Music is like the online ad business 10 years ago

I've written about my love affair with Amie St., so its obvious that I am intrigued by different ways to deliver audio content.

My friend David, who has been at the epicenter of the online ad business for the past 10 years, and I were talking last night while checking out Songkick.

We discussed how the changes undergoing the music business today are amazingly similar to the changes that occurred to the (online) ad business 7 or 8 years ago, to wit:

* it's moving from a seller-driven to a buyer-driven industry;

* it's moving from a volume model (CPM) to a transactional (CPC) one;

* we are witnessing the commoditization of the middle man;

* there is now a real lack of analytics, showing for example how to value different forms of consumption; and

* delivery is moving from a fixed/set flight to an always on (platform agnostic) structure for distribution.

If these are in fact the case (and I think they are), there could be real value to be had by looking at the successes of the ad model, and then porting them over.

The most interesting online ad news of the year

. . . could be the new My Space targeted ad platform reported on by CNET and Tech Crunch.

Looks like this is the fruit of the earlier Fox Interactive Media acquisition of Strategic Data Corp. earlier this year.

This has the potential to be much more interesting than the much heralded deals involving aQuantive, Doubleclick, Right Media, etc., because this could represent the most advanced instance of behavioral targeting into social media networks.

If this advancement allows real action-based (i.e., not just interest based) targeting (what Lotame and Andy Monfried call "verb targeting"), maybe real value can finally be brought to the consumer and advertiser. That's the potential, at least, and if it works I think represents the biggest breakthrough for online advertising since AdSense.

And while I had heard that there was still much too much manual categorization going on inside MySpace as part of this - if the end result is an easy, efficient product for advertisers, it will do well.

Secular Advertising Shift

New York Times:

"Last year, Nike spent just 33 percent of its $678 million United States advertising budget on ads with television networks and other traditional media companies. That’s down from 55 percent 10 years ago, according to the trade publication Advertising Age."

Yahoo and Blue Lithium

Yahoo acquires Blue Lithium, as widely reported.

Personally, I think this is a much more interesting deal than Yahoo's acquisition of Right Media, Microsoft's purchase of aQuantive, and Google's buy of Doubleclick, because I believe advanced targeting, particularly as it relates to social media, is the biggest growth opportunity in online advertising.

Andy Monfried and I exchanged notes about this last night. We are seeing a secular shift in consumption patterns towards more interactive ways of communication. To date, the ability to present relevant marketing and advertising to new forms of social media has been lacking, for a number of reasons including the difficult of targeting inside a publishing model where he consumers are a (or "the") major source of content. Better targeting -- whether from analytics, ad networks, or exchanges -- can solve this problem (and ultimately allow social media sites to be free to use!).

Henry Blodget frets about the behavioral targeting perception risk that this deal may usher in:

"We continue to expect that "behavioral targeting"--in which publishers and ad networks place cookies on users' PCs and gather data on what they do--will eventually experience a bout of intense press and government scrutiny."

While I think this risk is overblown (behavioral targeting does not represent more targeting of users, just better targeting), the perception does remain, and ad tech companies must get ahead of the perception game.

UPDATE: Andrew Parker, in a comment below, thinks the issue here is not that great, but for a different reason:

"There's a larger question as to whether behavioral targeting should be default opt-in or default opt-out, but I think this is a much smaller issue consider how easy it is to opt out of every behavioral targeted network all at once."

He points out that Tacoda, a Union Square Ventures company, puts a link to opt-out of targeting right on their home page.

End to end online ad provider?

Brian Norgard wonders if its possible:

"The mythical, “End-to-end,” solution is much discussed yet far from being realized. My best guess is that it will emerge from companies that have built tools themselves (or most of them for that matter). There is so much information coordination when it comes to the ad space. Patching together company after company feels difficult, labor intensive and non-optimal from a technical standpoint. The ad spectrum being wide as it is: text, display, CPA, video, etc. and the customers coming from violently different economic stratas–from multi-national conglomerates to mom & pops–I feel a fully integrated, one stop solution is still a ways out."

I tend to agree, yet I know a bunch of folks currently trying this macro level roll up strategy themselves. As Brian writes, the online ad world is so broad, and I have always tended to think about things in buckets anyway. For example lead generation in my mind is a world apart from behavioral targeting.

The more interesting strategy, in any event, could be to find areas where there is consistency of purpose, customers and revenues, and therefore easier operating leverage to be gained from putting the pieces together. For example, an ad network, or exchange, combined with a provider of behavioral analytics. Then, start from that position and see if building out makes sense, or not.

Advertising on social media

John Borthwick says:

"Ads are often blunt instruments that fail to offer value to a membership engaged in a dynamic conversation – targeting and metadata only get you so far."

Greg Yardley, on the other hand, wonders:

"But what if individual ad targeting gets really good? What if the proportion of ads that don’t work plummet, and start getting replaced with more and more ads that actually make me want new stuff?

What happens to society in general, if due to the increased effectiveness of targeted advertising, we all experience a sudden uptick in the things we want?"

So what about targeted ads that are designed, through their attributes, to reinforce the dynamism of social media? Ads that are delivered based on activities (and conversations, as John says) that are occurring within specific social media. There is alot of value to be created there if someone gets that right.

Ads on "social nets"

Great analysis from Umair at Bubblegen on advertising on social nets:

"The point is - ads on social nets are seriously underperforming at the moment. It's unlikely that naive ads will be the b-model that lets them capture a share of the massive value they have created. Rather, it's when they revolutionize today's stale, inert adscape is when real (top-line) growth will occur."

The way that "social nets" (broadly defined) have radically altered the content production, distribution market needs to be replicated to the way ads are placed, sold and delivered. I'm biased, but I do think that such replication can occur in an obvious way: by viewing the recipient of the ad, and that person's actions, as the focal point of the whole ad system.

Ad serving is officially a commodity

Well, this has probably already been the case for years, but in the past two weeks:

*Openads, the "free, open source ad server," announced a $5mm funding, in part to become an open advertising platform. Their core products, Openads 2.o (formerly phpAdsNew) and Openads 2.3, are licensed open source under the GPL.

*Exponential, parent company of ad network Tribal Fusion, released a free commercial ad server.

In many ways these two events are not surprising as ad technology providers rip apart the online advertising stack and attempt to provide real differentiated services (and business models) at points where those services are truly valuable. Ad serving is valuable, obviously, but most publishers consider it an expense, and not an investment. Targeting, analytics, networks and exchanges more clearly result in revenues.

Amit Shah, one of the founders of Openads, writes that one of their goals, is "to allow as many participants in the advertising ecosystem to work together on one platform for mutual benefit."

Whether it's one platform or many, with the price of ad serving trending towards zero (what moves will the non-free serving companies make in the next few weeks?), the company that can, with transparency to the publishers provide demonstrated value in those upper regions of the stack will have an interesting, and I think lucrative, run of the market in the next few years.

Half of the ad network story

My friends at Lotame processed their one billionth ad transaction this weekend and will quickly double that.

At the same time, Jeremy Liew writes about content specific ad networks that in effect are creating synthetic ad channels:

"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."

Examples of content specific ad networks that Jeremy points to include Jump Start and Glam.

Ad networks fill an important gap in the online publishing equation -- the efficient and orderly monetization of content assets. That being said, clearly ad networks are great for advertisers and the networks, but are they great for publishers? Some, like Mike On Ads, believe ad exchanges can/will step in to balance that equation.

I think the ad network businesses are becoming commodities and as such the drive for differentiation and higher prices leads, on one path, to content specific channels. It's one reason I like the vertical ad business of Adify so much - it attempts to place itself out of the domain specificity business and just provide the relevant platform and tools.

And, exchanges are also a way to provide differentiated unbiased value, but they too could become commodities as their numbers rise.

But I still think networks, synthetic ad channels, vertical ad businesses, etc., are only half the equation, because they all still focus primarily on the content side of the equation, the publisher's perspective. They provide great value in determining what a consumer's interests are, based on the sites being visited (that's precisely the value proposition of a synthetic channel). But in using the content as the starting point, they run the risk of merely re-creating the ad business online. Same old inside-out model.

They don't yet provide enough value on what the consumer of content is doing, with and to that content. They don't flip the ad perspective to concentrate on the actions consumers take and then create value from there. Media companies, as Roger Ehrenberg points out, are and have to move to this focal point. I think the next wave of real online ad innovation will be parallel to this trend and move away from content toward the consumer. It's an important step that can help the new models -- including synthetic channels -- add much more value than being associated with a vertical domain.

Online video advertising -- halfway there

This weekend I read about two interesting companies developing advertising platforms for online video providers and publishers.

ScanScout's technology scans video content, creates intelligence about the clip and then dynamically matches ads to the content and intelligence it has just created.

Adap.tv also appears to scan video content and then shows targeted ads, with a particular focus right now on targeted direct response offers.

Both of these services do seem to advance the state of advertising around online video content, but they also appear to be missing an important focal point -- that of the viewer or user of the content. They take a very traditional approach -- looking at the content, and delivering services outward from the publisher or content perspective. This is an important approach, but one that I think misses an even more important perspective and movement occurring, whereby value is being created by looking at the viewer, the consumer, the actor participating in the content. After all, isn't that what community and connectivity are all about. Such an outside-in approach to creating value is where real radical businesses will be built. Maybe these two new companies are just a start.

Outside In Services

In reading the recent Piper Jaffray Internet Advertising report, I was struck by what the report lists as trend number three in the "Media World Order:"

Indeed, I think the implications of this concept are greater than as relates to a strict definition of the media world.

Maybe we should start to call these things "Outside In Services" -- those services that begin their conception of value creation from outside the confines of what is traditionally considered areas where value, control and distribution lie. Services which create new ways of looking at data and people and content, using the actors (or customers, or users) involved with the data and content as the focal point, and not necessarily the distributor or publisher or even service provider. Such actors have generally been considered, at least by publishers, as passive recipients. Audiences, if you will. Similarly, value has traditionally been considered to lie with the content or services delivered to those actors.

By viewing actors as being the locus of activity enables radically new ways of creating businesses to serve those actors/customers/users. These services are Outside In because, while they serve a user base, their functionality and utility derive from the actors, not from the content. Thus, they create value from outside the system (starting with the users), pointing in (towards the content or publisher or service provider). The actors to these services do not necessarily have to be generating the content themselves (and so this applies to a much broader base than "user generated content"), although that is an easy starting point and a radical evolution in and of itself. Outside In Services start with a premise (philosophical, almost, and different, definitely) of where and how services can/should be delivered. Then they use that thinking to create new ways of doing business.

Outside.in is a good example and not just because their name applies specifically to this concept. This business starts with the proposition that, when it comes to information about neighborhoods, or localities, there is indeed no good center or publisher to work with. Thus, value here can best come from (and amplified and be promoted) the outside, from distributed postings, content, comments and listings. In a way, Outside.in is remaking itself as a new kind of center. This has lots of implications, take politics as an example. It's also been noted that maybe the inside-out, opposite approach to this market is too hard to scale and grow. More interesting commentary from some investors in this service.

Aggregate Knowledge is another good case study -- helping drive ecommerce, for example, not using products as the center, but again by considering users' interactions with products to drive data, sales and relevancy. The actors at the center of retail is how I think about this one.

Interestingly, Dapper looks at the issue by considering the content, or the data associated with a website, to be the actor itself, and then they provide services to push that data, those actions, form the inside to the outside, where they can then be utilized for even more services.

I'm also lucky to be involved in two other companies that are taking outside in approaches to business. Lotame is spinning the advertising and analytics business on its head by looking at that industry from the perspective of content users, viewers and audiences. Lotame looks at these actors and their actions and interests in digesting web content as the basis for providing value-added marketing services to publishers. Thus, for Lotame what's less relevant is web content qua content, and what matters MUCH more is what people are doing to that content and what they exhibit as interests.

Finally, Carmun is attempting to redefine educational or learning value by allowing learners and students to create connections and insights themselves outside of a school or other institution, and then use those connections or insights in old or new ways.

There are many more examples of Outside In Services and thinking. For example, take a look at Jay Gould's framework for creating an online business and see how many of his criteria are focused on criteria outside the content or service (all of them).

Segments and Data

Sramana Mitra:

I would submit, that Yahoo hardly needs to do anything drastic, except, that it needs to reorganize its entire portfolio into Segments and Lifestyles, and align the 4Cs of each segment, so that the people interested in advertising to a particular segment can reach the community in a focused way, in Context. If they want to sell Groceries to people reading recipes, they should be able to reach them right there. Or, if they have Gadget Geeks researching a cell phone, they should be able to access that eye-ball, in Context.

Amazingly insightful. Audience and user segmentation, I believe, is the key to unlocking value from community driven publishing and media models and businesses. The ability to segment, in turn, requires a discrete level of correlated user, usage, media and context data. It needs to be collected (efficiently, which the right detail to drive its organization, which I submit is not trivial), stored, analyzed and delivered in actionable pieces, to publisher and advertiser.

While this level of analytics is only now beginning to be available, it is, as I have written before, remarkably powerful.

Advertising, Data, once more

Dave Morgan (via Andy Monfried):

We have unique consumer insights and can tell advertisers and their agencies valuable things about their audiences and their campaigns and their products and services--things that they didn't know, and need to know. This can help them reach consumers in places that are not apparent to them right now, thus opening up underdeveloped inventory. Over time, I think that we will find that online ad-based consumer insights will be more valuable than the media that we use to deliver the ad and capture the insights.

Advertising = data.

Online advertising, again, equals data

"Someone will successfully fuse social networking and online advertising. If I am interested in some topic, like programming in Ruby, or Vespa scooters (along with thousands of like-minded others), then sponsoring an online watering hole for aficionados should make sense. But no one has cracked the code yet, except for the mega-sites like MySpace and Yahoo. This should be the area that traditional media companies would move into, if they had any sense."

- Stowe Boyd, Jan, 2, 2007

Right on. Once the goals of online advertising are seen as being primarily data-driven (and less about brand or even direct response), as many have written, than this vision will become a reality.

I don't think its an easy code to crack necessarily(because of the data repository and analysis needs -- think of the cycles to be spent finding Vespa interest data points and correlating them with advertiser messages), but it will happen in 2007.

Web Analytics

"More website business owners will realize there is this thing called Social Networks and panic when they can’t be measured. Rest assured, targeted solutions will follow in 2007. "

Avinash Kaushik, December 29, 2006

Advertising = Data

Scott Karp wrote last week that innovations in online advertising could dethrone the page view as the metric of choice. Jarvis picks up on it today, from a different angle.

This followed up on a post Karp wrote back in September about the middle -- and large -- area of online advertising that is in-between, so to speak, branding and direct response, where, he writes:

"Traditional approaches to advertising, rooted in TV and print, still hold sway over branding. And search clear dominates direct response. Whoever can figure out a new value proposition for the fuzzy middle will be able to take a big slice of the pie — and possibly even growth the pie, as search did."

I believe the huge opportunity -- the fuzzy middle Karp refers to -- is one with the absence of brand or direct response labels, and instead is a market focused on data or analytics. In other words, the advertiser intent or motivation (reach, response, etc.) becomes much less important, at least in terms of the publisher side of the equation. What increases in importance is the data provided to the advertiser. The middle opportunity can, in my opinion, be captured by providing rich, detailed and new levels of analytics. An advertiser may only care about reach, or unique users, for some campaigns, but for others might wants levels of segmentation that heretofore don't exist (but are being developed).

In other words, all that matters is data, and making that data relevant and actionable (and visible) (and even share-able).

Then, concepts like branding, DR or even page views fade in importance because an advertiser can take a data set (provided by a publisher, a network or a third party provider), analyze that data, mesh it with strategic or tactical objectives, and make an ad decision. I see alot of similarities here to the direct marketing industry which is data driven like this.

I am seeing much innovation coming from different areas in this regard. Lotame, a company I advise, is providing enhanced analytics, data and services for user generated content publishers and advertisers. Similarly, I have been impressed with what I have seen coming out of the AdBrite marketplace and the RightMedia exchange, to name just a few.

Old categories (brand, DR) miss the point, as I see it. Only one label matters -- data.