Web X.0

GooglePoint?

The prevailing wisdom seems to be that Google is out there developing an MS Office killer, and after launching mail, spreadsheet, calendar, database (sort of) and soon-to-be-word processor (following the acquisition of Writely), the next target on Google's cross-hairs must be an alternative to PowerPoint.

Maybe I'm slow to see what everyone else has already figured out. So at the risk of looking foolish I'll predict that Google is NOT going to release a PowerPoint alternative anytime in the near future.

Here's why:

• Google is great at web-based text applications, but has very little experience with graphic apps, which is a totally different ballgame.
• The definition of what an Office suite contains is quite arbitrary. As I posted before, I think Google is more interested in engaging MS engineers on defending their jewel products (instead of having them spend time developing an AdSense killer), and NOT on offering a full alternative to whatever Microsoft happened to define as belonging to the Office suite. If this speculation is correct, I suspect the products will be released in order of lowest-hanging-fruit, rather than in order of what Microsoft's marketing folks happened to package into the Office suite.
• The success of Google's "Office Killer" products can be ranked with almost perfect correlation to the advantages gained by turning them from desktop apps to web apps:
• Gmail is probably the most successful - the ability to access your mail from any web-enabled device and always have it synced is a clear advantage over the desktop app - Outlook Express. On the flip side, very little functionality, if any, is lost by using email online rather than on a desktop[1].
• Calendar - Again - enabling a calendar on the web adds significant advantages (access anywhere/anytime, and sharing of calendars) while losing very little functionality that's in the desktop app (security is the only aspect I can think of).
• Spreadsheet (and in due time - word processing) come next - some advantage is gained by allowing collaboration between people (and again - access), but lots of functionality is lost - graphs, macros, etc (not to mention security). Of course these are not functions used by all users, but it definitely decreases the overall appeal of the app.
• Google Page Creator (Google's "killer" app for Microsoft's FrontPage). Very little value is added by moving this app online because collaboration and access on development of personal websites is hardly useful. Yet lots of the rich editing functionality possible on a desktop application is lost when migrating online, making Page Creator a very lame product compared to FrontPage (which itself isn't something to write home about...)
• And this is where a Google version for PowerPoint would rank - little or no value added by moving the app online, while lots of value lost by doing so.
  

Google has shown multiple times in the past that it will spend huge resources on products it thinks are core to its arsenal (Gmail, Google Maps, etc), and that it will also develop low hanging fruits even if their importance to Google is questionable (Page Creator, Spreadsheets, Co-Op, etc). But I have yet to see a product they released which is both of questionable value AND requires a huge R&D effort. And a PowerPoint killer falls into that category.

Sergey & Larry (& Marissa?) are smart enough to set their own product agenda and therefore the definition of what's included in the MS Office suite is completely meaningless here, IMHO.

[1] Gmail should probably be compared to Hotmail rather than Outlook Express, but for the sake of the MS Office Killer discussion I'm sticking to Outlook Express. In any case, Gmail kicks Hotmail's ass big time both on storage capacity and functionality.

Google CPA - that was quick

A month ago I predicted that Google would eventually be tempted to introduce a CPA model by integrating Google Analytics with AdWords.

Looks like this day is coming, much faster than I imagined. Coverage by SeekingAlpha, John Battelle, Seth Godin and others.

1-for-1

The Yield Optimization Dilemma

With Yahoo recently announcing their intention to join the rest of the civilized world in optimizing their text ads for yield (rather than for bids, which can be fairly meaningless in a PPC world[1]), and with Wall St shaking up a little, it's a good time to look into an interesting, and generally overlooked, aspect of the yield optimization algorithms used by Google, Yahoo and MSN.

But before jumping into the Yield Optimization Dilemma, a little bit of background:

First came Overture and ranked results by cost-per-click bid. The highest bidder always got 1st place, etc.

Then came Google, and by combination of: a) having to bypass Overture's patent on CPC-based ranking, and b) figuring out that CPC-ranking can, again, be quite meaningless[1], they introduced a yield-based algorithm for ranking ads.

Yield-based ranking basically means that ads are ranked according to the following formula:

Yield = CPC x CTR

Or in English - The yield of each ad is determined by what the advertiser is bidding (CPC) times the # of clicks users are actually committing on that ad.

The beauty of yield optimization is that it inherently improves the relevancy of the ads shown over time, and therefore is good for the publisher (more $$ money[2] for its screen real estate), good for the advertiser (ads shown where users "vote" them to be relevant), and obviously good for the ad network (again - more money).

On its surface, the yield optimization formula (Yield=CPCxCTR) has the feeling of being 'scientifically true', and can therefore always be applied to auction-based ad networks as-is.

But there's a devious little detail in these formulas that is completely overlooked these days, but could be a major issue in times of recession and diminishing advertising budgets. This factor, which is baked into all the yield optimization algorithms out there, can be summarized as:

The Yield Optimization Dilemma - When optimizing display of ads for potential yield, should it be the publisher's yield be optimized, or the ad network's yield?

I know - it's almost petty to mention this issue these days. Google is flush with ad dollars[2] and with multiple advertisers competing for every conceivable word mutation. With about $1B estimated of unspent ad budget by Google advertisers[3], Google can almost always show the best ad (=highest yielding) on all of its page views, both on owned properties (Google.com, Gmail, etc) and on 3rd parties via the AdSense network.

But if the advertising history has taught us one thing, it's that the ad market is cyclical and very sensitive to recessions. After every advertising bull run, it is almost guaranteed that a recession will kick in. And when that happens, the first budgets to be slashed are usually the advertising budgets.

When that day comes, and I bet it does[4], this is basically what will happen within the black boxes of Google, Yahoo and MSN millions of times per day:
"We have 1 ad with a remaining budget of $X which is the best yielding ad for keyword Y. That keyword has just been submitted by an AdSense/YPN/MSNwhatever partner, but we predict this keyword will be submitted to our own search engine (Google.com/Yahoo.com/Live.com) 100 times during the remainder of the day. Should we serve Great Ad to the partner site, or keep it for later for our property?"

Remember that every such decision is amplified about 4x by the revenue-share factor (=Google/Yahoo/MSN do not share revenue on clicks on their owned properties and therefore they make about 3-4x more on each click generated on those properties versus clicks on sites within their networks).

In numbers this is how this decision might look on 2 ads, one of which is yielding a $1 eCPM, and the other yielding $1.5 (assuming a rev-share of 70-30 with the publisher[5]):

1. Do-No-Evil algorithm (or - Good Ad served on partner site) - publisher makes an effective CPM of $1.05, while Google makes an effective CPM of $1.45
2. Do-Evil-As-Long-As-Nobody-Notices algorithm (or - Good Ad kept for Google properties) - Publisher will drop to a $0.70 eCPM while Google's eCPM jumps to $1.80

That's a 25% difference in revenues for the ad networks operating their own properties, all with a simple flick of an algorithm that only they control, and probably only they truly understand.

In times of advertising recession, when this Yield Optimization Dilemma will pop up on servers many many times a day, the decisions made may amount to tens or even hundreds of millions of dollars annually going (or more likely - NOT going) into publishers' pockets.

Publishers should be aware of this, as it's part of the cost of doing business when handing ad management over to companies that are big publishers themselves and have a huge financial interest in monetizing their own content before they monetize a partner's site.

 

[1] I say that CPC-based ranking can be meaningless, because an advertiser can bid $50 per click yet have an ad so irrelevant that no one ever clicks on it, making its overall yield for Yahoo and the publisher a nice round $0 for all the impressions it was shown on.

That $50 ad may be "pushing out" an ad with a 50c bid that's extremely relevant to the keyword and can get tons of clicks, making it a very high yielding ad.

[2] This one's for you, Tami.... ;-)

[3] As estimated by Goldman Sachs analyst Anthony Noto during Google's recent analyst day.

[4] Of course Google is much more resilient to such economic downturns, thanks both to it's large advertiser base (~350K?), and the fact that it is heavily geared towards direct marketers who are much less likely to slash ad spending than brand advertisers. But if I have to place my chips, I will bet that a recession will eventually hit, and even mighty Google will find itself with more content than it can supply ads and budgets for.

[5] This is obviously an extremely simplified example. There are many other parameters in the real world, but the genera idea is basically the same.

Red Herring: "Israel's Hot"

Hats off to Red Herring on this week's issue (vol. 3, no. 23). From the editor's note (by Joel Dreyfuss, Editor-in-Chief):

One of the wonderful mysteries of capitalism is how innovation pops in the most unlikely places. Consider Israel, a small, beleaguered country surrounded by mostly hostile neighbors. Israel has been in a state of war for most of its existence; it maintains one of the world's most powerful armies, and Israelis live with a mesh of security checks that most Americans would not abide.

Yet, Israel has been a remarkable source of innovative technology far out of proportion to its size, which is smaller than New Jersey in area, with a population about the same size as New York City.

Red Herring is becoming relevant again. Subscribe to it here.

Wishlist: The State of the Feedosphere

I'm starting a wishlist of features/products/whatever I'd like to see coming from other companies.

#1 is for FeedBurner -
David Sifry of Technorati has done a great job reporting the estimated size of the blogosphere with their 'State of the Blogosphere' reports.

While those reports are great, they only shed light on the creation of blog media, but very little on the consumption of it.

It seems like FeedBurner, being a de-facto monopoly in blog feed syndication, is in a unique position to report on the consumption of blog content via RSS readers. I'm sure a bunch of people playing in this space would be very interested in knowing the approximate size of this market, and especially its growth over time (is mainstream adopting feeds or not?).

The only seemingly serious report I am aware of estimating the size of the RSS market is this one by Yahoo, but it seems like it's based more on anecdotal evidence (awareness surveys, etc) than on actual subscription data which FeedBurner has access to.

Rating VC answers

Fred Wilson and Michael Eisenberg write about turning down entrepreneurs from the VC's perspective. Michael Eisenberg says:

Personally, I find the hardest part of this business is telling an entrepreneur that we will not invest in his/her business...

...When saying "no" I get 2 sinking feelings in my stomach:
1. Is this really the right decision? Am I missing something that could be the next big thing?
2. The second is the horrible feeling you know the entrepreneur has after working hard in the diligence process and realizing that he needs to restart a process with another firm or angels. And, in the worst case, will need to give up his dream.

I thought I'd add an entrepreneur's perspective on this. Here's how I would rate the possible responses from a VC on a scale of 1-100:

1. "Yes, we want to invest" - 100
2. "No, we'll pass on this" - 95
3. "We like the company, lets continue talking" - 2

A few years ago I think I would have ranked this differently, in a way that would fit Michael's description above much better. Hearing from a VC that they "like the company" and want to continue talking would get us all excited. We hated the VC's that rejected us because they were stupid morons that didn't 'get it'.

But after having pitched to tens of VC's (and not getting funded by any), I started realizing that getting a straight "No" is 10x more valuable than the time-waster also known as "We like the company".

As Fred mentioned in his post, it is technically impossible for any VC to invest in all of the companies they like. This means that mathematically, any entrepreneur pitching VC's will *not* get funded by many more VC's than those that will fund him/her.

Once you understand that, getting a straightforward "No" from a VC actually becomes a desirable answer, because it lets you move on in a more rapid way to meet that one VC in the mathematical equation that will fund you.

Oh, and by the way - Michael Eisenberg, while at Israel Seed, is one of those many VC's I had the pleasure of pitching Quigo to, and I have to admit that I noticed none of the inner struggles he described in his post.... Good poker face?...

Mazal Tov Efrat & Uri!

When I started this blog I sort of vowed to myself not to post on any off-topic personal subjects. But this is a special occasion for two very special readers of this blog.

So - Mazal Tov Uri & Efrat!!!

No-more-personal-posts vow reinstated.

USS Google vs USS Microsoft

In the navy, the 1st rule of engagement with an enemy ship is to try to hit it with multiple missiles coming from multiple directions. Most naval ships can handle one missile shot at them fairly easily using chaff, electronic warfare or even shooting it down with good old shotguns. But throw at that same ship multiple missiles at about the same time, and it'll have its crew running around like chickens without heads trying to figure out which threat to handle first.

With each new product Google announces (latest being Google Spreadsheets), I can't help but think that Google is brilliantly applying naval missile tactics at USS Microsoft.

Microsoft has a long history of easily swatting off single-missile threats as if they were mosquitoes. Ask Netscape, Real Media, Lotus, Novell, etc, etc, etc. Each time such threat surfaced, Microsoft moved massive resources and all of its brightest folks to strike the missile and beat it. 

But Microsoft has no experience in handling multi-missile attacks, which are a completely different ballgame. It's a fairly easy decision to shift your entire crew to attack Netscape, when the cash-generating cows like Windows and Office are safe and cushy and don't need much attention. It's a *completely* different decision to move those same resources onto a new, high-risk and currently-revenue-less adventure (=MSN adCenter) while putting in jeopardy the company's existing assets.

Google Spreadsheets is obviously not core to Google in any way. I can't see how in the world it complements their search, and obviously it won't contribute anything worth mentioning in ad dollars (if they ever integrate ads into it, which I doubt). And being that it's free, I don't think anyone in Google's finance team is assigning anything but losses to this product in the future.

So the only remaining conclusion is that this is just one of a set of missiles[1] aimed at Microsoft, forcing them to spend significant resources on defending their castles rather than attacking Google's (AdWords + AdSense) full force.

I don't envy Microsoft in this scenario....

But then again, as I said in this post in more detail, this may just be the 20% pet project of a few Googlers... ;-)

[1] The next such missile on its way from Mountain View to Redmond is probably a word processor following Google's acquisition of Writely. More to come, I'm sure.

Israel's exports, part 2

Less than a month ago I noted that while some countries export products, agricultural goods, etc, Israel builds and then exports high-tech companies.

The crop of Israeli high tech companies acquired since that post:

• Whale Communications exported to Microsoft for ~$70-80M
• Demantra exported to Oracle for $41M
• Hotbar exported to 180Solutions/Zango for $52M. More on this maybe in a future post. (Congrats Oren!!)
• nLayers exported to EMC for ~$50M

The pattern continues - about one exported company per week.

Favorite podcasts, part 2

A few more great podcasts I stumbled upon lately:

1. Paul Graham speaking about What Businesses Can Learn from Open Source at OSCON '05. MP3 available here. Full transcript available here.

Favorite quote:

Meetings are like an opiate with a network effect... You can see how dependent you've become on something by removing it suddenly. So for big companies I propose the following experiment. Set aside one day where meetings are forbidden-- where everyone has to sit at their desk all day and work without interruption on things they can do without talking to anyone else.... You could call it "Work Day."

2. A lecture by Alan Rusbridger, editor of the Guardian on newspapers in the
age of blogs. MP3 here. Transcript here (in PDF)

3. Steve Wozniak speaking at Gnomedex 4.0. Wow! - Seems to me like after all these years of tinkering with computer boards and chips, Steve may have accidentally put his own brain in overdrive... This podcast is fascinating and really gets into how this whole mess started. Steve went on talking for nearly 2 hours, so this podcast is broken into two parts - Part 1 available here, Part 2 here.

(small Quigo tidbit - If you listen carefully around the middle of the 2nd part when Steve talks about how they invented the floppy drive, you'll hear him talking briefly about Randy Wigginton - Apple's first software engineer which we now have the honor of having as an employee of Quigo).

(my previous list of favorite podcasts is here)