The cost of online advertising sales and media globalization

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The current issue of BRW, Australia’s largest business weekly magazine, has an interesting article on how technology is changing the Australian media landscape, which is in the throes of a major transition. The article quotes me on the issue of scale in online businesses in Australia, especially relating to the cost of advertising sales. To expand on this theme… one of the most transformational advances in the online world over the last years was the introduction of Google AdSense, which allows anyone with a website to get advertising revenue without any overheads. All you do is set up Google AdSense – or any of a number of its competitors – on your website, a trivial matter, and you can garner revenue commensurate with the audience you are reaching. Google sells advertising, aggregates it, and then allocates it across millions of websites. Thus the long tail is born. However, naturally Google prices the advertising to take a tidy profit for itself, with AdSense accounting for 39% of its revenue. Thus you can make substantially more money if you sell advertising directly, both because you are cutting out the middleman, and because you are able to sell extremely targetted advertising and sponsorship, tailored to be presented in the formats most relevant and desirable to the advertiser. The other side of this, of course, is that you then incur the cost of advertising sales. This is the primary logic behind the blog networks such as b5media, Gawker Media, and Weblogs Inc., in which you bring together a pool of blogs, spread the cost of advertising sales across the network, and get the full potentail advertising value from your sites.

The interesting piece comes when you are targetting local (read non-US) markets. I have written before about how it is a lot easier to target most non-English markets – for example French, Portuguese, Korean, and Japanese websites are each predominantly visited by readers from one country. Yet in the English-speaking space, you are immediately sucked into a global, yet US-centric, world of sites, links, and conversations. So what does an online media company based in, say, Australia, do to make good money? This is particularly pointed if the site is based on communities or social networks. There is certainly a viable – if relatively small – local market to be addressed (2006 Q2 online advertising in Australia was $A226, up 59.4% YOY). If the reach of the online media site is sufficient it can justify a direct salesforce for local advertising, and then serve AdSense or similar advertising to visitors from overseas. However in the grand scheme, only fairly large local operations can afford to do this. From these factors stem a whole array of strategic issues for local online media company operators, including local versus international target audience mix, costs of advertising for local and international visitors, and alliances for ad sales aggregation. The globalization of online media is an increasingly important and multi-faceted issue – I will write more on these topics later. I also hope to get the time to make some comments on recent events in the Australian media landscape, but with around 80 hours scheduled on airplanes over the next two weeks, nestled between an imposing set of client strategy workshops on diverse continents, a keynote, and other major deadlines, I’m not quite sure when I’ll get to it…

User filtered content site Reddit bought by Conde Nast

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Conde Nast, the owner of Wired magazine, has just bought the user filtered news site Reddit, according to TechCrunch. After AOL set up Netscape beta as a user filtered news site, this is the second signficant foray of large media into this space. As described in our Future of Media Report 2006, user filtering is the Web 2.0/ participative analogue of editorial. It is not just users creating content, but also editing. Chris Anderson, editor of Wired magazine, is very excited about the acquisition, which plays perfectly to his long tail themes. There will be lots more play in this space yet.

Reinventing HTML and the evolution of standards

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Tim Berners-Lee, the creator of the World Wide Web, has just announced that the World Wide Web Consortium (W3C) will establish a completely new working group to work on the development of HTML, in his words “reinventing HTML”. This bold move has been prompted by the too-slow shift from a mark-up system which works reasonably well, but is still flawed. Attempts to evolve HTML to a “well-formed” structure that draws on the power of XML have been stymied by most people’s satisfaction with the current standard.

In my book Living Networks I created a chart showing what I described as the gradual progress towards open, accepted standards – see below. On one level, HTML is a poster child for an open, accepted standard, shown on the upper right of the diagram. There are no competitors for HTML – it is fully accepted as the standard for representing data on the Internet, and the W3C, for all the critcism it garners, genuinely attempts to represent and incorporate the views of all stakeholders. Yet, as anyone who has been involved in a standards committee knows, maintaining and developing an existing standard, particularly one with the impact of HTML, is no easy task, with ample scope for personalities and politics, which will certainly have to be addressed in this case. The developer community seems split between the positive and enthusiastic on one side, and skeptical on the other, with also other interesting analysis.

Figure 2-2.jpg

The gradual shift to open, accepted standards

The greater the uncertainty, the greater the value of scenario planning

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I have been applying scenario planning with clients for the last decade across a variety of industries and environments, including the future of financial services, technology, capital markets, risk management, construction, Internet, Asia, and far more. As I wrote back in 1998 in an article on scenario planning in portfolio and risk management, “The greater the degree of uncertainty and unpredictability, the greater the value of using multiple scenarios rather than forecasts.”

Knowledge@Wharton has just published an interesting discussion on Will a New Theory Help Firms to Manage in a ‘Flat’ World? (registration required), which looks at how executives can make sense of the rapidly changing environment. Paul Kleindorfer, a Wharton professor of operations and information management, made this very interesting comment:

In the past six months, there has been an upsurge in the number of companies coming through INSEAD [the European institute for management education] looking for assistance in scenario planning and scanning, or determining the signposts that suggest which scenario or scenarios should be the focus. Some companies — like Nestle, Unilever and Procter & Gamble — have been doing some scenario planning, but it’s been directed toward competition and technology. So these and other companies were completely blindsided by the recent increase in mineral oils — which was spurred by a law in Germany requiring power plants there to burn 10% bio-fuel by 2010 –and its impact on the vegetable oils and other ingredients they purchase for their products.

These sorts of commodity risks have escaped the scrutiny of many companies. Now they see a single government make a decision and it throws the profitability of an important ingredient out the window. So scenario planning and scanning, together with strategic modeling, intelligence and other issues, are really beginning to take on a much larger significance than before. It used to be about markets, technology and competitors, but now there’s a much richer texture.

Over the last decade I have certainly seen how the cycle of interest in scenario planning from major organizations has tracked the degree of perceived uncertainty in the business environment. The scope of the imponderable now, ranging from geopolitics to consumer behavior, overlaid on the necessity for long-term strategic thinking, means that scenario-based approaches are again on the rise. As suggested by Kleindorfer’s comments, I have seen many traditional consulting firms do scenario planning in such a reductionist manner that the scenarios cover only part of the scope of uncertainty, which entirely defeats the purpose. Today more than ever, there is massive value in engaging in scenario planning for long-term strategy development, in a way that really does uncover assumption and open out thinking across the organization.

Mobiles leapfrog the fixed internet in Africa

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I’m just back from a quick trip to South Africa, where I am working with a large organization to help develop their long-term corporate strategy. One of the many insights on this fascinating trip was how mobiles are leapfrogging the Internet across Africa. Across the continent, and even in relatively developed South Africa, fixed broadband Internet is difficult to access, expensive, and unreliable. Mobiles have already leapfrogged fixed line telephony across the continent. Research done last year indicated that 85% of small businesses run by black people in South Africa rely solely on mobile phones, and 97% of people in Tanzania have access to a mobile phone compared to 28% for fixed lines. Now phone companies are taking the opportunity to offer mobile data services and internet access. As a GSM-based continent, GPRS and HSDPA (which is very high speed – sometimes called 3.5G) are the core data platforms. MTN, a South African telecoms company with 28 million subscribers across 10 African countries, is already broadly offering data services, with of course little competition from other platforms. Most phones have GPRS capabilities, making data access a core functionality available to mobile users. MTN is using HSDPA to help Internet cafes to set up in townships where fixed Internet access is just a dream. Interestingly, the BBC recently reported that 61% of its international WAP users are in Nigeria, and 19% in South Africa. Of course this partly reflects that WAP is not used greatly in Europe, however it certainly shows that it is a viable technology given internet access being primarily from mobile phones in an emerging economy. Thus in Africa, digital content providers must focus on mobile delivery if they want to access anyone other than a handful of the elite who live in select areas and can afford fixed broadband. Despite its enormous economic and other problems, Africa is becoming a showcase for the potential of the mobile internet.

Changing investor disclosure could transform the world of blogging

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I have previously written about blogging and Regulation FD, which is a Securities and Exchange Commission (SEC) regulation that requires egalitarian dissemination of substantive news that could affect the share price. On the face of it, blogs and RSS are the perfect way to allow perfectly equal access to news by everyone. Yet this is not allowed by current SEC regulations. So Jonathan Schwartz, CEO of Sun Microsystems, has written to Christopher Cox, the chaiman of the SEC, to ask him to change the regulations to allow blogs and similar tools to be used for disclosure of substantive news. He says that previous conversations with Cox indicate this will be heard with receptive ears. Schwartz has of course disclosed this on this own blog, together with the full letter to Cox. If this change is approved, this will be an enormous boost for blogs, because it will mean investors and intermediaries will have to monitor the blogs of public company officers, and it will allow company directors to disclose substantive information on their blogs, in turn reducing the governance issues of corporate blogging. It makes all the sense in the world to use the power of RSS to disseminate information – this in fact would be a significant improvement to current mechanisms – so with just a tiny variation in the regulations on what are appropriate ways of disseminating corporate information, blogging could become quite a different world, with the development a thoroughly corporate segment of the blogosphere focused on egalitarian diffusion of investor information, and by-the-by, resulting a deeper and broader view of public company activities, and better informed investors.

Open innovation in collaborative filtering

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Netflix has just announced a $1 million prize to whoever can improve the accuracy of their movie recommendation engine. To enable people to design an improved recommendation engine, they’ve provided their users’ ratings of 100 million movies, an extremely valuable database. This harkens back to Canadian gold mining company Goldcorp’s initiative, whereby they publicly released the geological data on their properties, and set up a competition with prizes for whoever could give them the best recommendations on where to dig for gold. Other open innovation initiatives such as Innocentive match a whole series of people looking for innovation, again providing pre-specified rewards for meeting specific parameters. Some note that the prize will mean a lot of people work for free, and it’s arguable that if you can indeed do better than the other competitors, you’ll be able to make more than $1 million from it commercially anyway. The size of the prize indicates the value in enhancing the accuracy of collaborative filtering, as I’ve written about many times before. If Netflix can more accurately recommend a movie to its customers, the more likely they will stay with Netflix. For companies with other business models, greater accuracy directly impacts sales and revenue. More and more energy and resources will be going into this space. Netflix has chosen to combine two of my passions – open innovation and collaborative filtering – so I will be very interested to see the results from this. Details of the prize are at netflixprize.com, which will provide a progress chart on how the competing teams are doing.

IBM drives open business

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This is fantastic. IBM has announced that it will voluntarily publish its patent filings on the Internet. The upside is that it is taking the lead in creating a clearer, less confused, higher quality patent landscape. The (potential) downside is that it exposes its technology directions and strategy to its competitors as they develop rather than once they’re implemented. The great thing about this kind of leadership in creating openness and transparency in business is that it usually is a ratchet – once it becomes more open, it is very hard for it to go back. There are plenty of businesspeople who hate the idea of open business, and fight it in every aspect of how they do business. Too bad for them. We are shifting to a world of open business at a very tidy pace, and I for one think that’s a great thing. Embrace it, or have a tough and miserable time fighting the trend.

Microsoft spins off social networking site

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Back in November 2003 I blogged about a social networking project within Microsoft Research called MyWallop. At the time, fuelled by what I call the first phase of social networking, I speculated that something like this could become an opt-in part of Windows, unleashing an extraordinary ability for people to create useful connections across all PC users. The social networking space has – for now – moved on to focus on the big succcess stories like MySpace, which are based on personal expression, social identity, and entertainment, rather than business or utilitarian links (a space which has not gone away and will return in a different guise). It turns out that Microsoft sat on the project for several years, then finally decided to spin it out, with the expectation that it would be able to do better outside Microsoft’s walls than within them. Given what’s happening with some of Microsoft’s other initiatives, a wise choice. Wallop has now raised $13 million in venture capital, and just released the product in beta, with the intent of taking it to a full release early next year.

Wallop has a significantly different business model to other social networking sites. They have decided to eschew advertising, despite the massive deal MySpace won with Google. Instead, they charge members for the ability to customize their personal space. The personal spaces in MySpace’s are very basic and difficult to personalize extensively. As other commentators have noted, Wallop’s positioning is closer to CyWorld, which has had massive success in South Korea and recently launched in the US. CyWorld enables members to personalize their spaces to mimic their own homes, or create fantasy rooms. However in Wallop, members can also make money – if visitors buy the entertainment or features they have selected to place on their site, Wallop takes just 30%, leaving the rest of the revenue to the member. The idea is that the space becomes a marketplace for a wide range of digital expression, across music, avatars, art, animation, and more. Significantly, the entire site was developed in Flash, which enables Flash developers to create and sell artifacts within the site. In short, Wallop is a very interesting experiment to see whether people will both want to build networks in this environment, and spend money on content there. I think it will do at least fairly well, as it represents a real alternative to the existing social networking sites, but the critical issue here is scale. How well it does will significantly impact which way the social networking space evolves from here, as companies uncover what business models work or don’t work, and copy and refine the ones that do well.

Giving structure to citizen journalism

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Jay Rosen has just announced that Reuters is giving $100,000 to NewAssignment.Net, which provides a more structured model for open source journalism, bringing together amateur and professional media creators. The money will be applied to hiring a full-time editor for the site. Jay gives some background to why Reuters is choosing to support this project:

Part of the background to the gift is a speech given March 2nd 2006 by Reuters CEO Tom Glocer to the Online Publishing Association. It was called “The Two-Way Pipe.” Glocer said the news industry “faces a profound challenge from home-created content-– everything from blogging and citizen journalism to video mash-ups.”

In 2005 he and his colleagues were worried about a shift in power they saw coming, but “it was about the consumer as editor,” Glocer said. “You get the news you want when you want it, either pulled by something like an RSS feed or a Tivo box or pushed by the media company.” This was a legitimate demand. And while companies like his are still catching up with that demand “our audiences have already moved on-– now they are consuming, creating, sharing and publishing.” Consumers as producers! That’s a power shift more confounding than the explosion of choice.

His puzzle: “If users want to be both author and editor, and technology is enabling this, what will be the role of the media company in the second decade of this century?” As Scott Karp pointed out (his blog is about the next era in publishing) Glocer’s answers to that question weren’t very revolutionary.

But some of his observations were keen. “On the day the Tsunami struck, Reuters had 2,300 journalists positioned around the world, mercifully none were on those beaches,” he said. “On that fateful day we also had 1,000 stringers around the globe – but none of them were there either.” The only way to get the story was from amateurs to whom the tools of media production had been re-distributed. His conclusion: “You have to be open to both amateur and professional to tell the story completely.”

NewAssignment.Net is explicitly joining traditional and social media in creating a “pro-am”, or professional-amateur model. For example, amateurs can collectively be given fact-checking tasks, or issues identified by amateurs can be passed on to professional journalists. For a long time I’ve believed that what is happening and will happen is a merging and integration of traditional mass media and emergent social media. In our Future of Media Report, we explicitly discussed how the “professionalism” of traditional media both provides standards and expectations, and is also a limiting box. NewAssignment.Net looks like a particularly promising model, though the details are not yet clear. However irrespective of how successful it is, the space in which it is playing, of bringing together the resources and capabilities of amateurs and professionals, is where much of the action will be moving forward in the world of media.

[UPDATE:] Chris Ahearn, head of media at Reuters, has posted his comments on the deal. An extract:

Professionals and amateurs will cooperate to produce work that neither could manage alone, using “open source” methods to develop assignments and help bring them to completion. The idea is that people will contribute to stories that they believe will make a difference.

While the Internet is rapidly transforming the world of traditional media, it also presents amazing new possibilities in terms of strengthening the investigative arm of journalism. The Internet is the perfect vehicle for galvanizing the public to become more involved in reporting.