TRANSPARENT BUNDLES by Seth Goldstein

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: 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 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.