Posted: April 18th, 2009 | Author: admin | Filed under: Uncategorized | No Comments »
Finding Internet ad dollars in today’s gloomy environment
Chintu Parikh recently posted an interesting question about “Where to find Internet ad dollars in the current gloomy environment?” on LinkedIn and in his blog:
Check out my blog – Growth sectors for Internet ad spending
When you have a moment pls check out my blog at http://chintu.eparikh.com/ about “Where to find Internet ad dollars in the current gloomy environment?”. It analyzes Internet Advertising Bureau’s 2008 annual report, which was released yesterday, to briefly discuss the industry categories that posted above average growth in Internet advertising spend in 2008. I would to love hear your thoughts.
Blog link: http://chintu.eparikh.com/
This prompted some thoughts I have had on the opportunity for what HBS professor and author of “The Innovator’s Dilemma“, Clayton Christensen, calls “Disruptive Innovation” which might dramatically change the landscape of the Internet Advertising Network marketplace in the future, which I have explained below. But first here’s a brief sidebar for those who don’t know Christensen’s work.
Sidebar: Brief overview of the principles of Disruptive Innovation
For those readers who aren’t familiar with Christensen’s work, let me briefly point out that Christensen defines “Disruptive Innovation” in a very precise and technical way — a way that doesn’t necessarily match the common understanding that people have. That difference is important to what we have to discuss today.
Briefly, Christensen has collected numerous examples of markets where new entrants havesafely entered protected niche markets within a larger mainstream market and then grew those niches until ultimately the niche markets become the dominant part of the mainstream market. When that happens the new entrants replace the incumbent market leaders as the new dominant players. Christensen has collected considerable literature showing how this happened repeatedly in the disk drive market. The 14″ drives commonly used by mainframes were increasingly replaced by 8″ drives used by mini computers, which in turn were replaced by the 5 1/2″ drives common to desktop PCs, and then by 3 1/4″ drives demanded by the growing portable notebook computer market, and then 1.8″ drives helped power portable hand held devices, such as the iPod. With each transition in technology, a new entrant became the new market leader.
Christensen holds this is not due to stupidity or hubris of the established leaders — instead, he shows that this kind of market disruption occurs when there exist specific market conditions that make ignoring the initially small niche market, and focussing on a higher profit margin mainstream market the financially prudent way to manage the incumbent company. In fact, failure to do so would lead to a premature collapse in the market leader’s margins and would be instantly punished by investors. For this reason, market leaders willingly cede low profit niche markets to their new entrant competitors. He even cites the case of US Steel who regularly referred customers who wanted low profit items such as rebar to the new recyclers running mini-mills. US Steel still dominates the integrated steel business, but this is no longer the major portion of the steel market; the recycled steel mini-mills segment now greatly outproduces the integrated steel producers.
The Coming Disruptive Innovation in the Internet Ad Networks
At XooXooX (www.xooxoox.com) we think that the current turmoil in the Internet Advertising Markets caused by the larger economic downturn makes this is actually a good time for a new internet ad start-up — if the new entrant has the right business model and offerings to take advantage of the massive shifts in the media advertising and in payment models that advertisers are now spending shifting spending to. When everything is growing, advertisers may be content to try a broad mix — but when sales are shrinking there is always a refocus on advertising performance.
That creates a new business opportunity for a new entrant who is well positioned to take advantage of that shift. In fact, we think it is a classic example of the “Innovator’s Dilemma” where Disruptive Innovation can allow a new entrant to initially get a foothold in a niche that incumbents think is too low profit. Yet eventually those new entrants just might grow their niche until it dominates the mainstream market, just as steel mini-mills ultimately came be the dominant segment of the steel market, displacing the Integrated steel manufacturers.
What Makes Internet Advertising Ripe for Innovative Disruption?
Let’s face it, most retailers got slammed in the 2008 Christmas season, and with the current consumer uncertainty, poor revenues look likely for the foreseeable future as well. This means that these retailers desperately want to reach potential buyers, yet they also need to keep advertising ads lean and mean.
Advertisers seeking to shift more spending to pay-for-performance advertising
That means advertisers are eager to shift advertising dollars away from pure “ad exposure” based models like broadcast TV or online ads priced in 1000s of ad exposures (CPM). With increasing click fraud and link spam, even Cost Per Click (CPC) advertising seems less attractive.
What advertisers want to spend their dollars on is ads whose cost is tied directly to ad performance: That is, advertisers want to pay only for ads that result in revenue generating actions (CPA); such as commissions on sales paid to affiliate publishers, or affiliate referral fees paid only for delivering new users who sign up with a real verifiable email addresses or phone numbers.
How incumbent market leaders generate high profit margins
These CPA models are not the business models that today’s incumbent market leaders have embraced. Instead, incumbent Internet Ad Networks have preferred the CPM models — because CPM minimizes their own risk. Because they are paid for showing ads, not for results, it doesn’t matter to the incumbent Internet Ad Networks if the ad generates no sales because of poor page placement, poor ad copy, poor demographic fit, or even a poor product. Whether there is a sale or not, the Internet Ad Network gets paid purely for showing the ads. — Determining why the ad isn’t yielding desired results and the resulting uncertainty and risk is shifted to the advertiser to deal with.
Incumbents whose business models are based on CPM (and to a slightly lesser degree on CPC) have been the most successful at keeping their profit margins high and relatively consistent from quarter to quarter.
The tie between predictability and profitability
By using a bid pricing model, incumbents can earn even higher profit margins whenever they have a good chance of predicting the viewer’s current interest and then display ads for products and services in a matching product or service category. This predictability turns out to be highest when the user explicitly tells the Internet Ad Network their current interest. And that’s exactly what happens when users use a search engine and type in keywords. So it should be no surprise that today the most profitable Internet Ad Networks are those handling the most search requests.
Using demographics and page content to increase predictability
Among the non-search pages, profitability for the Internet Ad Network is dependent on whether the demographics of the page’s visitors are so homogenous that one can precisely target ads for that demographic (for example, a website for graduating college seniors with degrees in fashion design), or where the content of the page itself (e.g. product reviews of professional digital SLRs) is so predictable that the content itself can be used to predict the viewer’s interests.
Heterogeneity causes low predictability and low profit margins
The least profitable ads are on pages that attract a very heterogenous audience — e.g. news and weather report web pages draw users of all ages, races, economic class, and gender. And for people whose interests are broad, blogs, facebook and myspace pages, and YouTube videos can be so heterogenous — making prediction difficult — that they are the lowest profit margin segment for incumbent Internet Ad Networks.
Forces that create a safe niche in the least profitable segment
And we know that in Christensen’s Disruptive Innovation market that it is always in these low profit margin niche segments that new entrants are safe to grow without response by the incumbents. Instead, to maintain or grow their existing high profit margins, the incumbents will need to acquire large high profit segments — like fighting for control over more user search requests.
Growth opportunities in heterogenous content areas.
Yet these heterogenous content areas (blogs, news, weather, facebook, mySpace, YouTube, twitter, etc.) are also the fastest growing segment on the Internet.
Yet, because of their low profitability, these are also the pages with the most unsold ad inventory. These unsold ads, in turn, are consolidated by bulk Internet Ad Networks who resell ”run of network” advertising across these consolidated remaindered pages at and extremely low price. And the low price is appropriate because any ad could run on pages with such widely varied demographics and diverse content that predicting user interest is nearly impossible. That’s a reason that even the largest Internet Advertising Networks are fighting to control more search requests not more remaindered ad space.
Enter the New Disruptive Innovators
The new disruptive innovator Internet Ad Networks, such as XooXooX, purchase this lowest priced web ad space and find new ways to increase its value. This is the unsold ad inventory on a host of unrelated web pages that today’s incumbent market leaders find least profitable and are happy to get rid of, just as US Steel once was eager to send rebar customers to the new mini-mills!
In fact, dumping this low profit margin market segment will almost certainly increase the incumbent’s AVERAGE profit margins – by removing the below average segment that pulls the company’s average profit margins down.
Net result: The incumbent then reports increased profit margins — at a time when the industry profitability has been falling. Guess what that does to incumbent’s stock price in today’s market!
Meanwhile, the new entrants — who are privately held and who are so new that they didn’t have any profits in the past — are happy to get what little profits they can out of this least desirable market segment. Even a little profit is better than none!
Disruptive Innovators find ways to increase the profitability of the bulk ad market
And to extract the most profit they can from this segment, the disruptors create innovative new solutions that allow them to increase their profit in this segment above what the incumbent networks were able to do. Now these improvements might still be substantially lower than the average margins of the incumbents — so those incumbents are still going to be content with the decreasing amounts of remaindered ads they are handling.
An example, XooXooX
For example, the XooXooX Internet Ad Network doesn’t try to guess which ads will appeal to its users as incumbent leaders do. Instead, XooXooX enables its users to customize and personalize the ads they will see — so every XooXooX web ad is like a user directed window shopping opportunity for products that the user actually wants to track.
Users are naturally curious to see which product offers their XooXooX Personalized Shopping Assistant found for them based upon their own self-expressed interests. That means these users pay attention to XooXooX ads while ignoring most other web ads that they have no control over. And this combination of higher awareness and higher interest yields higher purchase rates.
To capitalize on this difference, XooXooX has adopted a different revenue model than the incumbents who rely on CPM and CPC business models. XooXooX uses a CPA model; XooXooX’s profit margin is the difference between what it pays for the unwanted ad space that incumbent Ad Networks eschew, and the revenue it earns from commissions and affiliate fees for products requested by it members, that it shows in those ad spaces.
Win, Win, Win: How the new entrant’s niche begins to grow
As more users fill out personalized XooXooX shopping lists, the purchase rates achieved with XooXooX ads begins to grow. And this enables XooXooX to move up market into higher and higher priced ad space. Moreover, the new incumbents, like XooXooX, establish relationships with advertisers that not only increase the advertisers sales, they also reduce the advertiser’s risk, since ads are only paid for if they generate sales. This creates a Win-Win opportunity that comes from an alignment of network and advertiser interests that doesn’t exist in the incumbent market, and this will also help the new entrants’ segment to grow.
Similarly, the new entrant now has also established more relationships with its growing user base. Once again, a second Win-Win opportunity arises from the alignment of network and user interests; in this case, the user wants to see only ads that are for products that they are interested in tracking, and the network only wants to show them ads they want to see.
And while the new entrant’s profit margin might be less than the incumbent advertiser’s AVERAGE profit margins, it is still substantially higher than what the mainstream advertisers were earning on that remaindered market they are surrendering. That marginal improvement in profitability allows new entrants to pay a little more to web publishers for their unsold ad space than the publishers would have received from the incumbents. And remember the segment that incumbents find hard to monetize due to its heterogeneity is precisely the fastest growing category of web pages!
The higher price for remaindered ad space attracts more publishers to the new ad network, a third Win-Win opportunity.
The End Game
As the new entrants win over more publishers in the fastest growing content areas, and more advertisers with higher sales, and more web viewers with more personalized ads, these disruptive innovators start to control more and more of the least profitable (but fastest growing) portion of the mainstream market until ultimately that segment the new entrants control becomes the majority of the total market.
Meanwhile the new entrants are safe from attack from above — since competing in this segment would lower incumbent’s average profit margins. Instead, the incumbents watch their AVERAGE profit margins increase as they shed more of the low margin customers. They wind up owning the most profitable segment — search — but it is a smaller percentage of the total market; a total market containing much more hard to monetize content.
Posted: November 26th, 2008 | Author: ScottMcGregor | Filed under: Adware, CleanWare, Portalware, Spyware, Uncategorized, privacy, user controlled ads | Tags: Adware, CleanWare, Portalware, privacy, Spyware | No Comments »
In my last post I commented on Chris Fralic’s observation that it is surprising that enabling users to control their own ads doesn’t get much attention. Letting you control your own ads is only half of what makes XooXooX CleanWare different.
But other half of what makes XooXooX CleanWare different is that your shopping preference data is stored and ad selections made client side. When you choose to use CleanWare, you have more control over your privacy. Today I would like to discuss how CleanWare is different from competing ad selection technologies and why it took so long for CleanWare solutions to become available.
Let’s start with the historical context that framed earlier user data privacy choices in the online ad business. I’ll look at two competing paradigms Adware/Spyware and Portalware, that both have been accused of treating your privacy inappropriately.
Adware & Spyware
As an example of the Adware approach we’ll consider the ad selection solutions pioneered by the company alternately known as Gator, Claria, and JellyCloud. The article: “Is the Original Spyware Company Finally Dead?” by Mike Masnick in the October 1st, 2008 edition of TechDirt, discussed how the Adware approach to user data privacy led this company to make two name changes before finally going out of business:
As the whole spyware [industry] (the companies in the space preferred the adware label) got a bad name, Gator first threatened to sue anyone who called its product spyware, and then eventually decided to shed the baggage of the Gator name and renamed itself Claria. — insisting that it was now a legitimate advertising firm. Except, the charges of spyware kept flying in Claria’s direction. The company tried and failed to go public, and then, once again, insisted that it was getting out of the adware business and moving into “behavioral advertising” — which, most people realized was just another term for what it had been doing in the past.
Plenty of folks were shocked when rumors started spreading that Microsoft wanted to buy Claria, though, the public backlash to the “leaked” rumor was so harsh that Microsoft very quickly backed away from those plans. So, without being able to IPO or sell itself — and with a still awful reputation as a spyware provider, the company tried to change once again.
The company insisted (yet again) it was getting out of that old sketchy business, and tried to launch a “portal” that would provide relevant content based on how you surfed. In other words: it was still in the spyware business, just positioning it under a better name. The company did try and fail to sell off its traditional adware business.
Portalware
Portalware is typified by Google, Yahoo and Microsoft, and the implications of their decisions concerning your data is discussed in the recent article by Kevin J. O’brien in the November 17, 2008 New York Times entitled Privacy Laws Trip up Google’s Expansion in Parts of Europe. Here is a brief extract
Data protection advisers to the European Commission in Brussels are questioning Google over how long the company retains user logs — the files containing an individual’s queries typed into Google search fields. A panel of regulators wants Google, as well as Yahoo and Microsoft, to purge the records after six months.
Google says it needs the data for nine months to hone its search engine to reflect the constant changes in contextual meaning caused by news and events. Before October, Google retained the records in the European Union for 18 months. Yahoo keeps records for 13 months and MSN, Microsoft’s search service, for 18 months. European officials are trying to persuade Google and the others to comply, but have not ruled out asking the commission to intervene.
Implications for user privacy
We have just seen reports concerning the two major paradigms for selecting web ads for the last ten years criticized for how they failed to protect user privacy. Can we do better?
Yes, CleanWare protects user privacy better.
So why didn’t Gator, Google, Yahoo and Microsoft design their ad selection technologies to better protect user privacy?
To answer these questions we have to look at the development of the World Wide Web technologies, as well as how web advertising evolved in it.
Competing Ad Selection Paradigms
When the Web was just in its 1.0 incarrnation (late 1990s), strategies for collecting user data and for making the decisions could be separated into two major paradigms shown in the first two rows of the table: Adware/Spyware and Portalware.
Recent Web2.0 technologies have introduced a new possible paradigm: CleanWare.
| Paradigm and examples |
User Data collection technology |
User Data Storage Location |
Ad Selection Location |
Ad Selection Strategy |
| Adware/Spyware, e.g. Gator, et al |
Client-side snooper application |
Server-side |
Server-side |
Educated Guess |
| Portalware, e.g Google, Yahoo & Microsoft |
Server snooper applications |
Server-side |
Server-side |
Educated Guess |
| CleanWare, e.g. XooXooX |
Client side Web2.0 user data entry in browser |
Client-side Private Data Object |
Client browser Web2.0 applet |
Search for user specified requests |
Let’s compare these paradigms.
Adware/Spyware: Client Side User Data Collection
Before the internet, all personal computers were basically stand alone. Personal computer users worked on their own personal data (e.g. email and documents) stored on their local machine (e.g. in folders and floppies) and worked on them using desktop applications like Microsoft Office. Because there was no data transmission to remote locations, the Graphical User Interfaces (GUIs) of these applications could be relatively responsive.
When the web arrived, most of the user’s data and applications were in the client. And with low speed data connections and only synchronous Web1.0 technologies, server applications couldn’t provide the same level of responsiveness. So Adware/Spyware developers tried to put their data collection engines on the clients where most of the data was. But Clients weren’t beefy enough to do a lot of processing on large amounts of data, so ad selection was best done on Servers, and that is where user’s data was sent. For users one of the real concerns about having an adware application on your computer was that it theoretically had access to everything on your computer and everything you did. It is no wonder that people feared adware as noted in the TechDirt article.
Portalware: Server Side User Data Collection
As responsiveness increased and the world became more interconnected, Portals were able to intercept a lot of data going through the portal, or stored within the portal (e.g. email like Hotmail, Gmail and Yahoo mail). This enabled the second paradigm, which I’ll call Portalware. At least with Portalware, the portals could only get access to some of your data — namely the data you shared with them when you used their services, and which they could track with cookies. But as people store more and more data on servers, this has become a concern as well, as noted in the NYT article. And when there are occasional accidental data leaks these concerns increase.
Life before Web2.0
To be fair, when adware and portalware debuted, they did not have web2.0 technologies available to us today, hardware was slower, broadband less common, screen sizes more limited, online purchases less common, and the widespread use of ads on content pages hadn’t happened yet. That meant software had to be downloaded, installed, and always running in the background on the client, degrading making the user’s computer slow. The background download and updating processes would further slow dial-up performance making web access seem even slower.
And since there were not many ad spaces available for purchase at the time, ads would be displayed in annoying pop-ups, or in special browsers that grabbed a large part of the already limited screen real estate for use displaying ads. Lastly, since few users had experience purchasing products online, and the ad companies were desperate enough for advertisers that advertisers weren’t limited to companies who could give the best customer service, users were often nervous about making purchases on line.
Brave New Web2.0 World:
The limitations that led to the creation of Adware and Portalware are gone now.
Advent of Client CPU Power
Web2.0 technologies don’t require download and installation, and are resident only when the pages they are embedded in are visible — avoiding CPU draining activity when those pages aren’t active. And typical client equipment is fast enough that it is reasonable to run Web2.0 technologies like Flash even on many mobile devices and handsets.
When client CPU performance was poor compared to today, ad selection work just wasn’t feasible on the average home desktop computer, so lots of user behavioral data was being sent to servers to make ad selections. But once on those servers, whether derived from adware or portalware users had no control over what those companies did with it.
Advent of High Speed Data Communications
Today, sending personal data to servers for ad selection is unnecessary since even mobile handsets have the CPU power to perform ad selection client side. At the same time, sending rich data asynchronously from the server to the client is now possible too. Broadband DSL, Cable, WiFi and3G cellular networks all have more than enough bandwidth suitable for displaying content pages containing rich web ads.
Advent of a robust Web Ad market
The web ad market is also now very robust. There is already so much web ad space embedded on the content web pages that people read daily that there is no need for additional annoying ads and pop up ads, such as those which Gator was infamous for.
Today the existing ad space already on content pages can just be made more interesting and more personally relevant — and that is XooXooX’s approach
Enter CleanWare™ — a new paradigm.
I saw the value of doing some kind of opt-in web ad solution years before I started XooXooX, but it wasn’t till I knew that we could do it without downloads and software installed on the user’s computer that I thought it was worth starting a company (XooXooX). Unless we could avoid installating software, I felt there was too large a risk that such a product would get smeared with the adware label and avoid getting picked and the executable profile would get added to aware databases and the software would be removed by some adware removal tool even if it was benign.
Keeping User Data safe — by never leaving the client
So I am really excited now that through our innovative use of Web2.0 technology we can now avoid the need for such an executable. In fact, not only can we now avoid the need for a client side executable running all the time, but we have constructed XooXooX in keeping with the principles of CleanWare. Because XooXooX stores the user’s private data on the user’s own computer in private Data Object storage, it can’t be lost or intercepted on it’s way to a server — because it never goes there. And it can’t be accidentally (or intentionally) revealed or hacked into by computer criminals while it sits on a server with thousands of other people’s data — because it never goes there.
Now it is time for the world to take stock of this new paradigm and decide how important user cata privacy really is.
Posted: November 24th, 2008 | Author: ScottMcGregor | Filed under: Uncategorized, user controlled ads | Tags: user controlled ads | No Comments »
Image from
I recently received an email from Chris Fralic at First Round Capital that prompted me to share some thoughts I have had on the topic of opt-in user controlled ads. Chris mentioned that he has “always been struck by how little attention is given to offering users choice in ads.” I couldn’t agree more.
A review of reported response rates for various kinds of ads show that opt-in postal mailed catalogs, and opt-in email lists perform dramatically better than junk mail and spam (1000-10,000X higher response rates!). This information isn’t exactly a secret, so it seems rather surprising that there has not been more interest in opt-in web ads to boost response rates over today’s existing bulk and targeted non-search page web ads.
Not more ads — but more personally relevant ads
This lack of prior interest is even more surprising when you consider that user controlled opt-in web ads, like XooXooX, don’t increase the number of ads you see, they just increase the relevancy of the ads you already see. That’s an even better proposition for the user than they get with opt-in postal mail or opt-in email where you get these “in addition” to all the junk mail and spam you have always received. Moreover, the effort in evaluating opt-in web ads is much less — there are no cluttered inboxes (physical or email) or messages that require a click or envelope to scan and a click or toss in the wastebasket to delete. You can see Web ads out of your peripheral vision and notice them or ignore them without a click.
What about people who hate all ads?
For our earliest trials we wanted to have some very technical people (who self-identify as “geeks” and “hackers”) testing our software to make sure it was robust and secure under a variety of different browsers and hardware platforms, even though these testers were not typical of our ultimate target audience. Still, there was no point in testing the software with people who are less tolerant of technical problems until there we could be sure that they wouldn’t face such problems. So until we were sure that any serious technical problems had been identified and resolved we limited our trials to members of our own geek squad.
Our first testers spend most of their days online, reading a lot of blogs and other content pages that currently contain web ads in the margins. As a result, they are probably exposed to many more web ads than the average web user. And they tell us the ads in the margins are almost always irrelevant and frequently annoying.
Turning a blind eye to ads
And while our testers tend to do a lot of online purchasing at retailers like Amazon and eBay, they all reported that they had developed a kind of cognitive blinders that allowed them to view the pages they read without even noticing the ads. So, while they agreed that they would do some deliberate Quality Assurance testing of our product, they assured us that they were not really appropriate targets for the production service since whenever they were not doing deliberate testing they would once again ignore the ads, because they just don’t buy based on any web ads.
The Power of Curiousity
Based on this self-reported disinterest in web ads, we didn’t expect them to purchase anything. But a strange thing happened. We actually generated several unexpected purchases during the test, even though completing purchases was not a part of this phase of the quality assurance testing. And even more surprising, a majority of our early testers wrote us that they wanted to continue using XooXooX after the initial test was over, each saying how their blinders had changed.
One tester told me:
“I didn’t think that I would actually notice the XooXooX ads when I wasn’t doing the tests. I pretty much just don’t even see web ads normally. But, because I select the products XooXooX was searching for, I find myself constantly noticing ads that have the identifying XooXooX heart logo in the upper left corner. I check the XooXooX ads out, because I’m curious. XooXooX ads are like a grab bag package I am being given — I am always wondering “what did I get?” It is kind of like when I go onto Amazon.com and there is a new recommendation for me. I get curious what it is. And it is not like either of these require any real effort to satisfy my curiosity. I don’t have to click on anything or bring up another window. I just notice it out of the corner of my eye without any effort. And here’s the strangest part. I’m noticing only the XooXooX ads. I am still blind to the other ads on the pages I see. It is just that now it is a selective blindness.”
Some readers might be tempted to consider this report of changes in selective blindness to be more wishful thinking (and a form of “please the experimenter” bias) than a real scientific result. And to be sure we haven’t done scientific trials to verify such claims. But before readers throw out this anecdotal report entirely, they might want to consider the scientific results reported in a research paper “Unconscious determinants of free decisions in the human brain” by Chun Siong Soon, Marcel Brass, Hans-Jochen Heinze and John-Dylan Haynes that appeared this past April in the journal Nature Neuroscience. A nice summary for lay audiences, titled “Brain Scanners Can See Your Decisions Before You Make Them” was written by Brandon Keim and appeared online in Wired on April 13, 2008. It may be that our unconscious minds will decide which ads we notice, without our being aware of this filtering.
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