Seth Goldstein

 
Technostalgia

 A few weeks back, I went to a Christies auction on the history of
cyberspace.  In front of me was Mark Stahlman,
one of the earliest cybergeeks in New York.  To my right, with his wife,
was Mitch Kapor.  Kapor of course invented Lotus 123, the precursor to Microsoft
Excel, which was ultimately sold to IBM for a
lot of money.  In any case, he was aggressively bidding on the first
computer business plan by Eckert and Norbert Weiner’s entire library of strange
scientific studies.

I bid for a couple of interesting things that
weren’t quite as famous (or expensive), like an early 19th century british
study on early automata (with extended commentary on the Turk, the "magic" chess machine that
revealed a dwarf inside) as well as examples of the first programming language
guides (for a language called Algol).

When I brought my
collection home,  I opened one of the oldest items which was a book from
1833 on Zerah Colburn who was one of the
first human computers.  He could calculate in his head
so quickly that crowds were literally amazed. I do not think that former AOL
biz dev exec David Colburn is a descendant, although I am
not sure of this in so far as he too could calculate accretive partnerships
with unnatural alacrity. The book is so old that its spine has basically turned into
dust and so all of the pages are barely caked together.  A last remnant of
the first human powered computer.

It is now 2005, more than 50 years since the
first electronic computer was built, and we have a massively popular open
computing program that is the internet.  It is generating more than $100
billion in annual online ecommerce and more than $10 billion in advertising
which is rapidly growing.  It has become an automatic part of our daily
lives, converting the 5-10 physical interactions that we
might have had during a work day in the past into a constant interactive stream
of tens if not hundreds of conversations.

A few weeks ago, Jordan Rohan a solitary sell-side analyst came out with a note that claimed paid search keyword prices were
rapidly declining. this appears to have been based on a single anecdotal
conversation with a 3rd tier search engine off-the-record.  The entire
sector plummetted. 

"Checks
indicate pricing has shifted from robust to weaker-than-expected," Mr.
Rohan said of Google, adding the pricing shortfall will
prove difficult to make up in the last six weeks of this quarter. Advertising
prices have fallen 10 per cent this quarter, and the company’s profit margins will narrow as hiring
continues in the face of slowing sales growth, he said. Shares of Google fell
$5.06 to $188.89 on the Nasdaq Stock Market yesterday after earlier dropping as
low as $182.23. AP

Investors are
gasping at any evidence of a turn for the worse (or the  better) for GOOG
and YHOO, and to a lesser extent, EBAY and AMZN.  Almost a quarter-trillion dollars of market capitalization is
currently being waged on the fortunes of these companies.  They are
perceived in terms of "platforms, networks, marketplaces"
central to the future of the Media and Technology markets.  Just like
Compuserve Netscape, Excite, and of course AOL before them.  What is
defensible now is the "critical mass" of the consumer audience base
(250 million or so) and the highly scalable merchandising, advertising, and search
systems that have evolved to support their needs online.

The Reintermediation of  Community into the Online Equation 

What is curious when you press investors as to
why really these businesses can continue to scale, their answers somehow point
to the participation of the community in the production
process.  They talk about the "sellers" of EBay.  For
Google, they talk about the buyers of adwords and the small
site owners that can stick ad-sense (and soon YPN) easily on their sites.  Yahoo and Amazon suffer because
they haven’t figured out how to syndicate peoples’
desires to sell to others as well as they
have done with consumers themselves.

It was interesting to see About get bought for
$400m from the New York Times.  Have you been to About.com recently?  It is
riddled with highly curated ads.  Cheezy, but satisfying in terms of answering
certain kinds of commercial problems with human experts.

What I heard was
that the digital gray lady was more interested in About.com’s
ability to generate highly popular organic search results than it was in
About.com’s content.  The New York Times has figured out,
correctly, that it may not be able to afford keywords on search engines for
placing its stories.  Since so much internet activity starts with search,
and the engines control so much inventory, ny times
content therefore needs to show up algorithmically: About.com as New York Times
in-house SEO platform.

When Scott Kurnit
started the mining company in 1997, he was late to the party and I thought that
the idea of hiring actual guides to curate
content was silly.  Boy, was I wrong!  Well, it was silly.  And
opinion-driven, amateur, and limited relative to the breadth of the automatic
directories and engines.

And so now, the
traditional elite editorial voices of the times, are being undermined by a content management
approach that in some strange way reintermediates human agency in a distributed
fashion.  How many guides are there, 500 or so?  Perhaps this is the face of a new kind of media machine. You can download a presentation that I gave to the Stanford Media Center in early February with data supporting this thesis: Download sethgoldstein.mediacenter.2.9.pdf.

The Four (New) A’s of Internet Advertising:

And so from Van Kempelen’s
dwarf hidden within his chess-playing machine the Turk, to Kurnit’s human guides
powering the SEO efficacy of About.com, there would seem to be a long history of computing
machines exposing their human qualities as core to their effectiveness.  In proposing a framework for online media futures, it is critical to incorporate the consumer as
both creator of content and a subject of
advertisements at the same time. The next post will be an attempt to do so, along the following lines:

1. Automata
2. Algorithm
3. Alchemy
4. Arbitrage

I have been sitting on this post far too long and rather than run the risk of watching silently while the medium changes, I figured I better get this out there half-baked so as to keep chipping away at the ideas.

I recently came across the following paragraph:

The time has come when advertising has in some hands reached the status of a science.  It is based on fixed principles and is reasonably exact.  The causes and effects have been analyzed until they are well understood.  The correct methods of procedure have been proved and established.  We know what is most effective, and we act on basic laws.  Advertising, once a gamble, has thus become, under able direction, one of the safest of business ventures.  Certainly no other enterprise with comparable possibilities need involve so little risk. 

One could imagine this under the “Mission” section of one of the new-fangled pay-for-performance Internet advertising networks, no?  In fact, Claude Hopkins wrote this in 1923 in his seminal work, Scientific Advertising.

After my last post at the beginning of December, Majestic successfully produced its annual Internet conference.  Our goal was to raise questions rather than answer them.  The event accomplished its objectives (see David Jackson’s generous review) in so far as it stimulated conversations between smart investors and search/shopping experts.  For me, preparing for the conference and interacting with its participants enabled me to reconnect to many of the ideas that we were working on at SiteSpecific in 1997.  (Note:  we are hosting our next Internet event in June focused on the evolution of Internet marketplaces:  buyers/sellers and publishers/advertisers; please email me if you have good ideas about topics/companies or would like to participate)

Seven years ago Internet marketing promised to become fully accountable.  Doubleclick, Matchlogic, Accipitor, Focalink, Clickover, Flycast all promised to provide advertisers with direct access to liquid marketplaces of consumer interest.  The key metric was impressions and there was great focus on monetizing these eyeballs on behalf of advertisers.  What happened?  Why didn’t any of these companies emerge as conduit between consumer intention and advertiser demand, the way that Google Adwords and Yahoo!’s Overture unit have done in the past few years? 

In short, I believe that the answer is that none of these networks provided a value-added service to consumers; their proposition, in fact, was that in passively profiling visitors to web sites that they could serve up the most relevant, compelling ads.  As visitors started to recognize standard banner formats, however, they also began to tune out the messages, and click-thru rates plummeted along with the fortunes of many of these firms.

Up until recently, search has continued to improve as a consumer service.  Google maintained its excellent simplicity for years, focusing entirely upon the quality of algorithmic search results at the expense of any other developments.  Perhaps 18-24 months ago, with the roll-out of Froogle, GoogleNews and the intensification of sponsored links, Google traded its purity for applications and business models that could leverage Google’s massive traffic to generate cash flow.  Around the same time, Yahoo! combined its consumer utility with the business model of Overture to remain competitive with Google. 

Today, Yahoo! and Google are trying to outsmart each-other, while both MSN and AOL wait in the wings to reinforce their relevancy as search-driven media properties.  Amazon continues to try to connect to the search world through A9 while EBay maintains massive keyword campaigns across both Yahoo! and Google to drive consumers through its auction network.  In so far as consumers have adopted search as a primary driver of online usage, all of these sites and services are right to facilitate this behavior. 

Internet advertising is booming.

Google generated more than $1b in sales in Q4 2004 from internet advertising.  This is serious growth, which has convinced investors to value Google at more than $50b.  All other search engines, shopping engines, and advertising networks have similarly seen their fortunes increase dramatically in the past few years as companies big and small, global and local, have come to the net to look for customers.

But some of us are still afraid to admit it.

The medium has arrived at a stage that that many of us still remain too humbled from the crash of 2000 to fully acknowledge.  Regardless of what Jupiter or Forrester may have predicted back in the day (1995-1997), the size of the online advertising market feels bigger now than we ever imagined. 

The forms of Internet advertising continue to evolve.

The manner in which advertising is articulated online, however, continues to change.  Sponsored links driven by keywords are currently the largest market, just as banners were a few years ago.  But other forms of reaching consumers online have proliferated, like advertising within your email (GMail), contextual advertising (AdSense, Kanoodle) not to mention pop-ups and pop-unders (Direct-Revenue, FastClick).  Internet consumer behavior is a synthesis of the interests of consumers and the preferences (such as home page settings and tool bar installs) that constrain the activities of these consumers.  The basic search box remains perhaps the single most dominant guide of one’s interests online.  This seems to be why Google continues to find enormous upside in its business, despite frantic competition and distraction from other sites and engines.  Business models change quickly, consumer behavior doesn’t.

What is the long term viability of certain Internet advertising profit streams?

I have been struck by the fervor with which investors (both venture capitalists, later stage private equity shops as well as public investors) have become so willing to buy the shares of founders of Internet advertising companies (cf. Google, FastClick, and yet-to-be-announced financings in the online direct response agency market).  The rationale behind this is simple:  these companies are throwing off cash and therefore don’t technically need the money; so if you want to buy equity, you need to offer liquidity to the founders.  This makes me anxious as to the long term viability of these profits.  Typically, companies churn away for years before they get to the point of generating sustainable profitability at which time a late stage investor comes in and buys into that cash flow.  Instead here we have enormously profitable but ephemeral features (ie www.freeipods.com or home page hijackers) that pretend to be sustainable long term businesses. 

The Future of Internet Media = Collegehumor.com?

The New Yorker ran a profile last week of a couple of college grads living downtown running a site featuring college chicks, beer humor and funny t-shirts.  Generating $500k/month!  I was excited to check it out, and found that indeed there was a bunch of fun content, but it was suffused with commercial links that promise high payouts to the site on a per lead basis.  My sense is that a lot of college students are clicking away at all of these offers (since it costs them little but their time) and by doing so inflating the value of media across the Internet.

The future of Internet advertising is sales.

This is a long winded way of saying that Internet advertising is scientific, and that in the end our individual, unique search-driven behavior amounts to little more than a variable in a broad mathematical equation encompassing the entire Internet population.  The goal of the equation is to convert the rawest form of traffic (generic impressions) into the most specialized form of customers (ie California mortgage applicants).  This is not about branding, experience, education, or persuasion.  This is about sales.  Publishers are more than happy to pimp out their inventory to advertisers paying them on a per lead basis.  There is a lot more here than I have been thinking about that I will save for a subsequent post on online media arbitrage.  In the meantime, my point is simply that the evolution of Internet advertising has less to do with keywords and targeted impressions than it does with windowless call centers and legacy CRM systems.  Its about Yahoo! buying Siebel, not SixApart.   

CSOTD

As my friend Josh points out, the interests of Internet users cant be described entirely in commercial terms.  They also want to explore, connect, create and share stuff.  As both the natural and paid search algorithms continue to improve across all search engines, I am, somewhat ironically, becoming tired of looking for things.   It used to be a little bit magical to search for something on Google and instantaneously find a relevant piece of content.  Now I expect it as the cost of doing business.  I know that my queries are bringing me closer to the advertisers that I may in fact be looking to avoid. 

In so far as the opposite of analyzing is creating, it might stand that the opposite of searching is tagging.  Like many of you, I am exhausted by the bloggorhea surrounding folksonomies,  even if I do believe that del.icio.us is a genuinely important application.  What doesn’t tire me, however, is the extent to which the legion of surfs tagging links has provided me with legitimate discoveries (read: pleasurable experiences) that I otherwise would not have gotten from my own self-directed behavior through search engines, portals, or even my favorite blogs.  As the Internet medium becomes more and more directly automated as a sales channel for advertisers, it is the messy ingenuity of human beings that make it worth my attention.