Tuesday, April 19, 2011

Advertising, the Fallacy of Perfectibility, and the Best Minds of My Generation

Between men and brutes, there is another very specific quality which distinguishes them, and which will admit of no dispute. This is the faculty of self-improvement... perfectibility... It would be melancholy, were we forced to admit that this distinctive and almost unlimited faculty is the source of all human misfortunes; that it is this which, in time, draws man out of his original state, in which he would have spent his days insensibly in peace and innocence; that it is this faculty, which, successively producing in different ages his discoveries and his errors, his vices and his virtues, makes him at length a tyrant both over himself and over nature. 
- The Social Contract and Discourses, Jean-Jacques Rousseau

An entrepreneur I'm working with on an adtech company asked me recently "does any of this make any difference?" It's a good question.

Here's something you probably didn't know about me: when I ran venture capital for the world's largest advertising agency holding company back in the '90s, I refused to invest in internet advertising companies*. I did not think banner advertising was useful. I have not come so very far from that view.

* * * * *

There is a sometimes infuriating disdain of advertising among those who wear Northface and Converse, drink Starbucks and Horizon Organic milk, and find out about the farmers' market from drop cards in the local organic grocery store. But that they can hate advertising while being avid consumers of it isn't irrational, because advertising has two faces.

Before World War I in America, a belief in perfectibility was widespread.  Not just human perfectibility, but technological. Businessmen created and grew businesses based on a belief in perfectibility. All success required was creating the best product at a fair price, driving competitors out of business and cementing a permanent monopoly, all for the betterment of society. Competition, to people like Henry Ford and Theodore Vail, was a waste of resources. Creative destruction would have seemed like madness.

In this no-nonsense model, advertising was product news, an attitude typified by the Bates agency in New York in 1904, who viewed anything more as "bad copy--too literary and too general, lacking prices and good information." John E. Kennedy, the head copywriter for Lord & Thomas in those years thought that "instead of general claims, pretty pictures, or jingles... an ad should offer a concrete reason why the product is worth buying."  One of the students of this method said this method of copywriting "aimed at an appeal to reason and intelligence rather than the time-honored assumption that the public was a mass of dumb, driven sheep, who could be swayed with mere picture-and-catch words."**

This approach, though it was itself a reaction to an earlier character-and-jingles driven approach (Aunt Jemima, the Uneeda slicker boy and the Arrow Shirt man were all products of this earlier approach) finds its intellectual rationalization in the Chicago School. George Stigler described it: advertising provides information to buyers, allowing them to make better choices.  Because the Chicago school believed that economic actors were rational, and that economic activity must have some underlying sense, this was the only coherent explanation... even if the facts on the ground at the time did not bear it out (Stigler published his seminal Economics of Information [pdf] in 1961.)

By that time, advertising had changed. Many times. The War to End All Wars itself may have been the catalyst. At the beginning of the conflict, fact-based ads played well to a righteous population. But later, when war-weariness had taken hold, patriotic advertising showed that appealing to the emotions may be even more powerful, especially when the facts aren't all that pretty. Advertising can persuade. Posters of Uncle Sam pointing his finger and saying "I Want YOU for U.S. Army" worked.

But the creator of that image, James Montgomery Flagg, had misgivings: "A number of us who were too old or too scared to fight prostituted our talents by making posters inciting a large mob of young men who had never done anything to us, to hop over and get shot at... We sold the war to youth."***  These are the poles advertising swings between: providing information so people can make better decisions about which products to buy, and persuading people to do things they might otherwise not have done. This is why people can hate advertising while listening to it closely, both of these approaches are at work, sometimes in the same ad.

The carnage of WWI had another effect: the idea of perfectibility itself fell out of favor. There was no one after that war that could still believe that those in power were infallible or even that doing the right things leads to the right outcomes. A belief in the universal power of reason now had a powerful enemy in American culture: pluralism. I'd argue that the battle between openness and control that we see happening to the internet now (cf. Google v. Apple) is a battle between perfectibility and pluralism, between one person knowing what is best and the belief that progress proceeds from chaos.

* * * * *

Productivity growth has made our lives enormously better. And it is one of the keys to making the lives of our offspring better than ours. If there is one guiding principle in my work, it is trying to help nurture innovations that create productivity growth.

Productivity is not just doing more with ourselves, it's also preventing waste, and guiding resources to their best use. This last is what Hayek called "the economic problem." Hayek said that the solution was the price system, the "invisible hand" that put resources where they are needed. This is an astonishing insight, but it falls short. Hayek, I have to assume, never bought a car.

The price system may be the best way to make sense of decentralized knowledge when the resource being apportioned is tin, as in Hayek's example. But when we go to buy a car, we have many choices at any given price point. The cars, although similar in most regards, are different, and we can't choose on price alone. Choosing the car that is best for us requires more information. Some of this information (mpg, how it looks) we can find out ourselves, if we know to look. But in many cases putting the onus on the potential consumer to discover all possible choices is inefficient. When looking for a place to buy produce, I will not know to look for the farmers' market that I do not know exists. Advertising is key here.

I believe that after an efficient price system, an efficient matching of people with the provider of a product or service that is most appropriate to them is the economic problem.  When Jeff Hammerbacher laments that "The best minds of my generation are thinking about how to make people click ads," I think he's falling for a technocratic idea long discredited, one that only engineers still believe: perfectibility.  Jeff is young, and very smart. He may believe that there is a single best product or service in each category that can be found using the appropriate Google search. And perhaps he believes that he himself should be the person who can decide what people really want, as Theodore Vail did, or Henry Ford tried to do, or Steve Jobs tries to do. Because if he didn't believe in his own omniscience, and if he personally would prefer not to have some other person making his choices for him, then he would have to agree that each person needs information to make the right choices for themselves. In that case, if I put an ad in front of someone, and that person decides to click it, then I must be solving a very difficult problem indeed.

Getting a click means that you have shown the clicker something valuable to them. If you don't believe in perfectibility--in making peoples' choices for them--then the click is a win.

* * * * *

I make a sharp distinction in my ad-tech investing between better matching and persuasion.  I only invest in the former (although sharp lines can not always be drawn.) The data-driven media buying and ad placement companies that are a large part of my portfolio are all clearly aimed at putting the appropriate information in front of the right person****.  I see companies that I think will be successful persuaders, but I don't invest in these; they make me uneasy. I suppose you could say that I'm not very businesslike in that regard, that I don't appreciate the art of selling, that I don't appreciate the art of advertising, that I don't appreciate the cultural value of advertising, that I don't have a sense of humor. I guess that's all true.  But, in my opinion, the companies that make the biggest difference to their customers are the ones that make their lives better.  While I recognize that the customer of the ad-tech company is the advertiser, not the potential consumer, and that the advertiser's life is certainly better if it sells more product, I'm not buying it. While being once-removed from treating the consumer like a mark may ameliorate the ethical considerations, it does not make it good business, not in the long-term.

[Edit, five hours later: I will revise something I wrote forever. So, on the blog, I try to finish and then hit publish. This time, as soon as I did, I realized I had not closed the loop on the argument.

Here's my point: if you believe in perfectibility, that your product is the best one for everybody, you probably also believe that all you need to do is buy mass media ads telling everybody about the existence of your better mousetrap. If you have lost the belief in the perfect, then you will feel the need to compete for the attention of people on other than the facts, because the facts don't differentiate you. Competing on facts is better for society, and for the regular person who sees ads.

The people who are thinking about how to get people to click on ads are of two types: those who just want you to click on the ad, and those who want to put an ad in front of you that would be valuable for you to click on. Saying that the latter is somehow of ephemeral benefit is misunderstanding what is economically worthwhile. By matching the right ad to the right person, we can provide information even while allowing everyone to have their own individual tastes.]

* OK, that deserves some caveats.  I did invest in an ad network... two weeks before their IPO. I sold in the IPO. There was free money like that in 1999. I also heavily invested in the interactive agencies but, and this is my point, none of them would stand for being characterized as purveyors of advertising or, in many cases, any sort of marketing at all. Jeff Dachis' infamous difficulty in describing what Razorfish did on 60 Minutes being a case in point. It wasn't until Agency.com acquired iTraffic that any of the companies I worked with became involved with display advertising in any meaningful way.
** The Mirror Makers: A History of American Advertising and Its Creators, pp. 49-51.
*** Ibid, p.76.
**** While these technologies can also be used to put a persuasive ad in front of the person most liable to be persuaded, I don't think this use provides as much lift, and I hope it will be squeezed out.

Saturday, April 9, 2011

Innovators can come from anywhere. VCs, not so much.

It ought to be remembered that there is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success than to take the lead in the introduction of a new order of things. Because the innovator has for enemies all those who have done well under the old conditions.
- Machiavelli, The Prince

I put the kids to bed and started reading Forbes' Midas List, their list of the top 100 tech and life sciences VCs.  As I browsed, looking at where they went to college, I started to notice something:

Number of degrees by school, for the schools who issued more than one degree to a top investor.  Many of the investors got more than one degree, so the numbers sum to more than 100.
See the pattern? That's right, they all went to the same schools*.

I have to admit to being surprised. Not by the ordering of the schools, but by the sheer lack of diversity. The top four schools issued more than half of the degrees. The top ten more than 70% of them.  The top 15 schools include the ten bastions of the establishment: the Ivy League, Stanford and MIT.

It's striking that in a field where us gatekeepers are supposed to be spending our time finding and backing unusual people--those willing to take inordinate risk, come up with world-changing ideas, and generally just think different--we all went to the same few schools, the schools whose graduates would have done well under the old conditions, as Machiavelli had it. I wonder what VC would look like if its top practitioners were more different.

* And, to avoid the appearance of hypocrisy, I should disclose that while I'm not on the list, I also went to one of these schools, Columbia.