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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.

and

[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.

and

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.

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.

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.

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.

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* 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.

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 Last.fm. And, of course, Hype Machine and, through them, the music blogs.

But finding live shows was still tough. Last.fm 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 Last.fm 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.

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.