Web X.0

An alternative Plan B for Microsoft

Yahoo remind me of the famous saying about the Palestinians:

"They never miss an opportunity to miss an opportunity"

After playing a hand of cards they didn't have with Microsoft, they have now essentially committed harkiri by becoming a node within Google's business. Why would any advertiser now bid on Yahoo's platform? I can't find a single reason, and I doubt advertisers will either (not that they had many reasons before...). I agree with Michael Arrington - Yahoo totally screwed this up, and their search business is pretty much dead.

Now everyone seems obsessed with Microsoft's next acquisition target. I'd like to offer Ballmer my 2c on a potential alternative to the $50B acquisitions they're looking to make. It's called the 200% rev-share program.

But first, a little background:
Online advertising is a strange business. While the advertisers are the ones paying for everything, acquiring advertisers is a secondary concern for an ad network. A distant second. The #1 key to making an ad network work is the publisher side. Even though the publishers are being paid, it's much more difficult to win publishers than it is to win paying advertisers. The reason is pretty simple: Ad space is binary, while advertising budgets are not. A publisher has to make a binary decision on who gets to sell certain ad space. Whoever they choose becomes the de-facto exclusive "owner" of that ad space. Publishers cannot take risks on that kind of exclusive deal, and therefore they all choose the leader who has proven to monetize best - Google in the case of text/search ads.

Advertisers, even though they are the ones paying the bills, are much easier to obtain because their choice on how to distribute their budget is not binary by nature. They can put some money on Google, some on MSN, some on Quigo, etc. Advertisers will generally follow the distribution. He who has publisher real estate will eventually get the advertisers. The other direction is far from guaranteed (see Miva, LookSmart, etc, etc).

A much better plan B for spending those $50B is by seriously upping the rev-share paid out to publishers. And I'm not talking about upping it from 60/40 (about what Google pays out), to 70/30. My suggestion would be to go for a 200 / -100 rev-share with publishers. Take those $50B and use them subsidize the publisher earn-outs for the next couple of years. 

Publishers are dying to have an alternative to Google for monetization. The trouble is that no one has been able to naturally monetize better than Google. And that gap is widening by the minute. This game cannot be won in a dog chase.

The only way to get back into the game is by locking publisher distribution, and the only way to do that is by out-paying Google, even if that means doing it artificially via subsidizing the rev-share and not though higher yield.

Microsoft should offer a 200% rev-share to all publishers (and search sites, etc) for next couple of years until every publisher in the world is talking about how much better monetization is with MSN than it is with Google. When that happens, critical mass of distribution will occur, attracting massive advertising $$'s, allowing Microsoft to *slowly* throttle down the revenue split to under the 100% mark.

This isn't too crazy... If anything, I'd go for a 300% or 400% rev-share and completely nail this down. Google can obviously react to this and raise rev-share splits as well. But for Google this is the *only* revenue source and it would be awfully painful to turn that into a money loser. Microsot can still afford to do this while Windows and Office are still the cash cows that they are. In addition, some of these publisher subsidies will be offset by the improved monetization of MSN's own properties.

This is one of those unique moments where it can really be said that it's now or never.

The chess game continues...

So it looks like the predicted Microsoft-Yahoo deal will happen finally. This is waaaaay overdue - it should have happened back when MSN decided to leave Overture and pursue its own performance-based ad platform. The day that happened (sometime in 2003 as far as I remember) created 2 losing platforms.

I love the timing of this announcement. Looks like Microsoft were sitting on this waiting for Google's stock to dissapoint, and then hand it a beautifully timed 1-2 blow. Cool.
(on a side note - it's really great to see Google's stock crash from $750 to $525 within 3 months... healthy reminder that Google does not have exclusive rights to the world's wisdom and shareholder value)

Seems like the next natural move will be for Time-Warner to spin off AOL (disclosure: I co-founded Quigo which is now part of AOL), and sell it to Google (~$25B?...). The game is advertising, and the key is distribution. There are more ad $'s flowing to the internet every day, and not enough high quality distribution to meet that demand. With Yahoo out of the game, AOL will now be the #1 biggest player with available ad inventory (both on its own properties as well as on its huge platform-A). In a 2-player race, Google will not be able to afford losing AOL to the MS/Yahoo combo and will have to make this move (not to mention that it already owns ~5% of the company). Interesting days...

In case you want to get rich and/or work for Yahoo

Regardless of what happens on November 5th, and regardless of whether we end up calling social networks a "graph" or not... -
It's fairly clear that Yahoo will soon be scrambling to find a company that takes your Flickr friends, del.icio.us friends, Yahoo Mail contacts, IM contacts, etc, etc and merges them all into something that makes sense. A "social graph" perhaps.

This probably won't be a multi-billion-dollar acquisition, but it will almost certainly happen.

I don't recommend building-for-flipping, but if you're an entrepreneur and are eager to work for Yahoo with a nice signing package - here's a nice opportunity for you.

If you do use this tip, please send me a small comission in 6-8 months... :-)

{image captured here}

Microsoft finally understands - dog chasing is dead

With today's news re Microsoft looking to acquire Yahoo, it seems like they finally get it -
The performance-based advertising world is like no other space that Microsoft has ever played in before.

In spreadsheets, browsers, servers, databases, etc, etc - the Microsoftian way of doing business works like a charm. In all those categories, dog chasing proved to be a great way for Microsoft to win the market because it could out-price and out-patient its competition. Oh - and tying products into the OS monopoly didn't hurt too much either... ;-)

With performance-based advertising[1], dog chasing ceased to be an option. You can't undercut competition, because competition ain't pricing their product (it's the customers/advertisers who do, and they price it upwards, not downwards). You can't out-patient your competition because performance-based advertising has this wonderful virtuous cycle about it:

• The more clicks you have, the smarter your yield-optimization algorithms get...
• ...as the algorithms grow smarter, you can better predict your revenue per page...
• ...as your revenue-prediction power grows, you can better price new distribution deals with the confidence of not losing money...
• ...the better you can price deals, the more distribution you get...
• ...and the more distribution you get, the more clicks (and $$'s...) you have.

This virtuous cycle means that with every *second* that Microsoft was spending figuring out its world-domination dog-chase plan, Google (and others, Quigo included) were opening the gap making it even closer to impossible for Microsoft to become a real player in this space. And every purchase of a DoubleClick, RightMedia, etc just moved way more click data out of Microsoft's hands, opening the gap even more. Chasing a dog that's only gaining momentum faster than you, well - that's not a great chase to be in... 

I've had many conversations with good friends over at Microsoft over the past couple of years. And while the notion was that "we changed", "there's no more NIH Syndrome", "we're ready to make bold acquisitions needed to win this market", etc, etc - It's clear now that none of that really registered there and the plan all along was to dog-chase Google to victory. Looks like the price for realizing this mistake is going to be pretty big.

A ton more coverage on TechCrunch, Henry Blodget... oh what the heck - and everyone else on the planet.

[1] Disclosure: I'm co-founder of Quigo, a player in this space.

Yahoo, Newspapers and Quigo

Finally some good news for Yahoo... Today it announced a partnership with 176 newspapers. Coverage on TechCrunch, NY Times, PaidContent, and others.

From the NY Times:

A consortium of seven newspaper chains representing 176 daily papers across the country is announcing a broad partnership with Yahoo to share content, advertising and technology...

This sounds to me a little like the beginning of the "Switzerland Inc." that Tom Mohr (ex-President of Knight Ridder) described in his manifesto a few months ago (this very important doc is behind a password on Editor&Publisher... urrggghhh! No link love here!... see Greg Sterling's blog for some snippets).

From it:

To win, industry leaders must adopt a Marshall Plan embodying two key objectives: the migration to common platforms, and the acquisition of the ability to sell top-quality online product to our advertisers. To fulfill these objectives, the independent companies of a proud industry must aggregate into an industry-wide network. In this network, each company must cede some control over its digital future into a “Switzerland” organization that manages the network.

Seems like Yahoo is now tackling some of the pieces of the first part - offering common technology platforms for classifieds, maps, etc.

On the second part, Quigo (full disclosure: which I founded, and am employed at) is the undisputed leader. As the NAA recently pointed out in a research called "Online Newspapers' Response to Google":

"...Quigo easily took the category, having affiliations with half the respondents."

With Yahoo handling the classifieds/syndication/maps areas, and Quigo handling the performance-based advertising, it seems like the newspapers are starting to put together those building blocks for creating a Switzerland Inc. that will survive (and hopefully thrive!) through the Google storm.

YPN exodus?

According to PaidContent, two top execs at Yahoo's YPN are leaving the company:

Yahoo has confirmed that Bill Demas, SVP-Yahoo Publishing Network Group, is leaving at the end of November....
...Also confirmed by Yahoo—Will Johnson, VP and GM, YPN, is leaving as well.

I wonder if the recent Quigo-ESPN deal has anything to do with these departures?... Hmmm...

Anyhow - All you YPN'ers - if you're interested in joining the fastest growing text advertising network in the country, drop me an email with your resume at:
galai at quigo dot com

Google, Yahoo and stock prices

I'm pretty much clueless about the stock market (unless watching Jim Cramer throw around chairs counts for anything). I guess that stuff simply skipped my DNA. So if the following sounds to you like a 2nd grader asking stupid stock questions, you are absolutely right...:

With all the Google stock mania going on, alongside the poo-pooing of Yahoo as being a terrible investment, I'm mystified about one thing:

Isn't stock investing all about the future financial growth of the company?

Google is an incredible company, no doubt about it. Their revenues are beyond staggering. One of the main reasons their numbers are so great is that they figured out how to monetize a search query and optimized and optimized and optimized. And optimized.

They've done such an amazing job with optimizing revenue-per-query, that I wonder if there are any other big optimization tricks up their sleeve. If not, it seems inevitable that revenue-per-query will flatten or at least its growth rate will drop sharply. When that happens, overall *revenue* growth will result from overall *query* growth. This can come from 2 sources: New internet users, and/or converting users over from competition. Both ain't exciting growth prospects. [1]

Yahoo on the other hand has done a terrible job at monetizing their search queries so far. Their ads were too long, the placement was by bid price and not by overall yield, the relevancy was questionable, etc, etc, etc.

But that's all part of the past. At this point it seems like Yahoo has all the optimization growth in front of it, while Google is basically done with most of its per-query optimization growth. With Yahoo's new Panama system being soft-launched these days, it seems like they're focusing exactly on squeezing the hell out of each query's revenue potential.

So, if stocks are all about the *future* financial growth prospects of a company - Is it terribly stupid to go long on Yahoo, and short Google? I'm surely missing something that the rest of the market is seeing.

[1] Of course YouTube might start generating gobbles of money, etc. That might be. But today Google is basically a 1-trick revenue pony called AdWords (AdSense is mostly a money wash because of the low margins Google is operating it on).

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.

Why Yahoo will acquire Techmeme

Techmeme (formerly - Memeorandum) tracks and ranks conversations, or - memes, as they emerge in the blogosphere.

Techmeme is for blog post discovery, what PageRank is for regular web search. While PageRank focuses primarily on link analysis, Techmeme considers the other parameters that are unique to blogs - comments, trackbacks, etc.

Techmeme does an excellent job of surfacing the important current discussions and the most important sources to the top of the page. In the blog discovery space, those are the things that matter. Text analysis and link analysis (both areas traditional search engines are strong at) are far less important. Try Google's Blog search to see how bad blog discovery can be when traditional ranking algorithms are applied to the blogosphere.

And therefore I think it's absolutely inevitable that one the big three - Google, Yahoo or Microsoft will acquire Techmeme, and I'd be surprised if that doesn't happen in the next couple of months.

So who will it be?

Microsoft probably needs this most for their search war chest, but I'd be very surprised if they end up picking this up. They seem too busy in the Google dog chase to make moves that are ahead of the curve. I'll give them a 10% chance at most.

Google is tough to predict... On the one hand, they are busy buying any small company with cool software that they like. I hear Techmeme is a one-man show (or close to that), so there's definitely a match there. But most Googlers also suffers from the NIH syndrom, and acquiring a company like Techmeme will be like admitting that someone outside the Googleplex can think of an algorithm better than theirs. That's pain that Googlers don't like taking, and therefore I'll rank Google with a 20% chance.

Which leaves us with Yahoo. The only company that seems to combine true vision, with the humbleness needed to admit that good ideas may in fact emerge from outside the company is Yahoo. It is also the company that seems most interested in user-generated-content and therefore having the best blog discovery algorithms is a good match. These facts helped Yahoo bag Del.icio.us, Flickr, Upcoming, etc. And that's why I'll give them a 70% chance of being the ones to acquire Techmeme.

Predictions are for fools, but this one (barring the naming of Yahoo as the acquirer... I may have to eat my hat on that one...) just makes too much sense.

Yahoo & MySpace - the real story

JenSense had a great post (as usual) about Yahoo pulling its YPN ads out of MySpace:

MySpace has long been a marketing tool and a great way to drive traffic to other sites or advertising. But if you happen to be monetizing with MySpace and using Yahoo Publisher Network, you may get your account suspended, even if you have non-MySpace sites on your account as well.

Apparently YPN is shutting down the publisher accounts that are placing ads on MySpace.

So what's really going on here? Why is YPN giving up on so many potential page views that it probably badly wants? Their termination email to the publishers mentions the reason being "poor traffic quality", but the real reason is probably more like poor targeting combined with too much traffic. Here's the real story[1]:

While contextual advertising (such as Google's AdSense and Yahoo's YPN) is an amazing way to monetize content pages, there are fairly big pockets of content that are terrible for contextual matching. The main examples that come to mind are:

• Finance pages - A reader of a financial site reading an article about Cisco is not really interested in buying a Cisco router.
• Dating sites and social networks - The content of a dating page or social network page (about me, my favorite pet, hobbies, etc) has little or no connection to what the user is looking for while on those pages.
• Home pages - Notorious for being difficult for contextual algorithms because they usually contain lots of very dynamic bits of data on a wide variety of topics.

But that hasn't stopped Yahoo (nor Google) from placing ads on any of these pages in the past, so why is MySpace different?

Yahoo's dirty little secret is that when the pages don't contextualize well, Yahoo ignores relevancy and simply picks ads with high bids such as mortgage ads, credit card ads, etc. So even though click-through-rates on these pages are fairly low, Yahoo makes up for it because the bids on these categories are high (usually in the $2-5 range per click).

Of course the advertisers on those categories never intended to appear on pages that aren't relevant for, well, credit cards, mortgages, etc. They're bidding $5 to appear on a SERP or content page related to what they're selling. They're expecting a qualified lead for their buck. So how can Yahoo pull this trick without pissing off its advertisers?

The secret is all in the proportion that Yahoo (or Google) can maintain between their highly targeted search placements and those irrelevant placements described above above. As long as the mortgage advertiser is seeing a big % of the traffic coming from Yahoo's search, the non-relevant clicks get diluted in the mix and fly under the radar.

But as soon as this proportion is disrupted by adding the massive MySpace exposure, those bad clicks stopped flying under the advertisers' radars. I bet Yahoo got very angry calls from advertisers surprised to see they were being placed on pages they never intended to be on and that have no relevance to the keywords they were bidding on.

In ways, this reminds me of the old scheme for robbing a bank by shaving the rounding errors of each transaction. This works great as long as you keep shaving fractions of a penny from each transaction, but scales pretty poorly if you start taking dollars from each transaction.

The quality of traffic on MySpace is not inherently bad. The trouble is not 'poor quality traffic' as Yahoo is trying to claim, but rather intentional goofy ad targeting that simply doesn't scale very well...

[UPDATE] As I mention in the footnote below, this post is based purely on educated speculation. Yahoo posted some more clarifications on this issue on their YPN Blog, so go there for the real 'real story'.

[1] Well, scientifically speaking this is more speculation than 'the real story', but being that I work for Quigo (<--that was an embedded disclosure...), I think I have a fairly good insight into the dynamics of this story. Speaking of which, I think we did a fairly good job at solving the problems described in this post. But that's for another post maybe.