Filed Under – Doomed to Epic Fail

On paper, the idea of allowing users to give direct affirmative consent and feedback about ads they like, things they want, their interests sounds very democratic and utopian.  Power to the People! and all that.  The problem is that any model that relies on users doing anything other then what they really want to do flies in the face of what people actually do online.   Despite the web being about interaction and participation, almost 99% of what people do online is read, not participate.  At any UGC website – only a small portion of the audience actually ever uploads anything.  At YouTube for instance, I’ve heard reports that despite the 100 million users it sees everymonth less then 600,000 users ever upload and share anything publicly.  600,000 might sound like a lot but it’s less then 1% of their user base.  At FoggyGames.com, the casual games website I own, the percent of users who’ve ever rated a game – which only requires a nano second of effort to click on the classic rating star – is less then 1% as well.  Again and again you see participation rates in that range.  So now these new ad models expect the vast majority of users to actually rate each and every ad – even when they have shown again and again they won’t even participate in sites and actions where they actually want to participate – I don’t think so.

Sampling Don’t Work

OK then what about the idea that you don’t need every user to participate that just getting that sample to tell you about what ads they like or don’t like.  Unfortunately the idea of a sample defeats the whole principle of user targeting.  The basis of user targeting is targeting a specific’s user definite demographics, intents or interests.  And again and again – we’ve seen that sampling doesn’t work since it is the way that most site level targeting works today.  Sites sell ads based on samples of their user base – their user base is 60/40 Female/Male and thus they sell a disportionate number of ads targeting females (it’s largely what Glam Media does across multiple websites – not very sophisticated technically speaking).  Thus lots and lots of men get poorly targeted ads just because they go certains websites in this example.  The whole idea of user targeting is to solve that problem – show ads to men with ads for men in that scenario instead of generic ads based on a sample.  So without finite, user level data no user targeting scheme can work.  So in a web where you’ll likely get more then 1% of users to participate, models that requires something much greater then 10% and more like 25% of users to participate seems like a folly even at the start.

Conundrums and Contradictions

The conundrum and contradiction with user targeting is that users say they don’t like being tracked.  Yet what they won’t do is explicitly tell the advertiser or advertising provider what they want.  And yet, again and again users say they want ads targeting to them individually as way to increase the quality and relevancy of ads.  I’ve done enough research to know users like relevant ads – they actually stop them ads and start calling them information (ads are pejorative term meaning noisy, irrelevant, uninteresing, annoying marketing messages).  Tying a user’s information and interests from where users express them willingly (communities, social networks, etc.) to where they get exposed to ads is a way to solve that.  Doing so in a conscientious and respectful manner is critical for all players in the market (trust me I speak from experience – one bad actor can sink a market) if we want to solve the user targeting and participation problem.  And the folly is we’ll be able to avoid that get by getting the all the users online to vote on each and every ad – I’ll hopefully save everyone some time and investors money ‘cuz it ain’t going to work.

At the same time as noted by SAI and Venturebeat, a bunch of silly and seemingly crack-smoking inspired revenue estimates were published by Wall Street analysts estimating YouTube’s 2008 revenue at around $200 million for 2008 and $350 to $400 million for next year.

As I noted in a recent post – the video ad market has a long way to go to be anything of significance.  Given Wall Street’s ability to hype hallucinogenic estimates I am not surprised to see those crazy numbers thrown out there.  But someone has to take a closer look and expose the crack smoking for what it is.

Let’s take a look – 4% of YouTube’s content is monetizable.  Let’s assume for a moment that 4% represents 10% of YouTube’s traffic – given the 1 billion videos viewed per day – that’s 100 million views.  YouTube is selling a new format – the video overlay with some estimates as high as a $20 cpm.  Now being in the ad business – I doubt very much that Google is actually getting anywhere close to $20 – real 30 second video ads are getting $20 CPM for essentially the equivalent of a 5-10 second banner-sized pop-up ad.

Let’s say Google sales force is good and they are getting a $10 cpm on what they can sell and let’s assume they are achieving a typical premium sell through of 30% of their inventory.  That means that they aren’t selling 100 million overlay ads per day that means they are selling 30 million.  At a $10 CPM that’s $300k per day, $9 million a month and just under a $100 million per year.  And given the amount of inventory – I highly doubt YouTube is seeing a 30% fill rate and a $10 eCPM a much more likely scenario is half that fill rate at half that CPM or $25 million a year.  Also as more inventory opens up to Google, the eCPM’s are likely to fall as the social networks have shown having a ton of inventory puts a lot of downward pressure on CPM’s.

Now a $25 to $100 million dollar a year business is nice especially for a business that’s not even 4 years old but I doubt that even covers YouTube’s bandwidth costs even at the high end of the estimate.

And Comscore which likely undercounts pages views by a factor of 2 to 3x is OVERstating videos.  In their stats, they estimate the AVERAGE online user watches 83 videos a month!  Seriously.  Personally I can’t believe that stat.  I’m as addicted to the Internet as the next guy and I watch maybe 30 videos a month.  Maybe.

So even if you take Comscore’s numbers at face value, 11.5 billion isn’t that big of a number when you look at the economic size of the video market.  Assuming a range of $1 to $5 cpm and 1 ad per video (any format, method, size, style doesn’t really matter), you’re looking at a TOTAL market size of just $11.5 million to $57.5 million for all online video.  That’s out of a total online ad market of about $2 billion a month.

My point isn’t to say online video won’t be or isn’t important.  It’s more a comment about the incredibly large scale required to build a large media business or market.  The media business is about a little off a whole heck of a lot.  That’s why ads are priced in cost per thousands.  And the need to have immense scale also explains why the media business gravitates towards consolidation but that’s a post for another day.  When videos viewed starts approaching trillions then we’ll be somewhere.

Summary: eMarketer came out with some essentially nutty projections for the future of social net advertising.  As much as I wish and I hope eMarketer is right given my involvement with Lookery and the world market for that advertising grows to $4.1 billion by 2011, their numbers don’t quite add up when you take a closer look.  Yes, $4.1 billion a year for likely the most dominant category of online user engagement doesn’t seem like much when compared to the $20 billion search will pull in, but that doesn’t justify potentially silly modeling by eMarketer.  As you’ll see in the post eMarketer builds its model on some pretty wild and crazy RPM assumptions (that term is explained as well) that would require essentially turning every pixel on your social net profile into ad inventory.  Not going to happen.

That being said – I bet there will be a hundred VC pitches in the next few weeks who will gladly pimp these projections as justification for their ad supported social net startup.  Too bad no one will question their validity.

What’s amazing as I talk to friends in the online ad space how much advertisers and media planners are scared about being affiliated with inappropriate content. Facebook apps as my post notes are a great potential safe harbor but the company that nails the the technology to automatically, 100% of the time allow sponsors and advertisers to avoid inappropriate content will do really well for themselves.

Back in the day (mid-90’s) I worked at the Disney Channel in marketing (no I wasn’t on the brand or creative side of the team – i worked in subscriber acquisition and distribution two areas which would serve me well in my online roles down the road).  When I started at the Channel (as we called it inside the Magic Kingdom and no no one called themselves cast members) we were a niche paid monthly movie service focused on being a family friendly version of HBO.  Unfortunately there wasn’t much of a market for a niche move service so the Channel re-launched itself as folks know it today as a basic cable network competing with Nickelodeon.

One of the key benefits that we launched the new basic cable version of the Disney Channel around was being ad free.  We had the benefit of always having been ad free as a pay movie service so we could negotiate the license fees around being ad free.  And for those who can’t remember back then there was a big uproar with the FTC about advertising and its impact on young tv viewers.  Put the two together and we had a big win – or so we thought.

And so the Channel re-launched in all its ad free glory.  And you know what happened?  People started complaining that the Disney Channel didn’t have ads!  Seriously it was the #1 complaint.  Who would have thunk it!  Turns out people have been so trained to watch ads that they can’t sit still for more then 10-15 minutes without a break.  Doesn’t mean they liked they ads, it just means they couldn’t enjoy tv without the sense of a break.  So what happened?  Disney started running house ads for other programming which is still the format you see today on the Channel (and in large part because the Channel was contractually prevented from running 3rd party ads).  So the moral of the story is that people are a lot, and I mean a lot more, willing to sit through ads then they will ever otherwise admit.

The good news is in all of this is that there already is a $17 billion dollar micropayments business online.  What didn’t I just say that micropayments are DOA?  Yep, but there is an alternative – advertising.  Advertising is by FAR the best solution for monetizing micropayment level transactions.  Advertising can easily cover a penny for something price.  That’s why the web 2.0 universe is free.  It’s not free – it’s just being paid for by advertisers who are more then willing to pay you way.  Is this a new model?  Nope, broadcast TV has been using the same model for 60 years.

Now there were a few companies and/or products that I thought were interesting in no particularly order:

• Spock (disclosure – I worked with these guys for a little while this past winter) - great demo from Jay (one of the co-founders and vp of product even though Battelle gave him a promotion on stage from vp to ceo) showing how the idea of people as the object of the index of a search engine really can change a well known paradigm.  Googlng yourself will soon be replaced by Spocking yourself. 
• Adobe’s Apollo platform – this successor to flash potentially offers all the richness and advanced functionality that Flash lacks.  However Apollo’s penetration will take years to build.  Remember Flash roled out in the mid-90’s and took almost a decade to reach ubiquity.  Whether Flash is eaten by its child Apollo or whether Flash continues to grow will be interesting to watch.  Startups like Dekoh which offer similar platform vision will have a hard time swimming against the dollars, resources and entrenched developer network that Adobe has.  Their best hope – get bought by someone who wants to go toe-to-toe with Adobe.
• G.ho.st – cool concept and plays on the computer in the sky concept that I have been writing about this time as a literal computer in the sky.  It’s built on Amazon’s web services and I look forward to playing with it.
• Dapper – great concept – widgetize any website or build an api for any website that doesn’t have one.  Potentially very useful service when trying to incorporate random third party services that aren’t built for it.  Not sure I understand how they’ll make money (and thus stay in business) but it looks plenty cool.

One of the areas which I thought was missing from the expo was the lack of focus on monetization.  This to me is still the elephant in the room that no one is talking about.  Unless the web 2.0 world is happy living off of $0.25 to 0.50 cpm’s, then it’s something that will need to be addressed at some point (I have my own ideas naturally).  Time will tell.

Now the infrastructure side of the cloud is out there, others are rushing in to add services and utility.  The whole webware movement is a natural extension of the movement – add value to the utility infrastructure.  We are in the early stages with online versions of office apps from Google and Zoho for instance to vertical apps like CRM from Salesforce.com or accounting from Intuit with online versions of Quicken, TurboTax and Quickbooks easily available.

From a consumer perspective, the next movement will be free-ad suppoted computing in the sky.  There’s still work to be done as I have learned from experience monetizing content can be tricky.  Personal content often doesn’t work well with targeting engines like contextual engines (Google AdSense for instance).  And at the same time, users tolerance for ads in an application environment can be tricky.  Fortunately there are startups looking to solve this project.  And the day they do and a computing cloud service offers compelling utility with that ad-model built in is a day when I think this market truly explodes.  Imagine the ability for users to create personalized versions of services.  Point and click your way through a function and feature list to offer a service for you and your friends to enjoy.  OK I am getting a little dreamy but I think you get the point.