass, where it is reshaping advertising, but by definition, the Internet is accessed through computing devices (of all sorts) that have the ability to filter ads just as the PVR does. I’m sure that this capability is keeping entrepreneurs, VCs and Internet strategists awake at nights…or maybe it’s just me.

Tags: RSS, Google, CTR, PPC, Internet, Business, Ads, coupon, adblock

Friday, August 05, 2005

The Pending Death of Directories & Newspapers?

A reader asked me which would die first, newspapers or yellow pages directories. First let me state that the leaders in both of these industries have the time and money to redefine themselves or simply buy into the new media world. I doubt that they will roll over and “die”. A good example of this is News Corp.’s acquisition of Intermix, parent of MySpace. Other examples include Gannett/Knight Ridder/Tribune acquiring Shoplocal and Clearly the newspapers are feeling the heat from Internet upstarts and they are actively partnering and acquiring companies to fill that need.

The publishers of directories are not yet feeling the heat to the degree newspapers are. They have seen Yahoo’s Internet Yellow Pages take a dominant leadership position, but the printed side of the directory industry has not yet felt the Internet breathing down their necks like the newspapers have.

The traditional directory publishers have teamed up among themselves in an effort to make their the leader in the space. has also partnered with AOL and Switchboard to better enable them to go after Internet Yellow Pages (IYP) leaders Yahoo and Verizon/MSN.

The fact that they are focused on distribution and internal partnership, instead of attempting to buy outside technologies, is an indication that the directory business is not yet feeling the heat from the Internet, like newspapers are. They aren’t as desperate and seem to be moving more cautiously. There are other factors to consider as well.

Shelf-life/Contract Cycles:
Two factors, which go hand-in-hand, are the shelf-life of the product and the length of the advertising contracts. Newspapers have a one-day shelf-life, while directories have a 12 month shelf-life. This is further reflected in their advertising contracts. The majority of the advertising contracts for newspapers range from daily (one-time) to monthly. This means that advertisers, presented with a better solution, can switch rapidly to exploit Internet solutions. For directories, the contract runs 12 months. Advertisers are locked in to the contract, so switching isn’t as quick.

Switching/Testing Costs:
A newspaper advertiser can easily test an Internet alternative, because if it fails to meet expectations, that advertiser can easily re-engage the newspapers advertising again, getting into the following day’s paper. However, if an advertiser declines to advertise in the printed yellow pages, they must wait 12 months before they can get back in. Because of this, directories have higher switching/testing costs.

Instead of leaping into an Internet alternative to the printed directory, the prudent advertiser might scale back their directory ad, say from a half-page to a quarter-page, while they try Internet alternatives. This has a buffering effect on the financial impact on directory publishers.

Competitive Threat:
The competitive threat to newspapers is very high, because the user experience is dramatically better online. The news is fresher, typically free, classified ads are more comprehensive (often times including pictures) and in many cases free, coupons are more convenient (and improving), Blogs provide more detailed and hyperlinked information from specialists in the field. Basically, everything a newspaper offers is much easier and better online.

The improved online user experience is taking its toll on the newspapers. For example, look at the classified ads segment. In 2003 there were 120M classified ads in newspapers in the US. At this same time, there were 602M listings on eBay. Craigslist and others present a growing threat to printed classified ads, so newspapers are facing an immediate threat.

Directories don’t have that level of threat yet. The experience is not yet that dramatically better online. Yes search is nice, being able to link to their website is nice, but the user experience with a printed directory isn’t too bad. As a result the competitive threat isn’t that serious yet. But it is coming. Search engines are all testing local search, and local search is the new front-end to directory information. Local search must keep the traditional directory folks awake at night…it should.

Tipping Point/Event:
There is often an event that wakes people up to a new technology and enables that technology to achieve critical mass or mass mindshare. For Blogs, it was the combination of the Rather-gate scandal and the 2004 election cycle. In both of these cases, the blogs had the news well ahead of the mainstream press and provided more detail than the press. As a result, people woke up to the entire concept of getting news and editorial from blogs. Combine this with feed subscription a la Bloglines and people can assemble their own ad hoc newspaper.

We haven’t seen an event that will provide a tipping point for online directories just yet. The integration of local search into general Internet search may be that tipping point. Adding some significant value such as a large number of online coupons or some other capability or event is needed to push Internet directories to their tipping point, otherwise it will take some time.

The confluence of these factors means that the impact to newspapers is more of a clear and present threat to their printed revenue streams today. This is accelerated by declining readership of newspapers, a 20 year trend. At the same time, these factors describe why I have suggested that directory publishers are probably 3 years out from feeling the impact of the Internet on their bottom line.

The Speed of the Transition:
But there is another aspect of this question that demands consideration, and that is the speed of the transition from print to digital content. In other words, once the transition to online solutions starts, or even once it hits the tipping point, how quickly will it siphon readers away from its hardcopy brethren?

We have seen a fairly rapid transition for classified ads, with Craigslist and eBay soaking up most, almost all, of the growth. This will continue to grow and printed classifieds will soon start declining. But newspapers offer a diverse set of offerings. Having seen the impact on their classifieds, they are learning and applying this knowledge to other areas, including coupons, city guides, editorial content/blogs, etc. This diversity and their painful lessons in classified ads, and news, are helping them make the transition to diversified local portals.

The yellow pages don’t have this luxury. They are, for all intents and purposes, one-trick ponies. When the Internet starts to siphon readers away in earnest, what do they do? They are trying to build a local portal, much like newspapers, but the newspapers are way ahead. When online directory information is available through your mobile phone, VOIP phone, PDA, iPod, Internet search engine, etc. and it provides richer information such as hours of operation, areas of specialty, user ratings, user reviews, coupons, etc. and it hits the tipping point, the impact on directory publishers will be more rapid than the impact on newspapers.

So while I don’ predict the death of the industries or even the companies, I believe that both newspapers and directories will, over time, shift to a predominantly online delivery mechanism. I believe that the newspapers will feel the impact sooner, and have felt it sooner. But once it starts to really impact printed directories in earnest, their fall from leadership will be more precipitous.

…but hey, I could be wrong. What does your crystal ball say?

BTW, I was on vacation, but I'm back and will be puiblishing more frequently again...

Tags: localadvertising internet business, IYP, yellowpages, newspaper, strategy