Media Futures: From Theory to Practice

A Story in Five Parts:

1. Wall Street Meets Madison Avenue
2. Problem: Marketing is Inefficient
3. Solution: /ROOT Markets is a Financial Exchange for Consumer Leads
4. How the Securitization of Mortgages Opened Up the Housing Market for Consumers
5. How the Securitization of Internet Leads Will Open up the Attention Market for Consumers

Wall Street Meets Madison Avenue

What is a lead?
A lead is generated when a consumer clicks on an ad and is directed to a landing page—a web site that collects information critical to determining how valuable a potential customer is—and fills out a form.  This form includes both contact and intention information about the consumer.  This lead is then sold to an advertiser, who contacts the consumer to close the sale.

What is an exchange?
An exchange provides a context for giving and receiving.  It is a simple concept that solves hard problems, frequently in financial contexts: stocks, bonds, commodities, currencies, etc.  In these markets, exchanges provide price data and quality information about the underlying commodity.  Successful exchanges work hard to stay out of the way of market participants.  This means encouraging liquidity without providing any:  jujitsu not sumo.  With access to this data, traders with many different agendas can meet on the same, level playing field and compete.

Ten years ago I helped create some of the first advertising on the Internet: designing banners for HotWired, helping my friend Scott Heiferman market links at iTraffic and later starting my own firm SiteSpecific.  Advertising on the Internet required calling the webmaster of a site to manually place an ad image on a page that would like to the web site of the advertiser.  This was Internet media, before the era of search engine marketing, ad syndication and mashups.  And while we experimented with building targeted microsites for our advertisers and enabling "smart syndication", the focus, and money, was on building large complex corporate web sites.  I left the business in 1997 after selling my firm to a bigger firm out west.

In the intervening years, I worked on a service called root.net, which was a combination outsourced executive assistant / concierge / travel agent.  That business was too labor intensive, and I shut it down although I held on to the domain, which was full of meaning.  I then went to work with Fred Wilson at Flatiron Partners, the Internet VC firm in New York, where I learned, among other important lessons, about how the mood swings of public institutional investors directly impacts venture capitalists and therefore the young companies that they nurture.  After the capital markets corrected in mid 2000, I also learned quickly that the only people who made money when stock went down were hedge funds.  This was interesting.

In 2002 I noticed a few key trends: (1) the regulation of the sell-side research business mandated by Spitzer; (2) the roll-out of Regulation Fair Disclosure across corporate America; (3) the proliferation of hedge funds hungry for an edge; and (4) the emergence of new sources of Internet data that provided real-time visibility into key levers of a company's performance.  Based on these trends, along with a partner, I started Majestic Research, which has grown into an important source of rigorous, unbiased, real-time insights for sophisticated institutional investors.  I launched my blog in March 2003 as an outsider analysis of the independent investment research business.  Its title, "Transparent Bundles" refers specifically to a Wall Street commission payment mechanism that combines research, trading and underwriting costs as individual line items on a single bill.

Last year the worlds of Internet advertising and Wall Street started to resonate with eachother, and so I changed the name of my blog from "reflections on Independent Research" to "Somewhere between Madison Avenue and Wall Street lives the future of both."  In the context of Overture and Google AdWords, it was as if the Internet Advertising world that I remembered as being all about portals and large corporate sites, was suddenly starting to look a lot more like some sort of commodity exchange.  And yet, despite the enormous improvements in targeting, accountability and profitability, I was surprised at how opaque the paid search market had become.  There was no central price discovery mechanism for online advertising.  Based on this opacity, all sorts of new arbitrageurs entered the market and turned impressions into clicks, and clicks into leads:  advertising.com, shopping.com, and a bevy of lead generation brokers.

In February this year, I wrote a series of posts called Media Futures which offered a new language for describing the creation of value in Internet media and advertising.  The fundamental premise is that in order to understand where media is going, you need first to understand where computing and finance have come from.  Strange things happen when physical gestures turn into electronic signals.   Signals can be exchanged and valued, prompting intricate auction mechanisms that allow people to "trade" media.  The logic of trading is not governed by traditional media and advertising structures.

There has been a lot of innovation in the past six months since I wrote the original series.  I stopped writing and started inventing:  collaborating on a new participatory framework for consumer attention data AttentionTrust and leading a new commercial exchange that supports this framework /ROOT Markets.

Problem:  Marketing is Inefficient

Last week's Ad:Tech convinced me that the growth we are now experiencing in Internet advertising is far greater than even the most idealistic assumptions from the "bubble" of 1999-2000. Walking through the exhibition area was like weaving through a bazaar of Internet consumer acquisition machines.  Once upon a time companies differentiated themselves based on their unique means of acquiring customers.  This might have meant buying certain mailing lists for direct mail or putting up a bright sign in the window of each branch.  But that time has passed.  Increasingly, companies (specifically those that are highly considered and information-based such as financial services, insurance and online education) know precisely what kinds of customers they are looking for and what they are willing to pay to reach them.  Based on what you do as a consumer online, searching for a term, clicking on a link, entering in a form, your data is for sale. 

But the broader “you” is missing in this transaction, outside of the fixed number of data fields that you fill out to indicate your interest in a commercial relationship. This is some strange math:  entirely focused on optimizing your response and yet structurally uninterested in anything you might have to say outside of narrowly defined response parameters.

The only thing more remarkable than the commoditization of advertising is the proliferation of startup companies that are benefiting from this transformation.  Everywhere I turned at Ad:Tech, there was another cluster of niche providers offering targeting, personalization, measurability and monetization.  Internet advertising is about sales.  Sales are accomplished through getting access to contact information from consumers who have expressed explicit interest in a product or service.  But in a world of incentive marketing, co-registration and paid search, how can companies gauge the authentic intentions of a consumer? 

The challenge we are focused on is gauging and thereby pricing intent.  I often refer to the transformation of attention into intention simply as "lead generation;" however commercial leads are only one expression of intention, albeit the easist to monetize and therefore the one most likely to lead to new viable business systems.  The fact remains, however, that not all leads are created equal.  The 28 fields of data that Johnny entered on the mortgage form would seem to indicate the same authenticity of intent as Suzie’s.  But the fact is that he was only filling out the form because he was looking to earn a FreeiPod whereas she had spent the last three weeks doing research on how to refinance her home.  On the Internet nobody knows you are a dog, nor does anybody know if you are a legitimate lead. 

Solution:  /ROOT Markets is a Financial Exchange for Consumer Leads

Is an exchange the best mechanism for qualifying consumer intentions?  /ROOT Markets believes so.  We are building an exchange for the emerging market of Internet-generated leads.  Applying the transparent structures of a financial exchange to the fractured inefficiencies of the current lead generation market is not obvious, and so it might be useful to lay out the specific benefits for different participants in the exchange:

• Advertisers can access a large supply of high-quality consumer leads from one source at a fair price.  Today, advertisers must purchase leads from a variety of suppliers at different prices, with little control over quality.

• Publishers can access a simple means of turning their impressions into qualified leads, and selling these leads under their control to a network of lead buyers.  Currently, publishers have limited visibility or control as to how their inventory is being monetized by third parties.  Publishers have been able to sell media outright as well as speculate (through affiliate relationships) for some years now, although the degree of transparency available to publishers has been limited.

• Consumers can access, securely and conveniently, their personal data and share it with 3rd parties for a variety of benefits.  Most of the time, companies are the only ones that benefit from consumer data.  Consumers (even though in fact they are ''users'' of web services and therefore ''publishers'' of their attention data) have  direct access to a commercial exchange through which they can trade information about their attention and intentions for the first time.  We recently released the first version of /ROOT/vaults which enables users to Input | Store | View | Output the record of their clickstream routed through ATX, AttentionTrust's Firefox-based recorder.  We are enhancing this user-based API in the months to come in order to enable users to store different types of their personal data and expose them with different levels of permissions to different parties.

• Investors can access a new market for trading.  Most investment opportunities today are crowded with too much money chasing the same ideas.  By Investors, I mean proprietary traders, market makers and Internet arbitrageurs who tend to use their own capital to purchase “cheap” media and sell “expensive” leads.  These are currently exemplified by lead-gen brokers, some of whom you have heard of (ie Lowermybills, Quin Street, etc) and many that you haven’t.  Over time, I believe that an increasing number of pure financial speculators will enter this business with nothing more than (1) capital, (2) domain knowledge, and (3) risk management.  /ROOT Markets will provide them with investment tools analogous to those in today's advanced financial markets.  These tools will limit friction on the exchange and in doing so encourage the greed of investors looking to profit from inefficiencies between the price of "cheap" attention and the value of "expensive" intention (aka lead yield spreads).  This trading activity is vital in order to educate the market how inefficient it is (by showing other participants how much they are losing), which drives competitive behavior and increases liquidity.

How the Securitization of Mortgages Opened Up the Housing Market for Consumers

Last year, as I was putting together the business plan for /ROOT Markets (which was at the time called IAG for Internet Arbitrage Group), I referred in the appendix to the Mortgage Backed Security (MBS) market as a relevant analogy.   

If you consider the housing market in the 70's and early 80's, you will recall that the process of obtaining a mortgage was considerably more arduous than it is today and therefore far fewer people as a percentage of the population owned their own home.  In each instance of a borrower asking the bank for a loan, the bank had to independently vet the risk that the borrower might default on the loan.  The breakthrough idea was to consider a mortgage as simply a "promise to pay."  Such an individual promise held risks for default and pre-payment, but could be combined with other mortgages to create a pool of  mortgage-backed securities that could be priced in the aggregate.  The local bank, therefore, when presented with certain consumer borrowing variables, could check in with the "market" and provide the risk-adjusted rate almost immediately.  In attention computing terms, the physical gesture (ie applying for a mortgage) became mapped to an electronic signal (ie a series of personal data fields), which could then be priced, traded, and optimized.  Once freely tradeable by investors, consumers in turn benefited from faster response times, better rates, and clear access to home ownership.

This process has a name:

Securitization is a financial technique that pools assets and, in effect, turns them into a tradeable security. Financial institutions and businesses 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)

The person most responsible for inventing securitization was a legendary Wall Street maverick named Lew Ranieri forever immortalized in Michael Lewis's classic Liar's Poker.  In the 1970s, from his perch at the Salomon Brothers trading desk, Ranieri famously applied securitization to the mortgage market, creating what is now referred to as MBSs (mortgage backed securities) and CMOs (collateralized mortgage obligations).  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.

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. (Business Week, November 29, 2004)

The essence of Ranieri’s invention which was to shift the credit risk away from the lenders’ balance sheets and onto the portfolios of investors in an open market.  Before, the complexity and regulatory requirements of banks meant that getting approved for a loan might take months.  Ranieri and his traders at Salomon Brothers pushed decisions about credit into the marketplace where investors were able to price risk and establish lending rates faster than ever before.  Consumers benefited greatly because they were (and continue to be) more in control of their financial futures and not at the mercy of institutions with conflicting priorities. 

Recently, Ranieri and I decided to team up and build a new market.  I am excited to announce that Lew Ranieri has joined /ROOT Markets as our Executive Chairman and lead investor.  Despite his considerable experience and relationships as a financial architect, I have been most impressed by his concern for the data rights of the individual (not unlike his concern for the rights of people to own their own home).  This empathy helped inspire the development of AttentionTrust, a non-profit entity modelled in part after the mortgage security ratings agencies of the 80's.  Our collaboration is supported by an incredible group of executives, developers, designers, salespersons, etc. all focused on creating a level playing field for buyers and sellers of commercial intentions.  At the center is the alchemical transformation of raw attention data into qualified leads and the variety of trading strategies that this enables: aka Media Futures. 

How the Securitization of Internet Leads Will Open up the Attention Market for Consumers

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 based on a pure Cost Per Lead (CPL). 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 space. And so this remains the final obstacle to a liquid, efficient Media Futures market; namely that advertisers and their agencies continue to look for customers online when in fact they have no pure business doing so.

So if advertisers don’t advertise online, how will the market survive, much less prosper? In the same way that the mortgage security market transferred credit risk away from the balance sheet of operators and into the portfolios of professional investors, a media futures market will enable non-advertisers (aka speculators) to take  on the risk from the balance sheets of publishers.  Publishers will be happy to hedge out their inventory, limit earnings volatility, and focus entirely on creating value-added programming; rather than spending their time speculating whether CPMs are going up or down.

Similarly, companies (ie the buy-side) can concentrate entirely on developing better products and service.  Their marketing groups can focus on creating and communicating their brand images, while their sales organizations can simply specify the kinds of customers they are looking for and the prices they are willing to pay; the Media Futures market will take care of the rest.

Within these new markets enabled by Internet arbitrageurs, there are billions 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 or do something and the sponsor of the link who is trying to lure her into the sponsor's particular commercial environment.  Each one of these tiny interactions feature a buyer (advertiser), seller (publisher) and asset (consumer attention) financed by an arbitrageur (investor). 

Our goal at /ROOT Markets is to maintain liquidity across all of these tiny markets.  This is no small task, especially against the backdrops of apathy.  Consumers are generally apathetic about the value of their attention data.  Advertisers and publishers are apathetic about the cost of taking consumer attention.  Investors are apathetic about consumer attention as a tradeable commodity.  By educating the market about the value of attention, and enabling it to be traded (in the form of leads), we can continually feed back better and better information in terms of price, quality and yield on attention.  While this may not create new attention, it may indeed help reduce our significant attention deficit. 

One final observation: the Internet business path is about to split.  One direction leads to an open approach to data, governed by the principles of transparency and publicity.  The other direction leads to a closed approach to data, focused on privacy and opacity: the black box.  Both directions have legitimate and consistent end-user benefits and economic rationales.  The danger is getting stuck in the middle:  (1) looking to increase your edge but not locking up the information it is based on; or (2) promoting your open-ness but not sharing data back to the system.

Comments

[Stewart]

Why the need for an 'arbitrageurs'?

[Dick Costolo]

Geez Seth, could you stop glossing over the subject matter and dive into a little more detail? I'm surprised typepad let you put this much in the text box without overlowing some buffer somewhere. Whatever happened to the simple "Had toast for breakfast today, miss Tina, feeling sad"

Ok, let me play devil's advocate for two seconds. I realize this is a softball, but here it is: Isn't AdSense already a mechanism for "publishers to hedge out their inventory"? Isn't that why publishers forfeit part of their site and thus influence to a third party? On the grounds that the third party's market is more liquid than the publisher's? Signed, Curious in Chicago.

[Peter Caputa]

Good point, Dick. CPL or CPA can make the market even more liquid than CPC, though. There is still a lot of waste in PPC ad networks. Not just fraud, but lurkers or people that don't fit the right profile for an advertiser. If the advertiser only has to pay per QUALIFIED lead (ie 35-40 years old, married, excellent credit, wants to refinance mortgage), then the advertiser's risk goes down a lot further. As you'd probably imagine, there are single first time home buyers looking for mortgages on google too. And even if that click results in a form being filled out, their purchase won't make the advertiser as much money as other home buyers.

[steve]

hey seth, wow, pretty dazzling stuff.

question:

i'm not sure i get how ad inventory is an asset that can be "securitized", at least in the sense of mortgage-backed securities?

the securitization of mortgages had/has a basic, seemingly unassailable logic and comfort to investors: that home loans (if defined within certain safety limits, e.g. "conforming loans"), have, well, huge security (hence Lew's name, no?) -- the homes themselves, the real assets underlying the loans, plus the amazing, relative unlikelihood of default -- the simple fact that almost all homeowners will default on every possible obligation before they let themselves lose their homes.

but the "security" and value of ad inventory, especially internet ad inventory, is fleeting at best. publishers "default" on ad inventory every day -- they publish ad avails and inserts with no paid advertising in them because they have no buyers. more scary, the counting of ad inventory is a loose affair at best (porn bots, anyone?) plus "click fraud." etc...

or am i missing a basic point?

finally, how would you differentiate your basic business model from say, doubleclick's attempt in the late 1990s (still today?) to create a third party ad network, where doubleclick controlled inventory from a large number of publishers and (in theory anyway) allowed advertisers and agencies to get better models and targeting based on the presence of the "neutral" third party?

any case, again, wow. congrats and great luck.

[seth]

Thanks Dick, Peter and Steve for smart comments.

So, what I am hearing is the following "ad networks such as doubleclick (web 1.0) and adsense (web 2.0) allow publishers to hedge out their inventory risk all the time, what's the big deal?" and from steve kane, "how can you securitize something as fleeting as an ad unit?". There are two unique factors that I may not have made clear enough: (1) a lead is different from an ad impression; whereas an impression/click is media-driven and contains no explicit personal data, a lead is simply X fields of data along with an intention to purchase Y service in Z time period. (2) a mortgage (aka "promise to pay") is clearly worth a lot more than a lead, since it's backed by a john hancock and actual property asset value. That being said, however, a lead is still simply a promise at an earlier stage of the purchasing cycle and can be priced accordingly. Granted, these promises are all over the price in terms of level of commitment, authenticity, and terminal value of the product or service (ie a real estate purchase throws off much more brokerage value than a cash advance loan), but that is then precisely where the opportunity lies.