Seth Goldstein

The following is an excerpt from a conversation with Michael Goldhaber in March 2006, directly following OReilly’s Etech conference entitled The Attention Economy, where both Michael and I spoke.  I will release the full interview transcript in bite-size nuggets in the coming week/s.

Thread 1:  Attention and Productivity

MG:  …In an attention economy, everyone’s trying to get more attention, but the net amount really isn’t going to change very much. It’s just moved around.  The individual may feel they’re being more productive in the sense that they are doing things that ultimately get more attention, but you’re not really changing the sum total. So, why you’re doing things is much more because, whether it’s your software or somebody else’s software, you want attention from a Web site or whatever. And if people feel that that’s going to help them get attention in some way – I’m generalizing obviously  – they will then go for that.  They may be wrong; but there is the sense that they can get more

SG: I think the productivity argument is derivative of attention.  Meaning, I think that understanding the exchange of attention potentially allows you to save time.  So, if I’m able to understand whom I am paying attention to – if I’m able to understand the people I’m influenced by – what they’re paying attention to – Seamlessly – then maybe I can waste less time on things that I’m really not interested in.  So, the byproduct of that is productivity.  Right?  I think that’s the real, pure filtration.

MG: Yeah, I suspect that’s true, but what does wasting less time mean?  Wasting less time means in some sense being more effective in the allocation of your attention and in the sense of getting more attention than you’re giving.

SG: But is that related to productivity, if you get more attention?  I don’t see the connection.

MG: I would define productivity in a zero sum world, a world of attention scarcity, that getting more attention is the closest you can come to being more productive.  A society as a whole does not get more productive, because how do you define productivity?  We now define it in terms of money, but if I’m right, money is something that to a large extent, not completely at this point, but to a large extent, tracks attention.  And it will track more and more attention.  In other words, the more attention you get, the more productive you are.  Personally, the more attention you save, the more productive you are.  So, the more you can get attention, while paying the least attention, I would say maximizes your personal productivity.

SG: Why productivity?  I think of it as influence, being influential.  Why are you being more productive?  Is productivity a required variable in an economic framework?

MG: Productivity is an old term from the old economy in a way, but what I urge you to understand in effect is that what productivity increasingly means is, you’re more productive if what you do gets more attention.  That’s why a janitor gets paid a lot less than a movie star.  And we measure productivity in money terms and basically money goes largely, increasingly, to people who have attention.  So, the more attention you have, in effect you are counted economically as more productive.

SG: For the technology world, productivity is more like: I can get more shit done; I can get more tasks done.  It’s like calendar management - time.

MG: Right.  But for that to be economic productivity, it has to affect some output.  And that output ends up being essentially attention.  Anyways, that’s just one thought.  That’s a small thought in a way, but significant.

SG: I don’t think anybody is as evolved in their thinking about the attention economy as you are, but you see it’s like the stages of evolution that people go through mentally to kind of get to the attention perspective.  At first it’s like they’re a kid and they’re just throwing around words without any rigor, and then I think you start to see a little bit more care, and then a little bit more and more.  We’re used to using the word attention in a very un-rigorous way.  When you look at attention as a physics, as a substance, then you take it more seriously.

Securitization is a financial technique that pools assets together and, in effect, turns them into a tradeable security. Financial institutions and businesses of all kinds use securitization to immediately realize the value of a cash-producing asset. Securitization has evolved from its beginnings in the 1970s to a total aggregate outstanding (as of the second quarter of 2003) estimated to be $6.6 trillion. This technique comes under the umbrella of structured finance. (from Wikipedia)

In the 1970s, from his perch at the Salomon Brothers trading desk, Lew Ranieri famously applied securitization to the mortgage market, creating what is now referred to as MBOs (mortgage backed securities).  This application has enabled (1) millions of consumers to more easily become homeowners by (2) transferring credit risk away from banks and thrifts to independent financial investors in the bond markets.  To put the size of this market- $2.5 trillion- into perspective, you could take the combined market cap of the entire Internet sector (including paid search, ecommerce, advertising, travel, etc):

• TWX = $90B
• MSFT= $250B
• GOOG= $65B
• YHOO= $50B
• IACI= $15B
• AMZN= $15B
• EBAY= $50B
• Combined Internet market cap= $600B

The innovation and size of the MBO market qualifies Ranieri as a special blend of creativity and capitalism, and this led to his becoming one of the great financial alchemists of all time.

Business Week, November 29, 2004   
Lewis S. Ranieri: Your Mortgage Was His Bond
The bond trader turned home loans into tradable securities 

The past quarter-century has seen a revolution in finance. It’s felt every time a homeowner refinances a mortgage or signs up for a credit card. No one person can claim to have lit the fuse for this revolution– but Lewis S. Ranieri was holding the match. Joining Salomon Brothers’ new mortgage-trading desk in the late 1970s, the college dropout became the father of "securitization," a word he coined for converting home loans into bonds that could be sold anywhere in the world. What Ranieri calls "the alchemy" lifted financial constraints on the American dream, created a template for cutting costs on everything from credit cards to Third World debt — and launched a multibillion-dollar industry.

Last month, online mortgage lead generation company LowerMyBills (LMB) was bought for more than $300m by Experian.  According to the press release, here is how the two companies are described:

LowerMyBills.com is a one-stop destination that offers savings through relationships with more than 400 service providers across 17 service categories including home loans, credit cards, long-distance and wireless services, and auto and health insurance. Since its inception in 1999, LowerMyBills.com has helped more than 500,000 consumers save nearly $200 million.

Experian is a global leader in providing information solutions to organizations and consumers. It helps organizations find, develop and manage profitable customer relationships by providing information, decision-making solutions and processing services. It empowers consumers to understand, manage and protect their personal information and assets. Experian works with more than 50,000 clients across diverse industries, including financial services, telecommunications, health care, insurance, retail and catalog, automotive, manufacturing, leisure, utilities, e-commerce, property and government. Experian is a subsidiary of GUS plc and has headquarters in Nottingham, UK, and Costa Mesa, Calif. Its 12,000 people in 27 countries support clients in more than 60 countries. Annual sales exceed $2.5 billion.

This is interesting on a number of levels, not the least of which is the premise that (1) the mortgage leads and data process of LMB are valuable to an information broker such as Experian and not simply to traditional mortgage companies and (2) the consumer benefits from easy access to creditors who bid in a competitive environment for the consumer’s business.

The essence of securitizing mortgages was to shift the credit risk away from the lenders’ balance sheets and into a open market.  Whereas before, the complexity and regulatory requirements of banks meant that getting approved for a loan might take months, now the determination of credit worthiness was established by a far more efficient marketplace where investors in the business of taking such risks were able to establish a price for this risk quickly and provide consumers with a rate in a matter of weeks (which has become days, hours and increasingly seconds).  Consumers benefit greatly because they are much more in control of their financial futures and not at the mercy of institutions with conflicting priorities. 

I only have a passing understanding of the nuances of the modern bond market but I am looking forward to seeing the Internet evolve into the multi-trillion dollar market that structured finance has become.  Many markets have emerged online in the past 10 years where buyers meet sellers, consumers meet advertisers, and advertisers meet publishers in low-friction, value-added environments.   

Using Chris Anderson’s framework, as one moves down the tail by searching for ever more obscure (ie "un-covered") keywords, one inevitably finds companies like Nextag, Amazon and eBay/Shopping.com as the minimum bidders.  They believe that they have enough liquidity of product opportunities so as to be able to convert any cheap click (ie $.05) into a more qualified activity within their network.  In so far as Amazon sells actual products, its role is as much marketer as anything else.  eBay sells other people’s products and so is one step removed from Amazon (which of course also sells other people’s products through its marketplace).  Nextag and Shopping.com don’t sell anything, but are simply better engines for comparing products and finding the best prices.  Shopping.com is doing more than $100m in annual sales off of these and other techniques leading to their recent acquisition by eBay, while Nextag remains private but purports to be doing just as much revenue.

As we move further beneath the radar, there is another group of companies, mostly emerging from the online direct response agency world, that are generating significant profits by purchasing media, attracting prospects and selling leads to advertisers.  Four companies in particular stand out as the leaders in this space:  Adteractive, Azoogleads, Quin Street and NetBlue.  Together they will generate more than $500 million in 2005 sales with 30%+ profitability.  Yes, $500m.  Adteractive recently sold a minority share for more than $100m to a prestigious private equity firm.  In the next few months one of these will likely be bought or merged with another on the way to one of these going public in early 2006.

While the majority of Internet advertising is paid for on a CPM or CPC basis, the real driver of spending is advertisers’ willingness to pay on a pure Cost Per Lead (CPL), performance basis.  Remember the hand-wringing in 1999, for example, as to the efficacy of online advertising?  Strange isn’t it how we don’t hear much about that anymore. The emergence of pay-for-performance advertising online has effectively transferred the risk away from the medium.  With PPC, Internet media no longer has to convince advertisers to trust its ability to perform as effectively as other media (Cable, TV, Radio, Print…).  The quality of the commercial transaction is self-evident to the online advertiser, who now inherits all the risk from the publishers. 

Just to be clear, the fact that the risk now resides with the advertiser and not the publisher does not a pure market make.  Advertisers are companies in the business of selling things to consumers and other companies.  Their business is not buying advertising. 

Tiny (Internet) Markets

Within these new markets, there are millions of micro markets where a query or a unique user path comes into contact with one of more targeted advertisements.  A constructive tension emerges between the user who intends to find something or do something, and the sponsor of the link who is trying to lure her into their particular commercial environment.  Each one of these tiny interactions feature a buyer (advertiser), seller (publisher) and asset (consumer’s att/intention).

The latest Release 1.0 article on Spyware features a fable that imagines advertisers as merchants at a Bazaar and their various adware proxies as pushy street urchins, “Miss!  Miss! Look here!  Special deal!."   Efficient markets are based on trust.  This relates to markets of any scale, from the NYSE and eBay to my decision whether or not to accept an invitation into somebody else’s LinkedIn network.   

While the modern US interpretation of the Bazaar has been typically pejorative (with a few notable exceptions), there is nonetheless a very useful economic system for transferring value that has emerged in around the Bazaar, namely Hawala.   Hawala is a peer-to-peer payment system that enables any participant to make a decision as to any other participant’s credit worthiness:

The unique feature of the system is that no promissory instruments are exchanged between the hawala brokers; the transaction takes place
entirely on the honor system. (From Wikipedia)

It is unfortunate that Hawala got associated with the terrorist activities of 9/11, since as a structural mechanism it has much to offer us as a model for enabling the liquidity of attention markets that Media Futures require.  It takes courage to create new markets, but in so far as new markets establish new currencies of trust and individual control, then they are well worth the risk.

*

Note:  This is an abridged post.
Transparency finds its limits in posts about arbitrage.  While there is likely long term
benefit in an open exchange of intellectual property, specifically
around the collective invention of an attention marketplace,  the fact remains
that capital is usually created by the introduction of friction and
opacity onto otherwise smooth, transparent surfaces.  So long as I continue to debate the benefits of openness vs the importance of discretion, I will continue to hold certain things back.  In this series on Media Futures,  I have used all sorts of
"A" words to articulate how media
operates on the Internet in 2005.  I am looking forward to synthesizing the Media
Futures series into a book, which will include much that is now only in note form or else is too sensitive to share at this juncture..

Finally, all comments here reflect my
personal opinions and not those of any firm or organization I am associated with.  Specifically, I am proud of what our team has accomplished at Majestic Research in terms
of reinventing investment research in a rigorous, unbiased and
real-time fashion.  Majestic’s insights are driven entirely by data,
carefully interpreted by smart quantitive analysts.  When I
comment on this blog about any public or private company, such comments are entirely distinct from the investment research that
Majestic provides to its clients. 

An Algorithm is a set of instructions or procedures for solving a problem.

In the same way that computer scientists 50 years ago focused on the single problem of designing a general purpose computer, there is a similar focus in 2005 among leading Internet service architects:  creating a social media computer that leverages user generated content to automate the production of commercial content.  In so far as this represents the important problem that the best and brightest of us are looking to solve, then to an extent it is a race for the best algorithm. 

From PageRank to PeopleRank

Hovering over this endeavor is the shadow of the last great algorithm, namely Google search engine.  At its core, Google is PageRank (which nominally cites both one of its founders Larry Page and its subject of operation, Web pages):

"PageRank relies on the uniquely democratic nature of the web by using its vast link structure as an indicator of an individual page’s value. In essence, Google interprets a link from page A to page B as a vote, by page A, for page B. But, Google looks at more than the sheer volume of votes, or links a page receives;  it also analyzes the page that casts the vote. Votes cast by pages that are themselves "important" weigh more heavily and help to make other pages "important.”"

In this case, (1) the input for the algorithm is the population of web pages, (2) the instructions rank them in value based on their link structure, and (3) the output is the list of links that you see when you search for something.

Now transpose people for web pages, and you see how the race for the next great search algorithm has less to do with organizing static HTML content than with coordinating the constantly changing expressions of millions of distributed people.  For an interesting perspective, see my fellow entrepreneur Mark Pincus’s riff on the PeopleWeb.  Many Internet businesses have tried to direct user behavior into certain architectures of participation.  Services such as Friendster, Orkut, and even Pincus’s own Tribe, presume to address all of a person’s social communication needs in one place.  All of these services, however, are now rapidly trying to reinvent themselves to stay relevant to a community that refuses to be intermediated by somebody else’s system. 

The services that seem to do the best job at enabling users to communicate on their own terms are those that manage to find a middle ground between the DIY (do-it-yourself) ethos that is beginning to pervade the web and the need for structure to guide constructive interactions (ie the reason by Wikipedia succeeds and most other Wikis fail).  LinkedIn, with its two million profiles of professional affiliations, provides the tools for interesting social media production, even if the site itself limits one’s imagination (open up the API please).  The reason behind the annoying digerati blogfest on folksonomies (myself included) stems from the simple but mildly heretical notion that users, given decent primary (meta)data, might actually be able to create their own systems that scale.  Clay Shirky (lighting designer for the Wooster Group, CTO of SiteSpecific, advisor to Flickr, current leading pundit for the digerati at shirky.com) captures the anxiety perfectly in his title to last week’s panel at ETech:  "Folksonomy, or How I Learned to Stop Worrying and Love the Mess".  The question is, then, whether a PeopleRank algorithm that uses community driven tags as its input, could do to About.com, Gawker Media, and Weblogs what Google did to Alta Vista, namely deliver a superior end-user experience that requires only incremental server bandwidth to scale.