Ross Mayfield's Weblog

Promoted Tweets and the Next Ad Recovery

A lifetime ago I worked on an Eastern European telecom group's IPO and one of my favorite slides in my deck was borrowed from Goldman Sachs to paint the picture of a Multimedia Cycle. Yes, I said multimedia, but right now there is something shifting in the ad market that may or may not mean a recovery to yet another boom for the internet.

Picture this in a cycle:

Ads -> Content -> Applications -> Telecom Services -> Telecom Infrastructure -> Repeat

In 2002 I described the multimedia cycle like this,

"Just as potential customer spending drives advertising expenditures, Ad spending drives the development of content to create ad space.  Development of content drives spending telecommunications services to delivery it.  Development of telecommunications services requires investment in applications and infrastructure."

I also pointed out how GDP is correlated with ad spend and noted that ad spending drives internet recovery.

In 2004 there were signs the ad market recovered and the Web 2.0 boom was getting started. Google drove advertising innovation. To the point where way too many bloggers thought they could live off it. This ad recovery fueled a venture boom and falsely led many startups to leverage someone else's business model instead of finding their own. Many of course didn't make it through the crash, and those that did focused on creating their own leverage.

Ad revenue isn't what it used to be. And it won't be. Which may lead you to have concerns about the current recovery:

• The last boom didn't deliver innovation in new ad formats and metrics, and there still isn't a solid ad model for social networks like Facebook. Put simply, advertising still works for the old web. More on this later...
• Ad commoditization is moving far beyond text ads into other formats. The display ad market has moved to Real Time Ad Exchanges (disclosure: I'm an advisor to Triggit, which helps helps buyers optimize real time spend). Conversion rates always decline as the audience becomes sensitized, with the recent exception to newer formats like video ads (won't last long.
• The B2B lead gen business has been cutthroat as well. 
• CPMs, CPCs, CPEs & CPLs are falling through the floor. In part this may reflect the broader economy, but every last efficiency is being wrung out of the markets.
• What this means is what we've known. That traffic & engagement are less easy to monetize than during the last recovery. Or at the very least less than what was believed at the time.

This may lead you to believe the multimedia cycle will not be fueled, and internet recovery will stall the creation of the next wave of startups. But things have changed.

In Apple's Garden of Eden, you can skip advertising and directly monetize your content and apps. Subscription and ad models are ready for the taking as well. But this forbidden fruit drives your app down to $.99 and you only get 2/3rds. You find yourself in the hit business, and usually it ends up being Hollywood's studio model instead of an indie.

Startups already have to innovate their own ad models, and rise above them. When shit lobsters (a complement) like ^Dave McClure are calling for coupons, that's what he means.

The big case in point is Twitter's launch of Promoted Tweets, the launch of Bill Gross' TweetUp and other new ad formats for the real time web like MyLike. It's not just about Twitter finally finding a business model, built upon the problem they created for brands. They are testing a new ad format and ranking algorithm that hopes to strike a balance between advertiser and user. And the real test is if they gain distribution through their search and other ecosystem partners starting tomorrow @chirp.

I'm going to go out like a bird on a limb here to suggest that it may be another tipping point for Twitter. One that involves actual tips. And supports a good portion of the ecosystem. This will serve as a litmus test for ad formats on social networks.

But the key for Twitter is if they can gain a distribution advantage for how they monetize. The qualms of them buying partners shouldn't concern partners, a lack of acquisitions should. "Filling holes" is a ridiculous analogy, btw. It reminds me about that story of a Dutch kid taking his finger to a dike. But not literally.

Others ad formats are arising, like with SlideShare's AdShare for professional sharing (advisor disclosure).The question I have is if new ad formats and other ad innovation will fuel another modest boom, because ads will always be a portion of new rising internet business models that are widely adopted. What form will they take? And will social gain a creative form that is valued as much as the creativity we have despite it.

Playing with Triggit

I twittered that Triggit was the coolest thing I saw at Web 2.0 Expo.  Later on, they won the Launch Pad contest.  I've been watching these guys since they started showing up a Barcamps.  They've hit upon making adding widget content and ads on a blog or site dead simple.

By doing so, they make the act of placing an ad engaging.  When everyone is a publisher, the gestures they make empower influence which is far greater than basic impressions. So bear with me for a while I experiment.  It won't show up in RSS feeds, but basically I'm learning Blinglish on my blog.

Future of Ads Matrix

In light of Google's launch of Ad Widgets, Kevin Kelly riffs on my 2004 Cost Per Influence, Sell Side Advertising and transitive advertising concepts, and then discovers this new corner.  Perhaps the future is automagically subliminal?

  Future of Ads Matrix 
  Originally uploaded by Ross Mayfield

Decoupling Decision Rights and Decentralization

Andrew McAfee has an interesting post that challenges the trend of decentralization in organizations.  Noting Tom Malone's work on how decreased communication costs enable more decentralized decision rights, he makes a distinction between information and knowledge.  You can now provide information to any potential decision maker at a low cost, but the best tacit knowledge for a given decision may reside in someone the core of an organization instead of the assumed edge.

Let’s say that a mortgage company realized that a few of its loan officers were just better at assessing credit risk than all the others. For whatever reasons (intelligence, experience, intuition, etc. ), they just had superior specific knowledge. In that situation, it would make good sense not to decentralize, but instead to centralize that decision right within the company, taking it away from the other loan officers. All the general knowledge (income statements, credit histories, etc.) would be sent to these few people, who would apply their specific knowledge to it and made decisions. In this example low information costs are still important; they allow all the general knowledge to be zipped to the few good officers. But the effect of low information costs isn’t decentralization and greater empowerment. Instead, it’s centralization of an important decision right and reduced autonomy for most loan officers.

Thought experiments like this one indicate to me that the net result of disappearing information costs won’t necessarily be decentralization. It will instead be the decoupling of information flows and decision rights. Organization designers will be able to allocate decision rights without worrying about how costly it will be to get required information to deciders. Leaders will be able to ask "Who should make this decision?" without adding "Keeping in mind that it’s going to be slow, difficult, and expensive to get them the general knowledge they’ll need."

Will this work always, or even usually, lead to more decentralized organizations? I find myself less confident than Malone that this will be the case. I agree with him that we’re at a very interesting point in the history of technology and the economics of information, but I’d label it a great decoupling (of information flow and decision rights) rather than a broad decentralization (as decision rights lateralize along with information flows).

Information has no value until it informs a decision that results in an outcome.  This is part of why it wants to be free and increasingly is.  The decider certainly plays a role in this equation.  But something concerns me about this Carr-esque classification of decision making capabilities based on tacit knowlege (what is it about theories from Harvard on expertise ;-P).  And I don't think it is enough to buck the trend of decentralization.

Decreasing communication costs and ubiquitous information begets transparency.  While the future impact of IT provides both the directions of strong crypto and transparent society, with uncharted privacy implications and policy -- I believe transparency is a greater force.  Especially when it comes to revealing bad decisions.

Lets take Andrew's mortgage company example.  First, celebrate that the organization can change structure from the decoupling of information and decision rights.  Then, note it can shift back.  If a group gains centralized decision making capabilities because of their, augmented by "general" information, it is in a good position to execute the decision making process. 

But my read of Malone's book is it is not just about decreasing communications costs that enable decentralization, but how decentralized organizations can scale.  I believe Andrew is suggesting that information systems that automate information processing enables this group to scale its capabilities.  At first glance, this is similar to how trading desks work.  But approving a mortgage for an individual is very different from institutional trading.  Markets are social and the actors in institutional trading actually rely on relationships, and by doing so improve their tacit knowledge and handle exceptions better.  By taking the social interaction out of the hands of the mortgage officer who is closer to the actual customer and in a position to assess different kinds of risks beyond the FICO score.  And perhaps worse in the long term, it dehumanizes the organization's capability to develop a relationship with the customer.

Perhaps I am being too prescriptive with the business model, and maybe sidestepped the issue by hypothesizing there is a different kind of tacit knowledge at the periphery of the organization.   But the point is some kinds of tacit knowledge and decision making capability, those best at detecting and handling exceptions to business processes, may not be scalable through automation and centralization.

What I really like about Andrew's idea is the ability to reassign decision rights because they are decoupled from information.  Good thing too, because corporations don't have deciding who is best to decide down to a science.  Given the potential transparency in an organization, we may get better at more broadly handling exceptions and learning from decisions made.  We may actually discover who influences makes decisions. But my long term belief in decentralized organization recognizes that it is the environment the organization exists within, not that inside the organization, that creates the greatest amount of exceptions.  And the organizations that put decision rights closer to exceptions are more likely to adapt and survive.

Perhaps a better structure is to encourage decoupling of decision rights

Advertising is not Democratic

I was disturbed to read a pandering post by a Google employee that decries Michael Moore's documentary Siko and offers advertising as a means for the U.S. health care industry.  Others were, and Google's official position that was no position.  Dan Farber has been following the story, and added this update:

Update 2: Now we have an explanation from Ms. Turner regarding how to read her post. She just meant to state Google’s position that “advertising is a very democratic and effective way to participate in a public dialogue.” I won’t argue with the idea of advertising as democratic. Anyone with the money or winning bid can get their message out into the ether.  But ads tend to be one-sided sales pitches without footnotes, not a public dialog. If we want a public dialog, having the two opposing sides in a public debate would be a far better way to educate the public.

I will argue with the idea of advertising as democratic.  It is the opposite.  Spending isn't speech.  Sure, U.S. health care can buy ads to be placed in context alongside public discourse.  But not everyone can.  It concerns me that the bright people at Google could be talking themselves into believing that either advertising is democracy, let alone that it helps democracy.

If the U.S. health care industry really wants to respond to Sicko, they will engage in, if not host, online communities for civic dialog.  However, most online communities these days are powered by advertising. Community hosts and ad networks have to balance against the very strong incentives to smudge context and placement until where the line between paid and unpaid content are blurred.  A balance is struck, not unlike between editorial and publishing in traditional media, but with a very big difference in that the audience has the choice to go elsewhere with a single click.  Or create their own without the influence of advertising. 

Scoble Diggs Up Cost Per Influence

Robert Scoble asks:

How could we measure audience engagement?

What he is after isn't engagement, but influence.  Here's the answer I've been trying to encourage others to implement:

• Metric: Cost Per Influence
• Format: Sell Side Advertising

In other words, we've had this conversation.

Weak Signals in Online Advertising

I'm always on the lookout for weak signals for the online advertising market, the driver for the consumer internet.  Now it looks like ad spending failed to meet expectations this year and social media is creating an inventory glut. 

I wonder if Google's market share vertical integration strategy will structurally impact the market.  Some see this consolidation as a sign of strength, but it could be a longer term weakness. At the least, there is a short term driver for M&A for erstwhile competitors. The sponsorship segment of the market seems to be doing well and supporting the proliferation of micro-pubs and there is lots of room to innovate.  As long as people keep buying.

Feedburner Ad Network

I'm going to experiment with splicing ads in my RSS feed.  I've joined Explore Social Media (a FeedBurner Network).

If any subscribers object to this, please let me know in comments and it will weight heavy in my decision.  I'm really just playing here, not trying to make money. 

Sponsoring Techmeme

I was too busy to blog this yesterday, but Socialtext became one of the first sponsors of Techmeme's new ad format and it might be helpful to share the rationale. What is appealing about the format itself is the ability to control the content yourself, simply make a new blog post. From an advertiser's perspective, this is pretty revolutionary. Zero-barrier to campaign adaption, in the conversational format we are already communicating in and where campaign is in conversational context.

Now, I'm not really doing this right, and truly adapting the ad to the context of what is being discussed. If there were memes to directly play off of, and quite frankly we weren't so busy incorporating feedback on Socialtext 2.0 and the close of a great quarter, I'd be playing a different game. I had confidence in this ad buy, a rare thing for our company, because of who we were sponsoring and influence.

Gabe is a good guy, and sponsorship is the last remaining ad format yet to be commoditized, largely by Google. Last time I looked, sponsorship was 10% of online ad revenue. You may know my interest in Cost-Per-Influence and Sell-Side Advertising, which I believe is the future of online advertising. The buy started with Gabe reaching out to me, a gesture that meant he sought affiliation with our brand. I gauged the relative influence (not how many impressions, but who was impressed and whether those would impress others) of Techmeme in my decision. If Techmeme writers as readers could cross-post my ad (in a way they did, by blogging about the news of the format, but that isn't supporting a Socialtext meme) -- it would be the same dynamic as sell-side advertising.

It is early in the experience, and there is something to learn here, something else.

Erick Schonfeld pointed out that companies that really blog, like mine, could get on to Techmeme through meme merit. As it should be (btw, any Socialtext employee can post to this blog with only general good sense guidelines, so someone could commandeer the ad, within reason). The editorial and publishing sides of the house should take such sides, even if driven by an algorithm. After all, why else would users be there?

Let's explore that question. With me prodding Gabe like I have before (and without backchanneling).

I'd love to see the Techmeme ad format evolve towards its editorial content. Towards as in format, not as in business rules. Maybe keep the auction for 1st, 2nd and 3rd place -- but show the conversations linking to each ad post.

Scary thought, eh? The question is how that would effect the ad price. Would enabling ads in context of conversations scare off ad buyers? Only those oblivious to how little control they have over the message in the first place. For others, it may be more attractive. If an advertiser had confidence they could snowball positive conversations with their ad, buying an ad could amplify the effect. After all, broadcast casts what you want to be, networks amplify who you are.

Now what if the way advertisers were gaming the system, in a system of highly nested feedback loops, by creating great content as advertising to attract and influence others? Perhaps Gabe would run a whole page driven by advertisers they selected. Perhaps readers would find it as compelling an index as the one driven more by merit. The single criteria for fulfilling Sell Side Advertising is a system that is driven by incentives to create better ad content. And for that, I think we would all be better off.

Buy Side Publishing, An Open Model

Allow me to further simplify the Buy Side Publishing model. The most efficient part of the content business isn't in how or what they produce, nor how they distributed it, but how they make money.  Today the embraced commoditization is in advertising, with standardized metrics such as CPM.  But this makes money through directed attention, not directly from content.  To that, with the balance between freedom and profit motive required in a modern business model, you simply:

1. Apply CPM, and other standardized metrics developed for advertising, to content
2. Build upon the Creative Commons framework to ensure reuse without DRM under such commercial terms

This fills in the grey area between Commercial and Non-Commercial, or rather, let's you define Commercial use along with terms.  Maybe this is an over simplification, but picture this content universe...

1. But picture this post with a discoverable watermark that bakes in these two terms, with a CPM of $10 communicated to the clearinghouse each time the invisible .gif is impressed.  Say you read it and like it, fair reader and writer, and decide to republish it on your site. 
2. Someone else grabs it from my blogs and remixes it into a commercially minded remix.
3. Now picture someone finds it on your site, and thinks it would be a perfect complement to a Sell Side Advertising ad that is starting to take hold as a meme. 
4. Suddenly, as a publisher, I make money from all three transactions without the one-off transaction costs that plauge old notions of syndication.

I happen to think this is a model that not only unlocks value, but discovers it.

Jeff Jarvis comments:

But Ross, you assume that anyone would pay for content when they can link to it. Not sure that's a valid assumption. What am I missing?

Commercially viable remix use cases.

For example, search and aggregation are limited to fair use cases today.  Google scrapes and indexes an entire page, but only presents a link and summary on their own site.  What business models could they come up with going beyond fair use?  Or take more traditional media and their reliance on newswires as fodder.  What if they could efficiently syndicate diverse content sourced online into print?  Or from the initial publisher perspective, is there content you want to offer openly for non-commercial reuse, but also not restrict commercial use so long as you get paid?