Internet Ad Frenzy – what’s next?

Wow-what a past couple of days!  First I would like to say congratulations to David Moore, CEO of 24/7 RealMedia, on the company’s pending sale to WPP Group for $649mm.  I first met David in 1996 when he made his move from offline to online advertising as my prior fund invested in the initial round of 24/7.  We have stayed in touch throughout the years and what has impressed me most about David is his perseverance, sticking with the company through a few near-death experiences, struggling to find cash to make payroll, dealing with a penny stock, and ultimately fighting and building his way back to this exit.  What kept David plowing through was the belief that the crash was a temporary blip and that dollars would eventually move online in a big way.  Looking back, one could easily say that is a no brainer, but if you lived through the bubble you have to remember how the Internet was a dirty word.  Anyway, Aquantive is another company that survived the meltdown and is now about to sell itself to Microsoft for $6b.  I am not going to dive into the metrics here, but let me say that I still believe we are just in the second inning of this shift from offline to online advertising and that we should start looking for the next battleground.  What is interesting is that 24/7, AQuantive, and Doubleclick make most of their money from the boring stuff like SEM and display ads.  If you talk to most of these guys they will have a small bet on mobile and broadband video but will clearly admit that when it comes to managing a public company and having to hit quarterly revenue targets, you have to listen to your customer, the advertiser.  This means that the video and mobile stuff will be big but it is still way too early in those markets.

With AQuantive, Microsoft will get advertiser relationships and a platform from which to build a real online business.  I still think that Microsoft needs a Yahoo or even an AOL to compete with Google but despite that here are some things I would do.  I would go small and focus on building its publisher base where Google gets over 1/3 of its revenue.  I would buy small/medium sized companies that offer free and premium web analytics, feed management and RSS Ads, and potentially even a blogging platform from which to offer MSN AdCenter at the point of creation.  Getting publishers on board will help Microsoft get more data on clicks, increase its revenue base, and also allow the company to build relationships and good karma with the next generation of Internet entrepreneurs.  It already seems that Google is ahead of the curve as it is rumored that it is trying to buy Feedburner, a leading feed management and RSS ad platform (I currently use FeedBurner to manage my RSS feeds and deliver RSS Ads).  Besides the mobile and broadband space I mentioned above, one other opportunity that is huge and here for the taking today is the television and cable advertising market.  Companies like Spotrunner and VisibleWorld (a portfolio company) are approaching the market in different ways but clearly offer advertisers tremendous potential to bring Internet like tools and business models to an analog market.

Second Life for Kids (continued)

The kids space is hot.  Techcrunch just reported on rumors that Montgomery and Co or Monty was working with Club Penguin on a sale to Sony for $500 million.  Montgomery is the same investment bank responsible for selling Intermix (MySpace) to NewsCorp and Grouper to Sony so they have been building a nice practice in the Internet and digital media sectors.  As for the price tag, $500mm is pretty big money (I have heard ranges of $250-500) but according to Techcrunch the company projects around $65mm in revenue with $35mm in profit.  No wonder why the company didn’t need my angel or VC money :-).  If most of this revenue comes from subscriptions at $6 per month or $60 per year for upfront commitments, using a blended rate of $65 annually, you get around 1mm paying subscribers (this is simple math and does not take into account growth and ramp).  Not bad for a company that was started by 3 dads.  As I mention in an earlier post, virtual worlds are hear to stay and there will be a number of acquisitions in the space over the next couple of years.  In my household, Webkinz has taken the top spot.  It will be interesting to see what Ganz, a privately held company in Toronto, does with this fast growing property.  I can think of lots of ways it can further build out Webkinz and also monetize the community without losing its appeal and innocence.

Broadband video is hot…where are the advertisers?

There is an interesting interview in the WSJ today with Dave Rosenblatt, CEO of Doubleclick.  While talking about industry trends, Dave clearly lays out the fact that it is still early days in terms of broadband video advertising.

In general, video advertising as a trend is pretty firmly in motion. In spite of that, though, it is still very small. There are somewhere between half a million and a million search advertisers in the market, there are probably only a couple to five thousand graphical advertisers and probably less than a hundred video advertisers. There is no reason for that imbalance to exist. So one of our goals is to increase efficiencies with which people buy and sell video advertising and democratize access to the process in the same way that Google has democratized access to the search market…It is going to be easier to buy video advertising, and therefore many more people are going to do it.

I agree with the fact that buying and selling video advertising needs to get easier, but how do you monetize all of that user generated content?  On the making it easier part, I am sure Microsoft has been thinking long and hard about this market as it recently launched Silverlight, a cross-browser and cross-platform plug-in for rich media apps.  In addition it is offering 4gb of free hosting and streaming for its development community.  Think about how easy it will be for Microsoft’s developers to plug in Microsoft Ad center and some broadband video ads into their streaming content especially via an integrated offering tied into the development platform.  I am sure this fact is not lost on Microsoft as it looks to take on Adobe and also vie for leadership in the broadband video advertising market.  Sure Google has locked up search thus far but all of that potential broadband advertising revenue is still up for grabs. 

BTW, these stats on the number of advertisers is not all that surprising as it usually is the big advertisers with the huge budgets that will jump in first and explore new opportunities.  These numbers are also not all that surprising to me since my fund is an investor in Visible World.  As mentioned in previous posts, Visible World is bringing the power of Internet targeting to television:

While I have always been bullish about broadband video advertising, I have never believed that the $60b television advertising industry would disappear overnight.  In fact, before the Internet dominates all advertising why couldn’t one bring the tools of the web to the television world making TV advertising more effective, targetable, and measurable – in effect changing it from a mass media to a more targeted dynamic one.

What this means is that our advertisers who use Visible World can deliver dynamically changing television commercials based on any number of variables including the content, zip code, demographic, weather, etc.  Sure, lots of technology partners have continually stressed the broadband and mobile opportunities which are clearly building, but as Willie Sutton did, we are going where the money is today – helping that $60b spent on television advertising become more effective.  Sure broadband is in our sights and we can deliver that same video commercial or asset over any pipe whether it be broadcast, cable, satellite or broadband but the reality is that broadband can’t pay the bills right now.  In addition, I am of the viewpoint that the broadband video ad itself will have to be much different and shorter than your typical spot today.

So I agree 100% with Dave from Doubleclick (see Valleywag for more commentary).  For other evidence of the early nature of broadband advertising, I suggest doing some analysis and looking at where the bulk of revenue from other ad networks are generated.  Yes, you guessed it – banner display ads and search engine marketing.  Sure broadband has really high CPMs and trust me if these ad networks could build a huge business off of that today they already would have made some acquisitions but there just isn’t enough demand from their advertising customers.  As you guessed it, what that means is the market is still early and there are plenty of opportunities for innovative companies to help move some of that $60b spent on television ads online.

The future of television advertising (continued)

In my last post on television advertising, I mentioned that while video advertising on the web will grow rapidly over the next few years, the $60 billion currently spent on television advertising per year will not go away overnight.  What is needed for the industry is a way to make television commercials more relevant, targeted, and dynamic.  In other words, some of the best practices and technology from Internet advertising should be brought to television advertising.  Well, it is beginning to happen starting with big brands like Wendy’s International.  An article in today’s New York Times highlights the new television advertising campaign from Wendy’s where the ad will dynamically update based on what is happening on the football games aired on Fox. While most viewers may not actually get it on the first airing, Wendy’s campaign is definitely a big deal for the industry. 

The Wendy’s commercials, to be broadcast nationally on Fox Sports this weekend, are one of the earliest national examples of an emerging TV technology that allows advertisers to vary their message at the last minute. The Wendy’s ads will reflect events in the football games, creating what ad executives call a reverse product placement of sorts. Instead of putting Frostys or Wendy’s fries into a TV program, the company will incorporate a show’s content in its commercials.

TV advertisers are also now able to vary their spots based on audience demographics, changes in weather, sales goals or the campaigns of competitors. Borrowing a trick or two from the Internet, where ads are finely aimed at Web surfers, technology companies are working with consumer brand companies to move away from the one-message-fits-all approach.

“This is where the future’s going,” said Chris Boothe, president of Starcom USA, a media-buying agency that is part of the  Publicis Groupe. “We think that everything’s going toward more customization. It’s making sure that the message to the consumer is happening at exactly the time it is relevant.”

Congratulations to portfolio company Visible World for helping Wendy’s and Fox, sticking with its vision over the years, and helping the television industry take advantage of new technology to bring Internet-like dynamicism to an aging platform.

Set my music free – thank you EMI

Thank you EMI for releasing music singles without any DRM protection on it.  While I continue my love/hate relationship with the IPod, I do believe that my music needs to be portable and free. I recently bought the new Treo 680 for my wife and was in the process of loading music on her device when I remembered that my selection was limited.  I also have the same issue with the new Blackberry Pearl I just bought for myself.  Why is this the case?  It is because the hardware and technology vendors want to lock consumers into their ecosystems.  It is because the music companies are afraid of piracy.  In this case, it is because any music I bought from ITunes over the last few years requires me to have a device (iPod, iTunes, or  music phone) that can play ITunes or AAC encoded tracks.  Sure I could go convert the files to a wav format and then reconvert them to MP3 but who has the time or desire to do so.  The same goes for any device using Microsoft technology – your new device has to support WMA DRM.  In the end, I buy my music but it can’t go anywhere with me which is quite frustrating.  As we all know, this will become a bigger problem in the future as more and more devices support music like the Treo and new Blackberry Pearl.  As a consumer, I don’t necessarily want to be locked into one vendor forever and want to be able to easily port my songs between different devices.  There are forward thinking individuals in the industry like Michael Robertson (full disclosure, Michael is also the founder of portfolio company Sipphone) who wants to store your music in the cloud and allow you to access it from any device – wireless, Tivo, any PC, but at the end of the day the problem is that I still need to have iTunes if I want to play the music I bought from them.  This has to end!  So EMI is releasing a Norah Jones single through Yahoo Music with no DRM.  This is a baby step but a big one.  Maybe the fear of Apple’s dominance in the music industry is outweighing the industry’s concern for piracy? Either way, this is a welcome step for consumers.  I still may go back to the stone age and buy CDs and rip them myself as I want my music to be free, free of all DRM so I can use it how I want and on what device I want.

The future of television advertising (continued)

A little over 2 years ago, I wrote a post about the future of television advertising.  While I have always been bullish about broadband video advertising, I have never believed that the $60b television advertising industry would disappear overnight.  In fact, before the Internet dominates all advertising why couldn’t one bring the tools of the web to the television world making TV advertising more effective, targetable, and measurable – in effect changing it from a mass media to a more targeted dynamic one.  That is in effect what one of our portfolio companies, Visible World, has been working on during the last few years.  Visible World enables every ad to be as dynamic and diverse as the market and audience it captures as new data resources, analytics, tools, and platforms transform marketing.  With its simple-to-use tools, advertisers create, monitor, and deliver intelligent video spots that are edited automatically anywhere and any time they run to reflect the time, location, and context in which they appear.  All while delivering traditional reach within any media plan.  Think of what the web looked like in a static world versus today’s dynamically driven one where web pages are now assembled on the fly based on who you are and what you like.  Visible World is bringing the power of dynamic customization to television advertising.  It is especially nice when someone like Jonah Bloom, Executive Editor of Ad Age and a guy who really gets it, recognizes the power of our platform as evidenced by his AdAge column the other day.

Modifying TV spots
In an hour of omnipotence I’ve rebuilt and redistributed ads for some of the biggest companies in the country. Borrowing their existing creative I’ve modified a dozen commercials, turning each execution into hundreds of 30-second spots, each more targeted and relevant than the original. I’m confident that my work — if it were affecting the real world and not just Visible World’s demo system — would’ve multiplied the ROI on these ads by a geometric factor that would establish me as a genius within my organization, or at least ward off shareholder griping for another quarter….

Already six major marketers are using Visible World to manage and modify their ads in real-time. Another 12 are having dashboards built for them right now. This is a technology at a tipping point, and if you’re not prepared to take my word for it, maybe you can persuade the folks at Visible World to give you a turn as ruler of the ad world. It’s pretty heady stuff.

In short, I don’t believe that television advertising will go away but that it must be reinvented quickly and that advertisers must embrace rather than fear new technology.  And as we move into the future, rather than focus on broadband vs. television (digital vs. analog), I also see a world where both sides can work with each other to effectively deliver better results for advertisers.  As video becomes increasingly more fragmented and viewed on various systems and devices (television, VOD, broadband, gaming systems, cable, mobile, iPods), it will be imperative for advertisers to have an easy way to manage and optimize their video advertising campaigns wherever the audience is.  In addition, the more progressive advertisers will try to figure out how to marry online ad optimization with the offline world.  For example, let’s say you are an advertiser and your online ad for a specific mortgage product for ARMs is getting more clicks in a certain geography versus one for fixed rate mortgages.  Using that data from the Internet, wouldn’t it be great if you could change your television commercial so that the next airing has an updated offer for ARMs instead of for fixed rates?  That is just one example of how Visible World can bring the two worlds closer together, using data from your Internet campaigns to enhance and optimize your media spend on television.  And of course, without the Visible World technology, it would be hard to do this in a near real-time, automated, and cost-effective manner.  There are so many more ways that Visible World can make a television commercial more relevant and effective.  As Jonah goes on to say:

These are fairly obvious ways of using the technology, but as smart creatives start to get comfortable with this tool, we’re going to see way-more-ingenious applications. The ads could even become responsive to the programming. Think the Geico gecko opening his sales patter by commenting on the score in the game, perhaps — sort of entertainment being integrated into the ads, rather than the other way ’round.

Advertisers are starting to get it so keep an eye out for this idea of "advertising responsive to programming" during the next couple of weeks.

CBS going early

As I wrote early last year, my perspective is that one must go early, go late, or go home to make money in the venture market.  Given that we at Dawntreader have always been early, that is where we will continue to focus.  What is interesting is that on the heels of the new seed funding plan that Charles River Ventures recently announced, CBS just brought in an Allen & Co deal maker to head up its Interactive division with an eye on going early as well.  As Quincy Smith, new CBS head, said in a Reuters interview, "I’m looking for the next YouTube, only a year earlier, when they were 1/32nd of their size, without building out stuff that we would find duplicative like sales force. The core engineering team is always important."  Of course, what he is also saying is that he also does not want to pay exorbitant prices for companies that he could have found earlier. 

While CBS has certainly put some dollars and focus behind this "going early" effort, it is not lost on a number of media companies that I have met with in New York recently.  All of them are looking to invest and buy startups before they get too big.  As you all know, commoditization means it is extremely cheap to get a web business started and build an audience.  Since the inflection points for startups occur much sooner and on much less capital, missing that first round means you have to pay up to get involved.  Paying up means it significantly increases the bar for success and the risk of your investment or acquisition failing.  According to the PaidContent post today, "On the making deals side, it sounds like he’s in sync with Moonves, who has said the company won’t be making major digital acquisitions."  All of this is to say that Rupert Murdoch made a ballsy bet when he bought MySpace and paid the price that he did – no one else moved as quickly or as emphatically. 

In theory it sounds great – spread around a number of smaller bets instead of making a bet-the-farm acquisition like a Facebook. And  I am sure that CBS will see a ton of great entrepreneurs, but the question is whether or not CBS, a traditional media company, can identify the right companies and add significant value to drive them to success.  Early stage investing is not easy and neither is acquiring a couple of entrepreneurs working out of someone’s apartment.  Success for CBS will come down to execution as it will really be competing with technology companies like Google and Yahoo (take a look at a discussion we had at Kinnernet in April about this topic) who have a better pedigree and track record of buying pre-venture-backed companies and making them successful.  If you throw in the inevitable friction that will be created between the new and old media side of CBS, it will be interesting to see how this strategy evolves.  Regardless, more capital and more exit opportunities is great for entrepreneurs.

Google and YouTube – don’t mess with success

By now, everyone knows about the Google – YouTube deal, $1.65 billion for a leading online destination video site.   There is not much I can add, but I did find this comment interesting from Andrew Ross Sorkin’s NY Times article:

The idea of a deal had been broached a few days earlier. The setting was classic Silicon Valley start-up: a booth at Denny’s near YouTube’s headquarters in San Bruno, Calif. The Google executives threw out an offer of $1.6 billion and autonomy to continue running the business.

As I have written before, alot can happen when your competitors get acquired.  In most cases, your competition ends up spending too much time inwardly focused on integration and synergies and not enough time building their business.  While this problem is more prevalent in the enteprise software world given the nature of what it takes to make an acquisition succesful, (think Oracle-enterprise product integration is much harder and personnel and sales force training can take lots of time) it should not be the case in a lower friction web world.  As we can see, one of the smart things that Rupert Murdoch did was give MySpace autonomy to grow their business instead of stifling them with corporate culture.  I am not exactly sure how EBay has approached the Skype acquisition but I did hear that there is some imposition of EBay culture on Skype.  We all know that history repeats itself and one of the classes I remember from college was one on Literature and the British Empire.  One of the central theses of that class was that one of the reasons the British Empire failed is because they tried to impose their will or culture on others rather than have them slowly buy into it over time.  You can think of the cookie cutter approach – Britain conquers country, Britain installs own government system, Britain installs its own President, and eventually the conquered country revolts. This is what happens many times in acquisitions. What is briliant about Google’s play besides the attractive price is that it is not messing with YouTube’s success, it is giving the YouTube team the autonomy to keep building its business.

UPDATE: What I also forgot to mention is that one of the most important aspects of maintaining autonomy means maintaining product autonomy.  The last thing you want to do is piss off customers and destroy value.  Even small changes in the UI can make a huge difference when it comes to customer satisfaction. 

iPod sucks

I decided to go for a nice run today in the 30 degree weather to get a little mental relaxation.  I was debating whether or not to bring my ipod mini and checked to see the battery life which showed about 3/4 full.  So I was in the middle of my run charging up a hill when my ipod just dies out.  I have to tell you that Apple has done a nice job with the iPod making it easy and user-friendly for everyone but the battery and hardware problems just bother me.  In our family, we have gone through 2 other iPods where the battery just dies out after a year, conveniently after the warranty is over.  If you want Apple to replace the battery it costs you another $59 (used to be $99 but it seems Apple has gotten a little smarter about not pissing off its customers) or if you want to do it yourself, you can go to places like Sonnet and buy a new battery for $29.95 which is what I am going to do now.  Another iPod generated significant feedback and did not play after about 15 months to which I would have had to send it to Apple and get charged $250 for a repair fee.  Why would I pay $249 for an ipod repair or $199 for an iPod mini repair if I can get a new one for $199?  All I have to say is that Apple better keep developing new products because it seems to me that one of Apple’s marketing strategies depends on customers upgrading to the new thing before they recognize or even care that their old ipod has a shelf life of 18 months.  I have to tell you I am starting to get tired of this!  With all of these problems on the hardware side, Apple is starting to lose my loyalty.  I am just waiting for someone, anyone to step up with a family of devices to rival the ipod with high quality as a number 1 priority!


Just the other day, I took a redeye back from Israel and bumped into a couple of Israeli VCs and entrepreneurs making their annual journey to CES.  I have to admit that I am a bit jealous but since I have a number of trips scheduled in the upcoming weeks, I decided to pass on the conference.  That being said, I have been lamenting with fellow VC blogger Jeff Nolan on how hard it is to get our entertainment gear to work.  I have been waiting to get my home theater system with HDTV for a few years and made the leap this past holiday season.  I have to admit that I am pretty proficient with computers and technology but even I got stumped with the process of installing and making it all work correctly and SIMPLY.  It is no wonder why so many high-tech vendors are focused on opportunities in the digital home because the dollars are huge (I spent way more money on my entertainment systems in one purchase than I did through accumulation of lots of computer gear over the years) and the complexity is high to make it work right. 

While in Israel, I also had the opportunity to discuss home networking and automation with a few bright individuals.  In order to get a fully automated home (like a Crestron) where you can control your audio visual, home network, computers, lighting, heating, air conditioning, etc., from any other room or even remotely, one can expect to shell out ridiculous amounts of money to make it happen.  These vendors typically sell proprietary and closed-end systems that require custom coding to make them work right.  Besides the cost and complexity, the other thing that bothers me about the digital home is that there are too many competing standards and not everyone’s product works together.  For example, Sony pretty much only works with Sony and so on and so forth.  DirecTV provides Tivos that do not network with other boxes while existing Tivo boxes can be networked.  This drives me nuts. As the value is clearly in the software that drives many of these boxes, electronics, and HVAC equipment, the battleground and control will be driven by who can help the consumer cheaply and simply integrate and manage all of their systems.  If there is an industry begging to be open sourced, standardized and commoditized, this is it. While it is in all the vendors’ interest to bring the economics down to reach a wider market, I just don’t expect to see enough cooperation from them to drop their proprietary standards to make this happen soon enough.