Thursday, December 31, 2009

Musing on luck & Thank You

I was visiting a venture capitalist friend of mine a few months ago, talking about what we thought the future held and what kinds of companies intrigued us. He made a comment regarding a company I liked and he didn't. He said "I only invest in companies I know will be successful." On further questioning he admitted that not all of his investments had been successful: sometimes management had screwed up, sometimes customers did not get the value of the product quickly enough, etc. But in all cases, he felt he had invested in surefire plans; if the company failed, it was due to execution mistakes. And sometimes, even, he had made mistakes. But it was not that the validity of the business plan wasn't knowable, or even that he couldn't know--sometimes it was just that mistakes were made.

This is also how I thought, a few years ago: that I could know. The idea that we can always find answers and act on them and thus change our environment or the world not only underlies our technological and business culture but is explicitly taught in our best schools and finest corporations.

A few years ago, someone I worked with teased me because I never said "I don't know." Ever. I would say "I'll get back to you on that" or I would attempt to answer even though I didn't have the answer, or I would deny that the question had significance. Occasionally I would aggressively change the subject or grow angry with the person who wouldn't agree with what seemed so clear to me but that I couldn't explain. This annoying tendency of mine came from years of feedback in the classrooms and management meetings and boardrooms where "I don't know" was not an acceptable answer. Not even close. People who said "I don't know" did not get the good grades, they did not get the promotions, they did not get the bonuses, they did not get the slaps on the back. Not knowing was weak.

One thing that venture capital teaches you, though, is that you don't know. There is probably no other area of life--aside, perhaps, from going up to bat in professional baseball--where you are constantly and ruthlessly reminded that you are not only not always right but that you are usually wrong. And even, that when you did everything possible--all the due diligence, all the research, all the number-crunching, all the strategic thinking--there was no way, a priori, to know. Many venture capitalists do not accept this. Almost all people do not accept this. But it's an inescapable fact. And, it's not only true in investing but in all parts of life--it's just more obvious in investing. The proper lesson to learn from this is probably humility, but successful people rarely became successful by being humble.

This decade I've been too often reminded that a chance meeting or an idle phone call can turn what looks like inevitable failure into wonderful success. Or vice versa. That is, that there is never any way to know for sure what will end in success and what will end in failure. For me luck has not been risk; it is not beta, it is not some fat-tailed distribution. It has been the unexpected and, yes, the unknowable.


I think about luck a lot.

There's an old story, related by Alan Watts, about the farmer whose horse ran away. His neighbors say "Such bad luck!" The farmer says "Maybe." The next day his horse comes back, with two wild horses following him. His neighbors say "Such good luck!" The farmer says "Maybe." The next day the farmer's son falls off the horse while trying to tame him and breaks his leg. His neighbors say "Such bad luck!" Etc.

Good luck and bad luck come and go, and there is no distinguishing them, either before or after the fact. There is no beginning or end of things because there is no way to isolate a single causal event; causes effect widely. We technocrats would explain this by saying, simply, Things are Complicated--we have a Math for that. But this is not enough: this interconnectedness through time and across events could more easily lead to a dampening, an unchanging condition, but it does not. Watts explained this by saying that there is a cycle of remembering and forgetting. Anybody who's been paying attention would have to say that, as is often the case, the zen analysis is more useful than the scientific.

This decade I've had a lot of bad luck end up well and a lot of good luck end up poorly. If I knew then what I knew now, there would have been a lot less Good Luck and Bad Luck and a lot more Maybe.

I've often felt that my comparative advantage in the work world is my willingness to take the risks than the next person would not want to, to weather more sheer unpleasantness, deal with more complexity, and in general gladly volunteer to walk into the knife-storm that my professional life has often felt like over the past ten years. That this sort of thing did not bother me much, while others found it intolerable, is a valuable trait, it seems. It worked for me. But if my neighbors came up and said "What good luck!" I would have to say, Maybe. Because while things worked out at work, they didn't at home. My thinking that I could isolate my home life from my work life was part of the reason. But nothing is isolated.


So, this isn't one of those What a Great Decade posts, although it was a great decade for me, for a lot of reasons, work and even personal. It's just my annual reflection, being realistic about the good and the bad. For me, it's always easy, upon being told "What good luck!", to say Maybe. The hard part is saying the same when told "What bad luck!"

Ten years ago my goal for the decade had something to do with doing well and, perhaps, even doing some good. In retrospect, my major accomplishment was learning how to say "I don't know" and then stopping to listen. (I do not consider my wonderful children accomplishments, I consider them gifts.)

For the next ten years, my goal is to be able to answer Maybe to bad luck with the same equinamity I do to good luck. If I could do this, then everything else would be easy.


But I do want to say a little bit what a great year it's been. I want to appreciate all of you reading here. And thank you for commenting and connecting outside of this forum. I use this space to think out loud, it helps me order my thoughts to know that other people will read them. This is valuable to me, and why I started writing in the first place.

What I didn't expect was that in addition to the benefit of writing, I get the benefit of connecting. I've met a few great people through this blog, I've stayed connected to a few other great people, and I've learned an awful lot from the people who read it. I am thankful. I haven't quite quite found the invisible college, not yet, but it's a start.

So, thank you. And in the new year, may good luck find you and may you transform all bad luck to good.

Tuesday, December 22, 2009

Pinch and Flurry Merging

Pinch Media and Flurry, the two best providers of analysis services to mobile phone app developers, are merging. This is a huge step in enabling the better monetization of these apps, and I think Pinch/Flurry will be a key enabler in the growth of this market.

A year and a half ago I sat on the floor in the back of the TWC Borders* with Greg, talking about the mundane details of getting a company started. It's awesome to think how far Greg and Jesse have taken Pinch from there, and how bright the future looks with them teamed up with Simon and the Flurry team.

Maybe it's just me but--even in our more democratized era--the celebrity status of successful companies and their CEOs causes some cognitive dissonance when I'm sitting on the floor of a Borders in t-shirts and sneakers talking to an entrepreneur about building a great company. It's worth remembering that most great companies started similarly.

Congrats on a big step, Greg, Jesse, Simon and the rest of the Pinch/Flurry team.

* In NY we don't start companies in garages. The attendants frown on it.

Sunday, December 13, 2009

Information and markets, 3

An anecdote.

A few years ago a private equity firm asked me to help them look at some lead-gen companies. One of the target companies had a network of many thousands of small lead buyers and were known to produce high-quality leads. They had worked years to build this reputation. They got good prices for their leads. But high quality leads are expensive to generate--and there aren't as many of them out there--and building and maintaining a large distribution network is also expensive so while they had historically made OK margins, they weren't blowing the doors off and their growth was steady but slow.

Then the founders started thinking about selling. They hired an investment banker a few months before the PE firm started looking at them. In that time, revenue had started to grow faster and margins had started increasing. The lead-gen company credited improved technology.

The PE buyer was enthusiastic. They asked me what I thought. I called a couple of people who were in the same lead sector. This is what I heard: "they're stuffing the channel, everybody knows that." Maybe everybody in the lead-gen business, but obviously no one in the PE business.

The company had decided that, to boost their valuation, they were going to generate lower-quality leads, and more of them. Since their customers generally bought a few dozen leads at most, they did not in the few months after the change notice when the average conversion went from about 5%-10% to something much lower*. This allowed the lead generator to raise revenue and margins. I warned the PE company that the buyers of these leads would not be fooled for much longer, that this way of doing business would come back to bite them**. And that is what eventually happened; the lead-gen company lost half its customers over the next six months, as the customers became aware that they were paying for high-quality leads and getting low-quality leads.

Any smart buyer knows that uncertainty exists: quality changes over time, for many reasons. The natural response to this is a concentration of buying. Larger buyers have more information, so will notice and respond to changes in quality much more quickly. Any market where quality information is not available will favor large buyers over small, causing the exit of small buyers. This will then cause the marketplace itself to suffer: a large buyer does not need an external marketplace, sellers will come to them. Without a competitive marketplace, the sellers suffer, both from lack of pricing power and lack of information about what is working for the buyers (reflected in varying price levels.) This then causes inefficiencies in production, leading to higher production costs.

This decline in overall efficiency of the ecosystem affects the sellers first, but also eventually affects the buyers. The process, though, can not be avoided by the buyers, even if they are aware of it: they are stuck in a prisoner's dilemma. The only solution is to have more open and robust quality information available.

* Junior year I took a semester abroad. My alma mater did not believe that any other university, anywhere in the world, could possibly educate me nearly as well as they. As such, they would not allow me to include any class I took anywhere else on my transcript. The most they would do was allow me to take a test and place out of classes I took abroad. Because of this dynamic, I spent my time in London doing anthropological studies of the pub culture. When I got back I did pass the required tests and so placed out of statistics and a year of German. I now find that I can neither speak German nor do statistics unless I have had several pints of bitter. I was going to tell you how many leads a lead buyer would have to buy before they would have a good idea that quality levels have changed, but I wrote this post Sunday morning and I couldn't get my hands on a sufficient supply of ale.

** Oddly, they did not believe me. This turned out badly for them.

Thursday, December 10, 2009

Information and markets, 2

Those most familiar with the cattle trade agree that there often exist wide differences between the actual selling price of cattle in the market and the previous estimate by the feeders sending them forward as to the prices they should bring. The small feeder, who seldom follows his cattle to market, has a poor chance to learn market conditions and requirements, but the regular shipper has an excellent opportunity to do so. Feeders must rely largely upon the market reports for their knowledge of the condition of the cattle trade... Inability on the part of the feeder to interpret correctly market quotations places him at a decided disadvantage either in selling his cattle to a shipper or in shipping to the open market.--Market classes and grades of cattle with suggestions for interpreting market quotations, Herbert Mumford. (1902)
Beef isn't assigned to quality grades--like prime, choice and select--to help buyers know what to buy. It's assigned quality grades so producers know what to produce. Mumford's groundbreaking work led, eventually, to the voluntary grading of beef and other commodities by the USDA.

Raising cattle that has a higher proportion of well-marbled, tender, Prime muscles is more expensive than raising one full of chewy, touch Select muscles. So even more than needing to know at what price they can sell cattle, cattlemen need to know at what price they can sell different quality cattle, so they can figure out whether it makes business sense to spend the money to raise high-quality beef.

Markets not only consume information, they generate information: primarily information about demand at different price levels. Price information, of course, is what drives efficient allocation of resources*. So, lack of public information about quality causes both
  • Problems for the buyer when the seller knows quality but the buyer doesn't, and
  • Problems for the seller, when the buyer knows quality but the buyer seller doesn't**.
The first case is relatively straightforward: as per Gresham's Law, bad commodities drive out good. The second case is more subtle. Because the buyers know what a quality product is worth to them but the sellers don't, buyers will tend to price goods at the lowest possible price level that ensures they will keep being produced.

In the lead-gen world, I heard over and over from lead generators that it took at least a year before a newcomer could make money. Not because they couldn't generate quality leads at a decent cost, but because it took a year to realize just how much the companies buying their leads were screwing them on price.

In the display ad world, the buyers have access to all the information they need to judge quality--context, customer, behavior, etc. But the sellers, the publishers, have let themselves be isolated from the information they would need to link quality and price on any inventory they sell through markets***. It shouldn't be surprising that the prices they get are rock bottom.

* I'm sure you've read about it, but if you haven't actually read it, do: Hayek's The Use of Knowledge in Society. It's a good read, and short. It's also explains the key concept in how our economy works.
** If neither knows the quality of the good being sold, a robust market is still possible. The stock market, for instance.
*** Including the ad nets, the ad exchanges and the ad optimizers, all of whom run a type of market.

Tuesday, December 8, 2009

Information and markets, 1

There are many markets in which buyers use some market statistic to judge the quality of prospective purchases. In this case there is incentive for sellers to market poor quality merchandise, since the returns for good quality accrue mainly to the entire group whose statistic is affected rather than to the individual seller. As a result there tends to be a reduction in the average quality of goods and also in the size of the market.
--The Market for Lemons: Quality Uncertainty and the Market Mechanism, George Akerloff. (1970)

Markets that don't have a good way to judge the quality of the goods being sold have a problem. As Akerloff noted, if buyers can not differentiate quality, they will pay for a statistically likely quality level. This will then drive away the higher quality goods (thus lowering the statistically likely quality level!) Buyers then adjust their price down, and this downward cycle continues until only the shoddiest goods are left.

One long-standing problem in the lead-gen industry (and, in a different way, in the display ad industry) is the inability to grade quality. There are high-quality leads and low-quality leads (quality here meaning likelihood to convert into a sale.) It's cheap to generate low-quality leads (think reg path or, if you've been around a few years, free ipod.) It's expensive to generate high-quality leads.

Problem is, once a lead is generated, it's pretty hard to tell if it's high quality or low quality. You can cross check address, telephone number and email, but you can't see from the face of the lead the key unknown: intentionality. Does the lead actually intend to buy the good or service they entered their information for. Anybody who's been the person calling the lead can tell you how often they hear "I'm not interested in a new car, I just wanted the free _____." This is a poor quality lead, despite all of the information being correct.

Imagine a lead market where the leads have a random quality from 1 to 100. Leads with quality 1 are worth $1. Leads with quality $100 are worth $100. What would you pay for a lead? Statistically it would make sense to pay about $50. On average, you would be getting your money's worth. But when the price level is $50, the people who are selling the leads with quality greater than 50 all leave the market (and, probably, start generating lower quality, lower cost leads.) The average quality now sinks to 25, so the price also goes to $25. Repeat until the quality reaches the lowest increment. This is Akerloff's point, and what I've seen actually happen in lead marketplaces.

Now, ask yourself, why is the inventory trading through the ad exchanges the worst inventory above remnant? Buying and selling through an ad exchange beats direct buying and selling in every single way that doesn't involve expense account meals. Yet both direct sales and ad network/rep sales have higher CPMs than the ad exchanges, because buyers believe the higher quality impressions are sold that way. Is there an information problem here?

Sunday, December 6, 2009

CPMs rising?

So, this has been bothering me for a couple of months. I figure it may well be a figment of the data, or I am abusing the data. But I don't know, so I'll put it up... comments welcome.

This is a graph of Implied Average Online Display Ad CPM, 2006 through Q2 2009 (left axis, thick blue line.) Implied Average CPM is ad spend divided by impressions.

The right axis and thin black line are impressions in millions, as per Thursday's post. This seems to show that as display ad impressions fell in 2008, ad spend did not fall as fast. For this to happen, CPM must have increased. This is both not what has happened, anecdotally, and is hard to believe in this era of expanded access to non-premium inventory. But I hate to think I believe the data when it confirms my preconceptions and then disbelieve it when it doesn't.

Are average display CPMs really nearing $7?

Anyone know what's going on here?

Sources: Ad spend--TNS. Impressions--Nielsen Online. Both purport to be display only.

Friday, December 4, 2009

Ad impressions by month

More data. Nielsen Online's ad impressions per month, via (paid CPM display ads only*.)

First, the raw data.

Broken out by category, sorted by change from August 08 to today: largest decline on top (software), largest increase on bottom (telecommunications.)

Change in four largest categories, and total, since February 06 (Feb 06=100.)

And percentage of impressions by sector. This one's a bit psychedelic.

* Per Nielsen: "Nielsen Online, AdRelevance service uses a proprietary methodology for estimating online advertising expenditures and only takes into account image-based technologies and advertising sold per CPM. Above data does not reflect house advertising activity, strategic partnerships between publishers and advertisers, or text units, paid search, sponsorships, email, units contained within applications (e.g., messengers and pre-rolls) or performance based advertising. "

Saturday, November 28, 2009

Better than Panglossian

Andrew Goodman did not like my post Eliminate Advertising. He says "in an attention economy, can you logically even conceive of no advertising? Not even remotely." He doesn't say why not.

But, to be fair, I also don't believe there will be a time when there is no advertising. In fact, I fear quite the opposite. I fear there will be plenty of advertising, and none of it useful.

An investor in my last company--who, whatever else you might say about him, was quite smart--told me once that the company would be successful in direct proportion to the value it created for the consumer. We thought about this a lot as we built the business, and that was no easy thing, because we were in the lead gen space.

And this is the problem: our incentives were not to create more value for the consumer. The consumer wasn't our customer, the advertiser was. This is the problem for all advertisers.

I think advertising is bad. I also think it's good. I guess, in the end, I think it's the worst possible system, aside from all the rest. Pre-internet, how else could companies let customers know what products were available to them in a reasonably efficient way? Producing a message and distributing it was a scale effort; it was only effective en masse. So the cost of delivering the message had to be borne by the advertiser.

This, though, meant that the consumer had to determine if a given ad could be taken at face value. The elaborate game played between legitimate advertisers, trying to signal quality, and the others, who aped the legitimate advertisers' messages in order to ride on their coat-tails, led ads further and further from actual information-delivering devices*.

This Summer I read The Economics of Attention by Richard Lanham. Lanham argues that in an attention economy what matters is rhetoric: style wins out over substance. He argues it quite convincingly. He spooked me, saying that there is no way to have an open attention economy without rhetoric gaining the upper hand.

In this world the best way to decide which product to buy is to listen to two competing producers argue with each other. Like opposing lawyers in court presenting their case to you, the jury. Or like two politicians putting up TV commercials during election season. Neither of these is an efficient way to come to a rational decision, of course, but what way would be better? Lanham views this result as not only inevitable, but the natural order of things. The scientific mindset, that there is some underlying truth, is to him an anti-Hayekian attempt at top-down control, perpetrated throughout our Western culture, from Plato through Feynman. Against this he says: there is no truth, there is only opinion; let each have their say and you decide who you think is more persuasive.

Call me scientific, but I think that some products are objectively better fits with certain people than others. But I am also a Hayekian, and I don't believe that it's right to tell people what products are right for them. I do believe that we can build tools to help people find products better. Goodman and I can agree on this.

Too many people take advertising as it is for granted, though, rather than seeing today's environment as a bit of a historical anomaly. Look at the chart of ad spend per capita above** (this is in real dollars, btw.) The hockey-stick here, starting in the 1950's, was driven by the emergence of mass media; the increase in access to consumers***.

Now we are witnessing, at the same time, both the apotheosis and the destruction of mass media. The apotheosis--reaching every consumer whenever the advertiser wants--has been realized more fully than ever before. And the destruction: the consumer no longer needs to rely on getting their product information from three TV channels, a monthly and two weekly magazines, and a daily newspaper--they can get all the information they want at their own instigation. Both courtesy of the internet and its concomitant radical reduction in the cost of communicating at personal scale.

Apotheosis: the sophistic element of advertising will expand enormously; I think it already has started to. Destruction: the consumer will get the facts on products in places other than ads; I think they already have started to.

As a result, the slow shift of advertising away from think towards feel will become complete. Within a generation, I predict that any ad that tells the truth will be conveying an emotion and that any ad citing a fact will be a con.

If this is so, then what good will it do us as an industry to target better, to buy more efficiently, to have better-converting landing pages? Yes, we need those things and can sell those things short and even medium-term. But, as an investor and some-day-again-entrepreneur, I also want to think longer-term and bigger. Longer-term, companies and consumers will still find each other through a chaotic sea of information, but it won't be what we think of today as advertising. It will be through allowing consumers other ways of determining the truth, and using other, more grass-roots, means to convey context.

I hoped someone smarter than me would read the blog post and say "I know how to do that" and then go do it. That's why I wrote it. I still hope that. There is work to be done and better ways of doing what advertising does poorly now. Goodman calls me a utopian. I'll accept that.

* This, if you think about it, explains a lot about the advertising agency business, including why good creative is so difficult to make.
** Sources:
(1) Real and nominal GDP, GDP deflator, and population: Louis D. Johnston and Samuel H. Williamson, "What Was the U.S. GDP Then?" MeasuringWorth, 2008.
(2) Ad spend, Douglas Galbi based on Coen numbers.
*** This is not to say that consumers got no benefit, just that the increased benefit was not the driver. In other words, I believe that the rise in spending per capita was accompanied by a decrease in advertising efficiency above and beyond diseconomies to scale.

Wednesday, November 25, 2009

Not yet Enough

I was reading Skidelsky's critique of Keynes' "Economic Possibilities for Our Grandchildren". In Economic Possibilities, written in 1930, Keynes asked

What can we reasonably expect the level of our economic life to be a hundred years hence? What are the economic possibilities for our grandchildren?
He concluded that by the year 2030,
Assuming no important wars and no important increase in population, the economic problem may be solved, or be at least within sight of solution.
Because economic growth makes us wealthier, at some point people would have enough--"the absolute needs...satisfied in the sense that we prefer to devote our further energies to non­-economic purposes"--and would cut back on hours worked.

This seems reasonable (if a bit far from the problems we face today) but Skidelsky notes that, despite significant progress in the developed countries towards what Keynes viewed as enough, we are not working less.
...We are two-thirds of the way towards Keynes’s target. We might therefore have expected hours of work to have fallen by about two-thirds. In fact they have fallen by only one-third – and have stopped falling since the 1980’s.

This makes it highly improbable that we will reach the three-hour working day by 2030. It is also unlikely that growth will stop – unless nature itself calls a halt. People will continue to trade leisure for higher incomes.
Skidelsky says the reason is that
The accumulation of wealth, which should be a means to the “good life,” becomes an end in itself because it destroys many of the things that make life worth living.
Now, I think Skidelsky is a genius, both in his biography of Keynes* and his more recent book on Keynes' renewed influence, Keynes: The Return of the Master. But I think his acceptance of Keynes' definition of enough--about eight times the average income of 1930--is the flaw, not human nature.

It must have seemed to Keynes that incomes eight times higher than the then-current incomes would be an enormous amount. Today the average US household income is about $68,000**. Imagine if the average household income were north of $500k. Everyone would certainly then have enough, wouldn't they?

This is probably how Keynes felt. And it's true that we've become wealthy in terms of what people thought they needed in 1930. In 1934--soon after Keynes wrote Economic Possibilities--food, clothing and shelter consumed 76% of household income, on average. In 2002-2003, these expenses were only 50% of household income***. (And, god knows, we are consuming more food, housing and clothing than we were in 1934, so our well being has increased more than these numbers indicate.) Far more households can now afford the basics they need to survive, and far more households have much more money left over after they buy these basics.

What have we done with all this new wealth, this extra income? Why haven't we, as Keynes expected, cut back our working hours, and thus our incomes? Why haven't we realized that we now have enough? Skidelsky thinks it's because of our paucity of imagination.

But maybe instead it's because once we had food, shelter and clothing, we realized that we needed more. We've moved up the hierarchy of needs, from physiological to safety. Now that we can, on average, afford the physiological needs, we are spending on health and education. In this light, the enormous increase in the costs of these services might be the desirable result of our ability to finally afford them.

Or, at least, start to afford them. Our healthcare debate is now dominated by whether we really can pay for everyone to have basic healthcare. Costs have increased at jaw-dropping rates, and many feel that we've lived beyond our means for too long already. Even with incomes that Keynes would think were more than enough, we find that we don't have nearly enough for what we now think we need.

But this also points to the solution. Just as we grew into being able to afford the basic needs, we need to grow into the ability to afford these new needs. On healthcare, for instance, the question is not How can we keep the cost down? but, instead, What policies can we enact to be able to afford it sooner? The answer to Skidelsky's question--How Much is Enough?--is that what we have now isn't enough: it would be inhuman to have the means to make peoples' lives better and then not do it, to be able to save lives and then not save them. Instead, we need to think about what we can do to increase our rate of economic growth. What can we do to be able to afford quality healthcare for all, not 100 years from now, but within our lifetimes?

* Although not so much a genius that I read the full three volumes. I read the 1056 page "abridged" version.
** Median is about $50k and, while the median is more telling about how the average person lives, I think using the average is a better measure when talking about societal income.
*** Source: "100 Years of of Consumer Spending", US Department of Labor Report 991, May 2006.

Tuesday, November 24, 2009

The FCB Grid and its flipside

A while ago I talked about different views on how advertising works. Personally, I've never believed in a single theory, people evaluate different products differently. They also evaluate products differently depending on where in their product evaluation cycle they are. So, for instance, household cleaners are advertised informatively, while facial soap is sold with brand ads. Car dealers prefer informative advertising while car manufacturers prefer brand advertising.

One of these so-called 'integrative models' is the FCB grid, developed at Foote, Cone & Belding (now Draftfcb) and written about by Richard Vaughn*. This model divides goods and services into four categories, along two axes: the Think/Feel axis, and the High Involvement/Low Involvement axis.

Vaughn makes interesting generalizations about how marketers should address the consumer decision process in each of these four quadrants**. But those are sort of boring, so I overlaid my vague and general idea as to what marketing approaches work, instead.
On the internet, WOM is social media marketing. Direct Marketing is lead-gen and email. And sales promotion is couponing (among other strategies.)

I think this framework is also somewhat helpful in thinking about the various ways to help consumers find the right product (as opposed to selling it to them.)
Personally, I'd like to see a lot more articulation on this last. Helping consumers find the right product will turn out to be a lot more fruitful over the next ten years than figuring out better ways to sell them one.

* Vaugh, Richard (1980), "How Advertising Works: A Planning Model," Journal of Advertising Research, 20 (September/October), 27-30; and (1986), "How Advertising Works: A Planning Model Revisited," Journal of Advertising Research, 26 (January/February), 27-30. Sorry, no link.

** Later refined by Rossiter and Percy: Rossiter, John R., Larry Percy, and Robert J. Donovan (1991), "A Better Advertising Planning Grid," Journal of Advertising Research, 31 (October/November), 11-21. Again, no link. Academic journals suck.

Thursday, November 19, 2009

Being allowed to make your own decisions, right or wrong

There was a fairly banal column over at the New York Times last Friday, complaining about being condescended to by a bank "customer service" rep.
“Did you want to add him to the account, or open a separate joint account?” she asked.

“We’ve talked about the options,” I said, giving my husband, James, my secret “not again” look, “but we’d just like to add him to this account.” I smiled pleasantly... “Are you sure?” she pressed on... I assured her that we had considered it and decided to stick to the original plan... She sat back a little in her chair and gave me a half-nurturing, half-scolding tilt of the head. “What would your mother say?”

I went on to read the comments, thinking there would be unanimous annoyance at the bank. Instead, there were an awful lot of people saying that the bank service rep was probably "right" and implying that being right was more important than respecting the customer.

I find this directly comparable to the claims by various boosters that they are doing consumers a service by placing relevant ads in front of them. The idea that someone else is determining what is right for you, based on incomplete knowledge about your situation and your decision process does not seem like an advantage for the consumer. It may sometimes result in a better match between consumers and products, true. But it will always impinge on the consumer's autonomy. I think there needs to be some greater good than slightly better product matching to justify this as a net increase in welfare.

Clearly, if the people advocating the benefits to the consumer of ad targeting believed it, they would instead be advocating better tools to help the consumer choose, not a process that is best adapted to targeting the most persuadable, rather than the best fit.

There are advantages to ad targeting, for the advertiser certainly, and for certain media outlets, but not for the consumer.

Tuesday, November 17, 2009


I was with my friend Josh today as he pitched a really smart investor on his new company. The investor, as per the script, started picking holes in this and that. Mostly silent to that point, I interjected something to the effect: "this is a pretty cheap option on changing the world."

What is it with VCs?

Friday, November 13, 2009

Eliminate Advertising

I was rereading one of my favorite books last weekend, Reinventing the Bazaar: A Natural History of Markets, and came upon this:

Entire sectors of a modern economy are devoted to organizing transactions. The retail and wholesale trades and the advertising, insurance and finance industries exist not to manufacture things but to facilitate transacting... Innovating in any of these sectors means discovering a way to reduce the costs of transacting.
The point of marketing is to to spread information about products and services so that buyers can find sellers in a way that maximizes their welfare. Marketing has two goals: (1) match buyers and sellers as well as possible, and (2) do that as cheaply as possible.

A lot of the entrepreneurs I talk to are building things to help marketers find more customers, goal 1 above. It's interesting, although I'd love to see more of an emphasis on matching buyers and sellers more efficiently, rather than just trying to get peoples' attention.

But the blockbuster companies are the ones that make progress on goal 2. Innovating means discovering a way to reduce the costs of transacting. Someday, somebody will discover a way to do away with advertising altogether, reducing that particular cost of transacting to zero. That company will be bigger than Google.

[Addendum: More here.]

Away from witnesses

My favorite thing about this blog is that many of the readers are practitioners. People actually out making money by using marketing to sell products or generate leads.

I spend a lot of time daydreaming about the future, and one of my primary heuristics is a belief in progress, that things will become better, faster, more efficient. Others call it wishful thinking. But when I get out on a limb, the practitioners pull me back in (or, oftentimes, push me off.)

I spend a lot of time talking to very early stage companies, and they have world-changing ideas, but often don't really know what the world looks like in detail right now. And how could they? They aren't in business yet. So without feedback from the people who are actively engaged in actually doing the work, I would lose touch with what is feasible, practical, economical and as-yet-undone; things the "official" numbers and mainstream blogs obfuscate or simply don't understand. This is a trap I think a lot of investors--professional VCs more than angels--fall into.

At about the same time I posted on AdMob/GOOG, so did my friend Niki Scevak. Niki's POV is different than mine about the deal.

I think that for the smartphone ecosystem to succeed, there needs to be advertising to support mobile media. Since there needs to be advertising, somebody will find a way to make it work. But I don't know how--if I knew that, I'd be starting a company right now, not investing in other peoples' companies.

Niki looks at mobile advertising and says it's not going to work. There's no point, he says, because advertising supports commerce. Online advertising supports online commerce; mobile advertising will support mobile commerce. In supporting mobile advertising rather than commerce, GOOG has put the cart before the horse.

The interesting thing to me, in talking to people like Niki, is the tension between what is possible today and what I think the world will look like in three years. Getting from here to there is what makes this business exciting.

The fight is won or lost far away from witnesses--behind the lines, in the gym, and out there on the road, long before I dance under those lights. -- Muhammad Ali

Wednesday, November 11, 2009

AdMob, Google, Apple

Along with everyone else, I've been pondering the Google acquisition of AdMob. Some thoughts:

  • Google needs to be in mobile hosted media; Apple's early move towards owning that space had the potential to sideline Google. Apple owned the customer. Thus Android and now AdMob.
  • The mobile platform that is successful long-term will depend on the media available on it.
  • The success of mobile based media relies to a large extent on the economics of advertising both on the devices and by tying the user of the device to their web presence*.
  • The companies best positioned to improve these economics are Google and Apple. Among other reasons, because only they can tie online and mobile behavior of a large portion of mobile users through their control of the iPhone and Android app stores.
I think the upshot is that Apple needs to do something soon. As someone smarter than me said today, Apple has no advertising DNA. They either need to start hiring ad people**, and I hear nothing to that effect, or they need to buy something. Not necessarily an ad network, but something that gives them a means to extend the advertising ecosystem on the iPhone***.

But, PLEASE, don't take this news to mean that you should run out and start a mobile ad network. After the huge valuations put on web ad networks in 2007 (Doubleclick+Google, aQuantive+Microsoft, 24/7+WPP) there was a rush of company-starting and venture-funding that has, by and large, come to naught. By the time Google buys something, it is already too late to start a me-too competitor. Waaay too late. Build for three years from now, not for yesterday.

* Both web retargeting based on mobile media usage and mobile targeting based on web usage will be extremely effective once they are available. The privacy implications of this are... interesting. But I'm not going to open myself to entirely valid accusations of hypocrisy by passing judgement. Others can do that more effectively.

** Meaning people who understand the new math and operations behind advertising. Not creative folk.

*** 16 C.F.R. 255: I have an investment in one, natch.

Monday, November 9, 2009

VC Investment Amounts

When I can't sleep, I play with data. It's like meditating.

The National Venture Capital Association recently released their latest venture investment numbers for the US. On their web site, they use the annoying iChart gadget. Annoying because as you scroll backwards and forwards in time, it adjusts the x axis, so I can't really compare amounts across time. Why would they do that? Are they mad? I'm going to send Edward Tufte to beat them over the head with Javanese railroad timetables.

Anyhoo, so I took their US regional data and charted it more congenially (click on the charts for larger versions. I graphed the three largest regions, Silicon Valley, New England and NY Metro. Here is total investment: I've heard a lot of talk recently about New York having a startup renaissance. My Boston VC friends have meanwhile been bemoaning how quiet Boston is, and living on the Acela to NYC. The data does not support this. New England may be a bit ghost-towny, but NY isn't taking off.

Let's look at number of deals:

Same. I mean, I don't have access to the NVCA database, just their publicly released data. If I did have access, I would do this analysis with early-stage internet companies; that may show a different story.

Average deal size:

This is interesting mainly because it shows average investment size to be about the same from region to region (although NY is noticeably more volatile, while Silicon Valley less so--probably because there are more deals.) I find this surprising, given the different character of industry in the three areas. I wonder if this is a product of the VC model, as opposed to actual business capital needs: the tail wagging the dog. This is anecdotally so, and certainly not a good or efficient thing if true.

The other interesting thought that came up was the big drop in investment Q1 and Q2 of this year and the slight pick-up in Q3. I thought this was happening, as I noted in Is the Time for Angels Passed? Here's the proof. There are many potential reasons for this, but the most obvious is that VCs invest when they see the economy getting better. Here's a graph of Total US VC Investment (left scale) and the S&P 500 (right scale):
Well, now. Aside from a bit of the euphoria in 2000, VC investment tracks pretty well. In fact, it looks like it may lag a quarter or two. Why is this? Leaving aside the canard that venture is uncorrelated, venture investment lifecycles are not the same as public company lifecycles. You might invest in IBM this year, expecting them to raise their dividend next year because of the improved economy. But you shouldn't invest in non-public companies that way. You should expect your venture investments to mature in three to five years (depending on the stage at which you invest.) Unless you really don't believe in the business cycle, the best time to invest is when the stock market is low. Venture investment should be counter-cyclical. Is this a case of a buy high, sell low mentality, or another structural failing of the VC model?

I can see the Empire State Building out my window. When they turn the lights out at 2am I know I'm going to be tired tomorrow.

Saturday, November 7, 2009

Data consistency sidebar

I mentioned here that I would compare my post on online spending trends to Rob Leathern's and see why we came to different conclusions. The answer, unsurprisingly to anyone who's done any work with this type of industry data, is that we use different numbers.

I used TNS for ad spend data. Rob used both TNS and IAB numbers. TNS and the IAB have wildly different estimates for online ad spending. For example, US online spend in billions:


TNS has consistently had smaller numbers for online spend than the IAB. I'm not going to pass judgement on whose numbers are better: I do not know. I merely noted the difference and decided that if I was going to compare online to other media, I would use spend numbers from a single source. This, I think, gives a better comparison, if not necessarily a better absolute number.

Tuesday, November 3, 2009

How to rake it in by screwing your customers

A long, long time ago I was at Prodigy when we decided to change from hourly pricing to a flat rate of $19.95 per month. Flat rate pricing was clearly preferred by our customers, and our competitors who were offering it were taking them away from us.

Problem was, when people are accessing the internet by dialing into 28.8k modems, more hours online meant more peak demand meant more modems needed, meant more expense.

As we evaluated the price change, I noticed that some of our formerly best customers would now become our worst customers. For instance, there was a bunch of die-hard group text-based RPG fans who spent 100+ hours online per month*. Paying by the hour they were great customers, but with a flat rate they were our worst. We had to ditch the RPG.

In fact, we had to ditch any content that people spent a lot of time with. It turned out that the people who liked the service the most, who spent the most time on it, were our worst customers. Our best customers were the people who never logged on but never got around to turning off the monthly bill.

I lost interest in this business model and moved on; businesses that do better as their customers do worse should not survive.

I was thinking about this today because of my friend Josh's excellent blog entry on the Google Mortgage thing and on retail banking in general.

Unlike most people's mental model of retail banking operations, banks do not make most of their money on the difference between the rates at which they lend versus the rate they offer for savings. American banks, quite distinctly from banks elsewhere in the world, make the bulk of their money from fees and charges. Invisible and often unavoidable consequences of little clauses in contracts that no one ever reads.
Banks' best customers are the ones who are getting screwed by the banks. Banks' worst customers are the ones who are probably pretty happy with their bank. This perverse incentive shouldn't persist, but it has. What's it going to take to change it?

* This was a lot back then.

Wednesday, October 28, 2009

More on Ad Dollars per Hour

My friend Rob Leathern, over at CPM Advisors* was blogging about the same thing I was blogging about in Details, Details (unbeknownst to me, since he keeps changing where he's blogging from.)

We used the same approach, but seem to have come up with different conclusions. I don't have time today to figure out why, I'll do it tomorrow. In the meantime, read these:

Online Time Not Worth What It Should Be

More Television vs. Online “revenue per user hour”

* Blogger disclosure: I'm an investor in CPM Advisors.

Tuesday, October 27, 2009

The 300%-500% Lift Meme

I talk to a lot of people trying to make internet advertising more effective, most of them startups or people socializing a new idea before starting a company. Over the past two years, I think about two-thirds of them have told me that their new technology/process is going to provide a "300%-500% lift."

I even heard a story of a VC, after being pitched on a more reasonable lift, say "your approach is interesting, but we need to see you deliver a 300%-500% lift to be competitive in the market." ( I looked at this VC's website and found no ad targeting companies in his portfolio.)

Sometimes upon hearing this, I drift into a daydream about combining behavioral targeting, social targeting, retargeting, creative optimization, rich media, distribution optimization, contextual targeting and offer optimization technologies into one super-arbitrage strategy. The resulting 328,050% - 19,531,250% lift would allow me to buy $0.50 CPMs and pretty much overnight control the US economy*.

Assuming, of course, that these lifts are real, are the average lifts, are replicable at scale, are actually the result of the data/process/technology itself and not some artifact of attention (i.e. the Hawthorne Effect), and are orthogonal (which I'd expect if they are real and not artifacts, maybe not to the extent of the last paragraph, but between, at least: targeting, distribution, creative/offer/media.)

Not sure where this meme originated, but it very clearly says one thing: noone knows nothing. How well any of this technology works is an open question.

* I suppose, in a way, this is kind of what Google did, so I'm not saying it's not possible, just that I doubt we can all sit down at our laptops and replicate it.

Sunday, October 25, 2009

Those projects that come to nothing

After I pulled data from umpteen sources and crunched it for Details, Details, I looked at the resulting graph and saw that I had found... nothing. If I was a journalist, I'm sure my hard-bitten, cigar-chomping editor would have chewed me out, "There's no story here, Neumann!"

But that's the way it is. I was hoping for some trend or abrupt change that would tell me something I didn't know, some result I could attribute to a cause.

Let's look again at the nothing, the ad dollars per hour of online use. I'm going to correct for changes in overall spending per hour of media use, because the period in question was a bit up and down for the ad world. Below is a graph of Online ad dollars per hour as a percent of total ad dollars per hour, from 2001 to 2007.

Data sources the same as for Details, Details.

Why is this not much? Because it is a graph of efficacy. This is what we online marketing people do. The online media folk and the online app folk and even the Verizon DSL technicians get people online and get people to spend more time there. This graph factors that out.

Macroeconomic conditions determine how much is spent on advertising. This graph factors that out.

All this graph shows is how much an advertiser is willing to pay to get their message to a consumer over the course of an hour online as a percent of what they are willing to pay over all media. If it is 50%, then that probably means the advertiser feels they are about 50% as likely to sell something in an hour as they would be otherwise. The ads are half as effective.

So, an increase of 5% over four years is not much of anything. Nothing, really.

What happened in this period? Here's a few things that apparently changed nothing:

Starting in 2000, Google revolutionized the purchase of intent.

Starting in 2002, Tacoda and the scores of companies following its lead, revolutionized what advertisers know about the people seeing their ads, allowing precision targeting.

Starting in 2005 (or thereabouts), Right Media and its followers revolutionized the purchasing of ads across the huge internet media landscape.

What has all the work done over the past ten years to build the infrastructure for a true one-to-one ad marketplace gotten us? Are advertisers, with all the data and mathematics and optimizing they have available, really getting no more for their money than they were ten years ago? I find it hard to believe, personally. What am I missing? Or, what are we all missing?

Thursday, October 22, 2009

No starting gun

Chris Dixon's blog post, The Ideal Startup Career Path is spot on: if you want to start a company, go work for a startup. I'd add: find a company started by someone who comes out of the entrepreneurial community and has a really big idea, join as early in the company's lifecycle as possible, and make it clear through your actions that you will wear any hat needing a head on any given day.

At my last startup, we actively looked for and hired entrepreneurial people and several of them went on to found their own companies. The ones I've given support to include Greg Yardley with Pinch Media, Viva Chu with Handipoints, and Rob Leathern with CPM Advisors. There are others, and then others who will or are starting something. For a company that only had some 30-odd employees, that's a pretty good conversion rate.

I'm tempted to say that we made it look easy, but I'm pretty sure what went through their heads was "if these idiots can do it, then I certainly can." This realization, in its many forms, is certainly the spur to more startup formation than any other factor ever will be. I meet so many would-be entrepreneurs with good ideas who just can't figure out how to start. Who worry about knowing what to do next. Who are waiting for some intangible starting gun to go off, some sign from heaven. There is no starting gun, there will be no sign from heaven. You just need to know that it isn't really that hard.

Watching someone else manage the building of a company provides the crucial lesson: there's no special secret magic. Go work for a startup, and you'll see.

Monday, October 19, 2009

Details, details

"An important lesson... is that details may matter."
- Kyle Bagwell, The Economic Analysis of Advertising
Supply in the ad market market is impressions created, people seeing an ad. Everything else can be viewed in terms of this. Demand is impressions bought.

Supply = Impressions created = Hours viewing media x Impressions per hour
Demand = Impressions bought = Ad spend x 1000 / CPM

Supply = demand, so:

CPM = Ad Spend / Thousands of hours x Impressions per hour

Here's a graph of total US ad spend divided by total US hours spent with media, both online and offline.

Average CPMs would be this amount divided by average ad impressions per hour.

1) Online spend per hour is much less than offline spend per hour. This is partly a result of people moving online faster than ad spend, as John K. made me aware last week. But also note that offline ad spend per hour was rising until 2007, which means that--absent offline efficacy having improved over the last ten years (ha!)--marketers are getting worse ROI offline than they had been. In fact, the projections say that when the ad market recovers, this trend will continue. Perhaps internet ad spend will grow faster than the forecasters think? The alternative is that marketers are hidebound and insensitive to wasting money. You choose.

2) The difference between online and offline ad spend/hour is significant and not shrinking. If this were entirely marketer ignorance, the gap would have shrunk over the last five years, as knowledgeable online people became more mainstream in the agencies. My lead generator friends are arbitraging the difference between the high price of offline advertising that is built into the cost structure of most products and the low price of online advertising, so the gap can't be entirely efficacy. What else is there? I think the answer has to be uncertainty about what, exactly, the advertiser is buying. There was a time when a media buyer could flip through the newspaper or magazine or watch the TV show and know how his ad fit. When he's out buying a million disparate impressions through an exchange or network, he can't. He could be buying one display ad in a sea of ads, or one in a pristine page. But it could be something else entirely.

3) CPMs. The online CPM is the above number divided by impressions per hour. Note that the online spend/hour is pretty steady from 2002 to 2008, between $58 and $66 per thousand hours. The decline in online CPMs can't be attributed to this, unless there was a large increase in ads/hour. This may be so (I can think of arguments both ways, but have no idea what the facts are) but who cares, really? If I spend an hour on the NYT site and they show me 30 ads at a $2 CPM or 6 ads at a $10 CPM, they make the same amount of money: I assume they show the number of ads that maximizes their revenue. So, two hypotheses:
  • Fragmentation of online time: people spend less time on each site, spreading the money around and making it seem like less money is being made; and/or
  • Ads are being put where there were no ads before so money is being made by people who didn't make money before, and that money is coming out of the pockets of the established online media.
Both of these would lower CPMs because there are more ads. This is the only 'supply' argument that seems reasonable to me.

4) As Niki Scevak noted in the comments yesterday, search is 5% of the time and 50% of the revenue. Since the numbers in the graph are averages across all online, one explanation for declining display CPMs could be increasing search eCPMs. In any case, if Niki's stat is true, then it might also be that we are simply noticing, as the display ad infrastructure is extended, how low display ad CPMs have always been.

Data sources: US population, US Census Bureau; Internet Users, ITU and Nielsen (last three via; time spend on internet, USC Annenberg Center for the Digital Future, Digital Futures Report press releases and IAB summary (too expensive to get actual report); time spent on media, Veronis Suhler Communications Industry Forecast (my friends at VSS use to give me a copy of this every year... I need to invent a reason to go visit them soon); ad spend through 2008, CMR/TNS; ad growth 2009-2014, eMarketer.

Friday, October 16, 2009

Two (More) Hypotheses on Low Online CPMs

1. If low online CPMs were a result of oversupply, why haven't CPMs in other media dropped by the same amounts? If oversupply were why prices are so low, not efficacy, then online media would be a substitute for other media and ad spend would shift to the low-cost medium, equalizing prices. This is not what seems to be happening.

But if online ad spend has not yet caught up with online attention, that supply is temporarily exceeding demand. One way to test this would be to see if offline CPMs are increasing (because demand there would exceed supply, driving up prices.) If it were true, it means that online CPMs should increase over the next few years back to "normal" levels.

2. Since media sells attention but is paid by the impression, then the fragmentation of time spent on media might lower CPMs as the "bad money" of low-attention impressions drives out the "good money" of high-attention impressions.

Media has always been an attention economy

My friend John Krystynak finally got around to reading my old post, Supply of What?. In it I argue that a surplus of advertising inventory online is not the cause of low CPMs. He vehemently disagrees:

First you say "there is not appreciably more inventory". HA. Prima Facie ridiculous. Are you talking about online? THERE'S A TON MORE INVENTORY now online, maybe a factor of 500? or 5000? YouTube + Google alone would be enough to prove my point.
My point is that what we call advertising inventory (space on a page) is not really what advertising inventory is. This is confusing, so let me say it differently. I'll agree to call space on a page inventory if you agree that what media companies sell is not inventory, but attention.

That is: media companies do not sell advertising space, they sell access to the consumers of their media.*

I mean, they do sell advertising space, but not really. When Advertisers buy a page in a magazine that sells a million copies, they are not paying to get 1 million pieces of paper, they are paying for the attention of 1 million people. The advertiser is not buying space and the media is not selling space, they are buying and selling audience attention. They simply measure it in pages distributed.

Let's say the advertiser was paying $0.01 per page printed, or $10,000. Now lets say the publisher decided to print 2 million copies of the magazine, but still only sold 1 million copies (the other half went unread.) The advertiser would still only pay $10,000, right? So the price per page printed would halve. That's because the advertiser is not paying for space, they are paying for audience attention.

The supply here is not advertising "inventory", but people paying attention to the inventory.

So, is there more attention being sold now, or less? There is more on the internet itself, but this is certainly offset by less being sold in other media. If we are spending less time with media overall, then this has to be true. Let's assume hours spent with media as a proxy for attention available to be sold by media. If this is true, then we can say two things for certain:
  1. There is less attention, and
  2. That attention has become extremely fragmented.
People used to spend some hours a day reading newspapers. They now spend some of that time on the internet. But if they spend 10 minutes on YouTube, 20 minutes looking at Facebook messages, 15 minutes reading their Gmail, 5 minutes searching on Google and 10 minutes looking at a friend's vacation photos on Flickr, they still will only pay attention to the same amount of advertising as if they spent an hour reading a newspaper.

So all of this brings up two other possibilities about low online CPMs, but I'm going to break those out in a different post.
* Advertising is a two-sided market. Consumers and advertisers interact through the platform of the media. There's been some really interesting analysis of this, like Anderson and Gabszewicz's A Tale of Two-Sided Markets. But I have not yet seen a fully-articulated two-sided market model that provides any explanation of price levels. It doesn't seem like it would be hard to build a simulation, but I suspect the simulation would be very sensitive to the assumptions, whereas the real world--at least the old media real world--does not seem to be especially sensitive to changes in exogenous variables, like media consumption per capita, roi of marketing spend, etc. If this is true, the model would probably not be very useful.

Tuesday, October 13, 2009

What is it worth?

Maybe this is obvious.

Things are worth different things to different people. Companies, pork bellies, advertising inventory. Any things. If the thing is worth more to someone other than its current owner, the owner might sell it to that person, creating value for both.

The value to the buyer (b in the picture below) has to be greater than the value to the seller (a). At any value between a and b, both parties are better off. So what price, between a and b, will be paid?
One of my mentors in the valuation business insisted that any value greater than a was strategic value and that the seller did not deserve any of it: the price paid should be as close as possible to a. In an efficient auction, however, the price paid is pretty close to b.

Both the buyer and seller do best by figuring out what the value of the thing is to the other party, and negotiating to that value. If both buyer and seller know the value to the other party, the negotiation over price can be very difficult, because there is no right answer*. So people try to hide how much something is worth to them: whoever has better information ends up with most of the excess value.

Advertising inventory is worth next to nothing to the publisher itself. It's worth something to the advertiser. The excess value, the gap between a and b, is very large. The advertiser knows exactly what the inventory is worth to the publisher. But the publisher has no idea whatsoever what it is worth to the advertiser.

Guess who gets the excess value?

* Non-iterated.

Wednesday, October 7, 2009

Tuesday, October 6, 2009

Shirky: Advertising Now Priced at its Real Value

Clay Shirky, in a fairly recent talk, observes

[Newspaper's making their money from advertising] was the historic circumstance, and it lasted for decades. But it was an accident. There was a set of forces that made that possible. And they weren’t deep truths — the commercial success of newspapers and their linking of that to accountability journalism wasn’t a deep truth about reality. Best Buy was not willing to support the Baghdad bureau because Best Buy cared about news from Baghdad. They just didn’t have any other good choices.
[Newspaper] advertisers were forced to overpay for the services they received, because there weren’t many alternatives for reaching people with display ads — or especially things like coupons.
The second characteristic of the happy state of the 20th-century newspapering was that the advertisers were not only overcharged, they were underserved. Not only did they have to deliver more money to the newspapers than they would have wanted, they didn’t even get to say: “And don’t report on my industry, please.”... Neither of those, neither the overpaying or the underserving, is true in the current market any longer, because media is now created by demand rather than supply — which is to say the next web page is printed when someone wants it to be printed, not printed and stored in a warehouse in advance if someone who may want it. Turned out that when you have an advertising market that balances supply and demand efficiently, the price plummets. And so for a long time, people could say analog dollars to digital dimes as if — well, when do we get the digital dimes? The answer may be never. The answer may be that we are seeing advertising priced at its real value for the first time in history, and that value is a tiny fraction of what we had gotten used to.
These are just the parts relevant to advertising. Read the whole thing. Clay is--as always--the smartest commentator on the newspaper business I know (yes, this is like being the tallest dwarf, but still.)

I wonder whether he's right about what the real price of advertising should be. He's the first person I've heard categorically claim that newspaper CPMs were (and thus are, to some extent) not good value. His assumption that advertising markets used to be inefficient and are now efficient perhaps gives too much credit to the current online system.

If newspaper CPMs were not good value--that is, if the ROI on newspaper advertising was less than the applicable advertiser hurdle rate--then why did advertisers buy them at all? Clay's answer, that they had no other choice, is non-sensical in terms of value (if we agree that newspaper advertisers were not each very stupid for a very long time.) Perhaps what he means is that the negotiating leverage has changed. But this is a rather weaker claim.

Sunday, October 4, 2009

Skidelsky on Scapegoating

Here's something I've been trying to say for a year, poorly. Skidelsky in his new book, Keynes: The Return of the Master, says it succinctly:

Whenever anything goes badly wrong, our first instinct is to blame those in charge--in this case, bankers, credit agencies, regulators, central bankers and governments. We turn to blame the ideas only when it becomes obvious that those in charge were not exceptionally venal, greedy or incompetent, but were acting on what they believed to be sound principles: bankers in relying on risk-management systems they believed to be robust, governments in relying on markets they believed to be stable, investors in believing what the experts told them. In other words, our first reaction to crisis is scapegoating; it is only by delving deeper into the sources of the mistakes that the finger can be pointed to the system of ideas which gave rise to them.
As the crisis fades and everyone turns their attention elsewhere, I don't want to forget the lesson learned: what we know about economics is incomplete. Even more, no serious student of economics can now claim that any of the current "systems of ideas" are more than simplistic, directional models. No one knows nothing, and the people who claim to are fooling themselves.

Thursday, October 1, 2009

Is the Time for Angels Past?

In the past month I've had two companies that I've committed to investing in come back and say a VC has decided to take the whole round. These were the best two deals in my funnel. The next two best companies are asking for non-standard deal terms. I don't do non-standard deal terms (after twelve years of professional venture investing, I've realized non-standard deal terms are just not worth the hassle.)

The last 18 months have been a great time to be an angel. Only the hardest-core company-building VCs--like USV and First Round--were systematically investing in seed stage companies. This left room for people like me to invest.

Now the VCs who sat out the last year scared have realized that if they want to put money into successful companies at reasonable prices, then they need to have invested in those companies before they became successful. And this option value means they can offer entrepreneurs a better deal than I can (my optionality is limited by my relatively meager investable funds.)

The people I've co-invested with over the past couple of years have been a huge resource to the companies we're in. I'd hate to see that strategic value squeezed out in favor of investors who are more money-manager than company-builder. But that, I think, is what is about to happen.

Friday, July 31, 2009

Communities vs. Networks

My first job, at IBM, I knew nothing about computers. Why they hired me to design mainframe CP logic, I can't figure out. Columbia taught Electrical Engineering as a liberal art, so while I graduated able to talk in detail about semiconductor physics and hold my own in a conversation about Claude Shannon's master's thesis, I could not use the UNIX command line. I asked a lot of annoying questions my first year there, like "so, how do I turn it on?" and "what's the difference between MVS and VM?"

My first week I needed to print some 20 page design document. I sent it to the printer queue. Then I trudged over to the room where the high-speed printer was, lined up at the half-door, told the printer tech my job number and he handed me 500 pages of gobbledygook. Probably tied the printer up for an hour. Whoops.

I asked the guy down the hall, who had been very helpful, what I did wrong. He asked me to email him the file. He then emailed me back the file in a different format and told me to print that. I asked him what he had done and he told me that the original was in a markup langauge that needed to be pre-processed. I asked him how to pre-process the files, since I would undoubtedly have to do this many times. He told me to email them to him and he would do it.

No matter how much I pressed him, he would not tell me how to do this. So I asked someone else and, in 30 seconds, they showed me the program to run.

My only explanation for why he would not show me how to do this simple thing is that he must have felt that knowing something that I didn't know was valuable. That by keeping the knowledge to himself, he made himself indispensable. In reality, he had just made himself a bottleneck. And a freakin annoying one, at that.

This came to mind recently because I've been doing a lot of networking. A friend at a mid-sized ad network asked me to find some really good, smaller ad networks that might want to partner with them. While I narrowed my list of 418 ad networks down to the ones that seem like the best fit, I figured I'd ask around if anyone knows anyone they think would be right for this. I've gotten great responses and a lot of introductions (I'm still looking, BTW, so if you know anyone, drop me a line.)

A few people, though (and some I've known for more than ten years and been through some character-defining shit with), won't introduce me to people they know. They are more than happy to have me tell them what I am looking for and pass that on, then get a response and pass that back. Just like Annoying Guy at IBM, they want me to email them the file every time. They want to be the bottleneck. And just like at IBM, the only explanation I can think of is that they think this makes them important.

The Epicurean Dealmaker had an interesting post on Goldman Sachs a few days ago. He is commenting on a Slate article:

Ms Moore points out the fact that, for all its reputation as "a devastating hive mind that can control any institution it touches, including the U.S. government," and as an gathering of the smartest minds, human and machine, on the planet, Goldman Sachs employees have proved singularly inept outside of the hive.
TED's explanation for why this is is the interesting part:
Notwithstanding what they like to tell you, investment bankers... are successful to the very extent they can maintain themselves in the flow of market information. Investment banks derive their market power and importance by maintaining dense and robust information networks across the numerous markets they participate in... Take a banker with excellent network connections out of his or her supporting environment, and he or she becomes dramatically less effective.
A while ago, on the advice of a friend, I stopped thinking about the people I knew as a "network" and started thinking of them as a "community." This made me do two things very differently: I made a lot more introductions, many at my own instigation and just because I thought the two people might find some common interest; and, I consciously tried to stop mediating connections, to stop thinking the point of my relationships is in knowing the person but rather that the point is in communicating with the person, and in helping them communicate with others. Doing this has worked unbelievably well for me.

I think people who try to mediate access to their network fundamentally misunderstand the value of networks. The value is not in the number of edges connected to your node, it's in the information that flows over those edges. I think I was present at the creation of the idea that the metric for the attention economy is the number of people paying attention to you divided by the number of people you pay attention to, and I agree that it's a seductive idea. But it is completely wrong.

The value of your network, to you, is the amount of high-quality information that flows through it, and not necessarily through you. More and better relationships mean that you get more and better-filtered information; this is widely noted. Less noted is that if the people in your network are more interconnected, the information in your network will be of higher quality. This is obvious, once you stop to think about it. (If it's not, then think about the institutions that create high-quality information and how they are organized. And if that doesn't make it obvious, go read Jane Jacobs' The Economy of Cities.)

Creating communities of interconnected people is to your benefit, even if it means that you are no longer included in every communication. In the end, the information that finds its way to you will be much more useful, and there will be more of it. If your goal is to get more Twitter followers, to have your blog more widely read or to have the most LinkedIn connections, then you're not creating value at all*. Instead, create a "dense and robust information network": introduce everyone you know to someone else you know, make sure that when you learn something that you pass it on to the people who will benefit (and not necessarily everyone who follows you), and trust that the community you help build will end up making everyone in it more creative, informed and effective.

* Although you could argue, and Richard Lanham does argue in his The Economics of Attention, that the competition for attention is the best available filter, a la Hayek. I think this is probably true where cooperation is not available, either because not enough value is being created or for some other reason. These reason don't apply here.

Monday, June 22, 2009

It might have turned out badly if I'd been on anything but a Harley

One Wednesday 1am in the years when I couldn't sleep I wandered into a ramshackle biker bar out route 46 and found a guitarist playing the blues. The guy was like 50 and looked like an accounting professor, but man could he play. I listened until he closed the place down and left on the quiet highway feeling better than I'd felt in a long time.

That said, randomly barging into intimidating roadhouses looking for decent music hasn't generally worked for me.

Music's important to me. Finding ways to keep up with it now that my once music-geek friends have moved on to other hobbies--like work--took me a while. AllMusic was a huge help, then And, of course, Hype Machine and, through them, the music blogs.

But finding live shows was still tough. says I have played 1,328 different artists in the last couple of years. And I hate large venues. I'd love to see Andrew Bird live, but I'm not going to Radio City to do it. I told a friend that I needed something to tell me when my favorite bands were in town (and that I wasn't going to somehow link to all 1,328 of them through MySpace or somesuch.) He introduced me to the guys who started Livekick. Livekick goes through your iTunes library and scrapes your or other account to find out what bands you like and then sends a weekly email telling you who is going to be playing near you. Genius! There's no way I would have known that Ted Leo & the Pharmacists is going to be at Maxwell's tonight without them.

Anyway, I put some money into the company, so maybe I'm just talking my book, but if you like music, you need to check them out.

Wednesday, June 3, 2009

But, then, why have a website at all?

I've been sitting in front of my computer all day, doing general industry research: who does what, who the competitors in specific micro-segments are (i.e. who the ten billion companies competing to be the leading real-time mobile app video advertising social behaviorial targeting data exchange are. OK, that was a bit of hyperbole, but not by much.), etc.

One thing I noticed is how hard it often is to figure out what a company does by looking at its website. I figured that after giving the elevator pitch 3,000 times to VCs-frantically-pushing-the-Door-Open-button, the entrepreneurs would be able to clearly and concisely say what they do.

Monday, May 18, 2009

First Ever Ad Market

I was out with Josh Grotstein--CEO of Motionbox--last week, and got to talking about how the inefficient market design of our current ad exchanges saps liquidity.

OK, maybe I was talking about it.

Possibly I was ranting*.

Josh wisely changed the subject to an episode of 1987's Max Headroom, featuring the first vision of an ad exchange that we could think of, the steam-punkish Ad Market. It's not entirely clear what the underlying is in this market, since elsewhere in the episode a big advertiser seems to be using Skype to tell a network head to get the ratings up. It could, perhaps, be a pure risk-hedging derivatives market without any delivery of the underlying, which would certainly explain the show's dystopian setting.

Elsewhere in the episode, Amanda Pays makes those 80s style big-shoulder suits look pretty damn good.

* The thing about a rant is that it can't be kept in. So here it is.

Liquidity in a marketplace is generally determined by depth of limit order books. If the limit order book gets depleted, there is no liquidity. Most research on this subject focuses on the ratio of limit orders (supply liquidity) to market orders (deplete liquidity). This ratio depends on trader patience and market design.

Market design decides time to execution, the key endogenous factor traders take into account in deciding whether to place a market or limit order (mappable, perhaps, to the more classical 'waiting costs.') Variability is a function of spreads, spreads a function of liquidity, and liquidity of time to execution. Highly variable prices drive down the average price level.

In a well-designed market, time to execution can be minimized even with low volumes. Many marketplaces have historically kept TTE low by opening only for a limited period of time every day or every week. By concentrating order flow in a smaller period of time, the chance that each trade would clear quickly was increased.

Our current ad markets seem to be headed in the opposite direction. I consider these markets low-volume. But instead of working to decrease TTE by increasing the concentration of order flow, they seem to be motivated instead to decrease inventory risk by imposing a small TTE, diluting order flow. This depletes liquidity and must, in the aggregate, lower CPMs.

Of course, this is all speculative on my part, since I don't have the data to back it up. Also, this effect is probably a small part of why online CPMs are so low, the relative inefficacy of online ads being the bigger part. But liquidity is certainly more interesting to think about. It also makes me wonder what the heck Hal Varian does at Google.

Thursday, May 14, 2009

On Regulation and Innovation in the Financial Industry

Yesterday President Obama said

We started taking shortcuts. We started living on credit, instead of building up savings. We saw businesses focus more on rebranding and repackaging than innovating and developing new ideas that improve our lives.
But contrast that with this, from November of last year:

The Securities and Exchange Commission this week issued a formal cease and desist order against peer-to-peer lender Prosper Marketplace Inc.

The San Francisco company said in October that it was no longer accepting new lenders or loans as federal regulators consider the company’s application to establish a secondary market for loans made on its person-to-person lending site. That process is expected to take months.

It's easy to talk the talk about wanting innovation, but government regulation and innovation are inimicable. It's hard enough to start a new company. It's next to impossible for a startup to comply with government regulation that is opaque, one-size-fits-all, slightly different in each of the 50 states and written by lobbyists to benefit incumbents. To comply with the regulations, companies have to hire expensive, well-connected lawyers and go through a several month process. As an early-stage investor, I probably wouldn't invest in working cold fusion if it required the company to be government regulated.

I know everybody and their mother thinks the solution to all our financial system woes is more regulation, but it's worth considering that the US financial services industry is probably the most heavily regulated industry in the world (and if it's not, then it's second only to our incredibly inefficient healthcare industry.) It seems everybody and their mother thinks that if beating your head against a brick wall isn't working, well, just beat harder.

I'm not against regulation, really. I just think that if the regulation we have isn't working, we need to go back and figure out why, rather than layering on a new layer of regs. We should also go back and figure out who wrote our current regulations and burn them in effigy, to better motivate the current regulation writers. Nothing focuses the mind like a hanging.

The first principle in writing new regulations should be an explicit statement of what we are trying to achieve. And if what we are trying to achieve is that no one loses money ever, then perhaps what we want is not a financial system at all. That goal would be best achieved by returning to the gold standard and issuing safes to every home.

But whatever the goals are, one of the primary ones should be to promote innovation. And one of the primary goals of that innovation should be promoting diversity of business models. After increased regulation, the primary prescription in the mass media for the financial system is making sure that no company is too big to fail. This worthy-sounding goal is a non-starter in today's economy. Even if every financial services firm in October of last year had been split into 100 identical sub-firms, we would have had the same problems. Paul Kedrosky has talked about making sure that firms are less tightly coupled as one solution to rolling failures. While I believe this, I wonder if it's possible to implement.

But if you turn the problem 90 degrees on a completely different axis, we can address the tight coupling along functional axes: if we had many types of firms, then even if they are financially intertwined, only a small subset will fail in any given crisis. This idea--that diversity is key to the resilience of an ecosystem--is widely understood by ecologists, biologists and evolutionary scientists. The benefits of biodiversity are inarguable.

We need an appreciation of diversity in our financial services companies. We need to encourage innovative startups that try to provide crucial financial services--like converting savings into investment--in new ways. We need hundreds of them, understanding that most will fail. (Innovation is akin to an evolutionary process in this.) We need to change our regulations to encourage innovation, rather than discourage it. The president needs to stop placing blame and start planting seeds.

And we need to get over the fact that some blameless people will lose some of their money some of the time. Because with the financial services monoculture we have now, every taxpayer loses a lot of money every ten years or so.