TRANSPARENT BUNDLES by Seth Goldstein

Media Futures 2006: 1/5 Automata

  

Automatic Motion and the Gestures of Social Media

The Attention Economy is based on human behavior, behavior which includes the full range of physical gestures that we use to express our inner intentions.  These gestures could be saying something,  stretching our arms, walking past a group of people, or reading a book.

Many gestures end in themselves, as discrete actions.  Other gestures trigger subsequent gestures: for the person who performs the gesture (such as throwing a ball into the air and then catching it on the way down) or for the one that receives the gesture (such as calling somebody on the phone who then picks up their phone).  Since its introduction as mass consumer platform over ten years ago, the Internet has attracted an increasing amount of the latter: electronic gestures that use keyboards and mice (and increasing voice and video) to trigger subsequent gestures from others across the Internet.  It is not simply that more human behavior is being expressed through the Internet; entirely new kinds of human behavior are being created by virtue of the medium.  Many of these gestures are able to authenticate intentions with great subtlety so as to increase the ratio of signal to noise.

These are the gestures of social media, where influence is measured by the amount of Attention one gets relative to the amount of information one gives  The most influential online individuals combine a high pagerank that lands them above the Google fold (ie their unique algorithm) and a rich personal stream of syndicatable "what makes me me"-ness:  ie their natural API. 

The Turing test measures whether a computational response is mistakable for an actual human being.  George Dyson’s recent essay Turing’s Cathedral imagined this test to be central to Brin and Page’s agenda for Google.  They are trying to build an artificial intelligence whose automatic responses to queries seem natural and humanistic.  In order to experience the rich social media of a post-Web 2.0 landscape, however, we need to venture beyond the shadow of the Google page-rank Golem.  How can we trust an electronic reality based solely on the single perspective of pagerank (ie the link model), when our actual behavior seems more like, in the words of William James, a “blooming, buzzing confusion” of human electronic gestures.

"Egosystems, not Ecosystems"

Stallman, Torvalds, Doc Searls, R0ml and many others have established the underlying value of an Open Source ecosystem.  At the first public meeting of AttentionTrust.org in October 2005, Tim O'Reilly suggested that the next generation of the Web (3.0?) was going to be about "Data Inside".  And so if you apply the discipline of a truly Open system to all of the behavioral data that is expressed by these electronic gestures, you end up with a new organizing framework- a framework of egosystems which, for the first time, bind human behavior to the transport policies of Open Source ecosystems.  My wife Tina Sharkey came up with this brilliant expression, "egosystems, not ecosystems." in which the notion of an egosystem can be used to express the rich variety of our interactions across the Internet:  email, search, browsing, buying, tagging, chatting, and other electronic activities.  One egosystem may interact with other egosystems in infinitely different ways.  And so even at maximum resolution, this social media fabric appears richly woven and densely textured:  tiny threads of gestribution bundled transparently around eachother.

Enter the worms (which happen to be the subject of the last section of the last chapter on Arbitrage).  These little creatures that both consume and produce in equal measures provide the best model for understanding the physics of the Attention Economy.

Hamlet explains that:

We fat all creatures else to fat us, 
and we fat ourselves for maggots. Your fat king and your lean beggar is
but variable service- two dishes, but to one table.

So Hamlet 2.0 might say:

We encourage others to participate so that we may consume them
and we make ourselves interesting for the blogosphere.  Your Internet CEO and your Joe Blogger are just different algorithms- two APIs, but to one network.

What distinguishes social media from other forms of media is this worm-like behavior, where production and consumption occur simultaneously.  You can look at it as a form of therapy, where individual data is constantly being reorganized (quantitatively) to generate richer (qualititative) meaning.  This is the  Gillmor moment, when the naval-gazing gesture of an individual’s Attention feeds back, anonymously, into crystal-clear affinity pools of metadata.  Inference and influence reverberate off of eachother, turning a mess of discrete gestures into a continuous Gesture stream.

Attention Science

Attention has forever been described as an absence in terms of distractions, deficits and obligations.  Media Futures is a model for talking about Attention as something more; as an active substance that we create, express, share and remember.  This Attention substance- let's call them attentrons- operates at a size and frequency that makes it invisible to our naked eye.  Fortunately, none of us need travel very far to reach the Attention super collider, where we can test for traces of these attentrons.  The mashups that emerge on Digg are powerful reactions of data and people.  From the new dance clubs in Second Life ripple new patterns of social networks.  How can we analyze these seemingly spontaneous phenomena so as to make visible the elements and interactions that drive their behavior?

This is the project of Media Futures: to come up with a conceptual schema that synthesizes the  constructivist aspects of social media and the analytical rigor of the Attention Economy.  It is a language game:  as complex as Chess, and as fleeting as Chutes and Ladders.  Computer scientists in the 1950’s gave us the building blocks of Input, Store, View and Output;  MS-DOS gave us operations like copy, file, print and run; Unix gave us root access.  In the Attention OS, it's the 5 A's: Automata, Algorithm, API, Alchemy and Arbitrage.

Maggie Dillon has done a great job aggregating brief histories of each topic, both to establish its historical credibility and to expose the subtleties of its use over time.  This syntax of Media Futures is valuable, however, only in so far as it is applied to real social media use cases.  These new services require active minds, creative imaginations and lots of quality code.  What's missing is the sense of continuity between early computing history and the widget design for next week's release.  And that is what we are working on here.  Enjoy.

Next: History of Automata

Media Futures, Part 5/5: ARBITRAGE: V. Therapy

Food for Worms

King. Now, Hamlet, where's Polonius?

Ham. At supper.

King. At supper? Where?

Ham. Not where he eats, but where he is eaten. A certain convocation of politic worms are e'en at him. Your worm is your only emperor for diet. We fat all creatures else to fat us, and we fat ourselves for maggots. Your fat king and your lean beggar is but variable service- two dishes, but to one table. That's the end.

King. Alas, alas!

Ham. A man may fish with the worm that hath eat of a king, and eat of the fish that hath fed of that worm.

King. What dost thou mean by this?

Ham. Nothing but to show you how a king may go a progress through the guts of a beggar.

(Shakespeare, Hamlet, Act IV, Scene 3)

Following his murder of Polonius, Hamlet starts talking about worms.  As a subject, worms are disgusting and it is easy to simply brush his comments aside as the incoherent ramblings of an antic disposition.  But there is something that gripped me as I have been re-reading this.  What does Hamlet mean by “variable service” and is it really “progress” if a beggar is simply remixed as a King? 

*

Media Therapy

Another month has gone by as I have been collecting my thoughts for this final section of Media Futures.  As you know, I have been looking for the light at the end of the tunnel of Internet Arbitrage.  If automata is a form of artificial life, then it is the function of arbitrage to extinguish such life through the systematic liquidation of all vital spreads.  Arbitrage is a key lubricant for any emerging market economy.  The conventional meaning of therapy is overdetermined by the specter of Freud and the practice of talking about your childhood to a shrink on the Upper West Side.  But this is only one context, and I would like to remove the practice of therapy from psychology per se and introduce it into our conversation about Media Futures.

Let us understand therapy to be the practice of working with decay:  decay in the sense of something that has happened and needs to be worked through in order for one to move forward, grow, prosper, profit, progress, develop.  Therapy can happen in a variety of ways so long as it is a dynamic process.  Talking, writing, reading, shopping, running are all potentially therapeutic processes in so far as they act on prior conversations, states and conditions.  In describing how we use language to create a meaningful social environment, Wittgenstein says that "in the practice of the use of language one party calls out the words, the other acts on them" (PI, #7).   

What the Internet has enabled is an “acting-upon-ness” of singular historical scope and scale.  I was recently at an exhibit at the ZKM in Karlsruhe called “Making Things Public: Atmospheres of Democracy” curated by French Anthropologist Bruno Latour and New Media Philosopher Peter Weibel.  The core assumption is that we have always used communications and computing instruments to participation in the architecture of social meaning.  The Internet has simply normalized our feedback to the point where our interests are indistinguishable from the history of our click streams.

Not that this is an avant garde European theory, just look at the recent cover of Business Week:

The poster for the ZKM exhibit was a giant quote from Tom Watson of IBM stating “There will be a need for no more than 5 computers in the world.”  The intended comment I believe was to show how far off he was on the downside.  For me, the error was on the upside, for there really is only one computer and it is called the Internet.  Yes, there are billions of CPUs out there each of which is technically a computer but in so far as an increasing majority of them are connected or connectable via TCP/IP, then they collectively form the I/O extensions of a single social computing machine.

And so now we can go back to thinking about our 5 A’s of Media Futures: Automata, Algorithm, API, Alchemy and Arbitrage   in the context of this computer that we are all acting upon.  Our actions, expressed as Attention, establish networks that connect us, our family, our friends, our colleagues and our affinities. 

As we spend time online we are actually impressing ourselves upon certain links within these social networks and choosing not to impress ourselves upon other links.  Our most popular email recipients and instant message buddies, our bookmarks, our cookie trails are residues of where we have decided to pay attention.  The net currently has a schizophrenic but unique way of remembering bits and pieces of these attention streams:  Not all data is captured; the consumer has no central attention management tool; and most companies don’t want you moving your history between their networks anyway. 

Despite these points of friction, more and more applications are being built upon our attention streams.  Every new web application or mash-up from HousingMaps to Backpack to Del.icio.us is simply a better enabler of some existing user behavior.  People were using Google to find Craigs Listings, people were using wikis and blogs to manage their projects and to-do lists, people were storing and sharing their favorite links for themselves and their friends. 

It is the promise of Internet media to know everything about you so that it can engage you in an intimate conversation with advertisers around specific products you are looking to buy.  But we are still many years away from a truly personalized advertising experience.  In the meantime, architects of participation are channeling specific community zeitgeists into hyper functional media products.  The consumer is invisible in the moment, leaving only traces of her clickstream behind her as a trail of evidence.  Innovations in internet media are like handfuls of white flour dropped over the invisible outlines of consumer intention.  At times, user behavior drives media construction directly, but at other times the original user behavior evolves beyond the ability of the media to engage it.  These hollow shells of former behavior are being swept up constantly by domain, banner, click-thru and lead brokers who recycle the detritus into more usable (aka monetizable) impressions.

Remediation is the removal of pollution or contaminants from land (including sediments in waterways) for the general protection of the environment.  Remediation in terms of new media, is the representation of one medium in another. (from wikipedia)

The process of remediation has become the status quo of Internet media consumption.  What we consume online is likely the residues of other people’s behaviors.  Innovation occurs through the subtle differences between my behavior and that of everybody else who has formed the sediment that I now surf upon.  In so far as my strange behavior becomes reinforced by that of others, then I am creating the foundation for new forms of media.  These are typically the alchemical moments when the mad scientist designs a feature that becomes a product that becomes a company.  Josh Schachter transformed del.icio.us from a link storage feature for him, to a link sharing product for the community to a link sharing company for investors.

MagArb

If we are comfortable describing the process of Internet innovation as a form of remediation, then we might as well put Hamlet’s worms back on the table.  Worms are like arbitrageurs: nobody likes them very much but then again nobody questions the role they play in making markets more liquid.  The covalence of arbs and worms should not come as a great surprise, since I am sure many of the greatest financial arbitrageurs have been referred to as “maggots” as some point in their careers.  This may however be the first time a maggot has been called an arbitrageur.

The technical term for using worms as a form a medicine is Biotherapy. Shakespeare’s cure for Polonius was hundreds of years ahead of its time.  In February 2003, the BBC ran a story about a novel approach to treating wounds:

Maggots heal hospital wounds
A hospital in Northern Ireland has been using an unorthodox treatment involving maggots to treat wounds where modern medicine has failed to cope.  Known as larval therapy, the maggots eat dead tissue, but leave healthy tissue alone.  Although staff at Daisy Hill hospital in Newry were initially skeptical, clinical specialist in tissue viability Jenny Mullan said the treatment produced "unbelievable" results.  Hospital maggots are specially bred for wound treatment. They are sterile and are usually of the green blowfly variety as this species only ingests dead tissue.  The therapy was first used at the hospital on a diabetic patient, who had recently had a limb amputated and developed a pressure sore on his other heel.  The patient reported that the pain had been reduced, said Ms Mullan. Even so, maggot therapy may have  a bright future. According to Handler, they're cheap, they don't become ineffective over time like some antibiotics, and they work. "Especially as doctors are getting stretched thinner and thinner," he said, "it will be helpful for them to conserve their resources and use maggots." (emphasis mine)

I like the irony of doctors “stretched thinner and thinner” using maggots as an enriching way to “conserve their resources.”  This expands the conventional meaning of worms as consumers to embrace worms as creators.  The very fact that these worms are recycling, remediating and remnating diseased tissue is in itself a creative activity, not unlike many of the Web 2.0 mashups that synthesize a vital new experience from two or more existing web services.  All of these examples underscore the core thesis of Internet media therapy, namely the ability for quantitative reorganizations to produce qualitative change.  This is perhaps best exemplified online by the Web API which routes multiples streams of data input into (the potential for) a qualitatively different stream out.

The relationships between worms in the organic and Internet worlds is a rich vein of interpretation.  In both contexts they provide an infrastructure for processing decaying materials.  At the end of his life, Darwin became obsessed with worms and his penultimate book of 1883 was in fact entitled The Formation Of Vegetable Mould Through The Action Of Worms With Observations Of Their Habits; in it, he writes:

Worms have played a more important part in the history of the world than most persons would at first suppose. In almost all humid countries they are extraordinarily numerous, and for their size possess great muscular power. In many parts of England a weight of more than ten tons (10,516 kilogrammes) of dry earth annually passes through their bodies and is brought to the surface on each acre of land; so that the whole superficial bed of vegetable mould passes through their bodies in the course of every few years. From the collapsing of the old burrows the mould is in constant though slow movement, and the particles composing it are thus rubbed together. By these means fresh surfaces are continually exposed to the action of the carbonic acid in the soil, and of the humus-acids which appear to be still more efficient in the decomposition of rocks… When we behold a wide, turf-covered expanse, we should remember that its smoothness, on which so much of its beauty depends, is mainly due to all the inequalities having been slowly levelled by worms. It is a marvellous reflection that the whole of the superficial mould over any such expanse has passed, and will again pass, every few years through the bodies of worms. The plough is one of the most ancient and most valuable of man's inventions; but long before he existed the land was in fact regularly ploughed, and still continues to be thus ploughed by earth-worms. It may be doubted whether there are many other animals which have played so important a part in the history of the world, as have these lowly organized creatures. 

Darwin establishes here two core principles that we have been working through in a variety of contexts:

1. Finished products (be they Darwin’s smooth, “wide, turf-covered expanse” or today's Google homepage) are the consequences of worm arbitrage.
2. Worms feed on mould, detritus and death.  Remnant spaces, recyclable materials and remediation are critical for their success.

At his now-famous graduation speech to Stanford University students, Steve Jobs, the preeminent creative entrepreneur of our time, shared a story of his near-death experience with pancreatic cancer.  His suggested that "Death is very likely the single best invention of Life. It is Life's change agent. It clears out the old to make way for the new." Jobs ended his speech with the Whole Earth Catalog refrain "Stay Hungry" which puts worm logic in a beautifully constructive, creative and curious context.

There is, of course, a techno-literal meaning for worms (and viruses) as they relate to Internet media and communications.  Bruce Schneier, the Internet’s best critic of cryptography and security, forecast the following worm reality for 2005:

In 2005, we expect to see ever-more-complex worms and viruses in the wild, incorporating complex behavior: polymorphic worms, metamorphic worms, and worms that make use of entry-point obscuration. For example, SpyBot.KEG is a sophisticated vulnerability assessment worm that reports discovered vulnerabilities back to the author via IRC channels.  We expect to see more blended threats: exploit code that combines malicious code with vulnerabilities in order to launch an attack. We expect Microsoft's IIS (Internet Information Services) Web server to continue to be an attractive target. As more and more companies migrate to Windows 2003 and IIS 6, however, we expect attacks against IIS to decrease.  We also expect to see peer-to-peer networking as a vector to launch viruses.

Targeted worms are another trend we're starting to see. Recently there have been worms that use third-party information-gathering techniques, such as Google, for advanced reconnaissance. This leads to a more intelligent propagation methodology; instead of propagating scattershot, these worms are focusing on specific targets. By identifying targets through third-party information gathering, the worms reduce the noise they would normally make when randomly selecting targets, thus increasing the window of opportunity between release and first detection.

Even though Schneier is referring specifically computer security, his comments are useful for our conversation about Media Futures.  The “window of opportunity” that he identifies "between release and first detection" applies equally well to the creation of new media applications and the attention management tools that they enable.  Once new applications have been “discovered,” just like that of any wide spread, they are likely already in the process of deteriorating.

*

Over the past month, I have been reading my boys Norton Juster’s classic, The Phantom Tollbooth.  In a chapter entitled “The Word Market,” Juster sets the ambiance of a bazaar of fresh fruit and exotic delicacies, but where instead of food there are words.  Suddenly, a merchant cries out: “Juicy, tempting words for sale.”  My six year-old loves this part; he appreciates words' unique ability to convey different shades of meaning.  Every new word he learns is another tool he can use to establish control over his environment.  He wants to take each new word and wield it like a light saber of intention.

This weekend maybe I will sit down with him outside, on the grass, dig into the soil with my hand and pick up a worm.  “Do you remember that scene from Phantom Tollbooth, where they are selling words?  Well, when the words go stale and nobody wants them, do you know what happens to them?”  I am not sure how he will respond.  But I will take the worm, put it in his hand, and say  "The worms eat the words.”  And he will probably look at me like I am joking and being the smartie that he is, will ask “And what do the worms do with them?”  And I’ll tell him frankly “Why, the worms feed the words to Google.”  And he will laugh, and I will laugh. 

But I wont be kidding

Media Futures, Part 5/5: ARBITRAGE: IV. New Markets

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. 

Media Futures, Part 5/5: ARBITRAGE: III. Attention

ATTENTION-BACKED SECURITIES

Want an iPod? Get one free at freeiPods.com

I hate sounding like a crass web promoter but FREE remains the best single response mechanism on the Internet.  We are happy to provide our full attention in exchange for free stuff: iPods, Razrs, Flatscreens, PSP, and more.  And it really works, as people actually do end up with iPods which are free in terms of money but expensive in terms of attention.

It is easy to dismiss the random college student who has nothing better to do with his time than click away on offers he isn't really interested and sell out his five other college friends as potential online education and auto loan applicants.  It's similarly easy to dismiss the stretched dad who eagerly clicks on low cost mortgage ads even though he has already borrowed 200% of his income on credit credit cards and usually pays 100% annualized interest on cash advance services to service his debt.  It is scary when you consider how much the Internet advertising economy depends on juicing up consumer credit; as JK suggests at his excellent blog, more than 20% of Google and Yahoo search ad revenue may be dependant on mortgages.  Our research at Majestic suggests that the top paying keywords on paid search have consistently been Home Equity Loan and Refinance purchased by Countrywide and ELoan for over $20 per click.

An enterprising consumer could fabricate her identity and that of her referrals in order to try qualifying for products without ever being contacted again.  But that’s not what happens.  The great majority of America does not subscribe to RSS feeds or use Firefox.  These Americans think a tag sale is a great way to spend a Saturday afternoon, not the next revolution in Internet advertising.

We are an American populus of lazy attention providers who opt in to elaborate network marketing schemes that resell us multiple times over and append increasing data about our demographics and purchase intentions. We would rather not bother with multiple email identities with unique passwords; life is too short.

Spitzer may indeed go after freeipod.com once he is done with Intermix.  Consumers who have filled in a lot of data and have yet to see their free iPods arrive in the mail will cry foul.  In the same way that some retail investors cried foul to the Attorney General after losing their 401k money on Internet Capital Group or Infospace.  Mayor Bloomberg was right when he said that people make their own investment decisions and should be held responsible for any losses they incur. 

I wonder if he will say the same thing when consumers begin the witch hunt against any Internet advertising company that sells their attention to advertisers without their explicit permission each step of the way.  The individual’s decision to save time and money in exchange for their passive attention represents our collective failure to imagine a more active Internet lifestyle.  This should come as no surprise in the context of our dependencies on credit, oil, porn, sugar, and gambling.  These industries are not in danger of collapsing anytime soon.

It is ironic how personal technology and the Internet continues to be represented culturally as a source of control; we are everywhere reminded that our browser gives us the ability to establish order on a world of constantly changing information.  When we search for something, we are driving the process of personalized information retrieval

But on the other side of the mirror, we are being watched.  Our queries are being mapped legitimately by companies looking to contact us.  If you are not careful, an errant click will be answered with a telephone call from a sales representative.  And so as we succumb to these performance-based networks, our future purchases, our future media consumption, our lifetime economic value across hundreds of categories and thousands of companies, are all being calculated in real-time.  Not by a single agent, but by multiple agents each trying to evaluate our momentary state of purchase intent in the context of the many monetization levers these advertisers have at their disposal. 

As the Internet medium continues to evolve into a sales channel, the price of advertising is becoming mapped algorithmically to probable outcomes.  Very little is being left to chance, as even the most ephemeral of creative decisions (color of the car in the banner, the choice of text in the link) are immediately evaluated in terms of click-thru rate and ultimate conversion.  As Josh Kopelman, who used the prototypical arbitrage concept of “half” to create a $300m exit for his company half.com to EBay, puts it, “online advertising is just math."

Media Futures, Part 4/5: ALCHEMY

The practice of transmuting base metals into precious metals.

In considering Alchemy as it relates to the Internet, I have been spending my time trying to reconstruct my college readings of Walter Benjamin, the beautifully melancholy German essayist from the 30's.  I took a class on the Frankfurt School, a group of intellectuals who distinguished themselves with their critique of the emerging modern consumer culture and the technology that enabled it.  Benjamin was the imaginative outlier of the bunch, writing about "Hash in Marseille," the psychology of the collector and the shopping arcades of Paris at the turn of the century.   I cannot recall an instance of Benjamin discussing computers, although his commentary on art in the age of mechanical reproduction as well as his citation of Kempelen's chess-playing dwarf machine, the Turk, in important ways pre-figured our contemporary situation of extreme automation. 

The reason I have been rummaging through college essays and running down to St Mark's Bookshop at 11p on Sunday night is because I have this quote stuck in my head like a persistent Hall & Oates tune.  I remember Benjamin stating that "Great categories are monuments in the history of civilization" and I thought that this perfectly summed up the alchemical act that relates to everything from my decision to describe a link with a certain tag on del.icio.us to the broader power of naming markets and establishing value.  For the life of me, I could not confirm the quote online, and so I located the original source, which was the dense prologue that Benjamin wrote to the only book he was able to publish when alive, the Origin of German Tragic Drama.  The introduction is less about any particular subject (ie Trauerspiel) than it is about the theory of knowledge in general, and the specific powers of naming.  When I found the text, it actually read as follows:

The great categories which determine not only the shape of the systems, but also philosophical terminology- logic, ethics, and aesthetics, to mention the most general- do not acquire their significance as the names of special disciplines, but as monuments in the discontinuous structure of the world of ideas.

Not quite as catchy as what I remembered, but it does get the same point across:  how we describe something is in itself an act of creation, beyond simply representing some external object.  Something happens during the act of naming.  It could be a company, an index, a domain, a category, or a database class.  This is the modern alchemist, consistent with the history of the solitary materials scientist who mixed various elements into something whose value was far more than the sum of the parts. 

*

A fine example of the Internet alchemist is Joshua Schachter, the inventor of del.icio.us.  The seed of his idea, like that of many of his peers, was simple enough: I have a problem, nobody else has solved it to my satisfaction, and so I might as well figure it out and share the solution with others.    As he commented to a blogger:

I started a website in 1998 or so; that kind of thing would later get named a "blog."  Anyway, in the running of this site, I collected a lot of links so I could hopefully organize and post them.  So I started keeping them in a file, which grew and grew. To be able to quickly find things, I started leaving one-word notes at the end.  Tags.  I later built a system, around 2002, that was a web-based database for storing my bookmarks.  It also had tags, but was not multiuser.  I'm not sure if it was 2002 or 2001, anyway. It first shows up in archive.org at 2002 though.  Then later, I rewrote it multiuser, as del.icio.us.  That was 2003 or so.  So the motivation was mostly because I was solving a problem I had, and then I solved it for everyone."

The burning question for me in understanding Josh's unique contribution, and by extension the art of Web alchemists in general, is to what extent he figured "multiuser" behavior into his initial system?  I doubt he consciously imagined a service that would feature thousands of simultaneous users posting links.  Still, few developers have been able to create such a massive self-organizing with total focus and deep resources, much less when working on it part-time while employed as a developer of trading systems on Wall Street.

Ironically, Josh's citizenship in finance is useful here as it relates to the experience of George Soros, who almost 20 years ago wrote about his concept of reflexivity in the Alchemy of Finance.  Soros claims that one's understanding of a situation changes the situation, and that the secret to his investing success was understanding his (and other investors') impact on what had otherwise been seen to be efficient markets.

This is consistent with what I see happening online, where meta-data (information about information) is creating significant economic value, from the many millions of Google and Overture keywords to the emerging class of Flickr, Del.icio.us and other tag-driven systems.  Our browsing, clicking, searching and tagging behavior are the base metals which alchemists like Josh are turning into precious datastors.  Rather than perform this magic in some sort of black box (ie like our friends in the Googleplex), Josh is transparent about his agenda:

Hmm. Mostly right now I have a big deck of cards with all the todos ("hipster pda") which I need to move to some sort of online thingy. I'd set up a tadalist with RSS feed, but it appears that the RSS feed is empty.

Mostly there's three major categories of stuff to do; Server Architecture, Things Involving Schema Changes, and Other Stuff.

For those of us living on the West side of Manhattan, Josh is our (mostly) friendly neighborhood Internet architect.  He has the vision (and the perfectionism) of Louis Kahn and does not suffer fools lightly.  Little is important to Josh other than preserving the simple scalability of del.icio.us as a system of collective meaning.  In the spirit of my incantation of Benjamin, when I first met Josh late last year (through another emerging Internet alchemist and pal Mike Frumin) he described his project as "crystallized attention."  What is del.icio.us after all but the traces of what people do with their time?  These memory links, and the tags that go with them, are themselves a form of media.   For me, this is the essence of Internet alchemy, and relates the complementary functions of automata, algorithms and APIs.  It is also the reason why I took to Josh, encouraged him to take friendly venture money so that he could quit his job, and recently became involved in del.icio.us as an angel investor and advisor. 

*

If we look back over the past ten years, there are handful of similar alchemical moments in the history of the World Wide Web (and many other minor moments that may have generated significant financial profit but were otherwise inconsequential in terms of establishing long term structural value such as Broadcast.com).  The most memorable are probably Andreesen's browser at University of Illinois, Yang and Filo's "Yet Another Hierarchical Official Oracle" at akebono.standford.edu, Bezos' online bookstore, Omidyar's Pez-trading application, and Page and Brin's simple search box.  (It is strange, no, that Andreesen and Bezos are direct investors in del.icio.us?). 

In his 2002 commencement address at Tufts, EBay founder Pierre Omidyar, described what he considered to be the secret of EBay's success:

I can tell you, without the ability to prepare for the unexpected… …There wouldn't be an eBay today. The key is recognizing that no matter how convinced you are in the power of your own ideas… …Sometimes, ideas have ideas of their own.

That's certainly true in terms of system design. Almost every industry analyst and business reporter I talk to observes that eBay's strength is that its system is self-sustaining -- able to adapt to user needs, without any heavy intervention from a central authority of some sort.

So people often say to me - "when you built the system, you must have known that making it self-sustainable was the only way eBay could grow to serve 40 million users a day." Well… nope. I made the system self-sustaining for one reason: Back when I launched eBay on Labor Day 1995, eBay wasn't my business - it was my hobby. I had to build a system that was self-sustaining… …Because I had a real job to go to every morning.

I was working as a software engineer from 10 to 7, and I wanted to have a life on the weekends. So I built a system that could keep working - catching complaints and capturing feedback -- even when Pam and I were out mountain-biking, and the only one home was our cat.

If I had had a blank check from a big VC, and a big staff running around - things might have gone much worse. I would have probably put together a very complex, elaborate system - something that justified all the investment. But because I had to operate on a tight budget - tight in terms of money and tight in terms of time - necessity focused me on simplicity: So I built a system simple enough to sustain itself.

By building a simple system, with just a few guiding principles, eBay was open to organic growth - it could achieve a certain degree of self-organization. So I guess what I'm trying to tell you is: Whatever future you're building… Don't try to program everything. 5 Year Plans never worked for the Soviet Union - in fact, if anything, central planning contributed to its fall. Chances are, central planning won't work any better for any of us.

Build a platform - prepare for the unexpected... …And you'll know you're successful when the platform you've built serves you in unexpected ways. That's certainly true of the lessons I've learned in the process of building eBay. Because in the deepest sense, eBay wasn't a hobby. And it wasn't a business. It was - and is - a community: An organic, evolving, self-organizing web of individual relationships, formed around shared interests. 

Clearly, Omidyar created EBay within an architecture of public participation.  Listening to him, as well as to Josh, it would seem that there is simply no way to create long term sustainable value online without engaging consumers in the act of media production.  And yet one could argue that Yahoo! and Amazon do not necessarily do this.  Yahoo! is working hard to incorporate community production and meta data into their core platform (cf. Flickr acquisition, Yahoo360, etc) and Amazon leverages ratings, reviews, wish lists, associates and other community features to create a richer experience for users.  Still, these are not as fundamental to the browsing and shopping experience respectively. 

With regard to Google, it is hard to figure out exactly to what extent they leverage the community at large and and to what extent they are simply providing this community with cheaper storage, better tools and faster search.  Community in Google is not Orkut, their attempt to compete with Friendster which was aborted mid-stream when the threat evaporated.  Rather, the Google community folds in on itself as user search behavior drives keyword purchases by advertisers (AdWords), which suggests which content offers the highest effective value  in the form of context-sensitive ads (AdSense) which users can leverage profitably for their own blogs (Blogger).  One of the first examples of this was Michael Buffington's Asbestos Blog.  I have not met Michael, although from reading his blog I have a lot of respect for his alchemical curiosity and ability to execute interesting tests.  He expresses melancholy with the knowledge that these strategies are, as in any advanced liquid market, moving into the hands of speculators who are far more focused on the gold than they are on the magic of base metal transformation. 

As Scott Eagle, the SVP of Marketing at reformed spyware company and current behavioral marketing firm Claria  told the New York Times last month: 

"We'll take ad inventory that costs 50 or 75 cents, buy it in bulk, and turn it into gold by targeting $6 or $15 precision ads there," he said. "We'll be the alchemists."

Without further commentary, this is the natural segue into a discussion of Arbitrage which will complete the Media Futures series.

Media Futures, Part 2/5: ALGORITHM

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. 

Media Futures, Part 1/5: AUTOMATA

Self Operating Machines

The most exciting new Internet companies are focused on lead generation, behavioral targeting, co-registration paths (aka coreg) and domain name brokerage.

I seem to stumble every day across some new firm propping itself up on the shoulders of Google, Yahoo! or others to take advantage of a current wrinkle in an otherwise perfectly efficient landscape.  The fact is, however, that these wrinkles never seem to disappear.  These advertising mechanisms emerged alongside of the pure media companies, starting with Doubleclick back in 1996, and followed by other advertising networks such as Flycast, Overture and Advertising.com, each firm iterating on the prior model to gain some head room from the imminent internal advertising service offerings of the pure media companies.

Although these advertising technologies have focused on targeting the behavior of consumers, they have also tended to ignore the role of consumers in the production process of the media that they consume.  This is why these networks tend to dynamically balloon in terms of sales growth.  They capitalize on a behavioral blindspot, where the supply of inventory versus the demands of advertising value are disjointed.  As consumers become smart about these artificial mechanisms (banners, keywords, freeipods) their effectiveness drops and they look to get acquired by larger media entities.

The elusive goal of internet media (and the advertising that drives its value) has been to keep up with changing consumer preferences as the technologies of communication continue to evolve.  The adoption of a new means of using the Internet (whether it be ecommerce, webmail, search engines, or shortly blog readers) creates enormous economic value for the donors incredibly quickly. 

The latest shift in online consumption has been the institutionalization of amateur publishing tools.  The unique attribute of RSS is how simply it enables individual publishers of data to connect with individual subscribers to such data.  RSS tools like typepad, flickr, adsense and del.icio.us have made it easy for individuals to syndicate their preferences, memories and desires.  RSS tracking tools like feedburner make it easy for individuals to track who is paying attention.  At the site you are on, I am streaming my Flickr photos, am recommending books as an Amazon associate and am promoting a Google ad-sense ad.

Not unlike dial-up authentication protocols (remember the classic AOL logon "hand-shake"),  the interaction between RSS feeds and their readers is a structured negotiation:  do you, John Q. Public, agree to take the whole feed, nothing but the feed, until you delete it?  I do. Click.   

When you aggregate all of these individual reading and writing agents, it looks more like a landscape of cellular automata than a tradition publishing model.  This would seem to be the essence of social media (props to my wife and guide Tina Sharkey for coining this years ago and registering the domain) and social computing, two memes that seem to be growing in influence.  When individual decisions such as applying certain tags to pages or photos achieve a broad social consensus, then it as if these tags begin to self replicate which is the essence of automatic behavior.

There is a good word to describe this, which comes out of physics, namely Excitable Media.  as per Wikipedia:

Cellular automata provide a simple model to aid the understanding of excitable media. Each cell of the automaton is made to represent some section of the medium (for example, a patch of trees in a forest, or stress in heart tissue). Each cell can be in one of the three following states:

Quiescent or excitable -- the cell is unexcited, and can be excited. In the forest fire example, this corresponds to the trees being unburnt.

Excited -- the cell is excited. The trees are on fire.

Refractory -- the cell has recently been excited and has not yet been through the refractory period. A patch of land where the trees have burnt and the vegetation has yet to regrow.

The concept of cellular automata is useful as a metaphor for next generation Internet content, which is similarly dynamic, member-generated, and excitable.  In the next post, I will focus on algorithms, as they transform the automatic social media into business rules and procedures. 

Technostalgia and Human Computers

 
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

 

False Profits: The End of Internet Advertising: The Beginning of Sales (and Surfs)

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.