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.

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* 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.

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?

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* 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.

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.

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* 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.

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.

Pennywise

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?

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

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.

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* 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.

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.

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:

	2007	2008
TNS	$11.3	$11.8
IAB	$21.2	$23.5

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.

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?

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* This was a lot back then.