Posts from June 2006

Gone For Two Months


Josh Boarding The Camp Bus
Originally uploaded by fredwilson.

The kids are gone for the next two months at camp.

It’s a summer ritual at this point in our family.

It’s Jessica’s eighth year, Emily’s sixth, and Josh’s third.

But the site of them walking through that door and up the stairs is always a little emotional, much less so now than in the early years.

It’s a preview of college and beyond I am sure.

We’ll miss them.

MP3 of the Week

Next month, on July 26th, the Gotham Gal and I are going to see Golden Smog at Bowery Ballroom (one of my favorite venues). My brother Rod and my friend Steve are coming as well.

It seems that the show is sold out on ticketweb and I don’t know of a good way to get tix if you want to see the show but maybe someone will leave some ideas in the comments.

Anyway, I am looking forward to seeing them. And so my MP3 of the Week is Golden Smog singing "Looking Forward To Seeing You" off of the Weird Tales record.

Looking Forward To Seeing You

PS – They’ve got a new record coming out, called Another Fine Day. If I can get my hands on it (its pre-release on Amazon), I’ll let you know what I think.

Being Marginal

It’s no secret that the best ideas always seem to come from outside the mainstream, "the margin" as Paul Graham calls it in this excellent essay that explores why that is true. GIve it a read, its worth the 5-10 minutes it will take.

Disaggregated Media (continued) – The Rise of the Ad Networks

Yesterday I posted on the subject of the disaggregation of the vertically integrated media model. In my haste to to finish the post and head off to dinner with friends, I left out probably the most important part of the system – the revenue producing function.

Just like content creation is happening separately from editorial which in turn is happening separately from distribution of the content, I believe the ad sales function will be largely divorced from the production and distribution of media.

That’s not an obvious outcome and certainly all major internet media businesses (from NewYorkTimes.com all the way to MySpace.com) have direct sales organizations to monetize their pages. So why do I think the monetization function will largely be divorced from the creation and distribution of content online?

Well first, we can see it happening already. Search is a classic example of this. The first step in the content consumption process (finding the content you want) is being monetized by Google and Yahoo! and others, not by the companies that a producing the very content you want to find.

I spent some time this morning looking for the 2005 online ad market data broken out by the key categories but I couldn’t find it. If and when I do find it, I’ll update this post with the numbers. But search probably represents about 35-40% of all online ad revenues right now and none of that is sold by the media properties.

The next fastest growth category in the online ad market is third party ad networks. They’ve been around for a while, really since the beginning of the Internet when Doubleclick and others offered to sell advertising for their customers. Those early entrants are largely gone from the scene now, but they’ve been replaced by ever more complex and effective ad network approaches.

In the bleak years after the first bubble burst, the "remnant" networks rose to prominence. They bought or simply took on the role of selling all the ad inventory an online property couldn’t sell themselves. And in those years, that was a large portion of the total inventory a site had to sell.

Companies like advertising.com, fastclick, valueclick, burst, and others aggregated that inventory, did some segmentation, and performance monitoring, and sold it off in bulk at CPMs between $0.25 and $0.50. And they built very large businesses doing this.

Last year, these networks represented at least 20% and possibly as much as 30% of the online advertising market. And I suspect they continue to grow more quickly than the portion of the online ad market that is sold directly by a media property’s own sales force.

But we are now witnessing the rise of "premium" third party ad networks that do more than just get rid of remnant inventory. They often are able to generate effective CPMs approaching those that a direct salesforce can generate. The contextual networks like Google’s AdSense and Yahoo! YPN are the best know of these. And for certain kinds of content, like a gadget blog like Engadget or Gizmodo, or a highly targeted healthcare site, they are likely to result in CPMs that approach what a direct salesforce can get.

Now were are seeing the next generation of ad networks like behaviorally targeted networks (we have an investment in the leading one – TACODA), video ad networks like Tremor and Lightningcast, feed powered ad networks (we have an investment in FeedBurner), lead generation exchanges like Root and LeadPoint, and many other emerging premium third party ad networks.

These premium networks use scale, reach, and data to deliver better ad performance than any single web property, with the possible exception of the portals, can offer on their own.

Today, most ad servers have a "waterfall’ algorithm that puts ads that are sold internally at the top of the ad server rotation, then they move down the value chain, measued by effective CPM, in order to move all of their inventory at the best available price.

I predict that within the next couple years, we are going to see these algorithms start putting some  third party ad networks above the internally sold ads. And in five years, we will see some major online media companies starting to question the wisdom of having an internal sales force.

This doesn’t mean that ad sales people will be out of jobs, it simply means that they will end up working for companies that specialize in the revenue producing function, not the content creation function (of course if you read the previous post, those companies are going to look a lot different too).

Just like the computer industry went from a vertically integrated model 30 years ago to a horizontal model today, we are seeing technology force that change upon industry after industry. The media business will be no different. Of that I am sure.

Disaggregated Media

Let’s go back to the newspapers of the early 19th century. They hired the journalists who ran around the city covering news stories. They employed the editors who directed the journalists and then decided which stories to run and where to run them. They owned the printing press that printed the papers. They even owned the distribution system that got the papers delivered to the newstands.

If you look at the newspaper business today, it’s basically the same.

The same is mostly true of television news, at least local television news. They own the stations, they employ the talking heads who deliver the news and producers who decide what to cover.

Traditional media is about vertical integration, from the creation of the content, to the display of it, to the distribution of it.

There have been some important moves to disaggregate and organize around a horizontal model in recent years. Cable is a good example of that. The production of the content is divorced from the distribution of it in the cable model. CNN produces a 24 hour news channel but Comcast gets it to your home.

The Internet is forcing the entire media business into a disaggregated horizontal model where the creation of the content will happen in one place, the editorial function will happen in another, the production will happen somewhere else, and the distribution will happen in yet another manner.

But these horizontal layers are not going to look like slices of the vertically oriented media company of the past. You won’t see a layer of content producer companies selling content to a layer of editorial companies selling content to a layer of distribution companies.

These layers are going to be dominated by lighweight web services (think google or craigslist) that will empower the users themselves to do this work. People talk about user generated content as if there is another kind. There isn’t. I love the story about the animated video created for Firefox Flix that prompted the people at Firefox to say "that was done by a professional". Maybe so, but he is still a user and a fan, and as professional as it seems, it is user generated content. Same is true with Om Malik. Is he a traditional journalist or a blogger? Does it matter?

Editors are quickly being replaced by services like Digg or the new Netscape where people decide what goes up on the front page and what does not. And we are in the top half of the first inning when it comes to a people powered editorial function. This is where I see a lot of action happening in the coming years.

And distribution?  Well for one, its all going via IP; wire line, powerline, coax, wifi, wimax, 3g, and who knows what other forms of IP. But people powered distribution is the big story here too. Whether its emailing links, embedding videos onto social network pages and blogs, or superdistribution of music and video where everyone participates in the value chain, we are seeing the end users participate actively in the distribution of media.

So when I get a business plan that suggests that all of this can be packaged into a single company, a new media company for the digital age, I cringe. Media will not be delivered from creation to consumption by a single entity in the digital age. Anyone who tries will fail. I am sure of it.

UPDATE: In my haste to finish this and get to a dinner with friends, I left out the whole monetization layer. That won’t be any different. Ad networks like Adsense, FM Publishing, TACODA, and FeedBurner are already showing how that’s going to play out.  But maybe that’s a post for tomorrow.

YouTube Video of the Day

I love this new song by the Arctic Monkeys called Who The **** Are The Arctic Monkeys. This is a video of them performing it live in Barcelona. This video does a great job of capturing the energy of their live show. The video is only 1 minute long, just the first part of the song.

Net Neutrality (continued)

Neutrality
I posted my thoughts on the debate raging in congress several months ago.

And I still largely think that whatever congress does on this issue is going to be irrelevant because entrepreneurs and market forces are so much more powerful than government regulation in terms of what actually transpires in the marketplace.

Education
But I got an education on Net Neutrality from some really smart and knoweldgeable people at our Union Square Sessions event last week. And I’ve received a bunch of emails from readers requesting my views on the subject. So hear goes.

We have four companies that largely control the last mile into our homes in this country, two telcos and two cable companies each control significant market share. Some of their CEOs have gone on record that they want to use tiered pricing to fund new development on their networks. Sounds good, but its crap.

First because the telcos and the cable companies have not done much to improve their networks here in the US. At best, we have 6mpbs service into our homes in the US. There are countries in other parts of the world that think that 6mpbs is so slow they don’t even offer it anymore. 25mpbs is the standard and they are headed to 100mbps while we are trying to figure out how to get to 6mbps.

So putting more money into the telco and and cable pockets is not likely to result in higher bandwidth networks.  It’s more likely to result in more golf courses and G5s for their CEOs.

Lessig
In our country, all the innovation has happened in the startup world. The startup ISPs and CLECs are the ones who first rolled out the services that the telcos and cable operators are now making money with. But would they have rolled them out if they hadn’t been put at competitive risk by the startups? I think not.

So first and foremost, we need a competitive network. That was what we were supposed to get with the telecom deregulation act in the 90s. But somehow we didn’t get competition. We got effective duopolies in telcom and cable. So the fight I’d be fighting is not Net Neutrality, it would be getting telecom deregulation right. The funny thing is that our deregulation formula was copied in other parts of the world, most notably in the UK. And they made it work there. But we didn’t.

Gigi
And if we are not going to get a competitive network, then should we settle for some kind of Net Neutrality regime?  I have my doubts that we’d get what we want because our congress is in the pocket of the telcos and cable companies. The companies we love and use all day long; Google, Yahoo!, eBay, Amazon, Skype, etc aren’t spending any time or money in Washington.

That’s why they build great services we love. They focus on the product and the customer instead of the corrupt politician. After we posted about our Sessions event, I got an email from a friend who has spent the past 5+ years inside a large corporation and he said, "you’d be amazed at how much time is spent on these issues in large corporations". No I am not surprised at how much time is spent on these issues. And I hope they keep spending time on them and ignoring their customers.

Because I will fund entrepreneurs all day long to take their customers from them while they are wining and dining corrupt politicians on their golf courses and G5s.

But there is one thing that I think we *must* protect with regulation. We cannot allow the telcos and cable operators to discriminate traffic on the basis of what is in the packet. That is the central issue in Net Neutrality in my mind. My friend John Mahoney makes that point in this excellent post on the subject.

I can live with the telcos and cable operators being able to price based on services offered. They do that today and nobody gets hurt. But if they start saying "for filesharing you must pay another $10/month" or "for porn you must pay another $20/month", the Internet is screwed in this country. I am no fan of illegal file sharing or porn, but the fact is that our current network architecture is "dumb". It doesn’t care what application runs on top of it. And if we change that simple fact, the Internet in our country will cease to be a viable platform for innovation. The action will move to Estonia, India, China, Israel, Korea, or wherever else they understand the power of a dumb network.

TomIt’s pretty clear that our government doesn’t.

For more reading on the subject, including two awesome posts by Tom Evslin, go to my delicious tag on the subject.

Nuggets

Nebraska
The Gotham Gal and I went to see Bruce’s Seeger Sessions show last night. Like the show I saw on Monday night in Saratoga, it was wonderful. Bruce is such an entertainer. This time, instead of a not so great version of Adam Raised A Cain, he did a wonderful version of Atlantic City, one of my favorite Bruce tunes.

So this morning, I put on Nebraska and am listening to my second favorite Bruce record (the first being Darkness which is on my top 50).

Nebraska is a fantastic record and shows that Bruce really does belong in the same genre as his mentors Bob Dylan, Woodie Guthrie, and Pete Seeger. The songs are dark and sparse. It’s just Bruce, his acoustic guitar, and a harmonica. But the result is a powerful moving record and I love it.