New York Times Profitability Solved

What they Want, What they Need

Reading the comments on Saul Hansel's NYT piece, An Icon that Says They're Watching You. The two knee-jerk responses to advertising appear in the first few:

#3: "Make a great product and people will seek you out and buy it. The market research dollars should be for learning what people truly want - not what business and advertisers tell us to want."

#4: "Stop polluting my world with ads that will never appeal to me."

Rephrased:

#3. Stop telling me what I want.
#4. Please tell me what I want.

Is the truth perhaps somewhere in between?

Supply of What?

Why are online CPMs so low?

Why is the reader of an article on NYTimes.com worth a third of the exact same person reading the exact same article on paper?

Dumb question. Everyone know that CPMs are low because there is an excess of advertising inventory: supply and demand.

This can't be true.

Let's say you had a newspaper--like in the old days--and you sold a quarter page ad for a $25 CPM. And let's say that advertisers thought that was a fair price and--despite not being able to measure it very well--thought it provided the right ROI. You had 20,000 readers in your little city, so you made $500 off that ad space every day. Now let's say a competitor comes into your city with another newspaper, one that remedies your woeful sports coverage. Your competitor takes half your readership and sells ads just like you.

What has happened to inventory here? There are twice as many newspapers, so has it doubled?

No. Even though there are now twice as many ad spaces, they each get half the number of impressions. So the inventory, the total number of impressions, stays the same. Of course it does! Unless the readers are reading more news in total, the ad inventory has to stay the same: the inventory is the consumers' attention.

(Of course, if CPMs stay the same, your newspaper now makes half as much because it has lost half its readership, but that's a completely different problem.)

The same is true online. There is not appreciably more inventory in the world than there was ten years ago. In fact, in a world where we collectively spend less time with media, inventory is contracting. Online inventory is increasing because the amount of time spent online is increasing. But the supply of inventory per user is constant, and demand per user should be constant, so supply and demand should stay matched. Plummeting CPMs are not a supply and demand problem.

So, then, why are online CPMs so low? If it's not supply and demand, what is it? The answer has to be either: (1) the market for online ad inventory is fubar, or (2) online ads just don't work very well. I suspect it's a bit of both, but this whole supply and demand argument has just got to go.

50,000,000,000 $20 Bills

Geithner thinks he's busy now? Wait until a 4,000 mile high stack of twenties lands on his desk, awaiting his signature.

The Fed's decision to print up a trillion dollars of crisp new greenbacks just a few days after we assured China that their investments in US debt were sound is kind of funny. Slapstick, maybe. We just traded in China's $1 trillion in claims on our future production for little green pieces of paper. Bargain!

If I were China, I'd take those green pieces of paper and trade them for something that might actually hold its value. Coca Cola wants to buy your juice company? Why not Pac-Man and buy Coke?

Personally, I'm going long the manufacturers of printing presses. That's a lot of twenties.

Echoing Green: Funding Social Entrepreneurs

I volunteer some of my time to Echoing Green, who provide seed funding and support to social entrepreneurs. EG's approach is to find social entrepreneurs who take a businesslike approach to building sustainable organizations aimed at creating social change. I met them a few years ago and they asked me to be a reader: to rate several of the business plans the social entrepreneurs submit.

I love EG's mission and I'm impressed with their vetting process. But mostly I am impressed with the plans I read. Most of them are better thought out than the business plans I see from for-profit startups. But the thing that really amazes me in every plan I read is the quality of the entrepreneurs. The people starting these organizations are, to a person, the kind of people that should be backed. They are smart, they know their market, they know their customer, they have vision and, most of all, they are driven to make their ideas real.

The only hard part about the process is knowing that at the end only a couple of these entrepreneurs will be funded. I wish them all success.

Bigger Ads Roundup

A lot of disagreement on the new OPA initiative. Only Jonathan Mendez seems as enthusiastic as I am. Some other views below (I should note, if my comments seem snarky, that these are the views of people whose opinions I follow and respect.)

Why Super Banners are Lame, Noah Mallin on SearchViews.

Let’s face it, the banner ad is an inherently broken model. To some extent this is due to the unreasonable expectation that because it’s online it should be measured by clicks. Really, it’s a static ad like a billboard or a print page and it shouldn’t be expected to function as much more beyond that. Forcing the ad into a bigger and more obnoxious format will only make the user experience suffer.

Funny how nobody talks about the user experience of TV viewers suffering from ads, or the horrible user experience of trying to find the actual content amid the ads in a typical issue of Vanity Fair. This isn't because the user experience doesn't suffer, it's because we're okay with this as a tradeoff for subsidized content.

New OPA Display Ads to Help Ad Networks and Exchanges on AdExchanger.

The OPA continues to try to avoid the insight and power that technology provides in the advertising marketplace through exchanges and networks. We predict that selling premium impressions "direct only" will not yield efficient ROI for advertisers in the long run... If it wasn't for those gosh darned ad networks and exchanges which keep monetizing their unsold inventory, their CPMs would be so much better! ... When is the OPA going to understand that technology is its member publishers' best friend rather than worst enemy?

I think they'll realize technology is their friend when it starts delivering them CPMs high enough to pay for the content. The middle piece of the quote is sarcasm, if that doesn't come through after my cutting and pasting. On thinking about it, I don't disagree with AdExchanger that these ads may be sold through a network or exchange, but if there is remnant inventory of these ads, they are not working. The whole point is that these are scarce, so command a better CPM. If they can't be sold out by the publisher then it's a failed experiment.

Online Publishers Hope Bigger, Bolder Ads Can Save Display by Tameka Kee on PaidContent.

But there’s the issue of how these new, bolder units will impact the user experience. While most web users understand the trade-off between free content and advertising, a survey by Opinion Matters and Howto.tv found that 59 percent of users said they’d stopped visiting a site because of obtrusive or irrelevant ads ... Pop-ups, and ads that were otherwise difficult to minimize were included in the mix; if these new units eventually drive down page-views and unique visitors, then publishers will be back where they started again...

This article was pretty balanced, but the idea that people won't read the New York Times because they have to watch an ad seems overblown. There are some sites where these ads won't work--most sites actually--but if a consumer values the site highly enough, they will suffer through the 15 second interruption.

Coming to a Web Site Near You: Bigger, More Obnoxious Ads by Peter Kafka on AllThingsDigital.

The reasonable thing to point out here is that there’s nothing that prohibits advertisers and publishers from doing interesting and creative stuff with these formats... And if you’re really lucky, you’ll find that the ads are even about stuff you’re interested in learning about... But if the ads aren’t interesting and aren’t relevant to you? It’s the kind of thing that could drive a mild-mannered person to install ad-blocking software.

If the seizure-inducing animated lead-gen banners haven't caused you to install an ad-blocker yet, nothing will. Certainly more relevant ads perform better and the publishers can still target, but keep in mind that brand advertising is often not meant to be too finely targeted. Who is P&G selling Tide to? Do you wash your clothes? Reach and frequency in brand advertising aren't used just because there are no other metrics, they're used because they mean something.

You Can't Brand in a Banner

Members of the Online Publishers Association have decided that bigger is better in their quest for brand-advertising dollars, and 26 members of the group are adopting a new set of three interactive ad units to get agency minds on better creative and off low-CPM ad networks.

The publishers, including Martha Stewart Living, Conde Nast Digital, Discovery and CBS Interactive, have agreed to only direct-sell the new units, and not sell them through ad networks. The new ads will run alone on the page, giving advertisers exclusivity that publishers hope they'll pay a premium for

From AdAge.

The units are standardized, but big enough to do real brand advertising in, advertising that will make you remember when you're in the grocery that this soup in the red and white can is m'm, m'm, good. The ads are also big enough to annoy consumers, who have gotten used to ad formats they can automatically ignore. But being annoying doesn't mean they won't work (cf. direct mail, TV ads.) The ads may even garner fewer click-throughs because of annoyed consumers, but CTR is not the metric these ads are measured on. They're branding ads, not sales ads.

I think these new ads will start to ask the consumer to 'pay' true value for content. They will work in front of content that has high value-density*: people will tolerate these ads in order to get to the New York Times, but they won't tolerate them to get to their Facebook page. This also means the ads are not especially amenable to the ad network/ad exchange model because there is a limited group of high value-density websites that can use them without bouncing readers.

If the publishers are smart, they'll keep the value-add piece of the digital model--the automated ordering and placement, the targeting, the tracking, etc.--and increase CPMs at the same time.

* Look ma, I'm making up words! My point is not that Facebook content is not valuable, but that it's valuable in a different way. FB's value is spread out over more time and more views; the value of each view to me is less than the value of each view of the NYT (but I have more FB views overall.) The value per view should correlate directly with the CPM, in theory. In contrast, the ad network/ad exchange model has caused CPMs to correlate to the value of the viewer, not the view, causing a disconnect between what the viewer is willing to pay for content and what is actually paid.

More Capping

Another voice in my crusade (such as it is) to stop paying exorbitant salaries to everyone on the government dole.

In the hubbub surrounding President Obama’s decision to cap salaries of commercial-bank CEOs at $500,000 (if they receive future federal funds), the salaries of college and university presidents have been flying under the radar. Some reconsideration is due, particularly because substantial taxpayer dollars go into their services, with more funds coming via the stimulus package. State and federal taxpayers subsidize public universities substantially, but even private schools benefit from things like tax-subsidized student loans and tax-funded faculty research...

The 184 public research universities [in The Chronicle of Higher Education's survey of college and university presidents’ compensation packages] had 59 presidents whose 2007-2008 compensation packages were worth more than $500,000. The average for this $500,000-plus club was $654,000... Of the 32 research-intensive private universities, 31 had 2006-2007 presidential compensation packages worth more than $500,000, the average being $895,000.

HT: Alex Tabarrok, Marginal Revolution.

Money to Grow

The quote from Shane's book yesterday could be taken to imply that somehow it is the venture capitalists that create jobs. Correlation, not causation. As the title tried to convey, it is growth companies that create jobs, and since venture capitalists try to invest in growth companies, their investments are a good proxy for growth companies as a whole.

Internet startups these days don't need much money. It's generally believed that web companies can get to beta for a few hundred thousand dollars max. As a result venture capitalists perceive deals differently: if the startup needs next to nothing to get going, they are eager to put a couple of million dollars in; if it needs a couple of million dollars, they pass. The old canard about bankers--they'll only lend you money if you don't need it--has become true of VCs.

That said, I think the VCs are still a critical player in creating successful growth companies. Even though there are notable examples to the contrary, almost all growth companies need to raise a substantial amount of money at some point in their life-cycle to scale.

The only thing about my angel investments that keeps me awake at night is whether--when they need the bigger institutional round--the VCs will be in the mood to step up.

To Encourage Growth We Need to Invest in Growth Businesses

My friend John K. and I disagree about how to create jobs by encouraging more startup formation. I think the disagreement comes from John wondering how to create more startups and me wondering how to create more jobs. There's a difference, as explained pretty well in Scott Shane's article in The American, The Startups We Don't Need.

Shane first systematically takes apart the received wisdom that startups are the engine of job creation. He shows that the average startup doesn't create many jobs at all and that the jobs created are worse than jobs in corporate America. But we all know that our economic growth is dependent on startups, right? Well,

A tiny sliver of startups accounts for the vast majority of the contribution to job creation and economic growth that comes from entrepreneurial activity. According to data from the National Venture Capital Association, since 1970, venture capitalists have funded an average of 820 new companies per year. These 820 startups—out of the more than two million companies started in this country every year—have enormous economic impact. A report posted on the Venture Impact website explains that, in 2003, companies that were backed by venture capitalists employed 10 million people, or 9.4 percent of the private sector labor force in the United States, and generated $1.8 trillion in sales, or 9.6 percent of business sales in this country. Moreover, in their book The Money of Invention: How Venture Capital Creates New Wealth, economists Paul Gompers and Josh Lerner report that in 2000, the 2,180 public companies that received venture-capital backing between 1972 and 2000 comprised 20 percent of all public companies in the United States, 11 percent of their sales, 13 percent of their profits, 6 percent of their employees, and one-third of their market value, a figure in excess of $2.7 trillion dollars.

Instead of just believing naively that all entrepreneurship is good, policymakers need to recognize that only a select few entrepreneurs will create the businesses that will take people out of poverty, encourage innovation, create jobs, reduce unemployment, make markets more competitive, and enhance economic growth. Therefore, as unfair as it might sound, policymakers need to “stop spreading the peanut butter so thin.” They need to recognize that all entrepreneurs are not created equal. They need to think like venture capitalists and concentrate time and money on extraordinary entrepreneurs, and to worry less about the typical ones.

Shane expounds on this and cites the research in his book The Illusions of Entrepreneurship: The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live By. It's an interesting read in many ways, especially if you're interested in what the data actually show.

Return on Venture Money is Not the Bottleneck

I think the bottleneck to increased startup formation is people, not exits or tax rates.

If exits were the problem, then LPs would stop putting money into venture funds as expected returns diminish. Fred Wilson (and many others) have said that lack of money is not the problem. I believe them. So exits can't be the problem (For startup formation, that is. Exits are certainly a problem for the VC funds.)

From the point of view of the money, lowering capital gains taxes--much as I personally enjoy lower rates--is not going to increase the rate of startup formation. As previously noted, there is already plenty of money looking for a home with the current returns. Increasing the returns would only draw more money into an already overly funded pool.

From the entrepreneur's point of view: while I hate to depart from economic orthodoxy and I do believe that incentives matter, I don't think that the entrepreneur we want to encourage (the one creating a large company that employs a lot of people, not home-based businesses and restauranteurs) thinks much about the after-tax difference in the amount of money he'd make in a success. Ventures are generally binary: the company fails or the company succeeds. In a success the entrepreneur hopes to come out of it with quite a bit of money, and whether it's $10 million or $12 million is not really the point. The change in after-tax return is completely swamped by whether there is a return at all.

Advertising in a Downturn: Other Opinions

I get a lot of hits from people searching for "marketing in a downturn" or "advertising in a downturn." I haven't blogged on that for over a year because there's no point in trying to predict the present.

But for all you searchers, here's a great resource: the FT's Advertising in a Downturn page. Supports my contention that putting marketing money to work when times are bad is a great investment. I know I said it a year ago and god help those who took my advice then--especially the car manufacturers--but I still think I'm right.

Let's Not Pretend There's No Problem and There's Nothing We Can Do About It Anyway

I don't agree with government sponsored venture capital, as I've said before*. So I wasn't enchanted by Tom Friedman's NYT Op-Ed proposing that the government give bailout money to the top VC firms to invest. On the other hand, I thought it a constructive proposal, an addition to the debate. One of the primary concerns with the various government rescues is that the government will buy things for inflated prices and then, having bought them, won't know how to run them. Friedman addresses this by proposing that the government hire the VC firms to do it.

There are a ton of practical problems with this. But I applaud Friedman for floating an idea. A lot of commentary I've read, though, is like Fred Wilson's:

Please leave the venture business alone. It's working pretty well as it is and it certainly doesn't need more money or some kind of stimulus plan.

This almost perfectly illustrates my complaint that we ignore our own flaws while easily seeing others'. The venture business is a piece of the finance system--the system of turning savings into investment. Fred can't possibly be arguing that the finance system is serving society well, so I assume he's arguing that venture capital is systemically apart from the rest of finance.

It's not.

There are more cogent commentaries, like Roger Ehrenberg's quoting of Matt Harris' criticism of and constructive alterations to Friedman's idea. I don't agree with Matt, but he and Roger are on the right track: early stage investors need to put up some ideas.

The current Panic highlights how finance can be used either to create growth or to finance consumption. There needs to be some of both, but current events show that in the last six or seven years finance has overfunded consumption to the point of crowding out growth financing. As the part of the finance industry that finances growth, we can't just say that the other part (the part that finances consumption) was wrong and out of control and needs to be reined in and leave it at that. We need to figure out how we can do more and better and what we need the government to do to support us in that. If it's not money we need, then what? There will always be competition between these two types of finance for investable money: what can we do to win more often?

Here are my ideas.

Really bright, tech savvy, self motivated risk takers are the bottleneck in the venture creation business, not money. This is why Friedman's idea won't work (and, I think, the root cause of the conditions that Fred describes when saying it won't work.) To increase the formation of more early stage companies we need to increase the number of these people. There are two ways to do this: (1) make people smarter and more tech savvy, and (2) lower the risk to individuals of starting a new company and failing.

My specific prescriptions:

(1) We should pay for college, for everyone. This would be the best use of government money ever. If the US did this and did it right, we would remain the global tech powerhouse for the next century.

(2) Universal health care. Health insurance is expensive. It's one thing to not have it when you're young and single, it's something else when you have a family. Working out of your garage for a year while living on your savings is an acceptable risk, not being able to pay your kid's doctor bills is not.

In general, I think we need to support company creation by enabling the company creators, not the financiers. I may be wrong about my specific ideas, of course, so I'd love to hear other constructive opinions.


* As a follow-up to that post, I'll note that Owen Davis--who is running the NYC Seed Fund--allayed much of my cynicism about that project: he's smart, independent and will definitely make a difference in the NYC early stage community if given enough and continued support by his backers. I can't imagine a better person for the job. The fund should be thrilled to have him and work hard to keep him, IMHO.