JayWeintraub.com - Internet Advertising Analysis and Growth Insights

Musings from Jay Weintraub, Customer Acquisition Strategist. Currently, Founder of Grow.co. Previously Founder of LeadsCon.

What Will Google Do Now?

MySpace and Google have always garnered their fare share of press, and the level of inherent interest has only increased upon the announced of their 39 month, almost one billion dollar deal to work together. While Google has money to throw around, and some of its ventures suggest they do so whimsically, Google would not enter such a sizeable, long term deal unless the company feels it must. And, as other articles pointed out, the Google / MySpace deal was not the only major partnership signed during this time frame. Google entered into an agreement with Associated Press only days before the MySpace announcement. Then, a day or two later, but still before MySpace, Google shared another impressive (sounding) arrangement, one with Viacom to distribute selected video content through Google’s AdSense Network. (We’ll have to save the implications of MySpace as a publisher for Viacom content for another time.)

For some, the Google / MySpace deal bails out MySpace; for me, the deal validates MySpace as a company and profiles pages as the newest evolution of digital communication. Whether Google’s products feel cohesive or even intentional is one thing, but their most necessary products try to play some role not just in organizing / making information searchable, but also during the exchange of information. For example, GMail and GTalk represent Google’s attempt at two of the most popular methods for people to communicate, and they are areas where Google has historically had limited presence. As far as information generation, an unimaginable amount comes from email and chat; it’s where people spend most of their time and as a result among the largest inventory sources for ads. Google needs that extra ad space.

Google invested into AOL because of its need for ad space, and the same holds true for Google’s investment in MySpace. But, the deal feels more symbolic than a means to secure AdSense and search inventory. It really feels like (and this was mentioned last week too) the passing of the guard. AOL had been where users congregated. Today, with 45 million members, MySpace trumps AOL and probably has just as many active users. In this sense, MySpace is AOL 2.0. It is the site that brings users online, that brings them together. (For Google, it’s get the users. For the rest of us, it’s figure out Google.)

One topic worth mentioning further that has a greater relevancy to our space is just what the MySpace / Google deal means in terms of monetization. Google mentioned in one of its interviews, and it’s a point echoed by the execs at MySpace, that by working more closely together the two companies can maximize pre-existing user activity.  By Google and MySpace working together Google makes sure they get the users and MySpace gets money. The deal terms all reference traffic numbers, but they don’t necessarily discuss how that traffic will guarantee revenue. I’m sure some back of the envelope figures could take the expected number of searches, ad impressions, search ad clicks, and price per click to arrive at some rough estimates. And, while I have no doubt that the volume will exist to meet the metrics, what I have less faith in the quality of traffic.

John DeMayo wrote a little while ago about Google moving to the fringe of behavioral marketing. As most know, Google’s ads helped define the notion of contextual advertising. Overture was in many ways the first to do paid contextual advertising, but it was Google that took the same principle of context and applied it to display advertising in scale. Google turned content into context by boiling down an article into keywords. For many sites, especially smaller niche sites and even sites such as news sites that had a lot of inventory across a wide range of topics, Google’s contextual ads performed far superior than the other options available. But, by definition, though, contextual ads need some context. And, one reason why GMail ads don’t make a lot of money and why email sites in general have such low eCPMs compared to other inventory is the lack of context.

Given that MySpace in many ways resembles the next evolution of email, it too lacks a lot of context. Users reveal a lot about themselves, provide copious amounts of information in their profiles, comments, and in the linking of their relationships, but none of that translates readily into context. If it did, then there would be no Google deal, because MySpace would have already monetized its content so well that it didn’t need to be rescued or validated by Google. So, while the deal presents a challenge to many companies that currently rely on MySpace inventory, it does not invalidate the need and opportunity for behavioral marketing. The question now is perhaps not if, but when, Google will start to leverage its immense user profile data and become a behavioral marketing company, not just a contextual marketing one. The sheer volume of MySpace traffic might force their hand into creating added relevance or alternatively accelerate alternate media formats. And if that happens, it could drastically change the way direct marketers use the engine – hopefully for the best, although history has yet to fall on our side.

August 19, 2006 in DMConfidential - Thoughts | Permalink | 0 Comments | TrackBack (0)

Direct Response In A Behavioral Marketing World

If Google is the king of search, then MySpace is the king of the impression. Analysts, journalists, and all other sorts of “ists” have for years closely tracked the percentage of queries that each of the major search engines receives, but with the advent of MySpace, the “ists” have started to treat the percentage of ad impressions by site as more than just a passing statistic. For MySpace, what was a 10% share of the ad impression market at the beginning of this year has jumped to a 17% share of the market, and it’s a trend that doesn’t look to slow.

The top sites online have always accounted for the majority of ad impressions, but just how many is almost mind-numbing. Assuming the Nielsen//NetRatings AdRelevance numbers reflect somewhat accurately the actual landscape, Yahoo Mail and Hotmail account for more than 45% of all ad impressions, with Yahoo owning a whopping 38% in May 2006 and Hotmail 8% during that same time period. MySpace during that month had a little more than 14%, but the landscape continued to shift again in June 2006 with MySpace up to 17% and Yahoo down almost three percentage points and Microsoft losing one.

MySpace’s growth and its impact on Yahoo and Hotmail among other sites tells only part of the story. The other part of the story deals with addressing the increased flak the social networking giant attracts as its share rises. This has nothing to do with its content and everything to do with revenue. Critics and living room referees everywhere keep calling MySpace an ad dud because of its incredible portions of remnant inventory that attract only low dollar CPMs. The missives come even with the company steadily increasing its ad revenue which several have pegged to hit $200 million this year.

Two hundred million is a nice chunk of change, and compared to its 200 or so employees even implies decent efficiency. It’s only because of the sites share of users and impressions that others feel it should do better. The question is, should it? I’m not so sure that it should. Like MySpace, Yahoo Mail also has a relatively low CPM, especially when compared to other places on Yahoo, and there is a reason that Yahoo Mail and MySpace rank numbers one and two. Both are communication destinations. It took me a while to realize this and someone smarter than I suggesting it, but I’ve bought in to the theory. MySpace has grown so much and has taken away share from Yahoo Mail because it improves upon how people communicate online. It’s not about social networking but interacting with your network.

Unfortunately for direct marketers though, aside from a select few incentivized promotion ones, MySpace inventory does not convert. And despite the abundance of mortgage and education offers running on Yahoo Mail, a company cannot simply put up one of those ads and have it work. The same is doubly true of MySpace, as its younger audience often means that you won’t find it adorned with LowerMyBills ads. So, for all its clout, the site remains in many ways off limits to most direct marketers. And, unfortunately, it doesn’t seem like that will change. In fact, many sites have got their 1999 going on and seek to woo the brand marketers.

Even Google with its latest landing page change seems to have sent a not so subtle “you’re expendable” message to direct marketers. As someone on Webmasterworld pointed out, Google has in many cases more demand than they do supply. Except for people in the space, nobody is really looking four pages deep just for the ads. And they too have potentially conflicting interests. They want the brand marketers, but they also want to see their own CPA advertisers do well. There is, however, some light at the end of the brand and run of network tunnel, behavioral marketing.

To date, talk of behavioral marketing has primarily focused on the brand marketers. Companies like Revenue Science have sophisticated tools for brand heavy web sites such as the Wall Street Journal that allows them to find high value users elsewhere on their site and show them a higher paying ad instead of a lower paying one. Helping sites make more from their own advertiser base is only one of the benefits of behavioral targeting. Another big advantage comes by helping add context to users as they visit non-relevant sites. Many of the larger behavioral targeting companies and networks with such targeting partake in this making sense of the web activity. They place tracking pixels across content sites so that they can show more relevant ads when they see a user on a less relevant site.

Direct response fits into the behavioral equation because by adding that layer of understanding prior to showing the ad, advertisers see increased conversion rates, and that is good news. Brand might be the low hanging fruit for behavioral marketing, but a company that can act as a platform for those in the direct marketing space could end up owning the tail of the big sites’ impressions, and with behavioral targeting added, direct marketers could stay competitive in many inventory situations. It will be a win-win as brand marketers will only buy so many impressions, and direct response marketers will look for new ways to reach the “remnant” as they no longer can afford to blanket the Internet by going direct to the big sites. Behavioral targeting and a behavioral targeting firm could end up being the Google for banners ads – being the marketplace and the gateway for users.

July 24, 2006 in DMConfidential - Thoughts | Permalink | 0 Comments | TrackBack (0)

Power Law Functions - Explaining “The Tail”

Tail talk is all the rage right now. Here is something I wrote last week on that subject, taking solice in my originally composing it prior to the mainstream barage.

It begins with this...

At some point last year, I realized just how little I knew about the Internet. I had lived in a world that dealt originally with email advertising in newsletters to registration paths. I grew up, if you will, in a time where search had yet to prove itself and the rest of us had our heads down trying to find a way to make a buck. We didn’t think about the next big thing, and spent little time trying to understand the changing landscape. Yet, the changing landscape is exactly what provided many of us an opportunity in the first place. It’s only natural that as the web changes again, a new type of opportunity exists. Chris Anderson, editor-in-chief of Wired Magazine, coined the phrase which describes among the leading, if not at the very least most talked about, type of opportunity in today’s changing landscape, The Long Tail.

By now, it’s almost expected that everyone know about the long tail, the term itself having almost become hackneyed. The reality is that not everyone does, just as I had no idea what tagging or even Flickr was not ago. Not being a statistician, economist, or formerly schooled in business, it took some digesting the concept. Now, I find myself using the notion of The Long Tail quite frequently. For those who have, no doubt, heard of this long tail mumbo jumbo and wanted to know more, only to be overwhelmed by the academic and industry information on the topic, these two articles are for you.

Like many people, I found myself heading (via Google incidentally) to Wikipedia, and in reading their summary of The Long Tail, another concept worth covering comes up first – the 80/20 rule, also known as the Pareto principle. Older and more widely used than The Long Tail, it has equal if not greater addictiveness. Once used, you will hold yourself back from finding examples of it in life and using it in work. In short the Pareto principle is an extrapolation of the finding by Italian economist Vilfredo Pareto that 80% of the income in Italy was earned by only 20% of the people. If you work at an ad network, just think of your clients; chances are a handful of the publishers drive the majority of the volume; similarly, the majority of revenue comes from a handful of advertisers.

The Pareto principle is known as a “power law” function for the shape of the graph and the unequal weighting of one side of the curve. Power law functions look like the right half of the bell shaped normal curve, but with an even steeper initial drop. Think of a plastic drawing aid that helps create quarter-circle images. (There is a nice looking example in Part 2.) Power law functions, especially the Pareto principle have increased in popularity as more and more systems seem to follow this type of distribution. There are books, seminars, you name it on how to apply the Pareto principle to your life.

What the Long Tail author Chris Anderson suggests is that technology has started to change the power law curves that define so many of life’s systems. In other words, no longer do many systems we thought followed the 80/20 rule have to. He gives the example of Robbie Vann-Adib, CEO of Ecast who asks "What percentage of the top 10,000 titles in any online media store (Netflix, iTunes, Amazon, or any other) will rent or sell at least once a month?" The right answer according Vann-Adib and the article is not what most would think, this is to say that it no longer has to fit within the 80/20 paradigm. As to how many will rent, it turns out almost 99% will. That demand fits across a wider spectrum than previously imagined talks to only one piece The Long Tail economics. The other major component comes when you combine the size of the 20, the non-hits (to use music speak), i.e. the tail. The sum of the tail can equal and exceed the sum of the head, the assumed threshold for worth. 

Creating and capturing the tail is big business. Take this example given by Mr. Anderson: The average Barnes & Noble carries 130,000 titles. Yet more than half of Amazon's book sales come from outside its top 130,000 titles. All of the sudden, the small guys mean something, and it’s only possible through technology. The top businesses online today all leverage the tail, be it Google and its aggregation of advertisers or eBay and its aggregation of products. In his mind, The Long Tail is about three things – 1. Making everything available, 2. Low prices, and 3. Helping consumers find information. In Part 2 of this week’s Digital Trends, we continue with the idea of The Long Tail and take a straightforward approach to its components and our take on how to identify such a system.

...

The follow-up piece will post shortly.

July 13, 2006 in DMConfidential - Thoughts | Permalink | 0 Comments | TrackBack (1)

Exitcution: The “150/100” Challenge, Part 2

Exitcution is all about how a company handles growth. Exitcution deals with not just how companies handle growth but whether they will continue to grow. It's part strategy and an even bigger part execution. With respect to those in the internet advertising space, exitcution revolves around an idea I first read about in The Tipping Point, the Rule of 150. Part 1 of this piece discusses in greater detail the Rule of 150, which in short specifies the maximum size of a group. Anything bigger and communication and cohesion can break down if not handled properly. In the internet advertising world, that Rule of 150 coincides with the $100 million revenue hurdle. When companies reach these benchmarks, the challenge of exitcution arises.

Here in Part 2, three graphs tell the story of exitcution. The first is the Static Scenario.

Exitcution_static_scenario_1
Figure 1.1 Static Scenario

The Static Scenario is what many of us fear. It begins with the rapid growth but ends in a flatline. It can happen for a variety of reason, especially when a company might have too great an exposure to a channel with volatility, e.g. email. A company could have had a strong presence in email but have been hurt in phases two and three by legislation and the filters. Additionally, the latter stages involve operating in a more mature market where it’s harder to find pockets of undermonetized inventory. Very likely too, in addition to product exposure / weakness, are operational issues. Companies in this state grew by the seat of their pants, but didn’t manage that growth internally. They did not develop a hierarchical business; theirs is most likely flat with one, maybe two decision makers, making them more akin to a hunting and gathering society, i.e. they hit their breaking point.

Exitcution_static_scenario_2
Figure 1.2 The Decline Scenario

If the Static Scenario is what many fear, the Decline Scenario might as well be a heart attack. Yet, it is a very real possibility for some. Without proper strategy, reinvestment, and a focus on building the metaphorical railroad tracks well in advance of the train needing them, a company can find it lacking the ability to keep customers and stay competitive. Especially in our space, which now, more than ever, requires a strong technology expertise.  Companies that choose not to develop that expertise can find themselves quickly outdated. Going back to the railroad analogy; so many companies during the boom were like trains going downhill trying to lay the tracks at the same time. As they hit the bottom of the hill and the frantic pace slowed, many should have started to scout ahead, to look for potential ravines and lay alternate routes. Those that coasted are those that we see in the Decline Scenario.

Exitcution_growth_scenario_3
Figure 1.3 The Growth Scenario

Those companies that have the proper balance of strategy and execution can ride the momentum, still, and carry that into a new phase of high growth. For many companies that succeeded by not having a strategy, just executing, doing this can present a daunting task. Doing it right though, means they will control their destiny and put themselves into a position to start locking out others and consolidating the market. In my opinion, that period of exitcution defines whether they make it or not. The companies that do, have not just focused on scalable technology to take advantage of the market; they have built their internal infrastructure – the process and workflow – to be equally scalable.

Some companies that flat line and some that decline will immerge, transforming themselves into growth success stories, while some growth companies will err and join those in the flat line or decline sector. Right now, we have some huge success stories and companies that show the importance of understanding The Rule of 150. Those that do, might become the next Gore Associates - a very profitable, growing enterprise where coincidentally people want to work and turnover occurs one-third less often. For those facing the 150/100, it's all about exitcution.

July 06, 2006 in DMConfidential - Thoughts | Permalink | 0 Comments | TrackBack (0)

Exitcution: The “150/100” Challenge, Part 1

In The Tipping Point, Malcolm Gladwell writes, “There is a concept in cognitive psychology called the channel capacity, which refers to the amount of space in our brain for certain kinds of information.” Channel capacity helps explain why so much of what we can remember falls in between six and fifteen units. There is a reason, for example, why phone numbers started out with seven digits. It turns out that studies showed people had a difficult time remembering accurately more than that without making mistakes. As Mr. Gladwell writes, “Perhaps the most interesting natural limit, however, is what might be called our social channel capacity.”

Gladwell quotes British anthropologist Robin Dunbar in that “The figure of 150 seems to represent the maximum number of individuals with whom we can have a genuinely social relationship, the kind of relationship that goes with knowing who they are and how they relate to us…it’s the number of people you would not feel embarrassed about joining uninvited for a drink if you happened to bump into them in a bar.” The Rule of 150 holds true in everything from hunter gatherer societies to armed forces fighting units. The Rule of 150 even applies to businesses, the non-military “company” as they too are a group of individuals. The Rule of 150 matters because once groups get beyond that size, people start losing the natural closeness and divisions start to occur. It matters to us because many in our space have started to come up against that imaginary barrier, and success or failure will depend on their ability to navigate through this.

The Tipping Point highlights one company that has navigated through the issue of 150, the Gore Associates, makers of Gore-Tex waterproof fabric and Glide floss to name a few. They have many more than 150 people, but behave like a small entrepreneurial start-up, and they succeed, including being consistently named one of the top companies in America for which to work. Founder, Wilbert “Bill” Gore once said, “We found again and again that things get clumsy at a hundred and fifty.” Each of their plants contains just enough space to house 150 people, and other plants can stand just a parking lot away. At Gore, when one group grows too large, it splits. It's a company that has figured out how to manage growth and continue to scale. Those in our space are not immune, and the 150/100 refers to the plateau that many seem to hit, how to grow past beyond the 150 person range and/or the 100 million in revenue mark.

The Internet advertising arena contains many companies that share a similar history. Most began during the downturn when users still came online in masses even though so many companies began to fall by the wayside, all of which equaled a rather fertile environment. Those who took this chance included the one or two co-founders who ultimately began some of today’s top performance advertising firms with little to no funding, just a belief that money existed for those willing to earn it. And judging by the results, they were right about the opportunity, and the money.

These once scrappy companies out to make a buck, now find themselves facing an even more challenging face, maturity. Besides their origin, another thing seems to define them. Each has grown over the past four to six years to, as mentioned above, roughly 150 people and has crossed the $100 million mark in revenues. And each, after heavy growth, now finds themselves facing the hardest challenge to date, finding a way to sustain the growth, i.e. finding a way to overcome the 150/100 hurdle.

I show in Part 2 three diagrams, each representing a potential scenario for those facing the 150/100.

  • The Static Scenario
  • The Decline Scenario
  • The Growth Scenario

Each of the three scenarios has four sections

Section 1 – Growth. This is the period that happened during the first two to three years where companies increased revenues and cash flow by two plus times year over year.
Section 2 – Normalization. Here growth still outpaces the industry as a whole but it slows from the sometimes 1000% growth of periods past.
Sections 3 and 4 – Exitcution. This is where companies will either make it or they won’t. It is all about execution. Companies exit their first phase of high grown and will either flat line, decrease, or enter their next phase of growth.

Continue to Part 2 of “Exitcution” for the illustrations and conclusion.

July 06, 2006 in DMConfidential - Thoughts | Permalink | 0 Comments | TrackBack (0)

"What If" Mergers

Summer seems to bring with it more than just warmer weather. It also seems to bring with it increased activity in mergers and acquisitions. This time last year, we saw within a sixty day window deals that included Valueclick buying Webclients, MTV buying Neopets, Scripps' purchase of Shopzilla, eBay dong the same with Shopping.com, Experian's acquiring LowerMyBills, and NewsCorp's famed acquisition of MySpace. This summer has yet to match the frenzy of last year, but has had several worthy deals, ones that signify the maturity of the market. They happened one after the after, and we covered the first, 180 Solutions' purchase of Hotbar, in our June 8th issue and the other, the merger of Vendare and Netblue, last week. This week we cover another big merger, but unlike the newly formed Zango and VendareNetblue, this one is a work of fiction.

If I had my wish, I'd raise $500 to $750 million and acquire/merge three to four companies to create a multi-billon dollar powerhouse that I feel would become the largest player in the performance advertising arena outside of Google and Yahoo. The companies that I like and would want to fit together most likely wouldn't end up together on their own. Each has a vision that it must execute and couldn't build its business upon the hopes of a merger. That doesn't stop someone like me from saying "What If?" The one described here does not come from my one-half to three-quarter billion dollar wish list. It stems from thinking about VendareNetblue and why if two others were to come together it might present a good opportunity for a future exit for their stakeholders.

The performance-based Internet advertising space has spawned, quite amazingly, more than a few self funded companies with several hundred million dollar valuations. Two of those success stories have taken in considerable funding, almost $110 million between them, and are household names among those who have anything to do with CPA advertising. The two companies in this particular "what if" scenario both got their start in email, with one remaining 100% focused on the channel and the other diversifying to occupy a spot in between a Commission Junction and an Advertising.com. What makes the potential merger of the two exciting is that separately they stand a chance, together they could tell a story that would in my opinion interest institutional investors more. And, with their level of funding, I can only assume an exit remains top of mind for some shareholders.

The two companies are none other than AzoogleAds and Datran. I first heard of the former when working at Advertising.com and talking to email publishers. They spoke of this company in Canada that they used as a list host. That company had its own list and made its technology available to others. Having amassed this body of publishers, they made the leap to network, leveraging the collective inventory of all rather than just their own. Their relentless focus on the publisher helped them to become the largest email ad network in less than a year. By adapting to market needs, they managed to grow even when email declined. Today, their offers make up a decent percentage of revenue of several of the best arbitragers whether that be in search or display. They do what others can't or won't – they act fast, push for the best rates from advertisers, and act as a partner rather than pure network, doing almost whatever it takes to keep their top performers still performing. Some of the stories I have heard are amazing, and Azoogle does this despite having investors.

Started not long after Azoogle, Datran got its start the old fashioned way, they bought email addresses through co-registration, built up a large list, and mailed offers to the list. Fast forward three and a half years, and today Datran runs the largest email list management company in existence and sends more email than perhaps any other company. They did well enough for VantagePoint, who had a victory with Intermix Media, to invest $60 million in the company. It's an incredible story, especially if, like me, you remember meeting the former Traffix guys back when they fit to a tee the stereotype of an "emailer." And, that's not necessarily a compliment.

Datran realized what many did, that nothing mattered more than delivery, and if a company could get into the inbox, it would make money. Having decided this, they had a decision to make with respect to growth. A company could only get so big with its own list. At some point, it would have to start dealing with others' lists. They could go down the typical service provider path, much like an SEM and earn a slim margin by letting others compose messages and hit send, or they could move up the value chain, and thus the margin chain, and control as much of what gets sent to not just their list but others' lists. They opted for the latter, and, borrowing a phrase from a one of the more impressive entrepreneurs I've met, Datran decided to become a principal rather than an agent. They may have just purchased a list host, but the core company acts very different than one.

The VantagePoint funded Datran grew as the incentive promotion market grew. Incentive promotion companies such as Gratis Internet, TheUseful, WebClients, the now-defunct MetaReward, and Netblue, generated as part of their operations millions of email addresses. As I wrote in one of my earliest pieces, mailing to them in a post CAN-SPAM, post spam filter world did not equal guaranteed money. Enter Datran who focused on the two essential ingredients in the modern email landscape – ISP relationships and technology. Datran had a relentless effort on both, making sure that email got delivered to the inbox better than any other commercial mailer, and, by creating value with their core technology that learns what users respond to, and sending them offers based on this learning. All told, they could take healthy margins because they still made more than individuals could do on their own. The company since expanded to handle more mainstream email lists from some very impressive blue-chip companies, playing more the list host than list monetizer. That makes sense, as an upmarket push allows them to leverage their assets, gain increased credibility, and not have to rely on the declining incentive space for money.

What makes Azoogle and Datran interesting to me is that I believe each will find challenges as they look to participate in some additional capital event, e.g. a sale or IPO. With Azoogle, while they do host many of the offers, they have an incredible sales force with incredible relationships, but they do not have the same strength technologically. I could see investors wondering whether they can sustain the rapid growth and build a more defensible position. As for Datran, they have a very buttoned up story, but they are in email, and as a colleague mentioned, it's hard to see the big fund guys getting excited about email. The company does have an affiliate arm that acts much like eMarketMakers did for Vendare, to help gain additional exposure for offers running on their lists and as a means to bring in new offers, but they don't have the scale yet. Combine the two and you have a company that left email to become a network, joining a company that owns a delivery channel but doesn't have a network. Together, I could see them going public and putting up the numbers that would have investors interested and the rest of us envious.

June 29, 2006 in DMConfidential - Thoughts | Permalink | 0 Comments | TrackBack (0)

Google Goes CPA

Earlier this week, I had the opportunity to present, as part of a panel at the snoozefest which was DM Days, my thoughts on the changing search landscape. My piece focused on CPA search, a topic that fascinates me in no small part due to the arbitrage activity taking place on the engines whether opportunistically or by necessity. Just how much of this activity takes place is hard to say, but it would not be unreasonable to say that at least 25% of all money spent on search comes from sophisticated marketers looking for an action - be it a sale, a lead, a click on their sponsored link. Ebay and Shopping.com are not just owned by eBay but perhaps the two biggest advertisers on search. Not only do they spend more than ten million dollars monthly combined, they count among those looking to hit a cost per action, bidding on a CPC but getting paid on some other metric.

EBay is but one piece in the CPA search landscape. Those in mortgage and online education spend at least $20 million monthly, and when you factor in other verticals such as automotive, ringtones, dating, travel, VOIP, and credit cards, that number should top $200 million monthly. A wide range of companies benefit / contribute to this number, not the least of which are ad networks such as Azoogle and affiliate networks such as ValueClick's Commission Junction unit, a company whose main rival sold for $425 million in September 2005. These companies though don't drive the vast majority of the traffic; their affiliates do.

While CPA networks and affiliate networks both have affiliates and affiliates that use search, Azoogle (excluding their MPORT unit) and CJ differ vastly. The CPA networks, e.g. Azoogle, focus on fewer offers and, in many respects, operate in a more competitive landscape. Their market acts more like a commodity, with their offers rarely being truly exclusive. As such they must fight for price and do their best to differentiate through better payment terms and applying internal resources to help out top affiliates. CPA networks disclose the advertiser but maintain the relationship with the affiliate. A company such as CJ on the other hand pitches itself as a technology solution provider and marketplace creator. They offer the interface so that a company can easily start to accept affiliates and manage them without building any technology on their own. They play a limited role in matching up affiliates to merchants, and in most cases require exclusivity from merchants, which means that an affiliate will not find it elsewhere.

An affiliate network does not create custom brands, e.g. a Wendy's that is really run by McDonalds, or guarantee that offers will perform. They let the merchant handle this. It means that the merchants must have an understanding of the landscape if they are to compete and gain affiliate's volume. A CPA network will only take on offers it thinks can work; thus, on the whole, they service fewer clients, but the affiliates will have a better success rate as a percentage of the whole. It's one reason why a company such as Azoogle does more revenue than ValueClick, and both companies success with CPA and search helps explain the interest by others in getting a piece of this ecosystem. Some of the entrants include a startup search engine, Snap.com, ad network Revenue.net's CPA Search Network, search engine marketing firm Efficient Frontier, and numerous arbitragers who have built technology meant not for others to use but for them to become better affiliates.

All of these companies – from affiliates to networks – have one thing in common, Google. Each relies on the search engine's traffic for a good piece of their revenue. This has left many in the Internet advertising space wondering when the search company would switch to accepting CPA ads instead of CPC. The big news is that they have, but in typical Google fashion they have done so in a blue ocean way, i.e., they didn't do the obvious. My thanks to Beth Kirsch for making me aware of the entrance by Google into CPA and for pointing me to fellow ReveNews blogger Jeff Doak, Scott Jangro, and the one who first broke the story in addition to posting a copy of the letter sent by Google, David Jackson's impressive Seeking Alpha.

Many pieces have already been written, and many more will be written. What I find so interesting about Google's Content Referral Network (CPA Network) is, as alluded to earlier, that they didn't begin with the finished product. As a marketer, I would want to buy Google.com search on a CPA basis. That's not what Google unveiled. They unveiled a content strategy, a means for web site publishers to promote CPA ads on their site in addition to the existing contextual ads which pay on a CPC basis. This benefits the select marketers as they will receive conversions at a fixed price. It will benefit Google as they will have a chance to gain increased learnings about the performance of offers across various channels. (As many know the search engine already has perhaps the largest advertiser base and has performance tracking placed on a large number of them.)

Only time will tell Google's true intention. Is the Content Referral Network a sandbox for accepting CPA on their search inventory? Is CRN a future replacement for AdSense, for content which works for some but has serious quality / click fraud issues? Is it a means to compete with eBay's new network by having a future version showing optimized, merchant driven ads? Perhaps this new network has something to do with the new Google payment system so that the company can own the whole process, from click to conversion to payment? Maybe Google doesn't know, and they simply wanted a way to test the business in much the way they started to test video by showing not pre-roll / post-roll as might be expected but simply video ads on sites. By rolling out what seems like an affiliate network they play with other people's inventory, the online equivalent to other people's money.

I don't think Google's affiliate network is meant to hurt arbitragers (they'll just turn around and take Google merchants and bid on Google) or take that activity in-house. Google could probably make more money doing CPA Search in-house (controlling where offers show based on a CPA goal), but that gets away from their core competency, and makes them too liable for placement. Additionally, I think that they make more letting others bid inefficiently, i.e. paying a higher effective CPA than they would if they could bid on a CPA basis the way they do now on a CPC one. Nor will Google's Content Referral Network hurt affiliate networks right away. Google operates famously opaquely, and affiliate marketing as it is practiced today involves the exact opposite. That doesn't mean CJ/LinkShare, et. al. shouldn't be worried. Google is, according to them, a technology company, and that is the exact role of the true affiliate network. Even though they will start with weekly stats via email (huh?), don't think they can't build leading interfaces. Whatever it is, and however rudimentary it appears, with thousands of employees, chances are this is but one tiny step in a much bigger plan. More than anything, Google continues to solidify their position as a force that cannot be ignored in online advertising.

June 23, 2006 in DMConfidential - Thoughts | Permalink | 0 Comments | TrackBack (1)

VendareNetblue -- Part 2 -- History of Netblue

In piece on VendareNetblue, I covered the history of Vendare, a company that went from tens of millions of dollars annually to breaking one-hundred million dollars four years later. The company grew through smart acquisitions and in large part thanks to a solid technologist and do whatever it takes, operations plus creativity executives. Their story continues with funding, a change in management, and an unanticipated liquidation in top talent. In that respect, the Vendare Media story doesn’t differ too much from that of its new partner, Netblue. Here, in Part 2 of VendareNetblue we run down the history of what for the most part counts as an equally phenomenal story of growth and success during economically unfavorable times.

Unlike Vendare, Netblue did not begin life as a venture funded company. It began more or less due to the brute force and determination of its founder, Ken Chan, who by 24 had already shown a knack for taking something small and turning it into something big. He used the same gift for making money to raise money, starting Everyone.net, an outsourced email provider, a company that made it possible for sites with an audience to offer email to their users without having to build the infrastructure. As growth slowed due to the market, it made sense for him to find his next vehicle.

That next vehicle for growth had, at its roots, an unexpected source of inspiration…condoms, free condoms to be precise. The founders of what is now FreePay / Gratis Internet created the wacky incentive site that gave away free condoms in exchange for participation in various offers. Ken saw an opportunity to market something other than condoms and other than cash which Netflip offered. Netflip, though, had, at this time in late 2000, started to build MetaReward, mainly to help companies like Gratis have access to offers and tracking. This meant Ken didn’t need to build technology or a sales force to get started.

Netblue, which at that time went by YFDirect, decided to promote DVDs. The initial idea consisted of offering a free* Girls Gone Wild DVD, but after speaking to Adteractive, who like MetaReward had begun focusing on a means to supply incentive sites with offers, the focus shifted towards more main stream titles. In addition to Adteractive, Ken also spoke to Scott Rewick, the VP of Business Development at Netflip and man that drove the growth of their MetaReward platform. Scott, who knew today’s incentive powerhouses before they turned pro, reiterated the advice given to Ken from Adteractive regarding promoting more advertiser friendly content. Their initial meeting left with Ken promising to become Scott’s largest affiliate within six months, never mind that he didn’t really have any business.

Six months after Ken and Scott met, Ken came close to his word and Scott decided to join Ken and YFDirect. Working alongside three others plus Ken out of his condo, Scott set about to help YFDirect capture more distribution. The company had begun primarily through Commission Junction, offering to pay affiliates $15 per shipped DVD. It seemed fair, but given that a decent amount of people who qualify for the DVD do not go through with redemption, it meant YFDirect would make more than $4 profit. The first major breakthrough came when the company started, not too dissimilar from Vendare, to take a more user acquisition approach, focusing on email address first. Historically, the company took visitors to the DVD selection page. This change had them take users to an email submit page showcasing one DVD and then to the offers page for redemption.

One of their first major increases in volume came through a deal they had with Adteractive. I remember running across this in 2002 when I couldn’t understand how a direct deal would pay less than running the offer through Adteractive. The two companies, it turned out, were early adopters of reciprocity. Adteractive would take no margin on the YFDirect offers in exchange for exclusivity on the backend. This meant that if a user clicked on an ad supplied to a publisher by Adteractive, when they reached the page to complete an offer in order to get their DVD, those backend offers contained only Adteractve’s.

Their deal with Adteractive allowed them to focus more heavily on the front-end, building more compelling offers and on modeling out fulfillment. People semi-joke about the breakage in rebate businesses, and the incentive business mirrors the offline rebate redemption closely. A healthy percentage of people that could claim the rebate simply don’t. They have the initial enthusiasm but not the follow through. The team and YFDirect explored this behavior to match what certain offline redemption fulfillment houses saw with respect to the metrics.

Having grown in 2001 and early 2002 through email distribution, YFDirect turned their attention to the web. They willingly stepped in to fill the inventory void left by the departure of the brand advertisers. They came to Advertising.com during this time, and worked their way up to becoming one of its largest clients, all while paying on a CPA basis. The DVD business worked, but YFDirect began branching out and launched YourGiftCards.com in addition to YourFreeDVDs. The gift cards resonated with consumers, prior to being almost beaten to death by the other marketers.

By the end of 2002, the company earned more from gift cards than it did from DVD marketing. A strategy started to come together especially after they figured out how to go more upscale in the value of the product, beginning with a DVD player. Apex, the famous importer of inexpensive DVD players had the perfect product for YFDirect to figure out the model. They did it by focusing on a single high bounty vertical, credit card offers, for fulfillment. By this time, some of the other powerhouses were charging hard, including TheUseful. Feeling the competition in the email and ad network space, YFDirect set their sites on something others did not, cracking the MSN nut.

YFDirect spent quite a bit of money learning how to properly arbitrage CPM display ad buys, but when they did, they took advantage and grew rapidly. From end of year 2003 to end of year 2005, they had tripled revenue. Similar to Vendare though, the company made a change towards the end of 2004, which had a major impact. They decided to take in $20 million in funding from Oak Investment Partners. It seemed a reasonable choice given the level of interest and that the company didn’t really need the money. That event though fundamentally altered the DNA of the company.

Before the investment, YFDirect, now Netblue, had a heavy focus on product, on staying competitive, and growing the arbitrage business. After, it focused more internally on building out its management team and putting in place process that might seem attractive to an acquirer or in a public offering. The changes did not, though, enable quick decisive movement, a hallmark of the company’s growth. It became a different company than before, and in another parallel to Vendare, two of the senior contributors of the growth, departed. Again, like Vendare, their departure left a wake which included a number of their talent to leave as well.

While of different roots, Vendare and Netblue have an overlap in their story. They both scaled well in difficult times, and realized that growth in large part due to several key players that acted like the glue for the much larger organization. Each had a rhythm that became disrupted around the same time. The disruption came upon inserting, perhaps too early, the desire for a mature process when the businesses had not reached maturity. Like dealing with a teenager, these still young companies could not adjust and adopt the parental guidance, ultimately rebelling. The rebellion though left each in need of the others’ strength. In Netblue, Vendare finds a solid technological infrastructure and senior leadership to fill the gaps and Netblue a bigger sandbox in which to play. Many of the superstars have left, but in a way the larger, skeleton business makes the right environment for the more standard, dare I say mature, leadership.

June 21, 2006 in DMConfidential - Thoughts | Permalink | 0 Comments | TrackBack (0)

VendareNetblue -- Part 1 -- History of Vendare

Almost reminiscent of movie releases where studios carefully plan out their launch dates to maximize their exposure, you can almost imagine the behind the scenes dialogue of this week’s Internet studio blockbuster. Last week, news came out of 180 Solutions’ merger with Hotbar. This week two veterans of the performance marketing space announced their merger, a deal that feels more like the indie movie of the two even though VendareNetblue dwarfs the newly enlarged Zango. For this week’s Digital Trends, we take a look at the history of the two companies that find themselves newly joined. Part 1, focuses on the first half of the new company, the idealab backed Vendare Media.

Hard to believe that the company that brought the Internet world GoTo (Overture) and at one point thought about sending people to the moon, also brought the world Jackpot.com. Started as Fifty-Fifty, Jackpot began at the tail end of when eyeballs mattered most in online advertising, focusing less on the free lotto approach and more on providing a platform for playing games, namely the million dollar slot machine and solitaire. Having come on board late in the CPM game, they barely hit their stride before the rug was pulled out from under them in 2001 along with so many others.

Jackpot had one asset that ended up becoming the sustenance for the company and basis for much of the company’s future business, an email list. The company smartly realized the value and profitability of email and switched their business to acquiring and monetizing users, not simply growing the number of people who played at the site. Helping them with this was Brett Cravatt, former Stanford Volleyball player not to mention JD/MBA candidate of the same university. Jackpot acquired his SportSkill.com business bringing on board partner and classmate Thomas Bruck, who would become a well recognized face of the Internet advertising industry.

Then CEO Keith Cohn, who ran the company from early on in the Jackpot days until early 2006 had connections within Fox, which made the acquisition of SportSkill appealing; Jackpot could connect the platform with the brand and take a piece of the burgeoning world of subscription revenue. The vision didn’t play out into reality as Fox did not actively promote their SportSkill powered fantasy sport site. That left Jackpot with a great brand association but the full burden of scaling out the audience. To make any money it had to scale, since they paid Fox a flat fee for licensing. After doing their best, they closed down the SportSkill division to focus on the growth, email.

For a company that had little money in the bank, Vendare managed to grow through acquisition better than many more capable companies could have. This included the 2002 acquisition of Blink.com, a money losing business that had some cash in the bank but no way to stop from burning through it. They parlayed this into several future acquisitions including two well known ones – Flipside and Traffic Market Place. Both took place in 2003, the former including three brands – online gaming sites Uproar.com and VirtualVegas.com along with cash gaming site iWin.com which Jackpot sold off in a separate deal.

At some point during its growth Jackpot changed its name to the Vendare Group, a move that made sense as it acquired more and disparate businesses, one of which was the aforementioned Traffic Market Place. In an interesting twist, the company purchased both TMP and Flipside from Vivendi Universal, who in 2003 had a fire sale on many of its Internet assets. Vendare very cleverly managed to purchase TMP which gave them a foothold into an area that they didn’t currently have, display media. At that time, the company did have a growing presence in internally owned email through its Jackpot and Uproar businesses.

Thomas Bruck and Brett Cravatt expanded on the internal email success using some of the clients to launch eMarketMakers – the company’s CPA, and to some extent CPC network. Much like the earlier days of Azoogle, the internal traffic gave them a good test bed and good rates with which to attack the outside market. Success came down to simply scaling sales more or less, i.e., finding offers and publishers. Traffic Market Place, the display ad network on the other hard, required a solid technology infrastructure to make it work, and again, with Brett playing a role, Vendare saw a great ramp up in sales and ended up making its money back on the deal quite quickly.

As 2003 turned into 2004, Vendare was turning into a sizeable force in the online space. They continued their growth in email and display, but the kink in the armor started to appear later in the year. The email businesses started to take a beating as delivery became tougher. Higher margin dollars became replaced by higher top-line but lower bottom line ones, and the company made, what in hindsight might be some operational mistakes. It moved its offices from Sherman Oaks to El Segundo (which won’t mean much to non-SoCal I-405 fearing people), due to predicted size constraints of the existing office space. This left 90% of the staff with a less desirable commute and materially altered the culture. It did have space, though, so the company began beefing up its hiring considerably, most likely as a result of the late stage investment into it by Insight Venture Partners.

Just before Vendare took in the funding but after it moved, they purchased fellow idealab company New.Net. Itself a fascinating story, not the least of which because the company transitioned from being an alternate domain name extension company into a domain portfolio owner, Vendare knew of them in many ways by chance. The two occupied space together in their old (idealab) building. The fit made sense for Vendare as it gave them a great source on inventory for their offers, and in theory it meant Vendare could help distribute the New.net toolbar. Vendare seems to have received the better end of that deal, though.

At a time when things should have continued strong, they didn’t. Vendare had a tough 2005, despite the solid top-line growth. Three rounds of layoffs took place to right the expenses of overstaffing. Certain members of management lost sight of the day to day focusing on a potential exist, and morale hit a new low, but there were some bright spots including two new business lines – list management and lead generation which included the well-known Vonage deal. Unfortunately, the two weren’t enough even with the name change to Vendare Media from the Vendare Group.

The other units had hit a cap and even saw some decline which directly or indirectly led to this year’s biggest news, the early February departure of long-time CEO Keith Cohn. Not long after Keith left, and with new, very different leadership in place, Vendare saw their superstar Brett Cravatt resign. His departure began a sizable exodus of their core talent, much to the benefit of certain startups. Potentially needing something to happen, the two largest corporate shareholders – idealab and Insight approved the merger with star of Part 2, Netblue. (Part 2 on DMConfidential.com. I will post it here shortly.)

June 16, 2006 in DMConfidential - Thoughts | Permalink | 0 Comments | TrackBack (1)

The Funding of Adware

This piece comes from my writing for DMConfidential.com. Read me and other industry guys in the weekly newsletter. (Sign-up is on the left-hand side and you will receive only the newsletter, no ads except for industry conferences.) In response to the below, an anonymous commentor wrote "Those companies aren't worth the bandwidth you used to write about them. Maybe all the higher ups can print out this article to read in prison.."

Begin article...

In several past pieces I have often compared Adware to Email, two highly lucrative areas of Internet marketing whose unfettered growth ultimately led it to the brink of collapse. Similar to the complaints against email marketing, users started receiving marketing messages that weren’t necessarily illegal, but in many cases they were “uninvited.” As the proliferation of lawsuits and complaints filled the popular press and fueled countless millions of anti-spyware purchases, it’s easy to forget the amount of money that investors poured into adware companies. This article takes a look down investment memory lane into four of the largest adware purveyors – Claria, 180Solutions, WhenU, and Hotbar.

The trip begins with one of the more recent announcements, this one taking place in July 6, 2005 when (no pun intended) WhenU announced that it had completed a round of $35 million, $15 million in funding from Trident Capital plus $20M in funding secured earlier that year from ABS Capital Partners. By that time, WhenU had committed itself to becoming a model for ethical marketing in the adware space, something that would sound like an oxymoron to many. Nine months earlier the company announced what seems like a major win, they brought in Bill Day, co-founder and former head of About.com to lead the business. They stopped purchasing ActiveX, weeded out risky distribution channels, posted a toll-free number on ads, and greatly increased notification to users. They lost a reported 50% of users during the cleanup, but those that remained, still make money and the war chest gives the company the opportunity to figure out what it wants to do when it grows up.

Another company that has experienced both ends of the distribution spectrum in terms of notification to users is Claria. They began in 1998, about a year earlier than most other adware companies, and were founded by Denis Coleman of Symantec. His incredible connections no doubt helped when the company went to raise money after seeing the great growth upon launch of their eWallet product. In January 2000 Claria did just that, raising $11.7 million in their first non-angel round of financing with contributions that included money from the founders of Intuit and Sun. Later that year, in July, the company announced another round of financing, this one totaling $44 million. That put the total raised to approximately $59 million, although later reports suggested the total number tops $80 million. Fast forward six years, and Claria announced that they had again taken in money. In a double whammy, they not only told of the $40 million they raised but also declared their exit from the adware business by looking to sell their 40-plus million member user base.

It’s hard to top keep up with Claria in terms of raising money, but one of the companies that we focus on in the other adware related piece didn’t do so badly with respect to capital. In February 2001 about seven months after Claria completed their fourth round, Hotbar announced that it raised $11 million, an impressive feat considering that this was during the dot-com collapse. The company had one prior round that took place in November 1999 in which they raised $3 million. More interesting than the amount of their initial funding was from whom; the list included DaimlerChrysler, Deutsche Telekom, and Lockheed Martin Corp. Hotbar added to their second round of financing with a third round that wrapped up in April 2001, just two months after raising $11 million, taking on an additional $3.5 million.

The second company profiled in the previous post is 180Solutions. Like WhenU, Claria, and Hotbar, they too took in funding. Their only round occurred five years into operations in March 2004, when they disclosed that they took in a whopping $40 million, a pretty amazing amount considering they had 60 employees at the time. Then again, Spectrum Equity Investments, who provided the capital, had $3 billion in management, so one can only surmise that the amount fell into their normal range. Upon making public the funding, 180Solutions, which was reportedly near bankruptcy during the Internet downturn, said that it planned to use the money to hire as many 150 people, launch two new brands, all while on pace for $50 million in sales for 2004. At an estimated $20 million in earnings, they were practically printing money; the funding was merely icing on a really sweet cake.

The past two years no doubt hearkens back to 1998 and 1999. We’re in a frothy market today. While no one is really asking when it began, I’m going to say right when 180Solutions, a maker of adware and attractor of complaints left and right, took in an unbelievable sum from a very established private equity firm. Their ride sounds like something from the first bubble - a college dropout, his brother and two buddies from high school start a company. Unlike Bubble 1.0 though, 180Solutions made money – profitable quarter after quarter, 30 million installs in March 2004, and revenue growth of more than 5x from the end of 2001 to Q1 2004.

I still don’t think 180’s investors really understood what they were buying. I do think they understood the potential upside. To them the business probably looked like Mike Tyson with them being Don King. Boxing certainly isn’t pretty, but it makes money. The adware guys get to do the same thing they did before, only bigger. Not a bad deal. Then again, Mike Tyson didn’t turn out to be all that good for boxing in the end.

June 14, 2006 in DMConfidential - Thoughts | Permalink | 0 Comments | TrackBack (0)

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